Archean Chemical Industries Limited: Surfing the Specialty Wave

Company Introduction

ACI is the leading specialty marine chemical manufacturer in India, focusing on producing and exporting bromine, industrial salt, and sulphate of potash to customers worldwide. The company holds a 60-70% market share in bromine exports and derives 49% of its revenue from bromine, with the remaining coming from industrial salt. ACI serves 27 global customers across 13 countries and 28 domestic customers, with 70% of its revenues coming from its top 10 customers.

Historical Performance

• Revenue growth from ₹439 Cr in FY18 to ₹1,441 Cr in FY23, a CAGR of 27%
• PAT improvement from a loss of ₹79 Cr in FY18 to a net profit of ₹384 Cr in FY23
• ROCE averaging 45% in the last 3 fiscal years, highlighting efficient capital utilization

Industry Analysis

• Global industrial salt market projected to expand at a CAGR of 2.8%, growing from 157 million metric tons in 2020 to 185 million metric tons by 2025
• Global bromine industry, valued at approximately $3.1 billion in 2021, anticipated to grow at a CAGR of 5.8% between 2023 and 2025
• India exporting bromine at higher prices compared to the cost of bromine imports, with 95% of India's bromine exports primarily to China

Key Drivers and Investment Thesis

1. Resurgence in Bromine Demand: ACI is experiencing a significant upturn in bromine demand, influenced by the geopolitical environment in Israel and a rise in customer inquiries
2. Stable Chlorine Market Dynamics: The stable demand in the chlorine market is positively impacting industrial salt volumes, ensuring a consistent revenue stream for ACI
3. Projected Production Timelines: ACI aims to commence production of clear brine fluid and PTA catalyst by FY24 end and launch Brominated Flame Retardants (BFR) in Q1 FY25, highlighting its strategic production expansion and innovation capabilities
4. Positive Outcomes from R&D in Bromine Derivatives: ACI's R&D efforts in bromine derivatives have received positive market feedback, reflecting the company's commitment to innovation and potential for growth and diversification

Financial Analysis and Valuation

Based on our analysis, we project ACI's FY25 EPS at INR 46.13 and assign a multiple of 20x. This results in a target price of INR 922, implying a 48% upside potential within the next 12-18 months.

Recommendation

We recommend a "Buy" rating for Archean Chemical Industries Ltd, considering its strong market position, strategic initiatives, and growth prospects in the specialty marine chemicals industry. The company's focus on innovation, production expansion, and diversification, coupled with its robust financial performance, makes it an attractive investment opportunity.

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