Sell Apcotex Industries; target of Rs 80: ICICI Direct

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ICICI Direct's research report on Apcotex Industries

Apcotex registered a revenue decline of 24% YoY to Rs 116 crore, largely impacted by sluggish growth from NBR segment due to slowdown in the auto sector along with a fall in realisation due to passing on of benefit of lower RMAT prices. Further, fall in tyre latex along with carpet latex revenue also weighed on the overall performance. The company was struggling to maintain its historic gross margins of 30-32% in the last few quarters due to increase in NBR imports from Europe at lower prices leading the company to sell NBR at losses or breakeven level in the last few quarters. This was curtailed during the quarter due to fall in spread of butadiene between South East Asia and Europe, resulting in gross margins of 31.8% vs. 24.3% in Q3FY20 and 29.4% in Q4FY19. This has helped overall operating margins to remain at 6.8% vs. 0.5% in Q3FY20 and 9.2% in Q4FY19. Lower OPM YoY is due to higher other cost of around 300 bps YoY. We expect that is largely due to MTM forex impact. EBITDA remained at Rs 7.9 crore (-43% YoY). Higher taxes along with increase in the depreciation post commissioning of Rs 50 crore capex and increase in finance cost impacted bottomline, which was at Rs 3.1 crore (-80% YoY).

Outlook

We believe since Europe and SEA spread of key raw materials are narrowed, one can expect stability in gross margins for coming quarters. However, we believe Apcotex is largely a converter and less into specialty portfolio. Thus, it can fetch around 6-7x EV/EBITDA. Further, it is also exposed to auto along with carpet, construction sectors, which seem under pressure due to ongoing turbulent time. Thus, this can expose it to earnings vulnerability. Further, it plans to do a capex of Rs 90-100 crore in the next 12-18 months, which we believe can expose it to balance sheet risk due to poor FCF. Thus, we value the company at 7x EV/EBITDA to arrive a target price of Rs 80. We have a SELL rating on the stock.

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