Atul: Recovery to be gradual

2 May 2023 , 10:31 AM

Recommendation: Reduce

Target Price: Rs 6,370

Analysts at IIFL Capital Services have trimmed their FY24-25 EPS estimates by 16-20% post weak and below estimate Q4FY23 earnings. While they continue to assume margin recovery in coming quarters, there is risk to this assumption. Recovery in volumes remains key for earnings growth, which looks difficult in the current challenging environment. They have rolled over their target price to June 2024 (from March 2023), and revise target price downwards to Rs 6,370 (from Rs 7,250).

Volumes decline

Atul posted 2% decline in volumes, largely led by fall in exports. Domestic business saw minor volume growth. Exports dropped significantly for Aromatics and Colours divisions. Subsidiaries’ performance too was weak, with combined profit from subsidiaries and associates (Amal) declining from Rs 470 million in FY22 to Rs 100 million in FY23. Though some of these segments have witnessed recovery during Q12024, demand in Crop Protection has turned weak.

Mid-term revenue target still resting at last year’s guidance

Earlier, in the FY22 AGM, CMD Sunil Lalbhai guided to consolidated sales of Rs 80 billion. However, FY23 turned out to be very challenging, owing to demand headwinds and losses from asset stabilization. Based on the unrealized revenue potential from existing capacities and upcoming projects, incremental revenues would be in the range of Rs 25-27 billion at peak utilization levels. IIFL Capital Services’ calculations indicate that consolidated revenues will rise to ~Rs 80 billion (similar to guidance given last year).

Lacks triggers

Atul’s earnings have stagnated for the past few years in spite of capacities getting commissioned. Further, though margins pressure would ease, demand recovery is expected to be gradual. Analysts at IIFL Capital Services maintain a cautious view as the company continues to struggle with volume growth, despite commissioning some of the capacities. Therefore, they find valuations at 27x FY25 estimated P/E expensive.