CMP (NSE) 15:52, 11 Jun
Last updated on
28 Aug, 2020
Having steadily gained market share and become the world’s 4th-largest colour pigment producer SCIL is well-placed to continue rapid growth in the context of the imminent exit of its two largest global competitors (BASF and Clariant).
The company’s low-cost manufacturing advantage, technical capabilities, wide product portfolio, growing client relationships, and environmental compliance are its key strengths. Input cost pressures, which impacted FY19 financials, are now fading. SCIL has a Capex plan worth Rs10bn for the next few years, which is expected to drive incremental revenues of ~Rs40bn and RoCE of ~30%. Capex will be oriented towards higher-value segments (high-performance pigments) with a superior margin profile.
Management guided an improved performance in 2Q on the back of a pick-up in domestic demand (to ~90% of pre-Covid levels vs. ~60% in 1Q) and resumption of plant operations post mid-July.
However, new orders and capex are delayed by ~6 months due to labour shortages, travel restrictions and other bottlenecks. Our positive stance remains predicated on the longer-term growth story.
We raise FY21ii EPS by 9% to Rs17.0 post the 1Q earnings beat but leave FY22/23ii EPS largely unchanged at Rs23.7/Rs31.6.
Technically, the stock is on a verge of giving a long-term bullish Cup & Handle breakout on the weekly chart, further accentuating our bullish stance on the stock. We recommend a buy on Sudarshan Chemicals with a target price of Rs557 (~20x Sep-22ii P/E).