After having invested over Rs 700 crs in several projects last three years across businesses - be it aromatics, colors, polymers or pharmaceuticals - Aul now boasts of incremental sales potential (unrealized) of Rs 425 crs (15% of FY17 consolidated turnover) from the past capex in bulk chemicals, additives, intermediates and specialty chemicals. In bulk chemicals business, plans are afoot to boost capacity utilization of its new caustic chlorine plant - subject to external demand - and launch chlorine derivative products. Sensing increased demand for its polymers, higher capacities are planned for specialty resins, suplhone intermediates and other upstream/downstream products. For aromatics, building capacities for fragrance intermediate and downstream and launching new products from its newly established kilo lab facility are also on agenda.
Widening gap of its most flourishing polymers business revenues with that of others in last few years - reflected in awe-inspiring surge in volumes (18% in FY17) - has prompted it to boost sale of high margin products and partially convert epoxy products capacity from commodity to specialty. Despite rapid slowdown in major crop yields and ever growing demand for major crops, Atul's commodity natured crop protection business has often failed to capitalize on rapid volume growth. Expanding brand business to developing new formulation mixtures to boosting secondary sales (trading) are being planned to rev up this flagging business. Partially hit by demonetization, colors business revenues all but flat lined (though volumes increased 7%) not least due to dependence consumer oriented textile sector. Prophesying rapid recovery in colors is not devoid of big risk due to prevailing stress in demand for textile chemicals, though Atul targets to circumvent it by market share of existing products - VAT dyes, sulphur dyes, AQ disperse dyes - and commercializing high performance pigments.
Thanks to margin enriching measures in polymers and color businesses, its POC segment margins would gradually move up over the next two years - thus cementing its EBIT share at two-thirds. Yet grave uncertainty over crude oil supplies by producer nations would cap finished product realizations, roiling its asset turnover ratios; Atul displayed over 10% price (average) decline in in its crop protection business last fiscal; 4% in colors; 7% in polymers. Modest expansion plans (not over Rs 300 crs /$46.9m annually) would free up cash flows for debt retirement and Akzo Nobel project. Perceptible increase in debtors’ last fiscal due to demonetization induced stress in its colors and crop protection businesses would presumably be fleeting in nature.
The stock currently trades at 20.3x FY18e EPS of Rs 126.16 and 17.8x FY19e EPS of Rs 144.44. Notwithstanding nearly unsurpassable business opportunity in global specialty chemicals industry, risks in form of crude oil price volatility, Chinese competition (mainly for crop protection and aromatics businesses), lengthy qualification process and forex fluctuations cannot be discredited. Underplaying regulatory contingencies - like Central Pollution Control Board (CPCB) notice to close the Tarapur plant would not be pragmatic either. Yet its diversified product offerings unquestionably help quell impact of conceivable risks. Tie up with Akzo Nobel for MCA production in India would help it tap vast domestic market potential, besides meeting its captive demand. On balance, we retain our accumulate rating on the stock with revised target of Rs 3033 (previous target: Rs 2530) based on 21x FY19e earnings over a period of 6-9 months.
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