Atul Ltd: Pricing headwinds cropping up

24 Jul 2023 , 02:50 AM

Atul’s FY23 annual report commentary continued to be cautious with incremental pricing headwinds cropping up on the back of weak demand and high inventory prevailing across its business segments. The company is investing Rs13.5bn (to be completed by end of FY25) in various projects which would yield incremental sales worth ~Rs23.7bn. However, pricing headwinds are pressurizing margins now and would result into muted Ebitda in FY24. The stock has corrected considerably over the last one year and now stands at ~28x/24x FY25/26 P/E. Analysts of IIFL Capital Services tweak estimates lower by ~2% each for FY24/25/26 and roll forward to Sep’25, raising their TP to Rs6,500 (from Rs6,370). They look forward to management’s comments in the ensuing AGM.

Q1FY24 Ebitda outperforms estimates: 

Though revenues were below estimates, Atul reported better than expected EBITDA for Q1. The outperformance was largely on the back of lower other expenditure (down 30%/15% YoY/QoQ). Revenue declined by 20% to Rs11.8bn primarily led by weak sales from Life Science chemicals (LSC) segment (down 28%) while operational outperformance was led by strong sequential recovery in Performance and other chemicals (PC) segment, Ebit was up 4.6x QoQ. The recovery in PC is not meaningful enough to buffer the expected erosion in LSC’s profitability in the ensuing quarters.

No change in Mid-term revenue guidance: 

Atul completed investment of Rs3.5bn in FY23 (capitalized Rs3.7bn in FY22). Further, investments under implementation in standalone and subsidiaries would be ~Rs13.5bn to be spent over the next two year. The above investment amounting to ~Rs20.7bn to yield incremental revenue of Rs23.7bn. Consolidated revenue would there after rise to Rs78bn.

Other nuggets: 

1) company is carrying high-cost inventory in Crop Protection division which may impact short-term profitability. 2) Low demand and competition from China to impact sales realizations of Colors and Polymers business. 3) Company received ~Rs220mn out of approved insurance claim of ~Rs 320mn due to fire incident. 4) Atul Healthcare (WOS) acquired 50% stake worth Rs225mn in Valsad Institute of Medical Sciences to set up a 200 bed multi-speciality hospital in Gujarat.