Anubhav Sahu Moneycontrol Research
Benzene- based specialty chemical companies posted steady operating results. Improved prospects in key end markets and relatively better competitiveness versus Chinese manufacturers augur well for these companies. Strengthening raw material prices is a key near term concern. However, these companies have been so far been able to pass through the same to clients.
Seya Industries: Q4 review Seya Industries’ net profit jumped 10 percent sequentially, aided by better pricing. Its raw material cost trajectory appears to have moderated, but higher other expenses dented earnings before interest, tax, depreciation and amortisation (EBITDA) margin sequentially. However, higher other income helped sequential improvement in net profit.
On a year-on-year (YoY) basis, margin improvement have been the key driver behind the improved profitability.
Result snapshot
Aarti Industries: Q4 review Aarti Industries’ topline grew 23 percent YoY led by the pharmaceutical segment (16 percent of net sales) which posted sales growth of 46 percent. Specialty chemicals (78 percent of sales) witnessed volume growth of 9 percent YoY in Q4.
Higher revenue was supported by pricing effect due to pass-through of higher crude prices to long term contracts. While raw material cost was a tad higher, higher employee cost and other expenses weighed on EBITDA margins. Higher expenses were due to cost related to commissioning of new projects. At the segment level, a 500 basis points increase in the operating margin of the pharma segment was remarkable.
Result snapshot
Aarti industries’ topline grew by 23 percent on YoY basis mainly led by Pharma segment (16 percent of net sales) which posted 46 percent YoY sales growth. Largest segment, Specialty Chemicals (78 percent of sales) witnessed volume growth of 9% YoY in Q4.
Higher revenue was supported by pricing effect due to pass through of increase in crude prices to long term contracts. While raw material cost was tad higher, higher employee cost and other expenses weighed on EBITDA margins. Higher expenses were also due to cost related to commissioning of new projects. On the segment level, 500 bps increase in operating margin of Pharma segment was remarkable.
Capacity expansion in the benzene value chain
Seya’s capacity expansion of 4 lakh tonne (Rs 735 crore) is expected to get commissioned in H2 FY20. New capacity at an optimum utilisation level can add around Rs 900 crore to topline. Massive capacity expansion is similar in scale to bigger players in the segment like Aarti (about Rs 1,200 crore in two years).
Seya’s upcoming products include diversification into sulphur trioxide-based specialty chemicals, thionyl chloride, di methyl sulphate. These see applications in pharma, as preservatives in the food industry, fabric softeners, agrochemicals etc.
Aarti’s management has guided to an annual capital expenditure of Rs 600-700 over the next two years. This includes investment towards multi-year contracts with global agro-chemical companies for capacity debottlenecking and investment in downstream products.
Outlook
Aarti’s management expects 12-15 percent FY19 volume growth in specialty chemicals led by ramp up in utilisation of nitro toluene facility from the current 40 percent. In case of the pharma segment, it expects around 20 percent sales growth. Margins are expected to sustain on account of operating leverage as utilisation improves and due to receding competition from China.
Seya’s ongoing capacity expansion, foray into value-added products and improved product pricing is expected to aid over 25 percent earnings CAGR (compound annual growth rate) in the next three years.
Improved product pricing is expected to remain on account of higher crude oil prices and improved demand in segments like dyes and pigments, herbicides, engineering polymers and pharma intermediates
After the recent correction, both the benzene value chain stocks are currently trading at a reasonable multiple (Aarti/Seya at 23x/18x FY19e earnings, respectively) when seen in the context of improving growth prospects.
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