CRISIL maintains valuation grade of 5/5 to Omkar Speciality

Omkar Speciality Chemicals Ltd’s (Omkar Speciality’s) Q1FY13 results, driven by increasing traction in the sale of new products, were slightly better than our expectations. Revenues grew 18% y-o-y to Rs 503 mn driven by y-o-y volume growth of 14%. EBITDA margins remained flat y-o-y at 19.3% but declined ~140 bps q-o-q because of higher raw material cost. In contrast, PAT grew at ~30% y-o-y to Rs 52 mn because of lower depreciation and higher other income. The exports during the quarter increased to Rs 199 mn from Rs 63 mn in Q1FY12 driven by the sale of new products. We remain positive on the growth prospects from the new products and maintain our fundamental grading of ‘3/5’.

Exports and new product sales gained traction
Q1FY13 sales grew by 18% y-o-y largely driven by significant growth in exports that helped to offset a slightly subdued demand environment in the domestic market. Demand for its exported products increased as the company successfully converted trial orders of a few high value added products into commercial orders. The average realisation increased by ~4% y-o-y because of increasing contribution from the sale of new products. The company plans to commercially add more products once the Urdhwa plant begins production.

Urdhwa plant ready for production; expect ramp up in new product sales in 2H
The plant at Urdhwa is ready and the company is currently waiting for approval from Maharashtra Pollution Control Board (MPCB) to begin production. The management expects the plant to begin regular production by September end. We believe that commencement of the Urdhwa plant will be a boost for overall growth and profitability in the second half as it will enable the company to ramp up its production of high value added products. For capacity expansion at Lasa Labs, the company has applied for approvals to Maharashtra Industrial Development Corporation (MIDC) and the US FDA. In Q1FY13, the company has spent ~Rs 75 mn in capacity expansion in comparison to our estimate of Rs 400-500 mn for FY13.

Remain positive on growth prospects; maintain estimates and fair value of Rs 110
We remain confident on the growth prospects of the company, which will be largely driven by demand for new products. We continue to use the discounted cash flow method (DCF) to value Omkar and reiterate our fair value of Rs 110 per share. The fair value implies a oneyear forward P/E of 7x FY14 EPS estimate. At the current market price of Rs 84, the valuation grade is 5/5.

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