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Chemical Industry:A Growth Catalyst
Economic Outlook …….……………………………………………………………………….3
About The Sector……………………………………………………………….…………..…..5
Product:…………………...…………………………………………………………………..…..5
Certain Facts:.. ….….……………….…………….……………………….….……………..…6
Eye Catcher for Investment:……….…………..………….………….….………………..6
Growth Potetial.……………………………………..…………….……………………….…..7
Polices Established…..…………………………………………………………………..……8
Government's Initiative…………..………………………………………………………..…9
R&D Incentives:……………..……….…………………………………………….……………9
Companies Engaged In Manufacture Having An In-House R&D Centre:….9
State Incentives:…………………………..…………....…………........................…......10
Export Incentives:……………………………..…..…….…………………………………….10
Together For Sustainability:………………………………………………………………..10
A Colorful Outperformance:……………………………………………………………… 11
Number 1 Paint Company in India:…………………………………………………….. 11
All this in its bag and one company to name:Asian Paints!........................ 12
Product Line:…………………………………………………………………………………… 12
Financial Highlights:....………………………………..…………………………………….13
Investment Opinion:....….……………………………………..…………………………….14
Buy Recommendation:……………………………………………………………………….14
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Economic Outlook:
With 1.2 billion people and the world’s fourth-largest economy, India’s recent growth and
development has been one of the most significant achievements of our times. Over the six
and half decades since independence, our motherland has brought about a landmark
agricultural revolution that has transformed the nation from severe dependence on grain
imports into a global agricultural powerhouse supplying food worldwide through its
positive net exports. Life expectancy rates have more than doubled, literacy rates have
quadrupled, with improving health conditions a sizable middle class has emerged. India is
now home to globally recognized companies in pharmaceuticals,chemicals , steel and
information and space technologies. Providing a growing voice on the international forum
that is more in keeping with its enormous size and potential is what this country with
diversity has in its bag to offer.
Historic changes are unfolding, unleashing a host of new opportunities for this nation to
grasp. India will soon have the largest and youngest workforce the world has ever
witnessed. But at the same time, the country is amidst the massive wave of urbanization as
some 10 million people move to towns and cities each year in search of jobs and
opportunity making it the largest rural-urban migration of this century.
India's GDP was worth 2074 USD Billion in 2015 which represents around 3.34% of the
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world economy. This reflected an all time growth and made a low 63.5 USD Billion in
1970.Average GDP stood at 582.99 USD Billion as reported by the World Bank Group.
Booming consumption should support a robust expansion for the nation in FY 2016. The
Focus Economics panel for sights a GDP rising 7.5% in FY 2016. For FY 2017, the panel
sees growth stable at the robust pace of 7.5%.
August 2016 witnessed a rise in consumption prices at 5,05%,easing from a 6.07%in July
and hitting below the market expectation of 5.5% being the lowest in the last five months.
The reason being favorable weather conditions and good rainfall which lead to small rise
in food prices. Inflation Rate in India is reported by the Ministry of Statistics and Pro
gramme Implementation (MOSPI), India. The RBI had its benchmark repo rate remain unchanged at a five-year low of 6.5 percent
during the meeting held on August 9th, as widely expected by the analyst. While awaiting
space for policy action, policymakers said the stance of monetary policy will remain
accommodative and would continue to focus on the adequate provision of liquidity. The
central bank also decided to keep the cash reserve intact at 4.0 percent inorder to meet the
liquidity requirements but gradually lowered the average ex ante liquidity deficit in the
system from one percent of net demand and time liabilities (NDTL) to a neutral position.
Average Interest Rate in India stood at 6.71 percent from the year 2000 to 2016, reaching
an all time high of 14.50 percent in August of 2000 and a record low of 4.25 percent in
April of 2009.
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About the Sector:
The Indian chemical industry is rated sixth in the world and third in Asia in value added
terms at constant prices, is one of the important links in the global chemical supply chain.
With this said,the country has the potential to grow at the rate of 9%per annum in the
sector and to reach 214 USD Billion four years down the line. The Tata Strategic
Management Report states that currently it is contributing 139 USD Billion constituting
3.3 % of the world's production. Estimated Market Size of this sector is 144 USD Billion.
Product:
With 80000chemicals this sector is highly diversified constituting 15% of the country's
industrial output.
Among this one particular industry that is gaining importance and earning double digit
growth returns in last 5 years is none other than Specialty Chemicals. It is making India
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the Global Manufacturing Powerhouse. It accounts for 3% of the global specialty chemical
market and is valued at 25 USD Billion delivering 13% growth in past 5 years. The leader
in Specialty Chemical space being China is losing its market share due to environmental
concerns. Moreover the advantage of low labour cost is no more visible. The Government's
Make in India initiative along with FDI can deliver upto 30% CAGR by the FY's 13-15.
The Indian colorant industry is valued at USD 6.8 Billion, with exports accounting for
nearly 75%.India accounts for 16% of global industry share and this figure is expected to
further increase. Other segments include petrochemicals, bio-pharma, bio-agri, and bio-
industrial products.
Certain Facts:
Stood 4th
largest in terms of production of agro chemicals globally. India exports
nearly 50% of its production making it a key component.
Total production of Indian Chemicals amounting to 21.2 million tonnes during 14-
15.
India accounts for approximately 16% of the world production of dyestuff and dye
intermediates.
Production of polymers is Around 6.53 Million Tonnes of polymers were produced
during 14-15 and 3.73 million tonnes were imported being third largest in the world.
Eye Catcher for Investment:
The chemicals industry being a key constituent of the Indian economy, accounts for about
1.38% of the nation’s GDP.
India’s proximity to the Middle East, the world’s source of petrochemical
feedstock, makes for economies of scale.
Strong government support for R&D.
Polymers and agro-chemicals industries in India present immense growth
opportunities.
100% FDI permitted through automatic route which states that investment
in this sector does not require any prior approval from the Government or
RBI.
Chemical Sector is de licensed by the Government except for few hazardous
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chemicals. 20 items which were exclusively reserved for MSME sector have
been de-reserved on 10th April 2015 creating opportunities for investment.
Upcoming Petroleum, Chemicals and Petrochemicals Investment Regions
(PCPIR) & Plastic Parks will provide state-of-the-art infrastructure for
Chemical & Petrochemicals Sector.It is basically a region spread over 250kms
which is set up for the manufacturing of Petroleum, Chemicals and
Petrochemical products.
Trade in most of the chemicals is free except for those attracting provision of
international conventions.
Polymer demand is expected to grow by 8-10% with healthy growth in
industries such as clothing; automobiles etc.Growth drivers include a growing
construction industry and adoption of advanced coating, ceiling and polymer-
based reinforcing material in construction as well as plastics, paints and
coatings for the automotive sector.
Growth Potential
A large population, huge domestic market dependence on agriculture creating low
domestic consumption and strong export demand are the key growth drivers for the
industry. Gifted with the title of Asia being the World's Chemical Manufacturing Hub, we
are embarking towards a global shift.
As the per capita consumption of chemicals is low in the domestic market compared to
international forum reflects immense scope of further investments. Moreover, rising GDP
,key emphasis on new segments such as knowledge and specialty chemicals, low
manufacturing cost due to skilled professionals and world-class engineering provides
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wide scope of development of this sector. Strong R&D along with up-gradation in
technology lead to remarkable growth in this sector.
Polices Established
Industrial licensing has been abolished for most sub-sectors except for certain hazardous
chemicals.
The government is continuously contracting the list of reserved chemical items for
production in the small-scale sector, thereby facilitating greater investment in technology
upgradation and modernisation.
Policies have been initiated to set up integrated PCPIR.
Highlights of 14-15 Strategy:
1. Implementation of strategy for sourcing and allocation of feedstock.
2. Development of an innovation roadmap for chemicals sector and setting up of R&D
fund under Public Private Partnership model.
3. Focus on green and sustainable technologies and reducing the environmental impact of
the sector.
4. Augmenting existing testing centres to act as certifying agencies for testing plastic
products and raw materials to meet BIS standards.
5. Establishing specialised vocational training centres in clusters for the chemicals
industry.
6. Formation of industrial clusters/plastic parks of world class quality.
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Government's Initiative
Budgetary Impact (15-16)
The table below reflects the changes in the duty rates announced in the Budget 2015-16.
CHEMICAL BASIC CUSTOMS DUTY(BCD) SPECIALADDITIONAL DUTY(SAD) OLD NEW OLD NEW
ULEXITE ORE 2.50% 0.00%
NAPTHA 4.00% 2.00%
STYRENE MONOMER 2.50% 2.00% 4.00% 2.00%
ETHYLEME
DICHLORIDE
2.50% 2.00% 4.00% 2.00%
VINYL CHLORIDE
MONOMER
2.50% 2.00% 4.00% 2.00%
ISOPRENE 5.00% 2.50%
ANTHRAQUINONE 7.50% 2.50%
BUTYL ACRYLATE 7.50% 5.00%
LIQUEFIED BUTANES 5.00% 2.50%
R&D Incentives:
Government is providing a weighted tax deduction u/s 35(2AA) of the Income Tax
Act.Any amount paid to a national laboratory, university or institute of technology,f or
specified persons with a specific direction,provided the said sum is used for scientific
research within a programme approved by the prescribed authority has been granted with
200% deductions.
Companies Engaged In Manufacture Having An In-House
R&D Centre:
A tax deduction of 200% under Section 35 (2AB) of the Income Tax Act for both capital
and revenue expenditure incurred on scientific research and development. Expenditure on
land and buildings are not eligible for deductions.
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State Incentives:
Apart from the above, each state in India offers additional incentives for industrial
projects.
Incentives such as relaxation in stamp duty exemption on sale/lease of land, power tariff
incentives, subsidized cost of land,concessional rate of interest on loans, investment
subsidies/tax incentives, backward areas subsidies, special incentive packages for mega
projects etc are provided at state level.
Incentives are also provided in SEZ/NIMZ as specified in respectives acts .Units
established in North East, Jammu &Kashmir, Himachal Pradesh and Uttarakhand are
provided with rebates.
Export Incentives: Export promotion capital goods scheme.
Duty drawback scheme.
Merchandise Export from India Scheme
Service Exports from India Scheme
Together For Sustainability
Together for Sustainability(TfS), a joint initiative of leading global chemical companies,
has been formally launched in the country to encourage the Indian suppliers to adopt
sustainabilitypractices in their management and manufacturing systems.
Considering the important role played by chemical industry across sectors including
automobile, pharmaceuticals, textiles and even manufacturing, aligning with
sustainability will help the sector to drive innovation as well as their growth engine. Deepak Parikh, Vice Chairman and managing director and Region President,Clariant in
India, said, "The chemical industry is taking the lead towards sustainability by focusing on
innovative solutions, and consistently introducing new sustainable product offerings.
Innovative solutions and an improving eco footprint clearly testify the commitment of the
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chemical industry towards sustainability amid rising concerns around climate change and
depleting natural resources. Chemical companies are increasingly working towards
reducing energy intensity of their operations, minimizing effluent discharge and pollution,
increasing the share of recyclable products in their portfolio and diversifying their raw
material base to include bio-feedstock. While end-user companies are leaving no stone
unturned in their quest to reduce carbon footprint in their supply chain, it is here that
specialty chemicals play a pivotal role. Be it developing detergents that require less water
to cleanse, packaging materials without heavy metals, or paints with low volatile organic
compound."
A Colorful Outperformance
Number 1 Paint Company in India
Over 2 billion USD group Revenue
3 nearest competitor in India awarded by Times
4th largest paint company in Asia
Part of 30 Shares in Bse S &P Sensex
14th largest coating company on the world
Operating in 19 countries
26 Manfacturing plants established worldwide
Having marketing leadership in India since 49 years with many more to come.
Part of top 50 Companies by Forbes four times in a row.
Part of 50 Shares of Nse Nifty.
Providing Services to consumers spread across 65 countries.
Employment to more than 7000 employees world wide.
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All this in its bag and one company to name:Asian Paints!
Tracing back to its year of foundation this company has come a long way and turned out to
be the India's largest and Asia's Fourth largest paint and chemicals company with a 10 digit
turnover of Rs.155.34 billion. Step by Step the company has evolved from its little
beginnings in 1942. Set up by 4 friends as a partnership with a vision to capture the entire
industry by taking on the world's biggest , most famous paint companies operating in India
at that time,Asian Paints proved its dynamism always in all ways.
Within a span of 25 years,it attained the title of India's leading paints company and has still
withstood by it.This industry got its corporate face through this company providing a edge
in the global market. Presently double in size compared to any other paint company
operating in India Asian Paints manufactures a wide array of products it aims to become
one of the top 5 decorative coating company worldwide by showcasing its expertise in the
higher growth emerging market.(already a part of top 10 list). This has been achieved
through its aspiration of "being the fore runner of inspiring decor and actively
empowering customers in creating their dream homes".Strong consumer focus by
creating brand loyalty through top class services and innovative zeal to outdo the old trend
just painting the walls to "Every wall has a untold Story",the company has been the
market leader since 1967.
Robust Supply Chain and IT and dedicated R&D are strengths of this gaint.Poweful
consumer connect through 40000 dealers is something that the company can brag about.
Small packs, exterior paint segment,consumer and dealer helpline,Colour Next( prediction
of new and current trends),Special effect and texture paints,signature stores,colour idea
stores, samplers,home guides,Enycolour Service Brand,Home Solutions(for painting
Services) and colour consultancy for homes are innovative strategies adopted by the
company to enchance its marketing.
Product Line:
The company operates in four Segments in the Decorative Coatings.
o Interior Wall Finishes
o Exterior Wall Finishes
o Wood Finishes
o Metal Finishes
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Introduced new lines like waterproofing,wallpapers. adhesives etc.
Industrial Coatings has two broad categories
o Auto Coatings
o Non Auto Coatings
Asian Paints is also a manufacturer of PAN and PENTA chemicals.
With this said, the company currently intends to build long term value in the industrial
coatings business through alliances with established global partners.
Asian Paints said that as a part of the company's plan to consolidate its investments in the
overseas subsidiaries, Asian Paints (International) (APIL), Mauritius, a wholly owned
subsidiary of the company, has transferred its entire holding of 99.18% held in the
subsidiary company, Asian Paints (Lanka), Sri Lanka, to Berger International, Singapore, a
wholly owned subsidiary of APIL. The transfer process has been completed on 19
September 2016.
Financial Highlights
Asian Paints' consolidated net profit marginally decline by 10.46% to Rs 494.76 in
Sep 2016 crore from 552.56 crores in June 2016 QoQ.
The total income of the company for the September quarter of FY 2016-17 was
recorded at Rs.4189.65, which depicts a jump of 3.84%.
EPS has seen a phenomenal growth of 19.23% YoY Basis, from EPS 4.16 to EPS
4.96 in Sep FY17 and Sep FY16 respectively.
Revenue per Share has increased from 2015 to 2016 to Rs.121 to Rs.131
respectively.
If the Annual Trend is given a view then then company has been growing in terms of
Revenue and Total income Phenomenon-ally as highlighted in the Table below.
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(in Cr.) 2016 2015 2014 2013 2012
Income Statement
Revenue 12,645.88 11,648.83 10,418.78 8,971.70 7,964.16
Other Income 225.30 186.82 173.66 126.15 141.49
Total Income 12,871.18 11,835.65 10,592.44 9,097.85 8,105.65
Expenditure -10,231.67 -9,651.84 -8,651.47 -7,424.43 -6,612.41
Interest -23.40 -27.13 -26.08 -30.56 -30.82
PBDT 2,616.11 2,156.68 1,914.89 1,642.86 1,462.42
Depreciation -238.36 -223.11 -212.32 -126.98 -99.49
PBT 2,377.75 1,933.57 1,702.57 1,515.88 1,362.93
Tax -780.32 -606.17 -533.51 -465.88 -404.54
Net Profit 1,597.43 1,327.40 1,169.06 1,050.00 958.39
Equity 95.92 95.92 95.92 95.92 95.92
EPS 16.65 13.84 12.19 109.47 99.92
CEPS 19.14 16.16 14.40 122.70 110.29
OPM % 20.87 18.75 18.63 18.65 18.75
NPM % 12.63 11.40 11.22 11.70 12.03
Investment Opinion:
If we look at the ANNUAL REVENUE TREND of the last 5 financial years, the company
has maintained its revenue growth at around 10% .However, from FY15 to FY16 the
company has outperformed in the past five years as they witnessed a remarkable jump of
20.34% in terms of net profit which is double that of prevailing trend of about 10%to
13%.This might depict a headstart for the company in terms of generating profit as the
overhead costs are decreasing with increasing revenue. Minimized cost and vehement
focus on Consumer Demand this company has a LONG WAY TO GO. Moreover the
company has also created wealth for shareholders which are reflected by the growth in
dividend to 22.95% in FY 16.
We recommend a buy at 1085 with a short term target of 1300.
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Disclaimer
The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making in-vestment decision. Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022
Disclosure
Dynamic Equities Pvt. Ltd. is a member of NSE, BSE, MCX SX and a DP with NSDL & CDSL. It is also engaged in Investment Advisory Services and Portfolio Management Services. Dynamic Commodities Pvt. Ltd., associate company, is a member of MCX & NCDEX. We declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are reg-istered. SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on for certain operational deviations. Answers to the Best of our knowledge and belief of Dynamic/ its Associates/ Research Analyst: DYNAMIC/its Associates/ Research Analyst/ his Relative:
Do not have any financial interest / any actual/beneficial ownership in the subject company. Do not have any other material conflict of interest at the time of publication of the research report Have not received any compensation from the subject company in the past twelve months Have not managed or co-managed public offering of securities for the subject company. Have not received any compensation for brokerage services or any products / services or any compensation or other bene-
fits from the subject company, nor engaged in market making activity for the subject company Have not served as an officer, director or employee of the subject company
Report Prepared by Palak Gupta
