Reduce Archean Chemical Industries Ltd For Target Rs. 550 By JM Financial Services
Mega plans; execution track record patchy
Archean’s 2QFY26 earnings print was once again a disappointing one. Quarter after quarter, the company has attributed lower sales to a variety of factors, such as logistical challenges for salt, longer-than-expected monsoon, etc. This quarter, both salt and bromine sales were significantly lower than expected. There is not much uptick in bromine derivative sales, either. Moreover, the company has slashed Oren Hydrocarbon sales guidance to NIL from INR 1.5bn in FY26. The Street has been very positive on the stock as it finds the valuation attractive. However, numbers keep getting cut every quarter as the execution has been patchy. In light of struggles in similar or forward integration projects, we find the company’s plans of making semi-conductor materials aspirational. We cut our FY26E-28E EPS estimates by a sharp 19-35%, and maintain our cautious stance on the name with a REDUCE rating and Dec’26 TP of INR 550 (based on 15x Dec’27E EPS) (from Sep’26 TP of INR 635 earlier).
* EBITDA miss due to lower sales: Archean Chemical’s consolidated 2QFY26 gross profit came 18% below JMFe at ~INR 2.3bn (down 13% QoQ while up 3% YoY) as gross margin was higher than anticipated at 99.9% (vs. JMFe of 89.5% and 91.2% in 1QFY26) with revenue coming in lower than expected at INR 2.3bn (26%/27% below JMFe/consensus, down 20%/3% QoQ/YoY). Other expenses were lower than anticipated at ~INR 1.5bn (vs. JMFe of INR 1.75bn and ~INR 1.7bn in 1QFY26). As a result, EBITDA was 30%/28% below JMFe/consensus and stood at INR 626mn (down 20%/16% QoQ/YoY). Further, on account of higher interest expense, PAT was INR 290mn (down 28% QoQ while up 85% YoY), 43%/42% below JMFe/consensus.
* Industrial salt and bromine sales lower than anticipated: In 2QFY26, industrial salt sales volume stood at ~889,193MT (vs. average run rate of ~918,339MT over the last 6 quarters). Further, salt realisation declined to ~INR 1,664/MT (vs. INR 1,764/MT in 1QFY26). As a result, industrial salt revenue came in at INR ~1.48bn in 2QFY26 (vs. JMFe of INR 2.0bn and INR ~1.94bn in 1QFY26). The management had earlier guided for industrial salt sales volume of 4.5MMT for FY26. In 2QFY26, bromine sales volume declined to 3,160MT (vs. JMFe and 1QFY26 of 4,054MT) with bromine realisation increasing to ~ INR 228/kg (vs. JMFe of ~INR 210/kg and ~INR 207/kg in 1QFY26). As a result, bromine sales was below our estimates and stood at INR 720mn (vs. JMFe of ~INR 851mn). The management had earlier guided for bromine sales volume of 22,000-25,000MT for FY26.
* Estimates lowered; maintain REDUCE: We find the company’s disclosures inadequate as the segment-wise sales figures don’t tally with the overall sales figures. We expect greater clarity from the company in terms of disclosures, going forward. Moreover, it has, within a span of one quarter, cut Oren Hydrocarbon sales guidance from INR 1.5bn to NIL in FY26. We had been highlighting for a while now that there is no margin for error for the company’s execution, which has been patchy since its listing. Factoring in 2QFY26 results and commentary, our FY26E-28E EBITDA estimates are lowered by ~15-26% and EPS estimates are revised downwards by ~19- 35%. We expect ~32%/44% EBITDA/EPS CAGR over FY25-28E. After building these strong numbers, there is no margin for error. Our target multiple of 15x Dec'27E EPS builds in 25x target multiple for ~30% EPS contribution from the non-commodity business and 10x target multiple for ~70% EPS contribution from the commodity business (salt and bromine). We don’t ascribe any value to the company’s ambitious plans of manufacturing semi-conductor materials. Owing to the patchy execution and no margin of error, we maintain REDUCE with a revised Dec'26 TP of INR 550 (based on 15x Dec'27E EPS) (from Sep’26 TP of INR 635 earlier).
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SEBI Registration Number is INM000010361
