We project a 40% EPS CAGR over FY18-20, driven by steady growth in the company's base business, in which Himadri enjoys a strong competitive position, and rapid ramp-up in high-margin new products, advanced carbon material and specialty carbon black.
We initiate coverage on Himadri with a BUY and a March 2019 target price of Rs 240 (25x FY20ii EPS). We project a 40% EPS CAGR over FY18-20, driven by steady growth in the company’s base business, in which Himadri enjoys a strong competitive position, and rapid ramp-up in high-margin new products, advanced carbon material and specialty carbon black. We expect Himadri to continue to command premium valuations on the back of its strong earnings growth prospects, high return ratios and margins, competitive edge, and demonstrated capabilities and execution track record. Coal tar pitch is an essential input for customers in the aluminium and graphite industries, and furthermore Himadri enjoys a dominant market share of 70% in this product in India, which has helped it sustain margins even during cyclical downturns.
While we project stable margins in the base business, the recent recommendation for imposition of anti-dumping duty on SNF indicates upside risk to our estimates. We estimate that Himadri’s proposed expansion into specialty carbon black and advanced carbon material, if successful, could conservatively add c. Rs 500 crore to Ebitda by FY23. Himadri’s initial success in its efforts to penetrate these markets, and its execution track record, provide confidence regarding this ramp-up, which will also reduce Himadri’s dependence on the aluminium industry for growth. Himadri’s judicious use of by-products from the coal tar distillation process and its integration across the value chain give it a firm cost advantage. The company’s R&D capabilities and management’s willingness to invest with a long term view have been a key enabler in its successful addition of new products over the years.