Sudarshan Chemical Industries - Revenue beat impressive - ICICI Securities

Sudarshan Chemical Industries' (SCIL) Q4FY21 EBITDA increased by a strong 72% YoY to Rs875mn on recovery in revenues across segments, which should give confidence on its ability to drive Rs10bn-12bn additional revenues in next 3-4 years. Though near-term gross profit margins may come under pressure, it would only be transient. SCIL was able to expand its EBITDA margin by 320bps despite lower gross profit margin on higher operating leverage, and we believe the company can achieve 18-20% EBITDA margin over next few years (an upside risk to our estimates). This does not factor-in the benefit of backward integration, which will only add to it. We have raised our EPS estimates by 11%/9% for FY22E/FY23E on the strong revenue beat in Q4FY21, and accordingly increased our target price to Rs708. Downgrade to ADD (from Buy) on recent rally.

- Strong growth in pigment revenues. SCIL's revenues from the pigment segment grew 32% YoY to Rs5.3bn on demand revival across domestic market, up 32.5% to Rs2.7bn and exports, up 32.7% to Rs2.6bn. Specialty pigment revenues were up 27.8% YoY to Rs3.6bn, and the same from non-specialty pigments was up 44% to Rs1.7bn. We are impressed with SCIL ability's to show sharp rise in non-specialty revenues despite headwinds from rise in rebate for Chinese manufacturers. Company is planning to launch a few new products in Q2FY22, which should help drive revenue growth in future. It intends to expand its revenues to Rs27bn-29bn (from Rs19bn in FY21) from ongoing capex of Rs6bn (likely to end in FY22E). RM inflation pass-through may make revenue growth look much higher in FY22E.

- Margins should improve notwithstanding near-term pressures. SCIL's gross profit margin was down 210bps YoY to 42%, and was impacted from lower export incentives (100bps) and RM inflation. Company has experienced RM inflation of 200-250bps, but it will be able to pass-through the same in next few months. We see some margin compression in Q1FY22, which should improve thereafter if RM prices stabilise. EBITDA grew by a strong 72% YoY to Rs875mn, and margin improved by 320bps on operating leverage. EBITDA margins can improve to ~18-20% on recovery in gross profit margin and higher operating leveraging, though we are not factoring it in our assumptions. Net profit grew 96% YoY to Rs534mn.

- On way to complete Rs6bn capex. Company has completed majority of its planned capex and only Rs380mn is pending, which should get completed H1FY22. This should enable revenue growth from new products, and capacity expansion for existing products. Board has approved additional capex of Rs1.35bn on infrastructure for future growth. Company has plans for more capex for backward integration to become cost-competitive; however, it has not shared any guidance. Maintenance capex is Rs300mn-350mn p.a.

Shares of SUDARSHAN CHEMICAL INDUSTRIES LTD. was last trading in BSE at Rs.666 as compared to the previous close of Rs. 670.7. The total number of shares traded during the day was 42753 in over 3549 trades.

The stock hit an intraday high of Rs. 681 and intraday low of 653.8. The net turnover during the day was Rs. 28507423.

Source : Equity Bulls

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