Q2FY24 Review: Chemplast Sanmar: Betters weak expectations

6 Nov 2023 , 11:44 AM

Chemplast Sanmar (CSL) Q2 performance bettered analysts of IIFL Capital Services weak expectations. Though performance improved sequentially on the back of better PVC pricing, it continued to remain subpar. Domestic demand is healthy, however excessive dumping from China is impacting industry profitability. Prices of other products viz. Caustic Soda and Chloromethane are expected to recover gradually and CSM business is gaining traction as it singed third LoI this year. While analysts of IIFL Capital Services cut FY25-26 EPS by 17-10% to reflect gradual recovery in PVC, weak H1’24 performance has resulted into steep 90% cut in FY24 EPS. Analysts of IIFL Capital Services roll over SOTP-based TP to Dec’24 (from Sep’24); their revised TP now stands at Rs540 (earlier Rs580). 

Reports sequential improvement: 

CSL reported sequential improvement in Q2 with Ebitda turning black at Rs460mn. However, the performance continued to remain subpar as PVC imports from China at lower price remain elevated. Though DGTR has recommended quantitative restriction on imports, MoF is yet to grant consent. Paste PVC was under pressure with Standalone performance reporting Ebitda loss, while performance of suspension PVC improved. Gross margins contracted 92bps to 33.6%. Other expenses declined ~10% YoY due to reduction in energy costs. Prices of other products viz. Caustic Soda and Chloromethane are expected to recover gradual recovery. 

CSM business gains traction: 

CSL has signed third LoI with a global agrochemical innovator to supply an Active Ingredients. Portfolio contains eight molecules is being expanded to eleven molecules now and thus provides enough confidence of filling the expanded capacity. Management remained confident of achieving 20-25% growth in FY24 despite global destocking in agrochemicals. It has commissioned phase-1 of MPP in Sep23, and is on track to commission phase-2 by end FY24. 

Valuations reasonable, maintain BUY: 

Both the capex projects viz. 41Ktpa paste PVC at Cuddalore and phase-2 of CSM MPP, remain on track for commissioning and are expected to drive profitability. While analysts of IIFL Capital Services cut FY25-26 EPS by 17-10% to reflect gradual recovery in PVC, weak H1’24 performance has resulted into steep 90% cut in FY24 EPS. At 17x FY26 earnings, they believe valuation are reasonable and does not factor in full upsides in CSM business. Recovery in PVC prices remains key trigger.