Multibagger stock: Sadhana Nitro Chem shares delivered over 550% returns in 3 years; should you invest?

Sadhana Nitro Chem, one of the country's leading producers of nitrobenzene, has provided remarkable returns to its shareholders within a brief span. Over the past three years alone, the shares have surged from ₹14.20 per share to ₹93.70 apiece, resulting in a massive return of 560%.

According to projections made by domestic brokerage firm Ventura Securities, the bullish momentum of the stock is poised to persist. The brokerage firm in its January 06 research note has initiated coverage on the stock with a 'buy' rating and set a 24-month target price of ₹148 apiece, reflecting an upside of 57.46%.

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Established in 1973, Sadhana Nitro Chem is a leading manufacturer specialising in intermediate specialty chemicals. It operates from its state-of-the-art 22-acre facility in Roha and holds the esteemed status of a 2-Star Golden Export House, with a notable 80% of its sales dedicated to exports.

In 2021, the company was recognised under the Production-Linked Incentive (PLI) scheme for manufacturing 36,000 TPA of PAP, and its current production run rate stands at 3,000 TPA. This, according to the brokerage, heralds a significant opportunity for the company, positioning it as the second global manufacturer of PAP (following Mallinckrodt Pharmaceuticals) through the nitrobenzene route.

PAP manufactured from nitrobenzene has negligible impurities compared to other manufacturing processes and hence commands a significant pricing premium in international markets, it added. 

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Despite having a promising product portfolio, the financial performance of the company was not reflecting its true potential, the brokerage noted.

Even three years after the onset of the COVID-19 pandemic, the company posted a revenue of ₹143 crore in FY23, 46% lower than the ₹267 crore clocked in FY2019. Looking forward, the brokerage holds a bullish outlook on the company's growth prospects, citing a notable improvement in the overall business environment.

It said that the reduction in Chinese manufacturers' production, coupled with decreased demand for Chinese products, will create a more favorable pricing environment. In FY24, the company's introduction of the in-house MMDPA facility will stabilise ODB2 production and margins. Additionally, the brokerage anticipates that the scale-up in PAP production will contribute to increased revenues.

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In light of these developments, the brokerage forecasts a CAGR of 73.8% in revenue, 102.3% in EBITDA, and 214.1% in PAT from FY23 to FY26. Furthermore, margins (EBITDA/PAT) are projected to improve by 730/850 basis points to 23.1/12.4% during the forecast period.

Consequently, return ratios ROE and ROIC are poised to expand to 22.2% and 26.7%, respectively. Moreover, the brokerage expects the company's working capital cycle to shrink substantially to 215 days in FY26 from the prior 377 days (FY23).

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Meanwhile, the company has recently announced a fundraise program of ₹49.95 crore via rights issue for the manufacture of green hydrogen, contributing to self-sufficiency in green energy and paving the way for the export of "Green PAP" to regulated markets, securing significant pricing premiums compared to domestic sales, said the brokerage.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.