Chemicals - Apr-Jun'22 Earnings Preview - Stable quarter QoQ but demand outlook cautious

Mr. Nitesh Dhoot- Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Chemical companies are expected to deliver strong revenue/EBITDA performance YoY led by continued price rise to offset surge in raw material, energy and logistics costs. In Q1FY23 crude oil prices were up ~15% QoQ due to geopolitical issues, while oleochemical feedstock prices (vegetable oils viz palm, rapeseed, soyabean, sunflower oil etc.) were up 5-20% QoQ given Indonesia's ban on palm oil exports. While commodity prices are now moderating (ex-crude oil), demand environment has weakened particularly in discretionary end user industries due to extreme inflation witnessed over last few quarters. Demand outlook is cautious given weak consumer confidence, though chemical companies' capex programmes are on track. For our coverage stocks in Q1FY23, we expect Revenue/ EBITDA/PAT growth of 52%/86%/94% YoY and 3%/-2%/-3% QoQ. Gross/EBITDA margin decline of ~210 bps/ 140bps QoQ factors higher ASP's. We maintain 'BUY' on FINEORG (preferred pick) and NOCIL and 'ACCUMULATE' on ARTO.

- FINEORG: Pass through of higher costs to customers continued in Q1FY23, led by further increase in vegetable oil prices (5-20% QoQ), fueled by Indonesia's ban on palm oil exports and Russia-Ukraine crisis. We expect revenue/EBITDA/PAT to increase 86%/ 214%/ 227% YoY and 8%/ 2%/ -4% QoQ. From H2FY22 FINEORG navigated cost headwinds extremely well with EBITDA margin recovering from lows of 14.5% in Q1FY22 to 25.9% in Q4FY22 and likely at 24.5% in Q1FY23. Its medium term growth prospects look encouraging given 1) healthy demand traction in polymer additives and global consolidation benefits 2) capacity headroom to enable higher volume in FY23, though constraints visible in FY24 3) peak profitability likely in FY24 on optimum product mix and operating leverage playing out and 4) net cash balance sheet and healthy OCF of Rs 7.6bn over FY23-24 to enable self-funded capex. Maintain 'BUY' at TP of Rs 5600 (40x FY24 EPS).

- NOCIL: We expect higher average realizations YoY to drive revenue/ EBITDA/ PAT growth of 28%/ 31%/ 34% YoY, though on QoQ basis we expect decline of 5%/ 14%/ 8% on account of moderation in realization from peak witnessed in Q4 on softer key raw material prices (particularly MIBK and Acetone, while Aniline remained stable). While EBITDA margin is likely to moderate sequentially to 21.8% vs 24.1% (narrowing of spreads), absolute profitability continues to remain strong. NOCIL is well-placed given (1) sufficient capacity headroom to capture demand improvement expected from tyre industry capex (2) prices realigned to factor in cost inflation (3) net cash balance sheet and robust FCF generation of Rs 3.5 bn over FY22-24E. Maintain 'BUY' at TP of Rs 310 (12x FY24E EV/EBITDA).

- ARTO: We expect healthy growth in revenue (+43% YoY/ 6% QoQ) led by pass through of higher input prices in both chemicals and pharmaceutical segments, while volume growth to be restricted on availability of nitric acid (key RM). EBITDA to increase by 13% YoY/ 5% QoQ while margins are expected to contract 500 bps YoY/50 bps QoQ on lag in pass-through (~3 months) given continued RM price rise during the quarter. Maintain 'ACCUMULATE' at TP of Rs 880 (19x FY24E EV/EBITDA).

Source : Equity Bulls

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Chemicals Q1FY23 EarningsPreview PrabhudasLilladher