Q2FY24 Review: Archean Chemical: Destocking hits bromine demand

9 Nov 2023 , 11:28 AM

Archean Chemicals Q2FY24 performance was dragged by weak Bromine sales both in exports and domestic market. Destocking in user industries coupled weak demand in bromine derivatives created severe pressure on bromine realisations. Performance of industrial salt business was steady while uptick was seen in SOP sales. Though bromine derivatives capex is a tad behind its schedule, it will yielding results from FY25. The geo-political tensions around Dead Sea have not yet disrupted supplies, however customers have started engaging with Archean to diversify sourcing. Analysts of IIFL Capital Services cut their FY24-25 estimates by 8-25% on weak bromine volumes and realizations, however largely maintain FY26 EPS. TP rolled over to Dec’24 (from Sep’24) comes down to Rs630 (earlier Rs685). Maintain Buy. 

Destocking hits bromine demand: 

While the elemental bromine demand remained weak due to higher inventory in flame retardants, destocking in user industries viz. chemicals and agrochemicals hit bromine demand hard during Q2. Bromine sales were down ~51% YoY with volume declining ~25%. Industrial salt posted sequentially steady performance and helped mitigate the pressure on sales. Overall revenues declined by 1% YoY while EBITDA declined 20%. Gross margins contracted by 350bps to 93.5% while Ebitda margins contracted 750bps to 32.9%. 

Bromine derivatives to start yielding results soon: 

Management reiterated that the bromine derivative facility is on track with samplings already underway in Phase-1 that includes PTA catalyst and clear brine fluids. Phase 2 capex containing flame retardant is expected to come onstream by Q1FY25. Thus, bromine derivatives will start contributing meaningfully from FY25 onwards. 

Positive Outlook:

While the ongoing geo-political tensions around Dead Sea have not yet disrupted supplies, the company has started witnessing enquiries. It therefore remains positive on volume uptick in the near future which should also result in firm pricing. Though FY24 performance will be challenging due to weak bromine volumes, earnings will find support from bromine derivatives in FY25.