Chemicals - Jan-Mar'22 Earnings Preview - Profitability to improve sequentially

Nitesh Dhoot, Research Analyst - Institutional Equities, Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Price hikes undertaken across companies in Q4FY22 to offset surge in raw material, energy and logistics costs; to continue given further cost escalation

- Demand outlook continues to be positive but extreme inflationary environment may dampen demand in discretionary end user industries

- Capex programmes are on track but witnessing cost overruns, because of the increase in building material costs, shipping costs etc.

Chemical companies are expected to deliver improvement in performance QoQ on pass through of higher costs (without/ with a lag from previous quarters) and steady demand aided by recovery post a milder wave of covid. Petrochemical feedstock (crude oil, naphtha, natural gas) prices are up ~20% QoQ while oleochemical feedstock prices (vegetable oils viz palm, rapeseed, soyabean, sunflower oil etc) are up 10-20% QoQ, largely on Russia-Ukraine crisis, thereby driving increase in prices of downstream products. USDINR has been largely stable QoQ. For our coverage stocks, we expect Revenue/ EBITDA/PAT growth of 46%/ 44%/ 48% YoY and 8%/ 9%/ 12% QoQ while Gross/EBITDA margin decline 350bps/ 60bps YoY and increase 20bps QoQ. We reiterate BUY on FINEORG and NOCIL and HOLD on ARTO.

FINEORG: Pass through of higher costs to customers continued in Q4, led by further increase in vegetable oil prices (10-20% QoQ, fueled by Russia- Ukraine crisis). We expect EBITDA to increase 90% YoY/ 15% QoQ and PAT to increase 95% YoY / 20% QoQ. Its growth prospects look encouraging on (1) healthy demand traction aided by improved client confidence and visible global consolidation benefits (2) capacity headroom helping capture demand improvement (3) ability to pass through higher costs to customers without any lag, protecting profitability (4) net cash balance sheet and healthy cash flow generation of ~Rs 6.5 bn over FY22-24E to enable self-funded growth capex. Reiterate BUY with TP at Rs 4600 (28x FY24 EV/EBITDA).

NOCIL: We expect price hikes undertaken in Q4 to drive revenue (+41% YoY/ 18% QoQ) and EBITDA (13% YoY/ 17% QoQ). Unit margins to improve sequentially as increase in realisation is expected to be higher than the cost push in Q4 (coming with a lag from previous quarters as ~60% business is contractual). Its well placed given (1) sufficient capacity headroom to capture demand improvement (2) moderate competitive intensity as prices getting realigned to factor in cost inflation (3) net cash balance sheet and robust FCF generation of Rs 3.5 bn over FY22-24E. We tweak estimates by 5-6% and reiterate BUY with revised TP at Rs 285 (12x FY24E EV/EBITDA)

ARTO: We expect healthy growth in revenue (+32% YoY) on account of pass through of higher input prices led by both chemicals and pharmaceutical segments. EBITDA to increase by 28% YoY while margins are expected to contract 60 bps YoY on lag in pass through (~3 months). Second long term supply contract capex was commissioned in Q4. Maintain HOLD rating with TP at Rs 1040 (21x FY24E EV/EBITDA)

Source : Equity Bulls

Keywords

Chemicals Q4FY22 EarningsPreview PrabhudasLilladher