Saykha Benzene Project Nearing Viability Will Strengthen Future Prospects

Key Takeaways

• Expansion into benzene downstream and salt-free dyes is set to boost revenue and margins, leveraging existing resources efficiently.
  
• Enhanced capacity utilization in dye intermediates and chlor-alkali businesses aligns with stable demand, supporting revenue and earnings growth.
  
• Increased project expenses and debt burden, alongside financial losses from international subsidiaries, impact overall profitability and threaten financial stability amidst delayed revenue growth.

Catalysts

Engages in the manufacture and sale of dyestuffs, dyes intermediates, and other chemicals in India.

• The expansion into benzene downstream products through the Saykha Greenfield Project is nearing commercial viability, with anticipated contributions to both top-line revenue and earnings once operational efficiencies and certifications for the pharma industry are achieved.
  
• The company is capitalizing on the emerging demand for salt-free dyes, a new product line expected to yield positive returns in the future due to growing use in textiles, potentially boosting revenue and margins with existing facility resources and minimal additional costs.
  
• Improved capacity utilization in dye intermediates and chlor-alkali businesses will likely continue to enhance revenue growth and earnings, given current stable demand and volume advancements.
  
• Anticipated revenue growth from the partial internal consumption of benzene and basic chemicals, along with increased production capacity, is expected to solidify revenue streams and support margin enhancements.
  
• The potential implementation of renewable energy solutions could lower operational costs, improving net margins, though no immediate capital allocation is planned for this at present.

Bodal Chemicals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bodal Chemicals's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 5.5% in 3 years time.
• Analysts expect earnings to reach ₹1.4 billion (and earnings per share of ₹11.53) by about February 2028, up from ₹60.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 120.5x today. This future PE is lower than the current PE for the IN Chemicals industry at 25.3x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.09%, as per the Simply Wall St company report.

Bodal Chemicals Future Earnings Per Share Growth

Risks

• Increased interest, depreciation, and other overheads from the Saykha benzene downstream project without adequate revenue contribution have offset the profitability of other divisions, impacting net margins and overall profitability.
  
• The Dyestuff division has experienced degrowth, with an 8% decline in revenue quarter-on-quarter and a 6% growth year-on-year for the 9 months, due to end application industries like textiles and leather not recovering as expected. This could lead to reduced revenue and earnings.
  
• Delays in achieving required pharmaceutical certifications and low utilization rates at the Saykha benzene project have hindered its revenue contribution, potentially affecting future top-line growth and net margins.
  
• The Turkish subsidiary is experiencing financial losses due to hyperinflation, contributing to a consolidated loss, which could negatively impact the net profit and overall financial stability.
  
• A significant portion of the company's debt is tied to new projects like the benzene downstream products, leading to a high interest burden. Servicing this debt amidst fluctuating profitability could strain cash flows and net earnings.

Valuation

• The analysts have a consensus price target of ₹90.5 for Bodal Chemicals 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 ₹100.0, and the most bearish reporting a price target of just ₹81.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹24.7 billion, earnings will come to ₹1.4 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 17.1%.
  
• Given the current share price of ₹57.79, the analyst price target of ₹90.5 is 36.1% higher.
  
• 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.