Bodal Chemicals Research Report By ICICI-Direct

Growth to rebound from FY19E onwards…

 Bodal is the largest integrated manufacturer of dyestuff and dyeintermediates in India. It has undertaken multiple expansions in its core business and diversified areas with subsequent ramp expected to fuel next leg of growth in FY19E-20E

 As of 9MFY18, its core business of dyestuff and dye intermediates continued to witness satisfactory growth in volume terms

 However, partial resumption of Chinese capacity in FY18E led to softening of product realisations (down 10% YoY) thereby resulting in marginal decline in topline in FY18E (absolute basis)

 Bodal has successfully commissioned its 12,000 tonne dyestuff facility along with a 5 megawatt (MW) power plant slightly ahead of schedule. This augurs well for the company as it will provide incremental sales at a more stable margin profile over FY19E-20E

Slow execution in diversification projects

In the past, Bodal has announced and executed certain diversification projects that are witnessing business specific headwinds and expected to ramp up at a gradual pace in FY18-20E.

In the LABSA segment, the company is yet to stabilise amid demand headwinds and raw material supply issue. The management expects to clock a turnover of ~ | 50 crore in this segment by FY20E. In the liquid dyestuff segment, the ramp up is slow amid a long contract cycle of paper mills and stiff competition in the marketplace. Margins in this segment are robust. The management expects a slow ramp up in this domain.

In Trion Chemicals (associate company), the company has temporarily shut down operations due to unprecedented increase in price of raw material (chlorine, caustic soda). It hopes to restart operations from Q1FY19. In the SPS domain (subsidiary), vinyl sulphone (VAS) capacity of 4200 tonne is due to be commissioned in FY19E with incremental sales and profit, going forward.

China story; more structural in nature; sustainable moat!

An environmental clampdown in China due to excessive production and non-adherence to pollution control norms had led to supply disruptions & shortage of essential industrial chemicals.

This is an opportunity playing out in the Indian chemical space and looks more structural in nature thereby developing as a sustainable moat, going forward.

Moreover, major chemical sourcing companies are looking at India as an alternate credible supplier & intend to widen the procurement base thereby acting as a shot in the arm for domestic chemical players, including Bodal.

Healthy balance sheet; robust return ratios; growth visibility; retain BUY

Bodal successfully raised | 225 crore by way of a QIP issue in October, 2017 to fund an impressive capex plan. Given the healthy product demand and conducive environment post GST for organised players, we expect it to clock sales, EBITDA & PAT CAGR of 9.0%, 9.2% & 12.0%, respectively, in FY18-20E.

On the balance sheet front, post the QIP issue, Bodal has a cash surplus of ~| 50 crore with corresponding gross debt: equity at 0.2x as of FY18E.

The company has a capital efficient business model wherein it realises ~2.2x asset turnover and records ~15%+ EBITDA margins amid controlled working capital cycle (~75 days) thereby resulting in core return ratios in excess of 20%.

It also generates heathy cash flows, with present CFO yield of ~10%. We value the company at | 150 i.e. 13.0x P/E on FY20E EPS of | 11.5/share.

We have a BUY rating on the stock.

We also derive comfort from an increase in core promoter stake, environmentally compliant chemical manufacturing facilities and strong customer profile like BASF in the dyestuff space.