Sudarshan Chemical Industries' (SCIL) Q3FY21 EBITDA increased by a strong 26.5% YoY to Rs79 crore on recovery in volumes in specialty (+21% YoY) segment, and non-specialty (+24%), says ICICI Securities in its report.

According to ICICI Securities, gross profit margins were hit from higher raw material costs and lower export incentives, and the company expects bounce-back in the next few quarters. SCIL expects gross margins to gradually improve from its historical average driven by better product mix and operating leverage resulting in much higher EBITDA margin.

The company is in a sweet spot with vacuum in top 3 global players and its strong product pipeline, which would help it drive higher incremental market share. We maintain our estimates, but increase our target price to Rs595 (from Rs533) on valuation rollout to FY23E.

Strong revenue print: SCIL's pigment business revenues grew 22% YoY to Rs4.8bn on strong demand in the domestic market (up >25%) and exports (up 9%). Specialty pigment volume growth was impressive at 21% YoY; while non-specialty pigment volumes were up 24% despite headwinds from increased incentives for Chinese manufacturers. Product sampling of Yellow HPP has started, and the company expects product approvals to come in from Q1FY22. New products' contribution to overall revenues has not been material in the past, but SCIL aims to drive it up to 15-20% over the next few years aided by a few big product launches. It plans to launch 4-5 new HPPs (high performance pigments) among the 20-25 new products planned for FY22.

Margin expansion to follow: SCIL's gross profit margins (down 140bps QoQ to 42.8%) were hit due to lower export incentives and rise in a few raw-material prices, which it plans to pass-on in the next quarter. It expects, over the next few years, gross profit margins to expand gradually with rise in contribution from HPP segment. Employee cost increase was due to new senior management hiring for geographical expansion, and annual increments implemented in Oct'20. Company expects employee cost inflation to be moderate in the foreseeable future as it does not plan any new international operations. Other expenses increased due to higher sales cost, and increased operations.

Capex further pushed to H1FY22: SCIL has Board approval for capex of Rs 5.85bn, of which Rs2.25bn was completed in FY20. It plans to execute capex of Rs1.5bn in FY21E (earlier guidance was Rs2.5bn, which looks difficult due to restriction on people movement and logistical issues), and Rs2.6bn in H1FY22. Productive capex (manufacturing) accounts for 70% of the planned capex, and the rest is for driving efficiency. SCIL expects asset turnover of 3x on productive capex. It has planned accelerated setting-up of plants for new products.