29 Mar , 2022 By : monika singh
Anupam Rasayan (ARL) is well-positioned to benefit from ‘China 1’ with its diversified chemistry expertise, wide customer base and presence across multiple verticals. Strong LT contract pipeline offers medium-term growth visibility. We forecast Rev/Ebitda/PAT CAGR of 33%/29%/31% over FY22-24e. Valuation is favourable after a 16% correction. We initiate at Buy with a Rs 1,040 PT at 38x P/E on accelerating earnings growth and upside potential from new contract wins.
Large custom synthesis and manufacturing (CSM) opportunity: China’s climate goals have impacted the smooth functioning of its chemical industry. The CSM revenue CAGR of Indian players (35% over FY18-21) has outstripped their Chinese counterparts (16%), suggesting market share gains.
Competency across diverse chemistries, flow chemistry: No single chemistry contributes more than 12% of ARIL’s revenues. It has developed expertise in continuous flow chemistry and has migrated c30% of its manufacturing to this platform. It derives 35% of its revenues from its top 3 customers and 82% from the top 10, reducing the risk from potential loss of any customer. It provides CSM services to agro chem, personal care, pharma, pigments and dyes verticals, which diversifies its revenue streams. This reduces its vulnerability to any slowdown in the global agrochemical cycle.
Strong growth visibility via long-term contracts: Contract wins of Rs 8.2 bn and LOI of Rs 18 bn over YTDFY22 should add Rs 4.2 bn (39%) to annual revenues in FY24e (over FY22e base). We expect a 33% revenue CAGR over FY22-24e on the back of the new orders and a ramp-up in newly commercialised molecules. We build in 200bps of margin fall over FY22-24e. ARIL is carrying inventories to cover LT contracts in CY22. Raw-material inflation will impact its shortterm portfolio and favourable product mix of FY22 should normalise in FY23E. Operating leverage could cushion the impact.
Scale economics to improve return ratios: New plants for recently awarded contracts can be set up on surplus land in the company’s possession and use common facilities. This should improve return ratios by 440 bps to 12.1% by FY24e. Predominance in multi-step synthesis requires higher capex and has lower asset turns, resulting in lower ROCE compared to its CSM peers.
Accelerating growth: We forecast Ebitda/PAT CAGR of 29%/31% over FY22-24e on the back of the recent contract wins and new molecules commercialised. Its small revenue base provides meaningful upside optionality from  potential contract wins. Initiate at Buy with Rs 1,040 PT at 38x fwd PE (1.2x PEG) given the strong earnings visibility.
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