Vijay Kedia Portfolio Stock Recommendation – Sudarshan Chemical Industries

Sudarshan Chemical Industries – Buy recommendation of HDFC Securities

– Market Leader with long established track record
– Diversified Product Portfolio
– China’s woes are blessings for Indian Chemical companies

– Company has plan in place to grab the opportunity

 Large Capex in line
 Divestment of all non-core businesses
 To minimize impact on cost side

GLOBAL PIGMENT GIANT IN THE MAKING

4th largest pigment manufacturing company globally and the largest in India, Sudarshan chemicals is now aspiring to become 3rd largest. Management has put many plans in place to achieve that in next 5 years.

China has been major player in Global Chemical business. But since last couple of years Chinese Chemical Industry has been facing many challenges because of stricter environmental norms.

US-China trade tensions, rising cost of labour and rising competition from Asian players, two global major players BASF and Clariant are looking to vacate this space and their lies the opportunity for the Sudarshan to become a global giant. Over FY19-21E, we expect revenues to witness 13% CAGR while Net profit to grow 47% CAGR on the back of 170bps margin expansion and lower tax rate according to new c orporate tax
announcement (tax rate will be reduced to ~25% from previous ~33%).

Company Profile:

Established in 1952, Sudarshan Chemical Industries Limited is a 4th largest pigment manufacturing company globally and largest domestically with 35% market share. Company is mainly engaged in the manufacturing of Organic, Inorganic and Effect pigments. Primarily, it serve the coatings, plastics, inks and cosmetics markets. The products are offered under the brands – Sudaperm, Sudafast, Sudacolor, Sumica and Sumicos.

Company sales its products to more than 85 countries with 50+ sales team and 60+ channel partners. Since majority of the pigment market is in the developed market of Europe, North America and China management has set up marketing subsidiaries in these geographies. Sudarshan has two state-of-the-art manufacturing plants at Roha and Mahad, a dedicated R&D site at Ambadwet near Pune.

Investment Rationale:

 Market Leader with long established track record
 Diversified Product Portfolio
 China’s woes are blessings for Indian Chemical companies
 Sudarshan has plans in place to grab the opportunity

View and valuation:

Over FY19-21E, We expect revenue to grow at 13% CAGR while Net profit may see faster 47% CAGR on the back of 170bps margin expansion and lower tax rate according to new corporate tax announcement (tax rate will be reduced to ~25% from previous ~33%). Despite huge capex, the debt to equity ratio is expected to remain around 0.5x, while RoCE is expected to improve by 200bps to 21.3% in FY21E. Sudarshan is currently trading at 17.7x FY21E earnings. We recommend Sudarshan Chemical Industries a BUY at CMP of Rs. 375.6 and add on dips to Rs. 350 for the sequential Price targets of Rs. 445 and Rs. 510 over next 4-6 Quarters.