Sudarshan Chemical Industries - Shifting gears from normalisation to growth - ICICI Securities

Sudarshan Chemical Industries' (SCIL) Q2FY21 EBITDA rose 2.1% YoY to Rs677mn on recovery in volumes. In Sep'20, the company achieved highest production volumes, which can make H2 much stronger, if sustained. SCIL is shifting gears from normalisation of production to accelerating growth. It plans to relaunch yellow pigment in Dec'20 and add one more product in HPP category in Mar'21 and Sep'21. SCIL continues to work towards becoming world's third-largest pigment company (revenues of >US$500mn) and has adopted three key strategies: 1) Improve distribution by better go-to-market plans, 2) enhance product portfolio with specialty pigments, and 3) attain cost leadership. We increase our target price to Rs533 (from Rs484) as we raise our FY22 P/E multiple to 22x (from 20x). Maintain ADD. Numbers updated for annual report.

- Demand strong; supply normalising. SCIL's pigment revenue grew 0.4% YoY (+17.8% QoQ) to Rs4bn despite two weeks shut down of Roha plant. This was due to recovery in India demand which has reached to pre-Covid levels (though SCIL cautious as part of demand could be channel inventory filling); and exports demand continues to remain strong. It has reached highest production volumes in Sep'20. It expects demand to remain strong in India due to festive season which tapers post Diwali. Growth was led by volumes; realisations have been stable. Overall, Sudarshan has exposure (in same pecking order) in coatings, plastics, print and cosmetics. However, domestic demand is more skewed towards plastics and print, while less in cosmetic as buyers (FMCG companies) have globally approved the products.

- New product launches to accelerate growth. SCIL has focused on normalisation of business in H1FY21, and other activities were under freeze. Yellow pigments modification exercise has started in Oct '20, and it expects relaunch by Dec'20. SCIL has guided for one more HPP product in Mar'21, and another in Sep'21 which were earlier planned in FY21. China's change in export rebate to 13% (from nil) in Mar'20 is a headwind for low value pigments. HPP is not materially impacted as these products are mostly sold by BASF / Clariant. Further, SCIL expects cost leadership in many products with completion of backward integration. It continues to see preference to India-based manufacture as buyers are looking to diversify from China.

- Gross margin was stable. Gross margin improved 110bps YoY (20bps QoQ) to 44.2% on better product mix and stable raw material prices. Gross profit rose 3.5% YoY to Rs1.9bn. EBITDA rose 2.1% YoY to Rs677mn. PBT was down 9.6% YoY to Rs425mn on higher depreciation and finance cost on commissioning of new facilities. The company still sources 30-35% of its raw materials from China, which will reduce on backward integration. Positive impact of this on margins will be visible from H2FY22E.

- Capex of Rs6bn will be executed over FY20-22. The company has board approval for capex of Rs5.85bn of which Rs2.25bn has been completed in FY20. It plans to execute capex of Rs2.5bn in FY21E, and Rs1.1bn in H1FY22. A large portion of this capex is towards growth (additional capacity for the existing products and new plant for new products), and some capex for backward integration. The company expects asset turnover of 3x on growth capex. It expects to accelerate investment on backward integration, post board approval, in FY22.

Shares of SUDARSHAN CHEMICAL INDUSTRIES LTD. was last trading in BSE at Rs.470.5 as compared to the previous close of Rs. 487.95. The total number of shares traded during the day was 36682 in over 2376 trades.

The stock hit an intraday high of Rs. 484.65 and intraday low of 467.6. The net turnover during the day was Rs. 17299979.

Source : Equity Bulls

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