Q2FY24 Review: Atul Ltd: No respite from slowdown

23 Oct 2023 , 01:58 AM

Atul’s Q2 earnings remained suppressed, on the back of weak exports demand for discretionary products. Further, continued global destocking and Chinese dumping took a toll on the margins in Life Science and Performance Chemicals segments. That said, the base will now turn favourable from Q3’24 and thus, will arrest steep earnings decline. However, analysts of IIFL Capital Services see limited scope for immediate rebound in demand and hence, maintain their cautious view. Analysts of IIFL Capital Services trim FY24-26 EPS by 7-8%, post the weak performance; roll over their TP to Dec’24 (from Sep’24), and revise TP downwards to Rs6,300 (from Rs6,500). 

Exports remain challenging: Q2 results were impacted by weak demand and compression in margins mainly in the Life Science Chemicals segment. Export prices of 2,4-D herbicide (within crop protection) have sharply declined, due to worldwide destocking and Chinese dumping of generic agrochemicals. Further, spreads of key products in aromatics and other segments remained weak, despite correction in the input costs. 

Commissioning of new capacities getting delayed: Cash outflow towards capex stood at Rs3.0bn, while net addition to gross block was Rs1.8bn only during 1H’24. Near-term growth drivers — commissioning of caustic-chlorine and epoxy plant — are getting delayed. This, coupled with a slow ramp-up of capacities commissioned in the last few years, is impacting the overall performance. Also, ATLP has filed application with DGTR to initiate Anti-dumping duty investigation on Sulphur Black imported from China. The ramp-up has been under pressure, owing to Chinese dumping. 

Lack triggers: For the past few years, Atul’s earnings have stagnated in spite of capacities getting commissioned. Further, though margins pressure will ease on correction in input costs, demand recovery is expected to be gradual. Analysts of IIFL Capital Services maintain a cautious view as the company continues to struggle with volume growth.