SMC initiate coverage on Bodal Chemicals with target implying 24% upside over next 12 months

SMC | April 22, 2015, midnight

Bodal Chemicals, a key manufacturer of acid, direct and reactive dyestuffs, and dye intermediates, has been able to capitalize on the opportunities which have emerged on account of change in dynamics of the DI and DS industry globally. However, over the medium to long term we believe, structurally the company is poised to benefit on account of its early mover advantage owing to lower cost of environmental compliance as the company's allocation for effluents is fairly well placed compared to peers largely operating in the unorganized segment which comprises a mix of traders and manufacturers. Besides, other growth avenues such as its foray into Specialty Chemicals (water treatment chemicals), expansion of Dye Stuff capacity, growing business opportunities in LABSA and Liquid Dye Stuff could add to the topline of the company in a meaningful way over the next 3-4 years. In addition to the above, what we also like about Bodal is its level of business integration, both horizontally and vertically. Such an ability and large scale of operations in the Indian Dye Intermediate and Dyestuff segment is a rarity. Owing to the above mentioned factors we initiate coverage on the stock with a “BUY” rating as we value the stock at P/E of 12x thus arriving at a price target of INR 154/share over the next 12 month period translating into a 24% upside.

Investment Rationale

  • Strategic focus on expanding high margin Dye Stuff Capacity: Given the large opportunity to cater to the growing Dye Stuff demand in the international markets where Bodal has about 3% market share, there lies immense opportunity to be tapped. Seeing this, the company's management is expanding its existing DS capacity by 8,000MTPA in its first phase at Unit VII. The same will be entirely funded (INR 280mn) from internal accruals. Further, DS also has much higher margins than DI which could aid expansion of EBITDA Margin for Bodal over the coming years.
  • Foray into Speciality Chemicals (water treatment) under Trion: With US imposing antidumping duty on Chinese products used in water treatment there opens an immense opportunity for Bodal to foray in this specialty chemical segment. For the same the company has a 42% stake in Trion Chemicals which manufactures T.C.C.A. The total size of this market in USA is ~300,000MTPA while Bodal has an installed capacity of 12,000MTPA.
  • Faster than expected exit from CDR and next level of growth driven by fiscal prudence: Having faced difficult business conditions in FY2012 and Fy2013, Bodal entered into a CDR for a ten year period with its bankers with stringent financial conditions attached. For any company under CDR it is a daunting task to operate business with bare minimum capital requirements. However, Bodal has been able to make a complete and early exit from CDR in FY2015 owing to its focus on improving business, capitalizing on the opportunity created due to China plant shutdowns and adhering to fiscal prudence. This only indicates the management's resolve to grow its business on a sustainable basis.
  • Voluntary investments in environment protection gives a leg up: While, Bodal is the the only player with effluent disposal permission of 1mn litres per day the company has gone a step further in installing a Multi Effect Evaporator (MEE) at a cost of INR 350mn. This MEE is amongst the latest system installed by Bodal to treat effluents, thereby making it the only company to do so in the domestic chemicals industry.


At CMP of INR 124, the stock is trading at a P/E of 10.1x its FY18E EPS. The largest manufacturer of DI in the domestic market, its large scale of operations compared to peers in the Indian context, fully integrated operations across the DI and DS value chain, voluntary investments in setting up latest Effluent Treatment facility (Multi Effect Evaporator), strategic focus on high growth areas such as foray in speciality chemicals (chlorine based water treatment products), higher margin Dye Stuff segment (ongoing capacity expansion) and competitive positioning against Chinese companies at the current juncture seem to ensure Bodal is well positioned to capture the next phase of growth over the next couple years. We estimate the company to register a Revenues/EBITDA/PAT CAGR of 21%/22%/25% over FY16-FY18E. We value the consolidated business of Bodal on P/E basis at 12x FY18E EPS (INR 12.3), to arrive at a target price of INR 154 with an upside of 24% over the 12 month time frame. We initiate with a “BUY” rating on the stock.


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