Analysis of the prospects of 11 Specialty Chemicals companies by ICICI Securities

Chemical companies to outperform on EPS growth again

We estimate our specialty chemical coverage universe revenue to grow 19.3% YoY (down 0.6% QoQ) in Q2FY23, partly on rise in prices due to input cost inflation. Gross profit to grow 22.7% YoY (down 1.4% QoQ, largely due to seasonality), which indicates strong underlying trend led by our expectation of 1) SRF’s robust growth (36.7% YoY) on continuous good show in ref-gas, offset by weakness in non-chemicals business, 2) Gujarat Fluorochemicals’ (57% YoY) growth on strong show in new fluoropolymers, 3) Clean Science’s (52% YoY) growth on low base and 4) Navin Fluorine’s EBITDA expansion from commissioning of HPP plant. We expect Rossari Biotech (+51% YoY) to benefit from the acquisitions. Tatva Chintan’s performance was hurt by muted SDA sales. Galaxy Surfactants’ volumes may dip on weakness in AMET, but EBITDA/kg may be healthy. Chemplast’s volumes to dip YoY on seasonality and high base, but PVC spread is likely to be weak which implies steep drop in EBITDA YoY. PCBL’s gross profit/kg is expected to improve on the back of better India sales, and benefits in exports market. EPL and Sudarshan are likely to continue facing cost headwinds.

► SRF’s chemical business EBIT to grow 85% YoY / down 10.5% QoQ to Rs4.7bn. SRF’s chemical business EBIT may gain from steady growth (YoY) in fluorospecialty, and sustained high price in ref-gas (HFC) despite seasonality led weakness. Technical textiles were impacted by slowdown and packaging films’ EBIT is likely to be lower QoQ on dip in margin and inventory losses. SRF’s revenue to grow 29% YoY / down 6% QoQ to Rs37bn, EBITDA to rise 22.6% YoY / down 16.8% QoQ to Rs8.3bn. Net profit to grow 34.6% YoY / down 15.3% QoQ to Rs5.2bn.

► Navin Fluorine’s EBITDA to rise 47% YoY to Rs1.2bn. Revenue is likely to grow 43.4% YoY to Rs4.7bn. This would be aided by 70% YoY growth in HPP (which also includes ref-gas and inorganic fluoride) on commissioning of intermediate product for Honeywell. Specialty chemicals and CRAMS revenue to grow 40% and 10% YoY, respectively. EBITDA margin may rise 60bps QoQ on better mix, and operating leverage. EBITDA / PAT may grow 47% / 37% YoY to Rs1.2bn / Rs850mn,

► Gujarat Fluorochemicals’ EBITDA may rise 70% YoY / 9% QoQ to Rs5bn. Caustic soda and chloromethane revenues are likely to be stable QoQ, while ref-gas revenue to dip QoQ on seasonality. PTFE may have higher volumes (Q1FY23 was hurt due to lower availability of TFE) and new fluoropolymers to have higher capacity utilisation in FKM and PVDF on increased availability of R-142B. Gross profit margin may slightly dip QoQ. Net profit may rise 63% YoY / 10.4% QoQ to Rs3.4bn.

► Clean Science’s net profit to grow 39% YoY / 18.2% QoQ to Rs744mn. We expect Clean Science’s revenue to grow across segments partly driven by price increases. Gross profit margin is expected to jump 200bps QoQ to 63% aided by drop in key raw material prices. Company’s EBITDA is likely to jump 54% YoY / 16% QoQ to Rs1bn, and EBITDA margin to be 41.9% (up 290bps QoQ).  Tatva Chintan’s EBITDA to dip 59% YoY / 3.5% QoQ to Rs147mn. Revenue from SDA to remain muted at Rs56mn, down 93% YoY on slowdown in auto, and de-inventorisation by customers. PTC, electronic chemicals and PASC to grow at a healthy pace, but fail to offset SDA revenue decline. The company has guided for recovery in SDA Q3FY23E onwards, and commentary on the segment will be critical for our FY23 EPS estimate.

► Galaxy Surfactants’ volumes to contract 0.6% YoY to 58.5kte on stress in AMET. India and RoW should see steady volume performance. This will likely drive specialty care volumes up 2% YoY. The realisation may dip on drop in LA prices. Thus, revenue to dip 4% QoQ, but grow 27% YoY to Rs11bn. Gross profit margin to improve 50bps QoQ (optically on lower raw-material cost), while EBITDA margin may dip 20bps. EBITDA /kg to remain healthy at Rs23.9 (vs Rs26.8 in Q1FY23). Net profit to grow 116% YoY / down 10% QoQ to Rs906mn.

► Rossari’s net profit to grow 15% YoY / 5% QoQ to Rs302mn. Rossari’s YoY figures are not comparable as Q2FY23 has numbers from merger of Unitop and Tristar. This should add ~Rs2bn to revenue, which is included in the HPPC segment. Also, standalone business in Q2FY22 had one-off benefit in revenue. Rossari’s consolidated revenue is expected to grow 16% YoY / 2.1% QoQ to Rs4.4bn. Textile business is likely to have muted revenue due to headwind for the industry. EBITDA should grow 38.5% YoY to Rs608mn, while EBITDA margin may slightly improve by 40bps QoQ to 13.7%. Lower other income to impact PBT.

► EPL’s EBITDA to dip 12.5% YoY to Rs1.4bn. Though revenue is likely to grow 5.7% YoY, it would largely be on the back of higher feedstock price inflation. Revenue growth to come across geographies – AMESA (+5% YoY), EAP (+7%), Americas (+6%) and Europe (+10%). Gross profit may be up 1% YoY to Rs5bn and EBITDA down 12.5% YoY to Rs1.4bn (due to higher operating cost particularly higher energy cost). Net profit is likely to decline 8% YoY to Rs467mn. We expect EBIT margin improvement sequentially across segments except in Europe, while forex which is part of unallocated cost to hurt company.

► Sudarshan Chemical’s EBITDA to drop 11% YoY / up 13.7% QoQ. Revenue is expected to rise 12% YoY / 0.7% QoQ to Rs5.6bn. Gross profit margin may improve 45bps QoQ to 40.8% and EBITDA margin may improve by 100bps to 8.4%. We expect net profit to dip 51% YoY to Rs112mn.

► Chemplast Sanmar’s EBITDA to dip 79% YoY to Rs723mn. Volumes are likely to dip 10.3% YoY, on high base of Q2FY22, to 136kte. Revenue is estimated to dip 27.4% YoY to Rs12.2bn on lower realisation. PVC spread is expected to shrink due to high cost inventory and excess supply from China. Specialty revenue growth is impacted by lower realisation in paste-PVC, and limited growth in custom manufacturing on capacity constrain. Gross profit may be lower by 37.8% YoY to Rs3.7bn. Higher power cost will likely eat into EBITDA growth. Net profit should contract 91% YoY to Rs132mn.

► PCBL’s EBITDA to rise 5.9% YoY / 1.3% QoQ to Rs2bn. Volume growth to be constrained by capacity, and dip 2% YoY to 113kte. Realisation to be higher on input cost inflation and better realisation in exports market. Gross profit/kg to improve 14.6% YoY (down 1% QoQ) to Rs34.7 on better domestic mix, higher spreads in exports market, rise in specialty mix and higher realisation for power (by-product). Net profit to grow 5% YoY / 1.5% QoQ to Rs1.3bn