Sudarshan Chemical Industries Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Dyes & Pigments

Company

Sudarshan Chemical Industries Ltd

Reco Price
Rs. 307.40
Price Target (1.5 - 2 Years)
Rs. 615.00
Upside
100.07%

Date

December 09, 2016
Sensex
26747.18
CNX Nifty
8261.75

Exchange

Code

NSE
SUDARSCHEM
BSE
506655

Cheap valuation along with government thrust will drive the future growth.

Strong presence across all organic pigment segments:
Sudarshan Chemicals has presence across the azo, phthalocyanine and HPP sub segments with no other domestic competitor having presence across all the three segments together. Sudarshan has clocked a 16% CAGR in the organic pigments segment compared to the 6% in inorganic pigments between FY10-16, thereby increasing the contribution of organic pigments from 66% in FY10 to 75% in FY16. Though the internet’s proliferation has taken a toll on the printing market (publication of newsprint and periodicals), the demand for printing ink for packaging still remains strong. Organic pigments in China and India are estimated to grow at 5% a year due to rising demand for inks and coatings.

Strong capability across major organic HPPs, Product mix likely to shift towards HPP:
Sudarshan has also forayed into the organic HPP (High Purity Products) space, producing all the major types of high performance organic pigments like Benzimidazolones, which only Pidlite has presence (domestically) , apart from international players like Clariant, Heubach and Sun Chemicals. The company aggressively ventured into the HPP segment following a three-year expansion phase ending FY13. It now markets its organic HPP offerings under the Sudaperm brand. HPP entails higher realizations compared to ordinary or commoditized pigments as they require higher investments and have longer customer approval timelines in general. Although Sudarshan does not disclose the proportion of revenue attributable to the HPP segment, management has been pursuing a strategy of shifting its product mix in favor of HPP, as they provide higher margins compared to commoditized pigments.

Sole domestic player in a niche category:
Pearlescent pigments combine the properties of absorption and metal effect pigments. Also, thanks to their layered structure, light is reflected at different levels in the pigment. Under the right conditions, the reflected waves can interfere with each other, causing amplification or cancellation, which depending on the structure of layers gives the pigments their unique character. Natural mineral mica is the most used inorganic pearlescent pigment. After extraction, it is cleaned and then coated with one or more metal oxides (TiO2 mostly) in a precipitation process resulting in a layer-substrate pigment. The result is a specific interference colour, depending on the thickness of the metal oxide. A wide variety of effects can be achieved from matte shimmer similar to a pearl with significant shimmer in all colours of the rainbow.

Global footprint with presence across all segments with wide network:
Sudarshan’s domestic competitors like Meghmani Organics and Asahi Songwon have a strong presence in the phthalocyanine segment, while Pidilite is present in azo, phthalocyanine and quinacridones segments, whereas Sudarshan has the entire product range of pigments—synthetic iron oxide pigments, classical azos, phthalocyanines and HPP and is also the sole producer of effect pigments in India.

Well developed global distribution network:
The company has a global distribution network with 6 sales offices, 19 stock points and 80 channel partners. It has been operating in the pigment business for more than 50 years and has developed significant goodwill with its clients, largely driven by consistency in quality, extensive sales, distribution network and supply chain network.

Value play:
Since majority of the pigment market is in the developed economies of Europe and North America, the management has set up marketing subsidiaries well across the geographies, which is likely to spur significant revenue growth over the next four-five years.

Stock Data

CMP (Rs)
309.90
Face value (Rs)
2
52 Week Range (Rs)
455.35 - 78.00
Market cap (Rs Crores)
2120.43
Price To Book Value (x)
6.75
P/E Ratio (x)
22.43
EV/EBIDTA (x)
13.75

One Year indexed Stock Performance

Sudarshan Chemical Industries LtdSensex
Sudarshan Chemical Industries Ltd
Return (%)
1m
3m
12m
36m
Absolute
-20.51
98.27
191.67
655.85
Sensex
-1.85
-0.06
6.83
25.42

Shareholders

(in %)
30-Sep
Promoter
52.89
Public
47.11
Others
0.00
Total
100

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research@stockaxis.com

 

Industry

The Pigment Industry is critical for the economic development of any country, providing products and enabling technical solutions in virtually all sectors of the economy. The industry has changed over time to meet the dynamic needs of the emerging economy. Strong economic growth and rise in per-capita income has caused steady increase in demand for Pigments. The industry has moved from a low-growth and a regulated environment to an increasingly mature core industry.

Worldwide, it is considered as one of the dominant industries around, with collective revenues of over USD 5.5 billion. The growth of the Pigment Industry has more or less moved in tandem with the growth of global economy. Growth in per capita income leading to growth in per capita spending fuels demand for Pigments ranging from paints to plastics to polymer, ink to cosmetics and more is encompassing every sphere of life.

Sudarshan Chemicals is the leader in the domestic Pigment manufacturing Industry with a 35% market share. The Company manufactures a wide range of Organic, Inorganic and Effect Pigments catering to domestic and export markets and mainly paint, inks, plastics, cosmetics, fashion accessories and automobiles as the user industries. The Company's Pigments are exported to most of the discerning markets in Europe, America and Asia. The manufacturing activity is carried out at Roha and Mahad factories with R&D facilities at Ambadvet (Sutarwadi), Taluka Mulshi, Dist. Pune.

There is an excess capacity for the manufacture of commodity pigments worldwide. This results in intense price competition in the commodity segments market. The China factor also continues to affect the Pigment Industry.

Profile

Sudarshan Chemical Industries Limited is a holding company. The Company is a color and effect pigment manufacturer. It operates through various segments, which include Pigments, Agro chemicals and Others. The Company's Pigments segment is engaged in the manufacturing of Azos, Blue and Green, High Performance Pigments, Effects, Pigment Preparations and Inorganics. The Agro chemical segment offers products, which are generic in nature. The Company supplies pigments to paints, plastics, inks, cosmetics, textile and other applications. It produces a range of classical organic pigments for the coloration of publication and commercial printing inks for magazines, direct mail and other commercial printing. The Company offers its pigments under various brands, including Sudaperm, Sudafast, Sudacolor, Sudadur, Sudafine, Sumicos, Prestige and Sumica. Its pigments are exported to various markets in Europe, America and Asia. It has over two production facilities at Roha and Mahad in India.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17E
Mar 18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Margin (%)
  • Adjusted EPS
  • 1118.63
  • -
  • 987.32
  • 131.31
  • 11.74
  • 3.78
  • 135.09
  • 42.87
  • 92.22
  • 36.76
  • 55.46
  • 20.41
  • 35.05
  • 3.13
  • 5.06
  • 1218.15
  • 8.90
  • 1087.75
  • 130.41
  • 10.71
  • 23.69
  • 154.10
  • 40.59
  • 113.50
  • 41.91
  • 71.59
  • 17.21
  • 54.38
  • 4.46
  • 7.86
  • 1409.33
  • 15.69
  • 1239.76
  • 169.57
  • 12.03
  • 14.03
  • 183.60
  • 36.52
  • 147.07
  • 48.10
  • 98.97
  • 29.06
  • 69.91
  • 4.96
  • 10.10
  • 1628.50
  • 15.55
  • 1410.50
  • 218.00
  • 13.39
  • 15.05
  • 233.05
  • 38.50
  • 194.55
  • 44.50
  • 150.05
  • 48.02
  • 102.03
  • 6.27
  • 14.74
  • 1905.50
  • 17.01
  • 1635.50
  • 270.00
  • 14.17
  • 15.05
  • 285.05
  • 45.50
  • 239.55
  • 54.10
  • 185.45
  • 59.34
  • 126.11
  • 6.62
  • 18.22
Source: Stockaxis Research, Company Data

Valuation

Sudarshan Chemicals has started shifting its focus towards high margin products, alongside having an already strong product portfolio and a wide distribution reach. It is creating a strong value play going forward. With the capacity addition taking place, the company is expected to post strong revenue growth in the future.

At a CMP of Rs 307.40, the stock is trading at a P/E of 16.87x FY2018E in base case assumptions. We feel the company has a strong potential to get re-rated in terms of valuation, supported by its focus in the niche segments. We therefore assign a valuation of 33.64x FY2018E with a target price of Rs 615 considering a long term horizon.

 

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