Broker’s call: Atul (Reduce)

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Target: ₹5,955

CMP: ₹6,920.85

Atul’s FY22 performance was bolstered by a strong showing in the domestic as well as export markets. However, after the FY22 peak, there has been a decline in both exports as well as domestic sales.

Amidst the backdrop of declining textile exports, Atul is bracing for a slowdown in product demand. This scenario impacts various products, such as VAT and Novatic dyes, both witnessing reduced sales because of lower textile exports. Additionally, the demand for 2,4D, a crucial product of Atul, is also affected by the current slowdown in the agrochemical sector.

The export volume of manganese sulphate, which is also used in textile applications, has also taken a hit. Cresol, another product in Atul’s portfolio, shows a decline in export volume, pointing to the overall softness in demand.

A cut is required in consensus estimates because of the slowdown in textile exports as well as global channel destocking affecting the demand for agrochemicals. At the same time, the ongoing expansion project leads to the possibility of leveraging Atul’s balance sheet, a new development after several years.

Assuming 100 per cent capacity utilisation, the expansion could contribute Rs27bn to gross profit, potentially resulting in a consolidated EPS of ₹340 in FY28-29. Atul trades at an expensive valuation as PE of stock is way above its historical mean.