Archean Chemical: Story intact, bromine to recover

18 Mar 2024 , 11:30 AM

Archean Chemicals Industries (ACIL) is a leading Marine Chemical manufacturer in India, mainly focussed on bromine. While bromine volumes and realisation moderated in 1H’24, 3Q witnessed volume recovery. The story remains intact with the base business on a path to recovery and foray into bromine derivative to enhance value in the medium term. The addition of Oren hydrocarbon is seen as a positive, as it will expand product offerings. The company is also actively pursuing other initiatives to deploy cashflows, so as to drive future earnings. At 10.2x FY26 EPS, the valuation is compelling. Analysts of IIFL Capital Services recommend investors to buy into the current weakness in the stock. Maintain BUY with TP of Rs705 (18% upside).

Base business in recovery mode:

ACI witnessed a handsome recovery in bromine volumes to 5KT (up 25%YoY) in 3Q’24, while the realisation stood at $2.5/kg (down 46%/16% YoY/QoQ). Salt revenues were up 34%, on the back of 18% volume growth and 14% realisation growth. Traction in SOP, too, was healthy with revenues at Rs184mn and volumes at 4.3KT. Thus, at a consolidated level, the business witnessed QoQ recovery with higher volumes driving 13% sales growth; while the lower bromine realisation resulted in a 9% decline in Ebitda.

Foray into bromine derivatives to be value-accretive:

The work on Rs2.5bn bromine derivatives capex is on track with phase-1 to get commissioned in 4Q’24. FY25 will see scaling up of this facility with potential sales of Rs2-3bn (at 60-70% utilisation). Phase-2 of the project, which involves flame retardants, is on track to get commissioned in 1HFY25. Scaling up is expected in FY26. The company has raised a debt of Rs1.6bn to fund its capex on bromine derivatives.

Compelling valuation, positive outlook:

While bromine prices remain benign, volumes — after moderating for the last few quarters — have started picking up. Thus, outlook for the next year remains positive as bromine performance is likely to improve, given the easy base while salt volumes will be steady. Further, the foray into bromine derivative will also be value-accretive. Valuation at 10.2x FY26 earnings are compelling.