CRISIL Research has come out with its report on Sudarshan Chemical Industries. The research firm has initiated coverage on the company with a fundamental grade of ?4/5? and has maintained the fair value of Rs 764 per share.

CRISIL Equities has assigned a CRISIL IER fundamental grade of 4/5 (pronounced four on five) to Sudarshan Chemical Industries Ltd (Sudarshan). The grade indicates that the company?s fundamentals are superior? relative to other listed equity securities in India. CRISIL Equities has assigned a valuation grade of 3/5, indicating that market price is ?aligned? with the fair value. Our one-year fair value of the stock is Rs 764. The stock is currently trading at Rs 760 per share. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument?s future market price or its suitability for a particular investor.

The assigned fundamental grade takes into account Sudarshan?s position as one of India?s leading pigment manufacturers, offering a wide range of products, as well as its increasing focus on value-added products like effect and high performance pigments, which offer better margins. We, therefore, expect the company to benefit from the increased demand for pigments due to the growth in end-user industries namely paints, inks, plastics and cosmetics. The grade factors in Sudarshan?s customer base which includes industry-wide leading players - Asian Paints, Kansai Nerolac, Sakata, Camlin, etc. The grade also considers Sudarshan?s increasing efforts towards building up a significant customer base - for high performance pigments - in the US and European markets, the world?s largest consumers of pigments. The grade is supported by the success of Sudarshan?s management in turning around the agrochemicals segment, which constitutes ~13% of revenues.

The grade is constrained by competition from the unorganised players, which reduces the bargaining power of the larger players. The performance is vulnerable to volatility in input costs, which could impact margins. Further, to expand in the US and European markets, Sudarshan will have to stave off competition from wellentrenched global players like BASF-Ciba, Clariant and Lanxxess; the company?s effort on this front remains a monitorable.

Financial outlook

CRISIL Equities expects Sudarshan?s revenues to grow at a two-year CAGR of 12% to Rs 9.2 bn in FY13 driven by growth in the pigments segment. EBITDA margin is expected to expand by ~270 bps and stabilize at ~14% in FY13 compared to 11.6% in FY11. EPS is expected to increase at a two-year CAGR of 12% to Rs 87.1 in FY13 from Rs 56.2 in FY11. We expect RoE to be 25% in FY13.

Valuation

CRISIL Equities has used the discounted cash flow method to value Sudarshan and arrived at a fair value of Rs 764 per share. At this fair value, the implied P/E multiples are at 10.2x FY12E EPS and 8.8x FY13E EPS, says CRISIL Research report.