Chemplast Sanmar’s (Chemplast) Q4FY22 spreads were impacted by high-cost inventory carried over from Q3FY22 and sold in its entirety in Q4FY22. This kept EBITDA flattish QoQ. Chemplast has sold most capacity in FY22, and in FY23 it has only 10% more capacity coming in S-PVC segment.

Large expansion in paste-PVC and custom manufacturing will commence only in FY24. Company plans to do more capex with good scope for large FCF generation and has not announced dividend in FY22 pending assessment of fund requirement. We expect big capacity announcement in S-PVC where the company already has environmental clearance to double its capacity to 600kpta. This will provide the much-required visibility on volume growth while more capex in custom manufacturing will be welcome.

Volumes grew on inventory liquidation. Specialty volumes rose 28% YoY to 22kte on liquidation of high-cost inventory in Q4FY22 since it could not be sold in Q3FY22 due to weak demand. S-PVC volumes were up 12.9% to 88kte; higher inventory in this segment had piled up due to extended monsoon in South during Q3FY22. Non-specialty volumes recovered (up 27% to 40.5kte) on a low base. Specialty spreads (gross profit/kg) dipped 38% QoQ to Rs168/kg, and S-PVC’s was down 28.8% QoQ to Rs26/kg (hit due to higher-cost inventory). Company’s S-PVC contribution margin was Rs18/kg in Jan/Feb’22 while in Mar’22 it was Rs29. During Q1FY23, lockdown in China has led to more S-PVC exports, and the contribution margin is at Rs23/kg. Company estimates FY23E contribution margin at Rs23-29/kg. 

Custom manufacturing revenues rose >50% in FY22. In Q4FY22, Chemplast’s revenues rose 35% YoY to Rs18bn, and gross profit was up 10% to Rs6bn. EBITDA was up only 0.7% YoY to Rs3.5bn while PBT rose 24% to Rs2.8bn on lower finance cost. For FY22, the company said custom manufacturing revenues were up >50%, which is very strong, and that enquires from clients have grown. Company is accelerating construction of its MPP-2 facility with investment of Rs2bn-2.5bn by early-FY24.

Capital allocation and roadmap for growth capex. Chemplast generated FCF (post interest cost) of Rs7.5bn in FY22, and we expect this to remain strong going forward in absence of any large capex. Company has not announced dividend for FY22 in anticipation of large capex outlay. In the past, it has mentioned an intention to expand S-PVC capacity to >600ktpa. Company will soon come back on new capex plans and thus provide visibility on future capital allocation.

Not much volume growth in FY23. Chemplast has very little headroom for volume growth in FY23 (only 10% capacity addition in S-PVC is planned), as most of the new capacity (in paste-PVC and custom manufacturing) will be added in FY24.