Rossari Biotech Ltd. share price target

•Rossari reported slightly lower-than-expected revenue but achieved 11% YoY growth, driven by strong execution in export markets for HPPC and textile segments, along with healthy performance in key ANH markets, despite challenging domestic conditions.
•Despite delivering lower than expected revenue, gross profit grew 16% YoY, aided by new product launches in Buzil Rossari Business.

Rossari Biotech reported lower than expected topline and bottom line Q2FY25 due to softer HPPC growth and material weakness in TSC segment. Despite these pressures , it posted 3.1%/12%/3.2%/7.2% revenue /GP/EBITDA/PAT growth on YOY basis led by heathy export growth in the HPPC segment.

HPPC business and capex to drive growth

We expect it is likely to deliver 18%/22%/25% revenue/EBITDA/PAT CAGRs over FY25-27 due to swelling demand, capacity expansion and mounting exports.

Rossari Biotech’s (Rossari) Q2FY25 HPPC revenue growth (+6.2% YoY) was hurt from softer demand and restricted ethylene oxide (EO) capacity.

Rossari Biotech’s revenue beat our estimate (+2.8%) due to strong volume growth in HPPC (Home, Personal Care, and Performance Chemicals) business and in the TSC (Textile Specialty Chemicals) division.
We anticipate this growth momentum in revenue will continue due to strong demand in the end customer segments.

Rossari Biotech is a leading specialty chemicals manufacturing company, focusing on four core chemistries of enzymes, silicones, acrylics and surfactants. It caters to industries such as home and personal care, and performance chemicals (HPPC), textile specialty chemicals (TSC) and animal health and nutrition (AHN) products

Rossari Biotech missed our revenue estimate due to subdued growth In Textile Specialty Chemical segment and Animal Health Nutrition segment which was partially offset by growth in Home, Personal care and Performance chemicals (HPPC) segment.
The stock is trading at PE multiples of 23.3x/18.9x based on FY25E/FY26E EPS estimates, respectively.

HPPC and capex to drive growth

For Q3FY24, Rossari Biotech's revenue was INR 4,638 Mn which grew by 19.1% YoY but declined by 4.1% QoQ. This growth was driven by strong growth in HPPC segment, which posted solid double-digit growth of 31.1% YoY but declined 3.2% QoQ to reach revenue of INR 3,554 Mn.

HPPC business and capex to drive growth

The HPPC segment posted solid double-digit growth (20.8% YoY and 21.9% QOQ) in revenue to reach INR 3,671 Mn. The strong performance in the company’s core segment was led by healthy contributions from Institutional cleaning, Paints, and Home and Personal care. The revenue contribution grew to 75.9% of the total revenue in Q2FY24 compared to 71.4% in Q2FY23.

Rossari Biotech’s (Rossari) Q2FY24 HPPC revenue (+21% YoY) was led by a volume push which has hurt prices and margins. Despite rise in utilisation from 50-55% to >75%, EBITDA margin dipped 100bp QoQ to 13.1%. It has chosen to play volume game for FY24 to drive utilisation, and expects to improve margins as plant utilisations stabilise at higher levels, which in our view can cap return ratio in near term.

Signs of a recovery in sight

Rossari Biotech’s (Rossari) Q1FY24 revenue dipped 5.5% YoY to Rs4.1bn due to drop in raw material prices, while volume grew ~20% YoY. Gross profit margin dipped 10bps QoQ despite softening raw material prices as the company focused on growing volumes and driving operating leverage. EBITDA margin has improved 70bps QoQ to 14.1%. Rossari expects revenue growth of 12-14% and EBITDA margin at 14% for FY24 despite a weak Q1FY24.

The HPPC segment witnessed a growth of 7% on QoQ and a de-growth of 11% YoY basis and contributed 68.9% to the total revenue, the revenues from this segment stood at INR 2,829 Mn. During the quarter, the HPPC segment showed a stable performance, even with weak demand in key domestic industries.

Signs of a recovery in sight

Rossari Biotech’s Q4FY23 revenue dipped 7.4% YoY (rose 4.4% QoQ) to Rs4.1bn due to drop in raw material prices. However, we were disappointed by a 40bps QoQ contraction in gross profit margin to 29.6%. EBITDA growth therefore was just 4.3% YoY.

The consolidated revenue of Rossari declined by 9.1% YoY/8.5% QoQ to INR 3893mn due to subdued revenue performance in the subsidiaries that led to lower sales in (HPPC) segment for the current quarter. Ongoing challenges in export markets such as Europe and Russia had a substantial impact on Tristar, while Unitop faced headwinds in the agrochemical business.

Rossari Biotech’s Q3FY23 performance disappointed with 9.1% YoY / 8.5% QoQ dip in revenues to Rs3.9bn. However, EBITDA margins showed recovery, up 60bps QoQ to 13.9%. Revenues were hurt due to multiple reasons: 1) lower realisation as a result of softening raw material prices; 2) complete exit of a large customer; 3) underlying headwinds for textile industry; and 4) muted performance by acquired companies.