Atul Limited Research Report By IIFL

Atul Limited (Atul) is an integrated chemicals company having a diverse product portfolio across various business segments. Atul has executed major capex activity of ~`360cr over last three years. We expect the company to focus on ramping up the utilization levels of newly commissioned plants. Its pricing for key products would increase in near future owing to supply side issues arising in China. We expect revenue CAGR of 11% with EBITDA margin expansion of ~460bps to 21.6% and PAT CAGR of 18%, over FY17-20E. We recommend BUY with a target price of `3,590 (21x FY20E EPS).

Utilization to improve as major capex ends:

Atul has completed capex projects across business segments in FY17. It is now ramping up capacity utilization (CU) from newly commissioned capacities, majorly comprising crop protection (8% CU in FY17), specialty bulk chemical (3%) and specialty polymers (60-70%). Atul would witness higher utilization backed by increased global demand for Indian chemicals (Chinese government’s restrictions on highly polluting industries, has caused supply issues in China, giving an edge to Indian chemical manufacturers). We expect EBITDA margin expansion of ~460bps to 21.6% over FY17-FY20E.

Earnings to rebound:

Atul’s return ratios have suffered in the past, mainly due to below potential use of assets, adverse price trends in key products, GST related issues and ` appreciation vs US$ as Atul is net exporter. However, as most of these issues are fading, net operating margins are expected to improve leading to better return ratios. We expect RoCE & RoE at 24.4% & 19.2% in FY20E as against 20% & 16% respectively in FY18E.

Outlook & Valuation:

Atul’s major phase of capex investments are nearing an end. Further, owing to the nearly debt free position of the company, we expect Atul to generate free cash flows to equity over FY18E-20E. The company is currently priced at reasonable valuation of 17.4x FY20E EPS and looks attractive amongst its peers.