Stock Analysis by Ventura on 9 Jan 2024
Sadhana Nitro Chem Ltd (SNCL) is India’s leading producer of nitrobenzene (Capacity- 12000 TPA) with forward integration for the manufacture of Meta Amino Phenol (MAP, Capacity 2400 TPA), sole domestic manufacturer of ODB2 (Colourformer, Capacity 2200 TPA), Para Amino Phenol (PAP, Capacity 36000 TPA). SNCL has recently been alloted the Production-Linked Incentive (PLI) scheme to manufacture 36,000 TPA of PAP from the nitrobenzene route. This heralds a significant opportunity for SNCL given the fact that it will be the 2nd global manufacturer of PAP (after Mallinckrodt Pharmaceuticals) from the nitrobenzene route. PAP manufactured from nitrobenzene has negligible impurities compared to other manufacturing processes and hence commands significant pricing premium in the international markets.
Despite having a promising product portfolio, the financial performance of the company was not reflecting its true potential. Even after three years post the onset of Covid, the total revenues at INR 143 Cr was 46% lower than INR 267 Cr clocked in FY2019. The depressed sales can be attributed to the following causes:
• Poor pricing due to dumping by Chinese producers for all products including raw material nitrobenzene and consequent impact on margins.
• Supply and prices were impacted due to the Ukraine war and geopolitical issues.
• Stretched working capital cycle due to the impact of sluggish inventory movement and longer receivable periods
However going ahead we are bullish on the growth prospects given that the business environment has turned significantly positive. Chinese manufacturers have curtailed production sans demand for Chinese products which is expected to lead to a more favorable pricing environment. In FY24, with the commencement of the inhouse MMDPA facility, ODB2 production and margins are expected to be more stable. Further, we expect scale up in PAP production to contribute to enhanced revenues.
As a result of these new developments, we forecast Revenue/EBITDA/PAT to grow at a CAGR of 73.8%/102.3%/214.1% to INR 751/174/93 Cr over the period FY23 to FY26. Margins-EBITDA/PAT are also expected to improve by 730/850 bps to 23.1/12.4% over the forecast period. Consequently return ratios ROE and ROIC are set to expand to 22.2/26.7%. The working capital cycle is expected to shrink substantially to 215 days in FY26 from the prior 377 days (FY23).
SNCL has recently announced a capital raise program of INR 49.95 Cr via a rights issue for the manufacture of green hydrogen which is for the purpose of self consumption in the production of PAP. Besides becoming a self sufficient green energy manufacturer, this is expected to help SNCL export “Green PAP” to the regulated markets and hence receive significant pricing premium vis-à-vis domestic sales.
We initiate coverage on SNCL with a BUY for a price target of INR 148 per share (39x FY26 earnings) representing an upside of 56% over the next 24 months. In our view, our estimates are conservative and if SNCL is able to achieve their internal estimates on revenue projections and net working capital cycle , the FCF generation would turn cash positive much earlier than our FY26 expectations. This should lead to a significant rerating of the stock given the significant business moats.