Specialty Chemicals Sector Initiation - Mar 2016 PhilipsCapital

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

INSTITUTIONAL EQUITY RESEARCH
Specialty Chemicals
Rerated by lower crude; not yet captured core potential
29 March 2016
INDIA | SECTOR INITIATION
Indian specialty chemicals foresees accelerated growth Companies

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 SRF
ahead, India’s large population base with lower per‐capita consumption of chemicals and Reco BUY
relatively strong GDP growth outlook (7‐8% over the next few years) will sustain healthy CMP, Rs 1267
domestic growth. The governments’ ‘Make in India’ initiative will facilitate the industry with Target Price, Rs 1700
common infrastructure and a consequent rapid flow of FDI into the sector (~30% CAGR over
Aarti Industries
FY13‐15 to US$ 2.67bn) will accelerate growth.
Reco BUY
CMP, Rs 472
Chinese export slowdown seems the key exports booster Target Price, Rs 700
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 Vinati Organic
its chemical exports. We expect Chinese exports to shrink more in 2016 as its environmental Reco BUY
CMP, Rs 395
cleansing process will continue. Another emerging trend – of industries shifting to the west
Target Price, Rs 485
of China from the densely populated eastern side – will continue to adversely impact
Chinese exports in the near and medium term. Meghmani Organics
Reco BUY
We consider falling chemical exports from China as a key export opportunity for the Indian CMP, Rs 20
industry – particularly for manufacturers of Indian polymers, dyes and pigments, textile Target Price, Rs 40
chemicals, and agro chemicals, which should benefit from China’s slowdown, provided they Camlin Fine Sciences
already have a respectable presence in the export market. Reco BUY
CMP, Rs 88
Lower crude and scale benefit to drive value growth Target Price, Rs 135
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 Atul Ltd
Reco NEUTRAL
was not to the tune of crude price correction. Hence, we expect the industry to maintain
CMP, Rs 1470
improved margin profile even if crude prices recover. Additionally, scale benefit from rising Target Price, Rs 1650
demand would ensure value growth ahead.
Navin Flourine
Sector certainly rerated due to lower crude; not yet captured core potential Reco NOT RATED
Lower crude has already re‐rated Indian specialty chemicals since mid‐2014, but we believe CMP, Rs 1694
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. Surya Patra (+ 9122 6667 9968)
spatra@phillipcapital.in
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. Mehul Sheth (+ 9122 6667 9996)
msheth@phillipcapital.in
Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

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 The ~US$ 25bn Indian industry accounts
league. Additionally, due to lack of innovation of new products or applications, these for only 3% of the global specialty
businesses have developed largely to meet immediate local demand, which requires chemicals market
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
100
80
60
40
20
‐
Total India chemicals Listed chemicals Top 25 chemicals SMEs chemicals
market (%) company (%) company (%) company (%)
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% The Indian specialty chemicals market is
annual average) against global growth of ~7%. More than exports, steadily rising local growing at almost 2x the global
demand supported its growth momentum. In fact, the industry gained from faster average
GDP growth in India, domestic demand attaining critical mass, low‐cost
manufacturing, and enhanced focus on process R&D.

Indian specialty chemicals industry grew at double the rate of GDP over last five
years
Growth over last five years
14%
12%
1.9x vs GDP
10% growth
8%
6%
4%
2%
0%
GDP CAGR (%) Indian specialty chemicals Global specialty chemicals
CAGR (%) CAGR (%)
The following factors indicate the robust potential of India’s specialty chemical Factors that will drive robust growth –
demand – large population with lowest per‐capita consumption of chemicals in the large population, but low per‐capita
consumption of chemicals + strong GDP
country, and India’s relatively strong GDP growth outlook (7‐8% over the next few
growth outlook + favourable initiatives
years). Various industry estimates also suggest that rapid progress in key end‐user by the Indian government
industries domestically would support growth.
Healthy growth in user industries provide better outlook Rapid progress in FDI into chemicals over last three years
Expected growth over next 3‐5 years
16%
15% 15% 15%
14% 14% 14%
12% 12%
10% 10%
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).

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
Inorganic Chemicals
Pigments for Paints
Organic Chemicals
China Total Export
Pigments for Dyes

Butadiene Rubber
Neumatic Rubber
Synthetic Dyers
Organic Dyers
Vinyl Chloride
Textile fabric
Textile Yarn
Carboxylic
Ethelyne
Phenols
Styrene
Rubber
MMSF
MMF
0%
‐10%
‐20%
‐30%
‐40%
‐50%
‐60%
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
China’s shutting down and relocation of
shutting down or shifting more than 1000 plants to a ‘green belt’ – over 2015 and
large state‐owned enterprises in 2016
2016. While China saw softer exports in 2015, we expect more of the same in 2016 would create demand‐supply
as: (1) inventory piles up before plant shut downs, and (2) initial clampdown on small imbalances in the global specialty
inefficient plants could not have impacted exports much. In addition, the emerging chemicals trade
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.

Indian labour cost is ~40% lower compared to China

6.0 China wages per person/year (Rs Lacs) 30%
India wages per person/year (Rs Lacs)
China's wage cost disadvantage over India (rhs) 20%
5.0
10%
4.0 0%
‐10%
3.0
‐20%
2.0 ‐30%
‐40%
1.0
‐50%
‐ ‐60%
2011 2012 2013 2014 2015
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 The Chinese slowdown will benefit
exporter of various chemicals such as manmade filaments (worth US$ 13.1bn), Indian manufacturers of polymer, dyes
manmade staple fibres (US$ 9.5bn), fertilisers (US$ 5.57bn), inorganic chemicals (US$ and pigments, textile chemicals, and
4.6bn), and tanning/dyeing extracts (US$ 2.2bn). Implementation of new agro chemicals manufacturers, provided
environmental laws in China has already caused a decline in its chemicals exports and the manufacturer already has a
respectable presence in the export
the trend is likely to sustain in 2016‐17.
market
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
India chemicals Net trade (US$ Bn) Net export of specialty chemicals by China (US$ Bn)
15 100
China chemicals Net trade (US$ Bn)
10
80
5
60
‐
(5) 40
(10)
20
(15)
(20) ‐
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.

Where to invest? Historical financials suggests The domestic specialty chemicals

‘bigger is better’ industry is highly fragmented among
+40,000 companies of which about 60
While the domestic specialty chemicals industry is estimated at US$ 25bn, it is highly
are listed and command 38% market
fragmented among +40,000 companies, most of which are unorganised. However, share or US$ 8bn
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 Scalability and efficiency are key to the
long‐term progress of any company. We consider the financial performance of the long‐term progress
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

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

• 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 FY12 FY13 FY14 FY15 Avg. FY11 FY12 FY13 FY14 FY15 Avg.
FY11‐15 FY11‐15 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 1.8
Atul 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 1.8
Camlin 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 1.5
Meghmani 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 1.1
SRF 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 0.8
Vinati 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 2.0
Navin 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 1.3
Gujarat 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 0.8
BASF 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 3.7
Deepak 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 1.9
Sudarshan 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 1.8
Clariant 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 2.7
Nocil 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 1.8
Plastiblends 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 3.4
Alkyl 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
• 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 34 117 132 130 127 106 102
Atul 72 73 76 74 75 66 71 67 72 62 64 60 75 66 66 64 60 51 68 74 81 71 79 76
Camlin 74 76 100 164 88 104 108 106 97 84 72 73 97 126 102 157 78 74 85 56 94 91 82 103
Meghmani 62 54 59 62 77 61 141 123 114 118 109 89 49 47 38 52 54 40 154 130 135 129 133 110
SRF 59 71 55 64 77 72 52 51 44 48 62 48 72 68 58 59 82 62 39 54 40 53 57 58
Vinati 38 50 44 45 31 34 56 58 69 74 59 61 15 17 13 16 14 17 78 91 100 104 77 78
Navin 59 62 67 60 56 53 33 48 33 49 67 73 104 80 38 55 79 83 ‐12 30 62 53 44 43
Alkyl Amines 67 63 63 64 62 60 54 59 56 60 78 100 42 44 37 36 38 46 79 78 82 88 101 114
BASF 64 58 56 56 45 49 76 77 71 67 55 69 88 96 83 67 52 81 53 39 44 56 48 36
Clariant 54 44 44 46 48 52 50 42 43 36 30 34 57 59 66 74 71 64 47 28 21 7 6 22
Deepak Nitrite 78 72 67 62 58 54 30 32 32 31 31 40 39 54 67 51 42 44 69 50 31 42 48 51
Gujarat Fluor 95 95 66 31 37 33 50 59 59 50 57 57 66 64 49 44 70 82 79 90 76 37 24 8
Nocil Ltd. 73 73 73 66 65 67 81 78 79 78 71 60 44 43 36 38 40 37 110 108 115 106 96 91
Plastiblends 62 64 62 57 53 46 35 43 48 55 55 49 26 26 20 17 16 16 72 81 91 96 92 79
Sudarshan 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 Bigger is better for investments
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

Aarti Atul Aarti Atul Camlin
Camlin Gujarat Fluoro Navin SRF Vinati
800
2,000 Meghmani Navin Meghmani
SRF Vinati 700
600
1,500
500
1,000 400
300
500 200
100
‐ ‐
Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 4‐Apr‐10 4‐Apr‐11 4‐Apr‐12 4‐Apr‐13 4‐Apr‐14 4‐Apr‐15
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‐ To maintain improved margin profile
2014) has certainly benefitted margins of specialty‐chemical peers (as visible in the even if crude prices recover
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.

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

Crude price ($, RHS) Aarti Atul Ltd.
Camlin Meghmani Navin
45 140
SRF Ltd. Vinati
40
120
35
100
30
25 80
20 60
15
40
10
20
5
0 0
Jun/08
Jun/09
Jun/10
Jun/11
Jun/12
Jun/13
Jun/14
Jun/15
Oct/08
Feb/09
Oct/09
Feb/10
Oct/10
Feb/11
Oct/11
Feb/12
Oct/12
Feb/13
Oct/13
Feb/14
Oct/14
Feb/15
Oct/15
With a visible accelerated growth in specialty chemical demand, and continuous but Faster revenue growth for the industry +
controlled capex, we foresee faster revenue growth for the Indian specialty chemicals scale improvement + continued lower
industry. Additionally, scale improvement and continued lower crude prices will drive crude prices = Value growth and stock
value growth, leading to stock rerating. 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)

19 10
Navin Navin
15 8 Vinati
EV/EBITDA (x) (FY18E)
Vinati Camlin
Atul Atul
PE (x) (FY18E)
Aarti
11 SRF Camlin 6 SRF
Aarti
7 4
Meghmani Meghmani
3 2
10 15 20 25 30 15 20 25 30
ROE (%) FY18 ROCE (%) FY18
Source: Company, PhillipCapital India Research Estimates

Specialty chemicals universe ROE over FY11‐18 Specialty chemicals universe ROCE over FY11‐18
Aarti Atul Camlin
Aarti Atul Camlin
50 50 Meghmani SRF Vinati
Meghmani SRF Vinati
Navin
40 40
30 30
20 20
10 10
0 0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
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 EPS ___EPS (Rs)___ ___PE (X)___ __EV/EBITDA (X)__ ___ROE (%)___ ___ROCE (%)___
CAGR CAGR
(RS bn) FY15‐18 % FY15‐18 % FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e
Aarti 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 19.3
Atul 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 23.2
Camlin 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 22.7
Meghmani 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 17.1
Navin 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 17.3
SRF 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 17.1
Vinati 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
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 value
Aarti Industries BUY 614 472 700 48 A play for structural growth in Indian specialty chemicals
Vinati Organics BUY 318 395 495 25 Most efficient Indian specialty chemical play led by integration
Meghmani Organics BUY 79 20 40 100 Operating leverage as well as financial deleveraging boost earnings
Camlin 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

Companies Section

SRF Ltd (SRF IN)

Value overcomes volume
29 March 2016
INDIA | SPECIALTY CHEMICALS | Initiating Coverage
Rapid progress in fluoro‐specialty to drive value growth BUY
By leveraging its unique experience of >25 years in handling fluorine chemistry, SRF has CMP RS 1267
already established itself as one of the leading players of fluorospecialty in the world. Rising
TARGET RS 1700 (+34%)
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
COMPANY DATA
business – and should deliver sales CAGR of >30% over FY15‐18 (supplemented by increasing O/S SHARES (MN) : 57
R&D focus, expanding customer base, and steady capacity creation), to drive value growth. MARKET CAP (RSBN) : 70
MARKET CAP (USDBN) : 1.1
Domestic leader of refrigerant gases – this segment should see volume and value growth 52 ‐ WK HI/LO (RS) : 1496 / 355
LIQUIDITY 3M (USDMN) : 3
SRF is the undisputed leader of refrigeration gases in India (an important derivative product
PAR VALUE (RS) : 2
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 SHARE HOLDING PATTERN, %
and will also lead to backward integration of HFC (Hydrochlorofluorocarbons) blends. Dec 15 Sep 15 Jun 15
Volume and value growth should also come from (1) acquisition of pharma‐grade R134a gas PROMOTERS : 52.4 52.4 52.4
business from Du Pont (making it one of the three leading suppliers of HFC gas to the FII / NRI : 16.1 15.2 15.5
FI / MF : 12.5 13.0 12.6
pharma industry globally) and (2) supply of R134a to WalMart, USA. The recent US anti‐ NON PRO : 1.9 2.1 2.1
dumping duty on Chinese imports of HFC blends (91.99‐210.46% range) could surprise SRF’s PUBLIC & OTHERS : 17.1 17.4 17.4
R134a/R32 sales growth positively in the medium term.
PRICE PERFORMANCE, %
Technical textiles: A cash cow operation despite radialisation and economic slowdown 1MTH 3MTH 1YR
ABS 12.4 ‐0.9 34.9
SRF is the largest producer of tire‐cord fabric (nylon – NTCF; polyester ‐ PTCF) in India and a REL TO BSE 5.9 0.1 45.3
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 PRICE VS. SENSEX
likely improvement in the domestic economy. The current domestic demand‐supply 500
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 400
anticipated major capex and steady demand, SRF’s textile business will remain a cash‐cow
300
operation with estimated annual operating cash flow of ~Rs 2bn over FY15‐18.
200
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 100
terephthalate (BOPET) and bi‐axially oriented polypropylene (BOPP) films. Despite subdued 0
global and domestic environment, it continues to outperform due to its focus on value‐ Apr/14 Oct/14 Apr/15 Oct/15
added products (chemical‐coated films account for 30% of the market), higher operating SRF BSE Sensex
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 Source: Phillip Capital India Research
led by (1) anticipated ~15% improvement in FMCG sector demand and (2) SRF’s planed plant KEY FINANCIALS
expansion with an investment of US$ 50mn. Rs mn FY16E FY17E FY18E
Net Sales 46,189 53,160 60,264
Valuations do not capture rapid earning growth; initiate BUY with TP of Rs 1,700 EBIDTA 9,884 11,855 13,439
We estimate SRF to deliver revenue/profit CAGRs of 14%/22% over FY16‐18. Its specialty Net Profit 4,320 5,183 6,404
chemicals operations would be the growth engine in this period with sales/profit CAGR of EPS, Rs 75.1 90.1 111.3
24%/35% respectively. Considering SRF’s diverse business profile, we value it at Rs 1,700 on PER, x 16.9 14.1 11.4
SOTP, implying 34% upside. At our TP, SRF’s blended operation will trade at 15x FY18 EPS EV/EBIDTA, x 9.6 7.9 6.6
P/BV, x 2.7 2.3 2.0
and 8.5x FY18 EV/EBITDA.
ROE, % 16.0 18.2 18.4
Debt/Equity (%) 87.4 71.8 53.1
Source: PhillipCapital India Research Est.

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
50000 In 2015 Aquired Global 1600
In 1970 Incorporated as Net Sales (Rs mn) Share Price (Rs) In 2012 New Chemical
Dupont™ Dymel® HFC 134a
Shri Ram Fibres Complex partly
Pharma Business
45000 In 1986 Commenced production commissioned at Dahej
of coated fabrics 1400
In 1974 Commenced In 2013 Set up facilities in
operations of nylon In 1989 Entered Chemicals Thailand and South
40000 Africa in the Packaging
tyre cord at Manali Business with production of
refrigerants Films Business 1200
35000 In 2008 Made 2 overseas
acquisitions, one for tyre cord plant
In 1979 Commences in Thailand, the other one for belting 1000
30000 production of nylon fabrics in South Africa
engineering plastics
25000 800
In 2007 Establishing Rs
In 1983 Commissioning
In 1995 Ventured 250‐cr polyester yarn
20000 of Belting Fabrics
into Packaging unit in Tamilnadu 600
facilities
Films Business
15000 In 1990 Shri Ram Fibres
renamed as SRF Ltd 400
10000
200
5000
0 0
SRF’s diversified business model

SRF
Technical Textiles Chemicals & Polymers Packaging Films

45% of sales 28% of sales 27% of sales
• Products ‐ Tyre cord fabrics (nylon and • Products ‐ fluorochemicals ‐ refrigerants, • Products ‐ BOPET and BOPP
polyester), belting fabrics, coated fabrics, chlorinated solvents • Global No. 2 for belting fabrics
laminated fabrics, and industrial yarns • Specialty chemicals‐ organic intermediates • India No. 1 for belting fabrics and no 2 for
• Global No. 2 for Nylon 6 tyre cord fabrics • Engineering plastics‐ polymer compounds packaging films
• India No. 1 for tyre cord • India No. 1 refrigerants, specialty • Sales CAGR 30% over FY10‐15
• Sales CAGR 6% over FY10‐15 chemicals, engineering plastics
• Sales CAGR 14% 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
CPB Ex‐CER sales (Rs Bn) CER sales (Rs Bn) CPB contribution to sales (%) CPB EBITDA mrgn (%) (RHS)
25 YOY change (%) (RHS) 80 50 40
70
20 40
60
50 35
15 30
40
10 30 20
30
20
5 10
10
0 0 0 25
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
This segment’s revenue contribution (adjusted for carbon credit income) increased to
CPB is SRF’s most profitable business
32% YTDFY16 from 19% in FY12 and led to higher EBITDA margins (+10% to 21% segment of SRF with operating profit
YTDFY16). We expect CPB sales CAGR of 24% over FY16‐18, which would take its margin of over 30%
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 Fluorospecialty compounds have higher
stream in terms of revenue and profitability. Its unique experience of >25 years in binding affinity, enhanced metabolic
handling fluorine chemistry (one of the most hazardous chemicals) and its concerted stability, and improved bioavailability
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.

Fluorspecialty chemicals to maintain high growth Volume led growth in fluorospecialty

Fluorospecialities sales (Rs mn) YOY change (%) (RHS) Fluorospecialities Volume (Tons) Relisation (Rs/Kg) (RHS)
14000 140 10000 1800
12000 120
8000
10000 100 1500
8000 80 6000
1200
6000 60
4000
4000 40
900
2000
2000 20
0 0 0 600
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
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
450 R&D Spend (Rs mn) % to sales (RHS) 1.1

400
350 1.0
300
0.9 SRF has a strong fluorospecialty pipeline
250
of over 50 products in various stages of
200 development, which provides healthy
0.8
150
growth visibility
100 0.7
50
0 0.6
FY10 FY11 FY12 FY13 FY14 FY15
Developmental flow of fluorospecialty products
R&D Pilot plant Multi‐purpose plant Dedicated Plants
15 dedicated plants;
2 R&D centers to 3 multi‐purpose plant For full scale
design/develop fluoro for scale up of new
Testing stage manufacturing on
compounds as per compounds successful
customer needs
commercialisation
50 products at various stages of development

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 ‐ Only Indian manufacturer with indigenously developed technology.
‐ Propellant in Meter Dose ‐ SRF at 50% utilisation holds ~45% market share in India, while balance being
Inhalers catered by competitors from Chinese import
‐ Chillers ‐ 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 ‐ One amongst top three global suppliers
Inhalers
‐ 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 ‐ One amongst four leading producers in India (Navin, GFL, HFL)
‐ Packaged air conditioners ‐ Already under phase down (10% production cut) for emissive purposes since
‐ Chillers/Commercial and 1st January 2015. It will see another production cut of 25% in 2020, and will
industrial refrigeration units be phased out completely by 2030 as per Montreal protocol
‐ Raw material for ‐ Import of gas filled compressors for air‐conditioners and refrigeration
Pharmaceutical Intermediates equipment is prohibited from 1st July, 2015. Hence, with production cut and
‐ Raw material for Polymers 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% ‐ Commercial Refrigeration ‐ No Indian players are backward integrated and largely depend on the
R143a+4% R134a) imported bulk gases
‐ Development of R‐32 to backward integrate SRF into blends
R407C (23% R32 + 25% ‐ Transport and Industrial ‐ Proposed anti‐dumping duty of 91.99%‐210.46% on Chinese HFC blends by
R125+52% R134a) Refrigeration the US could surprise SRF’s blends exports positively in the medium term

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

R‐134a sales (Rs mn) YOY change (%) (RHS) R‐134a Volumes (Tons) YOY change (%) (RHS)
3500 60 12000 60
3000 10000
40 40
2500
8000
2000 20 20
6000
1500 0 0
1000 4000
‐20 ‐20
500 2000
0 ‐40 0 ‐40
FY13 FY14 FY15 FY16E FY17E FY18E
FY13 FY14 FY15 FY16E FY17E FY18E
The scale up of Dymel supply after the scheduled commencement of its new R134a Acquired pharma grade R134a from
facility in Dahej (1200tpa, USFDA standard) from FY17 would drive R134a volume Dupont in FY15
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.

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. Under technical textiles, SRF
While NTCF is generally used as reinforcement material inside bias tires for manufactures and markets nylon tyre
trucks/buses/off‐the‐road vehicles, PTCF is used as reinforcement inside radial tires in cord fabrics (NTCF), polyester tyre cord
passenger cars and light commercial vehicles. fabrics (PTCF), belting, coated, and
laminated fabrics, fish net twines, and
industrial yarns. It operates from
While the concerns over radialisation impacting NTCF growth have become a multiple plants in India, Thailand and
buzzword, we believe the ongoing economic slowdown and its impact on the auto South Africa
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
Tire cord
NTCF fabric (Rs
‐ Revenue volume
mn) (tons) M&HCV (RHS) Passenger (RHS)
60000 120%
50000 100%
40000 80%
30000 60%
20000 40%
10000 20%
0 0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
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 FY2018E
Revenue 21857 20396 17688 18828 19415
EBITDA 2413 2313 2411 2482 2576
Margin % 11.0 11.3 13.6 13.2 13.3
PAT 1249 1449 1307 1326 1374
ROCE 12.6 17.0 15.9 14.8 13.9
Operating cash flow 2159.4 2094.9 1948.6 2020.1 2106.4

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 FY2018E
Revenue 8830.1 12460.0 13207.6 15188.7 17163.3
EBITDA 362.6 931.8 2511.1 2720.9 3000.2
Margin % 4.1 7.5 19.0 17.9 17.5
PAT ‐282.9 133.2 908.8 993.8 1204.0
ROCE ‐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 FY18E
Technical Textiles Business (TTB) 18615 21485 21313 21857 20396 17688 18828 19415
YoY 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 32
Chemicals and Polymers Business (CPB) (Ex CER) 6739 7655 7723 9563 12634 15384 19235 23777
YoY 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 39
CER sales (Rs mn) 728 4397 2627 ‐ ‐ ‐ ‐ ‐
Packaging Film Business (PFB) 8713 6607 6208 8830 12460 13208 15189 17163
YoY 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 28
Total Revenue 34735 40010 37829 40181 45399 46189 53160 60264
YoY 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
Chemicals and Polymers Business (CPB)
EPS (Rs) EBITDA margin (%) (RHS)
Technical Textiles Business (TTB) 120 35
70 60
Packaging Film Business (PFB)
60 YoY change (%) 100 30
40
50 17 25
80
15
40 20 20
12 13
7 9 60
6 19
30 9 15
19 0
18 40
21 21 20 10
20 22
19
‐20 20
10 24 5
15 19
12 10 10 13
7 0 0
0 ‐40
Improving operating efficiency Operating leverage to boost cash position

Capex (Rs mn) ROCE (%) (RHS) Operating cashflow (Rs mn) Capex (Rs mn) FCF (Rs mn)
10000 30
10000
25 8000
8000
6000
20
4000
6000
15 2000
4000 0
10 ‐2000
2000 ‐4000
5
‐6000
0 0 ‐8000

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 Target Multiple Value
(Rs mn) (x) (Rs mn)
TTB EBITDA 2576 6 15458
CPB EBITDA 7492 11 82416
PFB EBITDA 3000 5 15001
Total Enterprise Value (Rs mn) 112874
Net debt 15902
Target Mcap (Rs mn) 96973
No of shares (mn) 58
Target Price (Rs) 1700
CMP (Rs) 1267
Upside 34%
One‐year forward PE band One‐year forward EV/EBITDA band

2000 P/E EV/EBITDA
Rs 16x 120000
1800 Rs mn 8x
1600 100000
12x
1400 6x
80000
1200
1000 8x 60000 4x
800
600 40000
4x 2x
400
20000
200
0 0
Source: Bloomberg, PhillipCapital India Research Estimates

Operating leverage boosts efficiency ROE follows improving PAT growth
30 ROCE (%) EBITDA growth (%) (rhs) 80 ROE (%) PAT growth (%) (rhs)
30 16
25 60 14
25
12
20 40 20
10
15 20 15 8
6
10 0 10
4
5 ‐20 5
2
0 ‐40 0 0
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.

Financials
Income Statement Cash Flow

Y/E Mar, Rs mn FY15 FY16e FY17e FY18e Y/E Mar, Rs mn FY15 FY16e FY17e FY18e
Net sales 45,399 46,189 53,160 60,264 Pre‐tax profit 3,994 5,863 7,571 9,143
Growth, % 13 2 15 13 Depreciation 2,450 2,903 3,232 3,425
Total income 45,399 46,189 53,160 60,264 Chg in working capital ‐1,066 382 ‐1,311 ‐1,336
Raw material expenses ‐25,420 ‐24,018 ‐27,377 ‐31,036 Total tax paid ‐332 ‐1,598 ‐1,917 ‐2,369
Employee expenses ‐3,561 ‐3,418 ‐3,721 ‐4,219 Other operating activities ‐731 ‐4,266 ‐5,654 ‐6,774
Other Operating expenses ‐9,149 ‐8,868 ‐10,207 ‐11,571 Cash flow from operating activities 4,316 3,285 1,920 2,089
EBITDA (Core) 7,269 9,884 11,855 13,439 Capital expenditure ‐6,086 ‐5,874 ‐4,561 ‐3,343
Growth, % 39.1 36.0 19.9 13.4 Chg in investments ‐577 0 0 0
Margin, % 16.0 21.4 22.3 22.3 Cash flow from investing activities ‐6,663 ‐5,874 ‐4,561 ‐3,343
Depreciation ‐2,450 ‐2,903 ‐3,232 ‐3,425 Free cash flow ‐1,151 1,732 2,543 0
EBIT 4,819 6,981 8,623 10,014 Debt raised/(repaid) 2,595 ‐1,097 ‐915 ‐2,798
Growth, % 61.9 44.9 23.5 16.1 Cash flow from financing activities 2,595 2,534 3,587 2,926
Margin, % 10.6 15.1 16.2 16.6 Net chg in cash 248 ‐55 947 1,672
Interest paid ‐1,376 ‐1,349 ‐1,318 ‐1,172
Other Non‐Operating Income 646 231 266 301
Pre‐tax profit 3,994 5,863 7,571 9,143 Valuation Ratios
Tax provided ‐966 ‐1,598 ‐1,917 ‐2,369
FY15 FY16e FY17e FY18e
Profit after tax 3,028 4,266 5,654 6,774
Per Share data
Net Profit 3,028 4,266 5,654 6,774
EPS (INR) 53.4 75.1 90.1 111.3
Growth, % 73.8 38.4 20.0 23.6
Growth, % 73.8 40.6 20.0 23.6
Net Profit (adjusted) 3,123 4,320 5,183 6,404
Book NAV/share (INR) 393.0 462.3 540.6 640.1
Unadj. shares (m) 58 58 58 58
FDEPS (INR) 53.4 75.1 90.1 111.3
Wtd avg shares (m) 58 58 58 58
CEPS (INR) 95.4 125.6 146.3 170.9
CFPS (INR) 75.3 127.3 127.1 148.8
Return ratios
Balance Sheet Return on equity (%) 13.2 16.0 18.2 18.4
Y/E Mar, Rs mn FY15 FY16e FY17e FY18e Return on capital employed (%) 10.6 13.4 15.5 17.1
Cash & bank 1,073 1,019 1,966 3,638 Turnover ratios
Debtors 6,107 6,327 7,282 8,255 Asset turnover (x) 1.0 0.9 1.0 1.1
Inventory 7,635 7,593 8,739 9,906 Sales/Total assets (x) 0.8 0.8 0.8 0.9
Loans & advances 2,679 2,771 3,190 3,616 Sales/Net FA (x) 1.2 1.1 1.2 1.4
Other current assets 131 131 131 131 Working capital/Sales (x) 0.2 0.2 0.2 0.2
Total current assets 17,624 17,841 21,307 25,546 Receivable days 49.1 50.0 50.0 50.0
Investments 943 943 943 943 Working capital days 70.0 65.7 66.1 66.4
Gross fixed assets 66,773 71,688 76,949 80,592 Liquidity ratios
Less: Depreciation ‐27,585 ‐30,488 ‐33,720 ‐37,145 Current ratio (x) 2.2 2.1 2.2 2.3
Add: Capital WIP 1,076 2,035 1,335 1,035 Quick ratio (x) 1.3 1.2 1.3 1.4
Net fixed assets 40,265 43,235 44,564 44,482 Interest cover (x) 3.5 5.2 6.5 8.5
Total assets 59,540 62,727 67,522 71,679 Total debt/Equity (%) 106.0 87.4 71.8 53.1
Current liabilities 7,850 8,504 9,712 10,943 Net debt/Equity (%) 101.4 83.6 65.5 43.2
Provisions 283 283 283 283 Valuation
Total current liabilities 8,133 8,787 9,995 11,226 PER (x) 23.7 16.9 14.1 11.4
Non‐current liabilities 28,443 27,346 26,431 23,633 PEG (x) ‐ y‐o‐y growth 0.3 0.4 0.7 0.5
Total liabilities 36,576 36,133 36,426 34,859 Price/Book (x) 3.2 2.7 2.3 2.0
Paid‐up capital 584 575 575 575 EV/Net sales (x) 2.1 2.1 1.8 1.5
Reserves & surplus 22,336 25,976 30,478 36,202 EV/EBITDA (x) 13.4 9.6 7.9 6.6
Shareholders’ equity 22,963 26,594 31,097 36,820 EV/EBIT (x) 20.2 13.6 10.8 8.9
Total equity & liabilities 59,540 62,727 67,522 71,679

Aarti Industries (ARTO IN)

Art in project execution
29 March 2016
One of the leading global players of benzene derivatives BUY

Aarti is the largest producers of benzene derivatives in India and has emerged as one of the CMP RS 472
leading manufacturers globally. Its global market share in this segment is 25‐40% in various
TARGET RS 700 (+48%)
products. Globally, Aarti has the 3rd largest capacity in chlorination, 2nd largest in
ammonolysis and hydrogenation, and 4th largest in nitration.
COMPANY DATA
O/S SHARES (MN) : 83
A key beneficiary of the Chinese slowdown MARKET CAP (RSBN) : 39
Leveraging its cost advantage and quality, Aarti has long been exporting competently to MARKET CAP (USDBN) : 0.6
China. With a visible slowdown in Chinese exports (stricter environment policy) and rising 52 ‐ WK HI/LO (RS) : 585 / 294
LIQUIDITY 3M (USDMN) : 0.3
manufacturing costs in that country (due to higher compliance requirements), Aarti is well
PAR VALUE (RS) : 5
set to exploit the opportunity. Its on‐going and timely capacity expansion will help it to make
the most of the enhanced export opportunity. SHARE HOLDING PATTERN, %
Dec 15 Sep 15 Jun 15
Improving products mix in the benzene chain to drive earnings efficiency PROMOTERS : 54.8 54.8 59.1
Aarti’s continued focus on downstream products and co‐product/isomer‐balancing has FII / NRI : 3.0 3.2 1.3
FI / MF : 12.4 12.8 12.2
extended its operation towards better‐value chemical processes such as hydrogenation, NON PRO : 14.8 16.4 14.9
fluoro‐compounding, and phthalates. Hence, improving product mix with scale would drive PUBLIC & OTHERS : 15.0 13.0 12.7
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. PRICE PERFORMANCE, %
1MTH 3MTH 1YR
ABS 8.9 ‐7.2 36.4
Greenfield toluene project: A strategic import‐substitution‐led driver REL TO BSE 2.5 ‐6.2 46.7
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 PRICE VS. SENSEX
project is likely to commercialise early FY17, and will initially act as an import substitute. We
500
estimate this project to add sales of Rs 1.03/1.73bn in FY17/18.
400
One of the best executors of capex
Aarti has been very successful in executing its capacity expansion projects as its capex of 300
about Rs 12bn over the last five years added incremental revenue of Rs 41bn (implying an 200
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. 100
Demerger of pharma/personal care to unlock value 0

Apr/14 Oct/14 Apr/15 Oct/15
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 Aarti BSE Sensex
focus more on value‐added specialty chemicals, Aarti is likely to demerge these businesses Source: Phillip Capital India Research
in FY17, which will unlock value.
KEY FINANCIALS
Rs mn FY16E FY17E FY18E
Initiate BUY with TP of Rs 700, implying an upside of 48%
Net Sales 27,182 32,000 36,462
We estimate Aarti to deliver 16%/21% CAGR in revenues/profit over FY16‐18 to Rs
EBIDTA 5,328 6,336 7,365
36.2/3.72bn in FY18. Additionally, we believe its successful track record in execution of Net Profit 2,584 3,169 3,762
expansion projects over the last five years and its on‐going capex can surprise growth EPS, Rs 31.0 38.0 45.1
positively. We value Aarti at 9x FY18 EV/EBITDA – ~20% discount to SRF’s specialty chemical PER, x 15.2 12.4 10.5
target valuation multiple – at Rs 700. Initiate coverage with a BUY rating. EV/EBIDTA, x 9.2 7.6 6.5
P/BV, x 3.3 2.7 2.2
ROE, % 20.6 20.9 20.6
Debt/Equity (%) 91.7 83.3 74.4

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
35000 600
In 1984 Aarti Net Sales (Rs mn) Share Price (Rs) Aarti Industries
Organics Limited included in the MSCI
In 2010, AARTI Custom Scheme of
incorporated Small Cap Index
In 2008, Aarti Industry Synthesis division Vapi has Arrangement
30000
takes over Surfactants received USFDA approval between Anushakti 500
In 1986 commenced Chemicals and Drugs
1200TPA manufacuting Speciality Pvt. Ltd. and
get access to Upgrades Hydrogenation Limited with Aarti
plant for Nitro Chloro
25000 Home/personal care Technology for Manufacture Industries Limited
Benzenes (NCB) in has been approved
segment of Speciality Chemicals 400
Valsad,Gujarat by the High Court of
In 1990, implemented Commissioning of Sulfonation Gujarat
20000 unit at Pithampur (MP)
its expansion of valsad In 2006, Aarti splits its
facility to 4500TPA for stock from Face value of 300
NCB, ONCB, PNCB etc from Rs 10 to Rs 5
15000
In 1997, merged Aarti with Salvigor In 2003, Mr. Rajendra V 200

10000 Labs the largest producers of Gogri appointed as
chemical intermediates ONCB/PNCB Managing Director
and their downstream products
100
5000
0 ‐
Mar‐90 Mar‐93 Mar‐96 Mar‐99 Mar‐02 Mar‐05 Mar‐08 Mar‐11 Mar‐14
Business model
Aarti Industries
Pharmaceuticals Specialty Chemicals Home/Personal Care

(10% of sales) (83% of sales) (7% of sales)
• Focusing off‐patented generics to be • Agro chemicals leading target industry (30%) • Application: Non‐ionic surfactance, shampoo,
supplied in regulated markets followed by polymers (27%), pigments (19%), dyes Hand wash, Dish wash
• Recently commissioned expanded (5%) • Relatively low‐margin business
capacities • Global leader in processes like chlorination, • Recently debottlenecked some operations to
• 48 commercial APIs, with 33 EUDMFs, 28 nitration, hydrogenation, ammonolisation expand capacities
US DMF • Market leader in PNCB/ONCB and derivatives • Focus on export‐oriented products
• 60% exports coming from regulated • Only Indian player with benzene base fluoro • Sales CAGR of 31% over FY10‐15
markets compounds
• Sales CAGR of 21% over FY10‐15 • Among the few producers of toluene based
products

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
A Chlorination
B Nitration
C Ammonolysis
D Hydrogenation
E Others
F Flouro Compo
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

Specialty chemical (Rs mn) YoY growth (%)
35000 35
30
30000
25
25000
20
20000 15
15000 10
5
10000
0
5000
‐5
0 ‐10
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

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
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
500 Average price (Rs/Kg)
400
300
Others
Flouro 200
Chorinati Nitration Hydroge forward
Ammonol Compou
on(3rd (4th in nation integrat
ysis (2nd nds (only 100
largest the (2nd ed
globally) player in
globally) world) globally) product
India) 0
s
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.

Improving revenue mix – rising contribution from high‐margin products

60
55
50
59
45 55
50 50
40 45
35
FY14 FY15 FY16E FY17E FY18E
Note: High margin products include products after Amonolysis, hydrogenation,Fluoro‐compounding & other
downstream products
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.

Aarti’s toluene value chain
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

Capex (Rs mn) Assets turnover (x) (RHS)
4500 6.0
4000
3500 3.0
3000
2500
0.0
2000
1500
1000 ‐3.0
500
0 ‐6.0
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.

On‐going capex projects

Major Projects in FY16 Details Expected Outlay
(Rs mn)
Hydrogenation Unit at Jhagadia Expansion for polymer intermediate 800
NCB Expansion at Vapi Expansion of NCB capacities (2nd phase)
Nitration Unit at Jhagadia Expansion into toulene chemistry
Calcium 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 250
At Dahej SEZ Ethylation unit and speciality chemicals unit 750
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)
Spe Chemicals (%) Pharma (%) Spe Chemicals (%) Pharma (%)
30 H & P (%) consol ROE (%) H & P (%) consol EBIT margin (%)
20
25
15
20
10
15 5
10 0
5 ‐5
0 ‐10
FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15
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).

Financials
Specialty chemicals will remain the highest contributor to sales
(Rs mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Specialty Chemicals 12277 13503 17578 22167 23980 22340 26451 30041
YoY 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 82
Pharmaceuticals 1306 1646 1868 2490 3032 3547 4151 4898
YoY 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 1524
YoY 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 4
Total Sales 14530 16733 20962 26325 29080 27182 32000 36462
YoY 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
Revenue (Rs mn) YoY change (%) (RHS) EBITDA (Rs mn) EBITDA margin (%) (RHS)
40000 30 8000 25
35000 25 7000
20
30000 20 6000
25000 15 5000 15
20000 10 4000
15000 5 3000 10
10000 0 2000
5
5000 ‐5 1000
0 ‐10 0 0
Continued capex, but best execution Strengthening free cash despite continued capex
Capex (Rs mn) Assets turnover (x) (RHS) Operating Cashflow (Rs mn) Capex (Rs mn) FCF (Rs mn)
5000 1.6
1.4 6000
4000
1.2
4000
3000 1.0
0.8 2000
2000 0.6
0
0.4
1000
0.2 ‐2000
0 0.0 ‐4000

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) 7365
EV/BITDA target Multiple (x) 9
EV (Rs mn) 66288
Net debt (Rs mn) 8241
Mcap (Rs mn) 58047
CMP (Rs) 472
Upside 48%

800 P/E EV/EBITDA
Rs 16x 100000 Rs mn
700 12x
90000
600 12x 80000
70000 9x
500
60000
400 8x
50000 6x
300 40000
4x 30000
200 3x
20000
100
10000
0 0
Source: Bloomberg, PhillipCapital India Research

Steady improvement in operating efficiency Earning efficiency also sees steady progress
ROCE (%) EBITDA growth (%) ROE (%) PAT growth (%)
50 60
50
40
40
30
30
20 20
10
10
0
0
‐10
‐10 ‐20
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.

Financials

Y/E Mar, Rs mn FY15 FY16e FY17e FY18e FY15 FY16e FY17e FY18e
Growth, % 10 ‐7 18 14 Depreciation 820 956 1,094 1,250
Total income 29,080 27,182 32,000 36,462 Chg in working capital ‐724 1,640 ‐995 ‐1,299
Raw material expenses ‐18,321 ‐15,358 ‐18,112 ‐20,455 Total tax paid ‐430 ‐785 ‐969 ‐1,155
Employee expenses ‐936 ‐1,114 ‐1,312 ‐1,495 Cash flow from operating activities 2,213 5,083 3,167 3,608
Other Operating expenses ‐5,165 ‐5,382 ‐6,240 ‐7,147 Capital expenditure ‐2,982 ‐2,286 ‐2,331 ‐2,203
EBITDA (Core) 4,657 5,328 6,336 7,365 Chg in investments ‐220 0 0 0
Growth, % 16.0 14.4 18.9 16.2 Other investing activities ‐3,687 ‐4,773 ‐5,399 ‐5,860
Margin, % 16.0 19.6 19.8 20.2 Cash flow from investing activities ‐681 2,894 937 1,510
Depreciation ‐820 ‐956 ‐1,094 ‐1,250 Free cash flow 1,642 ‐923 1,104 1,029
EBIT 3,837 4,372 5,242 6,115 Equity raised/(repaid) 1,662 1,012 3,650 4,167
Growth, % 22.6 13.9 19.9 16.7 Debt raised/(repaid) 189 1,322 1,417 1,916
Margin, % 13.2 16.1 16.4 16.8 Cash flow from financing activities 2,548 3,272 4,037 4,812
Interest paid ‐1,380 ‐1,154 ‐1,269 ‐1,376 Net chg in cash 820 956 1,094 1,250
Pre‐tax profit 55 54 64 73
Tax provided 2,548 3,272 4,037 4,812
Profit after tax ‐610 ‐785 ‐969 ‐1,155 Valuation Ratios
Others (Minorities, Associates) 1,937 2,487 3,068 3,657
Net Profit 1,937 2,487 3,068 3,657
Per Share data
Growth, % 22.7 29.1 22.6 18.7
EPS (INR) 24.0 31.0 38.0 45.1
Growth, % 22.7 29.1 22.6 18.7
FDEPS (INR) 24.0 31.0 38.0 45.1
CEPS (INR) 33.9 42.5 51.2 60.2
CFPS (INR) 25.9 60.3 37.2 42.4
Balance Sheet Return ratios
Y/E Mar, Rs mn FY15 FY16e FY17e FY18e Return on assets (%) 10.1 10.7 11.8 12.0
Cash & bank 337 1,659 3,077 4,992 Return on equity (%) 19.1 20.6 20.9 20.6
Debtors 4,390 4,096 4,822 5,494 Return on capital employed (%) 16.7 18.2 19.0 19.3
Inventory 5,517 4,841 5,699 6,493 Turnover ratios
Loans & advances 5,820 5,436 5,600 6,381 Asset turnover (x) 1.3 1.1 1.2 1.3
Other current assets 323 323 323 323 Sales/Total assets (x) 1.0 0.9 1.0 1.0
Total current assets 16,387 16,355 19,520 23,684 Sales/Net FA (x) 2.8 2.2 2.4 2.5
Investments 1,392 1,392 1,392 1,392 Working capital/Sales (x) 0.5 0.4 0.4 0.4
Gross fixed assets 16,851 19,118 21,449 24,041 Receivable days 55.1 55.0 55.0 55.0
Less: Depreciation ‐7,182 ‐8,138 ‐9,231 ‐10,482 Inventory days 69.3 65.0 65.0 65.0
Add: Capital WIP 1,930 1,949 1,949 1,559 Payable days 40.5 53.4 53.5 53.8
Net fixed assets 11,599 12,929 14,167 15,119 Working capital days 167.5 154.4 144.6 144.2
Total assets 29,378 30,677 35,079 40,195 Liquidity ratios
Current ratio (x) 6.1 5.1 5.2 5.5
Current liabilities 2,708 3,198 3,765 4,289 Quick ratio (x) 4.0 3.6 3.7 4.0
Provisions 3,399 3,195 3,380 3,804 Interest cover (x) 2.8 3.8 4.1 4.4
Total current liabilities 6,106 6,393 7,145 8,094 Total debt/Equity (%) 118.3 91.7 83.3 74.4
Non‐current liabilities 13,049 12,127 13,230 14,259 Net debt/Equity (%) 115.0 78.0 62.3 46.3
Total liabilities 19,156 18,519 20,376 22,353 Valuation
Paid‐up capital 443 417 417 417 PER (x) 19.6 15.2 12.4 10.5
Reserves & surplus 9,721 11,682 14,228 17,367 PEG (x) ‐ y‐o‐y growth 0.9 0.5 0.5 0.6
Shareholders’ equity 10,223 12,158 14,703 17,842 Price/Book (x) 3.9 3.3 2.7 2.2
Total equity & liabilities 29,379 30,677 35,079 40,195 EV/Net sales (x) 1.8 1.8 1.5 1.3
EV/EBITDA (x) 11.5 9.2 7.6 6.5
Source: Company, PhillipCapital India Research Estimates EV/EBIT (x) 13.9 11.2 9.2 7.8

Vinati Organics (VO IN)

Sector leader in profitability
29 March 2016
BUY
Stronger and wider moat in ATBS CMP RS 395
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
COMPANY DATA
cost/price leadership. Price leadership is evident – despite being a crude derivative, VO’s O/S SHARES (MN) : 52
ATBS prices remained stable over the 70% correction in crude prices in the last two years. MARKET CAP (RSBN) : 20
VO’s cost/price leadership puts up an entry barrier for others. It reported sales/volumes MARKET CAP (USDBN) : 0.3
CAGR of 28%/23% in ATBS over FY10‐15 and we estimate 15% sales CAGR over FY16‐18 to 52 ‐ WK HI/LO (RS) : 668 / 361
Rs 3.35bn, led by steady progress in construction chemicals, paints, and water‐treatment
PAR VALUE (RS) : 2
chemicals.
SHARE HOLDING PATTERN, %
To maintain global leadership in IBB, but with muted growth Dec 15 Sep 15 Jun 15
VO is the largest manufacturer of isobutyl benzene (IBB) in the world with a capacity of PROMOTERS : 72.3 72.3 72.3
14,000TPA and >70% of global market share, thanks to its technological collaboration with FII / NRI : 1.1 1.1 1.0
FI / MF : 6.9 6.9 6.9
Institut Francais du Petrole (IFP), that earned it global scale and accreditation. IBB is largely a NON PRO : 3.0 3.0 3.1
pharma intermediate used in the preparation of ibuprofen (an anti‐inflammatory, anti‐ PUBLIC & OTHERS : 16.7 16.7 16.8
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 PRICE PERFORMANCE, %
Rs 1.98bn. 1MTH 3MTH 1YR
ABS 6.4 ‐12.3 ‐22.2
REL TO BSE ‐0.2 ‐10.5 ‐11.7
Well‐integrated product portfolio
VO launched innovative and cost‐competitive products (ATBS, IBB, and IB‐Isobutylene) PRICE VS. SENSEX
supported by its technological tie‐ups. Subsequently, leveraging its in‐house research, it 250
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 200
(DAAM) – these product‐lines make up about 15% of its revenue share currently. The new
150
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. 100
Expansion into downstream products and new alliances to sustain value growth 50
To further its growth plans, VO is undertaking capital expenditure of Rs 2bn over FY16‐17 for
0
backward integration and introduction of new downstream products. Additionally, it has Apr/14 Oct/14 Apr/15 Oct/15
entered into a long‐term tripartite agreement with USA and Japan‐based chemical
Vinati BSE Sensex
companies for supplying customised products. We expect VO’s new initiatives to be value
accretive and to contribute Rs 1bn in FY18. Source: Phillip Capital India Research
KEY FINANCIALS
Technocrat management ensures sustained business progress Rs mn FY16E FY17E FY18E
Hands‐on expertise of Mr Vinod Banwarilal Saraf (founder, BITS Pilani graduate, industry Net Sales 6,047 7,189 8,410
veteran) in new chemical/petrochemical projects identification and technical tie‐ups helped EBIDTA 1,701 2,049 2,476
VO deliver 5/8‐fold growth in revenue/profit over the last eight years. His leadership will Net Profit 994 1,209 1,496
ensure sustained business progress. EPS, Rs 19.3 23.4 29.0
PER, x 20.5 16.9 13.6
VO to maintain its earning supremacy; initiate Buy with TP of Rs 495 EV/EBIDTA, x 12.1 10.0 7.9
P/BV, x 4.0 3.3 2.8
We estimate VO to deliver 16%/21% revenue/profit CAGRs over FY16‐18 to touch Rs
ROE, % 19.4 19.8 20.3
8.21/1.45bn in FY18. Considering its sector leadership in terms of earning efficiency and with
Debt/Equity (%) 12.2 9.4 7.0
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.

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
9000 700
Net Sales (Rs mn) Share Price (Rs) Planned capex of ~Rs
200cr for forward
8000 Established in 1989 integration projects
600
7000 IBB Expansion to Capacity Expansion to : ATBS Capacity 26000 MTA

10000 MTA ATBS IBB Capacity 14000 MTA IBB Capacity 18000 MTA
VOL came out
Expansion to 3600 ATBS Capacity 12000 MTA and DAAM commissioned 500
with a IPO Nov‐
6000 1991 MTA in 2006 TBA Capacity 600 MTA 1000 MTA
In 2009
400
5000 Isobutylene Plant of
VOL started operations
in its first plant in Started TBA 12000 MTA
Mahad in 1992 with Production in commissioned in
4000 IBB Capacity
capacity of 1200 MTA 2008 2010 300
Expansion to 5000
MTA in 1998
3000
IBB Capacity VOL started ATBS
200
Expansion to 3000 commercial in 2002
2000 MTA in 1996 with the installed
capacity of 1000 MT
100
1000
0 0
Business model
Vinati Organics
Specialty Aromatics Specialty monomers Other specialty products

31% of sales 50% of sales 12% of sales
IBB is leading product ATBS, Na‐ATBS, TBA, DAAM IB, HP‐MTBE and Methanol
• End‐user application in • End‐user application in water • End‐user application in butyl

pharmaceutical industry‐ intermediate treatment chemicals, emulsions paint rubbers, antioxidants, fragrances and
for ibuprofen, perfume industry, and paper coatings, adhesives, oil perfumes, insecticides and pesticides,
specialty solvent field and mining chemicals personal care, monomers
• Market leader in IBB with >70% of • Price as well as capacity of 26,000 • Second largest player in India, 100%
global market share tonnes ‐ leader globally with ~45% backward integration for ATBS
• Worlds largest IBB manufacturing market share • IB/HP‐MTBE are leading products
capacity at 14,000 TPA • ATBS/Na‐ATBS CAGR of 28% over with CAGRs of 63%/70% over FY11‐15
•IBB leading product with CAGR of FY10‐15

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 ATBS finds wide application in
application in emulsions for paints and paper coatings, water treatment chemicals, emulsions for paints and paper
adhesives, hydrogels and super absorbents, textile auxiliaries, detergents and coatings, water treatment chemicals,
cleaners, acrylic fiber, construction polymers, and oil field polymers. But due to the adhesives, hydrogels and super
captive manufacturing practice of Lubrizol and Toagosei, ATBS was not available at absorbents, textile auxiliaries,
the right price/quantity for other applications. Leveraging the short‐supply position in detergents and cleaners, acrylic fibre,
ATBS, VO continuously expanded its capacity to 26,000tpa in FY13 and emerged as construction polymers, and oil field
polymers
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

ATBS (Rs mn) YoY ch (%) (rhs) ATBS capacity (tons) Utilisation (%) (rhs)
4000 80
30000 100
3500 70
90
25000
3000 60 80
2500 50 20000
70
2000 40 15000 60
1500 30 50
10000
1000 20 40
5000
500 10 30
0 0 0 20
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15
Vinati is a global leader in‐term of capacity

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
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.

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

120 ATBS Crude
100
Despite being a crude derivative, ATBS
80 prices have remained stable in the face
of +70% corrections in crude prices over
60 the last two years
40
20
0
Jul/14
Jul/15
Mar/14
Apr/14
Jan/14
Feb/14
May/14
Jun/14
Aug/14
Sep/14
Oct/14
Nov/14
Dec/14
Mar/15
Apr/15
Jan/15
Feb/15
May/15
Jun/15
Aug/15
Sep/15
Oct/15
Nov/15
Dec/15
Jan/16
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
ATBS capacity (tons) Utilisation (%) (rhs) ATBS (Rs mn) YoY ch (%) (rhs)
4000 80
30000 90
3500
60
25000 80
3000
20000 70 40
2500
15000 60 2000 20
1500
10000 50 0
1000
5000 40 ‐20
500
0 30 0 ‐40
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

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
IBB (Rs mn) YoY ch (%) (rhs) IBB Capacity (tons) YoY ch (%) (rhs)
3000 60
16500 120
2500 50 16000 100
2000 40 15500
80
15000
1500 30 60
14500
1000 20 40
14000
500 10 20
13500
0 0 13000 0
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 The new products are fully integrated
continued captive research on productivity and efficiency earned it global leadership with existing ones (as by‐products, co‐
in ATBS and IBB. VO is the largest manufacturer of IB India. products, or their further processed
products), which make VO the most
Leveraging its in‐house research, it introduced new products, which like N‐Tertiary cost‐effective producer of these
products
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.

Well integrated business model

HP‐MTBE Methanol
Speciality
MTBE IB Chemicals
Acrylonitrile ATBS
Na‐ATBS
Raw Materials
TBA Specialty
Diacetone Alcohol Monomers
DAAM
Raw Materials
Toluene
IBB Specialty
Aromatics Key Products
Propylene
NBB By products
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 IB is a hydrocarbon of significant
products; for many of these, it is the largest manufacturer in India. In order to further industrial importance, used as key
its growth plans, it is undertaking capital expenditure of Rs 2bn over FY16‐17 to intermediate for VO’s leading product
ATBS and it will remain a key
expand existing products and to introduce new downstream products. The new
intermediate for VO’s new downstream
projects include – (1) capacity expansion of IB, (2) new plant for producing para
product such as ‐ Tertiary Butyl Toluene,
Tertiary Butyl Toluene and para Tertiary Butyl Benzoic Acid, (3) new plant for para Tertiary Butyl Benzoic, couple
producing Isobutyl Aceto Phenone, (4) couple of export oriented custom synthesis other products
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 Product is an intermediary between IBB and Ibuprofen
Phenone (IBAP)
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 Products are IB based derivatives and find application
Toluene / para Tertiary Butyl Benzoic Acid in perfumery, personal care and as polymer additives
(PTBT/PTBBA)
New plant for producing Tertiary Butyl Amine Used in the rubber and pharmaceutical industry
(TB Amine)
Setting up of 5 MW Co‐generation plant at the 5 MW Co‐generation power plant is expect to reduce
company's Lote facility power cost by Rs 80mn per annum from 2018

Expansion into value‐added downstream products

2014‐15 Forward integration ptoducts 2016
HP‐MTBE Methanol
Tert‐Butylamine
MTBE IB
PTBT PTBBA
Acrylonitrile ATBS
Na‐ATBS
Outsourced Raw Materials

TBA
Diacetone Alcohol
DAAM Key Products
Toluene By products
IBB Isobutyl AcetoPhenone
Propylene Downstream products

NBB
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
Mr Saraf’s decades of hands on industry
key driving force behind the successful introduction of products such as IBB/ATBS and
expertise helped VO deliver 5‐8 fold
in the scaling up to global levels. He has hands‐on expertise in Grasim Industries in growth in revenue/profits over the last
new chemical and petrochemical projects identification, technical tie‐ups, and eight years
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.

ATBS to remain a leading contributor to sales
Amt (Rs mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
IBB 1018 1539 2047 2426 2322 1750 1863 1980
YoY change (%) ‐19 51 33 19 ‐4 ‐25 6 6
% of sales 55 32 35 38 35 31 30 27
ATBS 1109 1488 1536 1780 2349 1596 1810 2145
YoY change (%) 94 34 3 16 32 ‐32 13 18
% of sales 34 33 28 26 31 26 25 26
Na‐ATBS (Salts) 666 647 691 1040 1151 923 997 1203
YoY change (%) 49 ‐3 7 51 11 ‐20 8 21
% of sales 21 14 13 15 15 15 14 14
IB 126 346 560 867 887 603 642 739
YoY change (%) 0 176 62 55 2 ‐32 6 15
% of sales 4 8 10 13 12 10 9 9
other 74 292 528 684 836 1179 1780 2231
YoY change (%) 144 296 80 30 22 41 51 25
% of sales 2 7 10 10 11 20 25 27
Sales (Rs mn) 3226 4475 5480 6961 7663 6047 7189 8410
YoY change (%) 39 39 22 27 10 ‐21 19 17
Revenue to see CAGR of 18% over FY16‐18 Vinati to maintain margin leadership
Sales (Rs mn) YoY change (%) (rhs)
EBITDA (Rs mn) EBITDA margin (%) (rhs)
9000 50 3000 31
8000 40 29
2500
7000 30 27
6000 2000
20 25
5000
10 1500 23
4000
0 21
3000 1000
2000 ‐10 19
500
1000 ‐20 17
0 ‐30 0 15
Superior return ratios vs. industry peers Strong cash position to continue
45 ROCE (%) ROE (%) (rhs) 1400 Capex (Rs mn) Free Cashflow (Rs mn)
40 1200
1000
35
800
30
600
25 400
20 200
15 0
‐200
10
‐400
5
‐600
0 ‐800


We estimate VO to deliver 16%/21% revenue/profit CAGR over FY16‐18 to Rs We believe VO will maintain its sector
8.21/1.45bn in FY18. Looking at VO’s EBITDA margin performance of 22‐24% over the leadership in terms of profitability
last five years, we believe it will maintain its sector leadership in terms of profitability supported by – (1) global volume/value
supported by – (1) global volume/value leadership in ATBS and IBB, (2) visible lower leadership in ATBS and IBB, (2) visible
lower crude price, and (3) capex plan for
crude price, and (3) capex plan for forward integrated products. We estimate VO’s
forward integrated products
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) 2476
EV/BITDA target Multiple (x) 10
EV (Rs mn) 24756
Net debt (Rs mn) ‐806
Mcap (Rs mn) 25562
CMP (Rs) 395
Upside 25%

800 P/E EV/EBITDA
Rs 25x 45000
Rs mn 16x
700 40000
600 20x 35000
12x
500 30000
15x
25000
400 8x
10x 20000
300
15000
200 4x
10000
100 5000
0 0
Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 Apr‐16 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 Apr‐16

Recovery in operating performance in near future Earnings efficiency also sees steady progress
45 ROCE (%) EBITDA growth (%) (rhs) 60 45 ROE (%) PAT growth (%) (rhs) 80
60
40
30 30 40
20
20
0
15 15 0
‐20 ‐20
0 ‐40 0 ‐40

• 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.

Financials

Growth, % 10 ‐21 19 17 Depreciation 177 181 222 231
Total income 7,663 6,047 7,189 8,410 Chg in working capital ‐161 303 ‐279 ‐279
Raw material expenses ‐4,565 ‐3,088 ‐3,681 ‐4,264 Total tax paid ‐519 ‐512 ‐623 ‐771
Employee expenses ‐319 ‐356 ‐431 ‐505 Other operating activities ‐223 ‐217 ‐217 ‐217
Other Operating expenses ‐915 ‐902 ‐1,028 ‐1,166 Cash flow from operating activities 1,009 1,261 934 1,231
EBITDA (Core) 1,864 1,701 2,049 2,476 Capital expenditure ‐507 ‐993 ‐1,003 ‐241
Growth, % 18.0 (8.7) 20.5 20.8 Chg in investments 0 0 0 0
Margin, % 24.3 28.1 28.5 29.4 Cash flow from investing activities ‐507 ‐993 ‐1,003 ‐241
Depreciation ‐177 ‐181 ‐222 ‐231 Free cash flow 662 485 148 1,207
EBIT 1,687 1,520 1,827 2,245 Debt raised/(repaid) ‐963 ‐27 ‐49 ‐58
Growth, % 18.3 (9.9) 20.2 22.9 Cash flow from financing activities ‐658 ‐27 ‐49 ‐58
Margin, % 22.0 25.1 25.4 26.7 Net chg in cash ‐156 240 ‐118 933
Interest paid ‐63 ‐71 ‐66 ‐59
Tax provided ‐577 ‐512 ‐623 ‐771
Profit after tax 1,158 994 1,209 1,496
Per Share data
Net Profit 1,158 994 1,209 1,496
EPS (INR) 22.4 19.3 23.4 29.0
Growth, % 34.4 (14.2) 21.6 23.8
Growth, % 28.6 (14.2) 21.6 23.8
Net Profit (adjusted) 1,158 994 1,209 1,496
FDEPS (INR) 22.4 19.3 23.4 29.0
CEPS (INR) 25.9 22.8 27.7 33.5
CFPS (INR) 22.1 27.5 21.0 26.5
Return ratios
Balance Sheet Return on assets (%) 20.8 16.4 17.3 18.4
Y/E Mar, Rs mn FY15 FY16e FY17e FY18e Return on equity (%) 26.7 19.4 19.8 20.3
Cash & bank 271 512 393 1,325 Return on capital employed (%) 33.0 25.7 26.8 28.0
Debtors 1,291 1,072 1,268 1,463 Turnover ratios
Inventory 545 476 563 650 Asset turnover (x) 1.5 1.1 1.1 1.2
Loans & advances 351 302 359 420 Sales/Total assets (x) 1.3 1.0 1.0 1.0
Other current assets 33 33 33 33 Sales/Net FA (x) 2.3 1.6 1.5 1.7
Total current assets 2,492 2,395 2,616 3,892 Working capital/Sales (x) 0.2 0.3 0.3 0.3
Investments 27 27 27 27 Receivable days 61.5 64.7 64.4 63.5
Gross fixed assets 4,123 4,914 5,913 6,150 Working capital days 88.9 94.4 93.6 92.1
Less: Depreciation ‐850 ‐1,031 ‐1,253 ‐1,484 Liquidity ratios
Add: Capital WIP 200 402 406 410 Current ratio (x) 7.1 7.5 6.9 8.8
Net fixed assets 3,473 4,285 5,067 5,076 Quick ratio (x) 5.5 6.0 5.4 7.3
Total assets 5,992 6,708 7,710 8,996 Interest cover (x) 26.8 21.3 27.8 38.0
Current liabilities 353 320 380 445 Total debt/Equity (%) 15.0 12.2 9.4 7.0
Provisions 256 256 256 256 Net debt/Equity (%) 8.8 2.2 3.0 (10.9)
Total current liabilities 609 575 636 700 Valuation
Non‐current liabilities 1,043 1,016 966 909 PER (x) 17.6 20.5 16.9 13.6
Total liabilities 1,651 1,591 1,602 1,609 PEG (x) ‐ y‐o‐y growth 0.6 (1.4) 0.8 0.6
Paid‐up capital 103 103 103 103 Price/Book (x) 4.7 4.0 3.3 2.8
Reserves & surplus 4,237 5,014 6,005 7,284 EV/Net sales (x) 2.7 3.4 2.9 2.3
Shareholders’ equity 4,341 5,117 6,108 7,387 EV/EBITDA (x) 11.1 12.1 10.0 7.9
Total equity & liabilities 5,992 6,708 7,710 8,996 EV/EBIT (x) 12.3 13.5 11.3 8.7

Meghmani Organics Ltd (MEGH IN)

Ignored so far, but not for long
29 March 2016
One of the leading manufacturers of caustic soda in India through recent expansion BUY (Maintain)
MEGH entered caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with CMP RS 20
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,
COMPANY DATA
Gujarat Alkali, and DCM Shriram). O/S SHARES (MN) : 254
MARKET CAP (RSBN) : 5
Expansion in the high‐margin caustic soda business to drive value growth MARKET CAP (USDBN) : 0.1
MEGH is already one of the most efficient manufacturers of caustic soda with margins in the 52 ‐ WK HI/LO (RS) : 28 / 14
31‐35% range led by its strategic location (in the middle of India’s highest‐consuming region
PAR VALUE (RS) : 1
‐ 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 SHARE HOLDING PATTERN, %
of caustic potash (21,000 tonnes) with a minimal investment of Rs 650mn (internal accruals). Dec 15 Sep 15 Jun 14
The new project is ready to commission in April 2016. With this, we estimate FY15‐18 PROMOTERS : 59.6 50.9 50.4
sale/profits CAGR for its caustic operations (30% of sales) at 16%/27%. FII / NRI : 1.0 0.9 0.9
FI / MF : 0.2 0.1 0.1
NON PRO : 12.1 6.4 4.8
Pigment: Stable price and operating leverage to lead profitable growth PUBLIC & OTHERS : 27.1 26.7 28.0
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 PRICE PERFORMANCE, %
products such as pigment green and pigment blue give it a competitive advantage – the 1MTH 3MTH 1YR
ABS 6.3 ‐12.9 33.2
pigments are crude derivatives and their prices are relatively stable despite sharp correction REL TO BSE ‐2.0 ‐10.9 43.4
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 PRICE VS. SENSEX
to 54% (from current 36%) and lead profitable growth. 400
350
Agrochemicals: Rising focus on branded business is the key 300
MEGH has vertical integration in its agrochemicals business, which is largely dominated by
250
intermediates and technical‐grade products (these constitute 65% of agrochemical sales).
200
Exports of both technical and branded products in Africa, Brazil, LatAm, US, and European
150
countries account for 70% of these sales. We expect healthy growth in its branded business
100
based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in
50
India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India
0
presence by expanding its branded distribution chain – at 2,370 stockists and distributors Apr/14 Oct/14 Apr/15 Oct/15
YTD FY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs
Meghmani BSE Sensex
5.30bn. With lower crude prices, MEGH’s vertically integrated operation and improving
asset utilisation will lead to profitable growth in agrochemicals. Source: Phillip Capital India Research
KEY FINANCIALS
No incremental capex; 30% EPS CAGR over FY16‐18 Rs mn FY16E FY17E FY18E
Aggressive capex over the last five years (>Rs 5bn to fund its greenfield agrochemical and Net Sales 12,605 14,363 15,725
pigment plant in Dahej and to expand its caustic plant) has increased its leverage position to EBIDTA 2,710 2,944 3,145
1.2x of equity in FY15 (1.5x in FY14). However, it has no visible capex over the next two Net Profit 733 850 1,013
years. This, along with improving asset utilisation across all its segments and planned debt EPS, Rs 2.9 3.3 4.0
repayment (already repaid Rs 1.5bn since FY14 and plans to cut debt by >Rs 2bn), should PER, x 6.9 6.0 5.0
lead to 30% earnings CAGR over FY15‐18 to Rs 1.01bn in FY18. EV/EBIDTA, x 4.0 3.5 3.1
P/BV, x 0.8 0.8 0.7
ROE, % 12.2 13.0 14.0
Initiate coverage with a BUY and TP of Rs 40, implying upside of 100%
Debt/Equity (%) 99.6 87.2 68.8
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.

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
80 20000
MEGH started Converted into a Net Sales (Rs mn) Price
Public Ltd. Co. in Diversification
operations in 18000
1995 New Pigment into Caustic
70 1986
plant at Dahej Potash in 2015
Started
Got listed in SEZ in 2013
First Agro plant production in 16000
India in 2007
60 setup in 1995 MFL in 2009
Expansion of
Established
Started Blue Pigment CausticChlorine 14000
MFL with IFC
New Pigment production at Panoli facility in 2014
participation in Two new sites for
50 plant setup at plant in 1996 Agrochem at Panoli
2007
Panoli in 1996 and Dahej in 2009 12000
Acquired Agro
40 10000
assets from
Rallis in 2004
Private Equity 8000
30 investment in
MOL in 1997 Got listed in
Singapore in 6000
20 2004
4000
10
2000
0 0
Mar‐03 Mar‐04 Mar‐05 Mar‐06 Mar‐07 Mar‐08 Mar‐09 Mar‐10 Mar‐11 Mar‐12 Mar‐13 Mar‐14 Mar‐15
Business model
Meghmani organics
Agrochemicals (33% of sales) Basic Chemicals (30% of sales)

Pigment (35% of sales) Caustic soda, chlorine and caustic
Leading products Cypermethrin , 2,4‐D
CPC blue, pigment green, pigment blue potash
Acid, Permethrin Tech, MPB
• Market Leadership in blue pigment with • Global client base with ~70% business from • Expanded caustic‐chlorine capacity to
~7% global market share exports 476 TPD from 340 TPD
• Global presence with ~80% of pigment • Well known brands such as Megastar, • Uses fourth generation membrane cell
revenue from exports Megacyper, Megaban, Synergy, Courage Technology from AKCC (Japan)
• Long‐term client relationships with 90% • Muted 1% sales CAGR over the last five • Fourth largest caustic chlorine flakes
business from repeat clients years capacity in India
• Muted 9% sales CAGR over the last five • 34% sales CAGR over last 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 Basic chemicals has been the fastest
by 40% in FY15 to 167,000 MTPA, making it the fourth largest caustic‐chlorine‐flakes growing segment for MEGH
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
Caustic Soda TPA Caustic Soda Utilisation Level (%) (rhs) 800000
175000 100
150000 95
600000
90
125000
85
100000 400000
80
75000
75
200000
50000
70
25000 65
0
0 60 Grasim Gujarat Alkali DCM Shriram Meghmani
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Ltd.
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.

India contributes 4% of world capacity Indian caustic soda capacity is optimally utilised already
Capacity (000'MT) Production (000'MT)
Global Caustic soda production (mn TPA)
Consumption (000'MT) Capacity Utilization (%) (rhs)
India (mn 3500 90%
TPA), 4 88%
3000 88%
85% 84% 86%
2500
83%
84%
China (mn 2000 81%
TPA), 28 81% 82%
1500 80%
Others (mn 80%
TPA), 49 1000
78%
500 76%
0 74%
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Import dependancy of caustic soda is increaseing Domestic/global prices of causitc soda are comfortably stable
Exports Imports Import sepandancy (%) (RHS) Domestic Caustic Soda Price (Rs/kg)
50 2500
Global Caustic Soda Price Index (rhs)
350 14%
300 12% 40 2000
250 10%
30 1500
200 8%
150 6% 20 1000
100 4%
10 500
50 2%
0 0% 0 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 Aug‐11 Aug‐12 Aug‐13 Aug‐14 Aug‐15
Casustic soda application in different end‐user industries

Caustic soda consumption in India
Others Pulp & Papers
21% 16%
Water Treatment Alumina

3% 17%
Textile
9%
Soaps &
Detergents Inorganics Organics (Incl.
7% (Sodium silicate, Pharma,
STPP) Polycarbonate)
10% 17%
Source: chemicals.nic.in, PhillipCapital India Research

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
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
Caustic Soda TPA Caustic Soda Utilisation Level (%) (rhs)
175000 100
150000 95
90
125000
85
100000
80
75000
75
50000
70
25000 65
0 60
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Sees capex led sales growth Causitc soda enjoys operating profit margin >30%
Sales (Rs mn) YoY growth (%) (rhs) EBITDA (Rs mn) EBITDA margin (%) (rhs)
6000 120 1800 50
1600 45
5000 100
1400 40
80 35
4000 1200
30
60 1000
3000 25
40 800
20
2000 600
20 15
400 10
1000 0 200 5
0 ‐20 0 0

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 Largest phthalocyanine‐based pigment
among the top‐three players in the world, with a global market share of ~7% in terms manufacturers in India and among the
of volume. The global phthlocyanine pigments market is estimated at ~US$ 1‐1.25bn top‐three players in the world
–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
Pigment Net sales by country mix (%) as FY15 Pigment Net sales by product mix (%) as FY15
Others 8% Others 2%
Europe 11% US 32%

Alpha 11% Beta 39%
South Pigment
America 14% Green 7 20%
Asia 17% India 18%

CPC 28%
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.

MEGH’s leading product phthalocyanine maintained its prices despite crude fall
Phthalocyanine Blue price (Rs/Kg) Crude oil price
120
100
80
60
40
20
Pigment capacity utiliation to see gradual ramp‐up Pigment sales growth to remain stable over FY15‐18
Pigment Capacity (tons) Pigment Utilisation Level (%) (rhs) Pigment Sales (Rs mn) Pigment EBITDA (Rs mn)
35000 70 YoY Sales growth (%) (rhs)
6000 40
30000 60
5000 30
25000 50
4000 20
20000 40
3000 10
15000 30
10000 20 2000 0
5000 10 1000 ‐10
0 0 0 ‐20

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. Intermediates and technical‐grade
products constitute 65% of its
Largely dominated by intermediates and technical‐grade products agrochemical sales. Major products
MEGH’s agrochemical business is largely dominated by intermediates and technical‐ include 2,4‐D, cypermethrin,
grade products – 65% of its agrochemical sales. It produces commonly used permethrin, metaphenoxy
pesticides for crop‐ and non‐crop applications such as public health and in insect benzaldehyde, chlorpyrifos, and
profenophos. Key brands include
control in wood preservation and food‐grain storage. In branded formulations, it has
Megastar, Megacyper, Megaban,
a strong pan‐India presence with about 2,370 stockists, agents, distributors, and Synergy, Courag
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
Agrochemicals Net sales by country mix (%) as FY15 Agrochemicals Net sales by product mix (%) as FY15
Others 37%
Others 51% Branded 27%
India 30%
South Cypermethri
America 6% n Tech‐Z 20%
Bulk 8%
Africa 6% 2,4‐D 8%
Europe 7%
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.

Focus on branded portfolio will drive value growth EBITDA margin to remain at 18‐19%
Branded sales(Rs mn) YoY Change (%) (RHS) EBITDA (Rs mn) EBITDA margin (%)
1800 30 3500 25
1500 20 3000
20
2500
1200 10
2000 15
900 0
1500 10
600 ‐10
1000
5
300 ‐20 500
0 ‐30 0 0
FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
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

Capex (Rs mn) Assets turnover (x) (rhs) Debt (Rs mn) Equity (Rs mn) Debt/Equity (x)
1400 1.5
9000 1.8
1200 8000 1.6
1000 7000 1.4

1.0
6000 1.2
800
5000 1.0
600 4000 0.8
0.5 3000 0.6
400
2000 0.4
200 1000 0.2
0 0.0 0 0.0

Basic chemicals (Caustic Soda) see relatively faster growth
Amt in Rs mn FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Pigment 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 33
Agro 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 34
Basic 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 32
Others 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 6
Total 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

Pigment (RsBn) Agrochem (Rs Bn)
Basic Chems (Rs Bn) Others (Rs Bn) PAT (Rs mn) EBITDA margin (%) (rhs)
1200 35
Revenue growth (%) (rhs)
20.00 30
1000 30
25
0.99 25
15.00 20 800
1.10
1.22 5.10 20
1.36 15
4.90 600
1.65 15
10.00 1.15 1.48 1.51 3.31 4.02 10
1.57 2.62 400
2.34 2.89 5.30 5
4.59 10
4.35 4.05
5.00 4.37 3.97 0
3.97 3.40 200 5
4.00 4.56 5.21 ‐5
3.15 2.66 2.61 3.33 3.66
0 0
0.00 ‐10
No major capex in the near future; improves asset efficiency Strong Cash generation over FY15‐18
1400 Capex (Rs mn) ROCE(%) (rhs) 25 Operating cashflow (Rs mn) Capex (Rs mn)
2000
Free Cashflow (RS mn)
1200
20 1500
1000
1000
15
800
500
600
10
0
400
5
200 ‐500
0 0 ‐1000

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) Value

Pigment EBITDA 834 4 3337
Agrochemicals EBITDA 795 4 3181
Basic chemicals EBITDA 1581 5 7904
Enterprise Value (RS mn) 14421
Net debt (Rs mn) 4695
Mcap (Rs mn) 9727
CMP (Rs) 20
Upside 100%

45 P/E 12x EV/EBITDA
Rs 25000
Rs mn 8x
40
35 9x 20000
6x
30
15000
25 4x
6x
20
10000
15
3x 2x
10 5000
5
0 0
Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15

Operating leverage to strengthen ROCE Financial deleveraging powers earnings

ROCE (%) EBITDA growth (%) (rhs) ROE (%) PAT growth (%) (rhs)
20 70 18 125
16
100
55 14
15 75
12
40 50
10
10
8 25
25
6
0
5 4
10
‐25
2
0 ‐5 0 ‐50
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

Financials

Net sales 12,942 12,605 14,363 15,725 Pre‐tax profit 591 1,324 1,521 1,778
Other income 0 0 0 0 Chg in working capital 498 38 ‐621 ‐511
Total income 12,942 12,605 14,363 15,725 Total tax paid ‐30 ‐344 ‐395 ‐462
Raw material expenses ‐7,640 ‐6,680 ‐7,756 ‐8,570 Cash flow from operating activities 1,806 1,829 1,373 1,703
Employee expenses ‐725 ‐756 ‐862 ‐943 Capital expenditure ‐636 ‐701 ‐430 ‐415
Other Operating expenses ‐2,545 ‐2,458 ‐2,801 ‐3,066 Chg in investments ‐173 0 ‐2 ‐75
EBITDA (Core) 2,031 2,710 2,944 3,145 Cash flow from investing activities ‐810 ‐701 ‐432 ‐490
Growth, % 3.7 33.4 8.6 6.8 Free cash flow 997 1,128 941 1,213
Margin, % 15.7 21.5 20.5 20.0 Equity raised/(repaid) 334 473 544 707
Depreciation ‐747 ‐811 ‐869 ‐897 Debt raised/(repaid) ‐1,108 ‐471 ‐268 ‐716
EBIT 1,284 1,899 2,076 2,248 Dividend (incl. tax) ‐254 ‐259 ‐305 ‐305
Growth, % 11.0 47.9 9.3 8.3 Other financing activities ‐185 ‐558 ‐765 ‐1,031
Margin, % 9.9 15.1 14.5 14.3 Cash flow from financing activities ‐1,214 ‐1,063 ‐1,069 ‐1,648
Interest paid ‐746 ‐638 ‐627 ‐548 Net chg in cash ‐217 65 ‐128 ‐435
Non‐recurring Items ‐11 0 0 0
Pre‐tax profit 591 1,324 1,521 1,778 Valuation Ratios
Tax provided ‐131 ‐344 ‐395 ‐462
Profit after tax 460 980 1,125 1,316
Per Share data
Others (Minorities, Associates) ‐21 ‐247 ‐275 ‐303
EPS (INR) 1.8 2.9 3.3 4.0
Net Profit 439 733 850 1,013
Growth, % 93.0 62.9 16.1 19.2
Growth, % 93.0 62.9 16.1 19.2
Net Profit (adjusted) 450 733 850 1,013
FDEPS (INR) 1.8 2.9 3.3 4.0
Unadj. shares (m) 254 254 254 254
CEPS (INR) 4.8 6.1 6.8 7.5
Wtd avg shares (m) 254 254 254 254
CFPS (INR) 6.9 6.9 5.1 6.4
DPS (INR) 0.8 0.9 1.0 1.0
Return ratios
Cash & bank 156 305 398 286 Return on capital employed (%) 6.7 10.1 11.0 11.8
Marketable securities at cost 0 0 0 0 Turnover ratios
Total current assets 7,223 7,408 8,387 9,012 Fixed capital/Sales (x) ‐ ‐ ‐ ‐
Gross fixed assets 13,035 13,815 14,275 14,685 Inventory days 60.9 61.0 61.0 61.0
Less: Depreciation ‐5,221 ‐6,032 ‐6,900 ‐7,798 Payable days 48.0 53.5 52.8 52.5
Add: Capital WIP 229 150 120 125 Working capital days 149.3 153.0 151.0 150.6
Net fixed assets 8,043 7,933 7,494 7,012 Liquidity ratios
Non‐current assets 0 0 0 0 Current ratio (x) 4.1 4.1 4.1 4.0
Total assets 15,444 15,520 16,062 16,279 Quick ratio (x) 2.9 2.9 2.9 2.9
Current liabilities 1,774 1,818 2,050 2,238 Interest cover (x) 1.7 3.0 3.3 4.1
Provisions 305 335 369 406 Dividend cover (x) 2.1 3.4 3.3 4.0
Total current liabilities 2,079 2,153 2,418 2,644 Total debt/Equity (%) 116.7 99.6 87.2 68.8
Non‐current liabilities 6,907 6,436 6,167 5,451 Net debt/Equity (%) 113.9 94.5 81.1 64.8
Total liabilities 8,985 8,589 8,586 8,095 Valuation
Paid‐up capital 254 254 254 254 PER (x) 11.3 6.9 6.0 5.0
Reserves & surplus 5,261 5,734 6,278 6,986 PEG (x) ‐ y‐o‐y growth 0.1 0.1 0.4 0.3
Shareholders’ equity 6,459 6,932 7,476 8,183 Price/Book (x) 0.9 0.8 0.8 0.7
Total equity & liabilities 15,444 15,521 16,062 16,279 Yield (%) 4.1 4.3 5.0 5.0
EV/Net sales (x) 0.9 0.9 0.7 0.6
EV/EBITDA (x) 5.6 4.0 3.5 3.1
EV/EBIT (x) 8.9 5.7 5.0 4.4

Camlin Fine Sciences (CFIN IN)

Vertical integration to drive value growth
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 BUY
(BHA). CFIN has 60% market share (capacity) with TBHQ/BHA capacity of 3600/2400tpa. CMP RS 88
CFIN’s antioxidants sales in FY15 were Rs 3.11bn, implying a blended market share of about TARGET RS 135 (+54%)
50% in TBHQ and BHA. We estimate CFIN’s antioxidants business to maintain 19% CAGR
over FY15‐18 to Rs 5.2bn. COMPANY DATA
O/S SHARES (MN) : 97
MARKET CAP (RSBN) : 9
Entry into blends of antioxidants to add value MARKET CAP (USDBN) : 0.1
Having established global leadership in antioxidants, CFIN is moving forward in blending 52 ‐ WK HI/LO (RS) : 129 / 76
(which may not be appreciated by its customers) by setting up a small unit in Tarapur, India LIQUIDITY 3M (USDMN) : 0.5
and a unit in Brazil (with a capacity of 3720tpa) in FY16. Its strategic acquisition of a 65% PAR VALUE (RS) : 1
stake in a Mexico‐based blender,DresenQuimica(Dresen), in February 2016 should expedite
SHARE HOLDING PATTERN, %
its progress into the high‐margin operation of blends of antioxidants. We believe the Dresen
Dec 15 Sep 15 Jun 15
acquisition will be EPS accretive in FY17. PROMOTERS : 39.9 40.1 52.2
FII / NRI : 0.1 0.1 0.2
Performance chemicals: Capacity expansion to drive rapid growth FI / MF : 1.5 1.4 0.9
Its acquisition of Italy‐based Borregaard’s catechol operation in FY12 marked its entry into NON PRO : 25.7 19.7 19.5
PUBLIC & OTHERS : 32.7 38.6 27.3
performance chemicals and made CFIN the second global manufacturer of catechol after
Solvay. The acquisition also provided access to catechol‐based downstream products. To PRICE PERFORMANCE, %
cater to rising user industry demand, CFIN has doubled its guaiacol capacity to 4000tpa and 1MTH 3MTH 1YR
raised veratrol capacity by 67% to 1000tpa in FY16 – this will lead to 17% sales CAGR over ABS 14.7 ‐16.6 6.1
FY15‐18 to Rs 2.04bn. REL TO BSE 6.4 ‐12.0 15.4
PRICE VS. SENSEX

Aromatics: A strategic move towards high‐value downstream products, but futuristic
600
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, 500
ethyl vanillin, and other aromatic compounds. Chinese players dominate the vanillin market 400
(global demand of 20,000MTPA). However, with CFIN’s complete backward‐integrated
300
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‐ 200
guaiacol based vanillin is a preferred product in advanced markets of US/EU compared to 100
that of Chinese players (made out of toluene) due to quality/health hazard concerns.
0
Currently, CFIN’s aromatic sale is miniscule with ~1% contribution and we believe scale up of Apr/14 Oct/14 Apr/15 Oct/15
aromatics will lead value progress of CFIN, but it would be futuristic. Camlin BSE Sensex
Source: Phillip Capital India Research

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 KEY FINANCIALS
(highest till date for CFIN) in Dahej with an integrated manufacturing base for hydroquinone Rs mn FY16E FY17E FY18E
(basic raw material of antioxidants), catechol(basic raw material of performance/aromatic Net Sales 5,044 6,928 8,717
products), and vanillin. CFIN expects to complete and commission the project by the end of EBIDTA 872 1,275 1,648
FY17 and drive growth from FY18. However, we have not built any revenues from the new Net Profit 366 584 746
project in FY18 – this could provide more upside to our estimates. EPS, Rs 3.8 6.1 7.8
PER, x 23.1 14.4 11.3
EV/EBIDTA, x 10.9 8.4 7.0
Valuations yet to capture the visible value growth; initiate BUY with TPRs 135
P/BV, x 5.1 3.8 2.9
We estimate CFIN to deliver revenue and profit CAGR of 15% and 22% over FY16‐18. At CMP
ROE, % 22.0 27.7 27.7
of Rs 88, the company trades at 11x FY18 EPS and 7x FY18E EV/EBITDA. Considering CFIL’s Debt/Equity (%) 96.4 123.9 132.1
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.

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
140 6000
Revenue (Rs Mn) (rhs) Share Price (Rs) Started value‐added customised blends
Launched Aroma and Flavoring in ‐ Tarapur and Brazil
120 Ramp‐up in Antioxidant chemcials with products like Sucessfully deblottle neck Europe facility
Announced largest ever capex in last 10 5000
business with launch of Vanillin/ Ethyl Vanillin
TBHQ and BHA Stock Split From Rs.10/‐ to Rs.2/‐ yeras of Rs 230‐250cr
R&D for other Stock Split From Rs.2/‐ to Rs.1/‐
100 Got Listed on NSE
forward intetigrated Acquired CFS Europe S.PA 4000
products (under pilot (Borregaard Italia). Backward
Listing on BSE India trial) like ASB, PDMB integration forDiphenols ‐
80 and shifted focus to etc Hydroquinone (3600MTPA)
Antioxidant Catechol (4400 MTPA 3000
business of
Became world's
60 manufacturing Launched business vertical
largets producer of
TBHQ and BHA perfromance chemicals with a wide
Food antioxidants ‐
TBHQ and BHA range of chemicals like Guaiacol, 2000
Demergded Veratrole, TBC and MEHQ
40 from Camlin
Group
1000
20
0 0
Mar‐06 Mar‐07 Mar‐08 Mar‐09 Mar‐10 Mar‐11 Mar‐12 Mar‐13 Mar‐14 Mar‐15
Business model
Camln Fine Sciences
Antioxidants Performance Chemicals Aromatics; New segment contributes European Subsidiary (Boreggard, Italy)
~56% of sales ~23% of sales ~1% of sales ~20% of sales
• Products‐ Hydroquinone base • Products ‐ Catecol base • Products ‐ Guaiacol base ‐ Vanillin • Capacity for Hydroquinone and
derivative products like ‐ Tertiary derivatives products like ‐ Guaiacol, and Ethyl Vanillin Catecole ‐ basic raw materials for
Butyl Hydroquinone (TBHQ), Butyl Veratrole, Tertiary Butyl Catechol • Planned ~Rs 250cr capex for Camlin's product line
Hydroxyl Anisole (BHA), Ascorbyl (TBC), Mono Methyl Ether (MEHQ) green field project at Dahej • Acquired in 2011 for backward
Palmitate (ASP) and PDMB (Gujarat) integration
• Global leader in feed and food • Entered into business with • Planned capacity (tonnes) • Camlin procures ~60‐70% of its di‐
antioxidant industry acquisition of Italy base Borreggard, Hydroquinone‐ 9000, Catechol 6000 phenol requirement; remaining
• TBHQ leading products with ~45% which is also a backward and Vanillin 6000 volume for external sales in
and BHA with ~70% market share integration for its Catecol • Higher realisation and limited developed markets. Operates at ~85%
• Recently expanded capacity for requirement competition space utilisation
both TBHQ and BHA • Expanding the facility for Guaicol • Planned capacity (tonnes)
• Acquired 65% stake in Dresen for forward integration of aromatics Hydroquinone‐ 5000 and Catechol ‐
(Mexico) for blends operation 6000

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.
Geographically, Asia Pacific accounts
for ~35% of the total food antioxidants
Natural antioxidants like ‐ beta‐carotene, lutein, lycopene, selenium, vitamin A/C/E,
market, followed by US and Europe.
and rosemary are extracted from vegetables and fruits. On the other hand, synthetic Asia is expected to be the fastest
antioxidants are chemicals derivatives like butylatedhydroxytoluene(BHT) growing one, primarily India and China,
butylatedhydroxyanisole(BHA), tert‐butylhydroquinone(TBHQ), and propyl gallate. led by the high feed wastage because of
CFIN’s antioxidant products portfolio is derived from phenols and falls under the the oxidation process due to the humid
synthetic antioxidant segment. climate.
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
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), CFIN is the established global leader in
Butylatedhydroxyanisole (BHA), and Tert‐butylhydroquinone (TBHQ) – those put TBHQ and BHA with a revenue of Rs
together account for 80‐90% of the total synthetic antioxidants market in the world. 3.11bn in FY15, implying a blended
Food‐grade antioxidant market is largely dominated by TBHQ and BHA with about market share of about 50%.
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.

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
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 45
Butylated Hydroxyanisole (BHA) 2400 4000 3 70
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 CFIN expects to leverage Dresen’s
in DresenQuimica (Mexico) along with its group companies. Dresen is engaged in technology and market‐understanding
manufacturing and distributing antioxidant blends in Mexico, Peru, and other Latin coupled with its strong positioning in
American markets. It has a large products portfolio of blends, strong distribution antioxidants for penetrating the US
channels with market knowledge, and proprietary process/technology. Additionally, blends market soon.
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 FY18E
Revenue to camlin 980 1568
To EBITDA 204 329
% addition to Camlin's EBITDA 2.9 3.8
To PAT 98 157
MI 23 55
Incremental PAT to Camlin 75 102
% addition to Camlin's PAT 12.9 13.7
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
Antioxidants Sales Blends sales YoY change (%) (rhs)
6000
70%
5000
50%
4000
30%
3000
10%
2000
1000 ‐10%
0 ‐30%
FY15 FY16E FY17E FY18E
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.

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
Hydroquinone
(5000 MTPA)
Backward integration with acquisition of
Borregaard Chmeicals in March‐2011
Camlin Fine Sciences Antioxidants
Borregaard, Italy
Perfromance Chemicals
Guaiacol (2000 MTPA)
Catechol Veratrole (600 MTPA)

(6000 MTPA)
TBC (1200 MTPA)
MEHQ (100 MTPA)
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 Global demand Expected annual
(TPA) (TPA) growth (%)
Hydroquinone Mono Methyl Ether (HQMME) 1200 6000 4
Veratrole 1000 2000 5
TBC 1200 5000 10
Guaiacol 4000 50000 4
Performance chemicals will have strong growth in visible future
2500 Perfromance chemicals sales (Rs mn) YoY change (%) (rhs) 50
40
2000
30
1500 20
1000 10
0
500
‐10
0 ‐20

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 CFIN’s catecho‐guaiacol‐based vanillin
players. However, with CFIN’s completely backward‐integrated operation (full control is preferred in advanced markets
over intermediate product guaiacol and basic raw material catechol) it has positioned (US/EU) over the Chinese‐made product
itself as a quality global vanillin player. Additionally, CFIN’s catecho‐guaiacol‐based (made of toluene) due to quality/health
vanillin is preferred in advanced markets (US/EU) over the Chinese‐made product hazard concerns from the food industry.
(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
250 Aroma sales (Rs mn) % to sales (rhs) 3
200 2
150 2
100 1
50 1
0 0
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 We have not built any revenues from
financing. CFIN is currently in the process of getting environmental clearance for its the new Dahej project in FY18 and this
new project and expectsit to be complete and commissioned by the end of FY17, could provide more upside to our
which would drive growth from FY18. However, we have not built any revenues from estimates.
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
16000
Capacity as on FY16 Capacity post Dahej Plant
14000
12000
10000
8000
6000
4000
2000
0
Hydroquninone (HQ) capacity (Tons) Catecol (CT) capacity (Tons) Vanillin capacity (Tons)
Dahej to integrate Camlin’s operation backward as well as forward
Blending operations
Greenfield
Dresen Mexico
blending
65%Subsidiary
operation ‐ Brazil
India operations Dahej Plant operations

Europe
Blends Hydroquinone
Antioxidants
processing
Borregard (Italy) Camlin Fine Sciences
Catechol Dahej Plant
Aroma and Flavours
Hydroquinone Catechol Perfromance Chemicals

Vanillin
Guaiacol Vanillin, Ethyl‐ Vanillin

Sales to see 16% CAGR over FY15‐18E Vertical integration expands margin
Net Sales (Rs mn) YoY Change (%) (rhs) EBITDA (Rs mn) EBITDA margin (%) (rhs)
10000 160 1800 Margin FY16 onwards 20
Acquistion of
by lower input price
Borregard 1600
& forward move to 18
8000 1400 blends
110
1200 Margin shift due to 16
6000 backward
1000
60 integration of HQ 14
800 and Catechol
4000
600 12
10
2000 400
10
200
0 ‐40
0 8
Assets turnover remain healthy despite Highest ever CAPEX Greenfield Dahej plant raise debt position but remain
in comfortable zone
Capex (Rs mn) Asset Turnover (x) Debt (Rs mn) Equity (Rs mn)
1600 3.0 4500 2.5
1400 4000
2.5
1200 3500 2.0
1000 2.0 3000

1.5
800 2500
1.5
600 2000
1.0
400 1.0 1500
200 1000
0.5 0.5
0 500
‐200 0.0 0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E
Superior return ratios over FY15‐18E Robust earnings growth
35 ROCE (%) ROE (%) PAT (Rs mn) PAT margin (%) (rhs)
900 12
30 800
10
25 700
600 8
20
500
6
15 400
10 300 4
200
5 2
100
0 0 0


We estimate CFIN to deliver sales/profit CAGR of 15% and 22% over FY15‐18 to touch While antioxidants would see value
Rs 8.5bn/739mnin FY18E. While antioxidants would see value progress led by its progress led by its entry into blends, the
entry into blends, the performance chemicals would see capex‐led growth in the near performance chemicals would see
future. Additionally, CFIN’s mega expansion with planned commissioning by the end capex‐led growth in the near future.
of FY17 would provide incremental upside to our estimates. Additionally, CFIN’s mega expansion
with planned commissioning by the end
At a CMP of Rs 88, CFIN trades at 11x FY18 EPS and 7x EV/EBITDA. Considering CFIL’s of FY17 would provide incremental
upside to our estimates.
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) 1648
Target Multiple (x) 9
EV (Rs mn) 14828
Net debt (Rs mn)* 1647
Target Mcap (Rs mn) 13180
CMP (Rs) 88
Upside 54%
Note: * Net debt is adjusted for debt on Dahej project
One year forward PE band One year forward EV/EBITDA band
180 25000
20x Rs mn
160
12x
140 20000
15x
120
9x
15000
100
10x 6x
Rs80 10000
60
5x 3x
40 5000
20
0 0
Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 Apr‐16 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15 Apr‐16

Improvement in operating efficiency Earnings to maintain growth momentum
30 ROCE (%) EBITDA growth (%) 100 ROE (%) PAT growth (%)
35 600
30 500
25 80
400
25
20 60
300
20
15 40 200
15
100
10 20
10
0
5 0 5 ‐100
0 ‐20 0 ‐200

• 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.

Financials

Net sales 5,583 5,044 6,928 8,717 Pre‐tax profit 528 530 867 1,145
Total income 5,583 5,044 6,928 8,717 Chg in working capital ‐357 184 ‐487 ‐467
Employee expenses ‐406 ‐355 ‐492 ‐628 Other operating activities ‐102 ‐165 ‐165 0
Other Operating expenses ‐1,589 ‐1,730 ‐2,356 ‐2,911 Cash flow from operating activities 168 555 154 595
EBITDA (Core) 883 872 1,275 1,648 Capital expenditure ‐203 ‐308 ‐1,458 ‐1,275
Growth, % 38.3 (1.2) 46.2 29.2 Chg in investments 1 0 0 0
Margin, % 15.8 17.3 18.4 18.9 Cash flow from investing activities ‐201 ‐308 ‐1,458 ‐1,275
Depreciation ‐162 ‐171 ‐198 ‐261 Free cash flow 429 412 ‐1,162 ‐735
EBIT 721 702 1,076 1,386 Debt raised/(repaid) 101 2 1,117 1,096
Growth, % 38.4 (2.6) 53.4 28.8 Cash flow from financing activities 68 115 1,230 1,044
Margin, % 12.9 13.9 15.5 15.9 Net chg in cash 35 363 ‐74 364
Interest paid ‐228 ‐222 ‐285 ‐346
Pre‐tax profit 528 530 867 1,145 Valuation Ratios
Tax provided 22 ‐164 ‐260 ‐343
Profit after tax 550 366 607 801
Per Share data
Net Profit 550 366 607 801
EPS (INR) 4.1 3.8 6.1 7.8
Growth, % 43.9 (10.8) 59.7 27.7
Growth, % 45.6 (7.0) 59.7 27.7
Net Profit (adjusted) 410 366 584 746
FDEPS (INR) 4.1 3.8 6.1 7.8
CEPS (INR) 5.8 5.6 8.2 10.5
CFPS (INR) 2.1 7.0 2.5 5.1
Return ratios
Inventory 1,364 1,257 1,704 2,131 Asset turnover (x) 2.2 1.8 1.9 1.7
Loans & advances 252 242 333 418 Sales/Total assets (x) 1.4 1.1 1.2 1.1
Less: Depreciation ‐1,887 ‐2,057 ‐2,256 ‐2,517 Liquidity ratios
Add: Capital WIP 28 130 1,000 900 Current ratio (x) 2.6 2.8 2.6 2.7
Current liabilities 1,151 1,112 1,528 1,922 Total debt/Equity (%) 118.6 96.4 123.9 132.1
Provisions 160 160 160 160 Net debt/Equity (%) 104.3 63.0 103.0 105.5
Total current liabilities 1,311 1,272 1,688 2,082 Valuation
Non‐current liabilities 1,637 1,640 2,757 3,853 PER (x) 21.5 23.1 14.4 11.3
Total liabilities 2,948 2,912 4,444 5,935 PEG (x) ‐ y‐o‐y growth 0.5 (3.3) 0.2 0.4

Atul Ltd (ATLP IN)

Business diversification mutes growth
29 March 2016
Price leadership in p‐cresol leads value growth NEUTRAL

Aromatic is one of Atul’s most successful segments, not only due to its stellar performance CMP RS 1470
over the last five years (revenue CAGR of ~29% to Rs 5.2bn in FY15), but also because of its
TARGET RS 1650 (+12%)
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
COMPANY DATA
developing markets. Although the price of P‐cresol softened with crude, Atul’s price O/S SHARES (MN) : 30
leadership helped it retain most of the benefit from lower input cost (crude derivative). We MARKET CAP (RSBN) : 45
see value growth in this segment ahead. MARKET CAP (USDBN) : 0.7
52 ‐ WK HI/LO (RS) : 1805 / 1034
Visible growth in user industries and brands cushions polymer business
PAR VALUE (RS) : 10
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 SHARE HOLDING PATTERN, %
sulphones in the world, it is the largest domestic player in the epoxy market. Considering Dec 15 Sep 15 Jun 15
anticipated rapid growth in construction chemicals and paints and coatings in the emerging PROMOTERS : 50.8 50.8 50.7
markets, recovery in automobiles, and steady progress in the domestic branded business, FII / NRI : 6.3 6.9 7.0
FI / MF : 13.0 13.6 13.4
we estimate 10% CAGR for this business over FY16‐18 to Rs 8.3bn in FY18. NON PRO : 29.9 10.0 9.8
PUBLIC & OTHERS : 0.0 18.7 19.1
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 PRICE PERFORMANCE, %
and insecticides), and it is one of the world's five leading manufacturers of 2,4‐D range of 1MTH 3MTH 1YR
ABS 9.3 ‐6.0 35.6
chlorophenoxy derivatives. Going by the industry forecast of recovery in the global agro REL TO BSE 1.1 ‐4.0 45.7
market, and favourable monsoon in the domestic market, we build in 7% revenue CAGR
over FY16‐18 to Rs 3.45bn. PRICE VS. SENSEX
500
Colors: Near‐term outlook remains bleak
Colors is an integrated operation for Atul, with leading position in sulphur black in India and 400
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, 300
overall dye prices have softened a bit in FY16; simultaneously, exports demand for vat dyes 200
(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. 100
0
Perils of wide business diversification mutes growth
Apr/14 Oct/14 Apr/15 Oct/15
Considering muted growth across polymers, crop protection, colors, and bulk chemicals, we
Atul BSE Sensex
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 Source: Phillip Capital India Research
with no major expansion plan in the near future and adverse impact of economic slowdown.
KEY FINANCIALS
Rs mn FY16E FY17E FY18E
Initiate NEUTRAL rating with a TP of Rs 1650
Net Sales 25,863 27,678 30,313
Atul trades at 13x FY18 EPS and 7x FY18 EV/EBITDA. While we consider Atul’s strong EBIDTA 4,552 5,010 5,729
historical track record of steady growth and cash generation positive, its visible muted Net Profit 2,715 2,969 3,394
growth – both on revenues and profits – make us pessimistic. We value Atul at Rs 1,650, i.e. EPS, Rs 91.5 100.0 114.4
8x FY18 EV/EBITDA (vs. 9x target multiple for Aarti Industries) and initiate coverage with a PER, x 16.1 14.7 12.9
Neutral rating. EV/EBIDTA, x 9.8 8.5 7.1
P/BV, x 3.4 2.8 2.4
ROE, % 21.2 19.2 18.3
Debt/Equity (%) 25.2 21.4 18.5

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
30000 2000
Incorporated in 1975 Net Sales Share Price
Establishment of 22,000 1800

Commencement of Establishment of a
square feet R&D facility to
25000 manufacture of dyes for subsidiary company, Atul
grow APIs and API Inters 1600
the first time in India Bioscience Ltd
business
Establishment of a JV with Commissioning of the
1400
20000 Imperial Chemical (50%) Commissioning of Acquisition of 88% world biggest p‐Cresol
Multi‐purpose pilot stake in DPD Ltd facility in Ankleshwar
plant (UK) 1200
Commencement of Formation of a JV
manufacture of 2,4‐D Acid Commencement of with Rudolf GmbH
15000 for the first time in India Modernisation manufacture of p‐ (Germany) 1000
of Epoxy plant Anisic Alcohol for the
Commencement of
first time in India 800
manufacture of
Commencement of
Phosgene for the first
10000 manufacture of p‐Cresol
time in India 600
for the first time in India
Acquired of
Formation of
Gujarat 400
Atul USA Inc
5000 Aromatics Ltd
200
0 0

Business model
Atul Ltd
Performance Chemicals
Life Science Chemicals
(73% of sales)
(27% of sales)
Aromatics
(21% of sales) • Global leader for p‐cresol and
derivative products like p‐AA
Crop Protection Pharmaceuticals
Products: p‐Anisic, Aldehyde, 70%, p‐AA1 90% and p‐Cd 5%
(14% of sales) (13% of sales) • Sales CAGR: 29% over FY11‐15
p‐ Anisic Alcohol, p‐Cresidine
• 63 products ‐ 15 branded • ~50 products ‐ anti‐

/ 48 formulations depressant, diabetic, Bulk Chemicals
(4% of sales) • Market leader in Resorcinol,
• >30,000 retail outlets infective, retroviral,
Anisole
• Technical agrochems like cardiovascular
Products:Resorcinol Formaldehyde • Sales CAGR: 11% over FY11‐15
2,4‐D, Indoxacarb and • USFDA approval for
Nicosulfuron are key Dapsone API Plant Resins and Sulphur Trioxide
products • Sales CAGR of 12% over
• Sales CAGR of 3% over FY11‐15
FY11‐15
Colors
• Global leader in Dyestuffs like
(19% of sales)
Sulphur black and Vat Dyes
• 38 products
Products: Sulphur Black, Vat/other
• Sales CAGR: 10% over FY11‐15
Dyes and pigment
Polymers
• Global leader in Epoxy
(28% of sales)
• Product portfolio of 75 branded
and 276 formulations
Products: Epoxy hardeners
/resins and Sulphones

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 India (largely led by Atul) is among the
position in p‐Cresol and derivatives. With a strong customer base across advanced top three countries producing cresol in
and developing markets, Atul is the largest manufacturer p‐Cresol and its derivatives the world (after Germany and US).
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

Export sales (Rs mn) Domestic sales (Rs mn) YoY Ch (%)
6000 60
50
5000
40
4000
30
3000 20
10
2000
0
1000
‐10
0 ‐20
India gained ground in the global p‐cresol market

Export 2010 2011 2012 2013 2014 2015
India (tons) 8,329 6,880 9,644 10,829 10,634 9573
China (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.

Aroma products has maintain price despite crude fall Leadership in p‐Cresol will maintained with expanded capacity
P‐Cresole P‐Anisic Aldehyde Toluene P‐Cresol (Tons) Utilisation (%) (RHS)
29000 72
Able to
130 maintain
28000 70
realization
110
27000 68
90
26000 66
70
25000 64
50
24000 62
30
Mar/14
Mar/15
Jan/14
May/14
Jul/14
Sep/14
Nov/14
Jan/15
May/15
Jul/15
Sep/15
Nov/15
Jan/16
23000 60
FY14 FY15 FY16E FY17E FY18E
Rapid growth in user industries and brand play cushions polymer business
Polymers is Atul’s flagship segment with ~28% sales contribution. Under polymer, it Atul is the largest manufacturer of
manufactures and supplies bulk epoxy resins/hardeners, sulphones, and sulphones in world, it is the largest
polyurethane, to industries such as paints and coatings, adhesives, aerospace, domestic player in the epoxy market.
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
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.

Steady progress in Polymer sales

Polymer domestic sales (Rs mn) Export (Rs mn)
Domestic branded YoY change (%)
9000 40
8000
7000 30
6000
20
5000
4000
10
3000
2000 0
1000
0 ‐10
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
Domestic branded sales (Rs mn) Epoxy Phenol Propylene
140
1600 Polymer ontribution to overall sales (%) 35
120
1400 30
1200 100
25
1000 80
20
800 60
15
600 40
10
400 20
200 5
‐
Mar/14
Mar/15
Jan/16
Jan/14
Nov/14
Jan/15
Nov/15
May/14
May/15
Jul/14
Sep/14
Jul/15
Sep/15
0 0
FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Polymer revenue mix

Fig in Rs Mn FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E
Sales 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 1.9
YoY 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 24.6
YoY 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 75.4
YoY 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 69.1
YoY 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 28.9
YoY ch (%) 10.9% 9.9% 39.7% 9.6% ‐17.4% 10.0% 10.0%
Polymers 4380 4540 4681 6330 6970 6776 7458 8260
YoY ch (%) 3.7% 3.1% 35.2% 10.1% ‐2.8% 10.1% 10.8%

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 Atul is among the world's five leading
range of chlorophenoxy derivatives used in herbicides. It has capacity of 10,000tn and manufacturers of 2,4‐D range of
operates at around 70% utilisation. However, it lacks bargaining power as the chlorophenoxy derivatives used in
company fails to retain the benefits of lower input (phenol) prices. herbicides. It has capacity of 10,000tn
2,4D prices fall in tandem with crude
110 24D Phenol

105
100
95
90
85
80
75
70
65
60
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

2500
Branded sales (Rs mn) Bulk sales (Rs mn)
2000
1500
1000
500
0
FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Crop protection revenue mix dominated by domestic market

(Amt Rs mn) FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E
Bulk 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 33.7
YoY ch (%) 10.3 ‐29.2 38.2 ‐22.3 ‐10.0 8.0 9.0
Branded 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 66.3
YoY ch (%) ‐4.3 10.6 41.1 17.5 6.6 8.0 9.3
India 1560 1620 1410 1970 1940 1947 2102 2295
% to Crop 50.6 45.3 36.6 45.5 56.7 57.8 58.3 58.1
YoY ch (%) 3.8 ‐13.0 39.7 ‐1.5 0.3 8.0 9.2
Export 1520 1960 2440 2360 1480 1421 1505 1656
% to Crop 49.4 54.7 63.4 54.5 43.3 42.2 41.7 41.9
YoY ch (%) 28.9 24.5 ‐3.3 ‐37.3 ‐4.0 6.0 10.0
Crop Protection 3080 3580 3850 4330 3420 3367 3608 3951
YoY Ch 34.04 53.97 5.67 27.32 ‐5.53 9.17 11.60 34.04
Colours: Near‐term outlook remains bleak

Colours is an integrated operation and was the first business initiative of the The largest manufacturer of sulphur
company after its incorporation. Although Atul has a basket of 38 product in this black in India and one of the largest
group, sulphur black and vat dyes are major revenue contributors. It is the largest manufacturers of vat dyes in the world.
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
Indian Vat dyes Export
Sulphur Black Vat Dyes Crude
300 Volume (Tons) Price (US$/ kg) 32 200
180
250 27 160
140
200 22 120
100
150 17 80
60
100 12
40
20
50 7
‐
0 2
Jan‐13 Jun‐13 Nov‐13 Apr‐14 Sep‐14 Feb‐15 Jul‐15
Source: UN Comtrade, PhillipCapital India Research

Colors revenue mix

Amt In Rs mn FY2011 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E
India 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 61.5
YoY 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 38.5
YoY ch (%) 10.7% ‐11.2% 36.4% 35.9% ‐9.1% ‐12.5% ‐10.7%
Colors JV Rudolf Gmbh, Germany (50%) 90.0 210.0 310.0 430.0 434.3 447.3 469.7
YoY 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 1.6
Colors 3250 3460 3300 4260 5150 5033 4891 4889
YoY ch (%) 6.5% ‐4.6% 29.1% 20.9% ‐2.3% ‐2.8% 0.0%

Revenue break up
Revenue Break‐up (Rs mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Life sciences
Crop protection 3580 3850 4330 3420 2977 3197 3450
Pharma 2350 2870 2710 2870 3588 3982 4540
Atul Biosciences 110 270 350 470 573 631 713
Total Life sciences 6040 6990 7390 6760 7138 7810 8703
% to sales 34 36 32 27 29 30 30
YoY Ch 23 16 6 ‐9 6 9 11
Performance and other chemicals
Aromatics 2520 3880 4100 5220 4662 5087 5675
Bluk Chemicals & intermediates 720 770 990 1000 880 968 1084
Colors 3370 3090 3950 4720 4599 4425 4468
JV with Rudolf Gmbh, Germany (Atul 50%) 90 210 310 430 434 443 456
Polymers 4870 4680 6330 6970 6807 7494 8302
Total Performance and other chemicals 11570 12630 15680 18340 17382 18417 19985
% to sales 66 64 68 73 71 70 70
YoY Ch 14 9 24 17 ‐5 6 9
Total Standalone Sales 17610 19620 23070 25100 24520 26227 28688
YoY Ch 17 11 18 9 ‐2 7 9
Subsidiaries Adjustment 217 708 1373 1317 1344 1451 1625
% to sales 1 3 6 5 5 5 5
YoY Ch ‐54 227 94 ‐4 2 8 12
Total Consolidated sales (Rs mn) 17924 20429 24578 26564 25863 27678 30313
YoY Ch 15 14 20 8 ‐3 7 10
Sales to see muted 5% CAGR over FY15‐18E Steady improving operating efficiency
Revenue (Rs mn) YoY ch (%) EBITDA (Rs mn) EBITDA margin (%)
35000 25 7000 20
30000 20 6000
16
25000 5000
15
20000 4000 12
10
15000 3000 8
5
10000 2000
0 4
5000 1000
0 ‐5 0 0
Moderating return ratios Strong cash generation
30 ROCE (%) ROE (%) 4000 Operating CF (Rs mn) Free CF (Rs mn)
25
3000
20
2000
15
1000
10
5 0
0 ‐1000


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 While we consider Atul’s strong
historical track record of steady growth and free cash generation as positive, its historical track record of steady growth
muted revenue and profit growth makes us pessimistic. Hence, we value Atul at Rs and free cash generation as positive, its
1650 – 8x FY18 EV/EBITDA (vs. 9x target multiple for Aarti Industries) and initiate muted revenue and profit growth
coverage with a Neutral rating. makes us pessimistic.
Valuation Table (FY18E)

Particulars Value (Rs mn)
FY18 EBITDA 5729
Target Multiple (x) 8
Eterprise Value 45833
Net debt ‐3139
Target Mcap 48972
CMP (Rs) 1470
Upside 12%
One year forward PE band One year forward EV/EBITDA band

2000 P/E EV/EBITDA
Rs 16x 60000
1800 Rs mn
9x
1600 50000
1400 12x 7x
40000
1200
1000 8x 5x
30000
800
20000 3x
600 4x
400
10000
200
0 0

Operating efficiency to remain stable Gradual progress in earnings

ROCE (%) EBITDA growth (%) ROE (%) PAT growth (%)
50 90
80
40
70
30 60
20 50
40
10
30
0 20
10
‐10
0
‐20 ‐10

• 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.

Financials

Total income 26,564 25,863 27,678 30,313 Chg in working capital ‐156 ‐504 ‐493 ‐715
Raw material expenses ‐14,454 ‐12,802 ‐13,701 ‐15,005 Total tax paid ‐904 ‐1,219 ‐1,333 ‐1,523
Employee expenses ‐1,633 ‐1,810 ‐1,965 ‐2,152 Other operating activities 0 0 0 0
Other Operating expenses ‐6,464 ‐6,699 ‐7,003 ‐7,427 Cash flow from operating activities 2,799 2,895 3,219 3,484
EBITDA (Core) 4,013 4,552 5,010 5,729 Capital expenditure ‐566 ‐1,018 ‐938 ‐966
Growth, % 10.3 13.4 10.1 14.4 Chg in investments ‐33 0 0 0
Margin, % 15.1 17.6 18.1 18.9 Cash flow from investing activities ‐1,958 ‐3,906 ‐4,169 ‐4,742
Depreciation ‐603 ‐686 ‐746 ‐809 Free cash flow 2,318 1,879 2,284 2,522
EBIT 3,410 3,866 4,264 4,921 Debt raised/(repaid) ‐682 239 81 128
Growth, % 11.6 13.4 10.3 15.4 Cash flow from financing activities ‐684 2,646 2,742 3,214
Margin, % 12.8 14.9 15.4 16.2 Net chg in cash 157 1,635 1,792 1,956
Interest paid ‐257 ‐284 ‐298 ‐309
Tax provided ‐994 ‐1,219 ‐1,333 ‐1,523
Profit after tax 2,262 2,712 2,966 3,391
Per Share data
Net Profit 2,262 2,712 2,966 3,391
EPS (INR) 80.1 91.5 100.0 114.4
Growth, % 10.7 14.2 9.3 14.3
Growth, % 10.7 14.2 9.3 14.3
FDEPS (INR) 80.1 91.5 100.0 114.4
CEPS (INR) 100.4 114.6 125.2 141.6
CFPS (INR) 90.8 85.8 97.3 107.2
Return ratios
Balance Sheet Return on equity (%) 21.8 21.2 19.2 18.3
Y/E Mar, Rs mn FY15 FY16e FY17e FY18e Return on capital employed (%) 25.3 25.5 23.8 23.2
Cash & bank 367 2,178 4,235 6,576 Turnover ratios
Total current assets 11,313 14,099 16,931 20,397 Receivable days 60.8 70.0 70.0 70.0
Investments 661 661 661 661 Working capital days 99.0 108.8 108.2 107.4
Gross fixed assets 12,958 14,597 15,535 16,501 Liquidity ratios
Less: Depreciation ‐7,821 ‐8,507 ‐9,253 ‐10,061 Current ratio (x) 3.0 3.3 3.8 4.2
Add: Capital WIP 1,121 500 500 500 Quick ratio (x) 1.9 2.3 2.7 3.1
Net fixed assets 6,257 6,589 6,782 6,939 Interest cover (x) 13.3 13.6 14.3 15.9
Total assets 18,231 21,349 24,373 27,996 Total debt/Equity (%) 28.8 25.2 21.4 18.5
Current liabilities 3,739 4,211 4,492 4,902 Net debt/Equity (%) 25.2 8.2 (6.0) (16.9)
Provisions 596 596 596 596 Valuation
Total current liabilities 4,335 4,807 5,088 5,498 PER (x) 18.3 16.1 14.7 12.9
Non‐current liabilities 3,449 3,689 3,770 3,898 PEG (x) ‐ y‐o‐y growth 1.7 1.1 1.6 0.9
Total liabilities 7,784 8,495 8,858 9,395 Price/Book (x) 4.2 3.4 2.8 2.4
Paid‐up capital 297 297 297 297 EV/Net sales (x) 1.7 1.7 1.5 1.3
Reserves & surplus 10,093 12,500 15,161 18,248 EV/EBITDA (x) 11.5 9.8 8.5 7.1
Shareholders’ equity 10,447 12,854 15,515 18,601 EV/EBIT (x) 13.6 11.6 10.0 8.2
Total equity & liabilities 18,231 21,349 24,373 27,996

Navin Fluorine (NFIL IN)

Refrigerant gas outlook bleak; visible growth priced in
29 March 2016
INDIA | SPECIALTY CHEMICALS |Company Update
Curtailed R22 import quota by key export markets + price correction to hurt profitability Not Rated
NFIL’s unique experience of more than 30 years in handling fluoro‐chemicals established it CMP RS 1,694
as one of the top‐four leading R22 refrigerant gas manufacturers of India. While R22 is a
TARGET RS NA
leading sales contributor (32%), its outlook seems bleak due to – (1) restricted
production/consumption quota of 40,000/10,000tpa (requiring compulsory exports), (2)
COMPANY DATA
sharp reduction in R22 import quota from leading export destinations like Saudi Arabia and O/S SHARES (MN) : 10
Egypt (accounting for over 40% of Indian R22 exports), and (3) over 20% price correction in MARKET CAP (RSBN) : 17
R22 to ~Rs 120/kg from ~Rs 150 in FY15. Hence, we see flat revenue performance in this MARKET CAP (USDBN) : 0.2
business over FY16‐18 to Rs 1.84bn in FY18 – with a potential correction in profitability. 52 ‐ WK HI/LO (RS) : 2025 / 355
Pact with Honeywell is futuristic and won’t have major earning implication during FY16‐18 PAR VALUE (RS) : 10
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 SHARE HOLDING PATTERN, %
warming potential (GWP >1) against the competing R134a gas (GWP 1430). A mall‐scale Dec 15 Sep 15 Jun 15
PROMOTERS : 38.7 38.8 38.8
production is expected to begin by late FY17. Although Solstice®yf is superior in terms of
FII / NRI : 7.0 7.6 7.8
GWP, R134a is highly economical and there is no major concern of its phase down in the FI / MF : 17.9 17.0 16.2
visible future. Hence, considering very staggered scale up in Solstice®yf for NFIL, we see the NON PRO : 6.0 7.7 7.7
pact as futuristic and would have no major earning implication during FY16‐18. PUBLIC & OTHERS : 30.3 28.9 29.6
Specialty chemicals to maintain steady growth PRICE PERFORMANCE, %

In specialty chemicals, NFIL manufactures niche fluorinated compounds for applications in 1MTH 3MTH 1YR
pharmaceutical, agrochemical, and petrochemical industries. Over the years, it has built a ABS 36.7 ‐6.1 119.5
strong clientele in agro and pharma (domestic and advanced US/EU markets) for supplying REL TO BSE 28.5 ‐1.5 128.8
fluoro‐compounds. This segment reported 16% sales CAGR over the last five years and we
PRICE VS. SENSEX
believe it will sustain similar growth momentum over FY15‐18, led by its continued
geographic and customer expansion. 700
CRAMS to see capex‐led value growth 600

In order to scale‐up CRAMS, NFIL invested ~Rs 600mn in setting up a cGMP facility capable 500
of running high‐pressure fluorination chemistries at Dewas (MP) – commissioned this facility 400
in Q3FY16. We see a strong ramp‐up in CRAMS, led by incremental sales from Dewas and its 300
developmental pipeline of a basket of fluorinated molecules at different stages of 200
development, partnered with global pharmaceutical companies. We estimate robust CAGR
100
of 64% over FY15‐18 in CRAMS to Rs 1.37bn in FY18.
0
Piramal JV to see gradual ramp‐up Apr/14 Oct/14 Apr/15 Oct/15
NFIL and Piramal Enterprises formed a 49:51 JV in 2014 and set up a facility with an
Navin BSE Sensex
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 Source: Phillip Capital India Research
FY17, but considering the critical nature of the user industry, we see this JV as a futuristic KEY FINANCIALS
initiative that will see a gradual ramp‐up. We estimate Rs 630mn revenue and Rs 108mn PAT Rs mn FY16E FY17E FY18E
from this JV in FY18. Net Sales 6,377 7,107 8,174
MOL complements NFILs global positioning in specialty fluorochemicals EBIDTA 1,141 1,308 1,529
MOL – NFIL’s UK based 100% subsidiary – develops customized fluorinated molecules for Net Profit 720 885 1,077
chemical, pharmaceutical, and electronic industries. We believe its strategic location (in the EPS, Rs 73.7 90.6 110.2
PER, x 23.9 19.5 16.0
UK), R&D capability, and a wide basket of fluoro‐chemical compounds (over 40,000) will
EV/EBIDTA, x 15.5 13.2 11.0
complement NFIL’s progress in both CRAMS and specialty chemicals. We have built‐in 16%
P/BV, x 2.7 2.5 2.2
revenue CAGR for MOL over FY15‐18 to Rs 766mn in FY18. ROE, % 11.7 12.4 13.1
Valuations to remain under check as refrigerants remain under pressure; Not Rated Debt/Equity (%) 7.8 6.6 6.2
We estimate NFIL to deliver 12% and 21% CAGR in revenues and profit over FY16‐18 to Source: PhillipCapital India Research Est.
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.

NAVIN FLUORINE INITIATING COVERAGE
Financials

Net sales 5,915 6,377 7,107 8,174 Pre‐tax profit 783 1,064 1,235 1,463
Growth, % 22 8 11 15 Depreciation 201 246 271 298
Total income 5,915 6,377 7,107 8,174 Chg in working capital ‐671 ‐94 ‐137 ‐215
Employee expenses ‐741 ‐670 ‐753 ‐866 Other operating activities ‐262 ‐270 ‐224 ‐192
Other Operating expenses ‐1,558 ‐1,645 ‐1,827 ‐2,101 Cash flow from operating activities ‐161 627 774 915
EBITDA (Core) 722 1,141 1,308 1,529 Capital expenditure ‐602 ‐334 ‐384 ‐407
Growth, % 9.4 58.1 14.6 16.9 Chg in investments 590 ‐396 ‐19 ‐40
Margin, % 12.2 17.9 18.4 18.7 Cash flow from investing activities ‐13 ‐730 ‐403 ‐447
Depreciation ‐201 ‐246 ‐271 ‐298 Free cash flow ‐522 538 635 753
EBIT 521 895 1,037 1,230 Debt raised/(repaid) 36 ‐119 ‐33 25
Growth, % 17.9 71.9 15.8 18.7 Cash flow from financing activities 76 ‐119 ‐33 25
Margin, % 8.8 14.0 14.6 15.1 Net chg in cash ‐98 ‐222 338 493
Interest paid ‐33 ‐54 ‐51 ‐53
Pre‐tax profit 783 1,064 1,235 1,463 Valuation Ratios
Tax provided ‐200 ‐319 ‐370 ‐439
Profit after tax 582 745 864 1,024
Per Share data
Net Profit 582 745 864 1,024
EPS (INR) 60.9 73.7 90.6 110.2
Growth, % 12.7 21.0 22.9 21.7
Growth, % 12.6 21.0 22.9 21.7
Net Profit (adjusted) 595 720 885 1,077
FDEPS (INR) 60.9 73.7 90.6 110.2
CEPS (INR) 81.5 98.9 118.3 140.8
CFPS (INR) (19.9) 69.0 76.7 84.0
Return ratios
Inventory 761 903 1,007 1,158 Asset turnover (x) 1.3 1.2 1.3 1.4
Loans & advances 1,185 1,212 1,279 1,390 Sales/Total assets (x) 0.7 0.7 0.8 0.8
Investments 1,713 2,109 2,128 2,168 Receivable days 74.0 69.8 69.4 69.1
Less: Depreciation ‐1,566 ‐1,812 ‐2,083 ‐2,381 Liquidity ratios
Add: Capital WIP 1,013 510 510 510 Current ratio (x) 2.5 2.3 2.5 2.7
Current liabilities 1,364 1,470 1,639 1,885 Total debt/Equity (%) 10.4 7.8 6.6 6.2
Provisions 214 211 214 219 Net debt/Equity (%) 5.7 6.8 0.9 (5.2)
Total current liabilities 1,578 1,681 1,853 2,104 Valuation
Non‐current liabilities 935 816 783 808 PER (x) 29.0 23.9 19.5 16.0
Total liabilities 2,514 2,497 2,636 2,912 PEG (x) ‐ y‐o‐y growth 2.3 1.1 0.8 0.7

SPECIALTY CHEMICALS SECTOR INITIATION
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%.
Management
Vineet Bhatnagar (Managing Director) (91 22) 2483 1919
Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946
Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735
Research
Automobiles Infrastructure & IT Services Strategy
Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947
Nitesh Sharma, CFA (9122) 6667 9965 Logistics, Transportation & Midcap Anindya Bhowmik (9122) 6667 9764
Agri Inputs Vikram Suryavanshi (9122) 6667 9951 Telecom
Gauri Anand (9122) 6667 9943 Media Naveen Kulkarni, CFA, FRM (9122) 6667 9947
Banking, NBFCs Manoj Behera (9122) 6667 9973 Manoj Behera (9122) 6667 9973
Manish Agarwalla (9122) 6667 9962 Metals Technicals
Pradeep Agrawal (9122) 6667 9953 Dhawal Doshi (9122) 6667 9769 Subodh Gupta, CMT (9122) 6667 9762
Paresh Jain (9122) 6667 9948 Yash Doshi (9122) 6667 9987 Production Manager
Consumer Midcap Ganesh Deorukhkar (9122) 6667 9966
Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Amol Rao (9122) 6667 9952 Editor
Jubil Jain (9122) 6667 9766 Oil & Gas Roshan Sony 98199 72726
Cement Sabri Hazarika (9122) 6667 9756 Sr. Manager – Equities Support
Vaibhav Agarwal (9122) 6667 9967 Pharma & Speciality Chem Rosie Ferns (9122) 6667 9971
Economics Surya Patra (9122) 6667 9768
Anjali Verma (9122) 6667 9969 Mehul Sheth (9122) 6667 9996
Engineering, Capital Goods Mid‐Caps & Database Manager
Jonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944
Hrishikesh Bhagat (9122) 6667 9986
Sales & Distribution Corporate Communications
Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976
Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747
Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745
Bhavin Shah (9122) 6667 9974 Execution
Ashka Mehta Gulati (9122) 6667 9934 Mayur Shah (9122) 6667 9945
Contact Information (Regional Member Companies)
SINGAPORE: Phillip Securities Pte Ltd MALAYSIA: Phillip Capital Management Sdn Bhd HONG KONG: Phillip Securities (HK) Ltd
250 North Bridge Road, #06‐00 Raffles City Tower, B‐3‐6 Block B Level 3, Megan Avenue II, 11/F United Centre 95 Queensway Hong Kong
Singapore 179101 No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (852) 2277 6600 Fax: (852) 2868 5307
Tel : (65) 6533 6001 Fax: (65) 6535 3834 Tel (60) 3 2162 8841 Fax (60) 3 2166 5099 www.phillip.com.hk
www.phillip.com.sg www.poems.com.my
JAPAN: Phillip Securities Japan, Ltd INDONESIA: PT Phillip Securities Indonesia CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd.
4‐2 Nihonbashi Kabutocho, Chuo‐ku ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, No 550 Yan An East Road, Ocean Tower Unit 2318
Tokyo 103‐0026 Jakarta 10220, Indonesia Shanghai 200 001
Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940
www.phillip.co.jp www.phillip.co.id www.phillip.com.cn
THAILAND: Phillip Securities (Thailand) Public Co. Ltd. FRANCE: King & Shaxson Capital Ltd. UNITED KINGDOM: King & Shaxson Ltd.
15th Floor, Vorawat Building, 849 Silom Road, 3rd Floor, 35 Rue de la Bienfaisance 6th Floor, Candlewick House, 120 Cannon Street
Silom, Bangrak, Bangkok 10500 Thailand 75008 Paris France London, EC4N 6AS
Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835
www.phillip.co.th www.kingandshaxson.com www.kingandshaxson.com
UNITED STATES: Phillip Futures Inc. AUSTRALIA: PhillipCapital Australia SRI LANKA: Asha Phillip Securities Limited
141 W Jackson Blvd Ste 3050 Level 37, 530 Collins Street Level 4, Millennium House, 46/58 Navam Mawatha,
The Chicago Board of Trade Building Melbourne, Victoria 3000, Australia Colombo 2, Sri Lanka
Chicago, IL 60604 USA Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 Tel: (94) 11 2429 100 Fax: (94) 11 2429 199
Tel (1) 312 356 9000 Fax: (1) 312 356 9005 www.phillipcapital.com.au 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

Disclosures and Disclaimers

PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group.
This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at
times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd.
References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for
information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as
solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in
the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such
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any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or
her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements
and past performance is not necessarily an indication of future performance.
This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report.
Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness
of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future
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Additional Disclosures of Interest:
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Specialty Chemicals Sector Initiation - Mar 2016 PhilipsCapital

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Specialty Chemicals

Rerated by lower crude; not yet captured core potential

Indian specialty chemicals foresees accelerated growth Companies

Key stock recommendations

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

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

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

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

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

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

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

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

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

Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

Specialty chemicals: Set for accelerated value

Highly fragmented; been largely dependent on domestic

The specialty chemicals market in India is fragmented

Source: PhillipCapital India Research

Rise in GDP and end‐user industries drive growth

Page | 4 | PHILLIPCAPITAL INDIA RESEARCH

Source: PhillipCapital India Research

Source: PhillipCapital India Research

Favourable initiatives by the Indian government in developing chemical clusters with

Page | 5 | PHILLIPCAPITAL INDIA RESEARCH

Chinese slowdown is likely to be the key boost for

Implementation of stricter environmental law dent Chinese export volume

Pigments for Dyes

Source: Bloomberg, PhillipCapital India Research

Chinese exports to shrink more in 2016: Opportunity for Indian peers

Various issues in China make India stand out as an alternate source

Page | 6 | PHILLIPCAPITAL INDIA RESEARCH

Indian labour cost is ~40% lower compared to China

Source: National bureau of statistics of China, PhillipCapital India Research

Source: Govt of India, PhillipCapital India Research

Page | 7 | PHILLIPCAPITAL INDIA RESEARCH

Where to invest? Historical financials suggests The domestic specialty chemicals

Considering the intermediate manufacturing nature of the Indian industry, we believe

Sales & EBITDA CAGR over last five year

Page | 8 | PHILLIPCAPITAL INDIA RESEARCH

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

Operating efficiency screener

Page | 9 | PHILLIPCAPITAL INDIA RESEARCH

Valuation: Rerated by crude; not capturing potential

Relative price performance Relative one‐year forward PE trend

Source: Company, PhillipCapital India Research

Lower crude favoured industry margins, but not much

Page | 10 | PHILLIPCAPITAL INDIA RESEARCH

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

We initiate coverage on Indian specialty chemicals on a positive note and

PE vs. ROE (FY18) EV/EBITDA vs. ROCE (FY18)

Page | 11 | PHILLIPCAPITAL INDIA RESEARCH

Source: Company, PhillipCapital India Research Estimates

On FY18‐based valuation matrix (as represented in following charts), we believe SRF,

Page | 12 | PHILLIPCAPITAL INDIA RESEARCH

Page | 13 | PHILLIPCAPITAL INDIA RESEARCH

SRF Ltd (SRF IN)

Page | 14 | PHILLIPCAPITAL INDIA RESEARCH

About the company

Source: PhillipCapital India Research

SRF’s diversified business model

Technical Textiles Chemicals & Polymers Packaging Films