20 April 2012 - PhillipCapitalbackoffice.phillipcapital.in/Backoffice/Researchfiles/PC... · 2016-04-07 · Vinati Organic Reco BUY CMP, Rs 395 Target Price, Rs 485 Meghmani Organics

Specialty Chemicals Rerated by lower crude; not yet captured core potential

INSTITUTIONAL EQUITY RESEARCH

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

Specialty Chemicals Rerated by lower crude; not yet captured core potential INDIA | SECTOR INITIATION

29 March 2016

Indian specialty chemicals foresees accelerated growth The Indian specialty chemicals industry, valued at ~US$ 25bn, delivered 13% growth over the last five years (1.9x Indian GDP growth), primarily led by domestic consumption. Going ahead, India’s large population base with lower per‐capita consumption of chemicals and relatively strong GDP growth outlook (7‐8% over the next few years) will sustain healthy domestic growth. The governments’ ‘Make in India’ initiative will facilitate the industry with common infrastructure and a consequent rapid flow of FDI into the sector (~30% CAGR over FY13‐15 to US$ 2.67bn) will accelerate growth. Chinese export slowdown seems the key exports booster China’s implementation of a stricter environmental policy w.e.f January 2015 and subsequent clampdown on the polluting chemical industry has already led to a slowdown in its chemical exports. We expect Chinese exports to shrink more in 2016 as its environmental cleansing process will continue. Another emerging trend – of industries shifting to the west of China from the densely populated eastern side – will continue to adversely impact Chinese exports in the near and medium term. We consider falling chemical exports from China as a key export opportunity for the Indian industry – particularly for manufacturers of Indian polymers, dyes and pigments, textile chemicals, and agro chemicals, which should benefit from China’s slowdown, provided they already have a respectable presence in the export market. Lower crude and scale benefit to drive value growth A sharp correction in crude prices (per barrel to US$ 40 from over US$ 100 in mid‐2014) has certainly benefitted margins of specialty‐chemical peers. However, margin improvement was not to the tune of crude price correction. Hence, we expect the industry to maintain improved margin profile even if crude prices recover. Additionally, scale benefit from rising demand would ensure value growth ahead. Sector certainly rerated due to lower crude; not yet captured core potential Lower crude has already re‐rated Indian specialty chemicals since mid‐2014, but we believe that current valuations still fail to capture a visible growth uptrend in the domestic market, and more importantly, the huge export potential emerging out of softening Chinese exports. Key stock recommendations

SRF While rapid progress in the high‐margin fluoro‐speciality and refrigerant gases will drive value growth, steady free cash flow from technical textiles will supplement capacity expansion in fluoro‐speciality.

Aarti Industries The best executor of expansion projects with its timely capacity expansion is set to gain from the large visible export opportunity led by the Chinese slowdown.

Vinati The most efficiently integrated player will gain from integrated downstream products.

Meghmani Capacity expansion in high‐margin caustic potash and steady progress in agro and pigments will lead to financial deleveraging and EPS growth.

Camlin Fine Sciences One of the few global leaders of food‐grade anti‐oxidants will gain from forward‐integrated antioxidant blends and vanillin manufacturing.

Atul Most diversified business model, but seems struggling for growth due to lack of any major expansion plan and adverse impact of economic slowdown on colours and agro businesses.

Companies SRF Reco BUY CMP, Rs 1267 Target Price, Rs 1700 Aarti Industries Reco BUY CMP, Rs 472 Target Price, Rs 700 Vinati Organic Reco BUY CMP, Rs 395 Target Price, Rs 485 Meghmani Organics Reco BUY CMP, Rs 20 Target Price, Rs 40 Camlin Fine Sciences Reco BUY CMP, Rs 88 Target Price, Rs 135 Atul Ltd Reco NEUTRAL CMP, Rs 1470 Target Price, Rs 1650 Navin Flourine Reco NOT RATED CMP, Rs 1694 Surya Patra (+ 9122 6667 9968) [email protected] Mehul Sheth (+ 9122 6667 9996) [email protected]


SPECIALTY CHEMICALS SECTOR

Index

Specialty chemicals: Set for accelerated value growth .......................................... 4

Chinese slowdown is likely to be the key boost for exports ................................. 6

Where to invest? Historical financials suggests ‘bigger is better’ ......................... 8

Valuation: Rerated by crude; not capturing potential .......................................... 10

Companies

SRF Ltd ................................................................................................................... 14

Aarti Industries ...................................................................................................... 26

Vinati Organics ...................................................................................................... 37

Meghmani Organics ............................................................................................... 48

Camlin Fine Sciences ............................................................................................. 62

Atul Ltd .................................................................................................................. 74

Navin Fluorine International .................................................................................. 87



Specialty chemicals: Set for accelerated value growth Reiterating our view in the October 2015 edition of our Ground View Magazine – “What Makes Indian Specialty Chemicals So Special”, we believe that this sector is set for accelerated value growth over the next few years. While improving macro factors drive domestic demand for specialty chemicals, softening exports from China due to its stringent environmental policies will drive export growth for the Indian specialty chemical sector. Highly fragmented; been largely dependent on domestic consumption The Indian specialty chemicals industry, valued at ~US$ 25bn, accounts for a marginal 3% of the global specialty chemicals market. India’s disadvantages in feedstock position and lack of adequate infrastructure have hindered its progress into the big league. Additionally, due to lack of innovation of new products or applications, these businesses have developed largely to meet immediate local demand, which requires relatively smaller investment. Not surprisingly, this industry is highly fragmented among 40,000 companies – where 60% of volume is produced by SMEs. The specialty chemicals market in India is fragmented

Source: PhillipCapital India Research Rise in GDP and end‐user industries drive growth Over the last five years, the Indian specialty chemicals market saw faster growth (13% annual average) against global growth of ~7%. More than exports, steadily rising local demand supported its growth momentum. In fact, the industry gained from faster GDP growth in India, domestic demand attaining critical mass, low‐cost manufacturing, and enhanced focus on process R&D.

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The Indian specialty chemicals market is growing at almost 2x the global average

The ~US$ 25bn Indian industry accounts for only 3% of the global specialty chemicals market



Indian specialty chemicals industry grew at double the rate of GDP over last five years

Source: PhillipCapital India Research The following factors indicate the robust potential of India’s specialty chemical demand – large population with lowest per‐capita consumption of chemicals in the country, and India’s relatively strong GDP growth outlook (7‐8% over the next few years). Various industry estimates also suggest that rapid progress in key end‐user industries domestically would support growth. Healthy growth in user industries provide better outlook Rapid progress in FDI into chemicals over last three years

Source: PhillipCapital India Research Favourable initiatives by the Indian government in developing chemical clusters with adequate infrastructure, facilitating international investment, and the Make in India campaign gives better visibility for the industry. With the government’s focus on creating a conducive business environment, capex into the Indian chemical sector has already seen a 52% yoy jump to Rs 1.46tn in 2014 while FDI increased by 49% yoy in FY15 to US$ 4bn (As per Department of Industrial Policy and Promotion).

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Expected growth over next 3‐5 years

Factors that will drive robust growth – large population, but low per‐capita consumption of chemicals + strong GDP growth outlook + favourable initiatives by the Indian government



Chinese slowdown is likely to be the key boost for exports Over the last decade, China saw blind economic and industrial expansion led by government facilitation and easy financing, but its lax regulations contributed to serious environmental problems. In response to these, the Chinese Ministry of Environmental Protection implemented provisions effective January 2015, and enforced strict penalties on polluters. This resulted in numerous plant shutdowns and the global leader’s exports started softening since January 2015. Implementation of stricter environmental law dent Chinese export volume

Source: Bloomberg, PhillipCapital India Research Chinese exports to shrink more in 2016: Opportunity for Indian peers As per the new policy framework, China expects to cleanse its environment by shutting down or shifting more than 1000 plants to a ‘green belt’ – over 2015 and 2016. While China saw softer exports in 2015, we expect more of the same in 2016 as: (1) inventory piles up before plant shut downs, and (2) initial clampdown on small inefficient plants could not have impacted exports much. In addition, the emerging trend of China shifting industries to its west from a densely populated eastern side would continue to impact Chinese exports in the near to medium term. Various issues in China make India stand out as an alternate source China was a choice destination for MNCs due to rising chemical demand led by rapid economic expansion. Its government facilitation and cost advantages made the red dragon a global manufacturing hub for chemicals in the last couple of decades. However, the reasons for its success are haunting the country now — rampant growth of its chemical industry has started hitting its environment in a big way and its labour cost advantages are no longer a reality. Moreover, frequent government intervention favouring its state‐owned enterprises has become a concern for MNCs’ business strategies in China.

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China’s shutting down and relocation of large state‐owned enterprises in 2016 would create demand‐supply imbalances in the global specialty chemicals trade



Indian labour cost is ~40% lower compared to China

Source: National bureau of statistics of China, PhillipCapital India Research We expect India to emerge as a strategic alternate source for manufacturing of specialty chemicals for various MNCs (evidenced in the recent spike in FDI). Though China has been a net importer of all chemicals put together, it is a large exporter of various chemicals such as manmade filaments (worth US$ 13.1bn), manmade staple fibres (US$ 9.5bn), fertilisers (US$ 5.57bn), inorganic chemicals (US$ 4.6bn), and tanning/dyeing extracts (US$ 2.2bn). Implementation of new environmental laws in China has already caused a decline in its chemicals exports and the trend is likely to sustain in 2016‐17. Incidentally, India’s net chemical trade with the international markets (composition) is almost similar (although much smaller) to China’s. Hence, the emerging trade gap due to softening Chinese exports offers huge opportunities for Indian chemical players, particularly for manufacturers of polymers, dyes and pigments, textile chemicals, and agro chemicals. Both India and China are net exporter of dyes and China’s export in plastics is robust, although it is a net textile chemicals importer

Source: Govt of India, PhillipCapital India Research Hence, the current outlook for Indian specialty chemicals is best suited for accelerated and quality growth led by steady domestic demand, emergence of conducive export opportunities, and enhanced facilitation by government initiatives.

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The Chinese slowdown will benefit Indian manufacturers of polymer, dyes and pigments, textile chemicals, and agro chemicals manufacturers, provided the manufacturer already has a respectable presence in the export market



Where to invest? Historical financials suggests ‘bigger is better’ While the domestic specialty chemicals industry is estimated at US$ 25bn, it is highly fragmented among +40,000 companies, most of which are unorganised. However, the industry is represented by about 60 listed companies, with consolidated sales about US$ 8bn, which account for about 38% of the total market. Although the Indian specialty chemicals market is well represented by global MNCs (BASF, Clariant, Dow Chemical, Huntsman, Akzonobel, Mitsubishi Chemical Corp, Croda, Du Pont, Henkel, Wacker, Evonik, Syngenta, and Solvay), barely a handful of companies are large and listed. There are a set of MNCs who have built capacity with an objective of ‘in India for India’ – to participate in the long‐term growth. On the other hand, many MNCs outsource products from fringe Indian players and leverage their global clout in launching branded products. Considering the intermediate manufacturing nature of the Indian industry, we believe scalability and efficiency (led by R&D process, product, and application) are key to the long‐term progress of any company. We consider the financial performance of the last four years as the barometer for future assessment and (considering the criticality of scale and size) we restrict our evaluation to leading peers. • Scalability: Aarti Industries, Vinati Organics, and Camlin delivered steady growth

over the last five years with EBITDA improving faster than sales. Sales & EBITDA CAGR over last five year Sales Growth (%) EBITDA Growth (%) FY12 FY13 FY14 FY15 CAGR FY11‐15 FY12 FY13 FY14 FY15 CAGR FY11‐15Aarti 15 25 26 10 19 26 45 11 16 24Alkyl Amines 22 27 22 7 19 36 31 48 2 28Atul 15 14 20 8 14 18 22 46 10 23BASF 15 12 12 6 11 4 19 14 ‐51 ‐9Camlin 95 11 36 10 34 93 56 37 38 54Clariant Chem 0 12 14 ‐16 2 ‐9 ‐10 ‐11 ‐72 ‐33Deepak Nitrite 18 29 25 5 19 ‐3 37 40 22 23Gujarat Fluoro 106 ‐25 ‐29 16 6 158 ‐18 ‐39 69 22Meghmani 4 0 11 10 6 20 17 6 4 11Navin 99 4 ‐1 22 26 123 ‐67 ‐20 9 ‐10Nocil Ltd. 6 1 22 21 12 1 ‐41 113 60 19Plastiblends 32 23 20 14 22 11 ‐2 50 8 15SRF 7 ‐1 14 13 8 ‐47 ‐12 45 39 ‐1Sudarshan Chem 5 6 31 6 11 ‐53 ‐8 57 3 ‐9Vinati 39 22 27 10 24 39 19 37 18 28

Source: Company, PhillipCapital India Research

The domestic specialty chemicals industry is highly fragmented among +40,000 companies of which about 60 are listed and command 38% market share or US$ 8bn

Scalability and efficiency are key to the long‐term progress



• Operating efficiency: Vinati Organics is the undisputed leader in terms of EBITDA

margin followed by Alkyl Amines, Meghmani, Aarti Industries, and SRF. Gujarat Fluoro and Navin’s margin are inflated by carbon‐credit incomes.

• ROCE: Vinati takes the lead, followed by Plastiblend, Alkyl Amines, Atul, and

Camlin. SRF and Aarti’s ROCEs look lower due to their recent capex. Operating efficiency screener

EBITDA Margin (%) ROCE (%) Gross Assets turnover (x)

FY11 FY12 FY13 FY14 FY15 Avg.FY11‐15



Aarti 13.6 14.9 17.2 15.3 16.0 15.4 13.9 15.5 16.8 16.2 16.7 15.8 1.9 2.0 1.7 1.8 1.7 1.8Atul 11.2 11.4 12.2 14.8 15.1 12.9 16.8 16.1 18.5 25.2 25.3 20.4 1.6 1.7 1.7 1.9 2.1 1.8Camlin 9.1 9.0 12.5 12.5 15.8 11.8 9.5 15.7 22.7 25.0 26.5 19.9 0.8 1.5 1.5 1.8 1.9 1.5Meghmani 12.9 14.9 17.5 16.6 15.7 15.5 6.9 7.4 9.4 8.7 10.1 8.5 1.2 1.1 1.1 1.0 1.0 1.1SRF 23.0 11.5 10.2 13.0 16.0 14.8 26.9 20.5 11.4 7.0 10.6 15.3 0.9 0.9 0.7 0.7 0.7 0.8Vinati 21.6 20.7 19.9 21.8 23.2 21.4 30.0 24.7 21.6 30.1 33.0 27.9 2.2 2.4 1.6 1.9 1.9 2.0Navin 26.1 34.6 15.0 13.6 12.2 20.3 26.9 50.6 12.1 11.4 11.8 22.6 0.9 1.3 1.3 1.3 1.5 1.3Gujarat Fluoro 44.4 34.4 35.8 44.0 16.6 35.0 15.1 34.0 19.2 7.1 18.0 18.7 0.6 0.9 0.7 0.7 1.0 0.8BASF 6.7 6.1 6.5 6.6 3.0 5.8 16.3 14.0 13.8 11.6 1.2 11.4 4.0 4.1 4.1 4.0 2.3 3.7Deepak Nitrite 9.3 7.7 8.1 9.1 10.7 9.0 14.5 10.5 11.3 12.0 12.4 12.1 1.9 2.0 1.9 1.8 1.6 1.9Sudarshan Chem 13.5 12.0 10.5 12.6 12.2 12.2 28.5 16.4 10.1 14.6 14.7 16.8 2.1 1.7 1.4 1.8 1.8 1.8Clariant Chem 19.6 17.7 14.2 11.1 3.7 13.3 46.4 92.9 29.1 42.3 120.1 66.2 2.9 2.6 2.8 3.4 2.0 2.7Nocil Ltd. 12.8 12.1 7.0 12.3 16.3 12.1 15.8 13.3 10.2 10.0 18.7 13.6 2.4 2.5 1.1 1.3 1.6 1.8Plastiblends 13.8 11.6 9.2 11.5 10.9 11.4 21.1 19.0 17.4 27.1 26.9 22.3 2.5 3.1 3.5 4.1 4.0 3.4Alkyl Amines 14.0 15.6 16.1 19.5 18.6 16.8 12.2 17.0 20.3 27.6 25.1 20.5 1.3 1.3 1.6 1.7 1.7 1.5

Source: Company, PhillipCapital India Research • Asset turnover: Vinati and Aarti are the best executors of expansion projects

with better‐than‐industry‐average ROCE over the last five years despite continuous capex. BASF and Clariant look better on low capex bases and Plastiblend looks good as a small‐scale player.

• Cash‐conversion cycle: Navin, SRF, and Depak Nitrite are highly placed vs. the

industry. Atul and Meghmani’s cash‐conversion cycle looks stretched due to higher exports.

Cash‐conversion cycle

Inventory Days Receivable day Payable days Cash conversion cycle Days FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15

Aarti 85 84 82 96 98 81 70 82 88 74 61 54 38 35 40 43 52 34 117 132 130 127 106 102Atul 72 73 76 74 75 66 71 67 72 62 64 60 75 66 66 64 60 51 68 74 81 71 79 76Camlin 74 76 100 164 88 104 108 106 97 84 72 73 97 126 102 157 78 74 85 56 94 91 82 103Meghmani 62 54 59 62 77 61 141 123 114 118 109 89 49 47 38 52 54 40 154 130 135 129 133 110SRF 59 71 55 64 77 72 52 51 44 48 62 48 72 68 58 59 82 62 39 54 40 53 57 58Vinati 38 50 44 45 31 34 56 58 69 74 59 61 15 17 13 16 14 17 78 91 100 104 77 78Navin 59 62 67 60 56 53 33 48 33 49 67 73 104 80 38 55 79 83 ‐12 30 62 53 44 43Alkyl Amines 67 63 63 64 62 60 54 59 56 60 78 100 42 44 37 36 38 46 79 78 82 88 101 114BASF 64 58 56 56 45 49 76 77 71 67 55 69 88 96 83 67 52 81 53 39 44 56 48 36Clariant 54 44 44 46 48 52 50 42 43 36 30 34 57 59 66 74 71 64 47 28 21 7 6 22Deepak Nitrite 78 72 67 62 58 54 30 32 32 31 31 40 39 54 67 51 42 44 69 50 31 42 48 51Gujarat Fluor 95 95 66 31 37 33 50 59 59 50 57 57 66 64 49 44 70 82 79 90 76 37 24 8Nocil Ltd. 73 73 73 66 65 67 81 78 79 78 71 60 44 43 36 38 40 37 110 108 115 106 96 91Plastiblends 62 64 62 57 53 46 35 43 48 55 55 49 26 26 20 17 16 16 72 81 91 96 92 79Sudarshan 81 71 78 78 72 62 71 74 82 78 60 46 42 35 46 43 33 28 109 110 114 112 99 80




Valuation: Rerated by crude; not capturing potential Indian specialty chemicals saw healthy re‐rating since mid‐2014 primarily led by a sharp correction in crude prices. However, we believe that current valuations still fail to capture: 1. The visible growth uptrend in the domestic market. 2. Huge export potential emerging out of softening Chinese exports. We believe that only companies with a strong domestic footing as well as an established presence in the international market can reap the benefits of huge exports. Hence, we believe bigger is better for investments. SRF, Atul, and Navin saw the best valuation rerating over the last two years. While SRF and Navin benefitted from healthy progress in fluoro‐specialty play and crude price fall, a strong balance sheet with better financial track record re‐rated Atul. Interestingly, Vinati and Aarti are the truest and largest beneficiaries of a crude price fall, but their valuation rerating was not as much. On the other hand, scale disadvantage kept Camlin and Meghmani undiscovered. Relative price performance Relative one‐year forward PE trend

Source: Company, PhillipCapital India Research Lower crude favoured industry margins, but not much A sharp correction in crude prices (per barrel to US$ 40 from over US$ 100 in mid‐2014) has certainly benefitted margins of specialty‐chemical peers (as visible in the following quarterly margin chart). However, margin improvement was not to the tune of crude price correction. Hence, we expect the industry to maintain improved margin profile even if crude prices recover.

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Bigger is better for investments

To maintain improved margin profile even if crude prices recover



Sharp correction in crude didn’t result in equal improvement in margins

Source: Company, PhillipCapital India Research With a visible accelerated growth in specialty chemical demand, and continuous but controlled capex, we foresee faster revenue growth for the Indian specialty chemicals industry. Additionally, scale improvement and continued lower crude prices will drive value growth, leading to stock rerating. We initiate coverage on Indian specialty chemicals on a positive note and recommend a BUY on SRF, Aarti, Vinati, Meghmani Organics, and Camlin based on their leadership positioning, superior earnings growth, and rerating potential. However, we find Atul’s highly diversified business (with no major expansion plan) struggling for growth in the near future, hence we initiate with a Neutral rating on it. PE vs. ROE (FY18) EV/EBITDA vs. ROCE (FY18)

Source: Company, PhillipCapital India Research Estimates

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Specialty chemicals universe ROE over FY11‐18 Specialty chemicals universe ROCE over FY11‐18

Source: Company, PhillipCapital India Research Estimates On FY18‐based valuation matrix (as represented in following charts), we believe SRF, Aarti, and Meghmani are set for rerating due to superior earnings growth. Vinati should continue its sector supremacy due to its fully integrated business model and highest earnings efficiency. Camlin should see a gradual upgrade led by global leadership in antioxidants and forward integration towards high‐value product categories. Relative valuation Mcap EBITDA

CAGR EPS

CAGR ___EPS (Rs)___ ___PE (X)___ __EV/EBITDA (X)__ ___ROE (%)___ ___ROCE (%)___

(RS bn) FY15‐18 % FY15‐18 % FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18eAarti 39.3 16.7 23.0 31.0 38.0 44.8 15.2 12.4 10.5 9.2 7.6 6.5 20.6 20.9 20.6 18.2 19.0 19.3Atul Ltd 43.6 12.6 12.6 91.5 100.0 114.4 16.1 14.7 12.9 9.8 8.5 7.1 21.2 19.2 18.3 25.5 23.8 23.2Camlin 8.4 23.1 10.7 3.8 6.1 7.8 23.1 14.4 11.3 10.9 8.4 7.0 24.4 28.8 27.4 24.0 24.1 22.7Meghmani 5.1 15.7 32.2 2.9 3.3 4.0 6.9 6.0 5.0 3.9 3.5 3.0 14.5 15.2 16.1 14.7 15.7 17.1Navin 17.2 28.4 25.4 73.7 90.6 110.2 23.9 19.5 16.0 15.5 13.2 11.0 11.7 12.4 13.1 15.3 16.3 17.3SRF 72.9 22.7 27.1 75.1 90.1 111.3 16.9 14.1 11.4 9.6 7.9 6.6 16.2 16.7 17.4 13.4 15.5 17.1Vinati 20.4 9.9 8.4 19.3 23.4 28.6 20.5 16.9 13.8 12.1 10.0 7.9 19.4 19.8 20.3 25.7 26.8 28.0

Source: Company, PhillipCapital India Research Estimates Recommendation summary Reco Mcap CMP TP Upside (%) Comments (US$ mn) (RS) (RS) SRF BUY 1139 1,267 1700 34 Rapid expansion in fluorospecialty & refrigerants drives adds valueAarti Industries BUY 614 472 700 48 A play for structural growth in Indian specialty chemicalsVinati Organics BUY 318 395 495 25 Most efficient Indian specialty chemical play led by integrationMeghmani Organics BUY 79 20 40 100 Operating leverage as well as financial deleveraging boost earningsCamlin Fine BUY 132 88 135 54 Niche business of Antioxidants sees value progress from integration Atul Ltd NEUTRAL 682 1,470 1650 12 Diversified but lacks growth trigger


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SRF Ltd (SRF IN) Value overcomes volume INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

Rapid progress in fluoro‐specialty to drive value growth By leveraging its unique experience of >25 years in handling fluorine chemistry, SRF has already established itself as one of the leading players of fluorospecialty in the world. Rising application of fluorospecialty compounds in pharma/agro due to certain key properties have made fluorine chemistry a hot spot in chemical research. This is SRF’s highest margin business – and should deliver sales CAGR of >30% over FY15‐18 (supplemented by increasing R&D focus, expanding customer base, and steady capacity creation), to drive value growth. Domestic leader of refrigerant gases – this segment should see volume and value growth SRF is the undisputed leader of refrigeration gases in India (an important derivative product of fluorine chemistry). Its recent development of the R‐32 gas (an alternate to the most used R‐22, which is being phased out due to the Montreal Protocol) has de‐risked its R‐22 sales and will also lead to backward integration of HFC (Hydrochlorofluorocarbons) blends. Volume and value growth should also come from (1) acquisition of pharma‐grade R134a gas business from Du Pont (making it one of the three leading suppliers of HFC gas to the pharma industry globally) and (2) supply of R134a to WalMart, USA. The recent US anti‐dumping duty on Chinese imports of HFC blends (91.99‐210.46% range) could surprise SRF’s R134a/R32 sales growth positively in the medium term. Technical textiles: A cash cow operation despite radialisation and economic slowdown SRF is the largest producer of tire‐cord fabric (nylon – NTCF; polyester ‐ PTCF) in India and a leading player globally. Despite concerns of radialisation, we believe growth will come from sustained demand for bias tires in emerging markets (due to poor road infrastructure) and likely improvement in the domestic economy. The current domestic demand‐supply mismatch in NTCF (production of 84,000 tonnes vs. demand of 126,000) and anti‐dumping duty on Chinese imports until 2020 will ensure growth in tire‐cord sales. Thus, with no anticipated major capex and steady demand, SRF’s textile business will remain a cash‐cow operation with estimated annual operating cash flow of ~Rs 2bn over FY15‐18. Packaging films – A commodity business, but rides over healthy demand growth SRF is one of the largest manufacturers of a wide range of bi‐axially oriented polyethylene terephthalate (BOPET) and bi‐axially oriented polypropylene (BOPP) films. Despite subdued global and domestic environment, it continues to outperform due to its focus on value‐added products (chemical‐coated films account for 30% of the market), higher operating efficiency (it is the lowest‐cost producer in the world), and its long‐standing relationship with large customers. We estimate packaging sales to see steady 14% CAGR over FY16‐18 led by (1) anticipated ~15% improvement in FMCG sector demand and (2) SRF’s planed plant expansion with an investment of US$ 50mn. Valuations do not capture rapid earning growth; initiate BUY with TP of Rs 1,700 We estimate SRF to deliver revenue/profit CAGRs of 14%/22% over FY16‐18. Its specialty chemicals operations would be the growth engine in this period with sales/profit CAGR of 24%/35% respectively. Considering SRF’s diverse business profile, we value it at Rs 1,700 on SOTP, implying 34% upside. At our TP, SRF’s blended operation will trade at 15x FY18 EPS and 8.5x FY18 EV/EBITDA.

BUY CMP RS 1267 TARGET RS 1700 (+34%) COMPANY DATA O/S SHARES (MN) : 57MARKET CAP (RSBN) : 70MARKET CAP (USDBN) : 1.152 ‐ WK HI/LO (RS) : 1496 / 355LIQUIDITY 3M (USDMN) : 3PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 15PROMOTERS : 52.4 52.4 52.4FII / NRI : 16.1 15.2 15.5FI / MF : 12.5 13.0 12.6NON PRO : 1.9 2.1 2.1PUBLIC & OTHERS : 17.1 17.4 17.4 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 12.4 ‐0.9 34.9REL TO BSE 5.9 0.1 45.3 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 46,189 53,160 60,264EBIDTA 9,884 11,855 13,439Net Profit 4,320 5,183 6,404EPS, Rs 75.1 90.1 111.3PER, x 16.9 14.1 11.4EV/EBIDTA, x 9.6 7.9 6.6P/BV, x 2.7 2.3 2.0ROE, % 16.0 18.2 18.4Debt/Equity (%) 87.4 71.8 53.1

Source: PhillipCapital India Research Est.

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SRF BSE Sensex


SRF LTD INITIATING COVERAGE

About the company • Incorporated in 1970 • Diversified Indian MNC – prime focus on specialty chemicals, technical textiles,

and packaging films. • One of the leading global players of fluorospecialty and domestic leader of

refrigerant gases. • World’s second‐largest manufacturer of nylon‐6 engineering plastics in the

world. • One of the leading global manufacturer of technical textiles and the second

largest manufacturer of packaging films in India. • SRF is an Indian MNC with nine manufacturing bases across India and four in

South Africa and Thailand. SRF’s evolution

Source: PhillipCapital India Research SRF’s diversified business model


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50000Net Sales (Rs mn) Share Price (Rs)In 1970 Incorporated as

Shri Ram Fibres

In 1974 Commenced operations of nylon tyre cord at Manali

In 1979 Commences production of nylon engineering plastics

In 1983 Commissioning of Belting Fabrics facilities

In 1986 Commenced production of coated fabrics

In 1989 Entered Chemicals Business with production of refrigerants

In 1990 Shri Ram Fibres renamed as SRF Ltd

In 1995 Ventured into Packaging Films Business

In 2008 Made 2 overseas acquisitions, one for tyre cord plant in Thailand, the other one for belting fabrics in South Africa

In 2012 New Chemical Complex partly commissioned at Dahej

In 2013 Set up facilities in Thailand and South Africa in the Packaging Films Business

In 2015 Aquired Global Dupont™ Dymel® HFC 134a Pharma Business

In 2007 Establishing Rs 250‐cr polyester yarn unit in Tamilnadu

SRF

Technical Textiles45% of sales

Chemicals & Polymers28% of sales

Packaging Films 27% of sales

• Products ‐ Tyre cord fabrics (nylon and polyester), belting fabrics, coated fabrics, laminated fabrics, and industrial yarns• Global No. 2 for Nylon 6 tyre cord fabrics • India No. 1 for tyre cord • Sales CAGR 6% over FY10‐15

• Products ‐ fluorochemicals ‐ refrigerants, chlorinated solvents • Specialty chemicals‐ organic intermediates • Engineering plastics‐ polymer compounds• India No. 1 refrigerants, specialty chemicals, engineering plastics• Sales CAGR 14% over FY10‐15

• Products ‐ BOPET and BOPP• Global No. 2 for belting fabrics• India No. 1 for belting fabrics and no 2 for packaging films• Sales CAGR 30% over FY10‐15



Investment rationale

Strong and wide moat in chemicals/polymers to drive value growth Chemical and polymers business (CPB) is SRF’s flagship segment – second‐largest revenue contribution at 30% (after technical textiles) and highest (>50%) profit contribution. CPB has been its fastest growing segment with 26% sales CAGR over the last five years to Rs 12.6bn in FY15; 20% yoy YTDFY16. The CPB business comprises of – fluorospecialty, refrigerant gases, engineering plastic, and other allied products – but the first three sub‐segments account for over 85% of CPB revenues. Rising flurospecialty & refrigerants drive CPB growth Improving CPB contribution boosts overall margin

Source: Company, PhillipCapital India Research Estimates This segment’s revenue contribution (adjusted for carbon credit income) increased to 32% YTDFY16 from 19% in FY12 and led to higher EBITDA margins (+10% to 21% YTDFY16). We expect CPB sales CAGR of 24% over FY16‐18, which would take its revenue contribution to 37% and drive value growth. Industry leader of fluorospecialty Under fluorospecialty, SRF develops and supplies complex intermediates for new molecule innovations in pharma/agro chemicals and this is SRF’s leading earning stream in terms of revenue and profitability. Its unique experience of >25 years in handling fluorine chemistry (one of the most hazardous chemicals) and its concerted R&D efforts have made it one of the leading global fluorospecialty players. Its key customers in this segment include Bayer Corp, Syngenta, and Pfizer. Rising application of fluorospecialty compounds in pharma and agro due to certain unique properties made fluorine chemistry the hot‐spot in chemical research. On the other hand, the complexity in handling the highly flammable fluorine keeps it a low‐competition space globally.

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CPB is SRF’s most profitable business segment of SRF with operating profit margin of over 30%

Fluorospecialty compounds have higher binding affinity, enhanced metabolic stability, and improved bioavailability



Fluorspecialty chemicals to maintain high growth Volume led growth in fluorospecialty

Source: Company, PhillipCapital India Research Estimates SRF has already developed and supplied over 40 fluorospecialty intermediates for various customers in pharma/agro chemicals since its entry into this operation in FY04. Its fluorospecialty operation delivered rapid 35% CAGR over FY10‐15 to Rs 4.03bn in FY15. We expect it to sustain its healthy growth momentum at 30% CAGR over FY15‐18, well supplemented by increasing R&D focus, expanding customer base, and steady capacity creation. In order to meet the growing demand for customised fluorospecialty, SRF has built strong R&D capabilities with – (1) two state‐of‐the‐art centers located at Bhiwadi and Chennai, (2) dedicated R&D team of over 250 people, and (3) steadily rising R&D spend. Rising R&D focus to sustain SRF’s global positioning in complex fluoro‐chemistry

Developmental flow of fluorospecialty products


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R&D Pilot plant Multi‐purpose plant Dedicated Plants

2 R&D centers to design/develop fluoro compounds as per customer needs

Testing stage3 multi‐purpose plant for scale up of new

compounds

15 dedicated plants; For full scale

manufacturing on successful

commercialisation

50 products at various stages of development

SRF has a strong fluorospecialty pipeline of over 50 products in various stages of development, which provides healthy growth visibility



Domestic leader of refrigerant gases SRF is the undisputed leader of refrigeration gases (one of the important derivative products of fluorine chemistry) in India with a portfolio that includes HFCs (HCFC‐22 or R22), the new‐generation refrigerant HFC (HFC‐134a/R‐134a & R32), and HFC blends (like R410A, R404A, and R407C). Portfolio of refrigerant gases Gases Capacity (tn) Application Business Dynamics R134a 12500 ‐ Automobiles refrigeration

‐ Propellant in Meter Dose Inhalers ‐ Chillers

‐ Only Indian manufacturer with indigenously developed technology. ‐ SRF at 50% utilisation holds ~45% market share in India, while balance being

catered by competitors from Chinese import ‐ SRF is the price leader in India and could maintain stable prices despite

Chinese competition ‐ Scale up of export to Walmart, USA (commenced in FY15) to drive value as

well as volume growth ‐ Additionally, the recent imposement of antidumping duty by US on Chinese

imports of HFC blends (with R134a) in the range of 91.99%‐210.46% could surprise the R134a growth in medium term.

R134a (pharma grade) 1200 ‐ Propellant in Meter Dose Inhalers

‐ One amongst top three global suppliers

‐ Entered into the global league of advance market grade R134a manufacturing by acquiring the Dymel brand and technology from Du Pont in FY15.

‐ Though it sources the dymel from Du Pont's plant currently, it is setting up a new plant in line of USFDA standards in dahej which will commence in FY17.

R22 11000 ‐ Room air conditioners ‐ Packaged air conditioners ‐ Chillers/Commercial and industrial refrigeration units ‐ Raw material for Pharmaceutical Intermediates ‐ Raw material for Polymers

‐ One amongst four leading producers in India (Navin, GFL, HFL) ‐ Already under phase down (10% production cut) for emissive purposes since

1st January 2015. It will see another production cut of 25% in 2020, and will be phased out completely by 2030 as per Montreal protocol

‐ Import of gas filled compressors for air‐conditioners and refrigeration equipment is prohibited from 1st July, 2015. Hence, with production cut and simultaneous rising demand lead to gradual appreciation in pricing

‐ While the protocol assigned production quota of 40000tpa for India, the consumption quota fixed at 10000tn. So Indians have to rely on exports for growth.

‐ On the contrary, the import restrictions by various countries starting 1st January 2016 pose a concern for export growth.

‐ The leading export destinations of R22 (including ‐ Saudi Arab, UAE, Vietnam, Egypt & Turkey) account 70% of Indian exports.

R32 5000 ‐ Same as R22 ‐ Sole manufacturer in India ‐ R32 and R410A (a 50:50 blend of R32 & R125) are expected to replace R22

after its scheduled phase down and ultimate phase out. ‐ No visible progress at competitor's end ‐ Commences R32 plant in early FY17 (which is being set by converting its old

R134a plant) Blends R410A (50% R32 + 50% R125) ‐ Residential Air conditioners ‐ SRF is partially integrated ‐ Blends emerges as the safest alternative to CHFC & HFC gases which have

less global warming potential and ozone depleting potential R404A (44% R125 + 52% R143a+4% R134a)

‐ Commercial Refrigeration ‐ No Indian players are backward integrated and largely depend on the imported bulk gases

‐ Development of R‐32 to backward integrate SRF into blends R407C (23% R32 + 25% R125+52% R134a)

‐ Transport and Industrial Refrigeration

‐ Proposed anti‐dumping duty of 91.99%‐210.46% on Chinese HFC blends by the US could surprise SRF’s blends exports positively in the medium term

Source: PhillipCapital India Research



In order to align its product portfolio with changing market trends, SRF has indigenously developed R134a and R32 – which will replace HCFCs. It is the only manufacturer of R134a in India and a leading supplier to the automobile industry and pharma players such as Cipla and Lupin. Currently, at 50% capacity utilisation, SRF holds ~45% market share in India. Supported by the supply of R134a cans to Walmart‐USA in FY15, it has delivered 25% CAGR in R134a volumes over the last three years; we estimate similar growth momentum in FY16‐18. Leadership position in R‐134a will maintain its sales growth

Source: Company, PhillipCapital India Research Estimates The scale up of Dymel supply after the scheduled commencement of its new R134a facility in Dahej (1200tpa, USFDA standard) from FY17 would drive R134a volume growth. Additionally, recent imposition of anti‐dumping duty by the US on Chinese imports of HFC blends (with R134a) in the range of 91.99%‐210.46% could surprise SRF’s R134a/R32 growth positively in the medium term. De‐risked R22 phase out by developing alternate R32 SRF is one of the four leading R22 players in India with an annual production capacity of 11,000 TPA. Under the Montreal Protocol (emissions), R22 is already being phased out (10% production cut) from 1st January 2015; it will see further production cut by 25% in 2020 and a complete phase out in 2030. However, SRF has de‐risked its R22‐led refrigeration business by developing its alternate product R32. It is creating a capacity of 5000tpa by converting its old R‐134a plant, which would be ready for commissioning in FY17. Also, the usage of R22 for non‐emissive applications (like feedstock for agro and pharma) would mitigate the revenue loss due to the phase out.

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Acquired pharma grade R134a from Dupont in FY15



Technical textiles: Cash cow despite radialisation and slowdown SRF is the largest producer of tire cord fabric (NTCF & PTCF) in India and also one of the leading players globally. TCF leads this segment with >80% sales contribution. While NTCF is generally used as reinforcement material inside bias tires for trucks/buses/off‐the‐road vehicles, PTCF is used as reinforcement inside radial tires in passenger cars and light commercial vehicles. While the concerns over radialisation impacting NTCF growth have become a buzzword, we believe the ongoing economic slowdown and its impact on the auto industry is the key to the flattish performance in tire cord fabrics. Also, the business loss of NTCF, if any, due to incremental radialisation, would be compensated by increasing demand for PTCF. SRF’s tire cord fabric volume remained stable despite increasing radialisation

Source: CEAT, Company, PhillipCapital India Research Despite increasing radialisation, SRF (led by its leadership position in TCF globally and its efficiency), sustained its business over the last five years at around Rs 50bn. Volume growth ahead will come from continued demand for bias tires in emerging markets (due to poor road infrastructure) and anticipated improvement in the economy. Ongoing domestic demand‐supply mismatch in NTCF (production at 84,000 tonnes vs. demand of 126,000 tonnes) and anti‐dumping duty on Chinese imports until 2020 will ensure growth in tire cord sales. On the other hand, rising utilisation in yarn/laminated fabrics and improving performance in its international subsidiaries will boost overall earnings efficiency. TTB will be cash‐cow for SRF Technical Textiles Business (TTB) Facts FY2014 FY2015 FY2016E FY2017E FY2018ERevenue 21857 20396 17688 18828 19415EBITDA 2413 2313 2411 2482 2576Margin % 11.0 11.3 13.6 13.2 13.3PAT 1249 1449 1307 1326 1374ROCE 12.6 17.0 15.9 14.8 13.9Operating cash flow 2159.4 2094.9 1948.6 2020.1 2106.4


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Under technical textiles, SRF manufactures and markets nylon tyre cord fabrics (NTCF), polyester tyre cord fabrics (PTCF), belting, coated, and laminated fabrics, fish net twines, and industrial yarns. It operates from multiple plants in India, Thailand and South Africa



Packaging films: Commodity business, but will benefit from FMCG With manufacturing bases in India, Thailand, and South Africa, SRF provides flexible packaging solutions for many applications – from food to non‐food – in FMCG and industrial products. It is one of the largest manufacturers of a wide range of BOPET and BOPP films and exports packaging films to around 70 countries. While this industry is facing surplus capacity and the presence of many unorganised players globally, increasing demand (+13‐15%) led by the FMCG sector in emerging markets is the key to growth. Despite subdued global and domestic environment, SRF continues its outperformance led by its strategic focus on value‐added products (i.e. chemical‐coated films that account for 30% of the market), operating efficiency (lowest cost producer in the world), and its long‐standing relationship with large customers. In fact, SRF’s domestic plants are running at over 85% capacity and its subsidiaries in South Africa and Thailand are at 100%. Seeing it’s out performance and demand growth, SRF is setting up a greenfield packaging plant in Indore with an investment of about US$ 50mn, which will drive growth momentum in its packaging‐film business. PFB sees steady progress Packaging Film Business (PFB) Facts FY2014 FY2015 FY2016E FY2017E FY2018ERevenue 8830.1 12460.0 13207.6 15188.7 17163.3EBITDA 362.6 931.8 2511.1 2720.9 3000.2Margin % 4.1 7.5 19.0 17.9 17.5PAT ‐282.9 133.2 908.8 993.8 1204.0ROCE ‐0.4 5.0 11.0 9.3 9.6




Financial performance Revenue will be dominated by chemicals and polymer businesses (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18ETechnical Textiles Business (TTB) 18615 21485 21313 21857 20396 17688 18828 19415YoY growth (%) 22.1 15.4 ‐0.8 2.6 ‐6.7 ‐13.3 6.4 3.1% of total revenue 54 54 57 54 45 38 35 32Chemicals and Polymers Business (CPB) (Ex CER) 6739 7655 7723 9563 12634 15384 19235 23777YoY growth (%) 69.2 13.6 0.9 23.8 32.1 21.8 25.0 23.6% of total revenue 21 30 28 24 28 33 36 39CER sales (Rs mn) 728 4397 2627 ‐ ‐ ‐ ‐ ‐

Packaging Film Business (PFB) 8713 6607 6208 8830 12460 13208 15189 17163YoY growth (%) 158.9 ‐24.2 ‐6.0 42.2 41.1 6.0 15.0 13.0% of total revenue 25 16 17 22 27 29 29 28Total Revenue 34735 40010 37829 40181 45399 46189 53160 60264YoY growth (%) 39.0 15.2 ‐5.5 6.2 13.0 1.7 15.1 13.4 Chemicals business will drive value growth 22% earnings CAGR over FY15‐18

Improving operating efficiency Operating leverage to boost cash position


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Valuations and outlook Considering diverse business, we valued the company on SOTP: • SRF will deliver revenue/profit CAGRs of 14%/22% over FY16‐18; its specialty

chemicals operations will be its growth engine with sales/profit CAGRs of 24%/35%. Leveraging its leadership positioning in both fluorospecialty and refrigerant gases, it has aggressively expanded its capacity with an investment of over Rs 18bn in the last four years (that delivered incremental revenue of Rs 15bn) – so, significant operating leverage is yet to play out in this operation. In CPB, SRF will remain in capex mode (with reducing quantum) in order to meet increasing demand.

• We value SRF’s CPB at 11x EV/EBITDA, which is at a 10‐20% discount to other contract research and manufacturing players such as Divi’s Lab, Syngene, PI Industries.

• We value SRF’s TTB at 6x EBITDA (factoring global leadership position and steady cash‐flow) and PFB at 5x EBITDA (factoring visible growth in packaging and SRF’s focus on value‐added products).

• Our SOTP value for SRF stands at Rs 1700 (discounts our FY18 EPS by 15x), implying an upside of 34%. We initiate coverage with a Buy rating.

Valuation table Particulars FY18 EBITDA

(Rs mn)Target Multiple

(x)Value

(Rs mn)TTB EBITDA 2576 6 15458CPB EBITDA 7492 11 82416PFB EBITDA 3000 5 15001Total Enterprise Value (Rs mn) 112874Net debt 15902Target Mcap (Rs mn) 96973No of shares (mn) 58Target Price (Rs) 1700CMP (Rs) 1267Upside 34%

Source: Company, PhillipCapital India Research Estimates One‐year forward PE band One‐year forward EV/EBITDA band

Source: Bloomberg, PhillipCapital India Research Estimates

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Operating leverage boosts efficiency ROE follows improving PAT growth

Source: Company, PhillipCapital India Research Estimates Downside risks • Any slowdown in fluorospecialty, though not visible – can impact the profitable

growth in CPB. • Increase in Chinese competition (particularly on refrigerant gases and nylon tyre)

led by Yuan devaluation or other factors can hurt growth. • Since 40% of sales are export oriented, adverse movement in currency can pose

a risk. • A possible slowdown of R22 exports due to curtailed import licenses by key

markets seems a risk, but R22 contribution is not even 3% of total sales. Upside risk • Anti‐dumping duty by US on Chinese imports of refrigerant blends could boost

R134a/R32 sales volumes and realisations significantly.

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Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 45,399 46,189 53,160 60,264Growth, % 13 2 15 13Total income 45,399 46,189 53,160 60,264Raw material expenses ‐25,420 ‐24,018 ‐27,377 ‐31,036Employee expenses ‐3,561 ‐3,418 ‐3,721 ‐4,219Other Operating expenses ‐9,149 ‐8,868 ‐10,207 ‐11,571EBITDA (Core) 7,269 9,884 11,855 13,439Growth, % 39.1 36.0 19.9 13.4Margin, % 16.0 21.4 22.3 22.3Depreciation ‐2,450 ‐2,903 ‐3,232 ‐3,425EBIT 4,819 6,981 8,623 10,014Growth, % 61.9 44.9 23.5 16.1Margin, % 10.6 15.1 16.2 16.6Interest paid ‐1,376 ‐1,349 ‐1,318 ‐1,172Other Non‐Operating Income 646 231 266 301Pre‐tax profit 3,994 5,863 7,571 9,143Tax provided ‐966 ‐1,598 ‐1,917 ‐2,369Profit after tax 3,028 4,266 5,654 6,774Net Profit 3,028 4,266 5,654 6,774Growth, % 73.8 38.4 20.0 23.6Net Profit (adjusted) 3,123 4,320 5,183 6,404Unadj. shares (m) 58 58 58 58Wtd avg shares (m) 58 58 58 58 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 1,073 1,019 1,966 3,638Debtors 6,107 6,327 7,282 8,255Inventory 7,635 7,593 8,739 9,906Loans & advances 2,679 2,771 3,190 3,616Other current assets 131 131 131 131Total current assets 17,624 17,841 21,307 25,546Investments 943 943 943 943Gross fixed assets 66,773 71,688 76,949 80,592Less: Depreciation ‐27,585 ‐30,488 ‐33,720 ‐37,145Add: Capital WIP 1,076 2,035 1,335 1,035Net fixed assets 40,265 43,235 44,564 44,482Total assets 59,540 62,727 67,522 71,679Current liabilities 7,850 8,504 9,712 10,943Provisions 283 283 283 283Total current liabilities 8,133 8,787 9,995 11,226Non‐current liabilities 28,443 27,346 26,431 23,633Total liabilities 36,576 36,133 36,426 34,859Paid‐up capital 584 575 575 575Reserves & surplus 22,336 25,976 30,478 36,202Shareholders’ equity 22,963 26,594 31,097 36,820Total equity & liabilities 59,540 62,727 67,522 71,679 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 3,028 4,320 5,183 6,404Depreciation 2,450 2,903 3,232 3,425Change in WC ‐1,066 382 ‐1,311 ‐1,336Cash flow from operating activities 4,413 7,606 7,104 8,493Capital expenditure ‐5,563 ‐5,874 ‐4,561 ‐3,343Misc Exp 61 0 0 0Cash flow from investing activities ‐5,503 ‐5,874 ‐4,561 ‐3,343Equity 0 ‐9 0 0Dividends ‐680 ‐680 ‐680 ‐680Debt 2,595 ‐1,097 ‐915 ‐2,798Investments ‐577 0 0 0Cash flow from financing activities 1,338 ‐1,786 ‐1,596 ‐3,478Net chg in cash 248 ‐54 947 1,672Opening cash balance 825 1,073 1,019 1,966Closing cash balance 1,073 1,019 1,966 3,638

Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 53.4 75.1 90.1 111.3Growth, % 73.8 40.6 20.0 23.6Book NAV/share (INR) 393.0 462.3 540.6 640.1FDEPS (INR) 53.4 75.1 90.1 111.3CEPS (INR) 95.4 125.6 146.3 170.9CFPS (INR) 75.3 127.3 127.1 148.8Return ratios Return on equity (%) 13.2 16.0 18.2 18.4Return on capital employed (%) 10.6 13.4 15.5 17.1Turnover ratios Asset turnover (x) 1.0 0.9 1.0 1.1Sales/Total assets (x) 0.8 0.8 0.8 0.9Sales/Net FA (x) 1.2 1.1 1.2 1.4Working capital/Sales (x) 0.2 0.2 0.2 0.2Receivable days 49.1 50.0 50.0 50.0Working capital days 70.0 65.7 66.1 66.4Liquidity ratios Current ratio (x) 2.2 2.1 2.2 2.3Quick ratio (x) 1.3 1.2 1.3 1.4Interest cover (x) 3.5 5.2 6.5 8.5Total debt/Equity (%) 106.0 87.4 71.8 53.1Net debt/Equity (%) 101.4 83.6 65.5 43.2Valuation PER (x) 23.7 16.9 14.1 11.4PEG (x) ‐ y‐o‐y growth 0.3 0.4 0.7 0.5Price/Book (x) 3.2 2.7 2.3 2.0EV/Net sales (x) 2.1 2.1 1.8 1.5EV/EBITDA (x) 13.4 9.6 7.9 6.6EV/EBIT (x) 20.2 13.6 10.8 8.9



Aarti Industries (ARTO IN) Art in project execution INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

One of the leading global players of benzene derivatives Aarti is the largest producers of benzene derivatives in India and has emerged as one of the leading manufacturers globally. Its global market share in this segment is 25‐40% in various products. Globally, Aarti has the 3rd largest capacity in chlorination, 2nd largest in ammonolysis and hydrogenation, and 4th largest in nitration. A key beneficiary of the Chinese slowdown Leveraging its cost advantage and quality, Aarti has long been exporting competently to China. With a visible slowdown in Chinese exports (stricter environment policy) and rising manufacturing costs in that country (due to higher compliance requirements), Aarti is well set to exploit the opportunity. Its on‐going and timely capacity expansion will help it to make the most of the enhanced export opportunity. Improving products mix in the benzene chain to drive earnings efficiency Aarti’s continued focus on downstream products and co‐product/isomer‐balancing has extended its operation towards better‐value chemical processes such as hydrogenation, fluoro‐compounding, and phthalates. Hence, improving product mix with scale would drive the earning efficiency of its benzene chain. Relatively low‐value sales (after‐chlorination, after‐nitration, and by products) will fall to 40% in FY18 from 60% in FY15. Greenfield toluene project: A strategic import‐substitution‐led driver After building a global‐scale benzene derivative chain, Aarti diversified into the toluene chain (nitro‐toluene and derivatives) by setting up a greenfield facility for ~Rs 1.3bn. The project is likely to commercialise early FY17, and will initially act as an import substitute. We estimate this project to add sales of Rs 1.03/1.73bn in FY17/18. One of the best executors of capex Aarti has been very successful in executing its capacity expansion projects as its capex of about Rs 12bn over the last five years added incremental revenue of Rs 41bn (implying an asset turnover of ~3.6x). We believe the on‐going capex projects (including the toluene project) worth ~Rs 3.5bn over FY16‐17 would ensure sustained growth. Demerger of pharma/personal care to unlock value Pharma and personal care ingredient manufacturing are non‐core to Aarti’s specialty chemicals operation and are relatively low efficient/profitable operations. Hence, in order to focus more on value‐added specialty chemicals, Aarti is likely to demerge these businesses in FY17, which will unlock value. Initiate BUY with TP of Rs 700, implying an upside of 48% We estimate Aarti to deliver 16%/21% CAGR in revenues/profit over FY16‐18 to Rs 36.2/3.72bn in FY18. Additionally, we believe its successful track record in execution of expansion projects over the last five years and its on‐going capex can surprise growth positively. We value Aarti at 9x FY18 EV/EBITDA – ~20% discount to SRF’s specialty chemical target valuation multiple – at Rs 700. Initiate coverage with a BUY rating.

BUY CMP RS 472 TARGET RS 700 (+48%) COMPANY DATA O/S SHARES (MN) : 83MARKET CAP (RSBN) : 39MARKET CAP (USDBN) : 0.652 ‐ WK HI/LO (RS) : 585 / 294LIQUIDITY 3M (USDMN) : 0.3PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 15PROMOTERS : 54.8 54.8 59.1FII / NRI : 3.0 3.2 1.3FI / MF : 12.4 12.8 12.2NON PRO : 14.8 16.4 14.9PUBLIC & OTHERS : 15.0 13.0 12.7 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 8.9 ‐7.2 36.4REL TO BSE 2.5 ‐6.2 46.7 PRICE VS. SENSEX



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AARTI INDUSTRIES INITIATING COVERAGE

About the Company • Started its operations in 1975 as a single‐product company. • Leading supplier to global manufacturers of dyes, pigments, agrochemicals,

pharmaceuticals, and rubber chemicals. • Largest producer of benzene‐based basic and intermediate chemicals in India. • 16 manufacturing units spread across Gujarat and Maharashtra and strong R&D

with sophisticated instruments and a pool of scientists. Evolution of Aarti

Source: PhillipCapital India Research Business model


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Net Sales (Rs mn) Share Price (Rs)

In 1986 commenced 1200TPA manufacuting plant for Nitro Chloro Benzenes (NCB) in Valsad,Gujarat

In 1990, implemented its expansion of valsad facility to 4500TPA for NCB, ONCB, PNCB etc

In 1997, merged Aarti with Salvigor Labs the largest producers of chemical intermediates ONCB/PNCB and their downstream products

In 2003, Mr. Rajendra V Gogri appointed as Managing Director

In 2006, Aarti splits its stock from Face value of from Rs 10 to Rs 5

In 2008, Aarti Industry takes over Surfactants Speciality Pvt. Ltd. and get access to Home/personal care segment

In 2010, AARTI Custom Synthesis division Vapi has received USFDA approval

Upgrades Hydrogenation Technology for Manufacture of Speciality Chemicals

Commissioning of Sulfonation unit at Pithampur (MP)

Scheme of Arrangement between Anushakti Chemicals and Drugs Limited with Aarti Industries Limited has been approved by the High Court of Gujarat

Aarti Industries included in the MSCI Small Cap Index

In 1984 Aarti Organics Limited incorporated

Aarti Industries

Specialty Chemicals(83% of sales)

Pharmaceuticals (10% of sales)

Home/Personal Care (7% of sales)

•Agro chemicals leading target industry (30%) followed by polymers (27%), pigments (19%), dyes (5%)• Global leader in processes like chlorination, nitration, hydrogenation, ammonolisation• Market leader in PNCB/ONCB and derivatives• Only Indian player with benzene base fluoro compounds• Among the few producers of toluene based products

• Focusing off‐patented generics to be supplied in regulated markets• Recently commissioned expanded capacities• 48 commercial APIs, with 33 EUDMFs, 28 US DMF• 60% exports coming from regulated markets• Sales CAGR of 21% over FY10‐15

• Application: Non‐ionic surfactance, shampoo, Hand wash, Dish wash• Relatively low‐margin business• Recently debottlenecked some operations to expand capacities• Focus on export‐oriented products• Sales CAGR of 31% over FY10‐15



Investment Rationale

Specialty chemicals: Integrated business model, focus on accreditation One of the leading global players of benzene derivatives Its specialty chemicals segment is mainly focused on benzene derivatives and contributes to 82% of sales. Aarti is the largest producers of benzene derivatives in India and one of the leading manufacturers globally. Its global market share in various products is 25‐40%. Well integrated benzene chain

Source: Company, PhillipCapital India Research Agro chemicals are the leading end‐user industry for benzene derivatives (30% share of specialty chemicals sales) followed by polymers (27%), pigments (19%), and dyes (5%). Incidentally, India is among the top‐four producers of agro chemicals (after China, USA, and Japan) and second‐largest producer of dyes and pigments in the world. Aarti has leveraged locational cost advantage and has emerged a global‐scale manufacturer of benzene derivatives. Specialty chemicals to lead steady value growth


A ChlorinationB NitrationC AmmonolysisD HydrogenationE OthersF Flouro Compo

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Steady focus on process‐optimisation made it the lowest‐cost producer Apart from the India advantage, Aarti’s continued focus on process development, plant automation/upgradation, and quality standards made it the lowest‐cost producers of benzene derivatives in the world. Additionally, its capability in converting its by‐products from various processes into commercially viable products, and more importantly, its capability in balancing the co‐products demand, is the key to its competitive positioning globally. As a result, Aarti has built a strong base of marquee clients across end‐user industries including in polymer and additives, dyes and pigments, agro intermediates, and fertilisers. Well‐diversified global clientele

Source: Company, PhillipCapital India Research Rising contribution from better‐margin products to drive value growth In an effort to balance co‐products demand and move up the value chain for better‐margin downstream products, Aarti expanded its chemistry skills to a global scale for processes starting from chlorination (3rd largest globally), nitration (4th in the world), ammonolysis (2nd globally), to hydrogenation (2nd largest) and fluoro‐compounding (only player in India). While chlorination/nitration is the primary process, with limited value addition (in benzene), others are premium processes. Gained global scale in its chemistry skills Downstream products offer value addition

Source: Company, PhillipCapital India Research As per our estimates, the revenue contribution of chlorination/nitration‐based products and by‐products contributed 60% to Aarti’s specialty chemicals operation in FY15. With increasing focus on downstream products, the revenue mix is likely to improve towards more value‐added products that will lead to value growth for Aarti.

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Improving revenue mix – rising contribution from high‐margin products

Note: High margin products include products after Amonolysis, hydrogenation,Fluoro‐compounding & other

downstream products

Source: Company, PhillipCapital India Research Estimates One of the key beneficiaries of a Chinese slowdown Aarti is already established as one of the lowest‐cost manufacturers of benzene derivatives globally, which can be evidenced from the fact that 10% of its exports are towards China – the lowest cost base of the world. Aarti is well set to make the most of the opportunity of a slowdown in Chinese exports (led by plant shut downs due to a stricter environment policy from 1st January 2015) and rising manufacturing cost (led by enhanced compliance requirements leading to additional investments into Effluent Treatment Plant (ETP)). Additionally, its on‐going and timely capacity expansion will help it to use the enhanced export opportunity. Greenfield toluene project: A strategic import‐substitution‐led driver Toluene derivatives and ethylene product‐line add new source of growth After a successful global‐scale benzene derivative chain, Aarti diversified into toluene chain of products (nitro‐toluene and derivatives) by setting up a greenfield facility with an investment of around Rs 1.3bn. The project is expected to commercialise early FY17. Aarti expects to leverage its well‐established clientele for benzene derivatives to promote its toluene derivatives, as the end‐user industries are the same (i.e., optical brighteners, agrochemicals, pigments, and pharmaceuticals). Simultaneously, it has set up an ethylation unit by adopting Swiss technology at the Dahej SEZ, which will receive input material from its toluene plant. Aarti will be the first company ever to procure ethylene by a pipeline and operate a greener ethylation process. It plans to introduce gradually a range of ethylene‐based chemicals catering to end‐user applications of agrochemicals, engineering polymers, pigments, and additives.

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Source: Company, PhillipCapital India Research Imports substitution is the strategy behind the toluene project The toluene chain is a more competitive market globally with many big names, led by Lanxess (Germany). Deepak Nitrite is a leading domestic player. Aarti initially strategically targets the domestic market (which imports nitro‐toluene and its derivatives – worth ~US$ 22mn per year) and to tap the export market with more downstream products gradually. We expect a gradual pick up in Aarti’s toluene operation with ~30%/50% utilisation in FY17/18 as it has to build a clientele. However, Aarti plans to fill the unutilised toluene plant with benzene products initially. Hence, we estimate this project to add incremental sales of Rs 1.03/1.73bn in FY17/18. One of the best executors of capex Aarti has been very successful in executing its capacity expansion projects, as its capex of about Rs 12bn over the last five years added incremental revenue of Rs 41bn (implying an asset turnover of ~3.6x). However, on its overall assets, Aarti maintained asset turnover of ~2x. Best executor of incremental capex amongst Indian peers

Source: Company, PhillipCapital India Research Estimates The ongoing capex projects (including the toluene project) worth ~Rs 3.5bn over FY16‐17 would ensure sustained growth in the near future. Apart from this, Aarti is also in the process of setting up a multi‐purpose specialty‐chemicals complex at Jhagadia to manufacture a range of high‐end polymers and engineering plastics that are used in the automobile industry. This project will add value growth from FY18.

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On‐going capex projects Major Projects in FY16 Details Expected Outlay

(Rs mn) Hydrogenation Unit at Jhagadia Expansion for polymer intermediate 800NCB Expansion at Vapi Expansion of NCB capacities (2nd phase)Nitration Unit at Jhagadia Expansion into toulene chemistryCalcium Chloride Granulation at Jhagadia Setup of new calcium chloride granulation

unit New Projects over FY 16 & FY 17 At Jhagadia Chlorination complex 1500 Speciality chemicals complex Power plant At Vapi Acid re‐concentration plant 250At Dahej SEZ Ethylation unit and speciality chemicals unit 750

Source: Company, PhillipCapital India Research Demerger of pharma/personal care to unlock value Aarti has two operations that are non‐core to its specialty chemicals operation – One is active‐ingredient manufacturing for pharma players and the other is surfactant manufacturing for home and personal care players – both are relatively low‐efficient and low‐profitable operations. To focus more on value‐added specialty chemicals, Aarti is likely to de‐merge these businesses in FY17, which will unlock value for the company. Pharma and home and personal care businesses are less efficient than specialty chemicals (both ROE and EBIT margin)

Source: Company, PhillipCapital India Research Technical management keeps Aarti on the forefront Aarti’s promoters are first‐generation technocrats with sound entrepreneurial skills. Mr Chandrakant Gogri founded Aarti in 1975 and took it from a small unit to a path‐breaking enterprise; he retired in 2012. Mr Rajendra Gogri – the current CMD is a qualified chemical engineer from UDCT, Mumbai, and has a master’s degree in chemical engineering from IOWA University, USA. He has many years of expertise in operations, marketing, and financial management. Five out of Aarti’s six promoter‐directors are from an engineering background and three out of four are chemical engineers from ICT (formerly known as UDCT).

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Financials Specialty chemicals will remain the highest contributor to sales (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18ESpecialty Chemicals 12277 13503 17578 22167 23980 22340 26451 30041YoY change (%) ‐2.7 10.0 30.2 26.1 8.2 ‐6.8 18.4 13.6% of sales 84 81 84 84 82 82 83 82Pharmaceuticals 1306 1646 1868 2490 3032 3547 4151 4898YoY change (%) 10.7 26.1 13.5 33.3 21.8 17.0 17.0 18.0% of sales 9 10 9 9 10 13 13 13

Home/ Personal Care Chems 947 1584 1516 1668 2068 1295 1398 1524YoY change (%) 75.7 67.2 ‐4.3 10.0 24.0 ‐37.4 8.0 9.0% of sales 7 9 7 6 7 5 4 4Total Sales 14530 16733 20962 26325 29080 27182 32000 36462YoY change (%) 9.2 15.2 25.3 25.6 10.5 ‐6.5 17.7 13.9 Revenue to see 16% CAGR over FY16‐18 Move into downstream products to expand EBITDA margin

Continued capex, but best execution Strengthening free cash despite continued capex


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Valuation and outlook We estimate Aarti to deliver 16%/21% revenue/profit CAGR over FY16‐18 to Rs 36.2/3.72bn in FY18. Its successful track record in execution of expansion projects over the last five years and its on‐going capex can surprise positively. Its plan to set up a specialty chemical block by FY18 (not factored into our model) to tap the ever rising demand in specialty polymer and engineering plastics could surprise our revenue and profitability estimates. The company trades at 11x/6x FY18 EPS and EV/EBITDA. Considering its track record of successful execution of expansion projects – and future growth led by continuing expansions into value‐added downstream products – we believe EV/EBITDA is the right valuation method. We value Aarti at 9x FY18 EV/EBITDA – about 20% discount to SRF’s specialty chemical target valuation multiple. We arrive at a target price of Rs 700, and initiate coverage with a BUY rating. Valuation table (FY18E) EBITDA (Rs mn) 7365EV/BITDA target Multiple (x) 9EV (Rs mn) 66288Net debt (Rs mn) 8241Mcap (Rs mn) 58047No of shares (mn) 83Target Price (Rs) 700CMP (Rs) 472Upside 48%


Source: Bloomberg, PhillipCapital India Research

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Source: Company, PhillipCapital India Research Estimates Downside risk to valuation • Further slowdown in domestic and world economies can impact growth of Aarti’s

end‐user industries such as agro chemicals, dyes and pigments, and polymers. • 50% of Aarti’s sales are export oriented; any adverse movement in currency can

fluctuate earnings. • Volatility in crude could fluctuate Aarti’s revenue and profitability as it is a key

input material – benzene and toluene are crude derivatives. • Devaluation in Chinese Yuan could hurt its export anticipations. Upside risk Successful commissioning of its planned specialty chemical block to manufacture specialty polymer and engineering plastics could surprise our estimates – both revenue and profitability.

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Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 29,080 27,182 32,000 36,462Growth, % 10 ‐7 18 14Total income 29,080 27,182 32,000 36,462Raw material expenses ‐18,321 ‐15,358 ‐18,112 ‐20,455Employee expenses ‐936 ‐1,114 ‐1,312 ‐1,495Other Operating expenses ‐5,165 ‐5,382 ‐6,240 ‐7,147EBITDA (Core) 4,657 5,328 6,336 7,365Growth, % 16.0 14.4 18.9 16.2Margin, % 16.0 19.6 19.8 20.2Depreciation ‐820 ‐956 ‐1,094 ‐1,250EBIT 3,837 4,372 5,242 6,115Growth, % 22.6 13.9 19.9 16.7Margin, % 13.2 16.1 16.4 16.8Interest paid ‐1,380 ‐1,154 ‐1,269 ‐1,376Pre‐tax profit 55 54 64 73Tax provided 2,548 3,272 4,037 4,812Profit after tax ‐610 ‐785 ‐969 ‐1,155Others (Minorities, Associates) 1,937 2,487 3,068 3,657Net Profit 1,937 2,487 3,068 3,657Growth, % 22.7 29.1 22.6 18.7Net Profit (adjusted) 2,002 2,584 3,169 3,762Unadj. shares (m) 89 83 83 83Wtd avg shares (m) 83 83 83 83 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 337 1,659 3,077 4,992Debtors 4,390 4,096 4,822 5,494Inventory 5,517 4,841 5,699 6,493Loans & advances 5,820 5,436 5,600 6,381Other current assets 323 323 323 323Total current assets 16,387 16,355 19,520 23,684Investments 1,392 1,392 1,392 1,392Gross fixed assets 16,851 19,118 21,449 24,041Less: Depreciation ‐7,182 ‐8,138 ‐9,231 ‐10,482Add: Capital WIP 1,930 1,949 1,949 1,559Net fixed assets 11,599 12,929 14,167 15,119Total assets 29,378 30,677 35,079 40,195 Current liabilities 2,708 3,198 3,765 4,289Provisions 3,399 3,195 3,380 3,804Total current liabilities 6,106 6,393 7,145 8,094Non‐current liabilities 13,049 12,127 13,230 14,259Total liabilities 19,156 18,519 20,376 22,353Paid‐up capital 443 417 417 417Reserves & surplus 9,721 11,682 14,228 17,367Shareholders’ equity 10,223 12,158 14,703 17,842Total equity & liabilities 29,378 30,677 35,079 40,195 Source: Company, PhillipCapital India Research Estimates

Cash Flow FY15 FY16e FY17e FY18e

PAT 2,059 2,584 3,169 3,762Depreciation 820 956 1,094 1,250Change in WC ‐724 1,640 ‐995 ‐1,299Cash flow from operating activities 2,155 5,180 3,268 3,712Capital expenditure ‐2,836 ‐2,286 ‐2,331 ‐2,203Misc Exp 66 0 0 0Cash flow from investing activities ‐2,770 ‐2,286 ‐2,331 ‐2,203Equity 4 ‐26 0 0Dividends ‐623 ‐623 ‐623 ‐623Debt 1,642 ‐923 1,104 1,029Investments ‐220 0 0 0Cash flow from financing activities 803 ‐1,572 481 406Net chg in cash 189 1,322 1,417 1,916Opening cash balance 149 337 1,659 3,077Closing cash balance 337 1,659 3,077 4,992 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 24.0 31.0 38.0 45.1Growth, % 22.7 29.1 22.6 18.7Book NAV/share (INR) 122.0 145.2 175.8 213.4FDEPS (INR) 24.0 31.0 38.0 45.1CEPS (INR) 33.9 42.5 51.2 60.2CFPS (INR) 25.9 60.3 37.2 42.4Return ratios Return on assets (%) 10.1 10.7 11.8 12.0Return on equity (%) 19.1 20.6 20.9 20.6Return on capital employed (%) 16.7 18.2 19.0 19.3Turnover ratios Asset turnover (x) 1.3 1.1 1.2 1.3Sales/Total assets (x) 1.0 0.9 1.0 1.0Sales/Net FA (x) 2.8 2.2 2.4 2.5Working capital/Sales (x) 0.5 0.4 0.4 0.4Receivable days 55.1 55.0 55.0 55.0Inventory days 69.3 65.0 65.0 65.0Payable days 40.5 53.4 53.5 53.8Working capital days 167.5 154.4 144.6 144.2Liquidity ratios Current ratio (x) 6.1 5.1 5.2 5.5Quick ratio (x) 4.0 3.6 3.7 4.0Interest cover (x) 2.8 3.8 4.1 4.4Total debt/Equity (%) 118.3 91.7 83.3 74.4Net debt/Equity (%) 115.0 78.0 62.3 46.3Valuation PER (x) 19.6 15.2 12.4 10.5PEG (x) ‐ y‐o‐y growth 0.9 0.5 0.5 0.6Price/Book (x) 3.9 3.3 2.7 2.2EV/Net sales (x) 1.8 1.8 1.5 1.3EV/EBITDA (x) 11.5 9.2 7.6 6.5EV/EBIT (x) 13.9 11.2 9.2 7.8



Vinati Organics (VO IN) Sector leader in profitability INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

Stronger and wider moat in ATBS VO is a global leader of 2‐acrylamido 2‐methylpropanesulfonic acid (ATBS, 46% of total sales) in the world with a capacity of 26,000TPA and ~45% market share. Global scale and backward integration in ATBS (it is the only integrated player in the world) has earned it cost/price leadership. Price leadership is evident – despite being a crude derivative, VO’s ATBS prices remained stable over the 70% correction in crude prices in the last two years. VO’s cost/price leadership puts up an entry barrier for others. It reported sales/volumes CAGR of 28%/23% in ATBS over FY10‐15 and we estimate 15% sales CAGR over FY16‐18 to Rs 3.35bn, led by steady progress in construction chemicals, paints, and water‐treatment chemicals. To maintain global leadership in IBB, but with muted growth VO is the largest manufacturer of isobutyl benzene (IBB) in the world with a capacity of 14,000TPA and >70% of global market share, thanks to its technological collaboration with Institut Francais du Petrole (IFP), that earned it global scale and accreditation. IBB is largely a pharma intermediate used in the preparation of ibuprofen (an anti‐inflammatory, anti‐arthritic, analgesic medicine) and in the perfume industry. It is a mature but steadily growing product with a demand of ~20,000TPA globally. We estimate 6% sales CAGR over FY16‐18 to Rs 1.98bn. Well‐integrated product portfolio VO launched innovative and cost‐competitive products (ATBS, IBB, and IB‐Isobutylene) supported by its technological tie‐ups. Subsequently, leveraging its in‐house research, it introduced new products such as N‐Tertiary Butylacrylamide (TBA), N‐Tertiary Octyl Acryl amide (TOA), High purity Methyl‐Tertiary Butyl Ehter (HP‐MTBE), and Diacetone Acryl amide (DAAM) – these product‐lines make up about 15% of its revenue share currently. The new products are fully integrated to its existing line (as by‐products, or co‐products, or downstream products), which makes it the most cost‐effective producer in the world. Expansion into downstream products and new alliances to sustain value growth To further its growth plans, VO is undertaking capital expenditure of Rs 2bn over FY16‐17 for backward integration and introduction of new downstream products. Additionally, it has entered into a long‐term tripartite agreement with USA and Japan‐based chemical companies for supplying customised products. We expect VO’s new initiatives to be value accretive and to contribute Rs 1bn in FY18. Technocrat management ensures sustained business progress Hands‐on expertise of Mr Vinod Banwarilal Saraf (founder, BITS Pilani graduate, industry veteran) in new chemical/petrochemical projects identification and technical tie‐ups helped VO deliver 5/8‐fold growth in revenue/profit over the last eight years. His leadership will ensure sustained business progress. VO to maintain its earning supremacy; initiate Buy with TP of Rs 495 We estimate VO to deliver 16%/21% revenue/profit CAGRs over FY16‐18 to touch Rs 8.21/1.45bn in FY18. Considering its sector leadership in terms of earning efficiency and with future growth led by continuing expansions into value‐added downstream products, we value VO at 10x FY18 EV/EBITDA to arrive at our TP of Rs 495. Initiate with a Buy rating.


1MTH 3MTH 1YRABS 6.4 ‐12.3 ‐22.2REL TO BSE ‐0.2 ‐10.5 ‐11.7 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 6,047 7,189 8,410EBIDTA 1,701 2,049 2,476Net Profit 994 1,209 1,496EPS, Rs 19.3 23.4 29.0PER, x 20.5 16.9 13.6EV/EBIDTA, x 12.1 10.0 7.9P/BV, x 4.0 3.3 2.8ROE, % 19.4 19.8 20.3Debt/Equity (%) 12.2 9.4 7.0


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http://www.esuppliersindia.com/vinati-organics-limited/2-acrylamido-2-methylpropanesulfonic-acid-atbs--pr483568-sFP-swf.html�


VINATI ORGANICS INITIATING COVERAGE

About the company • Established in 1989. • Specialty chemical company producing aromatics, monomers, and polymers. • Started operations with its first plant in Mahad (Maharashtra) in 1992, with focus

on isobutyl benzene (a raw material for making ibuprofen, an anti‐inflammatory analgesic bulk drug) and achieved global scale.

• In 2002, it started commercial production in its second plant in Lote Parshuram (Maharashtra), producing ATBS, and emerged the largest producer in the world.

• Reasons for success – continued focus on product/process optimisation with in‐house R&D, successful substitution of external input materials to in‐house sources, converting by‐products to marketable ones, and strong marketing strategies.

• With its move towards downstream products, VO is set to maintain its earning supremacy in the Indian specialty chemicals sector.

Evolution of Vinati

Business model


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VOL came out with a IPO Nov‐1991

VOL started ATBS commercial in 2002 with the installed capacity of 1000 MT

VOL started operations in its first plant in Mahad in 1992 with capacity of 1200 MTA

IBB Expansion to 10000 MTA ATBS Expansion to 3600 MTA in 2006

IBB Capacity Expansion to 3000 MTA in 1996

IBB Capacity Expansion to 5000 MTA in 1998

Started TBA Production in 2008

Capacity Expansion to : IBB Capacity 14000 MTA ATBS Capacity 12000 MTA TBA Capacity 600 MTA In 2009

Isobutylene Plant of 12000 MTA commissioned in 2010

ATBS Capacity 26000 MTA IBB Capacity 18000 MTA and DAAM commissioned 1000 MTA

Planned capex of ~Rs 200cr for forward integration projects Established in 1989

Vinati Organics

Specialty Aromatics31% of sales

IBB is leading product

Specialty monomers50% of sales

ATBS, Na‐ATBS, TBA, DAAM

Other specialty products12% of sales

IB, HP‐MTBE and Methanol

• End‐user application in pharmaceutical industry‐ intermediate for ibuprofen, perfume industry, specialty solvent• Market leader in IBB with >70% of global market share• Worlds largest IBB manufacturing capacity at 14,000 TPA•IBB leading product with CAGR of

• End‐user application in water treatment chemicals, emulsions paint and paper coatings, adhesives, oil field and mining chemicals• Price as well as capacity of 26,000 tonnes ‐ leader globally with ~45% market share• ATBS/Na‐ATBS CAGR of 28% over FY10‐15

• End‐user application in butyl rubbers, antioxidants, fragrances and perfumes, insecticides and pesticides, personal care, monomers• Second largest player in India, 100% backward integration for ATBS• IB/HP‐MTBE are leading products with CAGRs of 63%/70% over FY11‐15



Investment Rationale

Global leadership in ATBS is the key to profit supremacy Largest manufacturer of ATBS in the world VO entered ATBS manufacturing by getting technology developed from National Chemical Laboratories, Pune, and setting a manufacturing plant with an initial capacity of 1,200tpa in 2002. VO was the third company globally to enter ATBS (after Lubrizol and Toagosei). Acrylamide tertiary butyl sulfonic acid is a vinyl polymer. Led by its excellent hydrolytic and thermal stability properties, ATBS finds wide application in emulsions for paints and paper coatings, water treatment chemicals, adhesives, hydrogels and super absorbents, textile auxiliaries, detergents and cleaners, acrylic fiber, construction polymers, and oil field polymers. But due to the captive manufacturing practice of Lubrizol and Toagosei, ATBS was not available at the right price/quantity for other applications. Leveraging the short‐supply position in ATBS, VO continuously expanded its capacity to 26,000tpa in FY13 and emerged as the largest manufacturer of ATBS in the world with over 45% of global market share. Sales maintained at high‐teen rate Gradual pick‐up in capacity

Source: Company, PhillipCapital India Research Vinati is a global leader in‐term of capacity


Its robust client base across various markets – including the US, Europe, Asia, the Middle East, and China – has been a key to VO’s success in ATBS. It has some of the world’s largest specialty chemical companies in its client list, including BASF, Dow Chemicals, Nalco Company (USA), AkzoNobel, SNF Floerger, Ciba, and Clariant Chemicals, among many others. Price leadership in ATBS is a key to VO’s supremacy in profitability While steady expansion in geographic reach and client base offered scale to VO’s ATBS operation, its strategic backward integration to IB (Isobutylene) manufacturing (one of the key raw materials for ATBS, which used to be imported) made it the price leader. It is the only backward‐integrated ATBS manufacturer in the world. VO’s price leadership in ATBS (which contributes 46% of its total sales) is a key to its sector leadership in profitability.

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Company ATBS Capacity (tons) Remark Vinati 26000 Global leader, holds 45% market share Lubrizol 14000 Majority of production for captive consumption Toagosei 6000 ATBS is not a major focused product

ATBS finds wide application in emulsions for paints and paper coatings, water treatment chemicals, adhesives, hydrogels and super absorbents, textile auxiliaries, detergents and cleaners, acrylic fibre, construction polymers, and oil field polymers



VO’s price leadership is evident – it could retain ATBS prices despite sharp correction in input prices led by crude. Retained ATBS prices despite sharp correction of ~70% in price of crude


ATBS sales to see 15% CAGR over FY16‐18, despite dip in EOR application VO delivered sales/volumes CAGR of 28%/23% in ATBS over FY10‐15. Over the last four quarters, sales volume saw an average decline of ~8% as enhanced oil recovery (EOR) application faced slowdown with a slump in crude prices. EOR application accounts for about ~15% of the ATBS application. However, we see rising demand in segments such as water treatment, construction chemicals, and personal care covering up for the lost business soon. We build 12% volume growth for ATBS over FY16‐18, which will improve capacity utilisation to 84% by FY18 from 66% in FY16. Hence, we estimate 15% CAGR in ATBS sales over FY16‐18 to Rs 3.35bn. Utilisation level to improve gradually FY16 impacted due to slump in global oil exploration activity


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Despite being a crude derivative, ATBS prices have remained stable in the face of +70% corrections in crude prices over the last two years



IBB to maintain its global leadership, but with muted growth Isobutyl Benzene (IBB) was VO’s first product. It is a specialty chemical widely used as an intermediate in the preparation of Ibuprofen, an anti‐inflammatory/anti‐arthritic/analgesic medicine for pain relief. Ibuprofen is primarily manufactured in India, China, and in the USA. It is also used in the perfume industry. VO is a market leader in IBB with >70% global market share. It has the largest IBB manufacturing capacity in the world at 14,000TPA at Mahad, Maharashtra. It has acquired the technology to produce IBB from Institut Francais du Petrole (IFP), France. This is a mature product with demand of ~20,000 TPA globally, growing at ~5% p.a. We estimate 6% sales CAGR over FY16‐18 to Rs 1.98bn. Mature business, will have stable growth Capacity is at highest level of utilisation


Technology‐led integrated product portfolio earns global accreditation VO launched innovative and cost competitive products like ATBS, IBB, and IB – supported by its technological tie‐ups with National Chemical Laboratories (India), Institut Francais du Petrole (France), and Saipem S.p.A. (Italy), respectively. Its continued captive research on productivity and efficiency earned it global leadership in ATBS and IBB. VO is the largest manufacturer of IB India. Leveraging its in‐house research, it introduced new products, which like N‐Tertiary Butylacrylamide (TBA), NTertiary Octyl Acryl amide (TOA), High purity Methyl‐Tertiary Butyl Ehter (HP‐MTBE) and Diacetone Acryl amide (DAAM) – and these new product lines make up about 15% of its revenue share. The new products are fully integrated with existing ones (as by‐products, co‐products, or their further processed products), which make VO the most cost‐effective producer of these products.

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The new products are fully integrated with existing ones (as by‐products, co‐products, or their further processed products), which make VO the most cost‐effective producer of these products



Well integrated business model

Source: Company, PhillipCapital India Research Expansion into downstream products and new alliances to sustain value growth Although VO is globally known for ATBS and IBB, it has an integrated portfolio of 15 products; for many of these, it is the largest manufacturer in India. In order to further its growth plans, it is undertaking capital expenditure of Rs 2bn over FY16‐17 to expand existing products and to introduce new downstream products. The new projects include – (1) capacity expansion of IB, (2) new plant for producing para Tertiary Butyl Toluene and para Tertiary Butyl Benzoic Acid, (3) new plant for producing Isobutyl Aceto Phenone, (4) couple of export oriented custom synthesis products, and (5) setting up a 5‐MW co‐generation plant at the company's Lote (Maharashtra) facility. Most of these projects are for downstream products of existing ones; the expanded IB capacity and the power plant would also aid backward integration. New projects targets both upstream and downstream products New projects Comments

New plant for producing Isobutyl Aceto Phenone (IBAP)

Product is an intermediary between IBB and Ibuprofen

Capacity expansion of IB Backward integration for ATBS, about 50% capacity expansions which will be used as captive for new pipeline products.

New plant for producing para Tertiary Butyl Toluene / para Tertiary Butyl Benzoic Acid (PTBT/PTBBA)

Products are IB based derivatives and find application in perfumery, personal care and as polymer additives

New plant for producing Tertiary Butyl Amine (TB Amine)

Used in the rubber and pharmaceutical industry

Setting up of 5 MW Co‐generation plant at the company's Lote facility

5 MW Co‐generation power plant is expect to reduce power cost by Rs 80mn per annum from 2018


Diacetone Alcohol

MTBE IB

Raw M

aterials

ATBS Acrylonitrile

Toluene

Propylene

HP‐MTBE

DAAM

TBA

IBB

NBB

Methanol

Na‐ATBS

Speciality Chemicals

Specialty Monomers

Specialty Aromatics

IB is a hydrocarbon of significant industrial importance, used as key intermediate for VO’s leading product ATBS and it will remain a key intermediate for VO’s new downstream product such as ‐ Tertiary Butyl Toluene, para Tertiary Butyl Benzoic, couple other products

Raw Materials Key Products By products



Expansion into value‐added downstream products

Source: Company, PhillipCapital India Research VO has entered into long‐term tripartite agreements with USA and Japan‐based chemical companies for supplying customised product, which it expects will contribute incremental sales of Rs 450mn in FY17, and should see a scale‐up subsequently. We expect its new initiatives to sustain value growth and estimate these to contribute Rs 1bn in FY18. Technocrat management ensures sustained business progress Vinod Banwarilal Saraf (a BITS Pilani graduate and an industry veteran) has been the key driving force behind the successful introduction of products such as IBB/ATBS and in the scaling up to global levels. He has hands‐on expertise in Grasim Industries in new chemical and petrochemical projects identification, technical tie‐ups, and feasibility studies. He worked as Managing Director in Mangalore Refinery & Petrochemicals Ltd. Mr Saraf’s decades of hands on industry expertise helped VO deliver 5‐8‐fold growth in revenue/profits over the last eight years. His leadership would ensure sustained business progress.

Diacetone Alcohol

MTBE IB

Outsourced

ATBS Acrylonitrile

Toluene

Propylene

HP‐MTBE

DAAM

TBA

IBB

NBB

Methanol

Na‐ATBS

2014‐15

Tert‐Butylamine

PTBT PTBBA

Isobutyl AcetoPhenone

Forward integrationptoducts 2016

Mr Saraf’s decades of hands on industry expertise helped VO deliver 5‐8 fold growth in revenue/profits over the last eight years

Raw Materials Key Products By products Downstream products



Financial performance ATBS to remain a leading contributor to sales Amt (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18EIBB 1018 1539 2047 2426 2322 1750 1863 1980YoY change (%) ‐19 51 33 19 ‐4 ‐25 6 6% of sales 55 32 35 38 35 31 30 27ATBS 1109 1488 1536 1780 2349 1596 1810 2145YoY change (%) 94 34 3 16 32 ‐32 13 18% of sales 34 33 28 26 31 26 25 26Na‐ATBS (Salts) 666 647 691 1040 1151 923 997 1203YoY change (%) 49 ‐3 7 51 11 ‐20 8 21% of sales 21 14 13 15 15 15 14 14IB 126 346 560 867 887 603 642 739YoY change (%) 0 176 62 55 2 ‐32 6 15% of sales 4 8 10 13 12 10 9 9other 74 292 528 684 836 1179 1780 2231YoY change (%) 144 296 80 30 22 41 51 25% of sales 2 7 10 10 11 20 25 27Sales (Rs mn) 3226 4475 5480 6961 7663 6047 7189 8410YoY change (%) 39 39 22 27 10 ‐21 19 17 Revenue to see CAGR of 18% over FY16‐18 Vinati to maintain margin leadership

Source: PhillipCapital India Research Superior return ratios vs. industry peers Strong cash position to continue


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Valuation and outlook We estimate VO to deliver 16%/21% revenue/profit CAGR over FY16‐18 to Rs 8.21/1.45bn in FY18. Looking at VO’s EBITDA margin performance of 22‐24% over the last five years, we believe it will maintain its sector leadership in terms of profitability supported by – (1) global volume/value leadership in ATBS and IBB, (2) visible lower crude price, and (3) capex plan for forward integrated products. We estimate VO’s EBITDA margin at 27‐28% over FY16‐18. The company trades at 14x FY18 EPS and 8x EV/EBITDA. Considering that (1) it is a sector leader in terms of earning efficiency, and (2) its future growth will be led by continuing expansions into value‐added downstream products, we value VO at 10x FY18 EV/EBITDA to arrive at a TP of Rs 495. We initiate coverage with a BUY rating. Valuation table Particulars Value (Rs mn)EBITDA (Rs mn) 2476EV/BITDA target Multiple (x) 10EV (Rs mn) 24756Net debt (Rs mn) ‐806Mcap (Rs mn) 25562No of shares (mn) 52Target Price (Rs) 495CMP (Rs) 395Upside 25%


One‐year forward PE band One‐year forward EV/EBITDA band


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We believe VO will maintain its sector leadership in terms of profitability supported by – (1) global volume/value leadership in ATBS and IBB, (2) visible lower crude price, and (3) capex plan for forward integrated products



Recovery in operating performance in near future Earnings efficiency also sees steady progress


Downside risk to valuation • Further slowdown in domestic and world economies can impact the user

industries VO’s such as agro chemicals, dyes and pigments, paints and polymers. • 50% of Vinati’s sales are export oriented; any adverse movement in currency can

fluctuate earnings. • Volatility in crude could fluctuate Vinati’s revenue and profitability as it is key

input materials are crude derivatives.

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Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 7,663 6,047 7,189 8,410Growth, % 10 ‐21 19 17Total income 7,663 6,047 7,189 8,410Raw material expenses ‐4,565 ‐3,088 ‐3,681 ‐4,264Employee expenses ‐319 ‐356 ‐431 ‐505Other Operating expenses ‐915 ‐902 ‐1,028 ‐1,166EBITDA (Core) 1,864 1,701 2,049 2,476Growth, % 18.0 (8.7) 20.5 20.8Margin, % 24.3 28.1 28.5 29.4Depreciation ‐177 ‐181 ‐222 ‐231EBIT 1,687 1,520 1,827 2,245Growth, % 18.3 (9.9) 20.2 22.9Margin, % 22.0 25.1 25.4 26.7Interest paid ‐63 ‐71 ‐66 ‐59Other Non‐Operating Income 91 57 70 82Pre‐tax profit 1,735 1,506 1,831 2,267Tax provided ‐577 ‐512 ‐623 ‐771Profit after tax 1,158 994 1,209 1,496Net Profit 1,158 994 1,209 1,496Growth, % 34.4 (14.2) 21.6 23.8Net Profit (adjusted) 1,158 994 1,209 1,496Unadj. shares (m) 52 52 52 52Wtd avg shares (m) 52 52 52 52 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 271 512 393 1,325Debtors 1,291 1,072 1,268 1,463Inventory 545 476 563 650Loans & advances 351 302 359 420Other current assets 33 33 33 33Total current assets 2,492 2,395 2,616 3,892Investments 27 27 27 27Gross fixed assets 4,123 4,914 5,913 6,150Less: Depreciation ‐850 ‐1,031 ‐1,253 ‐1,484Add: Capital WIP 200 402 406 410Net fixed assets 3,473 4,285 5,067 5,076Total assets 5,992 6,708 7,710 8,996Current liabilities 353 320 380 445Provisions 256 256 256 256Total current liabilities 609 575 636 700Non‐current liabilities 1,043 1,016 966 909Total liabilities 1,651 1,591 1,602 1,609Paid‐up capital 103 103 103 103Reserves & surplus 4,237 5,014 6,005 7,284Shareholders’ equity 4,341 5,117 6,108 7,387Total equity & liabilities 5,992 6,708 7,710 8,996 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 1,158 994 1,209 1,496Depreciation 177 181 222 231Change in WC ‐161 303 ‐279 ‐279Cash flow from operating activities 1,174 1,478 1,151 1,448Capital expenditure ‐511 ‐993 ‐1,003 ‐241Misc Exp 58 0 0 0Cash flow from investing activities ‐454 ‐993 ‐1,003 ‐241Equity 305 0 0 0Dividends ‐217 ‐217 ‐217 ‐217Debt ‐963 ‐27 ‐49 ‐58Investments 0 0 0 0Cash flow from financing activities ‐876 ‐245 ‐267 ‐275Net chg in cash ‐156 240 ‐119 932Opening cash balance 427 271 512 393Closing cash balance 271 512 393 1,325 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 22.4 19.3 23.4 29.0Growth, % 28.6 (14.2) 21.6 23.8Book NAV/share (INR) 84.1 99.2 118.4 143.2FDEPS (INR) 22.4 19.3 23.4 29.0CEPS (INR) 25.9 22.8 27.7 33.5CFPS (INR) 22.1 27.5 21.0 26.5Return ratios Return on assets (%) 20.8 16.4 17.3 18.4Return on equity (%) 26.7 19.4 19.8 20.3Return on capital employed (%) 33.0 25.7 26.8 28.0Turnover ratios Asset turnover (x) 1.5 1.1 1.1 1.2Sales/Total assets (x) 1.3 1.0 1.0 1.0Sales/Net FA (x) 2.3 1.6 1.5 1.7Working capital/Sales (x) 0.2 0.3 0.3 0.3Receivable days 61.5 64.7 64.4 63.5Working capital days 88.9 94.4 93.6 92.1Liquidity ratios Current ratio (x) 7.1 7.5 6.9 8.8Quick ratio (x) 5.5 6.0 5.4 7.3Interest cover (x) 26.8 21.3 27.8 38.0Total debt/Equity (%) 15.0 12.2 9.4 7.0Net debt/Equity (%) 8.8 2.2 3.0 (10.9)Valuation PER (x) 17.6 20.5 16.9 13.6PEG (x) ‐ y‐o‐y growth 0.6 (1.4) 0.8 0.6Price/Book (x) 4.7 4.0 3.3 2.8EV/Net sales (x) 2.7 3.4 2.9 2.3EV/EBITDA (x) 11.1 12.1 10.0 7.9EV/EBIT (x) 12.3 13.5 11.3 8.7



Meghmani Organics Ltd (MEGH IN)

Ignored so far, but not for long INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

One of the leading manufacturers of caustic soda in India through recent expansion MEGH entered caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 with an investment of Rs 5.5bn, for a capacity of 119,000 MTPA at Dahej. In FY15, it expanded capacity by 40% to 167,000 MTPA, making it the fourth‐largest caustic‐chlorine‐flakes capacity in India (after Grasim Industry, Gujarat Alkali, and DCM Shriram). Expansion in the high‐margin caustic soda business to drive value growth MEGH is already one of the most efficient manufacturers of caustic soda with margins in the 31‐35% range led by its strategic location (in the middle of India’s highest‐consuming region ‐ Gujarat), captive power plant, and its usage of latest ‘membrane‐cell technology’ from Asahi Kasei Chemical Corporation, Japan. It has recently undertaken a brownfield expansion of caustic potash (21,000 tonnes) with a minimal investment of Rs 650mn (internal accruals). The new project is ready to commission in April 2016. With this, we estimate FY15‐18 sale/profits CAGR for its caustic operations (30% of sales) at 16%/27%. Pigment: Stable price and operating leverage to lead profitable growth MEGH is one of the largest phthalocyanine‐based pigment manufacturers in the world with a global volume market share of ~7%. Its vertically integrated facilities for CPC blue and end products such as pigment green and pigment blue give it a competitive advantage – the pigments are crude derivatives and their prices are relatively stable despite sharp correction in crude. Steady improvement in volumes and improving asset utilisation supplements value growth. We estimate 14% sales CAGR over FY16‐18, which will improve its plant utilisation to 54% (from current 36%) and lead profitable growth. Agrochemicals: Rising focus on branded business is the key MEGH has vertical integration in its agrochemicals business, which is largely dominated by intermediates and technical‐grade products (these constitute 65% of agrochemical sales). Exports of both technical and branded products in Africa, Brazil, LatAm, US, and European countries account for 70% of these sales. We expect healthy growth in its branded business based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India presence by expanding its branded distribution chain – at 2,370 stockists and distributors YTD FY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs 5.30bn. With lower crude prices, MEGH’s vertically integrated operation and improving asset utilisation will lead to profitable growth in agrochemicals. No incremental capex; 30% EPS CAGR over FY16‐18 Aggressive capex over the last five years (>Rs 5bn to fund its greenfield agrochemical and pigment plant in Dahej and to expand its caustic plant) has increased its leverage position to 1.2x of equity in FY15 (1.5x in FY14). However, it has no visible capex over the next two years. This, along with improving asset utilisation across all its segments and planned debt repayment (already repaid Rs 1.5bn since FY14 and plans to cut debt by >Rs 2bn), should lead to 30% earnings CAGR over FY15‐18 to Rs 1.01bn in FY18. Initiate coverage with a BUY and TP of Rs 40, implying upside of 100% Considering its diverse business profile, we value the company on SOTP. Taking into account its strategic positioning, expansion, and superior margin profile of over 30%, we value its caustic operation at 5x FY18 EV/EBITDA and the other two segments at 4x – arriving at a valuation of Rs 40.

BUY (Maintain) CMP RS 20 TARGET RS 40 (+100%) COMPANY DATA O/S SHARES (MN) : 254MARKET CAP (RSBN) : 5MARKET CAP (USDBN) : 0.152 ‐ WK HI/LO (RS) : 28 / 14LIQUIDITY 3M (USDMN) : 0.4PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 14PROMOTERS : 59.6 50.9 50.4FII / NRI : 1.0 0.9 0.9FI / MF : 0.2 0.1 0.1NON PRO : 12.1 6.4 4.8PUBLIC & OTHERS : 27.1 26.7 28.0 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 6.3 ‐12.9 33.2REL TO BSE ‐2.0 ‐10.9 43.4 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 12,605 14,363 15,725EBIDTA 2,710 2,944 3,145Net Profit 733 850 1,013EPS, Rs 2.9 3.3 4.0PER, x 6.9 6.0 5.0EV/EBIDTA, x 4.0 3.5 3.1P/BV, x 0.8 0.8 0.7ROE, % 12.2 13.0 14.0Debt/Equity (%) 99.6 87.2 68.8


050100150200250300350400


Meghmani BSE Sensex


MEGHMANI ORGANICS LTD INITIATING COVERAGE

About Meghmani • Almost 30 years old. MEGH began operations in 1986. • It is a leading manufacturer of pigments and pesticides in India. • One of the largest producers of pigment blue in the world, leading producer of

pigment green, and one of the largest producers of pesticides in India. • Proven management team – founders have +100 years collective experience in

pigments and pesticides. • More than 80% of its pigment products and +50% of pesticides are exported. • Four multifunctional production facilities in Gujarat (India) – of which three are

ISO 9001‐2000. Meghmani’s evolution

Business model


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Net Sales (Rs mn) PriceConverted into a Public Ltd. Co. in 1995

First Agro plant setup in 1995

Private Equity investment in MOL in 1997

Started Blue Pigment production at Panoli plant in 1996

Acquired Agro assets from Rallis in 2004

Got listed in Singapore in 2004

Got listed in India in 2007

Established MFL with IFC participation in 2007

Started production in MFL in 2009

Two new sites for Agrochem at Panoli and Dahej in 2009

New Pigment plant at Dahej SEZ in 2013

Expansion of CausticChlorine facility in 2014

Diversification into Caustic Potash in 2015

MEGH started operations in 1986

New Pigment plant setup at Panoli in 1996

Meghmani organics

Pigment (35% of sales)CPC blue, pigment green, pigment blue

Agrochemicals (33% of sales)Leading products Cypermethrin , 2,4‐D

Acid, Permethrin Tech, MPB

Basic Chemicals (30% of sales)Caustic soda, chlorine and caustic

potash

• Expanded caustic‐chlorine capacity to 476 TPD from 340 TPD • Uses fourth generation membrane cell Technology from AKCC (Japan)• Fourth largest caustic chlorine flakes capacity in India• 34% sales CAGR over last the last five

• Global client base with ~70% business from exports• Well known brands such as Megastar, Megacyper, Megaban, Synergy, Courage• Muted 1% sales CAGR over the last five years

• Market Leadership in blue pigment with ~7% global market share• Global presence with ~80% of pigment revenue from exports• Long‐term client relationships with 90% business from repeat clients • Muted 9% sales CAGR over the last five years



Investment rationale

Basic chems: High margin + expansion = value growth One of the leading manufacturers of caustic soda in India MEGH entered the caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 with an investment of Rs 5.5bn for a capacity of 119,000 MTPA at Dahej. It expanded capacity by 40% in FY15 to 167,000 MTPA, making it the fourth largest caustic‐chlorine‐flakes capacity in India (after Grasim Industries, Gujarat Alkali, and DCM Shriram). As a result, its current product portfolio includes caustic soda, chlorine, and hydrogen. Basic chemicals has been the fastest growing segment for MEGH, delivering 34% sales CAGR over the last five years (primarily led by capacity expansion) to touch Rs 3.31bn in FY15; 10% yoy growth YTD FY16. Caustic soda sees expansion led growth MEGH has one of top four caustic capacities in India

Source: Company, PhillipCapital India Research Estimates Conducive industry scenario supplements growth Caustic soda has a wide range of industrial applications – in pharmaceuticals, soaps and detergents, PVC, chemicals, and textile manufacturing. Steady growth in end‐user industries ensures demand growth for caustic soda. With 4mn tonnes of caustic soda capacity, India accounts for just ~5% of the world market. With domestic capacity remaining static, domestic demand has been fed by imports (that saw 15% CAGR over the last five years). Imports of caustic soda account for 12% of domestic demand. The price of caustic soda has stayed comfortably stable over the last few years –international and domestic market prices move in tandem. Caustic soda price is not linked to crude prices.

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Basic chemicals has been the fastest growing segment for MEGH



India contributes 4% of world capacity Indian caustic soda capacity is optimally utilised already

Import dependancy of caustic soda is increaseing Domestic/global prices of causitc soda are comfortably stable

Casustic soda application in different end‐user industries

Source: chemicals.nic.in, PhillipCapital India Research

India (mn TPA), 4

China (mn TPA), 28

Others (mn TPA), 49

Global Caustic soda production (mn TPA)

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Global Caustic Soda Price Index (rhs)

Pulp & Papers16%

Alumina 17%

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Polycarbonate)17%

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STPP)10%

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Textile9%

Water Treatment3%

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Caustic soda consumption in India



High margin due to backward integration and better technology It is one of the most efficient manufacturers of caustic soda with an integrated captive power plant that uses the latest fourth‐generation ‘membrane cell technology’ from Asahi Kasei Chemical Corporation, Japan (one of the most established technology providers for chlor‐alkali products). Strategic location is a big advantage MEGH’ Dahej facility is strategically located within an industrial area that is close to the Dahej port; this eases imports of coal, and more importantly, provides proximity to customers (i.e., chemicals manufacturers). Capability of supplying caustic and chlorine by pipeline to selected buyers helped MEGH to reduce logistics costs substantially. MEGH’s Dahej plant strategically located within an industrial area

Source: PhillipCapital India Research Capacity expansion to drive value growth Considering the flourishing chemical industry in Gujarat led by the most successful petroleum, chemical and petrochemicals investment region (PCPIR) and rising demand for caustic soda there, MEGH is in the middle of a brownfield caustic potash expansion in Dahej. It has set up a plant with 21,000 tonnes capacity with a minimal investment of Rs 650mn (internal accrual) in FY16. Its captive power plant will meet the electricity requirement. We believe the expansion in this highest‐margin segment would lead to optimal utilisation of existing resources and drive value growth. We estimate basic chemical sales CAGR of 18% over FY15‐18 that would raise its revenue contribution to 30% and would drive value growth for MEGH.



Enhanced capacity will reach optimum level on strong demand of caustic soda

Sees capex led sales growth Causitc soda enjoys operating profit margin >30%


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Pigment: An established global business Leading global player in phthalocyanine pigments industry MEGH is one of the largest phthalocyanine‐based pigment manufacturers in India and among the top‐three players in the world, with a global market share of ~7% in terms of volume. The global phthlocyanine pigments market is estimated at ~US$ 1‐1.25bn –20% of the total organic pigment market – and it is expected to maintain steady growth. MEGH’s pigment business is vertically integrated and manufactures and markets various grades of pigment green, pigment blue, and CPC blue – an upstream product sold to other pigment manufacturers. US leads the export market for its pigments business Beta and CPC are MEGH’s leading products

Source: Company, PhillipCapital India Research These pigment products are used in multiple applications including paints, plastics, and printing inks. Thanks to the steady growth in these sectors (which together account for 90% of end use), pigments is a steady play for MEGH – it has delivered 9% sales CAGR over the last five years to touch Rs 3.68bn in FY15; 6% yoy growth YTD FY16. The pigment division derives ~80% of its net sales from exports with leading customers including Sun‐DIC, Flint Group, Akzo Nobel, DuPont, and PPG Industries. MEGH’s expertise and high‐degree customisation has helped it to develop long‐term client relationships resulting in 90% business from repeat clients. It has a global network with ~70 distributors. Its direct presence (with subsidiaries in the US, Europe, Indonesia, Dubai and representative office in China) helps it to have a front‐end presence and ability to work closely with end‐user customers. MEGH also has warehouses in Belgium, Turkey, Russia, USA, and Uruguay. Stable price and operating leverage to lead profitable growth Pigments are crude derivatives and pigment prices are relatively stable despite sharp correction in crude prices. Additionally, steady improvement in volumes as well as improving asset utilisation supplements value growth. MEGH has three dedicated manufacturing facilities with a consolidated capacity of 311,000 tonnes in Gujarat, which operated at a utilisation of 33% in FY15 and ~37% in FY16. We see 14% sales CAGR over FY16‐18, which should improve utilisation to 54%, leading to profitable growth.

US 32%

India 18%Asia 17%

South America 14%

Europe 11%

Others 8%

Pigment Net sales by country mix (%) as FY15

Beta 39%

CPC 28%

Pigment Green 7 20%

Alpha 11%

Others 2%

Pigment Net sales by product mix (%) as FY15

Largest phthalocyanine‐based pigment manufacturers in India and among the top‐three players in the world



MEGH’s leading product phthalocyanine maintained its prices despite crude fall

Source: PhillipCapital India Research Pigment capacity utiliation to see gradual ramp‐up Pigment sales growth to remain stable over FY15‐18


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Agrochemicals: Integrated; seeing rising branded play MEGH is one of the leading vertically‐integrated agrochemicals players in India, with product offerings covering the entire value chain – intermediate, technical grade, and formulation (bulk and branded). Its integration allows it to effectively manage raw materials costs and assures a constant and consistent quality supply. Largely dominated by intermediates and technical‐grade products MEGH’s agrochemical business is largely dominated by intermediates and technical‐grade products – 65% of its agrochemical sales. It produces commonly used pesticides for crop‐ and non‐crop applications such as public health and in insect control in wood preservation and food‐grain storage. In branded formulations, it has a strong pan‐India presence with about 2,370 stockists, agents, distributors, and dealers (major expansion from 1,000 in 17 states in India in FY15). India still the largest market for MEGH Branded portfolio will drive growth ahead

Source: Company, PhillipCapital India Research It has a strong global clientele base with exports contributing to about 70% of its agro‐chemical sales. It exports technicals as well as branded products to Africa, Brazil, LatAm, US, and European countries. Rising focus on branded business to drive growth MEGH’s agrochemical sales saw moderation in FY16, both domestic and exports. While the on‐going global slowdown impacted international sales, unfavourable climate in India slowed domestic sales. We expect healthy growth in its branded business based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India presence by expanding its branded distribution chain – at 2,370 stockiest and distributors YTDFY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs 5.3bn. With lower crude prices, MEGH’s vertically integrated operation and improving asset utilisation will lead to profitable growth in agrochemicals.

India 30%

Europe 7%Africa 6%

South America 6%

Others 51%

Agrochemicals Net sales by country mix (%) as FY15

Branded 27%

Cypermethrin Tech‐Z 20%

2,4‐D 8%Bulk 8%

Others 37%

Agrochemicals Net sales by product mix (%) as FY15

Intermediates and technical‐grade products constitute 65% of its agrochemical sales. Major products include 2,4‐D, cypermethrin, permethrin, metaphenoxy benzaldehyde, chlorpyrifos, and profenophos. Key brands include Megastar, Megacyper, Megaban, Synergy, Courag



Focus on branded portfolio will drive value growth EBITDA margin to remain at 18‐19%


No major capex over FY16‐18; 30% EPS CAGR MEGH has continuously added capacities across all business verticals in the last five years – it has invested >Rs 5bn (to fund its greenfield agrochemical and pigment plant in Dahej and in expanding its caustic plant), which has increased its leverage position to 1.2x of equity in FY15 (was 1.5x in FY14). With no visible capex over next two years, improving asset utilisation across all its segments, and planned debt repayment (already repaid Rs 1.5bn since FY14 and targets to cut debt by >Rs 2bn), we estimate 30% earning CAGR over FY15‐18 to Rs 1.01bn in FY18. Visible sweating of assets Financial deleveraging to improve earnings performance


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Financial performance Basic chemicals (Caustic Soda) see relatively faster growth Amt in Rs mn FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18EPigment 3149 2657 2609 3333 3657 3995 4564 5214% yoy growth 32 ‐16 ‐2 28 10 9 14 14% to sales 31 25 25 28 28 32 32 33Agro Chemicals 4373 3974 3398 3967 4354 4046 4588 5301% yoy growth 7 ‐9 ‐14 17 10 ‐7 13 16% to sales 43 37 32 34 34 32 32 34Basic Chemicals 1572 2339 2885 2624 3308 4018 4898 5099% yoy growth 109 49 23 ‐9 26 21 22 4% to sales 15 22 27 22 26 32 34 32Others 1154 1480 1511 1646 1359 1223 1101 991% yoy growth 21 28 2 9 ‐17 ‐10 ‐10 ‐10% to sales 11 14 14 14 11 10 8 6Total sales 10247 10622 10585 11783 12942 12605 14363 15725% yoy growth 26 4 0 11 10 ‐3 14 9 Steady revenue growth 30% earning CAGR over FY15‐18

Source: PhillipCapital India Research No major capex in the near future; improves asset efficiency Strong Cash generation over FY15‐18


3.15 2.66 2.61 3.33 3.66 4.00 4.56 5.21

4.37 3.97 3.403.97 4.35 4.05

4.595.301.57 2.34 2.89

2.623.31 4.02

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Valuations and outlook Over FY15‐18, we estimate MEGH to deliver revenue CAGR of 7% to touch Rs 15.7bn in FY18 (primarily due to lower crude) and profit CAGR of 30% to touch Rs 1.13bn. Margins should see an expansion of over 400bps to around 20%. While expansion in the higher‐margin caustic operation will boost efficiency, improving asset utilisation in agrochemicals and pigments will lead earning growth. Considering diverse business profile of MEGH’s segments, we value the company on an SOTP basis. Looking at the strategic positioning, expansion, and superior margin profile of over 30%, we value its caustic operations at 5x FY18 EV/EBITDA. We value agrochemicals and pigments at 4x FY18 EV/EBITDA, considering likely recovery in agrochemicals and steady growth profile coupled with its global positioning in pigments. We arrive at a value of Rs 40 and initiate coverage with a BUY rating. Particulars (Rs mn) FY18 EBITDA Target Multiple (x) ValuePigment EBITDA 834 4 3337Agrochemicals EBITDA 795 4 3181Basic chemicals EBITDA 1581 5 7904Enterprise Value (RS mn) 14421Net debt (Rs mn) 4695Mcap (Rs mn) 9727No of shares (mn) 254Target Price (Rs) 40CMP (Rs) 20Upside 100%



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Operating leverage to strengthen ROCE Financial deleveraging powers earnings

Source: Company, PhillipCapital India Research Estimates Downside risk to valuation:

• Increase in Chinese competition (particularly in agrochemicals and pigments) led by yuan devaluation can hurt growth.

• Further extension of weak agricultural environment in India as well as globally impact growth as well as profitability

• Any price competition in caustic soda either due to new capacity or cheaper imports could hit profitability

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Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 12,942 12,605 14,363 15,725Growth, % 10 ‐3 14 9Other income 0 0 0 0Total income 12,942 12,605 14,363 15,725Raw material expenses ‐7,640 ‐6,680 ‐7,756 ‐8,570Employee expenses ‐725 ‐756 ‐862 ‐943Other Operating expenses ‐2,545 ‐2,458 ‐2,801 ‐3,066EBITDA (Core) 2,031 2,710 2,944 3,145Growth, % 3.7 33.4 8.6 6.8Margin, % 15.7 21.5 20.5 20.0Depreciation ‐747 ‐811 ‐869 ‐897EBIT 1,284 1,899 2,076 2,248Growth, % 11.0 47.9 9.3 8.3Margin, % 9.9 15.1 14.5 14.3Interest paid ‐746 ‐638 ‐627 ‐548Other Non‐Operating Income 64 63 72 79Non‐recurring Items ‐11 0 0 0Pre‐tax profit 591 1,324 1,521 1,778Tax provided ‐131 ‐344 ‐395 ‐462Profit after tax 460 980 1,125 1,316Others (Minorities, Associates) ‐21 ‐247 ‐275 ‐303Net Profit 439 733 850 1,013Growth, % 93.0 62.9 16.1 19.2Net Profit (adjusted) 450 733 850 1,013Unadj. shares (m) 254 254 254 254Wtd avg shares (m) 254 254 254 254 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 156 305 398 286Debtors 3,167 3,108 3,542 3,877Inventory 2,158 2,107 2,400 2,628Loans & advances 1,379 1,489 1,608 1,737Other current assets 363 400 440 484Total current assets 7,223 7,408 8,387 9,012Investments 179 179 181 256Gross fixed assets 13,035 13,815 14,275 14,685Less: Depreciation ‐5,221 ‐6,032 ‐6,900 ‐7,798Add: Capital WIP 229 150 120 125Net fixed assets 8,043 7,933 7,494 7,012Total assets 15,444 15,520 16,062 16,279Current liabilities 1,774 1,818 2,050 2,238Provisions 305 335 369 406Total current liabilities 2,079 2,153 2,418 2,644Non‐current liabilities 6,907 6,436 6,167 5,451Total liabilities 8,985 8,589 8,586 8,095Paid‐up capital 254 254 254 254Reserves & surplus 5,261 5,734 6,278 6,986Shareholders’ equity 6,459 6,932 7,476 8,183Total equity & liabilities 15,444 15,520 16,062 16,279 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 439 733 850 1,013Depreciation 747 811 869 897Change in WC 498 38 ‐621 ‐511Cash flow from operating activities 1,684 1,582 1,098 1,400Capital expenditure ‐490 ‐702 ‐431 ‐416Misc Exp 124 0 0 0Cash flow from investing activities ‐366 ‐702 ‐431 ‐416Equity 0 0 0 0Dividends ‐254 ‐259 ‐305 ‐305Debt ‐1,108 ‐471 ‐268 ‐716Investments ‐173 0 ‐2 ‐75Cash flow from financing activities ‐1,535 ‐731 ‐575 ‐1,096Net chg in cash ‐217 149 93 ‐112Opening cash balance 373 156 305 398Closing cash balance 156 305 398 286 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 1.8 2.9 3.3 4.0Growth, % 93.0 62.9 16.1 19.2Book NAV/share (INR) 21.7 23.5 25.7 28.5FDEPS (INR) 1.8 2.9 3.3 4.0CEPS (INR) 4.8 6.1 6.8 7.5CFPS (INR) 6.9 6.9 5.1 6.4DPS (INR) 0.8 0.9 1.0 1.0Return ratios Return on assets (%) 5.8 9.0 9.6 10.2Return on equity (%) 8.2 12.2 13.0 14.0Return on capital employed (%) 6.7 10.1 11.0 11.8Turnover ratios Asset turnover (x) 0.9 0.9 1.1 1.2Sales/Total assets (x) 0.8 0.8 0.9 1.0Sales/Net FA (x) 1.6 1.6 1.9 2.2Working capital/Sales (x) 0.4 0.4 0.4 0.4Fixed capital/Sales (x) ‐ ‐ ‐ ‐Receivable days 89.3 90.0 90.0 90.0Inventory days 60.9 61.0 61.0 61.0Payable days 48.0 53.5 52.8 52.5Working capital days 149.3 153.0 151.0 150.6Liquidity ratios Current ratio (x) 4.1 4.1 4.1 4.0Quick ratio (x) 2.9 2.9 2.9 2.9Interest cover (x) 1.7 3.0 3.3 4.1Dividend cover (x) 2.1 3.4 3.3 4.0Total debt/Equity (%) 116.7 99.6 87.2 68.8Net debt/Equity (%) 113.9 94.5 81.1 64.8Valuation PER (x) 11.3 6.9 6.0 5.0PEG (x) ‐ y‐o‐y growth 0.1 0.1 0.4 0.3Price/Book (x) 0.9 0.8 0.8 0.7Yield (%) 4.1 4.3 5.0 5.0EV/Net sales (x) 0.9 0.9 0.7 0.6EV/EBITDA (x) 5.6 4.0 3.5 3.1EV/EBIT (x) 8.9 5.7 5.0 4.4



Camlin Fine Sciences (CFIN IN) Vertical integration to drive value growth INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

Well positioned in the niche business of global synthetic antioxidants CFIN is an established global leader of food‐grade synthetic antioxidants (market size of ~US$200mn, particularly in Tert‐butylhydroquinone (TBHQ) and Butylatedhydroxyanisole (BHA). CFIN has 60% market share (capacity) with TBHQ/BHA capacity of 3600/2400tpa. CFIN’s antioxidants sales in FY15 were Rs 3.11bn, implying a blended market share of about 50% in TBHQ and BHA. We estimate CFIN’s antioxidants business to maintain 19% CAGR over FY15‐18 to Rs 5.2bn. Entry into blends of antioxidants to add value Having established global leadership in antioxidants, CFIN is moving forward in blending (which may not be appreciated by its customers) by setting up a small unit in Tarapur, India and a unit in Brazil (with a capacity of 3720tpa) in FY16. Its strategic acquisition of a 65% stake in a Mexico‐based blender,DresenQuimica(Dresen), in February 2016 should expedite its progress into the high‐margin operation of blends of antioxidants. We believe the Dresen acquisition will be EPS accretive in FY17. Performance chemicals: Capacity expansion to drive rapid growth Its acquisition of Italy‐based Borregaard’s catechol operation in FY12 marked its entry into performance chemicals and made CFIN the second global manufacturer of catechol after Solvay. The acquisition also provided access to catechol‐based downstream products. To cater to rising user industry demand, CFIN has doubled its guaiacol capacity to 4000tpa and raised veratrol capacity by 67% to 1000tpa in FY16 – this will lead to 17% sales CAGR over FY15‐18 to Rs 2.04bn. Aromatics: A strategic move towards high‐value downstream products, but futuristic CFIN ventured into the aromatics segment in FY14 to manufacture and market strategic downstream products of guaiacol (one of its performance chemical product) such as vanillin, ethyl vanillin, and other aromatic compounds. Chinese players dominate the vanillin market (global demand of 20,000MTPA). However, with CFIN’s complete backward‐integrated operation (with full control over intermediate product guaiacol, and basic raw material catechol) it has positioned itself as a quality global vanillin player. Additionally, its catechol‐guaiacol based vanillin is a preferred product in advanced markets of US/EU compared to that of Chinese players (made out of toluene) due to quality/health hazard concerns. Currently, CFIN’s aromatic sale is miniscule with ~1% contribution and we believe scale up of aromatics will lead value progress of CFIN, but it would be futuristic. Green field CAPEX of Rs2.5bn ensures growth beyond FY18 Targeting scale and cost advantage, CFIN has planned major greenfield capex of ~Rs 2.5bn (highest till date for CFIN) in Dahej with an integrated manufacturing base for hydroquinone (basic raw material of antioxidants), catechol(basic raw material of performance/aromatic products), and vanillin. CFIN expects to complete and commission the project by the end of FY17 and drive growth from FY18. However, we have not built any revenues from the new project in FY18 – this could provide more upside to our estimates. Valuations yet to capture the visible value growth; initiate BUY with TPRs 135 We estimate CFIN to deliver revenue and profit CAGR of 15% and 22% over FY16‐18. At CMP of Rs 88, the company trades at 11x FY18 EPS and 7x FY18E EV/EBITDA. Considering CFIL’s forward move into high‐margin antioxidant blends and vanillin and its strong operating/financial efficiency (with 30% ROE, 26% ROCE), we value CFIN at 9x FY18 EV/EBITDA (i.e., same multiple assigned to Aarti Industries) at Rs 135 – implying an upside of 54%. Initiate coverage with a BUY rating.



Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 5,044 6,928 8,717EBIDTA 872 1,275 1,648Net Profit 366 584 746EPS, Rs 3.8 6.1 7.8PER, x 23.1 14.4 11.3EV/EBIDTA, x 10.9 8.4 7.0P/BV, x 5.1 3.8 2.9ROE, % 22.0 27.7 27.7Debt/Equity (%) 96.4 123.9 132.1


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CAMLIN FINE SCIENCES INITIATING COVERAGE

About the Company • CFIN came into existence after its demerger from Camlin Ltd in December 2006.

It is the leading manufacturer of food‐grade antioxidants in the world. • CFIN’s business can be categorised into three broad segments– antioxidants,

aroma, and performance chemicals. • Entered into performance chemicals segment with the acquisition of Borregard

and become one of the largest producers of di‐phenols (hydroquinone and catecole).

• Sophisticated R&D ability. • Recently entered in to new aroma segment with products like vanillin. • It has largest ever capex of – ~Rs 2.5bn in Dahej– for an integrated greenfield

plant to manufacture hydroquinone, catecole and vanillin, which will drive value growth for the company.

Evolution of Camlin

Business model


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Revenue (Rs Mn) (rhs) Share Price (Rs)

Listing on BSE India and shifted focus to Antioxidant business of manufacturing TBHQ and BHA

Ramp‐up in Antioxidant business with launch of TBHQ and BHA

Became world's largets producer of Food antioxidants ‐TBHQ and BHA

R&D for other forward intetigrated products (under pilot trial) like ASB, PDMB etc

Acquired CFS Europe S.PA (Borregaard Italia). Backward integration forDiphenols ‐Hydroquinone (3600MTPA) Catechol (4400 MTPA

Launched business vertical perfromance chemicals with a wide range of chemicals like Guaiacol, Veratrole, TBC and MEHQ

Launched Aroma and Flavoring chemcials with products like Vanillin/ Ethyl VanillinStock Split From Rs.10/‐ to Rs.2/‐

Started value‐added customised blends in ‐ Tarapur and BrazilSucessfully deblottle neck Europe facility Announced largest ever capex in last 10 yeras of Rs 230‐250cr Stock Split From Rs.2/‐ to Rs.1/‐Got Listed on NSE

Demergdedfrom Camlin Group

Camln Fine Sciences

Antioxidants ~56% of sales

Performance Chemicals~23% of sales

Aromatics; New segment contributes ~1% of sales

• Products‐ Hydroquinone base derivative products like ‐ Tertiary Butyl Hydroquinone (TBHQ), Butyl Hydroxyl Anisole (BHA), Ascorbyl Palmitate (ASP)• Global leader in feed and food antioxidant industry • TBHQ leading products with ~45%and BHA with ~70% market share• Recently expanded capacity for both TBHQ and BHA• Acquired 65% stake in Dresen (Mexico) for blends operation

• Products ‐ Catecol base derivatives products like ‐ Guaiacol, Veratrole, Tertiary Butyl Catechol (TBC), Mono Methyl Ether (MEHQ) and PDMB• Entered into business with acquisition of Italy base Borreggard, which is also a backward integration for its Catecol requirement• Expanding the facility for Guaicol for forward integration of aromatics

• Products ‐ Guaiacol base ‐ Vanillin and Ethyl Vanillin• Planned ~Rs 250cr capex for green field project at Dahej (Gujarat) • Planned capacity (tonnes) Hydroquinone‐9000, Catechol 6000 and Vanillin 6000• Higher realisation and limited competition space

European Subsidiary (Boreggard, Italy)~20% of sales

• Capacity for Hydroquinone and Catecole ‐ basic raw materials for Camlin's product line• Acquired in 2011 for backward integration • Camlin procures ~60‐70% of its di‐phenol requirement; remainingvolume for external sales in developed markets. Operates at ~85% utilisation • Planned capacity (tonnes) Hydroquinone‐ 5000 and Catechol ‐6000



Investment Rationale Antioxidants: Niche business; value growth from move to blends Established global leader in food‐grade antioxidants Antioxidants are chemicals that prolong the shelf life of end products by protecting them against deterioration caused by oxidation. They have a wide application in pharmaceuticals, food & beverages, feed additives, and cosmetics industry. These are largely classified into two types– (1) natural antioxidants and (2) synthetic antioxidants –on the basis oftheir manufacturing. Natural antioxidants like ‐ beta‐carotene, lutein, lycopene, selenium, vitamin A/C/E, and rosemary are extracted from vegetables and fruits. On the other hand, synthetic antioxidants are chemicals derivatives like butylatedhydroxytoluene(BHT) butylatedhydroxyanisole(BHA), tert‐butylhydroquinone(TBHQ), and propyl gallate. CFIN’s antioxidant products portfolio is derived from phenols and falls under the synthetic antioxidant segment. While the growing demand for organic products in the advanced markets boosts demand for natural antioxidants, relatively low prices have resulted in growing popularity of synthetic antioxidants. Steady growth in antioxidants market over next five years

Source: PhillipCapital India Research As per industry sources, the global antioxidant market was valued at ~US$ 2.25bn in 2014. While the synthetic antioxidant market was ~US$ 1.35bn (i.e. 60% of total), natural antioxidants were valued at US$ 900mn. Out of the total synthetic antioxidant market, food‐grade accounted for ~15% at US$180mn and this is the area of focus for CFIN. TBHQ and BHA lead the food grade antioxidant market The key synthetic antioxidants products include Butylatedhydroxytoluene (BHT), Butylatedhydroxyanisole (BHA), and Tert‐butylhydroquinone (TBHQ) – those put together account for 80‐90% of the total synthetic antioxidants market in the world. Food‐grade antioxidant market is largely dominated by TBHQ and BHA with about 60% share. CFIN is the established global leader in TBHQ and BHA with a revenue of Rs 3.11bn in FY15, implying a blended market share of about 50%. BHT is largely an animal‐feed‐oriented antioxidant.

Geographically, Asia Pacific accounts for ~35% of the total food antioxidants market, followed by US and Europe. Asia is expected to be the fastest growing one, primarily India and China, led by the high feed wastage because of the oxidation process due to the humid climate.

CFIN is the established global leader in TBHQ and BHA with a revenue of Rs 3.11bn in FY15, implying a blended market share of about 50%.



Limited competition helped CFIN become a global leader in participating antioxidants The global antioxidant market is well represented by biggies such as Eastman and Solvay, and many fringe Chinese and Indian players. While most antioxidant production by biggies is for captive consumption, fringe players are largely local with no global clout, quality, or scale. Global scenario of TBHQ and BHA manufacturer Manufacturer (TBHQ/BHA) Capacity (TPA) Comments Indian Players Camlin Fine sciences ~6000 Largest manufacturer and market leader Nova International <500 No major focus on antioxidant business Milestone preservatives 500 Core antioxidant player but with limited capacity ShevalynMultichem <500 No major focus on antioxidant business VDHChemtech NA No major focus on antioxidant business Crystal Quinone <500 No major focus on antioxidant business Global players Solvay NA Large capacity but major focus on captive consumption Eastman Aeci China Players Guangzhou Taibang NA Lower capacity compare to CFIN but no major focus on antioxidant business Guangdong Food Industry Institute 1000 Welbon NA Yurui (Shanghai) Chemical Co., Ltd NA

Source: PhillipCapital India Research Leveraging its global reach and strong clientele, CFIN gradually expanded its antioxidant capacity and emerged at the leading global player in food‐grade antioxidants, including TBHQ and BHA. Camlin is one of the largest manufacturers of TBHQ and BHA Antioxidants as on FY16 Camlin's Capacity (TPA) Global demand (TPA) Expected annual growth (%) Global market Share (%)Tert‐Butyl Hydroquinone (TBHQ) 3600 6000 3 45Butylated Hydroxyanisole (BHA) 2400 4000 3 70

Source: Company, PhillipCapital India Research With a global demand of ~6000TPA, TBHQ is a leading antioxidant followed by BHA, which has a global demand of ~4000TPA – both growing at ~3‐4% annually. Other antioxidants such as BHT, Ascorbyl Palmitate (ASP), and Ethoxyquin antioxidants are comparatively smaller, but are projected to grow at a CAGR of 4.6% in the next five years. Having TBHQ capacity of 3600tpa (2400tpa in FY15) and BHA capacity of 2400tpa (2000tpa in FY15), CFIN leads the global market with 60% market share. Integrated model in antioxidants is the key to CFIN’s profitable growth CFIN started its antioxidant operations in 2006 just as a manufacturer of TBHQ and BHA and gradually scaled up operation to become a global leader by FY10. CFIN used to import hydroquinone (HQ) (ingredient for TBHQ/BHA) from Borregaard, Rohdia, and Chinese players until FY12. Its strategic acquisition of HQ operation of Borregaard (along with Catechol) in FY12 backward‐integrated its antioxidant operation and ensured global leadership and profitable growth. Entry into blends of antioxidants to add value Although antioxidants have a wider application in pharmaceuticals, food & beverages, feed additives, and cosmetics, the blenders of various antioxidants (as required by the user industries) play a key intermediary role between antioxidant manufacturers and food/feed processing industries. Incidentally, blenders of antioxidants enjoy better margin vs. manufacturers, supported by their last‐mile connect with user industries.



Having established global leadership in antioxidants, CFIN is moving forward in blending (which may not be appreciated by its customers who are largely blenders) by setting up a small unit in Tarapur, India and a unit in Brazil (with a capacity of 3720tpa) in FY16. Its strategic acquisition of a 65% stake in a Mexico‐based blender, DresenQuimica (Dresen), in February 2016 should expedite its progress into the high‐margin operation of blends of antioxidants. We believe the Dresen acquisition will be EPS accretive in FY17. Acquisition of Dresen to expedite its progress in blends and would be EPS accretive In February 2016, CFIN entered into share‐purchase agreements to acquire 65% stake in DresenQuimica (Mexico) along with its group companies. Dresen is engaged in manufacturing and distributing antioxidant blends in Mexico, Peru, and other Latin American markets. It has a large products portfolio of blends, strong distribution channels with market knowledge, and proprietary process/technology. Additionally, Dresen’s presence (proximity to America,a leading blends market) is the key reason for the acquisition. As a strategy, CFIN expects to leverage Dresen’s technology and market‐understanding coupled with its strong positioning in antioxidants for penetrating the US blends market soon. Dresen will be EPS accretive from FY17 only Particulars (Rs mn) FY17E FY18ERevenue to camlin 980 1568To EBITDA 204 329% addition to Camlin's EBITDA 2.9 3.8To PAT 98 157MI 23 55Incremental PAT to Camlin 75 102% addition to Camlin's PAT 12.9 13.7

Source: Company, PhillipCapital India Research Estimates Dresen had sales of ~US$ 14.8mn with a margin of >20% in 2014 and grew about ~20% in 2015. Considering CFIN’s strategic expansion plan into USA, we build sales CAGR of 17% for Dresen over FY16‐18 to Rs 1.57bn. We believe that the Dresen acquisition will be EPS accretive in FY17 itself. Antioxidant revenue mix will see value growth from blends opertation

Source: Company, PhillipCapital India Research Estimates With this acquisition, the antioxidant business would see a lift, volume and value, soon. We estimate CFIN’s antioxidants business to maintain 19% CAGR over FY15‐18 to Rs 5.2bn.

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CFIN expects to leverage Dresen’s technology and market‐understanding coupled with its strong positioning in antioxidants for penetrating the US blends market soon.



Performance chemicals: Relatively new; expansion to drive growth Acquisition of Borregard marked CFIN’s entry into performance chemical To backward‐integrate its antioxidants business, CFIN acquired the HQ and catechol operation of Borregaard in FY12. The acquisition of catechol marked its entry into performance chemicals. This acquisition made CFIN the second global manufacturer of catechol after Solvay. Acquisition also provided access to catechol‐based downstream products including guaiacol, varatrole, TBC, and hydroquinone mono methyl ether (HQMME). These products have a wide range of applications in industries such as pharma, agrochemicals, flavour and fragrance, dyestuff, and acrylates. This division currently contributes ~23% to sales. Acquisition of Borregard marked CFIN’s entry into performance chemical

Source: Company, PhillipCapital India Research Multiple capacity expansions to boost With visible huge demand in global market for performance chemicals, CFIN has doubled guaiacol capacity to 4000tpa (2000tpa in FY15) and raised veratrol capacity by 67% to 1000tpa in FY16. Seeing steady progress in user industries, limited competition and capacity expansion by CFIN, we estimate 17% sales CAGR over FY15‐18 to Rs 2.04bn. Performance chemicals growth momentum to continue over strong global demand Products (Performance chemicals as on FY16) CFIN's Capacity

(TPA)Global demand

(TPA)Expected annual

growth (%)Hydroquinone Mono Methyl Ether (HQMME) 1200 6000 4Veratrole 1000 2000 5TBC 1200 5000 10Guaiacol 4000 50000 4 Performance chemicals will have strong growth in visible future


Camlin Fine Sciences

Borregaard, Italy

Backward integration with acquisition of Borregaard Chmeicals in March‐2011

Hydroquinone (5000 MTPA)

Catechol (6000 MTPA)

Antioxidants

Perfromance Chemicals

Guaiacol (2000 MTPA)

Veratrole (600 MTPA)

TBC (1200 MTPA)

MEHQ (100 MTPA)

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Aromatics: Strategic move to high‐value downstream, but futuristic With acquisition of Borregaad, the company has access to guaiacol, which is the basic raw material for producing vanillin and ethyl vanillin. Therefore, CFIN has recently ventured into the aromatics segment in FY14 with an objective to manufacture and market strategic downstream products of guaiacol such as vanillin, ethyl vanillin, and other aromatic compounds. Vanillin market, with global demand of 20,000 MTPA, is dominated by Chinese players. However, with CFIN’s completely backward‐integrated operation (full control over intermediate product guaiacol and basic raw material catechol) it has positioned itself as a quality global vanillin player. Additionally, CFIN’s catecho‐guaiacol‐based vanillin is preferred in advanced markets (US/EU) over the Chinese‐made product (made of toluene) due to quality/health hazard concerns from the food industry. Currently, CFIN has a pilot plant with a capcity of 300tpa in Tarapur, India, and it is setting up a greenfield facility of vanillin with a capacity of 6000tpa in Dahej, which will drive profitable growth from FY18. As of now, Fin’s aromatic sales are miniscule (with ~1% sales contribution); we believe aromatic initiatives will certainly lead to value progress, but it would be a futuristic. Aroma segment will have gradual pick‐up

Source: Company, PhillipCapital India Research Estimates A well‐planned mega CAPEX ensures growth beyond FY18 Targeting scale and cost advantage, CFIN has planned major green‐field capex of ~Rs 2.5bn (highest till date for CFIN) in Dahej (Gujarat) with an integrated manufacturing base for hydroquinone (basic raw material of antioxidants), catechol (basic raw material of performance/aromatic products), and vanillin. The targeted capacities include hydroquinone (9000mtpa), catechol (6000mtpa), and vanillin (6000mtpa). Currently, it sources hydroquinone and catechol from its Europe plant and other international players. The new capex will offer full backward integration and move it forward to high‐value vanillin. The expansion would be funded 30% from internal accruals and the rest from ECB financing. CFIN is currently in the process of getting environmental clearance for its new project and expectsit to be complete and commissioned by the end of FY17, which would drive growth from FY18. However, we have not built any revenues from the new Dahej project in FY18 and this could provide more upside to our estimates.

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We have not built any revenues from the new Dahej project in FY18 and this could provide more upside to our estimates.



Enhanced capacity with Dahej Plant will drive growth FY18 onwards

Source: Company, PhillipCapital India Research Dahej to integrate Camlin’s operation backward as well as forward


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Financial performance Sales to see 16% CAGR over FY15‐18E Vertical integration expands margin

Assets turnover remain healthy despite Highest ever CAPEX Greenfield Dahej plant raise debt position but remain in comfortable zone

Superior return ratios over FY15‐18E Robust earnings growth


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Valuation and outlook We estimate CFIN to deliver sales/profit CAGR of 15% and 22% over FY15‐18 to touch Rs 8.5bn/739mnin FY18E. While antioxidants would see value progress led by its entry into blends, the performance chemicals would see capex‐led growth in the near future. Additionally, CFIN’s mega expansion with planned commissioning by the end of FY17 would provide incremental upside to our estimates. At a CMP of Rs 88, CFIN trades at 11x FY18 EPS and 7x EV/EBITDA. Considering CFIL’s move into high‐margin antioxidant blends and vanillin as well as its strong operating/financial efficiency (with 29% ROE/26% ROCE), we value CFIN at 9x FY18 EV/EBITDA (i.e., same multiple assigned to Aarti Industries) to Rs135– initiate coverage with a BUY rating and target price of Rs 135. Valuation Table Particulars Value (Rsmn)FT18 EBITDA (Rs mn) 1648Target Multiple (x) 9EV (Rs mn) 14828Net debt (Rs mn)* 1647Target Mcap (Rs mn) 13180No of shares (mn) 96Target Price (Rs) 135CMP (Rs) 88Upside 54%

Source: Company, PhillipCapital India Research Estimates Note: * Net debt is adjusted for debt on Dahej project One year forward PE band One year forward EV/EBITDA band


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While antioxidants would see value progress led by its entry into blends, the performance chemicals would see capex‐led growth in the near future. Additionally, CFIN’s mega expansion with planned commissioning by the end of FY17 would provide incremental upside to our estimates.



Improvement in operating efficiency Earnings to maintain growth momentum

Source: Company, PhillipCapital India Research Estimates Downside risk to valuation • Forward move into antioxidant blends may not be appreciated by its customers

who are largely blenders and could impact antioxidants sales in the near term • Adverse fluctuation in currency could impact overall profitability as >85% of its

sales are export driven and it import input materials from its Italy based subsidiary.

• Any increase in competition from China could impact its progress

Upside risk • Earlier‐than‐expected commissioning of Dahej integrated facility (not factored

any sales in FY18) could surprise earnings positively.

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Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 5,583 5,044 6,928 8,717Growth, % 10 ‐10 37 26Total income 5,583 5,044 6,928 8,717Raw material expenses ‐2,705 ‐2,088 ‐2,806 ‐3,530Employee expenses ‐406 ‐355 ‐492 ‐628Other Operating expenses ‐1,589 ‐1,730 ‐2,356 ‐2,911EBITDA (Core) 883 872 1,275 1,648Growth, % 38.3 (1.2) 46.2 29.2Margin, % 15.8 17.3 18.4 18.9Depreciation ‐162 ‐171 ‐198 ‐261EBIT 721 702 1,076 1,386Growth, % 38.4 (2.6) 53.4 28.8Margin, % 12.9 13.9 15.5 15.9Interest paid ‐228 ‐222 ‐285 ‐346Other Non‐Operating Income 70 50 76 105Pre‐tax profit 528 530 867 1,145Tax provided 22 ‐164 ‐260 ‐343Profit after tax 550 366 607 801Net Profit 550 366 607 801Growth, % 43.9 (10.8) 59.7 27.7Net Profit (adjusted) 410 366 584 746Unadj. shares (m) 96 96 96 96Wtd avg shares (m) 96 96 96 96 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 193 555 458 768Debtors 1,134 1,029 1,394 1,743Inventory 1,364 1,257 1,704 2,131Loans & advances 252 242 333 418Other current assets 86 86 86 86Total current assets 3,029 3,169 3,975 5,146Investments 11 11 11 11Gross fixed assets 2,951 3,158 3,745 5,120Less: Depreciation ‐1,887 ‐2,057 ‐2,256 ‐2,517Add: Capital WIP 28 130 1,000 900Net fixed assets 1,092 1,230 2,489 3,503Total assets 4,297 4,575 6,639 8,824Current liabilities 1,151 1,112 1,528 1,922Provisions 160 160 160 160Total current liabilities 1,311 1,272 1,688 2,082Non‐current liabilities 1,637 1,640 2,757 3,853Total liabilities 2,948 2,912 4,444 5,935Paid‐up capital 96 96 96 96Reserves & surplus 1,253 1,402 1,935 2,629Shareholders’ equity 1,349 1,662 2,194 2,889Total equity & liabilities 4,297 4,575 6,639 8,824 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 550 366 584 746Depreciation 162 171 198 261Change in WC ‐357 184 ‐487 ‐467Cash flow from operating activities 356 720 296 540Capital expenditure 73 ‐308 ‐1,458 ‐1,275Misc Exp ‐458 0 0 0Cash flow from investing activities ‐385 ‐308 ‐1,458 ‐1,275Equity 13 0 0 0Dividends ‐52 ‐52 ‐52 ‐52Debt 101 2 1,117 1,096Investments 1 0 0 0Cash flow from financing activities 64 ‐49 1,065 1,044Net chg in cash 35 363 ‐97 309Opening cash balance 158 193 555 458Closing cash balance 193 555 458 768 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 4.1 3.8 6.1 7.8Growth, % 45.6 (7.0) 59.7 27.7Book NAV/share (INR) 14.1 17.3 22.9 30.1FDEPS (INR) 4.1 3.8 6.1 7.8CEPS (INR) 5.8 5.6 8.2 10.5CFPS (INR) 2.1 7.0 2.5 5.1Return ratios Return on assets (%) 17.4 11.4 14.0 13.1Return on equity (%) 40.8 22.0 27.7 27.7Return on capital employed (%) 26.5 24.0 24.1 22.7Turnover ratios Asset turnover (x) 2.2 1.8 1.9 1.7Sales/Total assets (x) 1.4 1.1 1.2 1.1Sales/Net FA (x) 5.2 4.3 3.7 2.9Working capital/Sales (x) 0.3 0.3 0.3 0.3Receivable days 74.2 74.4 73.4 73.0Working capital days 110.2 108.7 104.8 102.8Liquidity ratios Current ratio (x) 2.6 2.8 2.6 2.7Quick ratio (x) 1.4 1.7 1.5 1.6Interest cover (x) 3.2 3.2 3.8 4.0Total debt/Equity (%) 118.6 96.4 123.9 132.1Net debt/Equity (%) 104.3 63.0 103.0 105.5Valuation PER (x) 21.5 23.1 14.4 11.3PEG (x) ‐ y‐o‐y growth 0.5 (3.3) 0.2 0.4Price/Book (x) 6.3 5.1 3.8 2.9EV/Net sales (x) 1.8 1.9 1.5 1.3EV/EBITDA (x) 11.1 10.9 8.4 7.0EV/EBIT (x) 13.7 13.5 9.9 8.3



Atul Ltd (ATLP IN) Business diversification mutes growth INDIA | SPECIALTY CHEMICALS | Initiating Coverage

29 March 2016

Price leadership in p‐cresol leads value growth Aromatic is one of Atul’s most successful segments, not only due to its stellar performance over the last five years (revenue CAGR of ~29% to Rs 5.2bn in FY15), but also because of its global leadership position in p‐Cresol and derivatives. It is the largest manufacturer p‐Cresol and derivatives in India/ in the world with a strong customer base across advanced and developing markets. Although the price of P‐cresol softened with crude, Atul’s price leadership helped it retain most of the benefit from lower input cost (crude derivative). We see value growth in this segment ahead. Visible growth in user industries and brands cushions polymer business Polymers is Atul’s flagship segment with ~28% sales contribution and products such as epoxy resins/hardeners, sulphones, and polyurethane. While it is the largest manufacturer of sulphones in the world, it is the largest domestic player in the epoxy market. Considering anticipated rapid growth in construction chemicals and paints and coatings in the emerging markets, recovery in automobiles, and steady progress in the domestic branded business, we estimate 10% CAGR for this business over FY16‐18 to Rs 8.3bn in FY18. Crop protection: Global leadership in 2,4D is the only highlight; otherwise, it is muted Atul has a diversified portfolio of crop protection chemicals (covering fungicides, herbicides and insecticides), and it is one of the world's five leading manufacturers of 2,4‐D range of chlorophenoxy derivatives. Going by the industry forecast of recovery in the global agro market, and favourable monsoon in the domestic market, we build in 7% revenue CAGR over FY16‐18 to Rs 3.45bn. Colors: Near‐term outlook remains bleak Colors is an integrated operation for Atul, with leading position in sulphur black in India and vat dyes in the world. This division saw healthy 25% CAGR in FY13‐15 primarily led by spike in the prices of dyes and dye intermediates and a jump in the export volumes. However, overall dye prices have softened a bit in FY16; simultaneously, exports demand for vat dyes (a leading product for Atul) seems to have corrected meaningfully, led by global slowdown, making the outlook bleak. Indian export of vat dyes fell ~35% over the last 12 months. Perils of wide business diversification mutes growth Considering muted growth across polymers, crop protection, colors, and bulk chemicals, we estimate Atul will deliver muted 8% CAGR in revenues and 12% in profits over FY15‐18. Atul’s most diversified business model (amongst Indian peers) seems struggling for growth with no major expansion plan in the near future and adverse impact of economic slowdown. Initiate NEUTRAL rating with a TP of Rs 1650 Atul trades at 13x FY18 EPS and 7x FY18 EV/EBITDA. While we consider Atul’s strong historical track record of steady growth and cash generation positive, its visible muted growth – both on revenues and profits – make us pessimistic. We value Atul at Rs 1,650, i.e. 8x FY18 EV/EBITDA (vs. 9x target multiple for Aarti Industries) and initiate coverage with a Neutral rating.

NEUTRAL CMP RS 1470 TARGET RS 1650 (+12%) COMPANY DATA O/S SHARES (MN) : 30MARKET CAP (RSBN) : 45MARKET CAP (USDBN) : 0.752 ‐ WK HI/LO (RS) : 1805 / 1034LIQUIDITY 3M (USDMN) : 0.4PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 15PROMOTERS : 50.8 50.8 50.7FII / NRI : 6.3 6.9 7.0FI / MF : 13.0 13.6 13.4NON PRO : 29.9 10.0 9.8PUBLIC & OTHERS : 0.0 18.7 19.1 PRICE PERFORMANCE, %




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ATUL LTD. INITIATING COVERAGE

About the Company • Incorporated in 1947 – one of the oldest players in Indian specialty chemicals. • Broad‐based product profile spanning aromatics, bulk chemicals and

intermediates, colours, pharmaceuticals and intermediates, crop protection/ agrochemicals, and polymers.

• Key to Atul’s steady financial performance – global positioning in aromatics (led by P‐cresol and derivatives), polymers (particularly sulphones), colours (vat dyes).

Evolution of Atul


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Commencement of manufacture of dyes for the first time in India

Establishment of a JV with Imperial Chemical (50%)

Commencement of manufacture of Phosgene for the first time in India

Commencement of manufacture of 2,4‐D Acid for the first time in India

Acquired of Gujarat Aromatics Ltd

Commissioning of Multi‐purpose pilot plant

Modernisation of Epoxy plant

Formation of Atul USA Inc

Commencement of manufacture of p‐Cresol for the first time in India

Commencement of manufacture of p‐Anisic Alcohol for the first time in India

Establishment of a subsidiary company, Atul Bioscience Ltd

Acquisition of 88% stake in DPD Ltd (UK)

Commissioning of the world biggest p‐Cresol facility in Ankleshwar

Establishment of 22,000 square feet R&D facility to grow APIs and API Inters business

Formation of a JV with Rudolf GmbH (Germany)

Incorporated in 1975



Business model


Atul Ltd

Life Science Chemicals(27% of sales)

Performance Chemicals(73% of sales)

Crop Protection (14% of sales)

Pharmaceuticals(13% of sales)

• 63 products ‐ 15 branded / 48 formulations• >30,000 retail outlets• Technical agrochems like 2,4‐D, Indoxacarb and Nicosulfuron are key products• Sales CAGR of 3% over FY11‐15

• ~50 products ‐ anti‐depressant, diabetic, infective, retroviral, cardiovascular• USFDA approval for Dapsone API Plant• Sales CAGR of 12% over FY11‐15

Aromatics(21% of sales)

Products: p‐Anisic, Aldehyde, p‐Anisic Alcohol, p‐Cresidine

Bulk Chemicals(4% of sales)

Products:Resorcinol Formaldehyde Resins and Sulphur Trioxide

Colors(19%of sales)

Products: Sulphur Black, Vat/other Dyes and pigment

Polymers(28% of sales)

Products: Epoxy hardeners /resins and Sulphones

• Global leader for p‐cresol and derivative products like p‐AA 70%, p‐AA1 90% and p‐Cd 5%• Sales CAGR: 29% over FY11‐15

• Market leader in Resorcinol, Anisole• Sales CAGR: 11% over FY11‐15

• Global leader in Dyestuffs like Sulphur black and Vat Dyes• 38 products• Sales CAGR: 10% over FY11‐15

• Global leader in Epoxy• Product portfolio of 75 branded and 276 formulations



Investment Rationale Price leadership in aromatic drives value growth Global leadership in aromatics Aromatic is one of Atul’s most successful segments – with stellar performance over the last five years (CAGR of ~29% to Rs 5.2bn in FY15) but also its global leadership position in p‐Cresol and derivatives. With a strong customer base across advanced and developing markets, Atul is the largest manufacturer p‐Cresol and its derivatives including p‐anisic aldehyde (p‐AA) and P‐anisol alcohol (p‐AAI). Exports revenue contributes to over 70% of total aromatic sales. Leveraging its backward integration (to caustic soda) and cost advantage, Atul’s p‐cresol operation has a capacity of 25000tpa in FY15. However, the recent economic slowdown impacted volumes while prices softened due to lower crude. However, considering a likely gradual pick up in user industries (dyestuff, flavours & fragrance, pharma, personal care), we build 10% CAGR for Atul’s aromatic sales over FY16‐18 (of which over 80% is led by P‐cresol) . Aromatic sales to see 10% CAGR over FY16‐18

Source: Company, PhillipCapital India Research Estimates India gained ground in the global p‐cresol market Export 2010 2011 2012 2013 2014 2015India (tons) 8,329 6,880 9,644 10,829 10,634 9573China (tons) 13,597 10,630 9,968 8,675 5,967 NA

Source: UN Comtrade, PhillipCapital India Research Price leadership in p‐cresol favours ATLP Although the price of P‐cresol saw softness due to lower crude, Atul’s price leadership helped it to retain most of the lower input cost benefit. Hence, we see value growth in its aromatic segment ahead.

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India (largely led by Atul) is among the top three countries producing cresol in the world (after Germany and US).



Aroma products has maintain price despite crude fall Leadership in p‐Cresol will maintained with expanded capacity

Source: PhillipCapital India Research Rapid growth in user industries and brand play cushions polymer business Polymers is Atul’s flagship segment with ~28% sales contribution. Under polymer, it manufactures and supplies bulk epoxy resins/hardeners, sulphones, and polyurethane, to industries such as paints and coatings, adhesives, aerospace, automobiles, and construction chemicals across the world. It also markets consumer adhesive brands (Polygrip, Lapox, Lapogrip, Marbo Bond) in India. While, Atul is the largest manufacturer of sulphones in world, it is the largest domestic player in the epoxy market. Branded adhesives portfolio of Atul

Source: Company, PhillipCapital India Research Polymer business is largely domestic market oriented and accounts for ~65% of total sales. Polymer export/domestic sales reported 17%/10% CAGR over FY11‐15. While the volume expansion (led by steady market penetration) boosted exports sales, rapid progress in branded sales supported domestic performance. Atul’s polymers segment has delivered stable 12% CAGR over FY11‐15 to Rs 6.97bn in FY15.

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Able to maintain realization

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Atul is the largest manufacturer of sulphones in world, it is the largest domestic player in the epoxy market.



Steady progress in Polymer sales

Source: Company, PhillipCapital India Research Estimates Considering likely rapid growth in construction chemicals and paints and coatings in emerging markets, recovery in the automobiles, and steady progress in domestic branded business, we estimate 10% CAGR for Atul’s polymer business over FY16‐18 to Rs 8.3bn in FY18. Domestic branded sales of polymer will see steady growth Lacks bargaining power of prices as it follows the crude fall

Polymer revenue mix Fig in Rs Mn FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018ESales from new products 120 120 120 120 170 180 150 160% to Polymers 2.7 2.6 2.6 1.9 2.4 2.7 2.0 1.9YoY ch (%) 0.0% 0.0% 0.0% 41.7% 5.9% ‐16.7% 6.7%Polymers Brands only in India 530 760 720 850 950 1064 1224 1407% to India Polymer 17.1 24.4 23.1 20.5 20.7 23.0 23.8 24.6YoY ch (%) 43.4% ‐5.3% 18.1% 11.8% 12.0% 15.0% 15.0%Bluk sales 2570 2360 2400 3300 3630 3557 3913 4304% to India Polymer 82.9 75.6 76.9 79.5 79.3 77.0 76.2 75.4YoY ch (%) ‐8.2% 1.7% 37.5% 10.0% ‐2.0% 10.0% 10.0%India sales 3100 3120 3120 4150 4580 4621 5137 5712% to Polymers 70.8 68.7 66.7 65.6 65.7 68.2 68.9 69.1YoY ch (%) 0.6% 0.0% 33.0% 10.4% 0.9% 11.2% 11.2%Export 1280 1420 1561 2180 2390 1974 2172 2389% to Polymers 29.2 31.3 33.3 34.4 34.3 29.1 29.1 28.9YoY ch (%) 10.9% 9.9% 39.7% 9.6% ‐17.4% 10.0% 10.0%Polymers 4380 4540 4681 6330 6970 6776 7458 8260YoY ch (%) 3.7% 3.1% 35.2% 10.1% ‐2.8% 10.1% 10.8%


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Crop protection: Only highlight is global leadership in 2,4D; otherwise muted Crop protection accounts for about 12% of Atul’s sales. It has a diversified portfolio of chemicals covering fungicides, herbicides, and insecticides – both technicals and branded formulations. While it markets bulk technicals across the globe, it sells branded formulations in India. On the technicals front, Atul is among the world's five leading manufacturers of 2,4‐D range of chlorophenoxy derivatives used in herbicides. It has capacity of 10,000tn and operates at around 70% utilisation. However, it lacks bargaining power as the company fails to retain the benefits of lower input (phenol) prices. 2,4D prices fall in tandem with crude

Source: PhillipCapital India Research Atul’s branded formulations, led by its strong pan‐India presence with over 30,000 retail outlets, saw steady 15% CAGR over FY11‐15 to Rs 1.21bn. However, its bulk business shrank to Rs 2.21bn in FY15 from Rs 2.39bn in FY11. We see the downtrend continuing in FY16. The global slowdown in agriculture and price correction due to the fall in crude has dampened sales. However, going by the industry forecast of a recovery in the global agro market and favourable monsoon in India, we build in 7% revenue CAGR over FY16‐18 to Rs 3.45bn. Branded sales to see faster progress

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Atul is among the world's five leading manufacturers of 2,4‐D range of chlorophenoxy derivatives used in herbicides. It has capacity of 10,000tn



Crop protection revenue mix dominated by domestic market (Amt Rs mn) FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018EBulk sales 870 960 680 940 730 657 710 773% to India crop protection 55.8 59.3 48.2 47.7 37.6 33.8 33.8 33.7YoY ch (%) 10.3 ‐29.2 38.2 ‐22.3 ‐10.0 8.0 9.0Branded sales 690 660 730 1030 1210 1290 1393 1522% to India crop protection 44.2 40.7 51.8 52.3 62.4 66.2 66.2 66.3YoY ch (%) ‐4.3 10.6 41.1 17.5 6.6 8.0 9.3India 1560 1620 1410 1970 1940 1947 2102 2295% to Crop 50.6 45.3 36.6 45.5 56.7 57.8 58.3 58.1YoY ch (%) 3.8 ‐13.0 39.7 ‐1.5 0.3 8.0 9.2Export 1520 1960 2440 2360 1480 1421 1505 1656% to Crop 49.4 54.7 63.4 54.5 43.3 42.2 41.7 41.9YoY ch (%) 28.9 24.5 ‐3.3 ‐37.3 ‐4.0 6.0 10.0Crop Protection 3080 3580 3850 4330 3420 3367 3608 3951YoY Ch 34.04 53.97 5.67 27.32 ‐5.53 9.17 11.60 34.04

Source: Company, PhillipCapital India Research Estimates Colours: Near‐term outlook remains bleak Colours is an integrated operation and was the first business initiative of the company after its incorporation. Although Atul has a basket of 38 product in this group, sulphur black and vat dyes are major revenue contributors. It is the largest manufacturer of sulphur black in India and one of the largest manufacturers of vat dyes in the world. Exports accounted for 51% of total sales in FY15.

The colours business had seen steady performance over last five years with CAGR of 10% to Rs 4.72bn in FY15, contributing ~19% of total sales. Over FY13‐15, the CAGR was 25% – primarily led by a spike in the prices of dyes and dye intermediates and a jump in the export volumes. Decline in global demand for vat dyes is a big concern Dye prices have softened a bit in FY16 and export demand for vat dyes (a leading product for Atul) has corrected meaningfully led by global slowdown, making the outlook bleak. The weak global demand scenario is evident – Indian exports of vat dyes fell ~35% over the last 12 months. Considering weak pricing and volume in dyes, we estimate flattish performance for its colours division. The only positive aspect is that price corrections in dyes is less vs. input crude derivatives. Visible slowdown in vat dyes export concerns Atul Price of vat dyes & sulphur black are relatively stable compared to crude

Source: UN Comtrade, PhillipCapital India Research

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The largest manufacturer of sulphur black in India and one of the largest manufacturers of vat dyes in the world.



Colors revenue mix Amt In Rs mn FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018EIndia 1795.0 1850 1870 2310 2500 2625 2783 3005% to Colors 55.2 53.5 56.7 54.2 48.5 52.2 56.9 61.5YoY ch (%) 3.1% 1.1% 23.5% 8.2% 5.0% 6.0% 8.0%Export 1455 1610 1430 1950 2650 2408 2108 1884% to Colors 44.8 46.5 43.3 45.8 51.5 47.8 43.1 38.5YoY ch (%) 10.7% ‐11.2% 36.4% 35.9% ‐9.1% ‐12.5% ‐10.7%Colors JV Rudolf Gmbh, Germany (50%) 90.0 210.0 310.0 430.0 434.3 447.3 469.7YoY Ch 133.33 47.62 38.71 1.00 3.00 5.00% to sales 0.0 0.5 1.1 1.3 1.7 1.8 1.7 1.6Colors 3250 3460 3300 4260 5150 5033 4891 4889YoY ch (%) 6.5% ‐4.6% 29.1% 20.9% ‐2.3% ‐2.8% 0.0%




Financial performance Revenue break up Revenue Break‐up (Rs mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18ELife sciences Crop protection 3580 3850 4330 3420 2977 3197 3450Pharma 2350 2870 2710 2870 3588 3982 4540Atul Biosciences 110 270 350 470 573 631 713Total Life sciences 6040 6990 7390 6760 7138 7810 8703% to sales 34 36 32 27 29 30 30YoY Ch 23 16 6 ‐9 6 9 11Performance and other chemicals Aromatics 2520 3880 4100 5220 4662 5087 5675Bluk Chemicals & intermediates 720 770 990 1000 880 968 1084Colors 3370 3090 3950 4720 4599 4425 4468JV with Rudolf Gmbh, Germany (Atul 50%) 90 210 310 430 434 443 456Polymers 4870 4680 6330 6970 6807 7494 8302Total Performance and other chemicals 11570 12630 15680 18340 17382 18417 19985% to sales 66 64 68 73 71 70 70YoY Ch 14 9 24 17 ‐5 6 9Total Standalone Sales 17610 19620 23070 25100 24520 26227 28688YoY Ch 17 11 18 9 ‐2 7 9Subsidiaries Adjustment 217 708 1373 1317 1344 1451 1625% to sales 1 3 6 5 5 5 5YoY Ch ‐54 227 94 ‐4 2 8 12Total Consolidated sales (Rs mn) 17924 20429 24578 26564 25863 27678 30313YoY Ch 15 14 20 8 ‐3 7 10

Sales to see muted 5% CAGR over FY15‐18E Steady improving operating efficiency

Moderating return ratios Strong cash generation


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Valuation and outlook Considering muted performance across polymer, crop protection, colours, and bulk chemicals, we estimate Atul to deliver muted 8% CAGR in revenues and 12% in profits over FY15‐18. Its most diversified business model seems struggling for growth with no major expansion plans and due to the adverse impact of the economic slowdown. It trades at 13x FY18 EPS and 7x FY18E EV/EBITDA. While we consider Atul’s strong historical track record of steady growth and free cash generation as positive, its muted revenue and profit growth makes us pessimistic. Hence, we value Atul at Rs 1650 – 8x FY18 EV/EBITDA (vs. 9x target multiple for Aarti Industries) and initiate coverage with a Neutral rating. Valuation Table (FY18E) Particulars Value (Rs mn)FY18 EBITDA 5729Target Multiple (x) 8Eterprise Value 45833Net debt ‐3139Target Mcap 48972No of shares (mn) 30Target Price (Rs) 1650CMP (Rs) 1470Upside 12%

Source: Company, PhillipCapital India Research Estimates One year forward PE band One year forward EV/EBITDA band


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While we consider Atul’s strong historical track record of steady growth and free cash generation as positive, its muted revenue and profit growth makes us pessimistic.



Operating efficiency to remain stable Gradual progress in earnings

Source: Company, PhillipCapital India Research Estimates Downside risk to valuation

• Continued global slowdown could further hurt growth in its aromatics, polymer, colors, bulk chemical and agrochemical sales

• Volatility in crude oil prices to have an adverse impact on revenue, as 60‐70% of its raw materials are crude derivatives.

• Any increase in Chinese competition could impact overall growth.

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Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 26,564 25,863 27,678 30,313Growth, % 8 ‐3 7 10Total income 26,564 25,863 27,678 30,313Raw material expenses ‐14,454 ‐12,802 ‐13,701 ‐15,005Employee expenses ‐1,633 ‐1,810 ‐1,965 ‐2,152Other Operating expenses ‐6,464 ‐6,699 ‐7,003 ‐7,427EBITDA (Core) 4,013 4,552 5,010 5,729Growth, % 10.3 13.4 10.1 14.4Margin, % 15.1 17.6 18.1 18.9Depreciation ‐603 ‐686 ‐746 ‐809EBIT 3,410 3,866 4,264 4,921Growth, % 11.6 13.4 10.3 15.4Margin, % 12.8 14.9 15.4 16.2Interest paid ‐257 ‐284 ‐298 ‐309Other Non‐Operating Income 103 349 332 303Pre‐tax profit 3,256 3,931 4,299 4,914Tax provided ‐994 ‐1,219 ‐1,333 ‐1,523Profit after tax 2,262 2,712 2,966 3,391Net Profit 2,262 2,712 2,966 3,391Growth, % 10.7 14.2 9.3 14.3Net Profit (adjusted) 2,378 2,715 2,969 3,394Unadj. shares (m) 30 30 30 30Wtd avg shares (m) 30 30 30 30 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 367 2,178 4,235 6,576Debtors 4,424 4,960 5,308 5,813Inventory 4,153 4,606 4,929 5,398Loans & advances 1,488 1,474 1,578 1,728Other current assets 881 881 881 881Total current assets 11,313 14,099 16,931 20,397Investments 661 661 661 661Gross fixed assets 12,958 14,597 15,535 16,501Less: Depreciation ‐7,821 ‐8,507 ‐9,253 ‐10,061Add: Capital WIP 1,121 500 500 500Net fixed assets 6,257 6,589 6,782 6,939Total assets 18,231 21,349 24,373 27,996Current liabilities 3,739 4,211 4,492 4,902Provisions 596 596 596 596Total current liabilities 4,335 4,807 5,088 5,498Non‐current liabilities 3,449 3,689 3,770 3,898Total liabilities 7,784 8,495 8,858 9,395Paid‐up capital 297 297 297 297Reserves & surplus 10,093 12,500 15,161 18,248Shareholders’ equity 10,447 12,854 15,515 18,601Total equity & liabilities 18,231 21,349 24,373 27,996 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 2,407 2,715 2,969 3,394Depreciation 603 686 746 809Change in WC ‐156 ‐504 ‐493 ‐715Cash flow from operating activities 2,853 2,898 3,222 3,488Capital expenditure ‐536 ‐1,018 ‐938 ‐966Misc Exp ‐1,138 0 0 0Cash flow from investing activities ‐1,674 ‐1,018 ‐938 ‐966Equity 0 0 0 0Dividends ‐308 ‐308 ‐308 ‐308Debt ‐682 239 81 128Investments ‐33 0 0 0Cash flow from financing activities ‐1,023 ‐69 ‐227 ‐180Net chg in cash 157 1,810 2,057 2,341Opening cash balance 211 367 2,178 4,235Closing cash balance 367 2,178 4,235 6,576 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 80.1 91.5 100.0 114.4Growth, % 10.7 14.2 9.3 14.3Book NAV/share (INR) 350.1 431.2 520.8 624.8FDEPS (INR) 80.1 91.5 100.0 114.4CEPS (INR) 100.4 114.6 125.2 141.6CFPS (INR) 90.8 85.8 97.3 107.2Return ratios Return on equity (%) 21.8 21.2 19.2 18.3Return on capital employed (%) 25.3 25.5 23.8 23.2Turnover ratios Asset turnover (x) 2.0 1.9 1.9 2.0Sales/Total assets (x) 1.5 1.3 1.2 1.2Sales/Net FA (x) 4.2 4.0 4.1 4.4Working capital/Sales (x) 0.3 0.3 0.3 0.3Receivable days 60.8 70.0 70.0 70.0Working capital days 99.0 108.8 108.2 107.4Liquidity ratios Current ratio (x) 3.0 3.3 3.8 4.2Quick ratio (x) 1.9 2.3 2.7 3.1Interest cover (x) 13.3 13.6 14.3 15.9Total debt/Equity (%) 28.8 25.2 21.4 18.5Net debt/Equity (%) 25.2 8.2 (6.0) (16.9)Valuation PER (x) 18.3 16.1 14.7 12.9PEG (x) ‐ y‐o‐y growth 1.7 1.1 1.6 0.9Price/Book (x) 4.2 3.4 2.8 2.4EV/Net sales (x) 1.7 1.7 1.5 1.3EV/EBITDA (x) 11.5 9.8 8.5 7.1EV/EBIT (x) 13.6 11.6 10.0 8.2



Navin Fluorine (NFIL IN) Refrigerant gas outlook bleak; visible growth priced in INDIA | SPECIALTY CHEMICALS |Company Update

29 March 2016

Curtailed R22 import quota by key export markets + price correction to hurt profitability NFIL’s unique experience of more than 30 years in handling fluoro‐chemicals established it as one of the top‐four leading R22 refrigerant gas manufacturers of India. While R22 is a leading sales contributor (32%), its outlook seems bleak due to – (1) restricted production/consumption quota of 40,000/10,000tpa (requiring compulsory exports), (2) sharp reduction in R22 import quota from leading export destinations like Saudi Arabia and Egypt (accounting for over 40% of Indian R22 exports), and (3) over 20% price correction in R22 to ~Rs 120/kg from ~Rs 150 in FY15. Hence, we see flat revenue performance in this business over FY16‐18 to Rs 1.84bn in FY18 – with a potential correction in profitability. Pact with Honeywell is futuristic and won’t have major earning implication during FY16‐18 NFIL has signed pact with Honeywell to manufacturing and supply later’s innovative refrigerant gas ‐ Solstice®yf. The said gas is used in automobiles and has very low global warming potential (GWP >1) against the competing R134a gas (GWP 1430). A mall‐scale production is expected to begin by late FY17. Although Solstice®yf is superior in terms of GWP, R134a is highly economical and there is no major concern of its phase down in the visible future. Hence, considering very staggered scale up in Solstice®yf for NFIL, we see the pact as futuristic and would have no major earning implication during FY16‐18. Specialty chemicals to maintain steady growth In specialty chemicals, NFIL manufactures niche fluorinated compounds for applications in pharmaceutical, agrochemical, and petrochemical industries. Over the years, it has built a strong clientele in agro and pharma (domestic and advanced US/EU markets) for supplying fluoro‐compounds. This segment reported 16% sales CAGR over the last five years and we believe it will sustain similar growth momentum over FY15‐18, led by its continued geographic and customer expansion. CRAMS to see capex‐led value growth In order to scale‐up CRAMS, NFIL invested ~Rs 600mn in setting up a cGMP facility capable of running high‐pressure fluorination chemistries at Dewas (MP) – commissioned this facility in Q3FY16. We see a strong ramp‐up in CRAMS, led by incremental sales from Dewas and its developmental pipeline of a basket of fluorinated molecules at different stages of development, partnered with global pharmaceutical companies. We estimate robust CAGR of 64% over FY15‐18 in CRAMS to Rs 1.37bn in FY18. Piramal JV to see gradual ramp‐up NFIL and Piramal Enterprises formed a 49:51 JV in 2014 and set up a facility with an investment of Rs 1.4bn. The aim was to develop, manufacture, and sell specialty fluoro‐chemicals for applications in pharmaceuticals. This facility is expected to commission in early FY17, but considering the critical nature of the user industry, we see this JV as a futuristic initiative that will see a gradual ramp‐up. We estimate Rs 630mn revenue and Rs 108mn PAT from this JV in FY18. MOL complements NFILs global positioning in specialty fluorochemicals MOL – NFIL’s UK based 100% subsidiary – develops customized fluorinated molecules for chemical, pharmaceutical, and electronic industries. We believe its strategic location (in the UK), R&D capability, and a wide basket of fluoro‐chemical compounds (over 40,000) will complement NFIL’s progress in both CRAMS and specialty chemicals. We have built‐in 16% revenue CAGR for MOL over FY15‐18 to Rs 766mn in FY18. Valuations to remain under check as refrigerants remain under pressure; Not Rated We estimate NFIL to deliver 12% and 21% CAGR in revenues and profit over FY16‐18 to touch Rs 8.13bn and Rs 1.07bn in FY18. Its strategic expansion initiatives toward CRAMS will be back‐ended and muted performance in refrigerant business will keep its future growth under check. At CMP of Rs 1,763 it trades at premium multiples of 16x FY18 EPS and 11x FY18 EV/EBITDA, which we believe may not be sustainable.

Not Rated CMP RS 1,694 TARGET RS NA COMPANY DATA O/S SHARES (MN) : 10MARKET CAP (RSBN) : 17MARKET CAP (USDBN) : 0.252 ‐ WK HI/LO (RS) : 2025 / 355LIQUIDITY 3M (USDMN) : 0.5PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 15PROMOTERS : 38.7 38.8 38.8FII / NRI : 7.0 7.6 7.8FI / MF : 17.9 17.0 16.2NON PRO : 6.0 7.7 7.7PUBLIC & OTHERS : 30.3 28.9 29.6 PRICE PERFORMANCE, %


Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 6,377 7,107 8,174EBIDTA 1,141 1,308 1,529Net Profit 720 885 1,077EPS, Rs 73.7 90.6 110.2PER, x 23.9 19.5 16.0EV/EBIDTA, x 15.5 13.2 11.0P/BV, x 2.7 2.5 2.2ROE, % 11.7 12.4 13.1Debt/Equity (%) 7.8 6.6 6.2


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Navin BSE Sensex

https://www.honeywell-refrigerants.com/americas/applications/automobile-ac/�




NAVIN FLUORINE COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 5,915 6,377 7,107 8,174Growth, % 22 8 11 15Total income 5,915 6,377 7,107 8,174Raw material expenses ‐2,894 ‐2,921 ‐3,219 ‐3,678Employee expenses ‐741 ‐670 ‐753 ‐866Other Operating expenses ‐1,558 ‐1,645 ‐1,827 ‐2,101EBITDA (Core) 722 1,141 1,308 1,529Growth, % 9.4 58.1 14.6 16.9Margin, % 12.2 17.9 18.4 18.7Depreciation ‐201 ‐246 ‐271 ‐298EBIT 521 895 1,037 1,230Growth, % 17.9 71.9 15.8 18.7Margin, % 8.8 14.0 14.6 15.1Interest paid ‐33 ‐54 ‐51 ‐53Other Non‐Operating Income 295 223 249 286Pre‐tax profit 783 1,064 1,235 1,463Tax provided ‐200 ‐319 ‐370 ‐439Profit after tax 582 745 864 1,024Net Profit 582 745 864 1,024Growth, % 12.7 21.0 22.9 21.7Net Profit (adjusted) 595 720 885 1,077Unadj. shares (m) 10 10 10 10Wtd avg shares (m) 10 10 10 10 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 281 59 397 890Debtors 1,199 1,219 1,351 1,548Inventory 761 903 1,007 1,158Loans & advances 1,185 1,212 1,279 1,390Other current assets 40 45 52 60Total current assets 3,464 3,439 4,086 5,045Investments 1,713 2,109 2,128 2,168Gross fixed assets 3,894 4,732 5,116 5,523Less: Depreciation ‐1,566 ‐1,812 ‐2,083 ‐2,381Add: Capital WIP 1,013 510 510 510Net fixed assets 3,342 3,430 3,543 3,651Total assets 8,520 8,978 9,757 10,865Current liabilities 1,364 1,470 1,639 1,885Provisions 214 211 214 219Total current liabilities 1,578 1,681 1,853 2,104Non‐current liabilities 935 816 783 808Total liabilities 2,514 2,497 2,636 2,912Paid‐up capital 98 98 98 98Reserves & surplus 5,779 6,254 6,894 7,726Shareholders’ equity 6,006 6,481 7,121 7,953Total equity & liabilities 8,520 8,978 9,757 10,865 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePAT 546 720 885 1,077Depreciation 201 246 271 298Change in WC ‐671 ‐94 ‐137 ‐215Cash flow from operating activities 76 872 1,019 1,160Capital expenditure ‐597 ‐334 ‐384 ‐407Misc Exp ‐18 0 0 0Cash flow from investing activities ‐615 ‐334 ‐384 ‐407Equity 3 0 0 0Dividends ‐188 ‐245 ‐245 ‐245Debt 36 ‐119 ‐33 25Investments 590 ‐396 ‐19 ‐40Cash flow from financing activities 441 ‐760 ‐297 ‐260Net chg in cash ‐98 ‐222 338 493Opening cash balance 379 281 59 397Closing cash balance 281 59 397 890 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 60.9 73.7 90.6 110.2Growth, % 12.6 21.0 22.9 21.7Book NAV/share (INR) 601.6 650.2 715.8 800.9FDEPS (INR) 60.9 73.7 90.6 110.2CEPS (INR) 81.5 98.9 118.3 140.8CFPS (INR) (19.9) 69.0 76.7 84.0Return ratios Return on assets (%) 7.4 8.9 9.6 10.3Return on equity (%) 9.9 11.7 12.4 13.1Return on capital employed (%) 11.8 15.3 16.3 17.3Turnover ratios Asset turnover (x) 1.3 1.2 1.3 1.4Sales/Total assets (x) 0.7 0.7 0.8 0.8Sales/Net FA (x) 1.9 1.9 2.0 2.3Working capital/Sales (x) 0.3 0.3 0.3 0.3Receivable days 74.0 69.8 69.4 69.1Working capital days 112.2 109.3 105.3 101.4Liquidity ratios Current ratio (x) 2.5 2.3 2.5 2.7Quick ratio (x) 2.0 1.7 1.9 2.1Interest cover (x) 15.6 16.5 20.5 23.1Total debt/Equity (%) 10.4 7.8 6.6 6.2Net debt/Equity (%) 5.7 6.8 0.9 (5.2)Valuation PER (x) 29.0 23.9 19.5 16.0PEG (x) ‐ y‐o‐y growth 2.3 1.1 0.8 0.7Price/Book (x) 2.9 2.7 2.5 2.2EV/Net sales (x) 3.0 2.8 2.4 2.1EV/EBITDA (x) 24.3 15.5 13.2 11.0EV/EBIT (x) 33.7 19.7 16.7 13.7


SECTOR INITIATION SPECIALTY CHEMICALS

NOTES



Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia Level 37, 530 Collins Street

Melbourne, Victoria 3000, Australia Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA: PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management(91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Infrastructure & IT Services Strategy

Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Nitesh Sharma, CFA (9122) 6667 9965 Logistics, Transportation & Midcap Anindya Bhowmik (9122) 6667 9764Agri Inputs Vikram Suryavanshi (9122) 6667 9951 TelecomGauri Anand (9122) 6667 9943 Media Naveen Kulkarni, CFA, FRM (9122) 6667 9947Banking, NBFCs Manoj Behera (9122) 6667 9973 Manoj Behera (9122) 6667 9973Manish Agarwalla (9122) 6667 9962 Metals TechnicalsPradeep Agrawal (9122) 6667 9953 Dhawal Doshi (9122) 6667 9769 Subodh Gupta, CMT (9122) 6667 9762Paresh Jain (9122) 6667 9948 Yash Doshi (9122) 6667 9987 Production ManagerConsumer Midcap Ganesh Deorukhkar (9122) 6667 9966Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Amol Rao (9122) 6667 9952 EditorJubil Jain (9122) 6667 9766 Oil & Gas Roshan Sony 98199 72726Cement Sabri Hazarika (9122) 6667 9756 Sr. Manager – Equities SupportVaibhav Agarwal (9122) 6667 9967 Pharma & Speciality Chem Rosie Ferns (9122) 6667 9971Economics Surya Patra (9122) 6667 9768Anjali Verma (9122) 6667 9969 Mehul Sheth (9122) 6667 9996Engineering, Capital Goods Mid‐Caps & Database ManagerJonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944Hrishikesh Bhagat (9122) 6667 9986Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Bhavin Shah (9122) 6667 9974 ExecutionAshka Mehta Gulati (9122) 6667 9934 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

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