Building bromine ecosystem, Decent visibility of growth, Reasonable valuations
Archean Chemical Industries Ltd (ACIL) is the leading player in marine speciality chemicals manufacturing & exporting bromine, industrial Salts & SOP to its global customers. The company’s competitive edge in the global market is because of its low cost & high efficiency processes, making it unique & standout player amongst its competitors. Our faith in the company’s profitable business growth stems from the fact (a) Increased consumption of bromine in key end user industries like agro, pharma & appliances etc (b) Foray in downstream derivatives of bromine (BFR, CBF & PTA Catalyst) to increase its visibility, reach & boost earnings (c) Rectifying SOP technical difficulties will significant increase SOP business (45% revenue CAGR growth from FY24-27E) (d) Increasing customer base & expanding geographical reach (e) Best in class cost structure & margin profile, significantly different as compared to other chemical companies & access to raw material availability makes it preferred player (f) Strong FCF yield generation of ~2.4%/5.6% in FY24/FY27E (best in chemical industry). The company’s recent expansion into bromine derivatives will propel earnings growth going ahead. The company aims to capture a larger part of bromine end user pie. The company has strong moats around its business which translates into superior return & margin profile for the company (FY24/FY27E Post tax ROCE of ~20/23% & EBITDA margin of ~35/36%). Longer client approval period, Access to brine reserves & developing customer relationship are the key moats which makes it difficult to replicate the business model of Archean. Also, the company has strong & marquee client base (Top 10 contributing 69% & Top 20 contributing 83%) and strong visibility in international markets led by its niche offering. Considering the future growth visibility of this net cash company, we initiate coverage with a BUY rating with a target price of Rs 1,158 per share.
Valuation
▪ A net cash company with strong entry barriers having strong relationship with its customers focusing on downstream expansion to diversify across the value chain. Increasing volumes & adding new range of product segments thereby catering to entire value chain in bromine cycle is a big positive.
▪ We expect Archean to report a CAGR of 23%/24%/26% at Revenue/EBITDA/PAT level over FY24-27E. Also, long term contracts with customers (more than 1 year), robust cash conversion cycle (less than 2 months) & sustainable 20-25% ROCE, strong balance sheet with net cash position of Rs3.3bn deserves rerating in multiple.
▪ The stock is trading at P/E of ~16.7x on Sept 26E EPS. We assign 25x as the target multiple and arrive at target price of Rs 1158 per share which is upside of ~50% from current valuations. We assign BUY rating on the stock.
Archean Chemical Industries Ltd – Initiating Coverage – SMIFS Institutional Research
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