Detailed Narrative
Q2 FY26 Performance Overview and Market Challenges
Sudarshan Chemical Industries reported a disappointing Q2 FY26, with overall sales for Sudarshan's legacy business being flat year-on-year, though showing a 13% growth compared to Q1. EBITDA remained flattish. The market faced low demand across most pigment end-use sectors, including coatings and plastics, primarily due to high interest rates and reduced demand in automotive and paints. Global customers had accumulated above-normal inventory levels, leading to slower depletion and softer demand than anticipated.
H1 FY26 Financials and Segment Performance
For the first half of FY26, Legacy Sudarshan (pigment business + RIECO) reported flat sales at ₹1,330 crores (vs ₹1,340 crores last year) and EBITDA of ₹178 crores. The acquired group recorded a turnover of ₹3,565 crores with an EBITDA of ₹103 crores, representing a 3% EBITDA margin. Specifically, the Legacy Sudarshan pigment business saw a slight degrowth of 1.6% in revenue, with sales at ₹1,229 crores and EBITDA at ₹172 crores, achieving a 14% EBITDA margin for H1.
Acquisition Integration and Value Capture Progress
The integration of the acquired Heubach business is progressing well, with 17 global manufacturing sites across 11 countries now part of the combined entity. Management highlighted successful initiatives in value capture, including optimizing operations and supply chain, renegotiating supplier contracts, and rationalizing IT infrastructure. A new GCC structure is being defined, and ONE SAP implementation is underway, which is expected to drive further efficiencies. The acquired assets and inventories are in good condition, and strong customer relationships have been reaffirmed.
Margin Compression and Cost Structure Concerns
The domestic business experienced a notable drop in gross profit margin from 47% to 43% in Q2. This was attributed to lower production volumes, a strategic decision to reduce inventory, which consequently led to lower operating leverage. Management also noted that fixed costs, particularly in manufacturing, were higher than expected, contributing to the EBITDA drop. However, they believe there is significant potential for cost reduction through ongoing initiatives.
Revised Guidance and Outlook
The FY26 EBITDA guidance for the acquired group has been revised downwards to €25-30 million from the initial expectation of €35 million, primarily due to the subdued Q2 and anticipated soft Q3. Q3 is expected to remain subdued due to seasonal factors like holidays. However, management anticipates a strong rebound in Q4, with expectations of €10 million plus EBITDA from the acquired group, driven by customer inventory depletion and renewed buying from January 2026. The long-term 3-4 year guidance for the combined entity remains unchanged.
Working Capital Management
The company's net working capital to sales ratio currently stands at 26.2%. Management aims to reduce this to 24% by FY27. The current high working capital is partly attributed to inventory build-up due to unanticipated high customer stock levels and a planned higher demand that did not materialize. Steps are being taken to reduce this working capital going forward⏳.