This Small Cap Stock Has Dipped 10% In 6 Months, But Brokerage Sees Over 55% Rally Ahead

Shares of Sadhana Nitro Chem have remained under pressure in the last six months, but analysts at Ventura think that the company can turn things around.

The Sadhana Nitro Chem Analyst: Ventura analysts initiated coverage on the stock with a “buy” rating and a target price of ₹148 over the next two years. The target indicates a 57% upside from the stock’s last closing price of ₹94.23.

The Sadhana Nitro Chem Thesis: The brokerage pointed out Sadhana Nitro Chem has recently secured a significant opportunity under the Production-Linked Incentive (PLI) scheme. This allows SNCL to manufacture 36,000 TPA of Para Amino Phenol (PAP) through the nitrobenzene route.

Talking about the company’s recent financials, the analysts said that despite a promising product portfolio, the financial performance has not reflected its potential. Over three years post the onset of the COVID-19 pandemic, the total revenues stand at ₹143 crore, a 46% decline from the ₹267 crore recorded in FY2019.

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Several factors contribute to the subdued sales, including poor pricing resulting from Chinese producers’ dumping practices affecting raw material nitrobenzene, supply and pricing disruptions due to the Ukraine war and geopolitical issues, and a stretched working capital cycle attributed to sluggish inventory movement and extended receivable periods.

However, analysts are optimistic about future growth prospects, considering the changing business environment. Chinese manufacturers scaling back production without matching demand is expected to create a more favourable pricing environment. Additionally, the commencement of the in-house MMDPA facility and stabilized ODB2 production is anticipated to contribute to more consistent margins. The scale-up in PAP production is also projected to boost revenues.

As a result of these developments, Venntura forecasts a robust CAGR (compound annual growth rate) of 73.8% in Revenue, 102.3% in EBITDA, and 214.1% in PAT from FY23 to FY26, reaching ₹751/174/93 crore, respectively. Margins, both EBITDA and PAT, are expected to improve by 730/850 bps, reaching 23.1/12.4% over the forecast period.

Price Action: Sadhana Nitro Chem shares were down 0.40% to trade at ₹93.85 in early trade on Monday.

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