Down 37 percent from its all-time high of ₹10,959.17, hit in October 2021, shares of chemical firm Atul Ltd are likely to continue their downward trend going ahead. The stock lost over 23 percent in the last 1 year and has been giving negative returns for the last 8 months straight.
Just in 2023 YTD, the stock has lost almost 17 percent. The recent correction is on the back of disappointing results in the December as well as the March quarter. Also, the valuations of the stock seem expensive.
Recently, brokerage house InCred Equities retained its ‘reduce’ call on the stock with a target price of ₹6,431, indicating a downside of over 6 percent from its current market price of ₹6,866.05.
As per the brokerage, near-term earnings risks are high for the stock and consensus EPS estimates for FY24F and FY25F need a big cut.
"Consensus EPS estimates for FY23F, 24F and 25F appear to be too high and all of them need to be cut by 13 percent, 20 percent and 25 percent, respectively. As we have stated earlier, inflated consensus EPS estimates are normally a sign of a peak cycle. As of now, to some extent, the market doesn’t believe consensus EPS estimates but it also doesn’t believe that the estimate for FY25F needs to be cut by 25 percent," explained the brokerage.
The brokerage has valued Atul at 25x FY25F EPS, which is approximately at a 15 percent premium to its long-term mean valuation of 21.5x.
The peak EPS considering 100 percent utilization of new capacity can be around ₹340, but instead of FY25F, this EPS may be realized in FY28F, it noted. InCred believes that one should wait for a better price to make an entry.
Earnings
The brokerage further pointed out that Atul reported a disappointing set of numbers as revenues declined 13 percent YoY and 6 percent QoQ. Profit also declined by 33 percent YoY and 16 percent QoQ. With reported EPS of ₹170, consensus EPS estimate of FY24 and FY25 needs to come down by 20 percent each, it forecasted.
It also noted that the slowdown has hit the pigment business, as well as the Epoxy business of the company. On the positive, raw material cost pressures have eased, however, this again shows a lack of demand, said InCred. This also debunks that all chemical companies in India will get global diversification of supply chain (China+1 Theory), it added.
"Global demand slowdown is hitting the revenue of the company. While we knew that dyes and pigments are witnessing a slowdown however the disappointment and Epoxy resin sales came as a surprise to us. RM costs are falling however it’s the precipitous fall in the top line which is leading to earnings disappointment," it stated.
Expansion project
The brokerage informed that Atul is incurring a capex of ₹2000 crore for expanding its capacity and as per InCred's estimate, incremental gross profit can be around ₹2800 crore at 100 percent utilization.
The expansion project can be divided into these parts: 1) dyes, 2) agrochemicals and APIs, 3) epoxy resins and related chemicals, and 4) multiple API intermediaries (50-70kt) & other chemicals (500kt), further said the brokerage.
Atul has filed for environmental clearance for its 1.2 mt production capacity. Based on average spreads of the last seven years, the brokerage forecasts that when the entire capacity comes online, then Atul’s gross profit will rise which will lead to an increase in the EPS by 70 percent over FY23F. However, please note that given the slowdown in overall demand, the brokerage believes that 100 percent utilization of the expanded capacity is at least five years away.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
