ICICI Securities has initiated coverage on recent debutant Archean Chemical Industries with a ‘Buy’ rating and a target of Rs 760. The target price suggested a 33 per cent potential upside over Thursday’s closing price of Rs 571.65. Archean Chemical has strong business moat and that its value-creation has just begun, ICICI Securities said. Following the initiation report, the scrip rose 3.9 per cent to hit a high of Rs 594 on BSE.
The brokerage values Archean Chemical stock at a multiple of 12 times FY25 earnings per share. It likes the natural advantage the company enjoys in elemental bromine due to its access to brine reserves, which is difficult to replicate.
“Further, the bromine business has unique advantages such as value extraction from brine, China’s position as a major buyer (not competitor), rupee depreciation. Archean has scaled up its bromine production and is now adding capabilities and capacities in the bromine compounds business, which is helping create long-term value,” ICICI Securities said.
Archean Chemical has resolved issues with sulphate of potash (SOP) production, which is now expected to scale-up over the next few years, allowing Archean to extract more value from its brine, ICICI Securities said.
The brokerage said that the company also plans to extract magnesium chloride in the future, adding that the Industrial salt capacity addition will likely help drive volumes.
ICICI Securities expects Archean’s revenue to grow at 24.8 per cent compounded annually over FY22-FY25E. Bromine (including bromine compound) revenues are expected to account for 67.5 per cent of total revenues in FY25E from 53.5 per cent in FY22.
“Salt is a lower-margin business and is gradually being replaced by the higher-margin businesses of bromine compounds and SOP, which will likely aid margin improvement. We estimate Ebitda CAGR at 33.7 per cent over FY22-FY25E driven by Ebitda margin expansion to 51 per cent in FY25E from 41.3 per cent in FY22). Net profit is expected to further benefit from drop in finance cost post payment of high-cost NCDs,” it said.
Archean is a net-debt-free company and its return ratios are healthy and sustainable at over 30 per cent, ICICI Securities pointed out.
Shares of Archean Chemical Industries were listed on November 21, 2022. The stock is up 46 per cent over its issue price of Rs 407.
