BMA Research has reviewed the performance of Sitara Chemicals Industries Limited (SITC), which is setting up a new 50MW Coal Facility, which is set to spur growth momentum. Research house with a BUY rating and Jun26 target of PkR 1,441/sh, offering a potential upside of 100%.
The company will see a sharp expansion in gross margins because of its new 50MW coal power plant. Moreover, rising demand for caustic soda & allied products, supported by expected growth in textile sales volume, SITC may see a three-year bottom-line CAGR of 100%. The company has improved its product mix over the years, with caustic soda accounting for 61% of total revenue, followed by soap noodles with a 10% share.
Over the past 12 months, SITC has outperformed the market by 21%, EPCL by 131%, NICL by 70% and ICL by 10%. We believe this outperformance is justified, given the company’s growth potential and improving margins. We believe current levels offer an ideal entry point.
To summarize, SITC will likely benefit from: (i) commissioning of a 50MW coal power plant, (ii) improving local demand outlook, (iii) higher tariff on India to fuel our textile exports, leading to higher caustic soda demand, and (iv) lower interest rate to keep finance cost low.
Margins expansion with coal power plant: SITC, which relies heavily on electricity for its caustic soda production (contributing 61% of total revenue), is facing rising energy costs. Currently, the company sources power from gas (22%), the grid (35%), and imported coal (43%). However, it plans to shift entirely to a new 50MW local coal power plant by 1QFY26. This move aligns with government policy, is expected to reduce electricity costs by PkR 8.5/kWh, and is projected to add PKR 2,470 million (PkR 115/share) to its annual earnings. As a result, we expect profit margins to improve, averaging 33% over the forecast horizon, up from the 16% average over the past five years.
Power savings to support earnings further by reducing working capital needs: Coal project savings could help reduce Sitara’s short-term debt (PkR 9,429mn), enhancing profits. With inflation easing, the SBP has cut rates to 11%, and a further 100 bps cut could save PkR 111mn (PkR 5.2/share) on its total debt of PkR 18,272mn.
Growing demand for caustic soda led by higher textile volumes: We project a three-year earnings CAGR of 100%, driven by stronger caustic soda demand from recovering local textiles and rising exports. Higher U.S. tariffs on Indian apparel (now 50%) may shift demand to Pakistan, supporting export growth. Locally, improving consumer sentiment is expected to drive textile volume growth at a ~5% CAGR.
Market leader in caustic soda with market share of over 33%: The company leads the caustic soda market with over a 50% share, followed by EPCL and ICL. With demand expected to grow at a 5-year CAGR of 5%, a potential supply gap could drive capacity expansions. We believe SITC is well-positioned to capitalize on surplus coal power. It also holds strong shares in Soap Noodles (10%), Sodium Hypochlorite (34%), Hydrochloric Acid (38%), and Liquid Chlorine (65%), contributing 10%, 6%, 3%, and 1% to revenue, respectively.
Demand for other products won’t lag: Improved economic conditions and rising middle-class incomes in Pakistan are boosting FMCG demand, including soaps, paper, bleaching agents, paints, disinfectants, and pharmaceuticals. This trend will continue to benefit SITC’s product portfolio.
Valuation: Using a DCF model with a 12% risk-free rate, 6% equity risk premium, and 3% terminal growth, we value the company at PkR 1,441/sh for Jun26, implying an upside of 100% plus a dividend yield of 6%, for a total return of 106%. The stock trades at FY26E and FY27F PEs of 3.5x and 3.0x, discounted by 58% and 62% versus its 10-year average PE of 8.0x.
