Acquisition Of Heubach Will Expand Global Reach And Product Offerings In 2025

Key Takeaways

• Acquisition of Heubach Global Pigment business and successful CapEx projects are expected to boost revenue through product and geographic expansion.
  
• Improved leverage ratio and robust export growth anticipate enhanced earnings through reduced interest expenses and favorable product mix.
  
• Operational volatility and acquisition challenges may affect Sudarshan Chemical's profitability, margins, and ability to sustain growth amid demand and cost pressures.

Catalysts

Manufactures and sells organic, inorganic, effect pigments, and dispersions in India, the United States, Europe, China, Mexico, Japan, and internationally.

• Sudarshan Chemical's acquisition of Heubach Global Pigment business, expected to close by March '25, is likely to enhance revenue through expanded geographic reach and product offerings.
  
• The ramp-up of new products from previously completed CapEx projects is progressing as expected, indicating a potential increase in future revenue and margin improvement.
  
• The export market's robust growth, especially with new products gaining traction internationally, signals a favorable impact on revenue and potentially higher net margins due to better product mix.
  
• The reduction in net debt and subsequent improved leverage ratio are likely to positively impact earnings by reducing interest expenses and increasing financial flexibility.
  
• The ongoing transformation project for the RIECO engineering business targets a sustainable 10%+ EBITDA margin, which could enhance overall company earnings and return on capital employed.

Sudarshan Chemical Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sudarshan Chemical Industries's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 10.0% in 3 years time.
• Analysts expect earnings to reach ₹3.9 billion (and earnings per share of ₹54.46) by about March 2028, up from ₹1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2028 earnings, down from 67.1x today. This future PE is greater than the current PE for the IN Chemicals industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.71%, as per the Simply Wall St company report.

Sudarshan Chemical Industries Future Earnings Per Share Growth

Risks

• The Pigment segment EBITDA and EBIT have shown sequential declines, which could indicate volatility in operational profitability despite an improvement in segmental results. This may impact overall earnings stability.
  
• The Coatings segment exhibited weaker demand due to inventory destocking, which suggests potential revenue fluctuations in domestic sales.
  
• The integration and transformation costs related to the Heubach acquisition have been substantial (₹41.9 crores), and any further unexpected costs could impact net margins and profitability calculations.
  
• There may be unanticipated risks with the Heubach acquisition, such as ongoing operational losses at Heubach, which could present challenges in achieving projected earnings growth.
  
• There is pressure on gross and EBITDA margins, as seen with a slight decline in Q3 FY '25, potentially affecting the company's ability to sustain margins amid pricing and cost challenges in product mix changes.

Valuation

• The analysts have a consensus price target of ₹1036.0 for Sudarshan Chemical Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1224.0, and the most bearish reporting a price target of just ₹720.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹39.2 billion, earnings will come to ₹3.9 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹1006.1, the analyst price target of ₹1036.0 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.