Chemplast Sanmar’s (Chemplast) Q3FY23 result has marked the worst for EBITDA, and will likely show significant jump from Q4FY23 driven by: 1) Paste-PVC and S-PVC to benefit from normalisation of spreads; no inventory loss / gains; 2) restocking in PVC to help drive strong volumes; 3) fall in commodity revenue to be partly off-set by lower power cost; and 4) continued growth in custom manufacturing. It has increased its custom manufacturing capex outlay to Rs6.8bn (vs Rs3bn earlier) post supply approval for advance intermediate for an AI. This leads to two big deal wins in two quarters; company has 7-10 more products in the pipeline.

Chemplast believes custom manufacturing will have IRR of >25%. We anticipate custom manufacturing EBITDA contribution to rise >25% in the next 3 years which will improve mix and make capital allocation more efficient. Balance sheet remains healthy with cash balance of >Rs10bn. We have increased our EBITDA estimate by 2.5% / 3.9% over FY23/FY24, respectively.

Volume improves on restocking. Specialty volumes rose 38.3% YoY (down 3.1% QoQ) to 19.4kte, and S-PVC volumes rose 35.5% YoY (13.1% QoQ) to 88kte on restocking demand. Non-specialty volumes were up 9.2% YoY (3.5% QoQ) to 43kte.

Specialty spreads (gross profit per kg) dipped 38.2% YoY (+9.5% QoQ) to Rs166/kg, and S-PVC spreads fell 72.9% YoY (27.4% QoQ) to Rs10/kg. PVC spreads were particularly hurt from high-cost inventory for Oct and Nov’22. Price increases in paste and S-PVC, restocking demand and stable spreads will likely help Chemplast regain earlier quarterly EBITDA run rate of >Rs2.5-3bn.

EBITDA and net profit collapse, as expected. Revenue fell 18.1% YoY (-0.5% QoQ) to Rs12bn. Gross profit dipped 33.5% YoY (-0.2% QoQ) to Rs4bn. Other expenses rose 28.6% YoY to Rs3bn on higher power cost which should reduce from Q4FY23. EBITDA fell 77.8% YoY (-20.6% QoQ) to Rs0.8bn. Net profit declined 88.5% YoY to Rs271mn. Capex for 9MFY23 was Rs2.8bn while it has an ongoing capex of Rs10.3bn.

Improving outlook for custom manufacturing. Chemplast has maintained its revenue growth guidance for custom manufacturing business at 30% on debottlenecking in FY23. It has secured LOI from a global innovator to supply an advance intermediate for a novel active ingredient (AI) in Q2FY23. It has also been selected for the supply of advance intermediate for generic AI in Q3FY23. It has 7-10 more products under development which increases visibility for custom manufacturing business.

The company has announced the start of phase-2 capex in custom manufacturing with total outlay of Rs6.8bn (vs earlier Rs3bn). The asset turnover to start will be 1x, and will gradually ramp-up to 1.3-1.4x in 3-4 years. It remains conservative wherein it believes 1.7x asset turnover is also doable. IRR on the project is >25% with payback period of <4years. The pipeline is majorly from agro-chemicals, but also has pharma / performance chemicals.

Register Now to Attend NextGen Chemicals & Petrochemicals Summit 2024, 11-12 July 2024, Mumbai