Omkar Speciality: Delay in plant commission weakens results Moneycontrol (01/03/ 2013)
CRISIL Research has come out with its report on Omkar Speciality Chemicals. The research firm, expects manufacturing of new products to ramp up in Q4FY13 as the company has begun production at the Urdhwa plant.
"Omkar Speciality Chemicals' Q3FY13 results were below CRISIL Research's expectations. Revenue grew 29% y-o-y to Rs 570 mn primarily driven by volume growth but was lower than our expectation because of a three-month delay in commissioning of the Urdhwa plant. EBITDA margins declined 286 bps y-o-y to 16.7% due to increase in employee costs and lower profitable product mix during the quarter. Despite the decline in operating profitability, PAT grew by 35% y-o-y to Rs 53 mn driven by sales growth coupled with lower taxes and higher other income. We expect manufacturing of new products to ramp up in Q4FY13 as the company has begun production at the Urdhwa plant. We remain positive on the company's growth and maintain our fundamental grading of 3/5.
Product mix expected to improve in FY14 as production of new products ramps up
Hampered by the delay in getting environmental clearances, production at the Urdhwa plant could not begin as scheduled; this restricted Q3FY13 y-o-y sales growth to 29%. The plant got commissioned in mid-December and is currently running at an utilisation rate of around 35-40%. The utilisation rate is expected to improve to 50% by the end of Q4FY13 and we believe that new high value add products from Urdhwa will help to boost overall profitability going ahead. We are expecting sales of Rs 100 mn from the Urdhwa plant. The company's exports amounted to Rs 100 mn vs. Rs 82 mn in Q3FY11 and Rs 160 mn in Q2FY13. The company has done exports of Rs 450 mn in 9MFY13 and we expect exports to reach Rs 600 mn in FY13.
Focus on use of existing products to manufacture end
The company has reiterated its plan to use a few of its existing products, including pharma intermediates, to develop end-market products that will be launched commercially. The company has begun production of a few generic APIs and plans to sell them commercially to end customers. We believe it is a step in the right direction for margin expansion and sales growth; however we believe that it will take time before the company begins to see tangible benefit given the delay in capacity expansion at Lasa Labs. The expansion is likely to get completed in FY14.
Remain positive on growth prospects; increase our fair value estimate to Rs 130
While we remain confident on Omkar's growth prospects, we reduce our FY13 revenue estimates from Rs 2,435 mn to Rs 2,300 because of lower than expected revenue contribution from the Urdhwa plant. Simultaneously, we lower our FY13 EBITDA estimate from 20.0% to 18.3% based on lower sales contribution from new products. We maintain our FY14 sales and EBITDA margin estimates. FY13 and FY14 EPS have increased from Rs 11.0 and Rs 15.3 to Rs 11.9 and Rs 17.9 primarily due to decline in depreciation charges and lower taxes due to tax benefits from R&D expenses. We continue to use DCF method to value Omkar and roll forward our valuation by a year to Rs 130 per share. At the current market price of Rs 130, the valuation grade is 3/5.