Shree Pushkar Chemicals & Fertilisers Research Report

Company
Date of report May 22, 2017
Issuer
Target Price (Rs) 245
Gain (%) 17
Rationale

Steady performance, robust growth journey ahead

• Shree Pushkar Chemicals & Fertilisers (SPCL) reported a steady Q4FY17 performance. Net sales for the quarter was at Rs 92.7 crore

• EBITDA in Q4FY17 was at Rs. 14.4 crore with corresponding EBITDA margins at 15.5%. PAT in Q4FY17 was at Rs. 8.2 crore, up 43.4% YoY

• The management guided for scheduled commissioning of phase-2 of dyestuff facility (3000 tonne) by Q1FY18, which will drive the next leg of growth with phase-1 currently operating at 80% utilisation level

Dyes and dye intermediates; India in sweet spot; strategic fit

Dye intermediates find application in manufacture of dyes, which, in turn, are used as colouring agents in textiles. As per industry estimates, the global industry size for dyestuff & dye intermediates (FY16) was at ~800,000 and ~620,000 tonne per annum (TPA), respectively, growing at a CAGR of 2-3%. China and India govern the industry with a market share of ~75% and ~15%, respectively. However, stringent environmental regulations, rising labour & power costs and declining export incentives have eroded the low cost competitiveness of Chinese manufacturers. Sensing the opportunity, Indian manufacturers, including SPCL, have expanded capacities as global customers turn to India as a strategic fit to diversify their procurement base, placing India in a sweet spot.

Impressive capex up the value chain, volume led growth to follow

SPCL has moved up the value chain through the commissioning of its 3000 tonne dyestuff facility in January 2016 at a capex of ~Rs. 42 crore funded through its IPO proceeds. It is an integrated facility, which includes associated dye intermediates capacities viz. vinyl sulphone (1000 tonne) and H-Acid (750 tonne), which have also been commissioned in FY17. SPCL is further augmenting this facility by additional dyestuff capacity of 3000 tonne (capex ~Rs. 5 crore), which is due for commissioning by Q1FY18E. This will ensure healthy volume led growth in the dyestuff segment with its share in overall topline increasing from ~13% (Rs. 40 crore) in FY17 to ~32% (Rs. 149 crore) in FY19E.

Zero effluent discharge moat; fertiliser segment key contributor

The fertiliser segment prudently converts waste generated in other processes and is instrumental in making SPCL a zero waste discharge company. SPCL, in addition to its existing capacities of SSP & soil conditioners, NPK and cattle feed, has commissioned 10000 TPA sulphate of potash (SOP) and 6500 TPA granular calcium carbonate (GCC) facilities in Q2FY17 at a capex of Rs. 20 crore. On a combined basis, we expect revenues of the fertiliser division to grow at 33.6% CAGR in FY17-19E to Rs. 106 crore in FY19E (Rs. 59 crore in FY17) primarily on account of the commissioning of new facilities. The profitability of this segment is relatively lower in comparison to SPCL’s core dye business.

Strong earnings trajectory warrants re-rating; reiterate BUY

SPCL has a lean balance sheet with net cash of Rs. 8 crore (FY17) and is expected to be debt free on account of limited capex spend over FY17- 19E. It also has a controlled working capital cycle with net working capital days of ~71 days (FY17). With commissioning of dyestuff capacity, we expect sales, EBITDA & PAT to grow at a CAGR of 21.7%, 24.4% & 27.4%, respectively, during FY17-19E. Furthermore, SPCL realises a healthy 15%+ EBITDA margins and ~2.5x asset turnover resulting in impressive return ratios profile with FY17-19E average RoCE & RoIC at ~25% & ~29%, respectively. We value SPCL at Rs. 245, i.e. 15.0x P/E on FY19E EPS of Rs. 16.4 and assign a BUY rating to the stock.

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