Rossari Biotech (Rossari) has competency in four chemistries used for textile chemicals, but it has successfully applied its learnings into the new industries of HPPC, which has expanded its addressable market multifold. This was done without compromising on margins, balance sheet or RoIC (which remains the best among peers). Company is likely to have expanded its capacity >2x by FY21-end, which provides strong earnings visibility. Revenue and net profit are estimated to grow at CAGRs of 22% and 26% over FY20-FY23E. Our estimate does not include likely inorganic growth which management hinted in Q3FY21 earnings call. Initiate with HOLD and DCF-based target price of Rs1,020.

Proven competency and track record. Rossari has strong hold on four chemistries – acrylic polymer, surfactants, silicones, and enzymes, which are used in textile chemicals (TCs). It has become market leader in TCs in India and has also been able to apply its learnings to two segments: 1) home, personal care and performance chemicals (HPPCs), and 2) animal health and nutrition (ANH). In fact, the opportunity in HPPC is so large that it gives us confidence in sustained high growth in the foreseeable future.

Formulation and application expertise at the core. Rossari is a sales-driven organisation unlike peers, which are focused on manufacturing. Rossari’s product innovation, formulations and applications are derived from customer requirements, or problem solving. Company therefore needs to be close to customers, hence its technical sales force is one of the largest in the industry.

Greenfield expansion in Dahej provides revenue growth visibility. Formulation business does not require huge investment in production. The equipments commonly used are mixers and blenders, which are fungible across products, while bulk chemicals are bought from other manufacturers. Rossari has 120ktpa capacity in Silvassa and is in the process of completing greenfield capacity of 132.5ktpa at Dahej by FY21-end. This will expand its capacity >2x at an investment of ~Rs1bn. Company envisages peak capacity utiisation in the next 3-4 years, which should help increase revenues >2x.    

Unique business model, but initiate with HOLD on little margin of safety. We like Rossari’s business model: 1) focus on formulations, 2) asset-light nature, and 3) working capital discipline (best among peers). This is helping the company generate industry-leading ‘FCF to sales’ ratio (8% in FY23E) and RoIC (33.6% in FY23E).