After a 32 percent fall in the last 1 year and a 15 percent decline in 2022 year-to-date (YTD), brokerages now believe Sudarshan Chemicals is all set for a recovery.
Two major global players are shifting away from the pigment business which HDFC Securities believes Sudarshan Chemicals is in a sweet spot to seize this opportunity through product offerings similar to those of global players.
HDFC Securities maintained a buy call on the stock, with a target price of ₹620 apiece, indicating an upside of 34 percent. Meanwhile, Anand Rathi also has a 'buy' call on the stock with a target price of ₹633, indicating a 37 percent upside.
Despite its highest revenue in Q4 to ₹620 crore, Sudarshan’s EBITDA/profit slipped 1.6 percent/16.4 percent YoY due to higher costs of inputs, energy and logistics, and tax expenses, said Anand Rathi.
"Higher costs and global and domestic headwinds hurt Sudarshan’s Q4. Management expects a better Q1 margin with some demand compression in classic pigments. We believe a good long-term performance is possible," it noted.
It further added that the ₹750 crore capex, rising share of specialty pigments and focus on backward integration would boost performance and margins.
Meanwhile, HDFC Securities pointed out that the company’s focus on growing its specialty pigments portfolio is allowing for a favourable shift in revenue mix.
"The third wave of covid-19 had a negative impact on the domestic market demand, whereas exports continued to grow. EBIT margin for the segment grew, owing to higher energy and logistic costs. The pass-through of an intermediate price increase to customers continued through Q4. Capacity utilisation in Q4 was at around 76% of the operating capacity," said HDFC.
Post the earnings, management said that the demand for existing products would be subdued considering current market conditions while the growth of the new high-margin specialty products would be strong. The Q1 FY23 margin would be better than that of Q4 due to cost-reduction steps and prices passed on.
Management added that the FY23 capex would be minimal and the focus on ongoing capex execution and cash generation would continue. It also noted debt has peaked and would shrink in coming years. Management aims to expand engineering business margins, which bring 10 percent to revenue and generate low EBIT margins, said Anand Rathi.
The brokerage also noted that raw-material price fluctuations; delay in passing on logistics/energy costs, unfavourable forex movement, and delay in capex execution are key risks that could impact the stock in the near term.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.