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Decline in earnings, led by lower realization and loss in some subsidiaries

* Atul (ATLP) reported revenue in line with our estimates in 3QFY24. While revenue in the Life Science Chemicals segment declined 31% YoY, it increased by 2% YoY in the Performance & Other Chemicals segment. Gross margin came in at 47.1% (down 10bp YoY), while EBITDAM declined 30bp YoY to 13.3% during the quarter.

* Management highlighted that realization was lower for the company with increased volumes in the domestic market partly compensating for the weak demand in the export market. Decline in earnings this quarter is attributed to lower prices and underperformance of certain subsidiaries.

* The Life Science Chemicals’ contribution to EBIT dipped notably to 39% (from 82% in 3QFY23), whereas the contribution of Performance & Other Chemicals to overall EBIT jumped to 61% in 3QFY24 (from 16% in 3QFY23). Lower price realization and subdued demand in LATAM markets resulted in weak performance in the Life Science Chemicals segment.

* In case of Performance and Other Chemicals segment, lower price realization and poor export demand was partly compensated by a better domestic demand. There was also loss in some of the subsidiaries, partly due to the stabilization of operations that adversely impacted the performance of the segment.

* The stock is trading at 46.5x FY25E EPS of INR141.7 and 26.2x FY25E EV/EBITDA. We value the stock at 40x Dec’25E EPS to arrive at our TP of INR6,795. On a one-year forward basis, ATLP trades at 42.5x. We maintain our Neutral rating on the stock.

Beat on EBITDA and margin; pressure on both segments continue

* Revenue stood at INR11.4b (down 10% YoY). Life Science chemicals revenue stood at INR3.4b (down 31% YoY). Performance chemicals revenue was at INR8.4b (up 2% YoY)

* Gross margin stood at 47.1% (down 10bp YoY) and EBITDA margin was at 13.3% (down 30bp YoY). EBIT margin contracted for Life Science Chemicals significantly on a YoY basis. Life Science Chemicals margin stood at 12.6% (down 10pp YoY); EBIT at INR424m. Performance Chemicals margin stood at 7.8% (up 520bp YoY); EBIT at INR657m.

* EBITDA came in at INR1.5b (est. of INR1.1b, down 12% YoY). PAT stood at INR721m (est. of INR565m, down 30% YoY), resulting in EPS of INR24.4. Contribution from the subsidiaries/JVs remained negative (loss at INR377m in 3QFY24, vs. a loss of INR340m in 3QFY23 and a loss of INR121m in 2QFY24).

* For 9MFY24, revenue stood at INR35.1b (down 17% YoY), EBITDA at INR4.9b (down 22% YoY), and PAT at INR2.7b (down 36% YoY). EBITDAM stood at 13.9% (down 90bp YoY). 20 January 2024 3QFY24 Results Update | Sector: Specialty Chemicals Atul 23 January 2024 40

* For Life Science Chemicals, revenue stood at INR10.5b (down 32% YoY), EBIT at INR1.4b (down 59% YoY), while EBITM stood at 13% (down 840bp YoY). For Performance & Other Chemicals, revenue stood at INR25.8b (down 10% YoY), EBIT at INR2.3b (up 1% YoY), while EBITM was at 8.8% (up 100bp YoY).

Valuation and view – reiterate Neutral

* We highlight that the continued weakness in the agrochemical industry would have a negative impact on the earnings in the short to medium term. ATLP is facing short-term challenges due to a global economic slowdown and overvaluation as a commodity chemical firm. We expect ongoing earnings fluctuations to continue.

* The stock is trading at 46.5x FY25E EPS of INR141.7 and 26.2x FY25E EV/EBITDA. We value the stock at 40x Dec’25E EPS to arrive at our TP of INR6,795. On a one-year forward basis, ATLP trades at 42.5x. We maintain our Neutral rating on the stock.

* The upside risk could be a faster-than-expected ramp-up of new projects and products. Downside risks include weaker-than-expected revenue growth and margin compression.

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