Atul - Mixed Q3, strong recovery expected; maintaining a Buy says Anand Rathi

Atul’s Q3 revenue fell 8.5% yoy, 4.9% qoq impacted by lower exports supported by strong recovery in the domestic market. Ahead, we expect strong recovery considering its greater focus on retail and branded products, ongoing capex to support revenue growth and strong performances across business verticals, subsidiaries, associates and JVs. Anand Rathi maintains a Buy recommendation, at a same target of Rs 7500 (25x FY23e EPS).

Subdued Q3 performance from Atul:

Atul’s Q3 revenue was Rs.9.5 bn, down 8.5% yoy, 4.9% qoq, on the subdued performances at its divisions. Revenue from life-science chemicals fell 9.9% yoy, 17.7% qoq, to Rs 2.8 bn due to softer demand in exports. Performance and other chemicals revenue slipped 8.6% yoy, though flat qoq, to Rs 6.9 bn. The gross margin expansion continued in Q3 also, up 304bps yoy, 111bps qoq, to 55.3%, driven by better realisations, though partially impacted by higher operating expenses.

See Zee Business Live TV Streaming Below:

Atul’s Profit growth backed by higher other income:

Despite a decline in revenue and EBITDA, profit grew 11.6% yoy, 8.2% qoq, to Rs1.9 bn, backed by higher other income and lower tax expenses. Other income was up 224% yoy, 478% qoq, to Rs 373 mn boosted by higher dividend income received and adjusting for an exchange loss. 

Atul Outlook:
 
Atul has approved the buyback of 68965 shares for a limited amount (Rs 500 mn) at a price not exceeding Rs 7250/share. Ahead, Anand Rathi expects revenue/EBITDA/PAT to clock 17%/18%/16% CAGRs over FY21-23, supported by capex, greater utilisation of present capacities, rising share of its retail business, value-added and high-margin products.
 
Valuations of Atul:
 
Anand Rathi maintains a Buy rating on the stock with the same target of Rs 7500, valuing it at 25x FY23e EPS and 15.4x FY23e EV/EBITDA. 
 
Key Risks for Atul: 
 
Drop in spreads of major products, delay in capex and de-bottlenecking implementation, erratic increase in crude and derivatives prices.