Q3FY24 Review: Atul Ltd: Export demand remains weak…

24 Jan 2024 , 10:04 AM

Atul’s weak Q3 earnings confirm analysts of IIFL Capital Services belief that the exports demand remains under pressure, and there is limited potential for an immediate rebound. Nevertheless, domestic market demand remains stable. The Life Science Chemicals segment is affected by subdued demand in the Latin America market. Ongoing price pressures are squeezing margins in Performance Chemicals. Near-term earnings outlook is bleak however, the capex has started getting commissioned, benefits of which will result in earnings scale up over the next couple of years. Analysts of IIFL Capital Services cut FY24-26 earnings by 26-14% and roll forward their TP to Mar’25 (from Dec’24). With a 1YF (FY26 EPS) target multiple of 25x, analysts of IIFL Capital Services TP comes down from Rs6,300 and now stands at Rs5,850. 

Q3 earnings below estimates: 

Q3 results reiterate weakness due to a demand slowdown and margin compression in the Life Science Chemicals segment. Sequentially, export prices for Para cresol and Resorcinol have declined which would have impacted the segment’s margins. Though 2,4- D prices remain suppressed, a sequential increase would have resulted into 110bps improvement in segment’s margin. Ebitda was ~5% below estimates, however higher depreciation and lower other income resulted into PAT missing estimates by ~34%. 

Commissions Caustic-chlorine plant: 

Atul commissioned the much awaited 300TPD Caustic chlorine and 50Me power plant recently and incurred capex of Rs10.3bn. The unit has potential to generate sales of ~Rs5bn while by-product Chlorine will consumed captively for MCA. It has also commissioned 2,200tpa pharma plant and has begun operations in pilot plants of polymers. Analysts of IIFL Capital Services estimates build-in ramp-up for these capacities over the next couple of years. 

Trim earnings by 26-14%: 

Sustained weak demand and suppressed pricing has resulted into FY24-26 earnings downgrade by 26-14%. Analysts of IIFL Capital Services anticipate a gradual recovery in margins for the performance chemicals segments and bake in the ramp up of recently commissioned capacities. The base will turn favourable and thus will arrest steep earnings decline. Roll forward valuation to Mar’25 (from Dec’24) and revise TP downwards to Rs5,850 (25x FY26 EPS).