Sector Outlook: Neutral
Overall weak performance; Recovery expected in H2FY25
The company’s YoY revenue fell by 38.0% / QoQ decreased by 25.1% to Rs. 2,127 mn, which was below our expectations of Rs. 2,360 mn. Delay in vessel and container availability among other logistical issues at the ports were responsible for the major decline in quarterly revenue. EBITDA dropped by 47.1% YoY / QoQ was down by 18.3% to Rs712mn with EBITDA margin of 33.5%(up +279bps QoQ) in Q1FY25 due to higher gross margins (+569bps QoQ to 108.5%), driven by cost control focus and efficiency improvement initiatives; The net profit fell to INR448mn (down -52.2% YoY / down -22.1% QoQ) versus our expectation of INR535mn for Q1FY25; however, the PAT margin came at 21.1% vis-à-vis previous quarter which was at20.3%. But demand is still strong from both domestic as well as export markets. The company is targeting a bromine volume between 22k–25k MT for FY25. Guidance will be later given while the firm maintains that business will commence H2FY25. Whilst continuing research and development work on flow batteries, the company plans on growing capacity and subsidiary operations mainly focused within the ‘flow battery’ segment.
Key Concall Highlights
Bromine Business
- For the company’s bromine product, demand from the domestic market has been constant. It promotes market
- pickup on the export side for all end users overseas: agrochemicals, pharma, and flame-retardant manufacturers. The price of bromine is also expected by the company to stay around ~USD 2.83/kg as we move forward.
- The company targets volume between 22,000-25,000 tonnes in FY25.
Industrial Salt Business:
- The industrial salt business, during the quarter, was impacted by some dispatch delays because the export market constitutes most of this business.
- The company, in the Salt segment, remains bullish and expects a good recovery in FY 25. This growth will depend on how these external challenges ease out in the coming quarters.
Sulphate of Potash:
- The company has recently commissioned a pilot plant at the technology provider’s lab with a larger sample size and is seeing enquiries from both global and domestic markets.
- The sales are likely to commence from Q3FY25 and to be of material value in H2FY25.
Oren Hydrocarbon Update:
- The company received NCLT approval, and business is expected to start from H2FY25.
- Initiated groundwork to restart the plants. The commencement of plants would be in a phased manner, initially starting with two plants that have a direct connection to the oil and drilling industry as well as CBF products.
- Management anticipates a topline of Rs. 200 crores from the subsidiary.
Entry into the power electronic segment:
- Archean Chemical focuses on power electronic segment operations and has seen flow battery research results encouragingly.
- Management said it had partnered with IIT Bhubaneswar and did some ground in the semiconductor space.
Expansion in bromine derivatives business:
- The estimated cost for setting up the new Randedi, Gujarat facility for bromine performance derivatives products is ~Rs. 2.5 million, funded through internal accruals.
- The increased bromine capacities will be used for captive consumption in the bromine derivatives plant, leading to expansion in its product portfolio.
Greenfield Project:
- The company’s phase 1 expansion of a new facility will produce bromine derivative products i.e., Clear Brine Fluids and catalysts for PTA Synthesis. This would introduce a few new bromine derivative products.
- Also, the company is re-evaluating the phase 2 capacity expansion to produce Flame retardant related products. The company incurred approximately ~Rs. 140 crores of Capex out of Rs. 250 crores.
Valuation and Outlook
Being an export oriented business with a substantial client portfolio gives the company a competitive advantage over its peers. During the quarter, Archean witnessed encouraging market pickup on the export side from all end users, like agrochemicals, pharmaceuticals, and flame-retardant manufacturers overseas. We expect Rev/EBITDA/PAT to grow at 14.6%/27.0%/23.5% CAGR over FY24-26E, led by (1) leading market position and continuous expansion in bromine and industrial salt, (2) focused on capacity expansion and subsidiary operations, (3) consistent financial performance, and (4) diversification into bromine derivatives which have undergone trials and tests with customers. Thus, we expect Archean Chemical to generate healthy revenue over the long term and is trading at a P/E of 25.4x/17.9x on FY25e/26e EPS estimates. We value the company at 21x FY26e EPS and arrive at a revised TP of Rs. 826 per share, implying an upside of 17%.
