Astec Lifesciences: While the stock is currently trading at 30.4x FY22F EPS, we value the company at 25x FY23F EPS, the long-term mean P/E, to arrive at our TP of Rs1,073.
We value the company at an eight-year mean valuation as:
1. Core PAT growth will likely be 13.9% CAGR over FY21F-24F. This is lower than FY13-21 PAT growth of 34.7%. We forecast revenue to be 15% CAGR for FY21F-23F, lower than FY13-FY21F revenue growth of 16.2%. While revenue has mimicked past growth, earnings growth is lower and we value the company at a historical mean valuation. We do not assign any premium to it.
2. We expect EPS growth of 13.9% CAGR for the company, in line with peer average EPS growth for FY21F-24F. Astec’s RoE of 19.22% is slightly higher than the average of peers (under our coverage) of 17.5% for FY23F. However, in terms of size, Astec is much smaller than its peers, business is highly concentrated in a single chemical class and the company has not got a track record like Bayer, UPL, SRF, NFIL or PI. Hence, we value the company at its historical mean valuation, which is lower than its peers by 60%. Astec’s peer group comprises Rallis (Rallis IN, Add, TP Rs355, CMP Rs270), SRF (SRF IN, Add, TP Rs6,227, CMP Rs6,226), PI Industries (PI IN, ADD, TP Rs2,600, CMP Rs2,500), Vinati Organics (VOL IN, Add, TP Rs1,603, CMP Rs1,580), Navin Fluorine (NFIL IN, Hold, TP Rs2,599, CMP Rs3,085).
3. After a projected decline of 180bp in gross margins in FY21F, we expect it to bounce back 150bp over the next three years. However, Astec is at present in a declining chemical class, hence there are pricing pressures. At the same time, rising crude oil prices will lead to rising raw material costs. So, it is possible margins could be a negative surprise.
4. We forecast revenue to be 15% CAGR (FY21-24F) and PAT 13.9% CAGR for FY21F-24F. There are near-term headwinds as PAT growth will remain below consensus, however the company is diversifying into herbicides which is a long-term positive. Risk balances reward, hence, Hold.
Downside risks
1. We expect gross margins to bounce back by 150bp as prices are likely to recover for tebuconazole after a dismal FY21F. However, if prices do not bounce back, gross margin will not recover. Hence, EPS will be lower than our estimates.
2. We expect Astec to be able to pass on the crude oil-linked rise in raw material cost. However, if the company is unable to do so then gross margins and EPS will be lower than our estimates.
Upside risks
1. We build in a slow plant ramp up, which Astec Lifesciences is putting up at a cost of Rs0.8bn. We estimate the revenue in the first year at Rs0.3bn, however a faster ramp-up/ new order could surprise us positively.
2. We expect the domestic enterprise business to grow at 12% CAGR over FY21-24F. However, a sudden rise in fungus attacks on rice/ food and vegetables could increase the use of SBI-triazole fungicides (like tebuconazole) which will be positive for Astec’s revenue and EPS.
– By CIMB Bank Research
