The Silent Performer - Sudarshan Chemical Industries
By Kaustubh Ghotikar |
11/8/2010 12:57 PM Monday
At times, it makes sense to keep our selection criteria simple and hunt for value stocks. And our hunt led us to the Pune-based Sudarshan Chemical Industries, which, at its FY11 estimates, is available at a PE of a mere 7.8x and must therefore be included in one’s portfolio.
Basically a manufacturer of high-performance pigments catering to domestic and international customers, the company also has a presence in the agro-chemicals business. However, it is the pigment division that has been driving Sudarshan’s growth and contributes over 85 per cent of the revenues, with the balance coming in from its agro-chemical unit. There are various factors that make Sudarshan an attractive proposition. This low-profile company has grown at a brisk pace over the years. On a three-year CAGR basis, Sudarshan has been growing at 116 per cent in profits and almost 16 per cent in sales. This growth has mainly been driven by the pigment division which contributes 90 per cent to its EBIDTA. In the last three years Sudarshan’s operating and net margins have improved by 573 and 516 basis points respectively. This consistently good performance was carried through in H1FY11 also.
Certain factors such as good domestic demand, favourable input prices, and better export realisations have led the company to post good results. Considering the fact that Sudarshan caters to a host of user industries such as textiles, plastics, decorative paints, transportation, industrial sector, etc. that are doing well on their own turf, the demand is expected to remain buoyant for pigments in the coming period. According to a media report, Sudarshan has also lined up capex of USD 15 million to increase the capacity of its high-performance pigments to meet the increasing demand. This will further drive its future growth. Although China is seen as a threat to the Indian pigment player, one should note that China has huge capacities for commodity pigments while the Indian players are more into medium and high-performance pigments, thereby creating a clear demarcation of the markets.
On the agro-chemical front, the company expects to improve its performance by concentrating on bulk pesticides, high margin products, etc. It is also exploring contract manufacturing as a de-risking strategy. For H1FY11, Sudarshan’s sales increased by 24 per cent to Rs 349.30 crore (Rs 288.79 crore) while profits increased by 16 per cent to 27.75 crore (22 crore). For FY11, we expect Sudarshan to post revenues of around Rs 650-670 crore and profits of Rs 53-55 crore. At these estimates Sudarshan generates an EPS of 77.36, thereby resulting into a PE of 7.8x, which is lower than its peer Meghmani Organics that is available at almost 9x. Besides, Sudarshan also has a 20-year dividend track record with FY10 dividend of Rs 12.5 per share and dividend yield of more than 2 per cent. Thus, it makes sense to grab Sudarshan at its CMP of Rs 604 with a one-year target of Rs 793.
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