India_Chemicals_Operating_leverage_takes_center_stage_amidst_capex

India Chemicals
Operating leverage takes center stage amidst capex moderation
Director Research: Nitesh Dhoot Associate: Krushna Parekh

Tel: +9122 40969763 Tel: +9122 40969755
E-mail: niteshd@dolatcapital.com E-mail: krushnap@dolatcapital.com
June 14, 2024

Index
Sr. No. Topic Page
1 Summary 3
2 Sector stance 5
3 Preferred picks 6
4 India is the second fastest growing chemical exporter 7
5 India to take center stage in manufacturing 9
6 Macro headwinds led to sector’s underperformance 10
7 FY24 was extremely weak; eyeing recovery in FY25 11
8 Indicators suggesting demand recovery 14
9 Global interest rate cycle reversal 15
10 Container shortages resurfacing; Maersk, Hapag-Lloyd upgrade outlook 16
11 Company wise capex status 17
12 Management commentary/ outlook 18
13 Global chemical price trends 19
14 Valuation Matrix 20
Company Section
15 Fine Organics 23
16 Sudarshan Chemical Industries 33
17 Aarti Industries 41
18 Atul 49
June 14, 2024 2

India Chemicals
Operating leverage takes center stage amidst capex moderation
▪ India is amongst the top 10 global exporters of organic chemicals and Company Rating
second fastest growing (~8% CAGR) trailing only China (~11% CAGR). Indian Aarti Industries BUY
companies made substantial investments in capacity and capability building Atul Accumulate
over FY22-24 to capitalize on various opportunities in specialty chemicals, Fine Organic Ind BUY
coinciding with a weak cycle and underutilization of capacities. Gujarat Fluoro SELL
▪ FY24 was particularly weak, with companies in our coverage universe Laxmi Organic SELL
experiencing Revenue/ EBITDA degrowth for the first time in 10 yrs (-11%/- Navin Fluorine Accumulate
27% YoY) and margins at multi-year lows. Although, long term capex NOCIL SELL
trajectory remains positive, we anticipate a breather in capex intensity. FY25- SRF Accumulate
26 to see higher focus on capacity ramp-up, profitability and cash generation, Sudarshan Chem BUY
as capital allocation priorities are realigned. Vinati Organics Reduce
▪ Global and domestic chemical companies’ commentaries indicate that the
demand environment is gradually improving, notably in discretionary end Preferred Picks
uses. Manufacturing PMI is suggesting recovery in demand in key chemical Fine Organic Industries
markets (US, China, Europe, India). Further, container shortages resurfacing Sudarshan Chemical Industries
led to surge in freight rates (SCFI surged 200% YoY); and could trigger Aarti Industries
restocking. Spread recovery coupled with operating leverage benefits, is Atul
likely to drive significant EBITDA growth over FY25-26 (expect 34% CAGR).
▪ We turn positive on chemicals sector, but are selective in our
recommendations and prefer non-agrochemicals/diversified companies,
which will recover faster, and ideate basis presence of significant operating
leverage available, or company specific factors. We recommend ‘BUY’ rating
for Fine Organics, Sudarshan Chemical Industries, Aarti Industries, and
maintain ‘Accumulate’ rating on Atul.
Significant capacity additions done over last 3 years

Over past 3 years (FY22-24), Indian chemical companies in our coverage universe
have made substantial investments in capacity and capability building, matching the
total investments made during previous seven years (FY15-21). This surge in
investment aims to capitalize on various opportunities in specialty chemicals and
restructured supply chains induced by covid-19 disruptions and geopolitical
tensions. They aim to become reliable global suppliers with focus on sustainability,
reducing dependence on China, aided by government's supportive policies including
corporate tax reductions, customs duty cuts, 100% FDI (auto-route), implementation
of BIS standards, among others. The anticipated Production Linked Incentive (PLI)
scheme for chemicals is expected to boost domestic manufacturing and exports.
Capex intensity to slow down; all eyes on profit recovery
Nitesh Dhoot
Capital allocation priorities are likely to be realigned to the current environment and
Director Research
only to critical requirements. In-line with what global chemical companies have been
+9122 40969763
adhering to, most domestic companies will likely re-phase their growth investments. niteshd@dolatcapital.com
Despite weak operating profits in FY24 (-27% YoY), the OCF remained elevated (-
1% YoY), aided by release of working capital on pricing adjustments. However, Krushna Parekh
given limited leeway, in terms of further moderation, cash flows will be restricted. Associate
Raising significant debt, to pursue non-critical capex, may not be desirable. As per +9122 40969755
our estimates, net debt will likely peak in FY25 (+24% vs FY24) and ease thereafter krushnap@dolatcapital.com
as the cycle recovers. We have already seen leading companies like SRF, ATLP
softening near-term stance on capex.
June 14, 2024

Operating leverage at play
Chemical companies in our coverage universe registered revenue degrowth for the
first time in last 10 yrs (-11% YoY) with weak revenue performance across most
companies (decline upto 30% YoY). However, Q4 witnessed steep revenue declines
getting arrested (-4% YoY) as pricing base normalized and demand also started
recovering. FY24 gross margins were at multi-year lows given price decline and
spread pressure witnessed across products; gradual pick-up witnessed in Q4 as RM
costs largely stabilized. Spreads underwent rapid normalization across products,
moving below long-term averages, unsustainable in our view. As demand recovers,
gross margins/spread recovery coupled with operating leverage benefits will likely
drive significant EBITDA growth over FY25-26E (expect 34% CAGR).
Recovery in sight
Assessment of domestic and global companies commentaries indicate that the
demand environment is gradually improving, notably in discretionary end uses like
coating solutions, performance additives, fluoropolymers, rubber chemicals,
industrial adhesives etc and exports are beginning to recover with some key markets
like North America and Asia reviving. China consumer demand is improving despite
a weak property sector, and while EU demand remains soft, inventory levels are
leaner. Destocking narrative has mellowed down, though agri channel destocking
continues to be a headwind in H1CY24. Restocking is picking up selectively with
stability in energy costs and prices of chemicals, largely across the board, though
most commentaries indicate broader recovery acceleration only H2FY25 onwards.
Indicators suggesting demand recovery

Purchase Manager’s Index (PMI) is suggesting recovery in chemicals demand/
volumes, as manufacturing picks up across key chemical producing regions (Europe,
China, USA) in May’24, after healthy improvement in Jan-Mar'24 quarter. Interest
rate cuts (25bps each) by the European Central Bank and Bank of Canada recently,
indicate monetary easing is under way in the world's big economies. Lower interest
rates will aid increased industrial and consumer spending, boosting demand for
chemicals, in addition to production expansion and investments in innovation.
Container shortages resurfacing; Maersk, Hapag-Lloyd upgrade outlook

Freight rates are again soaring due to a container shortage in China, triggered by
vessel rerouting after Houthi attacks in the Red Sea. The Shanghai Containerized
Freight Index (SCFI), a key indicator of container shipping rates surged 75% since
Apr’24 and up more than 200% YoY crossing 3000 level first time since August'22.
The strong demand for container transport, combined with disruptions and port
congestions in Asia and the Middle East, led Maersk to upgrade its 2024 EBITDA
guidance by ~60%; Hapag-Lloyd AG also raised its outlook. CargoGulf noted that
current market demand has surpassed projections of six to nine months ago.
Chemicals sector witnessed higher profitability in FY22/FY23 on pricing tailwinds
aided by the supply chain crisis. While it’s difficult to assess the impact of re-
occurrence, (as there are many moving parts), we believe it could uplift demand/
trigger restocking (as there might be a requirement to secure material supplies).
June 14, 2024 4

Sector stance – Positive
We build revenue growth of 21%/17% for FY25/26E aided by recovery from a weak
base of FY24 and earnings growth of 47%/ 34% for our coverage universe. Risks to
estimates could be slower than expected demand pick-up limiting earnings growth,
as higher depreciation and finance costs weigh, given significant capitalization of
Rs160bn over last couple of years (~60% of FY22 gross block) and additional
Rs140bn capitalization expected (as indicated by managements) in the next couple
of years (Rs76bn/ 66bn in FY25/26). While risks of earnings cuts remain in FY25, it
may not be very severe as we have seen over past year (Exhibit: 13 & 14). We do
not build in pricing tailwinds in our assumptions, which could be an added positive.
While we are confident about long term prospects of the sector, we currently are
selective in our recommendations and prefer non-agrochemicals/diversified
companies, which we feel will recover faster, and ideate basis significant operating
leverage available, or company specific factors. We recommend ‘BUY’ rating for Fine
Organics, Sudarshan Chemicals, Aarti Industries, and maintain ‘Accumulate’ on Atul.
Capex trends
Exhibit 1: Significant capacity commercialization over last 2 years

600 30
500 25
20
400
15
300
10
200
5
100 0
0 (5)
FY26E
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY16
Gross Block (Rs bn) Change (YoY %) - RHS

Source: Company, Dolat Capital
Exhibit 2: Capex spends to moderate; likely to see Exhibit 3: FY25 to see lower capitalization; Capital
lower spends over FY25-26 vs. currently indicated work in progress (CWIP) down ~30% YoY
85 76 70 66
75 60 55
64 62 47
65 57 59 50
38
55 48 40 33
45 38 37 30 25
32 20
35 25 26 20 10 11
25 10
15 0
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY26E
FY25E
FY19
FY24
FY17
FY18
FY20
FY21
FY22
FY23
FY16
FY16
Capex (Rs bn) CWIP (Rs bn)

Source: Company, Dolat Capital Source: Company, Dolat Capital
June 14, 2024 5

Preferred picks
Fine Organic Industries (FINEORG)
FINEORG is well placed for long term growth (beyond FY26) with its upcoming
investments in Maharashtra SEZ along with prospective global expansions, while
having capacity headroom to accommodate near term export volume recovery.
Strong net cash balance sheet (Rs10.5 bn; 1.7x of current gross block) and healthy
OCF of Rs8bn over FY25-26E will enable funding its capex program. It is currently
trading at 32x/29x FY25/FY26E EPS, attractive given strong track record of >20%
earnings CAGR and high RoCE of ~35% (average) over last 10 years with current
RoIC of 50%. Re-iterate ‘BUY’; TP Rs5800 at 36x FY26 EPS (Rs5450 earlier).
Sudarshan Chemical Industries (SCHI)

SCHI remains well poised to benefit in the medium-long term from earnings
improvement led by (1) better absorption of fixed overheads (as demand improves in
key markets), (2) comprehensive product portfolio (post capex) comparable to any
Tier-1 pigment manufacturer, enabling tapping into industry consolidation tailwinds
(accelerated by Heubach insolvency), (3) strong client relationships & product
approvals (4) rising share of margin accretive specialty pigments (~68% of revenue)
given higher focus and commensurate capital allocation and (5) stability in input
costs. We expect operating leverage to play out as capacity ramps up and generates
healthy OCF (Rs6bn over FY25-26), enabling it to turn debt free by FY26E (vs net
debt of Rs7.9bn/ Rs3.9bn in FY23/24). We revise our EPS estimates upwards by
9%/12% for FY24/25 (conservative earlier). Upgrade to ‘BUY’; TP Rs1000 at 26x
FY26E EPS (earlier Accumulate; TP Rs900).
Aarti Industries (ARTO)

ARTO’s earnings recovery is expected to be driven by a combination of factors such
as (a) recovery in discretionary end uses demand (~50-60% contribution) aiding
increase in capacity utilization, even as agrochemicals continue to face headwinds,
(b) long term contracts (incl. MMA & MEA), and (c) new capacity addition (Chloro-
toluene) commencing in FY26E. We expect EBITDA/PAT CAGR of 40%/55% over
FY24-26E, as significant operating leverage plays out, given sufficient capacity
headroom and business profitability at a cyclical bottom. EBITDA/GB at ~15% in
FY24 vs 25-26% avg over last 5-10 years, indicates significant upside potential
alongside recovery in chemicals cycle, while further downside appears limited.
Upgrade to ‘Buy’; TP Rs820 at 30x FY26E EPS (earlier Accumulate; TP Rs715).
Atul (ATLP)
ATLP invested ~Rs20bn over FY22-24 (a substantial 3-year capex equivalent to the
last decade) to set up capacities, but revenue scale-up lagged due to external and
internal challenges. However, the company has significant unrealized sales potential
of over Rs23bn which includes (a) Rs15bn from recently concluded capex and
previously unutilized capacity, and (b) Rs8bn from a polymer project, which is under
implementation (50,000 tpa liquid epoxy resins plant) and expected to be
commissioned by Q2FY25. We believe ATLP’s earnings have bottomed out, as
spreads of key products are unlikely to fall further (already below long term
averages), plus volume growth is picking up as challenges ease. Large capacity
headroom will aid revenues, as the demand recovers. We expect
Revenue/EBITDA/PAT CAGR of 18%/ 35%/51% over FY24-26E. Maintain
‘Accumulate’; TP Rs7000 at 28x FY26E (Rs6850 earlier).
June 14, 2024 6
India is the second fastest growing chemical exporter
Exhibit 4: India’s organic chemical exports growth is far ahead of world avg (3%) and next only to China
12% 10.6%
10%
7.8% 7.3%
8%
5.9%
6%
4%
2.4%
2% 2.0% 1.9% 1.6% 1.4% 0.6% 0.5% 0.2%
0%
-0.9%
France
USA
Korea
Germany
Belgium
Singapore
Japan
UK
Netherlands
China
India
Saudi Arabia
Others
Ireland
Switzerland
-2%
-4%
-3.8%
-6% -3.4%
CAGR (2014-22) World Avg

Source: Industry, Dolat Capital
Exhibit 5: India is amongst the top 10 global exporters of organic chemicals

France; 3% Singapore UK; 2%
Saudi Arabia; ; 3% China; 19%
3% Japan; 3%
India; 4%
Netherlands; 4%
South Korea;
5%
Others; 18%
Switzerland; 6%
Belgium; 6%
Germany; 6% USA; 9%
Ireland; 9%
Exhibit 6: India at ~4% global exports share, and poised for rapid growth; China was here 2 decades ago
100%
90%
33%
80% 37% 39% 39% 41% 38%
70%
3%
60% 7% 4% 4%
1% 6% 6% 5% 4%
2% 2% 3% 9%
50% 12% 11% 11% 9%
10%
40% 3% 5% 19%
9% 11% 13%
30%
20% 39% 36% 33% 31% 31% 31%
10%
0%
2002 2006 2010 2014 2018 2022
Europe Majors China USA India Japan Others
June 14, 2024 7

Exhibit 7: Exports from India are diversified Exhibit 8: Import dependence on China is high
Others;
USA; 14% 17%
Kuwait; 2%
China; 7%
Malaysia; 3%
Others; China;
Netherlands; Japan; 3% 46%
46%
6% Thailand; 3%
Saudi; 6% Taipei; 4%
Belgium; 5%
Germany; 4% South Korea; 4%
Brazil; 3% Saudi Arabia;
Spain; 3% Singapore; 5% USA; 7%
UAE; 3% Japan; 3% 6%
Source: Industry, Dolat Capital Source: Industry, Dolat Capital
Exhibit 9: India is the top importer from China Exhibit 10: China’s imports are well diversified
India; South
13% Others; Korea;
27% 20%
USA; 12%
Others;
Germany; 3%
47% USA; 10%
Brazil; 6% Oman; 3%
South Korea; 6% India; 3%
Japan; 10%
Japan; 5% Brunei; 3%
Germany; 4%
Taipei; Saudi Arabia; 9%
Belgium; 3% Netherlands; 4% Singapore; 4% 8%
Exhibit 11: China generated massive trade surplus^ in last 8-10 yrs; Germany, US net imports shoot up
55 (USD bn)
45 44
35
27
25 22 22
16
15 1113 10 9
5 5 3 2
5 2
(5)
USA
Germany
Brazil
China
Italy
Saudi Arabia
South Korea
India
Ireland
Switzerland
-1 -3
-8 -6 -9
(15) -9
-15 -15 -6 -14 -8-16 -12
(25)
-25 -4
(35)
-33
2004 2014 2022
Source: Industry, Dolat Capital ^Organic chemicals
June 14, 2024 8

India to take center stage in chemicals manufacturing
India’s share in global chemicals to grow significantly
India's domestic consumption is expected to grow at a 9-10% CAGR in the coming
years, driven by 1) rising disposable incomes, 2) a favorable demographic dividend,
3) increasing global preference for eco-friendly alternatives, and 4) diversification of
global chemical supply chains. This growth could see India’s share in the global
chemicals market triple to 10-12% by 2040, adding an additional USD700bn in
market value, beyond the current contribution of USD 170-180bn (in 2021). The
Specialty Chemicals segment is likely to be a key growth driver, with potential to
boost India's net exports by more than USD20bn by 2040, a 10x increase from the
current USD2bn.
Exhibit 12: India is a fast growing demand centre for chemicals
Source: McKinsey
Domestic manufacturing needs to be competitive

Success in complex, high value and emerging sectors would position India as a
manufacturing hub catering to both domestic and global markets. The initiative to aid
manufacturing comprises competitive direct tax rates, a simplified indirect tax regime,
incentives under Production Linked Incentives (PLI), better quality of infrastructure,
access to renewable energy and other factors. PLI scheme, by far, has been the most
transformative reform, covering 14 sectors, which have attracted investment
commitments to the tune of Rs2.5trillion (USD31.3bn). Many labor-intensive sectors
such as textiles and food processing are covered by this scheme. Extending the PLI
scheme to the chemicals and petrochemicals industry, will provide a big boost to
domestic manufacturing; aid substituting imports and boosting exports. Areas which
could be susceptible to supply chain disruptions, must be included in the PLI scheme.
June 14, 2024 9

Macro headwinds led to sector’s underperformance
Exhibit 13: Change in FY25 earnings estimates (consensus) vs Stock price change over past 1 year
80% FY25 Estimates Change (%) 1-Yr Stock Price Change (%) 1-Yr Nifty Return (%)
60%
40%
20%
0%
0%
-20% -7% -9% -11%

-15% -16%
-24% -26%
-40% -34% -35% -34% -38% -38%
-41%
-60% -47% -49% -48%
-52%
-63%
-80%
AACL
SCHI
SRF
PI
TTCH
GALSURF
TATVA
FLUOROCH
ARTO
DN
ATLP
ROSSARI
NOCIL
VO
JUBLINGR
NEOGEN
NFIL
FINEORG
LXCHEM
Source: Bloomberg, Dolat Capital
Exhibit 14: Change in FY26 earnings estimates (consensus) vs. Stock price change over past 6 months
80% FY26 Estimates Change (%) 6-M Stock Price Change (%) 6-M Nifty Return (%)
60%
40%
21%
20%
5%
0%
-2% 0% 0% -8% -3% -3%
-20% -8% -8% -7% -11% -12%
-14% -17%
-40% -28% -26%
-34% -38%
-60%
ATLP
SCHI
SRF
NFIL
PI
AACL
TTCH
GALSURF
JUBLINGR
ROSSARI
DN
FLUOROCH
TATVA
ARTO
NOCIL
VO
NEOGEN
FINEORG
LXCHEM
June 14, 2024 10

FY24 was extremely weak; eyeing recovery in FY25
Exhibit 15: Revenue decline first time in last 10 yrs Exhibit 16: Sharp YoY decline getting arrested
640 50 140 80
540 40 120 60
440 30 40
100
20 20
340 80
10 0
240 0 60 (20)
140 (10) 40 (40)
40 (20)
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q2FY24
Q3FY24
Q4FY24
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
Revenue (Rs bn) YoY % - RHS Revenue (Rs bn) YoY % - RHS
Exhibit 17: FY24 gross margins at multi-year lows Exhibit 18: …gradual pick up visible in Q4
320 54 70 53
270 52 60 51
220 50
50
48 49
170 40
46
120 44 30 47
70 42 20 45
20 40
Q1FY22
Q2FY22
Q2FY24
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q3FY24
Q4FY24
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY26E
FY25E
FY16
GP (Rs bn) GM (%) - RHS Avg GM (%) - RHS Gross Profit Gross Margin (%) - RHS
Exhibit 19: Employee costs increasing at 12% Exhibit 20: Other expenses elevated in FY24, on
CAGR; absorption to improve with vol growth higher logistics costs and adverse op. leverage
40 9 140 23
8 120 22
30
100
7 21
20 80
6 20
60
10 5 19
40
0 4 20 18
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
FY16
Other expenses (Rs bn) As % of revenue - RHS Avg %

Empl. exp (Rs bn) As % of rev Avg %
June 14, 2024 11

Exhibit 21: FY24 EBITDA at multi-year lows Exhibit 22: … pick up in Q4 encouraging
140 24 30 24
120 22 25 22
100 20 20
20
80 18 15
18
10
60 16
5 16
40 14
0 14
20 12
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q2FY24
Q3FY24
Q4FY24
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
EBITDA (Rs bn) Margin (%) Avg Margin (%) EBITDA (Rs bn) EBITDA Margin (%) - RHS
Exhibit 23: FY24 EBITDA performance was weak across most companies
60 50.2
40
20
7.0
0
SRF
VO
ATLP
ARTO
SCHI
LXCHEM
NFIL
FINEORG
NOCIL
FLUOROCH
(20)
(17.7)
(10.4) (26.8) (17.8)
(27.6) (22.8)
(40)
(35.7)
(60) (53.4)
FY24 EBITDA Change (YoY %)
Exhibit 24: Depreciation has increased at 16% Exhibit 25: Finance costs have also surged in last
CAGR (over FY19-24) as capex intensity was high couple of years on higher debt and higher rates
35 7.5 10 8
30 7.0 7
6.5 8
25 6
6.0
20 6 5
5.5
15 5.0 4
4
10 4.5 3
5 4.0 2 2
FY26E
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
FY16
Depreciation (Rs bn) % of Avg. Gr. Block Finance cost (Rs bn) Avg Fin. Cost (%)
June 14, 2024 12

Exhibit 26: Sharp profit decline in FY24 (-39% YoY) on lower operating profits,
rising depreciation and surging finance costs
80 60
70 45
60 30
50
15
40
0
30
20 (15)
10 (30)
0 (45)
FY25E
FY26E
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY16
PAT YoY % - RHS
Exhibit 27: OCF remained robust despite weak Exhibit 28: Working capital release led by price
operating profits in FY24; aided by WC release moderation; intensity largely stable
100 1.2 140 120
90 1.0 120 110
80 100
70 0.8 100
90
60 0.6 80
50 80
0.4 60 70
40
30 0.2 40 60
20 0.0 20 50
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY25E
FY26E
OCF (Rs bn) OCF/ EBITDA (x) Core working capital (Rs bn) WC days (x)
Exhibit 29: Debt likely to peak in FY25 Exhibit 30: Return ratios at decadal lows
140 2.5 23
21
120 2.0 19
100 1.5 17
15
80 1.0 13
60 0.5 11
9
40 0.0 7
5
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
FY14
FY15
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY16
Net Debt (Rs bn) Net Debt/ EBITDA - RHS RoCE (%) RoE (%) Avg RoCE (%)
June 14, 2024 13

Indicators suggesting demand recovery
Purchase Manager’s Index (PMI) is suggesting recovery in chemicals demand/
volumes, as manufacturing picks up across key chemical producing regions
(Europe, China, USA) in May’24, after healthy up-tick in Jan-Mar’24 quarter.
▪ China PMI: China’s factory activity grew fastest in last two years, in May’24. The
Caixin/S&P Global manufacturing PMI rose to 51.7 in May (vs. 51.4 in Apr’24),
highest since Jun’22. Further, International Monetary Fund (IMF) recently raised
its forecast on China’s 2024 economic growth to 5% (vs 4.6%).
▪ Eurozone PMI: Eurozone HCOB manufacturing PMI, rose to 47.3 in May’24 (vs.
45.7 in Apr’24), below the 50 mark for 23rd month. The industry is on the cusp of
arresting the production decline that persisted since Apr’23. Encouragingly,
business confidence regarding future production is at its highest since early 2022.
▪ USA PMI: The S&P Global U.S. Manufacturing PMI rose to 51.3 in May’24 from
50.0 in April. May’s PMI increase was primarily driven by a resurgence in new
orders, leading to faster growth in production and employment.
▪ India PMI: India’s manufacturing sector continued to expand in Q1FY24, despite
a minor blip in growth momentum, amid an intensive heatwave reducing working
hours, impacting production volumes.
Exhibit 31: Eurozone Mfg PMI, rose to 47.3 in Exhibit 32: China Mfg PMI rises to 51.7 in May’24 vs
May’24 (vs. 45.7 in Apr’24), highest since Apr’23 51.4 in Apr’24; highest since Jun’22
54 52
52 52
50 51
50
48
49
46 49
44 48
42 47
May-22
Jul-22
Jan-23
Mar-23
May-23
Jul-23
Jan-24
Mar-24
May-24
Sep-22
Nov-22
Sep-23
Nov-23
May-23
May-22
Sep-22
Mar-23
Sep-23
May-24
Jul-22
Jul-23
Mar-24
Nov-22
Nov-23
Jan-23
Jan-24
Eurozone HCOB Mfg Final PMI China (Mainland) Caixin Mfg Final PMI
Source: Refinitiv, Dolat Capital Source: Refinitiv, Dolat Capital
Exhibit 33: US Mfg PMI rose in May’24 after posting Exhibit 34: India Mfg PMI continues to expand
no-change in Apr’24 despite temporary blip in May’24
55 60
53 58
51 56
49 54
47 52
45 50
Nov-23
Nov-23
May-22
Jul-22
Nov-22
Mar-23
May-23
Jul-23
Mar-24
May-24
May-22
Jul-22
Nov-22
Mar-23
May-23
Jul-23
Mar-24
May-24
Sep-22
Sep-23
Jan-23
Jan-24
Sep-22
Sep-23
Jan-23
Jan-24
United States S&P Global Mfg PMI Final IndiaHSBC Mfg PMI
Source: Refinitiv, Dolat Capital Source: Refinitiv, Dolat Capital
June 14, 2024 14

Global interest rate cycle reversal
The recent interest rate cuts (25bps each) by the European Central Bank and Bank
of Canada, indicate a shift towards monetary easing in the world's big economies.
Though there's caution over when others will join in, after the most aggressive global
rate-hiking cycle in decades, lower interest rates will aid increased industrial and
consumer spending, boosting demand for chemicals, in addition to encouraging
production expansion and investments in innovation.
Exhibit 35: Interest rates of leading central banks

7 (%)
6
5
4
3
2
1
0
(1)
Apr-22
Oct-22
Apr-23
Oct-23
Apr-24
Aug-22
Feb-23
Aug-23
Feb-22
Feb-24
Dec-22
Dec-23
Jun-22
Jun-23
Jun-24
US - Federal Reserve ECB India - RBI Canada - BOC
Source: Refinitiv, Dolat Capital
Chemical exports from India gaining traction in recent months
Exhibit 36: Indian chemical exports gain momentum in recent months

350
300
(Rs bn)
250
200
150
100
May-21
Jul-21
Mar-22
May-22
Jul-22
Mar-23
May-23
Jul-23
Mar-24
Nov-21
Nov-22
Nov-23
Sep-21
Jan-22
Sep-22
Jan-23
Sep-23
Jan-24
Exports Imports
Source: Industry, Dolat ^Organic + Inorganic
June 14, 2024 15

Container shortages resurfacing; Maersk, Hapag-Lloyd upgrade outlook
Freight rates are again soaring due to a container shortage in China, triggered by
vessel rerouting following Houthi attacks in the Red Sea. Previously, there were
excess of containers due to pandemic-related investments. However, the container
shortages seen recently may worsen, particularly with boxes not returning to China
as expected. The global trade imbalance, with China as a net exporter and the US
as a net importer, complicates container management. Thus, increased capacity will
be needed to resolve these issues and stabilize the global supply chain. Demand-
supply mismatch can lead to elevated rates and increased delays.
The Shanghai Containerized Freight Index (SCFI), a key indicator of container

shipping rates surged 75% since Apr’24 and up more than 200% YoY crossing 3000
level first time since August'22. The strong demand for container transport, combined
with disruptions and port congestions in Asia and the Middle East, led Maersk to
upgrade its 2024 EBITDA guidance by ~60%; Hapag-Lloyd AG also raised its
outlook. CargoGulf noted that current market demand has surpassed projections
from six to nine months ago.
Exhibit 37: Shanghai Containerized Freight Index up +200% YoY

5,500
4,500
3,500
2,500
1,500
500
Mar-23
Mar-20
Mar-21
Mar-22
Mar-24
Dec-19
Dec-20
Dec-21
Dec-22
Dec-23
Jun-19
Sep-19
Jun-20
Sep-20
Jun-21
Sep-21
Jun-22
Sep-22
Jun-23
Sep-23
Jun-24
Containerized Freight Index (Shanghai)
Exhibit 38: Ocean freight container price index rising steadily

25,500
20,500
15,500
10,500
5,500
500
Oct-22
Oct-20
Apr-21
Oct-21
Apr-22
Apr-23
Oct-23
Apr-24
Aug-20
Aug-21
Aug-22
Aug-23
Feb-21
Feb-22
Feb-23
Feb-24
Dec-20
Dec-21
Dec-22
Dec-23
Jun-20
Jun-21
Jun-22
Jun-23
Jun-24
Freightos Index (China to Europe) Freightos Index (China to US East Coast)

June 14, 2024 16

Company wise capex status
Company Capex progression
Capex outlay and timelines intact; Rs15-18bn in FY25; Rs25-30bn over FY24-25 and atleast
Rs10bn for FY26. Capacity expansion progress as per schedule, including specialty chemicals
Aarti Industries block, Nitro-toluene capacity, Chloro-toluene (CT) capacity, asset upgradation among others. New
site in Jhagadia to include additional MPP’s linked to some existing value chains also (other than
CT), or some standalone products as well. Capex outflow in FY24 was Rs13bn.
Unrealized sales potential of over Rs15bn from recently concluded capex and from previously
unutilized capacity. Polymer project, which is under implementation (50,000 tpa liquid epoxy resins
Atul plant) and expected to commission by Q2FY25, has revenue potential of ~Rs8bn. 300tpd caustic
and 50MW power plant commenced operations in Jan’24 (capex Rs10.4bn). Capex cycle is largely
done.
Final permissions and physical allotment of the land (~30 acres) from SEZ authorities is awaited;
now only the issuance of letter of allotment is pending, which should happen soon as per the
Fine Organic management. Commercialization to take min 18 months post EC, which will be fast paced since its
Industries part of SEZ. Details of capex to be disclosed once land is finalized. Thailand plant is ready to be
commissioned; One out of two permissions awaited was received; other one is also expected
shortly. Plant expected to commence trial production by June’24 end.
Capex target of Rs8bn in FY25, after ~Rs8bn already spent in FY24. Battery chemicals capex is as
Gujarat per schedule; Rs.60bn to be spent in FY24-28 and expect 2x asset turns with ~25% EBITDA
Fluorochemicals margins at optimal utilization. LIPF6 plant got commissioned and commercial sales are expected
from H2FY25. Fluoropolymers capex of Rs5bn in FY25 pertains to the previously deferred capex.
Investing Rs7.1bn at Dahej over next 3 years (~20% of the 85 acre land parcel) towards Specialties
and Essentials (Capex split 65:35). EC approval received, project construction to begin from
Laxmi Organic
Q1FY25, execution to take 18-20 months, asset turn will be 2-2.5x. Fluorochemicals final cost to
Industries
complete is Rs5.5bn; full ramp-up over next 3 years to generate revenue of Rs2bn. Capex was
Rs2.7bn in FY24; Rs1.9bn was towards capex in subsidiary (YFCPL), rest smaller capexes.
Dedicated agro capex commissioning by Q1 end/ Q2 early; firm orders in-place for FY25. New
capability capex of Rs300mn at Surat (incremental revenue potential of Rs450mn) is on track;
expected to generate revenue from FY25. Additional R32 capacity expansion (Rs840 mn; 4.5 ktpa)
Navin Fluorine is on schedule; expected to be commissioned by Feb’25. No clarity on HFO debottlenecking yet.
AHF project (40ktpa capacity) is on track, to commission by end FY25/ early FY26. CGMP IV of
~Rs2.88bn approved by the board; phase-1 with outlay of Rs1.6mn to support the MSA, expected
to commission by CY25 end.
Board approved Rs2.5bn capex at Dahej site. Work has commenced and is expected to commission
by end of FY27. Capex is for products where utilizations are optimal, even though overall company
NOCIL
utilizations are at ~65%. Management is also evaluating its entry into adjacencies/newer
chemistries, but timelines are not yet decided.
~Rs30bn capex commissioned in chemicals segment during FY24 (~Rs18bn in Specialty Chemicals
SRF
& ~Rs12bn in Fluorochemicals). FY25 capex spends indicated at ~20-21b.
As the capex cycle is complete, operating leverage is expected to play out as capacity ramps up
Sudarshan Chemical and generates healthy OCF (Rs6bn over FY25-26) thereby aiding debt reduction. FY25 capex would
Industries be around Rs1bn (towards maintenance). Backward integration capex not to be taken up at least in
the next 1 year. It is open to inorganic opportunities if there is a financial and strategic fit.
FY25 capex indicated at Rs5.5bn including subsidiary. ATBS capacity expansion (from 40ktpa to
60ktpa) is expected to be completed by H2FY25. Capex of ~Rs5bn consisting of MEHQ, Guaiacol,
iso-amylene derivatives, anisole, 4-methoxyacetophenone; One plant in product portfolio making
Vinati Organics
MEHQ Guaiacol commissioned in Mar’24 (product tested and sampled with customer); expect
revenue contribution from H2FY25. Anisole, 4-methoxyacetophenone, tertiary amyl alcohol and
para tertiary amylphenol to be commissioned in H2FY25.
Source: Dolat Capital
June 14, 2024 17

Management commentary/ outlook
Company Comments
Management guided EBITDA in range of Rs14.5-Rs17bn for FY25, aided by ~25% volume growth on recovery in
discretionary segments, gradual revival in agro/pharma, commissioning of new capacities during the year, and
Aarti Industries resultant operating leverage benefits, largely H2FY25 onwards (55-60% contribution). Chloro toluene revenue
targeted is > Rs20bn with EBITDA margin between 20-30%, aided by value added products. Management believes,
existing value chains (incl ongoing expansions, ex Chlor-toluenes) can deliver a peak EBITDA of Rs20bn.
ATLP invested ~Rs20bn over FY22-24 (3 year capex equivalent to the last decade) in setting up capacities, though
revenue scale-up has lagged, due to external and internal challenges. In its analyst meet, management highlighted
Atul
unrealized sales potential of over Rs15bn from recently concluded capex and from previously unutilized capacity.
US Anti-dumping duty on 2,4 D on India and China, whereby ATLP is in a relatively better position.
Management highlighted exports (especially to US and Asia) are showing signs of revival. However, Europe is still
languishing. Some plants are operating at full capacity, while few have headroom available, incl the E-73 plant at
Fine Organic Patalganga; to be absorbed gradually over next 2-3 years. The company guided ambitious expansion plans, which
Industries could even involve raising debt. It is (a) evaluating setting up of a considerable capacity outside India; (b) trying to
expand its product range through acquisitions; and (c) waiting for allotment letter from govt. authorities in
Maharashtra SEZ (expected shortly) to expand existing and new products.
FY25E EBITDA guidance was re-iterated at Rs20bn (FY23 equivalent). Management highlighted (a) fluoropolymer
Gujarat volumes to increase, benefitting from exit of legacy players and destocking phenomena being over and (b) RGas
Fluorochemicals business to remain weak in FY25 on R-125 tariff cuts by USA for Chinese exporters; spec chem also to remain
sluggish. In Battery Chemicals, LIPF6 plant commissioned and expects commercial sales from H2FY25.
Management highlighted pick-up in coatings & pigments and expects the momentum to continue in next quarter.
Pharma exports pick-up while agri demand is also witnessing recovery, though pricing pressure persists. Demand
Laxmi Organic environment continues to be weak in key markets like Europe (higher energy costs and soft realizations) & China;
Industries North America and India continue to be positive. Fluorochemicals project secured its first order in Q4FY24; FY25 to
be the first full year of ramp up; full ramp-up over next 3 years to generate revenue of Rs2bn. Dahej EC approval
received, project construction to begin from Q1FY25, execution to take 18-20 months, asset turn will be 2-2.5x.
HFO plant stabilized through joint efforts with Honeywell and Q4 volume was highest in four quarters. R-gas plants
are running at full capacity and gradual recovery is expected in CDMO for FY25 (H1 to remain muted). Additional
R32 capacity expansion (Rs840 mn; 4.5 ktpa) is on schedule; expected to be commissioned by Feb’25. Strategy to
Navin Fluorine
secure a right mix of late and early-stage molecules progressing well, as late stage/commercial pipeline with (a)
addition of new UK Pharma customer, validation campaign PO in hand for EU major, (c) POs in hand for 2 RSM’s
for delivery in CY25 for FDA approved drug for US major. Eyeing a better FY25 with all the order/ customer wins.
Management indicated FY25E to see higher volumes vs FY24, aided by higher sales to new customers. It believes
spreads have bottomed out and may not fall further, though competitive intensity remains elevated. Expects Indian
tyre industry to grow in mid-single digit for FY25 on stable replacement market and growth in OEM’s. However,
NOCIL
continued influx from Chinese competition due to ongoing global recessionary trends / subdued demand in
international markets, (including China itself), is exerting pressure on volume and prices. It believes, latex market
has bottomed out and could witness some recovery.
Management guided ~20% growth for Chemicals segment, though it could be back-ended (H2FY25). In
Fluorochemicals, the focus is on increasing blend sales, for eg. R-410A, where demand will be higher given the low
GWP vs. R-125 (price correction is lesser in R-410A). Next couple of years focus is to be on maximizing production
for quota / sales volumes. Management indicated 10-12k volume addition in FY25 driven by recently commercialized
SRF R-32 capacity, to be at optimal capacity utilization by end of FY25. One of the key products in Spec Chem witnessed
sharp price decline (~15-20%) of-late, due to increased Chinese competition. Management highlighted major
process breakthroughs, enabling significantly lower cost structure on this product, which will aid higher volume share
and absolute profit pool, as the market recovers. Packaging films demand-supply imbalance and margin pressure
to continue in near term. Expecting stable demand for NTCF and strong demand for belting fabrics.
Management sees improvement in global demand environment; EU demand witnesses an uptick; North America
continues to register double digit growth and few other geographies seeing better demand. However, it remains
vigilant on the geopolitical environment. They also expect approval cycle to accelerate in international markets and
Sudarshan
coatings could be the biggest opportunity. Turbulence in global pigment industry following Heubach's insolvency and
Chemical Industries
exit of other legacy players has expanded the opportunity for SCHI, company eyes sustainable volume gains.
Management indicated reaching optimum capacity utilization ahead of its previous guidance of 4 years (i.e. FY27).
Increasing contribution of specialty pigments will drive superior EBITDA margins.
Management believes destocking impact is largely behind, and pick-up is seen in most products, including ATBS.
Revenue growth guidance of 20% CAGR in next 3 years on (a) higher capacity utilization in antioxidants, (b) ATBS
Vinati Organics
pick-up in FY25 (double-digit growth), (c) IBB improvement in FY25, based on customer discussions, (d) ramp-up of
VOPL, post commencement. Blended EBITDA margin guided at 26%.
June 14, 2024 18

Global chemical price trends
Q1FY25 % % Pre covid
Q1FY24 Q4FY24 Latest
Commodity Curr/Unit (QTD Change Change Avg
(Avg) (Avg) Price
Avg) (QoQ) (YoY) FY19-20
Chlor-Alkali and chlorine downstream
Caustic Soda USD/MT 422 429 492 15% 17% 490 391 25%
Soda Ash USD/MT 300 284 250 -12% -17% 265 198 34%
Ethylene Dichloride USD/MT 262 279 232 -17% -11% 225 282 -20%
Vinyl Chloride Monomer USD/MT 667 641 663 3% -1% 675 741 -9%
Epichlorohydrin CNY/MT 8,232 8,219 7,516 -9% -9% 7,200 12,342 -42%
PVC USD/MT 830 784 803 2% -3% 830 879 -6%
Methanol downstream
Methanol USD/MT 290 305 302 -1% 4% 300 236 27%
Acetic Acid CNY/MT 2,938 3,094 3,181 3% 8% 3,250 3,531 -8%
Ethyl Acetate CNY/MT 6,479 6,419 6,030 -6% -7% 5,975 6,308 -5%
Formaldehyde INR/KG 28 24 27 13% -1% 30 26 17%
Formic Acid INR/KG 122 105 105 0% -14% 105 82 29%
Vinyl Acetate CNY/MT 6,455 7,247 6,063 -16% -6% 5,700 7,196 -21%
Cumene downstream
Phenol USD/MT 910 932 954 2% 5% 983 1,152 -15%
Acetone CNY/MT 6,051 7,368 8,090 10% 34% 8,325 4,484 86%
Acrylonitrile Butadiene Styrene (ABS)
Acrylonitrile USD/MT 1,415 1,296 1,442 11% 2% 1,475 1,651 -11%
Butadiene USD/MT 819 1,157 1,380 19% 68% 1,315 1,159 13%
Styrene USD/MT 1,027 1,164 1,228 5% 19% 1,220 1,105 10%
ABS USD/MT 1,366 1,352 1,498 11% 10% 1,540 1,606 -4%
Polypropylene (PP) and Polyethylene Terephthalate
(PET)
PP USD/MT 1,011 990 1,012 2% 0% 1,020 1,130 -10%
PET CNY/MT 7,546 7,219 7,262 1% -4% 7,222 8,297 -13%
PTA USD/MT 814 783 799 2% -2% 800 781 2%
MEG USD/MT 502 549 531 -3% 6% 535 694 -23%
Polyethylene (PE) and Polystyrene (PS)
HDPE USD/MT 1,043 1,022 1,035 1% -1% 1,040 1,084 -4%
LDPE USD/MT 1,049 1,096 1,150 5% 10% 1,200 1,048 15%
LLDPE USD/MT 1,014 1,007 1,025 2% 1% 1,050 1,002 5%
Polystyrene USD/MT 1,365 1,333 1,438 8% 5% 1,460 1,378 6%
Others
Caprolactam CNY/MT 12,358 13,460 13,083 -3% 6% 13,100 13,591 -4%
Nylon 6 INR/KG 99 124 131 6% 32% 132 181 -27%
Fluorspar 97% CNY/MT 3,187 3,250 3,650 12% 15% 3,700 3,024 22%
Acrylic Acid USD/MT 804 765 836 9% 4% 843 994 -15%
Maleic Anhydride USD/MT 905 894 879 -2% -3% 928 953 -3%
Phthalic Anhydride CNY/MT 7,808 7,434 7,763 4% -1% 7,950 6,685 19%
Titanium Dioxide USD/MT 2,373 2,329 2,339 0% -1% 2,222 1,948 14%
TDI CNY/MT 18,121 16,810 15,109 -10% -17% 14,600 17,611 -17%
Rock Phosphate USD/ST 305 203 203 0% -34% 203 63 222%
Ammonia USD/MT 378 478 462 -3% 22% 465 308 51%
Sulfuric Acid CNY/MT 213 227 282 24% 32% 248 368 -33%
Building Blocks
Benzene USD/MT 881 998 1,061 6% 20% 1,040 694 50%
Toluene USD/MT 886 877 935 7% 5% 950 694 37%
Ethylene USD/MT 888 951 991 4% 12% 950 926 3%
Propylene USD/MT 854 849 856 1% 0% 860 961 -11%
Feedstocks
Crude Oil (Brent) USD/BBL 77.9 81.9 85.0 4% 9% 83 66 25%
Naphtha USD/MT 607 686 684 0% 13% 675 554 22%
USD/MMBt
Natural Gas 2.3 2.1 2.2 6% -4% 3.05 3 14%
u
Indonesian Coal - 6322Kcal USD/MT 251 123 115 -6% -54% 114 86 33%
Oleochemical Feedstocks -16% -9% 13%
Crude Palm Oil MYR/MT 3,852 4,006 4,065 1% 6% 3,972 2,208 80%
Palm Kernel Oil MYR/MT 3,880 4,424 5,013 13% 29% 4,795 3,022 59%
Rapeseed Oil EUR/MT 879 882 996 13% 13% 1,020 756 35%
Soyabean Oil BRL/MT 4,421 4,072 4,234 4% -4% 4,350 2,504 74%
Freight
Baltic Dry Index (RHS) Index 1,330 1,832 1,823 0% 37% 1,836 1,272 44%
Freightos Index (China to US East Coast) Index 2,357 5,618 5,191 -8% 120% 6,658 2,838 135%
Freightos Index (China to Europe) Index 1,362 4,322 3,992 -8% 193% 5,022 1,505 234%
Containerized Freight Index (Shanghai) 981 2,023 2,272 12% 132% 3,185 839 280%
Currencies
USDINR 82.2 83.0 83.4 0% 1% 83.5 70 19%
EURINR 89.5 90.2 89.9 0% 0% 89.8 80 13%
CNYINR 11.7 11.6 11.5 0% -2% 11.5 10 12%
June 14, 2024 19

Valuation matrix
TP Mcap CAGR % (FY24-26E) EPS (Rs/ sh) PE (x) EV/EBITDA (x) ROE (%)
Particulars (Rs bn) Rating
(Rs) (Rsbn) Revenue EBITDA PAT FY24 FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E FY24 FY25E FY26E
Covered Companies
Aarti Industries BUY 820 245 24 40 55 11 19 27 59 36 25 28 20 15 8 12 16
Atul Accumulate 7,000 183 18 35 51 110 183 250 57 34 25 28 19 15 7 10 13
Fine Organic Industries BUY 5,800 144 6 5 10 134 143 161 35 33 29 25 24 21 24 21 20
Gujarat Fluorochemicals SELL 2,600 361 31 50 59 40 72 100 83 45 33 40 25 19 8 13 15
Laxmi Organic Industries SELL 245 71 13 38 36 4 6 8 58 39 31 26 18 14 8 9 11
Navin Fluorine International Accumulate 3,700 177 28 47 54 44 75 105 81 47 34 46 28 21 10 15 18
NOCIL SELL 240 45 13 27 29 7 10 12 38 28 22 21 16 13 7 9 11
SRF Accumulate 2,525 711 15 30 36 45 62 83 53 38 29 29 22 17 12 15 17
Sudarshan Chemical Ind. BUY 1,000 57 16 27 55 16 29 39 51 28 21 19 14 11 11 16 19
Vinati Organics Reduce 1,600 194 24 28 29 31 41 52 59 46 36 41 32 25 14 16 18
Uncovered Companies
Aether Industries NR 116 47 73 74 6 13 19 126 68 46 76 42 30 5 8 11
Alkyl Amines Chemicals NR 114 23 38 45 29 45 61 62 45 33 37 29 22 12 16 19
Clean Science NR 149 32 27 26 23 30 37 58 46 37 42 33 27 22 24 25
Deepak Nitrite UR 311 13 29 22 59 72 89 36 34 27 26 23 19 18 18 19
Galaxy Surfactants NR 91 11 17 18 85 100 118 27 26 23 17 17 14 15 16 16
Jubilant Ingrevia NR 77 18 37 50 12 20 26 39 26 20 19 14 12 7 11 13
Neogen Chemicals NR 35 37 44 64 14 25 37 86 65 44 32 32 25 6 8 11
Rossari Biotech NR 42 17 21 27 24 31 38 29 24 20 15 14 11 13 15 16
Tatva Chintan NR 30 37 57 84 13 28 45 83 36 23 36 22 15 5 9 12
Sector Average 22 57 45 59 39 29 32 23 18 11 14 16
Source: Company, Bloomberg, Dolat Capital
June 14, 2024 20

Company Section
June 14, 2024 21

June 14, 2024
In
te
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io
n
22
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Le
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B
la
nk
Fine Organic Industries BUY
Chemicals | Company Update
CMP: Rs.4,698 | TP: Rs 5,800 | Upside 23%
Financials (Rs bn)
Best play on green chemistry
Particulars FY23A FY24A FY25E FY26E
FINEORG is India’s largest oleochemical-based (green) polymer and Revenue 30 21 22 24
food additives manufacturer ranking among top 5-6 successful Growth (%) 61.1 (29.8) 2.9 8.8
players globally and operating at top end of the value chain with EBITDA 8 5 5 6
limited competition. We believe that the company is well placed for OPM (%) 27.5 25.2 24.5 24.6
long term growth (beyond FY26) with its upcoming investments in PAT 6 4 4 5
Maharashtra SEZ along with prospective global expansions, while Growth (%) 138.1 (33.4) 6.2 13.0
having capacity headroom to accommodate near term export volume EPS (Rs.) 201.6 134.3 142.6 161.2
Growth (%) 138.1 (33.4) 6.2 13.0
recovery. Strong net cash balance sheet (Rs10.5 bn; 1.7x of current
PER (x) 23.3 35.0 32.9 29.1
gross block) and healthy OCF of Rs8bn over FY25-26E will enable
ROANW (%) 49.4 23.8 20.8 19.9
funding its capex program. The stock is currently trading at 32x/29x ROACE (%) 48.6 24.1 20.6 19.7
FY25/FY26E EPS, which is attractive given strong track record of
>20% earnings CAGR and high RoCE of ~35% (average) over last 10 Key Data
years with current RoIC of 50%. We re-iterate ‘BUY’ rating with TP of Nifty 23,399
Rs5800 at 36x FY26 EPS (Rs5450 earlier). Equity / FV Rs 153mn / Rs 5
Market Cap Rs 144bn
Well geared up for growth capex USD 1.7bn
FINEORG has ambitious expansion plans that include (a) a large-scale 52-Week High/Low Rs 5,165/ 4,021
capacity expansion outside India; (b) increasing product range through Avg. Volume (no) 26,365
Bloom Code FINEORG IN
acquisitions; and (c) a greenfield capex project in Maharashtra SEZ (outlay
to be announced shortly after receiving allotment letter from govt. Stock Performance (%)
authorities). While the company has strong net cash balance sheet, it is Particulars 1M 3M 12M
not averse to raising debt for pursuing growth opportunities. SEZ land Absolute (%) 10 15 (7)
acquired for new capex ~30 acres, enables more than doubling of current Rel to NIFTY (%) 4 10 (33)
capacity without any external funds (current capacity of ~1.1lac tons is Shareholding Pattern
spread over 4 locations on ~25acres). Sep'23 Dec'23 Mar'24
Promoters 75.0 75.0 75.0
Export recovery augurs well for profitability
MF/Banks/FIs 12.2 11.9 10.8
Recovery in export volumes and new product launches (higher margin) will FIIs 3.8 3.6 4.5
ensure better profitability over FY25-26E on better product mix and Public / Others 9.1 9.6 9.8
operating leverage. Healthy demand recovery is seen in North America,
Company relative to NIFTY
while Europe languishes; domestic demand remains strong. Capacity
110
headroom is available at some plants, while Patalganga facility (10ktpa) is
still at low utilizations. Near term volume growth to be catered to by these 100
capacities and upcoming expansion(s) will aid long term growth. 90
80
High entry barriers
FINEORG is a niche proxy play on consumption oriented industries like 70
food, plastics, cosmetics, pharma, feed nutrition, coatings, rubber etc. The 60
Jul-23
Jan-24
Jun-24
Jun-23
Aug-23
Sep-23
Nov-23
Dec-23
Oct-23
Feb-24
Mar-24
Apr-24
May-24
company operates at the top end of oleochemicals value chain,

characterized by complex processes requiring specialized skills &
equipments and proprietary technology (process R&D over decades). High FINEORG NIFTY
customer stickiness is driven by stringent product vetting processes (3-5
Nitesh Dhoot
years approval cycle), regular technical support and strict regulatory +9122 40969763
requirements. Further, in-house equipment design and engineering niteshd@dolatcapital.com
capabilities minimizes capex intensity (vs. external vendors/ imports), Krushna Parekh
visible in high asset turns (~3.5x vs. ~1.3x for peers; avg for last 5 years). +9122 40969755
krushnap@dolatcapital.com
June 14, 2024

Realizations/ spreads likely bottomed out with input price normalization
FINEORG’s major raw materials are fatty acids like erucic acid, stearic acid, oleic
acid, behenic acid, propionic acid etc. These are derived from vegetable oils (palm
oil, palm kernel oil, soyabean oil, rapeseed oil etc), of which India is among largest
importers in the world (eg. crude palm oil, palm kernel oil, soybean oil etc). Prices of
most RMs have steadily normalized (down ~50% from the peak of FY23), translating
into lower end product prices, in-line with the inputs.
Erucic acid price is down 41% YoY Stearic acid price is down 21% YoY
500 (Rs/kg) 200 (Rs/kg)
400 150
300
100
200
50
100
0 0
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Erucic Acid Avg Price Stearic Acid Avg Price

Oleic acid price is up 10% YoY Caprylic Acid price is down 68% YoY
250 (Rs/kg) 700 (Rs/kg)
200 600
500
150 400
100 300
200
50
100
0 0
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Oleic Acid Avg Price Caprylic Acid Avg Price
Covid-19 supply chain crisis induced elevated vegetable oil prices have now normalized
(USD/ MT)
2,500
2,000
1,500
1,000
500
0
Palm Oil Palm Kernel Oil Rapeseed Oil Soyabean Oil Castor Oil
High Current
June 14, 2024 24 Fine Organic Industries

Operates at the top end of the oleochemicals value chain
Oleochemicals-based additives value chain Limited competition globally
FOOD
Vegetable oils
▪ Plastic Additives
▪ Palm & Palm kernel oils Derivatives IFF-Dupont
Base oleo chemicals ▪ Food Additives
▪ Soybean oil ▪ Amines
▪ Fatty acids ▪ Cosmetic Additives Kerry group
▪ Mustard oil ▪ Amides
▪ Fatty alcohols ▪ Pharma Additives
▪ Sunflower oil ▪ Esters Cargill
▪ Glycerin ▪ Paints & Inks Additives
▪ Castor oil ▪ Sulphates
▪ Methyl esters ▪ Rubber Additives Riken Vitamin
▪ Coconut oil ▪ Alkoxylates
▪ Textiles Additives
▪ Rice bran oil Palsgaard
FINEORG
operates at the
top end of the POLYMERS
value chain
Cargill
Easily available technology, high competition Specialized processes, limited competition
Emery Oleo
Base oleochemicals (fatty acids, fatty alcohols, methyl Manufacturing of green additives from base
esters) are produced from vegetable oils through oleochemicals is a complex process requiring PMC Biogenix
splitting, distillation and fraction process - a simple specialized skills and equipments involving proprietary
step in the value chain technology (few successful players worldwide) Peter Greven
June 14, 2024 25

Robust cash flow generation enables self-sustaining growth
Long term revenue growth to be driven by
increased adoption of oleochemical based
additives, with company’s new product/
category launches. Volume growth expected
on recovery in export volumes and new
product launches over FY24-26E. Additional
capacity to propel growth, once setup.
Margins/ spreads have stabilized after rapid
High OCF generation coupled with large normalization over the last year, and with stable
opportunity across existing and new products input costs now, gross spreads are also likely to
to enable continued investments and self stabilize (expecting gross margin of 40.8 in FY25/
sustained growth. Management is gearing up FY26 vs 42.7% in FY24). Higher volumes and
Revenue growth
for the next round of capex (greenfield and better product mix to ensure healthy EBITDA
inorganic), with a cash chest of Rs10.5bn margins (>24%) aiding steady profits in FY25-26
(1.7x of current gross block)
Capex Steady profitability
Steady margins coupled with stable Working capital cycle has been stable
working capital to drive robust cash over the years (avg core working capital
flows. Expect OCF of Rs 8 bn over Robust cash flows Stable working days ~70). While there could be periods
FY25-26E. Over FY19-24, it generated (OCF/FCF) capital cycle of increased stocking, given supply
1x OCF/ PAT and Rs12bn FCF. chain issues, but the intensity is largely
stable

June 14, 2024 26
Story in charts
FY24 rev decline on lower input prices Stable gross margins going forward
35 5.7 6 13 45
42.7
30 43
5 11 41.0 40.8 40.8
25
3.9 41
20 3.7 3.5 3.6 4 8
3.1 39
15 2.6 36.7
3 6 35.9 37
10
5 2 3 35
FY20 FY21 FY22 FY23 FY24 FY25E FY26E FY21 FY22 FY23 FY24 FY25E FY26E
Revenue (Rs bn) Asset turns (RHS) Gross Profit (Rs bn) Gross Margin (%) - RHS
Robust profit growth over long term (20% PAT CAGR over FY20-26E)
9 27.5% 29%
8 27%
25.2% 24.6%
7 24.5%
23.2% 25%
6
23%
5
19.4% 21%
4
3 17.6% 19%
2 17%
1 15%
FY20 FY21 FY22 FY23 FY24 FY25E FY26E
EBITDA (Rs mn) PAT (Rs mn) EBITDA Mgn (RHS)
Stable working capital and strong cash flows

Cash Flow (Rs bn) FY21 FY22 FY23 FY24 FY25E FY26E
PBIT 1.6 3.5 8.3 5.0 5.7 6.5
Add: Depreciation 0.5 0.4 0.5 0.6 0.5 0.6
Add: Others (0.1) (0.2) (0.5) (0.2) (0.9) (1.1)
Working Capital Changes (0.2) (2.2) (1.2) 2.5 (0.1) (0.4)
Less: Tax (0.4) (0.8) (2.3) (1.5) (1.2) (1.5)
Cash from Operations 1.3 0.7 4.9 6.3 4.1 4.0
Capex (0.5) (0.6) (0.8) (0.9) (0.3) (0.3)
Free Cash Flow 0.9 0.1 4.0 5.5 3.8 3.7
Working Capital (Days)
Inventory 41 46 54 45 45 45
Receivable 52 59 42 54 50 50
Payable (31) (30) (21) (23) (20) (20)
Core W.C.Days 61 75 75 75 75 75
Other Current Assets 22 23 12 10 10 10
Other Current Liabilities & Prov 8 12 7 8 10 10
Overall W.C.Days 75 85 80 77 75 75
Source: Company, Dolat Capital, ^not built-in our assumptions for capex or corresponding revenue as
not announced yet

Resilient operational performance to aid high return ratios
100
86.4
90
80
70 63.4
57.0
60 50.4
48.8
50 60.6
40
28.0
30
35.3
20 27.4
19.5 23.0 21.3
10
FY21 FY22 FY23 FY24 FY25E FY26E
RoCE (%) RoIC (%)
RoCE moderation over FY24-26E to 21% on net cash of ~Rs 18 bn given strong cash
flow generation, visible in RoIC of >60%
Highest fixed asset turns across leading chemical companies
4.0 3.5
3.5
3.0
2.5 2.0
2.0 1.7 1.6
1.3 1.1
1.5 1.0 1.0 0.9
1.0
0.5
0.0
FINEORG
VO
SRF
ATLP
ARTO
SCHI
NFIL
NOCIL
FLUOROCH
Asset T/o (5 yrs)
EBITDA margins higher than sector average

35 31.3
30 26.2
24.2 22.9
25 22.6
21.0
20 18.5
16.5
15 12.8
10
FINEORG
VO
ATLP
ARTO
FLUOROCH
SRF
SCHI
NFIL
NOCIL
EBITDA Margin (5 yr avg)


Financial Performance
Profit and Loss Account
(Rs Mn) FY23A FY24A FY25E FY26E
Revenue 30,231 21,230 21,848 23,771
Total Expense 21,920 15,889 16,492 17,920
COGS 17,842 12,170 12,929 14,075
Employees Cost 1,053 1,195 1,291 1,420
Other expenses 3,025 2,523 2,272 2,425
EBIDTA 8,311 5,340 5,356 5,850
Depreciation 479 561 535 558
EBIT 7,832 4,779 4,821 5,292
Interest 46 24 0 0
Other Income 642 719 863 1,121
Exc. / E.O. items 0 (6) 0 0
EBT 8,428 5,468 5,684 6,414
Tax 2,229 1,322 1,373 1,549
RPAT 6,181 4,119 4,373 4,942
Minority Interest 0 0 0 0
Profit/Loss share of associates (18) (26) 62 78
Adjustments 0 0 0 0
APAT 6,181 4,119 4,373 4,942
Balance Sheet
Sources of Funds
Equity Capital 153 153 153 153
Reserves & Surplus 15,259 19,057 22,605 26,672
Net Worth 15,412 19,210 22,758 26,826
Total Debt 272 0 0 0
Net Deferred Tax Liability (99) (108) (108) (108)
Total Capital Employed 15,586 19,102 22,650 26,718
Applications of Funds
Net Block 2,140 2,327 2,090 1,782
CWIP 404 297 250 250
Investments 388 362 362 362
Current Assets, Loans & Advances 15,026 17,959 21,767 26,302
Current Investments 0 0 0 0
Inventories 4,450 2,609 2,694 2,931
Receivables 3,506 3,113 2,993 3,256
Cash and Bank Balances 5,230 10,485 14,343 18,324
Loans and Advances 839 1,143 1,139 1,140
Other Current Assets 1,001 609 599 651
Less: Current Liabilities & Provisions 2,373 1,842 1,818 1,978

Payables 1,758 1,354 1,197 1,302
Other Current Liabilities 615 488 621 676
sub total
Net Current Assets 12,653 16,116 19,949 24,324
Total Assets 15,586 19,102 22,650 26,718
E – Estimates

Important Ratios
(A) Margins (%)
Gross Profit Margin 41.0 42.7 40.8 40.8
EBIDTA Margin 27.5 25.2 24.5 24.6
EBIT Margin 25.9 22.5 22.1 22.3
Tax rate 26.4 24.2 24.2 24.2
Net Profit Margin 20.4 19.4 20.0 20.8
(B) As Percentage of Net Sales (%)
COGS 59.0 57.3 59.2 59.2
Employee 3.5 5.6 5.9 6.0
Other 10.0 11.9 10.4 10.2
(C) Measure of Financial Status
Gross Debt / Equity 0.0 0.0 0.0 0.0
Interest Coverage 171.2 196.4
Inventory days 54 45 45 45
Debtors days 42 54 50 50
Average Cost of Debt 10.7 17.9
Payable days 21 23 20 20
Working Capital days 153 277 333 373
FA T/O 14.1 9.1 10.5 13.3
(D) Measures of Investment
AEPS (Rs) 201.6 134.3 142.6 161.2
CEPS (Rs) 217.2 152.7 160.1 179.4
DPS (Rs) 9.0 9.0 26.9 28.5
Dividend Payout (%) 4.5 6.7 18.9 17.7
BVPS (Rs) 502.7 626.6 742.3 874.9
RoANW (%) 49.4 23.8 20.8 19.9
RoACE (%) 48.6 24.1 20.6 19.7
RoAIC (%) 86.4 50.4 57.0 63.4
(E) Valuation Ratios
CMP (Rs) 4698 4698 4698 4698
Mcap (Rs Mn) 1,44,025 1,44,025 1,44,025 1,44,025
EV 1,39,068 1,33,540 1,29,683 1,25,701
MCap/ Sales 4.8 6.8 6.6 6.1
EV/Sales 4.6 6.3 5.9 5.3
P/E 23.3 35.0 32.9 29.1
EV/EBITDA 16.7 25.0 24.2 21.5
P/BV 9.3 7.5 6.3 5.4
Dividend Yield (%) 0.2 0.2 0.6 0.6
(F) Growth Rate (%)
Revenue 61.1 (29.8) 2.9 8.8
EBITDA 128.0 (35.7) 0.3 9.2
EBIT 141.3 (39.0) 0.9 9.8
PBT 139.0 (35.1) 4.0 12.8
APAT 138.1 (33.4) 6.2 13.0
EPS 138.1 (33.4) 6.2 13.0
E – Estimates

Cash Flow
Profit before tax 8,410 5,441 5,746 6,491
Depreciation & w.o. 479 561 535 558
Net Interest Exp (527) (642) (863) (1,121)
Direct taxes paid (2,281) (1,500) (1,244) (1,507)
Change in Working Capital (1,227) 2,484 (107) (436)
Non Cash 0 0 0 0
(A) CF from Operating Activities 4,853 6,345 4,066 3,985
Capex {(Inc.)/ Dec. in Fixed Assets n WIP} (807) (860) (250) (250)
Free Cash Flow 4,046 5,485 3,816 3,735
(Inc)./ Dec. in Investments (150) (3,513) 0 0
Other 110 466 863 1,121
(B) CF from Investing Activities (847) (3,906) 613 871
Issue of Equity/ Preference 0 0 0 0
Inc./(Dec.) in Debt (357) (274) 0 0
Interest exp net (45) (22) 0 0
Dividend Paid (Incl. Tax) (276) (276) (825) (875)
Other (436) (65) 0 0
(C) CF from Financing (1,114) (636) (825) (875)
Net Change in Cash 2,892 1,802 3,854 3,982
Opening Cash balances 2,257 5,148 6,951 10,805
Closing Cash balances 5,148 6,951 10,805 14,786
E – Estimates
Notes

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B
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Le
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In

Sudarshan Chemical Industries BUY
CMP: Rs.818 | TP: Rs 1,000 | Upside 22%
Financials (Rs bn)
Steady improvement in outlook
SCHI remains well poised to benefit in the medium-long term from
Revenue 23 25 30 34
earnings improvement led by (1) better absorption of fixed overheads
Growth (%) 4.6 10.3 16.2 15.1
(as demand improves in key markets), (2) comprehensive product EBITDA 2 3 4 5
portfolio (post capex) comparable to any Tier-1 pigment OPM (%) 9.2 12.5 14.4 15.1
manufacturer, enabling tapping into industry consolidation tailwinds PAT 0 1 2 3
(accelerated by Heubach insolvency), (3) strong client relationships Growth (%) (65.5) 149.1 79.3 33.9
& product approvals (4) rising share of margin accretive specialty EPS (Rs.) 6.5 16.1 28.9 38.7
pigments (~68% of revenue) given higher focus and commensurate Growth (%) (65.5) 149.1 79.3 33.9
capital allocation and (5) stability in input costs. We expect operating PER (x) 126.5 50.8 28.3 21.2
leverage to play out as capacity ramps up and generates healthy OCF ROANW (%) 5.4 11.3 16.2 18.8
ROACE (%) 4.9 4.5 12.7 15.7
(Rs6bn over FY25-26), enabling it to turn debt free by FY26E (vs net
debt of Rs7.9bn/ Rs3.9bn in FY23/24). We continue to be positive on
Key Data
SCHI; and revise our EPS estimates upwards by 9%/12% for FY24/25
Nifty 23,399
(conservative earlier; ref. Exhibit 1&2) and upgrade to ‘BUY’ rating Equity / FV Rs 138mn / Rs 2
with TP of Rs1000 at 26x FY26E EPS (earlier Accumulate; TP Rs900). Market Cap Rs 57bn
USD 683.6mn
Consolidation among global players/Europe + 1 52-Week High/Low Rs 893/ 437
SCHI is likely to benefit from industry consolidation in the pigment industry Avg. Volume (no) 4,91,188
as customers seek to de-risk their supply chain and several large players Bloom Code SCHI IN
exit the market. Recently, Heubach, Germany filed for insolvency; earlier
Stock Performance (%)
BASF (#1 player) was sold to DIC; Clariant (#2) was sold to Heubach group
Particulars 1M 3M 12M
(with SK Capital Partners); DCL Canada struggled and later sold to
Absolute (%) 11 43 67
Blackstone. Further, there could be a possible closure/sale of Lanxess
Rel to NIFTY (%) 6 37 41
chromium oxide plant at Krefeld-Uerdingen, Germany and Venator, is
shutting TiO2 plant in Duisburg, Germany (SCHI doesn’t produce TiO2). Shareholding Pattern
Sep'23 Dec'23 Mar'24
Ramp-up of expanded capacity for new & existing products Promoters 35.8 35.8 33.2
SCHI’s capacity expansion of ~Rs7.5bn (FY21-23) is targeted at MF/Banks/FIs 13.7 13.6 17.5
increasing production of High Performance Pigments (HPP) and complex FIIs 4.6 4.2 4.5
inorganic products, with an aim to boost topline by ~Rs13bn by FY27E (Rs Public / Others 45.9 46.4 44.8
7-8 bn from existing products and Rs5-6 bn from newer products in HPPs,
CICP and digital inks). We believe ramp up can be faster due to Heubach 180
event accelerating product approval cycles. Management re-affirmed
rising tailwinds in the industry though its yet to revise its guidance upwards. 160
140
Margin expansion on cards; strong operating leverage at play
120
Gross margins are expected to rise aided by (a) higher share of specialty
pigments (currently 68%), and (b) easing pressure on non-specialty 100
portfolio with improving macro-economic situation and stable input costs. 80

Jul-23
Jan-24
Jun-24
Jun-23
Aug-23
Sep-23
Nov-23
Dec-23
Oct-23
Feb-24
Mar-24
Apr-24
May-24
SCHI is well placed to consistently deliver pigment EBITDA margins >

15%, with the enhanced product portfolio, coupled with improving capacity
utilization (limited incremental fixed costs expected going forward). SCHI NIFTY
Nitesh Dhoot
Balance sheet strengthening steadily; to be debt free by FY26 +9122 40969763
Free cash flow of Rs.4bn over FY25-26E will help achieve a debt-free niteshd@dolatcapital.com
balance sheet by FY26E. Net debt is already down from a peak of Rs9.2bn Krushna Parekh
in FY23 to Rs3.8bn in FY24 given (a) improved operating performance in +9122 40969755
FY24, and (b) net proceeds of Rs2.9bn from land sale. Furthermore, stable krushnap@dolatcapital.com
working capital efficiency of 73 days (vs 75 days in FY23) amidst a
challenging supply chain environment, also supported balance sheet.
June 14, 2024

Higher than expected volume growth may spring an earnings surprise
SCHI posted pigment revenue growth of 7% in FY24, although the underlying volume
growth came higher (double digits) offset by lower realizations (pass-through of lower
input costs). The incremental capex of Rs ~7.5 bn was expected to boost its pigments
revenue by Rs13bn by FY27E (to ~Rs34bn), as originally guided by the management
(pre-Heubach event), but, SHCI’s growth trajectory is now likely to accelerate due to
the turbulence in global pigments industry caused by Heubach’s insolvency. While
we build in pigment revenue CAGR of ~18% (FY24-26) to Rs30.8bn for FY26E and
EBITDA margin at 15.3%/16.0% in FY25/FY26, any positive volume/ margin surprise
given global tailwinds, can boost earnings further.
Sensitivity Analysis
Earnings sensitivity to pigment revenue and EBITDA margins indicates a 10%-37%
upside to our current EPS estimate of Rs38.7 in FY26, if the optimum pigment
capacity utilization is achieved in 3 years (i.e. by FY26, an year ahead of original
guidance of FY27) and pigment margins range between current 16%-19%.
FY26E EBIDTA sensitivity to pigment revenue growth and EBITDA margin

(Rs mn) Pigment revenue CAGR FY24-26E
14% 16% 18% 20% 22%
13.0% 3951 4084 4218 4355 4495
Pigment
EBITDA
14.5% 4382 4530 4680 4833 4988

Margin
16.0% 4813 4976 5142 5311 5482

17.5% 5244 5422 5604 5788 5976
19.0% 5675 5869 6066 6266 6470
FY26E EPS Sensitivity to Pigment revenue growth and EBITDA margin

(Rs/ sh) Pigment revenue CAGR FY24-26E
14% 16% 18% 20% 22%
13.0% 25.8 27.2 28.7 30.2 31.7
Pigment
EBITDA
14.5% 30.5 32.1 33.7 35.3 37.0

Margin
16.0% 35.1 36.9 38.7 40.5 42.4

17.5% 39.8 41.7 43.7 45.7 47.7
19.0% 44.4 46.5 48.7 50.8 53.0
June 14, 2024 34 Sudarshan Chemical Industries

Moderation in input prices
SCHI’s raw materials include Napthols, Bon Acid, 2B Acid, DMSS, Caustic Soda,
Sodium Nitrite and Methanol, among others. While some inputs like caustic soda,
sodium nitrite, methanol and are available domestically, ~25% of the materials
consumed are imported, large part from China. Prices of most RM’s, have corrected
significantly (~30%-40%) from the peak of FY23, and are back to normalized levels.
Pigment prices have also corrected, as they are linked to the inputs and largely a
pass through. Stability in prices is typically good for the trade; price volatility results
in buying behavior changes, impacting sales and profitability.
Bon acid price is down 11% YoY 2B acid price is down 17% YoY
350 (Rs/kg) 450 (Rs/kg)
400
300 350
250 300
250
200 200
150
150 100
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Q4FY24
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Bon Acid (3-Hydroxy-2-naphthoic acid) Avg Price 2B Acid Avg Price
DMSS price is down 7% YoY Naphthol ASPH price is down 17% YoY
800 (Rs/kg) 800 (Rs/kg)
700 700
600 600
500 500
400 400
300 300
200
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Naphthol ASPH (3-Hydroxy 2-Naphtho Phenetidine)

Dimethyl Succinyl Succinate (DMSS) Avg Price Avg Price
Sodium Nitrite price is down 38% YoY Caustic Soda price is down 22% YoY
120 (Rs/kg) 70 (Rs/kg)
100 60
50
80 40
60 30
20
40 10
20 0
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Sodium Nitrite Avg Price Caustic Soda Avg Price


Story in Charts
Steady revenue growth and rising GM …aided by business mix improvement

40 45.2 45.7 46 100 47
35 44.2 45 29 46
80 32 30 31 32 31 32 31
45
30 44
42.9 43.1 60 44
25 42.3 43
40 43
20 42 42
40.9 40.6 20
15 41 68 70 69 68 69 68 69 71 41
10 40 0 40
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
Revenue (Rs bn) Gross margin (%) - RHS Specialty Non-specialty Pigment GM (%) - RHS
Capacity ramp-up to drive profitability Working capital efficiency improves

5.0 15.4 15.1 17 100 94 86 89 90 80 76
14.4 14.4 75 73
4.5
4.0 12.8 15 75
12.5 12.5
3.5 13 50
3.0
(Rs bn)
2.5 9.2 11 25
2.0
1.5 9 0
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
1.0 7 (25)
0.5
0.0 5 (50)
FY20
FY19
FY21
FY22
FY23
FY24
FY25E
FY26E
(75)
(100)
EBITDA APAT EBITDA margin (%) - RHS Inventory Receivable
Debt reduction led by Rs6bn OCF (2yr) Return ratios to recover with ramp-up
10 3.7 4.0 25 21.8 21.8
21.0
2.9 3.5
20 16.5 17.3
8 3.0 15.3
2.1 18.8
(Rs bn)
1.8 2.0 2.5 15

5 2.0 17.0 16.4 10.8
1.2 16.2
1.5 10 12.5 12.3 5.8
0.7 11.3
3 1.0
0.1 0.5 5
0 0.0 5.4
0
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
OCF Net Debt Net Debt/ EBITDA (RHS) RoCE (%) RoE (%)

Revenue 23,017 25,388 29,504 33,952
Total Expense 20,911 22,224 25,265 28,810
COGS 13,683 14,154 16,176 18,435
Employees Cost 1,840 2,100 2,288 2,494
Other expenses 5,389 5,970 6,800 7,880
EBIDTA 2,106 3,164 4,239 5,142
Depreciation 1,142 1,412 1,459 1,546
EBIT 964 1,752 2,780 3,596
Interest 415 369 226 136
Other Income 48 171 120 120
Exc. / E.O. items 0 3,151 0 0
EBT 597 4,705 2,674 3,580
Tax 150 1,131 674 902
RPAT 448 3,575 2,000 2,678
Profit/Loss share of associates 0 0 0 0
Adjustments 0 (2,459) 0 0
APAT 448 1,116 2,000 2,678
Balance Sheet
Sources of Funds
Net Worth 8,282 11,490 13,139 15,281
Total Debt 8,175 4,409 3,124 1,421
Net Deferred Tax Liability 1,120 1,410 1,410 1,410
Net Block 11,264 11,016 10,452 9,906
CWIP 443 145 250 250
Inventories 4,941 4,376 6,062 6,604
Receivables 4,861 5,853 6,386 7,348
Cash and Bank Balances 294 559 253 651
Loans and Advances 585 410 421 434
Other Current Assets 1,419 1,074 970 1,116

Payables 5,087 5,120 5,951 6,848
Other Current Liabilities 1,163 1,028 1,195 1,375
sub total
Total Assets 17,577 17,309 17,673 18,112
E – Estimates

Important Ratios
(A) Margins (%)
EBIDTA Margin 9.2 12.5 14.4 15.1
EBIT Margin 4.2 6.9 9.4 10.6
Tax rate 25.1 24.0 25.2 25.2
COGS 59.4 55.8 54.8 54.3
Employee 8.0 8.3 7.8 7.3
Other 23.4 23.5 23.0 23.2
Interest Coverage 2.3 4.7 12.3 26.4
Average Cost of Debt 5.1 5.9 6.0 6.0
FA T/O 2.0 2.3 2.8 3.4
AEPS (Rs) 6.5 16.1 28.9 38.7
CEPS (Rs) 23.0 36.5 50.0 61.0
DPS (Rs) 5.0 4.8 5.8 7.7
Dividend Payout (%) 76.5 29.8 20.0 20.0
BVPS (Rs) 119.6 166.0 189.8 220.7
RoANW (%) 5.4 11.3 16.2 18.8
RoACE (%) 4.9 4.5 12.7 15.7
RoAIC (%) 5.6 10.3 16.3 20.6
CMP (Rs) 818 818 818 818
Mcap (Rs Mn) 56,642 56,642 56,642 56,642
EV 64,523 60,492 59,514 57,411
MCap/ Sales 2.5 2.2 1.9 1.7
EV/Sales 2.8 2.4 2.0 1.7
P/E 126.5 50.8 28.3 21.2
EV/EBITDA 30.6 19.1 14.0 11.2
P/BV 6.8 4.9 4.3 3.7
Dividend Yield (%) 0.6 0.6 0.7 0.9
(F) Growth Rate (%)
Revenue 4.6 10.3 16.2 15.1
EBITDA (23.3) 50.2 34.0 21.3
EBIT (48.0) 81.8 58.7 29.3
PBT (65.1) 687.6 (43.2) 33.9
APAT (65.5) 149.1 79.3 33.9
EPS (65.5) 149.1 79.3 33.9
E – Estimates

Cash Flow
Profit before tax 597 1,554 2,674 3,580
Depreciation & w.o. 1,142 1,412 1,459 1,546
Net Interest Exp 401 328 106 16
Direct taxes paid (112) (835) (664) (891)
Change in Working Capital 804 (460) (1,139) (597)
Non Cash 37 (65) 0 0
Capex {(Inc.)/ Dec. in Fixed Assets n WIP} (1,906) 2,669 (1,000) (1,000)
Free Cash Flow 964 4,604 1,436 2,654
(Inc)./ Dec. in Investments 0 84 0 0
Other 13 41 120 120
(B) CF from Investing Activities (1,893) 2,793 (880) (880)
Inc./(Dec.) in Debt (328) (3,731) (1,285) (1,703)
Interest exp net (347) (350) (226) (136)
Other (10) (45) 0 0
(C) CF from Financing (1,027) (4,459) (1,911) (2,375)
Net Change in Cash (49) 269 (355) 399
Opening Cash balances 253 204 473 118
Closing Cash balances 204 473 118 517
E – Estimates
Notes

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Aarti Industries BUY
CMP: Rs.675 | TP: Rs 820 | Upside 21%
Financials (Rs bn)
Best operating leverage play with improved visibility
ARTO’s earnings recovery is expected to be driven by a combination Revenue 66 64 82 98
of factors such as (a) recovery in discretionary end uses demand Growth (%) 8.8 (3.7) 28.5 19.5
(~50-60% contribution) aiding increase in capacity utilization, even as EBITDA 11 10 14 19
agrochemicals continue to face headwinds, (b) long term contracts OPM (%) 16.5 15.3 17.6 19.4
(MMA & MEA) and older ones, and (c) new capacity addition (Chloro- PAT 5 4 7 10
toluene) commencing in FY26E. We expect EBITDA/PAT CAGR of Growth (%) (5.1) (23.7) 62.6 47.0
40%/55% over FY24-26E, as significant operating leverage plays out, EPS (Rs.) 15.0 11.5 18.7 27.4
given sufficient capacity headroom and business profitability at a Growth (%) (5.1) (23.7) 62.6 47.0
cyclical bottom. EBITDA/Gross Block at ~15% in FY24 vs 25-26% avg PER (x) 44.9 58.8 36.2 24.6
over last 5-10 years, indicates significant upside potential alongside ROANW (%) 11.6 8.1 12.2 16.2
recovery in chemicals cycle, while further downside appears limited. ROACE (%) 9.3 7.6 10.0 12.0
We upgrade to ‘Buy’ from accumulate with revised TP of Rs820 at 30x
FY26E EPS (Rs715 earlier) on steadily improving earnings visibility. Key Data
Key downside risks are higher product concentration and persisting Nifty 23,399
Equity / FV Rs 1,813mn / Rs 5
challenges in agrochemicals. Stronger than expected volume
Market Cap Rs 245bn
recovery could boost earnings.
USD 3.0bn
52-Week High/Low Rs 769/ 438
Large capacity additions across value chains to fuel growth Avg. Volume (no) 14,74,690
ARTO completed its nitro-chloro benzene expansion in FY24 (from 75ktpa Bloom Code ARTO IN
to 108ktpa) and is now ramping up. Expansion projects such as Nitro-
Stock Performance (%)
toluene (30ktpa to 45ktpa), ethylation (10ktpa to 30ktpa), acid phase 2,
Particulars 1M 3M 12M
debottlenecking, and expansion of few specialty chemicals units are
Absolute (%) 3 5 33
expected in FY25; greenfield projects at Zone IV (MPP, Pilot Plant and
Chloro toulene units) are expected in FY26. EBITDA potential of current Rel to NIFTY (%) (2) (1) 7
value chains (ex-Chloro toluene) is guided at ~Rs20bn (2x of FY24 Shareholding Pattern
EBITDA). Additionally, Rs4-5bn EBITDA contribution is expected from CT Sep'23 Dec'23 Mar'24
(~Rs20bn revenue at ~20-25% margins). We model Rs14.4bn EBITDA for Promoters 43.6 43.6 43.4
FY25, which is at the lower end of guided range of Rs14.5-17bn. MF/Banks/FIs 16.2 15.8 17.3
FIIs 10.6 10.8 10.9
Operating profitability at multi-year lows; worst seems behind Public / Others 29.7 29.8 28.4
Gross block increased to ~Rs75bn vs ~Rs20bn in FY18 (~3.8x). However,
EBITDA increase hasn’t been commensurate due to multiple factors,
130
including (a) long term contract termination (one time inflow in FY22), (b)
pandemic impact and persisting weak demand through last year, (c) key 120
input, nitric acid shortages at intervals, impacting production (d) non- 110
revenue generating capex of ~Rs12bn (refurbishment of older plants;
100
utilities etc). During this period (FY18-24) the Specialty Chemicals EBIT
remained flat as margins collapsed from 19.5% to 8.6% in FY24. We 90
believe, these multi-year low figures are unsustainable and will reverse. 80
Jul-23
Jan-24
Jun-24
Jun-23
Oct-23
Nov-23
Dec-23
Aug-23
Sep-23
Apr-24
Feb-24
Mar-24
May-24
Balance sheet to strengthen, as chemical cycle recovers

Large capex co-inciding with a weak chemical cycle weakened Balance ARTO NIFTY
Sheet, as by FY24, net debt increased to Rs30bn (vs Rs18bn in FY20),
Nitesh Dhoot
and will be up to ~Rs43bn by FY26, when it peaks, though net
+9122 40969763
debt/EBITDA has already peaked at 3.1x in FY24, in our view. Higher niteshd@dolatcapital.com
finance costs due to rising debt and interest rates, marred earnings and
Krushna Parekh
return ratios (RoCE/ RoE at 7.4%/ 8.1% in FY24 vs pre pandemic average +9122 40969755
at 18%/ 22%), which’ll recover steadily as large capex cycle nears its end krushnap@dolatcapital.com
in FY25/26, and with ramp up of capacities, financial deleverage could also
be at play in the forthcoming years.
June 14, 2024

Contracts & tie-ups improve long term earnings visibility
Long term contracts: ARTO entered into two long-term contracts (4 & 5) over last
6 months for (a) an agrochemical intermediate with a global agrochemicals major, for
a crucial input of widely used herbicide; (b) niche specialty chemical with a
multinational conglomerate, whereby significant contribution already started in FY24.
No additional capex is involved in fulfilling either of these contracts and
debottlenecking will be undertaken as required. These contracts provide better
earnings visibility as capacity utilization increases.
Joint venture with UPL: JV between ARTO and UPL for marketing and sale of
specialty chemicals, aims to leverage on respective competencies, as both would
provide key raw materials for manufacturing of these products, finding application in
agrochemicals and paints industry.
Tie-up for securing nitric acid supplies (key RM): The long-term supply deal with
Deepak Fertilizers benefits ARTO by way of RM security and enabling the company
to focus on future growth opportunities/ new value-added products and value chains/
forward integration, thereby, eliminating the need for backward integration. Prior to
this tie-up ARTO had proposed capex for nitric acid manufacturing, to secure
supplies, after having faced shortages hampering production. Given the rising
demand and supply issues, other players like Deepak Nitrite, Kutch Chemicals,
GNFC also announced Nitric acid capex, and its prices have also corrected.
Large contracts & tie-ups by Aarti Industries with various global and domestic companies
Contract Size Duration
Other details
Entered (Rs bn) (years)
Contract was for supply of dicamba intermediate to a global innovator, which
Contract 1
45 10 got terminated in June'20. ARTO received a compensation of USD120-130mn.
(Jun'17)
Plant was commissioned in FY22 and will likely be repurposed.
Contract for supply of specialty intermediate to a large global player, wherein
Contract 2
110 20 technology and USD 42mn was provided to ARTO for capex. EBITDA is fixed,
(Dec'17)
irrespective of volume offtake.
Contract 3 10 10 Plant was commissioned in Q3FY23 at Jhagadia and is ramping up.
Contract for agrochemical intermediate with a global agrochemicals major, for
Contract 4
30 9 a crucial input for a widely used herbicide. No additional capex required;
(Dec'23)
ongoing capex to be sufficient.
Contract with MNC conglomerate for n-methyl aniline, with incremental
Contract 5 revenue of ~Rs7.5bn as volumes double for the customer (current contribution
60 4
(Jan'24) being ~Rs7.5bn). No additional capex involved and debottlenecking to be
undertaken as required.
Long-term supply deal with Deepak Fertilisers and Petrochemicals, for 20
Nitric acid
80 20 years on take or pay basis, to source Nitric Acid (at formula driven international
sourcing
prices) from Apr’23.
JV between ARTO and UPL for marketing and sale of specialty chemicals
peak annual
JV with UPL (downstream derivatives of amines) having applications in agrochemical and
4-5 revenue
(May'24) paint industry. Rs1.5bn investment by both over 24 months. To commence
potential
operations by Q1FY27; peak revenue potential Rs5bn in next 2-3 years
June 14, 2024 42 Aarti Industries

EBITDA/ GB at trough; unsustainable Significant operating leverage at play
120 35 20 23.2 23.3 25
30 21.8
100 27 30 23
15 19.4
80 18.4 17.6 20
22 22 25
60
21 21 10 16.0 16.5 15.3 18
24 19
15 20 15
40
5
20 15 13
0 10 0 10
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY26E
FY25E
FY18
FY19
FY20
FY22
FY23
FY24
FY21
FY25E
FY26E
Gross Block (Rs bn) EBITDA/ Gross Block (%) EBITDA (Rs bn) PAT (Rs bn) EBITDA margin (%)
Para-di chloro benzene (PDCB) prices less lucrative vs pre-covid

110 (Rs/ kg)
100
90
80
70
60
50
40
30
20
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q2FY24
Q3FY24
Q4FY24
Q1FY25
PDCB Benzene
Source: Industry, Dolat Capital ^Q1FY25 pertains to Apr-May
N-Methyl Aniline (MMA) spreads going steady

90 210
80 190
70 170
60 150
50
130
40
30 110
20 90
10 70
0 50
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q2FY24
Q3FY24
Q4FY24
MMA Spread (Rs/ kg) - Aniline MMA Price (Rs/ kg) - RHS

Story in charts
Revenue growth with capacity ramp-up Operating leverage to boost earnings
110 60 20 23.2 23.3 25
52.8 53.1 21.8
95 50.9 55 23
48.3 15 19.4
80 50 18.4 17.6 20
65
42.7 42.0 41.1 42.4 45 10 16.0 16.5 15.3 18
50 39.1 40 15
5
35 35 13
20 30 0 10
FY24
FY18
FY19
FY20
FY21
FY22
FY23
FY25E
FY26E
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
Revenue (Rs bn) Gross Margin (%) FY26E EBITDA (Rs bn) PAT (Rs bn) EBITDA margin (%)
Large capex outflow over last few yrs Better working capital efficiency
20 14 100 150
11 13 12
15 9 10 108 101
10 7 60 93 86
3 5 4 84 82 82 100
5
0 20
(5) -3 -1 -1 0 -1 50
-4 -6 -5 (20)
(10) -6 -8 -10
(15) -12 -12 (60) 0
-13 -13 -13
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
(20) -15
FY26E
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
Inventory days Receivable days

OCF (Rs bn) Capex (Rs bn) FCF (Rs bn) Payable days Core working capital days
Debt/ EBITDA peaked in FY24 Return ratios to steadily improve

45 3.1 3.5 20 19.1
2.9 2.9
3.0 18 16.2 16.2
35 2.5 2.5
2.2 14.3
2.5 15
25 1.9 15.7 11.6 12.2
1.7 2.0 13
1.4 13.1 13.6
15 1.5 10 8.1
10.8 10.5 11.2
5 1.0 8
FY19
FY20
FY18
FY21
FY22
FY23
FY24
FY26E
FY25E
7.4
5
FY20 FY21 FY22 FY23 FY24 FY25E FY26E
Net debt (Rs bn) Net debt/ EBITDA RoCE (%) RoE (%)

Revenue 66,186 63,720 81,858 97,813
Total Expense 55,296 53,960 67,429 78,790
COGS 38,417 38,800 48,192 56,293
Employees Cost 3,853 4,040 4,748 5,282
Other expenses 13,026 11,120 14,489 17,215
EBIDTA 10,889 9,760 14,429 19,024
Depreciation 3,105 3,780 4,119 4,882
EBIT 7,785 5,980 10,310 14,142
Interest 1,683 2,110 2,527 2,663
Other Income 9 80 80 80
Exc. / E.O. items 0 0 0 0
EBT 6,111 3,950 7,864 11,559
Tax 659 (210) 1,101 1,618
RPAT 5,452 4,160 6,763 9,941
Adjustments 0 0 0 0
APAT 5,452 4,160 6,763 9,941
Balance Sheet
Sources of Funds
Equity Capital 1,813 1,810 1,813 1,813
Net Worth 49,201 52,900 57,533 65,055
Total Debt 28,740 31,840 42,471 43,427
Net Deferred Tax Liability 1,893 800 800 800
Total Capital Employed 79,841 85,550 1,00,813 1,09,291
Net Block 49,680 58,260 69,661 79,780
CWIP 9,890 10,520 10,000 5,000
Inventories 10,310 11,600 14,578 17,419
Receivables 9,405 8,260 10,541 12,595
Cash and Bank Balances 2,007 1,300 1,116 997
Loans and Advances 2,754 4,140 5,976 6,760
Other Current Assets 1,063 400 514 614

Payables 4,049 5,210 6,728 8,039
sub total
Total Assets 79,841 85,550 1,00,813 1,09,291
E – Estimates

Important Ratios
(A) Margins (%)
EBIDTA Margin 16.5 15.3 17.6 19.4
EBIT Margin 11.8 9.4 12.6 14.5
Tax rate 10.8 (5.3) 14.0 14.0
COGS 58.0 60.9 58.9 57.6
Employee 5.8 6.3 5.8 5.4
Other 19.7 17.5 17.7 17.6
FA T/O 1.3 1.1 1.2 1.2
AEPS (Rs) 15.0 11.5 18.7 27.4
CEPS (Rs) 23.6 21.9 30.0 40.9
DPS (Rs) 2.5 1.5 1.7 2.5
Dividend Payout (%) 16.7 13.0 9.0 9.0
BVPS (Rs) 135.7 145.9 158.7 179.5
RoANW (%) 11.6 8.1 12.2 16.2
RoACE (%) 9.3 7.6 10.0 12.0
RoAIC (%) 10.4 7.4 11.2 13.6
CMP (Rs) 675 675 675 675
Mcap (Rs Mn) 2,44,781 2,44,781 2,44,781 2,44,781
EV 2,71,514 2,75,321 2,86,135 2,87,211
MCap/ Sales 3.7 3.8 3.0 2.5
EV/Sales 4.1 4.3 3.5 2.9
P/E 44.9 58.8 36.2 24.6
EV/EBITDA 24.9 28.2 19.8 15.1
P/BV 5.0 4.6 4.3 3.8
Dividend Yield (%) 0.4 0.2 0.2 0.4
(F) Growth Rate (%)
Revenue 8.8 (3.7) 28.5 19.5
EBITDA (36.7) (10.4) 47.8 31.8
EBIT (47.2) (23.2) 72.4 37.2
PBT (55.5) (35.4) 99.1 47.0
APAT (5.1) (23.7) 62.6 47.0
EPS (5.1) (23.7) 62.6 47.0
E – Estimates

Cash Flow
Depreciation & w.o. 3,100 3,780 4,119 4,882
Net Interest Exp 1,680 2,110 2,447 2,583
Direct taxes paid (910) (910) (987) (1,518)
Change in Working Capital 3,120 3,060 (3,734) (3,579)
Non Cash (10) 30 0 0
Capex {(Inc.)/ Dec. in Fixed Assets n WIP} (13,260) (13,040) (15,000) (10,000)
Free Cash Flow (170) (1,020) (5,292) 3,926
(Inc)./ Dec. in Investments (40) (60) 0 0
Other 0 0 (865) 80
(B) CF from Investing Activities (13,300) (13,100) (15,865) (9,920)
Inc./(Dec.) in Debt 3,002 3,100 10,631 956
Interest exp net (1,680) (2,110) (2,527) (2,663)
Other 69 (77) (1,524) (1,524)
(C) CF from Financing 481 373 5,974 (4,125)
Net Change in Cash 271 (707) (184) (119)
Opening Cash balances 1,735 2,007 1,300 1,116
Closing Cash balances 2,007 1,300 1,116 997
E – Estimates
Notes

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Atul Accumulate
CMP: Rs.6,192 | TP: Rs 7,000 | Upside 13%
Financials (Rs bn)
Capex cycle complete; all eyes on ramp-up
ATLP invested ~Rs20bn over FY22-24 (a substantial 3-year capex Revenue 54 47 55 66
equivalent to the last decade) to set up capacities, but revenue scale- Growth (%) 6.8 (12.9) 17.2 19.2
up lagged due to external and internal challenges. However, the EBITDA 8 6 9 12
company has significant unrealized sales potential of over Rs23bn OPM (%) 14.3 13.5 16.7 17.5
which includes (a) Rs15bn from recently concluded capex and PAT 5 3 5 7
previously unutilized capacity, and (b) Rs8bn from a polymer project, Growth (%) (14.9) (37.2) 66.9 36.5
which is under implementation (50,000 tpa liquid epoxy resins plant) EPS (Rs.) 174.6 109.7 183.1 249.9
Growth (%) (14.9) (37.2) 66.9 36.5
and expected to be commissioned by Q2FY25. We believe ATLP’s
PER (x) 35.5 56.4 33.8 24.8
earnings have bottomed out, as spreads of key products are unlikely
ROANW (%) 11.3 6.6 10.1 12.5
to fall further (already below long term averages), plus volume growth ROACE (%) 10.5 6.2 9.6 12.0
is picking up as challenges ease. Large capacity headroom will aid
revenues, as the demand recovers. We expect Revenue/EBITDA/PAT Key Data
CAGR of 18%/ 35%/51% over FY24-26E. Maintain ‘Accumulate’ rating Nifty 23,323
with revised TP at Rs7000 (Rs6850 earlier) at 28x FY26E. Equity / FV Rs 294mn / Rs 10
Market Cap Rs 182bn
Proxy play on Indian chemicals USD 2.2bn
ATLP boasts a significant legacy in the chemical industry with one of the 52-Week High/Low Rs 7,590/ 5,175
broadest product portfolios among Indian chemical companies. It has a Avg. Volume (no) 71,748
strong presence across multiple end-industry applications and holds Bloom Code ATLP IN
dominant market shares in key products. The company differentiates itself Stock Performance (%)
through extensive and well-integrated infrastructure (including access to Particulars 1M 3M 12M
basic chemicals like caustic/ chlorine), presence in various verticals, niche Absolute (%) 4 3 (8)
products, unique chemistries and strategic capital expenditures, that leads Rel to NIFTY (%) (1) (3) (34)
to superior RoIC (10 year avg of ~22%) and healthy free cash generation.
Shareholding Pattern
Recovery round the corner; challenges easing Sep'23 Dec'23 Mar'24
ATLP’s Revenue/EBITDA/PAT declined by 14%/ 18%/ 37% in FY24 due Promoters 45.1 45.1 45.2
to multiple challenges (both internal & external) such as (a) delay in MF/Banks/FIs 26.5 26.1 25.7
implementation of projects, (b) hindered expected performance, both on FIIs 7.7 8.1 8.5
quality & production volumes, (c) unforeseen breakdowns & inefficient Public / Others 20.7 20.8 20.7
operations, restricting volumes and (d) external challenges relating to Company relative to NIFTY
subdued demand/ inventory destocking; sharp decline in prices & spreads; 110
Red sea crisis/supply chain disturbances etc. However, given gradually
resolving internal production issues (highlighted by management) along 100
with easing external challenges, FY25 is likely to see a healthy recovery. 90
80
Prices normalized, spreads below long-term mean
Spreads corrected across key products and are significantly below long- 70
term average, unsustainable in our view. For eg: 2,4 spreads are ~25% 60
Jul-23
Jan-24
Jun-24
Jun-23
Aug-23
Sep-23
Nov-23
Dec-23
Oct-23
Feb-24
Mar-24
Apr-24
May-24
below; sulphur black spreads are ~10% below its long term mean and
prices of p-cresol, p-cresidene, resorcinol, epoxy have moderated to LTA.
ATLP NIFTY
US Anti-dumping duty on 2,4 D on India and China
Nitesh Dhoot
Corteva Agribusiness filed petition to place anti-dumping and
+9122 40969763
countervailing duties on imports of the herbicide 2,4-D shipped from China niteshd@dolatcapital.com
and India. Corteva is the sole producer of 2,4 D in USA and has a capacity
Krushna Parekh
of ~40ktpa, much lower vs demand at >70ktpa. Alleged dumping margins +9122 40969755
are (a) China ~144%, and (b) India ~63%, much higher for China, thereby krushnap@dolatcapital.com
placing ATLP in a relatively better position even the duty is levied. ATLP
has 27ktpa capacity and is constantly debottlenecking to produce more.
June 14, 2024

2,4 D prices & spreads are ~25% lower than long term average
300 (Rs/ kg)
250
200
150
100
50
0
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
2-4 D - MCA/ Phenol Spread 2-4 D Price Avg Spread (long term)
Sulphur black - DNCB spreads are ~10% below its long term average
190 80
170 70
150 60
130
50
110
90 40
70 30
50 20
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Q1FY20
Q2FY20
Q3FY20
Q4FY20
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
Q4FY22
Q1FY23
Q2FY23
Q3FY23
Q4FY23
Q1FY24
Q2FY24
Q3FY24
Q4FY24
SB-DNCB Spread (Rs/ kg) -RHS Sulphur Black (Rs/ kg) - RHS
Avg Spread - RHS
Epoxy resin price and spreads have moderated (above mean though)
400 (Rs/ kg) (Rs/ kg) 130
350 110
300
90
250
70
200
50
150
100 30
50 10
Q2FY12
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
Q4FY19
Q2FY20
Q4FY20
Q2FY21
Q4FY21
Q2FY22
Q4FY22
Q2FY23
Q4FY23
Q2FY24
Q4FY24
Epoxy-BPA/ECH Spread (Rs/ kg) - RHS Epoxy Resin (Rs/ kg)

Avg Spread - RHS
June 14, 2024 50 Atul

Story in charts
18% Revenue CAGR expected over FY24-26E Earnings recovery driven by op. leverage
(Rs bn) (Rs bn) (%)
80 66 14 30
70 12 24.6
54 55 22.0 25
60 51 47 10 19.0
50 40 41 37 8 17.9 16.7 17.5 20
40 48
37 40 6 14.3 13.5
30 38 35 15
29 30 26 4
20
14 13 15 20 14 17 21 2 10
10 12
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY21
FY24
FY19
FY20
FY22
FY23
FY25E
FY26E
LSC POC Net Revenue EBITDA PAT EBITDA Margin (%)
Source: Company, Dolat Capital LSC – Life Science Chemicals, Source: Company, Dolat Capital
POC – Performance and Other Chemicals
Focus on capacity ramp-up Exports impacted; now recovering

10 100%
8
43.0
44.8
47.0
47.1
47.4
47.7
48.7
80%
6
Rs bn
60%
4
40%
2
57.0
55.2
53.0
52.9
52.6
52.3
51.3
0 20%
16-17
19-20
22-23
14-15
15-16
17-18
18-19
20-21
21-22
23-24
24-25
0%
Sales yet to realise
FY18 FY19 FY20 FY21 FY22 FY23 FY24P
Rs 15 + 8 bn
Domestic (%) Exports (%)
Robust cash flows, as capex negligible Earnings recovery to aid return ratios
11 (Rs bn) 8.7 30 25.8 25.7
9 5.9 25 21.7
5.0 17.2
6 3.7 3.2 20
2.1 2.5 2.5 22.7 12.4 13.9
4 15 18.8 11.3
17.5 7.8
1 10 14.6
11.3 12.5
(2) 5 10.1
6.6
(4) 0
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
FY19
FY20
FY21
FY22
FY23
FY24
FY25E
FY26E
OCF FCF Capex RoCE (%) RoE (%)

June 14, 2024 51 Atul

Revenue 54,275 47,257 55,388 66,021
Total Expense 46,527 40,890 46,113 54,457
COGS 28,640 25,105 28,719 33,752
Employees Cost 3,702 3,980 4,378 4,860
Other expenses 14,185 11,804 13,016 15,845
EBIDTA 7,749 6,367 9,274 11,565
Depreciation 1,978 2,429 3,092 3,392
EBIT 5,770 3,938 6,183 8,173
Interest 79 111 112 20
Other Income 1,149 582 1,164 1,746
Exc. / E.O. items 0 0 0 0
EBT 6,840 4,409 7,234 9,899
Tax 1,812 1,265 1,881 2,574
RPAT 5,141 3,230 5,390 7,358
Minority Interest (75) 11 13 17
Adjustments 0 0 0 0
APAT 5,141 3,230 5,390 7,358
Balance Sheet
Sources of Funds
Net Worth 46,714 51,143 55,617 61,725
Total Debt 470 2,319 500 0
Net Deferred Tax Liability 1,632 1,939 1,939 1,939
Net Block 17,497 27,712 28,927 28,036
CWIP 10,329 2,808 1,000 1,000
Investments 6,914 9,657 9,657 9,657
Current Investments 1,896 4,264 2,500 2,500
Inventories 7,894 6,183 7,587 9,044
Receivables 8,446 9,270 9,864 11,395
Cash and Bank Balances 520 723 4,681 9,577
Loans and Advances 2,106 1,840 1,879 1,929
Other Current Assets 1,914 2,094 2,454 2,925

Payables 5,385 5,793 6,829 8,140
sub total
Total Assets 49,296 55,892 58,534 64,125
E – Estimates
June 14, 2024 52 Atul

Important Ratios
(A) Margins (%)
EBIDTA Margin 14.3 13.5 16.7 17.5
EBIT Margin 10.6 8.3 11.2 12.4
Tax rate 26.5 28.7 26.0 26.0
COGS 52.8 53.1 51.9 51.1
Employee 6.8 8.4 7.9 7.4
Other 26.1 25.0 23.5 24.0
FA T/O 3.1 1.7 1.9 2.4
AEPS (Rs) 174.6 109.7 183.1 249.9
CEPS (Rs) 241.8 192.2 288.1 365.1
DPS (Rs) 32.7 25.1 31.1 42.5
Dividend Payout (%) 18.7 22.8 17.0 17.0
BVPS (Rs) 1586.7 1737.1 1889.1 2096.5
RoANW (%) 11.3 6.6 10.1 12.5
RoACE (%) 10.5 6.2 9.6 12.0
RoAIC (%) 12.1 7.6 11.3 15.1
CMP (Rs) 6192 6192 6192 6192
Mcap (Rs Mn) 1,82,315 1,82,315 1,82,315 1,82,315
EV 1,80,369 1,79,647 1,75,634 1,70,238
MCap/ Sales 3.4 3.9 3.3 2.8
EV/Sales 3.3 3.8 3.2 2.6
P/E 35.5 56.4 33.8 24.8
EV/EBITDA 23.3 28.2 18.9 14.7
P/BV 3.9 3.6 3.3 3.0
Dividend Yield (%) 0.5 0.4 0.5 0.7
(F) Growth Rate (%)
Revenue 6.8 (12.9) 17.2 19.2
EBITDA (15.0) (17.8) 45.7 24.7
EBIT (21.5) (31.8) 57.0 32.2
PBT (14.7) (35.5) 64.1 36.8
APAT (14.9) (37.2) 66.9 36.5
EPS (14.9) (37.2) 66.9 36.5
E – Estimates
June 14, 2024 53 Atul

Cash Flow
Depreciation & w.o. 1,978 2,429 3,092 3,392
Net Interest Exp (97) (78) (1,052) (1,726)
Direct taxes paid (1,934) (1,073) (1,636) (2,486)
Change in Working Capital 271 1,110 479 (1,674)
Non Cash (29) (220) 0 0
Capex {(Inc.)/ Dec. in Fixed Assets n WIP} (8,739) (5,035) (2,500) (2,500)
Free Cash Flow (1,672) 1,640 5,668 4,954
(Inc)./ Dec. in Investments 3,572 (2,000) 0 0
Other 474 203 1,164 1,746
(B) CF from Investing Activities (4,694) (6,832) (1,336) (754)
Issue of Equity/ Preference (867) (618) 0 0
Inc./(Dec.) in Debt (914) 1,849 (1,819) (500)
Interest exp net (79) (116) (112) (20)
Dividend Paid (Incl. Tax) (961) (738) (916) (1,251)
Other 252 3 (26) (33)
(C) CF from Financing (2,570) 379 (2,873) (1,804)
Net Change in Cash (196) 222 3,958 4,896
Opening Cash balances 577 380 602 4,560
Closing Cash balances 380 602 4,560 9,456
E – Estimates
Notes
June 14, 2024 54 Atul

Dolat Rating Matrix
Total Return Expectation (12 Months)
BUY > 20%
Accumulate 10 to 20%
Reduce 0 to 10%
SELL < 0%
Dolat Team
Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747
Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

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India Chemicals

Operating leverage takes center stage amidst capex moderation

Director Research: Nitesh Dhoot Associate: Krushna Parekh

June 14, 2024

June 14, 2024 2

Significant capacity additions done over last 3 years

June 14, 2024

Indicators suggesting demand recovery

Container shortages resurfacing; Maersk, Hapag-Lloyd upgrade outlook

June 14, 2024 4

Exhibit 1: Significant capacity commercialization over last 2 years

Gross Block (Rs bn) Change (YoY %) - RHS

Capex (Rs bn) CWIP (Rs bn)

June 14, 2024 5

Sudarshan Chemical Industries (SCHI)

Aarti Industries (ARTO)

CAGR (2014-22) World Avg

Exhibit 5: India is amongst the top 10 global exporters of organic chemicals

Source: Industry, Dolat Capital

June 14, 2024 7

June 14, 2024 8

Exhibit 12: India is a fast growing demand centre for chemicals

Domestic manufacturing needs to be competitive

June 14, 2024 9

-20% -7% -9% -11%

Source: Bloomberg, Dolat Capital

Source: Bloomberg, Dolat Capital

June 14, 2024 10

Other expenses (Rs bn) As % of revenue - RHS Avg %

June 14, 2024 11

June 14, 2024 12

June 14, 2024 13

June 14, 2024 14

Exhibit 35: Interest rates of leading central banks

Chemical exports from India gaining traction in recent months

Exhibit 36: Indian chemical exports gain momentum in recent months

June 14, 2024 15

The Shanghai Containerized Freight Index (SCFI), a key indicator of container

Exhibit 37: Shanghai Containerized Freight Index up +200% YoY

Exhibit 38: Ocean freight container price index rising steadily

Freightos Index (China to Europe) Freightos Index (China to US East Coast)

June 14, 2024 16

June 14, 2024 17

June 14, 2024 18

June 14, 2024 19

June 14, 2024 20

June 14, 2024 21

company operates at the top end of oleochemicals value chain,

June 14, 2024

Erucic Acid Avg Price Stearic Acid Avg Price

June 14, 2024 24 Fine Organic Industries

Source: Company, Dolat Capital

June 14, 2024 25

Capex Steady profitability

Source: Company, Dolat Capital

Stable working capital and strong cash flows

June 14, 2024 27 Fine Organic Industries

Highest fixed asset turns across leading chemical companies

EBITDA margins higher than sector average

EBITDA Margin (5 yr avg)

June 14, 2024 28 Fine Organic Industries

Less: Current Liabilities & Provisions 2,373 1,842 1,818 1,978

June 14, 2024 29 Fine Organic Industries

June 14, 2024 30 Fine Organic Industries