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Shares of Archean Chemical Industries have given stellar returns to investors since listing. Listed in November last year, the stock has jumped 45 percent from its IPO price of ₹407.
On the back of strong stock performance, leading market share of 60-70 percent in bromine and industrial salt segment, operating efficiency, and EBITDA growth, brokerage house SMIFS has a ‘buy’ recommendation on the stock with a target price of ₹905, indicating an upside of 55 percent over a time period of 12-18 months.
Expansion into bromine derivatives products will boost revenue by 2x, it added. Based on the above parameters, the brokerage expects the company to report EPS of ₹60.33 in FY25E.
Stock price trend
While the stock has given overall robust returns since listing in November 2022, it has witnessed strong volatility in 2023 amid the overall cautious market sentiment. In the current calendar year, the stock gave positive returns in just 3 of the 8 months so far and negative returns in the remaining 5.
The stock has surged over 12 percent in August so far. Before this, it was green in the month of March, up 3.3 percent and in January, up 23.6 percent. The stock gave negative returns for 4 straight months between April and July, shedding the most in April, down 15.3 percent. It was also in the red in February.
Currently trading at ₹590, the scrip is over 19 percent away from its record high of ₹731.75, hit in February this year.
Investment rationale:
Leading market presence: As per the brokerage, ACIL is the leading player in the bromine industry with the largest capacity in India. ACIL is one of the largest producers of industrial salt in India with a capacity of over 3 million MTPA. The industrial salt produced is 100 percent exported mainly to Japan, South Korea, and China. Industrial salt and bromine contributed almost 50 percent of each of the total revenues in FY23.
Leveraging on India’s natural advantage of bromine reserves: The moderation of bromine production in China due to the depletion of raw material resources and receding water level of the northern basin of the Dead Sea, and the relatively cheaper cost of bromine production in India has exponentially increased the exports of bromine from India over the past decade, noted the brokerage. India’s bromine production from Rann of Kutch has risen rapidly and ACIL will benefit from this as the largest and the lowest cost-intensive bromine producer globally, it said.
"Due to the quality and nature of sea brine available, the steaming out process is used to extract bromine which is cost-effective compared to the blowing out process used in China and Japan. Due to this, we expect sales volume from Bromine to increase in FY24. Industrial salt and Sulphate of Potash (SOP) are also produced through relatively cost-effective processes resulting in overall production costs being lower compared to domestic as well as global peers. We expect operating profitability to remain healthy at 25-30 percent over the near term," it stated.
ACIL also enters into 12-month fixed price contracts for bromine and 24-month fixed price contracts for industrial salt. These long-term contracts provide adequate revenue visibility and stability. These contracts not only provide earnings visibility but also help insulate the company in a falling commodity price environment, added SMIFS.
Expansion of product portfolio: The brokerage further pointed out that ACIL is expanding its product portfolio to bromine derivatives products like high-end-flame retardant (HEF), clear brine fluids (CBF) and pure terephthalic acid (PTA) synthesis with its greenfield expansion project. The company’s CAPEX for this project is ₹252 crore which is expected to be operational by Q4FY24. The Greenfield expansion is expected to have an asset turnover of three times and is expected to increase the company's sales by two times in the next two to three years with an EBITDA expansion of 25-30 percent, said SMIFS.
Improving financial risk profile: The firm's net worth is healthy at ₹1,430 crore as on March 31, 2023, supported by IPO proceeds of ₹805 crore in November 2022 and healthy operating cash flows in recent years, mentioned the brokerage. Also, the company has completed sizeable capex addition in the recent past, resulting in sufficient capacity for its key products. Post-retirement of the NCDs, the net debt-to-equity stood at zero for the period. ACIL did not have any long-term debt on its books on March 31, 2023. Besides, liquidity is also healthy, supported by estimated cash surpluses of ₹250 crore.
It is expected to avail ₹160-180 crore of term loans in FY24, to fund the bromine derivatives plant. Despite the debt addition, ACIL’s consolidated financial risk profile is expected to remain healthy due to steady cash generation, and continuing healthy liquid surplus, said the brokerage.
