Bodal Chemicals: Weak quarter but correction provides an opportunity
Bodal Chemicals’ quarterly results reflected GST transition hurdles at the end markets. While this dents topline growth for the current fiscal year, ongoing capacity expansion and initiatives for vertical integration puts the company on an accelerated growth path in the next few years. The valuation remains attractive from a long-term entry perspective.
Quarterly results – disappointing
Bodal Chemicals’ performance for Q2 FY18 was disappointing as it witnessed revenue de-growth of 23 percent due to lower demand from end markets, particularly textile industry on account of GST transition issues and competition.
EBITDA margin, however, improved to 18.2 percent (vs 17.8 percent in Q2 2017) due to higher contribution of dyestuff business (compared to dye intermediates). Product pricing also moderated during the quarter, particularly for basic chemicals and dye intermediates. However, in the current quarter, management opines that business has improved to pre-GST levels and the product pricing is also better sequentially.
Additional dyestuff capacity available in Q4 FY18
The company has nearly completed its first phase of dyestuff capacity expansion (12,000 MT) and it is expected to be operational in Q4 this fiscal year.
Additionally, key projects of the company like co-generation power project and Thionil Chloride (36,000 MT; raw material for vinyl sulphone) are also on track and expected to contribute from Q1 and Q2 of FY19, respectively. All these projects are expected to bring ~ 200 bps margin benefit.
Teething problems sorted for the additional production of ‘vinyl sulphone’
A 4200 MT vinyl sulphone plant in SPS processors (70 stake) is completed and the teething problem of supply of ethylene oxide feedstock from Reliance seems to be over. By Q4 FY18, production of vinyl sulphone from the new plant is expected to commence taking the company’s total capacity of vinyl sulphone to more than 16000 MT.
While there are some positive tractions on the above projects, there has been delay in the progress for the business of Trion Chemicals (Speciality chemical for water purification) and LABSA (Linear Alkyl Benzene Sulphonic Acid)
Valuation and projections
Taking account of weak financial performance in H1 FY18, we have revised our projections. We take note of the management’s unchanged guidance for the FY20 revenue (Rs 1950 crore –Rs 1550 crore), for sustenance of higher margins as new projects of backward and forward integration takes place.
Bodal Chemicals is currently trading at 11.3x/8.4x 2019/2020e earnings which is attractive, given the multiple growth drivers. In our view, current phase of consolidation and post result correction provides an opportunity, as increasingly vertically integrated Bodal Chemicals is well placed for the growth opportunity in the sector.
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