Q1FY24 Review: Chemplast Sanmar: CSM growth guidance raised

14 Aug 2023 , 02:12 PM

Chemplast Sanmar (CSL) reported a disappointing quarter with a Ebitda loss of Rs345mn as weak global demand of PVC led to excessive dumping from China. Prices of other products viz. Caustic Soda and Chloromethanes too corrected significantly and resulted into Ebitda loss. Management has pointed out that the domestic demand for PVC was strong and prices have started recovering from multi-quarter lows. It has also raised CSM business growth guidance for FY24 to 25% from 10-15% earlier. Analysts of IIFL Capital Services cut FY24-26 EPS by 29-19% to reflect weakness in PVC and other chemicals and roll over SOTP-based TP to Sep’24 (from Jun’24); analysts of IIFL Capital Services revised TP now stands at Rs580 (earlier Rs610). 

PVC prices poised to recover from lows: 

Q1 results were muted, on the back of weak PVC prices and excessive dumping from China. However, situation for the PVC segment has started to recover as the industry raised prices in the last few months. Besides, management commented that the dumping of PVC has declined in Jul-Aug 23 due to increase in local demand in China and decline in utilization. The company has also highlighted that the domestic demand continues to remain firm and spreads are expected to improve from hereon. 

Guidance raised for CSM business: 

The company has commercialized phase1 of MPP in CSM business and expects to ramp up the tilization on the back of two recent LOIs. The management was confident about the ramp of two LoIs (one of which already got converted into agreement) and hence raised growth guidance to 25% for FY24 (earlier guidance was 10-15%). The company has been selected by a global agrochemical innovator to manufacture a new Active Ingredient (AI) resulting into a strong pipeline of products. Management was confident of achieving revenues of Rs10bn in CSM business over the next 3-4 years with a RoCE of around 40% at peak utilization. 

Reasonable valuation, CSM remains a dark horse, Maintain BUY: 

Analysts of IIFL Capital Services cut FY24-26 EPS by 29-19%, to reflect a weak Q1 performance and gradual recovery in PVC spreads. Realizations of other chemicals viz. Chloromethanes and Caustic Soda are also expected to remain weak. Both the capex projects: 41Ktpa paste PVC capacity at Cuddalore and 2nd phase of CSM MPP, remain on track for commissioning and are expected to drive profitability. At18x they believe valuation are reasonable and does not factor in full upsides in CSM business.