Domestic brokerage Emkay initiated coverage on Atul Ltd. with a ‘buy’ rating and a target price of Rs 8,500. This comes following Atul's investment towards capacity expansion in existing products and in the backward integration of some key products.
Atul is expected to deliver a robust CAGR of 15% in revenue, 30% in EBITDA, and 37% in PAT over FY24–27E. Relatively inexpensive valuation and strong earnings growth forecast make Emkay optimistic on Atul's growth potential over the next couple of years.
Atul has invested approximately Rs 2,000 crore over FY22-24 for capacity expansion in existing products like liquid epoxy resin and caustic soda, as well as initiated backward integration for certain key products such as MCA.
Following the upgrade, the stock ended the session higher by 3.1 percent, closing at Rs 6,217 apiece.
These new capacities, coupled with the ramp-up of certain existing underutilized capacities, are expected to drive revenue potential of approximately Rs 2,500-3,000 crore over the next 2-3 years, primarily from volume growth. This expansion is also expected to result in broad-based margin improvement, driven by backward integration and operating leverage.
Atul has one of the highest capex, of Rs 2000 crores, over the last 3 years. Going forward, the company is expected to see strong volume-led growth, as Emkay suggests that existing capacities of up to 20-40% across products are still underutilized.
Atul retains a strong balance sheet, with around Rs 500 crores in cash and an estimated Rs 2000 crores in operating cash flow expected over the next three years. While a significant portion of this cash is likely to be reinvested as capex, the resulting operating leverage and volume expansion should result in meaningful improvement in return ratios.
The company comprises a diversified product portfolio with leadership in major segments such as Life Science Chemicals and Performance Chemicals, including niche products and complex chemistries. This diversification of its portfolio has helped Atul build a strong legacy in the chemical industry while de-risking its overall business model.
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