Anand Rathi has assigned a ‘Buy’ rating on Rossari Biotech shares with a target price of ₹950 apiece, implying an upside potential of nearly 26% from its Thursday’s closing price.
The specialty chemicals manufacturer Rossari Biotech is embarking on substantial ₹180 crore capex to yield an asset turnover of 4-5x on optimal utilisation. Anand Rathi believes such efficiency is poised to unlock additional revenue potential of ₹700 – 900 crore at peak operational capacity, and this capex would help generate an additional 40- 50% of current revenue in coming years.
Rossari Biotech’s EBITDA margin contracted to 12.4% after normalising from a peak of 17% in FY20 and FY21. It rose to 13.5% in FY23 and 13.6% in FY24 with normal demand, prices and inflationary pressure.
Going ahead, the brokerage firm expects margins to improve to 14.2% in FY26, supported by the benefits of backward integration, synergies from acquired entities, a rising share of niche, value-added specialty chemical products, economies of scale on better capacity utilisation and a pick-up in the high-margin business, mainly the AHN category.
With healthy margins, it expects a 20% EBITDA CAGR over FY24-26.
The company’s net profit is expected to register a 24% CAGR over FY24-26, to ₹200 crore, boosted by strong revenue growth and expanded EBITDA margins.
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“We expect net profit growth to outshine revenue growth, largely propelled by margin expansion, lower finance costs and higher other income. With expanding margins, strong revenue growth and better operating performance, the RoE is expected to rise to 15.5% in FY26 (from 13.3% in FY24) and the RoCE to 14.7% (12.9%), assuming a good performance ahead,” Anand Rathi said in a note.
On the valuations front, Rossari Biotech shares have quoted at an average P/E of around 45x in the last four years and 32x FY24 earnings. The brokerage firm reckons that a consistently better performance would be seen on capacity expansion, product launches and better margins.
Over FY24 – FY26, it expects the company to deliver 17%, 20% and 24% revenue, EBITDA and PAT CAGRs.
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“The stock quotes at 19x FY26 EPS estimates, which looks attractive, given expectations of strong growth. We value the stock at 26x FY26 e EPS with a TP of ₹950, which offers 26% potential for the next 12 months. We initiate coverage on it with a Buy rating,” Anand Rathi said.
However, the risks include delayed demand recovery, mainly in agrochemicals and textile chemicals, a slower pick-up in newly launched products, delayed approvals and margin pressure, it added.
Rossari Biotech share price has gained over 10% in one week, but the stock is down more than 4% year-to-date (YTD).
At 1:00 pm, Rossari Biotech shares were trading 1.08% higher at ₹764.25 apiece on the BSE.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 14 Jun 2024, 01:02 PM IST
