Specialty or Commodity Business? Our take – a Special Commodity !
Archean Chemical Industries Limited (Archean or ACIL) is a leading Marine Chemical manufacturer from India engaged in the production and sale of Bromine (Br), Industrial Salt (NaCL), and Sulphate of Potash (K₂SO₄) from its leased brine reserves located in the Rann of Kutch, Gujarat. ACIL has one of the largest integrated production facilities at Hajipur (Gujarat), which has a strategic proximity to Jakhau Jetty and Mundra Port, making exports easier and smoother. The company plans to forward integrate its business in Bromine derivatives – an established extension followed across global major Bromine producers, into Flame Retardants, Clear Brine Fluids, and PTA Synthesis Catalyst. We expect Archean’s forward integration to drive 27%/26%/37% CAGR in its Revenue/EBITDA/PAT over FY23-26E. We expect revenue growth to be supported by improvement in margin profile and reduced market cyclicality, which will lead to a better valutaion multiple for the company. Keeping this in view, we initiate coverage on Archean Chemical Industries Limited with a BUY recommendation. We value the company at 14x its FY25E EPS to arrive at a target price of Rs 810/share, implying a 33% upside potential from the current market price.
Investment Thesis
Established Player in Niche Bromine Chemistry: Archean is the largest exporter of bromine and industrial salt in India. Bromine production is correlated to brine field availability, which is globally limited. Archean uses brine from its own reservoirs, which provides a huge cost advantage, making it one of the lowest-cost producers globally. The Government of India has allocated most of the land surrounding the brine reservoirs. ACIL has scaled up its bromine production capacity over the years which requires a long gestation period for commercial viability. The company has established infrastructure and strong market position by leveraging itslong-term relationship with global customers. All these factors make it difficult for new players to enter this chemistry. Sadly, ACIL is also now a beneficiary of Israel-Hamas conflict as many global customers are diligently diversifying their supplies outside Israel which has led to increase interest in ACILs export business. This shall help company further establishing its presence in global markets.
Forward Integration into Bromine Derivatives: Archean is following the trajectory of major global Bromine producers to foray into Bromine derivatives as it strengthens its balance sheet post its IPO. The company has invested 250 Cr in developing the 28,000 tonnes derivatives facility which includes 10,000 tpa of brominated flame retardants, 13,000 tpa of clear brine fluids, and 5,000 tpa of Bromine catalysts used for the synthesis of pure terephthalic acid (5ktpa). This facility shall add 600 Cr annual revenue potential to ACIL optimised over the next two years. The company has locked orders for 90% of its Flame Retardant capacity to a Chinese buyer/technology provider which will commence from Q1FY25.
China – A Big Consumer, Not Competitor: Unlike most of the industries/chemistries where China comes as a fierce price-cutting competitor, Bromine’s natural moat protects Indian companies and, infact, benefits them as China is one of the largest consumers of Indian Bromine. Brominated Flame retardants are the largest application of Bromine in China which islargely used in the construction sector, the electrical industry, and to hinder or suppress accidentalcombustion. Both construction and electronics are crucial sectors for the Chinese economy as it has the world’s largest electronics production base. China is also one of the major markets for zinc-bromine flow batteries due to the region’s growing electric vehicle market, thus providing a huge market.
Robust long-term growth outlook – Initiate with BUY
Archean Chemical Industries Ltd. (ACIL) offers multiple MOATS which are expected to translate into key growth drivers going forward as the company slowly ramp-up its Bromine Derivative capacity along with its traditional secured Salt business and soon-to-be-revived Sulphate of Potash business. We believe ACIL is well placed in the bromination space given i) Strong industry growth drivers; increased usage of Bromine in agrochem and pharma chemistries, ii) Forward integration into high-value business with strong demand from the largest geographies in the world,and iii) Well-nurtured long-term relationship with customers. The stock currently trades at 10x FY25E EPS. We value the stock at 14x FY25E EPS and initiate coverage with a BUY rating on the stock with a target price of Rs 810/share, implying an upside of 33% from the CMP.
Click here to download the Initiating Coverage report on Archean Chemical Industries Ltd
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