Rossari Biotech Ltd – Can growth justify expensive valuation?

Highlights from the Rossari Biotech management commentary Operating performance

• The sequential growth in revenue was aided by the easing of raw material prices and the addition of several customers.

• Weak performance in its subsidiaries and loss of one major customer in Q3FY23 led to moderate growth YoY. However, the Management was able to recoup sales by adding several new customers.

• It expects a gradual improvement in margin over the next two years.

• EBITDA was impacted by certain one-off expenses (INR2.5–3cr) towards the acquisition of Tristar.

• Weak performance by Tristar and Unitop resulted in an overall pressure on margin and subdued volume offtake.

• Average capacity utilisation across segments stood ~55% in FY23. ROSSARI has no plans to expand capacity at present.

Home, personal care, and performance chemicals (HPPC) and textile specialty chemicals (TSC)

• Subdued demand in its subsidiaries —Unitop and Tristar — led to a contraction in consolidated revenue.

• ROSSARI faced headwinds with one customer. However, it was able to recoup the revenue run-rate from new customers.

• It added HUL as a customer in the HPPC segment.

• The company has multiple growth drivers in the HPPC segment. Going forward, revenue is expected to be driven by traction in water treatment chemicals and product additions in detergent and coating chemicals and silicon chemistry.

• The slowdown in the TSC segment will continue in H1, but demand will improve from H2FY24.

Animal Health and Nutrition (AHN)

• The YoY growth in this segment was due to healthy demand for its products.

• The management expects revenue to double over the next two-to-three years as these products are value accretive and offer a higher margin.

• The company added new products in vitamins and minerals. It will incur a small capex for vitamin premix in FY24.

Capex

• The company is expected to incur a capex of INR40cr-INR50cr in FY24/FY25.

Tristar Intermediates and Unitop Chemicals

• Volume offtake in both subsidiaries remains subdued.

• Revenue growth in Tristar was subdued owing to lower demand from Europe and Russia.

• ROSSARI completed the acquisition of Tristar in Q1FY24, with the buyout of the balance (16%) stake for INR17cr. The entire acquisition was funded through internal accruals.

• The management expects to complete the acquisition of Unitop in FY24.

• It is planning to merge Unitop and Tristar by FY24-end to unlock synergies.

Guidance

• The management targets 20% growth over FY23 absolute EBITDA in FY24

(Source:Nuvama Research)