Weekly Tactical Pick: Himadri Speciality Chemicals

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Moneycontrol Research

Dear reader,

Starting today, Moneycontrol Research Team will identify an investment opportunity every Friday, labelled  'tactical fundamental pick.' So then the obvious question: Is this a tactical call or a fundamental call?

Well, it is a mix of both. The recommendation flows from the list of stocks we like after having evaluated its fundamental merits.

Then why recommend it again?

Much as we favour a long-term approach, the market presents us with opportunities periodically. Sometimes, a stock may over correct during a market-wide sell-off, or because of some fundamental concern, which is already captured in the stock price. At such times, we are reasonably confident that the stock price should give good returns within the next 3-6 months.

The stock that we have picked up as our tactical pick this week is Himadri Speciality Chemical.

Himadri Speciality Chemical (Market cap: Rs 5150 crore), is a leading manufacturer of coal tar pitch and carbon black. The company reported robust operating performance (EBITDA/tonne: 34 percent year-on-year for the quarter ended June) backed by favourable conditions for the aluminum and tyre industries. Other product lines contributed to fatter margins with Sulphonated Naphthalene Formaldehyde benefitting from anti-dumping duty and advance carbon material (used for Lithium ion batteries) witnessing a capacity ramp up.

After correcting by about 34 percent from its high this year, the stock is currently trading at 10.4 times its estimated earnings for FY20. This looks appealing, given the strong volume guidance across product lines and a sustained effort towards high margin variants of products (specialty carbon black), due to which we expect a compounded annual growth of 31 percent (FY18-20e) in its earnings before interest, tax, depreciation and amortisation.