Plant shutdown led to lower volumes; expected to rebound to Q2 levels
EBITDA per tonne continue to witness improvement on the back higher value adds
Capacity expansion broadly on track
Utilisation ramp up expected to be gradual due to soft end markets
Himadri Speciality Chemical, the leading manufacturer of coal tar pitch (CTP) and carbon black, posted steady quarter with sales growth of 17 percent YoY. Sharp rise in raw material prices affected gross margins on YoY basis though sequentially it has improved. EBITDA margin, adjusting for forex impact, contracted on sequential basis due to higher employee cost partially offset by lower other expenses. However, productivity measurement on per tonnage (EBITDA per tonne) basis continues to improve.
Chart: Q3 financials
The company continued to post improving trajectory for profitability in terms of tonnage. EBITDA per tonne (Rs 15,885 per tonne) has improved by 23 percent on YoY basis. Sequentially, as well there was an uptick due to higher share of value added products, better realisations on SNF (Sulfonated Naphthalene Formaldehyde) and higher share of Carbon black.
As guided, company has completed the debottlenecking of coal tar distillation capacity in Q3 FY19. This provides an incremental capacity of 1 lakh tonne leading to 25 percent capacity addition in this segment. While the legacy capacity is optimally utilised, company expects a gradual ramp up in utilisation (peak utilisation in next two years) of new capacity as and when aluminum industry prospects improve.
Chart: EBITDA per tonne trajectory
Lower production volume (83,571 tonne) was the key drag this quarter. However, 9 percent sequential decline was mainly on account of planned shutdown (CTP plant) for the capacity expansion. In the near term, sales volumes are expected to rebound to the levels witnessed in Q2 FY19.
Company is on course to set up 20,000 tons (currently 600 tons) capacity for advance carbon material (ACM), in West Bengal, to be used for lithium ion batteries. This capacity would be available for production in phases starting from H1 FY20 over the next 12 months.
In case of Carbon black, 60,000 tons of additional capacity (currently: 1.2 lakh tons) of specialty carbon black having a non-rubber application would be available by H1 FY20. In the first year, company is expecting more than 50 percent utilisation of the capacity. Peak utilisation is expected in next three years with a revenue potential of Rs 750 crore.
On the balance sheet front, there is a steady improvement. Compared to March’18, net debt has reduced by Rs 96 crore which takes the net debt/equity to 0.32x vs. 0.43x earlier. It needs to be that ongoing capex programmes are funded through internal accruals.
On a medium term, volume growth is expected to come from both the key streams of revenue – CTP and Carbon black due to new capacities. However, capacity utilisation ramp up is expected to be gradual in light of softness in end markets. Further, while price realisations have eased, the company is positive on ability to defend operating margins.
Additionally, higher contribution from advance carbon material and higher utilisation of Sulfonated Naphthalene Formaldehyde (imposition of anti-dumping duty) are expected to be supportive for the margin profile.
Based on quarterly update and end market prospects, we have made a downward adjustment in our expectations and project EBITDA CAGR of 20 percent (FY18-20e). On account of this stock is trading at a trading multiple of 11.9x FY20 estimated earnings. In our view, the stock can be accumulated in a staggered manner for a long-term haul as the company is well positioned to capture pickup in demand trends later this year.