Stock To Buy: This Speciality Chemicals Stock Can Jump 60% From Current Levels

Prabhudas Lilladher has recommended buying the stock of Jubilant Ingrevia for healthy returns of upto 60%. The broking firm has set a target of Rs 860 on the stock, as against the current market price of Rs 536. The shares of the company were last seen trading at Rs 519 on the National Stock Exchange.

Good growth in revenue

The company saw a sequential growth in revenue/ EBITDA/ PAT of +12%/ 9%/ 6% QoQ, aided by higher specialty chemical (SPCM) sales (+26% QoQ) is encouraging though persisting cost pressure in SPCM on non-availability of contracted coal, lower Nutrition & Health Solutions (NHS) volume and margin normalization in Chemical Intermediates (CI) segment impacted profitability. According to Prabhudas Lilladher, H2FY23 to be better than H1 on commissioning of new plants and strong demand across products in specialty chemicals, acetic anhydride and expected recovery in Niacinamide volumes. Energy cost headwinds are expected to subside with FSA coal supply resumption from Dec'22, aiding margin recovery.

Buy the stock with a target price of Rs 860

Prabhudas Lilladher has maintaineda BUY rating on the stock with SoTP based target price of Rs 860. "We believe Jubilant Ingrevia (JUBLINGR) is well placed to capitalize on long term growth opportunities given (1) 60 new products pipeline (2) strong traction in CDMO (3) import substitution (4) China+1 strategy (5) commensurate capex outlay of Rs20.5bn over FY22-25. Specialty chemicals (SPCM) segment to lead earnings growth aided by highest capital allocation (Rs13bn). EBITDA contribution from higher value segments (SPCM + NHS) is expected to increase to ~67% by FY25E from 53% in FY22, as SPCM/ NHS EBITDA grows at 27%/11% CAGR, while concentration of its commodity vertical (Chemical Intermediates) reduces to 33% by FY25E. Strong balance sheet (Net Debt/Equity at 0.1x) despite ~Rs18bn cash outflow on capex over FY23-25E, and earnings mix improvement led by higher value and structural growth segments will drive rerating in the stock, in our view," the brokerage has said.

Debt to ease with working capital normalization

According to Prabhudas Lilladher, net debt increased to Rs 2.8 billion (vs Rs1.8 billion on 31-Mar-22) primarily led by higher working capital intensity (increase in core working capital from 51 days to 62 days) on strategic decision to build inventory of certain products (to capture a near term benefit) coupled with temporary procurement of domestic ethanol (lower credit period). "While capex cash outflow continues, better H2 performance coupled with working capital normalization to aid debt reduction by FY23 end," the brokerage has said.

Continuing margin pressure on higher energy costs

The company's EBITDA margin stood at 11.7% (vs 16% YoY/ 12.1% QoQ, PLe 13%) led by persisting cost pressure in SPCM on non-availability of contracted coal, lower volume in NHS and margin normalization in CI. "SPCM EBITDA margin at 16% (vs 16.7% QoQ and 24.1% YoY) while NHS margin was lower at 11.9% (vs 12.6% QoQ and 19.5% YoY) and CI was lower at 10.8% (vs 12% QoQ and 13.8% YoY) on inventory impact. PAT at Rs 843 mn (PLe 945 mn) was -24% YoY/ +6% QoQ," the brokerage has said in its report.