Chemical Stock to Buy Now for an Upside of 33%; Recommended by Nuvama

Synopsis: Quarterly results, capacity increase, and favorable growth projections have strengthened our optimism about this chemical business, despite the expectation of normalisation of profits in the coming quarters following a stellar performance for the current quarter.

This small cap stock company, which is primarily involved in the production of various segments of products including Life Science Chemicals & Performance and Other Chemicals under nine businesses, has been given attention by the brokerage firm that sees upside potential of 33 percent.

With the market capitalization of Rs. 20,138 Crores, the shares of Atul Ltd were trading at around Rs. 6,840 per share , which is 5 percent discount from its 52 week high of Rs. 7198 per share and is trading at a P/E of 25.3 where as industry P/E stands at 29.2

Brokerage View

Nuvama has maintained its ‘Buy’ rating on the stock and raised its target price to Rs. 9,111 from Rs. 8,451, implying an upside potential of around 33 percent from the current market price of Rs. 6,840. The brokerage believes the company’s cash-rich balance sheet, improving return profile, capacity expansion plans, and estimated 14 percent  PAT CAGR over FY26–FY28 support its long-term growth outlook, despite expecting the exceptionally strong quarterly performance to normalise in the coming quarters.

Strong Top-Line Growth with Operational Discipline

The company recorded excellent quarterly performance, posting 25 percent  YoY growth in consolidated sales to touch INR 18.4 billion. While the gross margins remained stable on a YoY basis at 48.7 percent , sequential margins witnessed a boost of 220 bps due to the positive impact of inexpensive inventories in Q1 FY27. Efficient cost management further improved the bottom line, with power costs increasing only by 0.2 percent  YoY and other costs rising 6 percent  YoY.

As a result, EBITDA rose 67.1 percent  YoY to INR 3.9 billion. The contribution from other income which increased 26.9 percent  YoY along with decreased depreciation of -4.8 percent  YoY helped drive net profit up by 91.8 percent  YoY to INR 2.5 billion. Subsidiaries made a significant contribution towards performance, led by the pricing power of Amal Ltd. in sulphuric acid, with sales and EBITDA growing 49.5 percent  YoY and 32.2 percent  YoY respectively.

Strategic Capex Expansion

This new capital expenditure by Atul is estimated at INR 1.67 billion for manufacturing plant construction of herbicide actives, which include MCPP-p (mecoprop-P) at 1,000 TPA and MCPA (2-methyl-4-chlorophenoxyacetic acid) at 750 TPA. The motive of this new capital expenditure is to consolidate its presence in the 2,4-D herbicide family, in which Atul already has around 13% market share globally. With this new potential in place, the total unrealized potential from all the six segments is estimated to be around INR 16.5 billion. With increased realization of potential, Atul is well placed to have a top-line revenue of around INR 77 billion by FY28.

Strong Growth Outlook and Return Profile 

Powered by continued increases in capacity utilization that could lead to ~INR 16.5 billion in sales potential, the profit margins are expected to grow at 14 percent  PAT CAGR for FY26-28E. The margin structure is supported by an excellent RoCE of ~16 percent . Based on the solid liquidity of the business, a 30x price-to-earnings ratio remains fully justified. At current levels, the stock is trading at a great multiple of 21x FY28E EPS.

Conclusion

Atul appears well positioned for long-term growth, supported by its expanding manufacturing capacity, strong balance sheet, disciplined capital allocation, and focus on higher-value products. While the brokerage expects profitability to normalize after an exceptionally strong quarter, the company’s improving return profile, healthy cash position, and ongoing investments in growth initiatives are expected to support sustainable earnings. These factors underpin the brokerage’s positive outlook on the stock.

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