Sudarshan Chemical: Uncertainty in global market. Downgrade to SELL

The Sudarshan Chemical Industries (SCIL) stock has run up more than 60% in the past seven months as the company has initiated integration with Heubach. The combination of cutting-edge technologies, a diverse product portfolio catering to a wide range of customer needs, and Heubach’s expansive global production and service network uniquely position the company to serve a worldwide customer base in coatings, plastics, inks, and specialty applications. This comprehensive offering enables SCIL to deliver industry-leading products and services with a global reach. Operational optimization and cost reduction programme undertaken by SCIL will improve efficiency. However, the gains from the synergy will take time to realize as it is a multi-geography, multi asset integration. Weak demand in global pigment markets, high inventory level at the customer end, and strong competition are adding to the woes. The global pigment manufacturers are uncertain over the demand outlook owing to geopolitical situation and ongoing tariff war. The intense competition from global players shall curb any potential price hike in the near term. We expect EBITDA to increase from INR7.88bn in FY26 to INR 9.36bn in FY28 at a 9% CAGR. EPS is expected to grow at 20% CAGR from FY26-28E. The stock is trading at EV/EBITDA 15.2/13.8/12.5x FY26/27/28, which is 33-166% premium to global peers. We believe the current valuation is contextually high. Thus, we are downgrading SCIL from ADD to SELL with a target price of INR1,175/share.

System integration and customer engagement is the priority: SCIL has now become one of the top players in the pigment industry globally. It will have 19 manufacturing sites in 11 countries across five continents. Post takeover of Heubach, the company has noticed that it has to focus on improving customer engagement and integration of data, systems, processes, and culture. There is limited focus on customers owing to internal issues and gaps in support functions as well. Therefore, SCIL has taken integration exercise at various functional levels like operation, procurement, IT, and product management. In an effort to integrate systems, the company has launched a project to integrate the four different SAP systems that were in place into one SAP system.

Cost reduction initiatives: SCIL has launched cost reduction programme across operations and supply chain and manufacturing sites, procurement, IT, SG&A, and portfolio optimization. Safety stocks have increased despite there being a broken supply chain previously. The company will focus on producing specialty pigments in Europe considering manufacturing cost in Europe is higher while commodity chemicals will be manufactured in India. Operational optimization shall improve efficiency and save costs.

Acquisition will enhance the value proposition: The acquisition will broaden the company’s product offerings. The company will have a footprint in organic pigments (high-performance to classical), effect pigments (Sudarshan legacy), and significantly strengthen portfolios in inorganic pigments, corrosion protection, pigment dispersion, and dyes. It will allow the company to offer value proposition to the customer. SCIL has reinstated customer’s service in each geography. Senior management is engaging with customers to rebuild trust and allowing customers to reach out directly.

 Disclaimer : This content is only for informational purpose. Any recommendation made is general in nature. Do not make any investment based solely on the above recommendation as it does not factor your unique risk tolerance and investment objectives.

Source: HDFC Securities Institutional Equities