New Expansions In CPVC And ECH Will Diversify Revenue Streams And Strengthen Market Position

Key Takeaways

• Expansion projects and new value chains are likely to boost revenue and earnings, enhancing diversity and capacity utilization by the end of FY '27.
  
• Focusing on domestic demand and international markets, Epigral aims to improve net margins through value-added import substitutes and integrated CapEx investments.
  
• Delayed margin improvements are expected due to slow demand growth, increased costs, and upcoming competitive supply pressures in core products.

Catalysts

Manufactures and sells chlor-alkali and related derivatives in India and internationally.

• Epigral is expanding the capacity of its CPVC resin and epichlorohydrin production facilities, with plans to double their capacities by FY '27. This is expected to significantly boost revenue starting from FY '27 onwards, given the growing domestic demand.
  
• The company is commissioning a new chlorotoluenes value chain project, which is anticipated to enhance revenues in FY '26 and beyond, contributing to a diversified revenue model.
  
• Future volume growth from ongoing and new expansion projects is expected to impact both revenue and earnings, supported by increased capacity utilization.
  
• Strengthening its position in value-added import substitute products, Epigral aims to leverage its integrated and complex CapEx investments, which is likely to improve net margins and revenue stability.
  
• The company's strategy of targeting domestic demand growth in the chemical sector and tapping into international markets suggests potential increases in earnings through improved revenue streams and market expansion.

Epigral Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Epigral's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.2% today to 13.7% in 3 years time.
• Analysts expect earnings to reach ₹6.0 billion (and earnings per share of ₹137.32) by about January 2028, up from ₹3.5 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 24.2x on those 2028 earnings, up from 22.8x today. This future PE is lower than the current PE for the IN Chemicals industry at 26.9x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.4%, as per the Simply Wall St company report.

Epigral Future Earnings Per Share Growth

Risks

• The chemical industry has shown slow growth in demand, which may impact future revenue and overall market conditions if the trend continues.
  
• The company's strategy includes expanding CPVC resin and epichlorohydrin production, but new capacities are only expected to contribute from FY '27 onwards, potentially delaying margin improvements.
  
• Fluctuations in caustic soda and chlorine prices, along with high logistic costs, have increased other expenses, which could affect net margins.
  
• The introduction of competitive capacities in ECH and CPVC might lead to price pressures and impact revenue if market demand does not absorb the new supply.
  
• The negative impact of foreign exchange and derivative trading on finance costs may create unpredictability in net earnings.

Valuation

• The analysts have a consensus price target of ₹2300.0 for Epigral based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹43.5 billion, earnings will come to ₹6.0 billion, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 13.4%.
  
• Given the current share price of ₹1839.4, the analyst's price target of ₹2300.0 is 20.0% 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.