An equity research report on Sudarshan Chemical Industries Ltd

Summary

Sudarshan Chemical Industries Ltd continues to focus on building an efficient chemical complex in India and globally. Its focus continues to be on safety and ESG.
The company aims to control its net working capital and inventories to optimize cash conversion cycle

Company overview:

Sudarshan Chemical Industries Limited is a global color and effect pigment manufacturer, with experience spanning over 70 years in supplying pigments and solvent dyes for coatings, plastics, printing and digital printing, cosmetics and special applications. The company focuses to be among top 3 pigments producers in world. Therefore, it has built diverse and strong product portfolio for domestic and global markets.

The company was able to strengthen its distribution network through its overseas subsidiaries and will continue to move on this path. After growing its footprints globally, Sudarshan Chemical Industries Limited continues to penetrate deeper into international markets, which has helped it in expanding its reach.

Business model of Sudarshan Chemical Industries Limited

Sudarshan Chemical Industries Limited operates in pigment industry and manufactures wide range of organic and inorganic pigments, effect pigments, agro-chemicals and other products and has 2 facilities at Roha and Mahad in Maharashtra.

The company has been categorised as largest producer of pigments in India and it caters to coatings, plastics, inks and cosmetics industries worldwide. Products of the company are used in various end-user industries including decorative and automotive coatings, plastics, inks and cosmetics. It has a product base comparable to global leaders and targets to add more products to its portfolio.

Product offerings of the company consist of well-known brands including Sudaperm, Sudafast, Sudacolor, Sumica and Sumicos. Its development focus is on high performance pigments primarily for automotive coatings and engineering plastics that are produced in its manufacturing facilities at Roha and Mahad.

Track record of management

The company continues to have operating track record of ~70 years, with management’s experience of more than 35 years in pigment industry. This has helped the company in building strong relationships with customers and suppliers.

Mr. Pradeep Rathi is the company’s current Chairman and was actively involved with Indian Chemical Manufacturers’ Association previously. He has also acted as Chairman of Foreign Trade Sub-Committee of Mahratta Chamber of Commerce, Industries and Agriculture. He has been with this company for over 4 decades and retired as a Managing Director in 2018.

Mr. Rajesh Rathi, who is the company’s Managing Director, has been with this company for over 2 decades. Mr. Ashish Vij is the company’s Mr. Ashish Vij and has worked with the company for over 15 years.

Financial performance of Sudarshan Chemical Industries Limited

Between FY11-FY23, Sudarshan Chemical Industries Limited was able to compound its sales at ~10% and operating profit at ~8% despite. These figures were achieved despite its decision to exit some of its businesses. The company saw subdued demand across geographies and segments which led to volume and pricing pressure in first 3 quarters. However, as a result of demand revival, the company saw strong performance in 4Q23.

In FY23, the company saw its income from operations coming at INR2,302 Crore. This means that it has compounded its income at ~10% over FY19-FY23. The company EBITDA was INR211 Crore in FY23. The company has invested for growth in last 3 years to transform its product portfolio and all of its capex projects have now been commissioned. FY23 was an extraordinary year for pigment industry as a result of subdued demand and inflationary pressure on costs. All of these factors have led to decline in profitability and related ratios.

On a standalone basis, the company’s total income saw an increase of 12%, while its EBITDA came in at INR233.3 crore against INR266.1 crore in FY21. It saw PAT of INR100.4 crore in FY22 in comparison to INR127.0 crore in FY21. On a consolidated basis, total income was INR2,205.8 crore against INR1,871.1 crore during FY21, exhibiting 18% growth despite disruptions throughout FY22. In FY22, the company saw several disruptions. Apart from raw material cost increases, it saw energy and logistics cost at higher level which led to higher manufacturing and selling costs. With cost pressures on direct and indirect material, its challenge was to safeguard margins while taking sound approach to balance volume growth. In FY22, sales from the company’s specialty pigment business came at INR1,378 crore, making up ~68% of its revenues. Non-specialty sales made a contribution of ~32% to the company’s revenues and stood at INR642 crore in FY22.

Industry analysis

In past decade, global pigments industry saw a marginal growth. This was supported by higher adoption of pigments in different end-use industries, from paints and coatings to construction. Since it is a partially fragmented business, market remained rich during historic timeframe because of higher usage. Global market was able to compound at ~4.2% during 2016-2020. Soaring chemicals and paints & coating industry stayed major bedrock for growth of pigments business globally. The companies operating in this business were able to maintain a balance between product offerings and R&D to penetrate business.

Growth of paints & coatings industry should be a critical driver of pigments market in coming future: Pigments are utilised in formulation of paints. Pigments help impart brightness, heat stability, and light stability to paint. Architectural paints & coatings industry grew considerably because of rise in infrastructure development and construction activities in developing economies. Growth of automotive and consumer goods sectors helped decorative paints & coatings industry. Per capita consumption of paints in developing countries is lesser in comparison to that in developed countries. However, this consumption is expected to increase in near future because of economic growth.

Higher consumption of plastic should also support market for pigments: Pigments are used as colorants in a range of plastics because of their compatibility with several plastics. Pigments help in getting unique appearance and styling effects to plastic products. Apart from coloring effects and improved aesthetics, pigments can help in increasing stability of plastics and improve resistance to weather conditions including heat and moisture.

Future prospects of Sudarshan Chemical Industries Limited

The company continues to lay emphasis on export markets. Initiatives are focused on engaging with overseas markets with a view to testing and demonstrating international competitiveness and targeting profitable opportunities for long term growth. Overseas wholly-owned subsidiaries of the company which are built with a primary objective of marketing and selling pigments continue to exhibit improved performance. These overseas subsidiaries have now entered a consolidation phase. As a result, these subsidiaries should play a critical role in positioning Sudarshan Chemical Industries Limited as a leader in global pigment industry.

The company continues to focus on commercialisation of new capex projects and generate cashflows from such investments, controlling costs with a frugal mindset, upgrade occupational and process safety, and improve customer experience through consistent and reliable quality.

Moving forward, capex program is expected to drive future growth and bring an improvement in EBITDA. Gradual sales ramp-up of new capex's should be able to drive growth and the company focuses on commencing execution of cost improvement and value chain integration projects. The company targets to expand its product portfolio to build globally competitive and comprehensive range. Apart from this, it aims for deeper penetration in certain international geographies.

Shareholding pattern

At March 2023 end, promoters of Sudarshan Chemical Industries Limited were having ~35.82% stake in the company, while ~46.87% was held by public. Among promoters, Mr. Anuj Narayandas Rathi held ~7.87% stake while Mr. Pradeep Ramwilas Rathi was holding ~6.05% stake. From previous few quarters, there was no change reported in their ownership structure. This means that insiders are optimistic about future prospects of Sudarshan Chemical Industries Limited.

Risks

Sudarshan Chemical Industries Ltd might challenges related to pandemic waves, disturbance in global logistics, higher cost of raw materials, increased coal cost, geo-political tensions, etc. However, the company plans to navigate such challenges by taking necessary actions to manage risks that have arisen because of unpredictable situations and events.

Acute increase in energy and logistics costs can also push up manufacturing and selling costs which can impact margins of the company. Shortage of shipping container and congestion at various ports might lead to delays in shipping. Therefore, the company can experience freight cost escalation.

Valuation and investment rationale

Sudarshan Chemical Industries Ltd has been categorised as a largest pigment manufacturer in India, with a market share of 35%. Strong distribution network of the company has supported it in posting healthy numbers in last fiscal year. Distribution network of the company comprises over 60 channel partners and subsidiaries in USA, Netherlands, etc. These partners help in distribution of pigments worldwide. In FY22, exports accounted for 45% of revenue against 49% in FY21. The company should see its global market position strengthen further as a result of ongoing consolidation in industry. Growth might be supported by product launches and benefits from large capex incurred over past few years.

At price of INR497.00, stock of the company currently trades at ~26.44x of FY22 EPS, which is at a deep discount to its sectoral average of ~35.43x. Therefore, investors should consider going long on this stock with a long-term perspective. Performance of the company is likely to be supported by its comfortable financial risk profile, healthy liquidity position, healthy market position in pigment industry, favourable industry dynamics, etc.