Atul is one of IIFL’s top ten mid-cap buy ideas for 2018. We expect Atul to report attractive earnings growth from 3QFY18 onwards, supported by a low base effect, operating leverage due to improving utilisation of newly-commissioned capacities, and positive price trends in key products on the back of supply-side issues in China. Longer-term, we think is Atul is likely to continue with steady growth, underpinned by its diversified business portfolio, low-cost manufacturing advantage, technical capabilities, and reputation. At 19x FY19ii P/E, valuations are reasonable. INR appreciation is a key risk. Steady stalwart: One of India’s oldest and leading chemical companies, Atul has a long track record of steady growth. Its diversification across six business lines not only de-risks revenues, but also opens up vast growth opportunities. In its more recent history,the company has demonstrated impressive margin expansion via efficiency improvement initiatives. Atul also carries a general reputation as a conservatively managed company.
Atul’s earnings were under pressure in the past four quarters due to a combination of factors including: adverse price trends in key products, under-utilisation of new capacities under the company’s largest-ever growth programme, input cost pressures, INR appreciation, and GST-related destocking. With most of these headwinds now fading, and given an easy base, earnings growth from 3Q FY18 onwards should be attractive.
Atul sports a nearly debt-free balance sheet, and with its capex programme having wound down, the company should generate strong free cash flows. A high-teen ROE despite zero financial leverage reflects the attractive financial characteristics of the business. At 19x FY19ii P/E, valuations are reasonable. We believe in the growth story of the Indian chemical industry, which is emerging as an alternative to China, and think Atul is well positioned to benefit from such tailwinds.