28th Sep 2017
INDIAN SPECIALTY CHEMICALS GROWTH CATALYSTS
USA Indian Specialty Chemicals 28 September 2017
Table of Contents
Contents Page No. Indian Specialty Chemicals Specialty Chemicals – Distilling the common into the special 4 Unveiling the key catalysts behind specialty chemicals 5 Where does India’s specialty chemicals industry stand? 6 Confluence of identified drivers suggests high growth potential 8 Specialty chemicals – An aggregate of distinct segments 20 Agrochemicals 23 Navin Fluorine (Buy, TP INR 700) 29 PI Industries (Hold, TP INR 750) 32
SRF (Buy, TP INR 1670) 35
UPL (Buy, TP INR 950) 38 Colourants 41
Aarti Industries (Not Rated) 51
Aksharchem India (Not Rated) 53 Asahi Songwon (Not Rated) 55
Atul Limited (Not Rated) 57
Clariant Chemicals (Not Rated) 59
Meghmani Organics Ltd. (Not Rated) 61
Sudarshan Chemicals (Not Rated) 63 Surfactants 65
Sunshield Chemicals (Not Rated) 74 Ultramarine & Pigments (Not Rated) 76 Water Treatment Chemicals 79
Ion Exchange (Not Rated) 86 Appendix Specialty chemicals – A special segment within chemicals 88 Specialty chemicals – Transitions, worth looking at 89 Oleochemicals – Driving consumers toward GREENER products 96
JM Financial Institutional Securities Limited Page 2
28 September 2017 India | Specialty Chemicals | Sector Report
Indian Specialty Chemicals Growth Catalysts
Over the years, growth drivers in the chemicals industry (including specialty chemicals) have shifted and evolved. The US was the original home to innovation and production of Mehul Thanawala chemicals and specialty chemicals. The industry then gradually transitioned to Europe, [email protected] | Tel: (91 22) 66303063 followed by developing countries such as China. In this report, we focus on specialty Alok Ranjan chemicals and analyse these transitions and identify their drivers, ultimately aiming to [email protected] | (+91 22) 6630 3073 understand whether India can be the next global growth leader. We believe the drivers for Pramod Krishna [email protected] | Tel: (91 22) 61781074 specialty chemicals are: (1) domestic availability of raw material at competitive prices, (2)
strong demand growth in consumer industries and a domestic industry that supports ‘premiumisation’ of products, (3) competitive manufacturing costs, (4) investment in R&D and (5) an ecosystem that supports the industry and innovation. Our analysis indicates that India has all these drivers required to ‘Make in India’ and become the top destination for specialty chemicals. Additionally, in this report, we analyse four specialty chemicals sub-segments and identify why they make an attractive investment proposition. We believe agrochemicals, colourants, surfactants and water treatment chemicals are the most attractive segments as they are characterised by high growth potential, high product differentiation and low-to- medium penetration levels. Having analysed this industry in detail, we believe companies with high focus on R&D, with a diversified product profile and increasing share of revenue from high-value products will be the most attractive in the long term.
The specialty chemicals industry needs certain drivers to grow: Some of the drivers we have highlighted may be generic and applicable to any industry, but drivers such as investment in R&D are more relevant to specialty chemicals. In this report, we empirically validate these drivers based on how the US, Europe and later China used these growth drivers to become leaders in the specialty chemicals industry.
India has all the drivers to focus on specialty chemicals: India has a strong base of technically skilled manpower (over 2.5 million students graduated in 2016 Science, Technology, Engineering and Maths - STEM). Just as STEM graduates were the base for growth in India’s IT and Pharma sectors, they can also help boost the specialty chemicals industry. India also has a well-developed chemicals industry, which is the 6th largest producer of chemicals globally. This not only provides raw materials at competitive prices, but also the expertise needed to store and handle chemicals. Finally, the Indian government has also focussed on the specialty chemicals industry under its ‘Make in India’ programme.
India’s global competitiveness improving: Globally, at various points in time, various regions have emerged as industry leaders. China has led the chemicals industry over the past two decades, but over the past five years, its labour costs increased from c.2% of sales to c.5%, while Indian companies’ labour costs have been stable at 6-7%. This has improved India’s competitiveness. We analyse these and other factors in the report to substantiate that Indian companies are now competitive.
The specialty chemicals industry has several segments: Specialty chemicals are used to add value to an end product, and therefore, the industry operates on a B2B premise. Accordingly, specialty chemicals can be classified based on their use into agrochemicals, construction chemicals, paints & coatings, personal care, polymer additives, textile chemicals and water treatment chemicals. They can also be classified based on application into segments such as colourants, flavours & fragrances and surfactants. We analyse these sub-segments in this report and identify those that are attractive from an investment perspective. Some of these segments (such as textile chemicals) do not have many listed players and some (like flavours & fragrances and paints & coatings) are more JM Financial Research is also available on: FMCG plays than chemicals. We exclude these and analyse the growth drivers and Bloomberg - JMFR
companies operating in the specialty chemicals industry. These are Navin Fluorine Please see Appendix I at the end of this International Limited (Buy rating; Sep’18 TP: INR 700), PI Industries Limited (Hold rating; report for Important Disclosures and Sep’18 TP: INR 750), SRF Limited (Buy rating; Sep’18 TP: INR 1670), UPL (Buy rating; Disclaimers and Research Analyst Sep’18 TP: INR 950), and others. Certification.
JM Financial Institutional Securities Limited Indian Specialty Chemicals 28 September 2017 1. Specialty Chemicals – Distilling the common into the special
The chemicals industry can be classified based on various parameters such as value addition Basic chemicals are high-volume (basic/specialty), end-use (water treatment/construction/agrochemicals), process and low-value chemicals. Specialty (batch/continuous), etc. If we focus on value addition, the chemicals industry can be chemicals are low-volume and classified into two broad segments - basic and specialty. high-value chemicals Basic chemicals are generally high-volume and low-value products that are sold to other industries for further processing. Typically, basic chemicals are more likely to be manufactured in continuous process plants and there is no major product differentiation among several manufacturers. Sales of basic chemicals are primarily driven by price. On the other hand, specialty chemicals are low-volume and high-value products sold on the basis of their quality or utility, rather than composition. Thus, they may be used primarily as additives or to provide a specific attribute to the end product. Specialty chemicals are more likely to be prepared and processed in batches. The focus is on value addition to the end- product and the properties or technical specifications of the chemical. Specialty chemicals are an important group, but classifying a particular chemical as ‘basic’ or ‘specialty’ has been somewhat contentious. Often, terms such as specialty chemicals, fine chemicals, and performance chemicals are used interchangeably and can cause confusion. Therefore, Kline and Company prepared a simple matrix to explain the classification.
Exhibit 1. Specialty chemicals - differentiation matrix
Fine chemicals Specialty chemicals
Specialty chemicals cost more per kg and have a high differentiation
Price ($/Kg) Price index
Commodities Pseudo-commodities
Source: Kline and Company, Inc., JM Financial Differentiation Index Another useful way to look at chemicals is based on the value chain (Exhibit 2).
Exhibit 2. Chemical industry value chain Parameters Basic chemicals Differentiated commodities Specialty chemicals
Chemistry Production of molecule Development of molecule Modification of molecule Specialty chemicals are Focus Economy of scale Operations Customer/market characterised by low capital
Structure Centralised Somewhat decentralised Decentralised intensity and high product technology Process & product Product & application Technology Process technology technology know-how Capital Intensity High Moderate Low
Source: Kline & Company, Inc., JM Financial
Appendix 1 analyses the basic and specialty chemical companies in more details. In this report, we focus on specialty chemicals. Since specialty chemicals are mainly used to add value to the finished product, they are primarily sold on a B2B basis. Specialty chemicals can be further divided into various sub-segments on the basis of end-use and application. In this report, we have classified specialty chemicals into ten sub-segments. These sub-segments are 1) Agrochemicals, 2) Colourants, 3) Construction chemicals, 4) Flavours & Fragrances, 5) Paints & Coatings, 6) Personal care, 7) Polymer additives, 8) Surfactants, 9) Textile chemicals and 10) Water treatment chemicals. Of these, we have discussed the important sub-segments with most growth potential in detail in later sections of this report.
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2. Unveiling the key catalysts behind specialty chemicals 2.1 An overview of the global specialty chemicals industry Globally, the chemical industry recorded sales of c.USD 4.3trn in FY15, of which specialty chemicals (including agrochemicals) recorded sales of c.USD 829bn (or c.20% of the global chemical industry sales). Industry estimates indicate that the chemical industry could record a Specialty chemicals form nearly CAGR of c.5.4% to reach c.USD 5.6trn by end-FY20, while specialty chemicals could grow at 20% of the total chemical industry a slightly faster rate, recording c.5.8% CAGR to reach USD 1.1trn by end-FY20 (Exhibit 3 below).
Exhibit 3. Global basic and specialty chemicals market size (USD bn)
6000
5000 1100
4000 829 Global specialty chemicals are 3000 expected to increase at a CAGR of
4496 5.8% per annum 2000 3471
1000
0 FY15 FY20
Basic Specialty
Source: TSMG-FICCI, Global Market Insights, JM Financial 2.2 Drivers for the specialty chemicals industry We note that specialty chemicals are low-volume products. If a country does not have a strong basic chemical industry and focuses only on specialty chemicals, then the raw materials would have to be imported. Importing and storing low volumes could make the specialty chemicals uncompetitive unless they are highly specialised/patented. Therefore, a strong chemical industry is one of the key drivers for specialty chemicals. We also note that specialty chemicals are primarily a B2B business aims at adding value to an end-product. Therefore, just as importing small quantities of raw material could make the specialty chemical unviable, exporting small quantities could also make specialty chemical unviable. Again, since specialty chemicals add value to end-products, a domestic economy that supports up-trading would help support and grow the domestic specialty chemicals industry. Competitive employee costs would be another driver for any industry and specialty chemicals is no exception. We have also previously stated that specialty chemicals require high product differentiation (Exhibit 1). Therefore, cost-effective innovation and investment in R&D is another driver. Finally, investment in innovation would need government policies not only to protect innovation but also support cost-effective manufacturing, including effluent treatment. Therefore, growth drivers for the specialty chemicals industry can be listed as 1) Domestic Innovation, raw material availability of raw material at competitive prices, 2) Strong demand growth in the consumer availability, demand growth and industry and a domestic industry that supports ‘premiumisation’ of products, 3) Competitive low-cost production are key drivers cost of manufacturing, 4) Investment in R&D and 5) An ecosystem to support industry and innovation. In Appendix 2, we empirically validate these drivers based on the experience of other countries. In the next section, we review the current state of the Indian chemicals industry.
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3. Where does India’s specialty chemicals industry stand?
In FY15, Indian chemical industry’s revenue was c.USD 147bn, implying a less-than-4% share of the global chemical industry (c. USD 4.3trn). This is despite strong CAGR of c.13% during FY10-FY15. The Indian specialty chemicals industry at c.USD 28bn (Exhibit 4) accounted for The Indian specialty chemicals c.3.4% of the global specialty chemicals industry and c.20% of the Indian chemical industry industry is worth USD 28bn in FY15. The Indian specialty chemicals industry reported annual growth of 14% during FY10-FY15 implying that growth in specialty chemicals was slightly stronger than growth in the overall chemicals industry.
Exhibit 4. Indian basic and specialty chemical’s market size (USD bn)
250
200 52
150 28
100 174 15 119 50 65
0 FY10 FY15 FY20
Basic Specialty
Source: TSMG-FICCI, JM Financial
Indian specialty chemicals grew by According to TSMG-FICCI, specialty chemicals industry could grow c.13% per annum during CAGR of 14% over FY10-FY15 FY15-FY20 (on the back of increasing consumption and high growth in end-use industries), and slated to grow 13% over leading to a market size of c.USD 52bn by 2020. FY15-FY20
Exhibit 5. Indian specialty chemicals segment - Forecast (USD bn)
60 56 15% 13% 52 11% 50 47
40
Indian specialty chemicals grew 2x 30 28 global specialty chemicals
20
10
0 FY15 FY20 - Base FY20 - Most likely FY20 - Optimistic
Source: TSMG & FICCI, Company, JM Financial
If India’s specialty chemicals industry grows at 13% as estimated above, against the global growth rate of c.6%, India’s share in the specialty chemicals global market could increase to c.5% by end-FY20 from c.3.4% in FY15. JM Financial Institutional Securities Limited Page 6 Indian Specialty Chemicals 28 September 2017
Exhibit 6. Specialty chemicals market size - India vs. Global
120%
100%
80% Indian specialty chemicals will account for 5% of global specialty 60% chemicals by end-FY20 97% 95% 40%
20%
3% 5% 0% FY15 FY20
India ROW
Source: JM Financial
In the next section, we try to understand if India has the drivers identified previously to become a global leader in specialty chemicals.
JM Financial Institutional Securities Limited Page 7 Indian Specialty Chemicals 28 September 2017 4. Confluence of identified drivers suggests high growth potential
We have previously identified drivers of specialty chemicals as:
Domestic availability of raw materials at competitive prices,
Strong demand growth in the consumer industry and higher disposable income encouraging ‘premiumisation’ of products,
Competitive cost of manufacturing,
Investment in R&D, and
An ecosystem to support the industry and innovation
4.1 Domestic availability of raw materials at competitive prices One of the first large private sector chemical companies in India (Atul Limited) was established exactly a month after independence on 15Sep’47. This makes the Indian India – 6th largest producer and 6th chemicals industry over 7 decades old and one that has only grown with the presence of largest consumer of chemical sales in large and small companies. world Today, India is the 6th largest producer of chemicals worldwide (Exhibit 7).
Exhibit 7. Worldwide chemical production data CY15 (in USD bn) - India at 6th position
1800 1690
1600
1400
1200
1000
800 622 600
400
177 138 163 200 89 93
0 France India South Korea Japan Germany USA China
Source: Make in India, JM Financial
This large industry base provides cost-effective expertise for handling, production, storage and transportation of various types of chemicals. This can easily be leveraged for specialty chemicals. Strong demographic potential and It is interesting to note from the above that all countries ahead of India (except China) are increasing penetration will support developed countries with populations lower than India’s. Therefore, there is significant market growth potential upside to the Indian chemicals industry if demand grows, as we analyse in the next sub-section.
JM Financial Institutional Securities Limited Page 8 Indian Specialty Chemicals 28 September 2017 4.2 Strong domestic demand growth in the consumer industry and a move towards premiumisation India also is the 6th largest market (Exhibit 8) for chemicals. Despite this, we believe there is still significant potential for growth in chemicals industry based on 1) rapid growth in the Indian economy and 2) increased penetration of specialty chemicals on the back of up- trading.
Exhibit 8. Global sales of chemical in CY15 (EUR bn) – India at 6th position
1600 1409 1400
1200
1000
800
600 519
400
200 148 136 115 77 74 72 60 52 0 China USA Germany Japan Korea, India France Taiwan Brazil Italy Republic
Source: CEFIC, JM Financial
I. Rapid growth in the Indian economy: During the past 6 years (FY10-FY16), the Indian economy grew c.6.85%, but industry research indicates that the growth rate over the next 5 years will be moderately higher, with India likely to become one of the fastest growing (if not the fastest growing) major economies in the world. Since chemicals are used across various industries, demand for chemicals is directly linked to economic growth. If economic growth in the next 5 years is stronger than the previous 5, demand growth for chemicals in the next 5 years will also be higher than the last 5 years. This is corroborated by studies by government trusts such as IBEF that said major industries consuming specialty chemicals will grow at a higher rate during FY15-FY20 compared with the growth rate during FY10-FY15 (Exhibit 9 below).
Exhibit 9. End-use industries’ market growth rate
20% 17.42% 18% 15.60% 16% 16% 16% 15% 14% High growth in packaged food, 14% 13% personal care and household care 12% 11.20% 10% will drive demand for flavours and 10% 9% 8.70% fragrances, personal care 8% 7% 5.50% 5.65% ingredients and surfactants 6% 4.90% 4% 2.95% 2% 0% Textile Real estate Packaged personal care Household Automobiles Consumer Construction industry food care durables
FY10-15 FY15-20
Source: IBEF, IJIRD, Industry, Company, JM Financial
JM Financial Institutional Securities Limited Page 9 Indian Specialty Chemicals 28 September 2017
II.Surpassing China in terms of growth in the specialty chemicals industry: Although India’s specialty chemicals industry’s growth rate was only marginally better than China’s over FY10- FY15, over the next 5 years (FY15-FY20), India (CAGR 13%) is slated to grow c.2x China (CAGR 7%). The slowdown in China’s specialty chemicals industry is mainly attributed to its transition phase. It has recorded a slowdown in economic growth and a shift to the production of personal goods/services vs. industrial goods. Exhibit 10 illustrates the slowing growth of key end-use industries. Additionally, the Chinese chemicals industry has over- capacity in commodity chemicals with heavy reliance on imported specialty chemicals. There has been an increased emphasis on environment protection, which has affected production, leading to increased exports from India. In the next section, we discuss in detail the attractiveness of India’s specialty chemicals industry.
Exhibit 10. End-use industries’ growth in China – growth slowed down
16% 14% 14% 12.30% 12% 11% 10.20% 9.80%10% 10% 9% 9.50% 9% 9% 10% 8.30% 8.40% 8% 7% 6% 5.80% 5.30% 5% 5% 5% 6% Slowing key end-use industries in 4% China 2%
0%
Textiles
Paper & Pulp
Construction
Personal care
MotorVehicles
Plastic products
Semiconductors
Rubberproducts
Food& Beverages Health& Social Services
2010-15 2015-20
Source: IHS Markit, JM Financial
Exhibit 11. China’s specialty chemical market (USD bn)
200 189.5 7% 180 13%
160 143.7 140
120
100
80 China’s specialty chemicals market 54.2 60 is slowing down
40
20
0 2008 2016 2020
Source: IHS, McKinsey Analysis, Industry, JM Financial
JM Financial Institutional Securities Limited Page 10 Indian Specialty Chemicals 28 September 2017
Exhibit 12. Indian specialty chemicals Industry - Forecast (USD bn)
60 56 15% 13% 52 11% 50 47
40
30 28 India’s specialty chemicals industry to grow 2x China’s 20
10
0 FY15 FY20 - Base FY20 - Most likely FY20 - Optimistic
Source: TSMG & FICCI, Company, JM Financial
III.Increased penetration of specialty chemicals on the back of up-trading: Over and above faster end-use industry growth, low penetration (ratio of domestic per capita consumption in The construction industry will drive USD to global per capita consumption in USD) of specialty chemicals in India will support demand for construction growth. For example, the polymer additives sub-segment is likely to grow 10% over FY15- chemicals, polymer additives and FY20, on account of growth in end-use industries and lower per capita consumption (Indian paints and coating per capita consumption is less than 10% vs. global per capita consumption - Exhibit 13).
Exhibit 13. Penetration ratio of Indian specialty chemicals
0.80
0.70 Colourants 0.60 Surfactants 0.50
0.40 Construction chemicals, polymer additives, water treatment and 0.30 Agrochemcials Personal care flavour & fragrances have the 0.20 Textile chemicals lowest penetration ratio (<0.15) Paints & Coatings 0.10 Construction Water treatment
Domestic Domestic penetration to global penetration chemicals F&F 0.00 Polymer additives
-0.10 5% 7% 9% 11% 13% 15% 17% Domestic growth rate
Source: Industry, Company, JM Financial
Among specialty chemicals sub-segments, water treatment, polymer additives, flavours & fragrances and construction chemicals have a lower penetration ratio (<0.15). Our analysis indicates that polymer additives’ consumption in China/EU/USA is 2.4x/13x/18x that of India’s. In construction chemicals, India spends around USD 1.5/m3 on concrete admixtures Per capita consumption of polymer vs. USD 3/m3 and USD 4.5/m3 in China and the US, respectively. With increased focus on additives/construction chemicals in th rd improving the quality of construction, per capita consumption of specialty chemicals in India India is 1/18 / 1/3 of US could grow faster than the industry rate. Thus, a rapidly expanding end-use industry, coupled with low penetration, would help specialty chemicals grow faster than the end-use industry.
JM Financial Institutional Securities Limited Page 11 Indian Specialty Chemicals 28 September 2017 4.3 Competitive cost of manufacturing Competitive cost of manufacturing for a country would depend on two factors: 1) availability of technically skilled manpower and 2) competitive labour costs. I.India has a strong pool of technically skilled manpower: The specialty chemicals industry requires skilled manpower and India had one of the highest numbers of graduates in Science, Technology, Engineering and Mathematics (STEM) in 2016 (Exhibit 14).
Exhibit 14. Countries with most STEM graduates (In mn)
Japan 0.2 India ranked 2nd in terms of STEM Indonesia 0.2 graduates in 2016; the Indian
Iran 0.3 chemicals industry will benefit from a strong base of engineering Russia 0.6 graduates
USA 0.6
India 2.6
China 4.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Source: Forbes Statista, JM Financial
India is also among the top 10 globally in number of scientific publications (Exhibit 15).
Exhibit 15. Research excellence
6 000 25.0
4 958 5 000 20.0 19.4 19.2 18.6 4 000 16.4 16.6 16.5 16.1 15.7 15.4 15.1 15.4 15.5 15.0 14.1 14.6 13.2 13.3 3 000 12.3 2 434 12.0 12.2 10.0 10.0 2 000 8.8 8.3 16.7 349 1 244 6.8 6.7 6.9 7.1 1 192 6.1 895 5.0 1 000 730 699 595 585 520 478 4.1 396 386 368 288 266 258 257 225 158 155 150 142 135 131 128 122 116 0 0.0
Number of publications (thousands) Percentage of publications among 10% most cited
Source: Data from OECD, JM Financial
However, while India has been ranked among the top 10 in the number of scientific papers India is among the top 10 published, it rates fairly low (about 6%) in terms of citations among the world’s 10% most countries in terms of the number cited articles. This is in line with the perception that there is a need to improve the quality of of publications education in the country. Consequently, we note that while there is a strong base for the Indian chemicals industry to grow on, there is a need to focus on innovation if India wants to become a global leader in specialty chemicals. At this point, it would be worth noting that India’s IT and Pharma industries have both benefitted from a strong base provided by the large number of STEM students in the country. Therefore, the Indian specialty chemicals industry can also benefit from this large pool.
JM Financial Institutional Securities Limited Page 12 Indian Specialty Chemicals 28 September 2017
II. Labour costs are among the lowest: While having a technically qualified pool is imperative, competitive labour costs are as important. Again, India and China have the lowest labour costs among major countries producing specialty chemicals (Exhibit 16).
Exhibit 16. Average hourly labour cost in 6 major countries*
60
50
40
India and China have the lowest 30 labour costs per hour among
major chemical producers Dollar hour per 20
10
0 India China South Korea Japan United States Germany
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: The conference board, BLS-US, National Bureau of Statistics of China, Labour bureau India, OECD, Company, JM Financial *Countries ranked by chemical sales as of FY15 *India – For year 2013 to 15, labour cost per hour derived from index provided by labour bureau, **China – For year 2014 & 15, labour cost is derived from cost given in CNY by National bureau of Statistics in China
Since India and China have the lowest labour cost, it would be relevant to focus only on these two countries (Exhibit 17). From the Exhibit, it is clear that Chinese labour costs have been rising at a much faster rate than India’s (Exhibit 17).
Exhibit 17. Hourly labour cost comparison – India and China
6
4.93 5
4
3 China saw accelerated labour cost
growth rate vs. a modest increase Dollar Dollar per hour 2 1.7 in India
0.95 0.95 1
0 India China 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: The conference board, BLS-US, National Bureau of Statistics of China, Labour bureau India, OECD, Company, JM Financial
In order to analyse the manufacturing competitiveness of India and China, we have also accounted for the difference in productivity between the two countries. Exhibit 18 (below) provides the productivity data for India and China taking into account GDP per person employed. We note that GDP per person employed measures productivity of all sectors (including manufacturing) and therefore may only be representative. We also note that if we adjust for the higher productivity in China, Indian labour costs are still competitive (Exhibit 19 below).
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Exhibit 18. Productivity (GDP/person employed) – India Vs. China Exhibit 19. Hourly labour cost (productivity adjusted) – India Vs. China
30000 3.5 3.24
25000 23846 3
2.5
20000 15652 2 1.7 15000 11268 1.5
8990 Dollar per hour 10000 0.95 1 0.76
5000 0.5
0 0 India China India China
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: World Bank, JM Financial, constant 2011 PPP $ Source: The conference board , World Bank, JM Financial
It is interesting to note from the above graph that Chinese labour costs have increased c.5x over a period of 10 years. In our view, despite this sharp increase in labour costs, Chinese chemical companies remained competitive owing to rapid sales growth. In order to further understand this aspect, we analysed in detail the labour costs in 22 Indian, 30 Chinese and 27 European specialty chemicals companies (Exhibits 20, 21, 22 and 23 below).
Exhibit 20. Increase in employee costs (YoY%) for companies Exhibit 21. Increase in employee cost (CAGR %, FY11-FY16)
60% 35% 52% 50% 29% 50% 30%
40% 35% 25% 20% 30% 25% 20% 20% 22% 16% 16% 15% 20% 14% 14% 11% 10% 10% 10% 8% 10% 6% 5% 0% FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 0% -10% -3% India China Europe
India China Europe CAGR(%)
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial
Exhibit 22. Increase in the number of employees (FY11-FY16) Exhibit 23. Employee cost as a % of sales 15% 8% 16% 14% 15% 7% 14% 14% 14% 7% 14% 6% 12% 5% 10% 4% 7% 4% 8% 7% 7% 7% 3% 6% 6% 5% 3% 6% 4% 3% 4% 4% 2% 4% 2% 1% 2% 0% 0% India China Europe FY11 FY12 FY13 FY14 FY15 FY16
CAGR(%) China India Europe
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial
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The key findings are: . Employee costs for Indian companies increased at slower pace when compared with Chinese companies (Exhibit 20). The CAGR for employee expenses in India is better placed among major Chinese companies was c.29% against 20% for Indian companies (Exhibit 21). chemical companies in terms of % This is also partly since Chinese companies were growing rapidly and needed increase in employee costs more employees (Exhibit 22). . Employee costs as a % of sales (Exhibit 23) increased from only 2% in FY11 to 5% of sales in FY16 for Chinese companies. For Indian companies, it was flat at c.6-7%. Therefore, the gap between Chinese companies and Indian companies has reduced from c.4% in FY11 to c.2% in FY16. . It is also pertinent to note that hourly labour costs have increased rapidly (discussed previously). Therefore, if Indian specialty chemicals companies can expand rapidly (or if Chinese labour costs continue to increase), Indian companies can become more competitive.
4.4 Investment in R&D While those mentioned above are broadly positive aspects that can support the Indian specialty chemicals industry, we believe Indian companies will have to increase investment in R&D. This could include investment in R&D to cater to India’s distinct needs, such as products for small cars, additives for the construction sector (quick-setting concrete) and personal care materials suited to the country’s hot and humid weather. Currently for Indian companies, the investment in R&D/sales ratio is just 1.3% while for global companies, the ratio is 3%-4% (Exhibit 24). Indian companies’ investment in R&D is the lowest among major regions - USA/Europe/China/India.
Exhibit 24. R&D expense as a % of sales (FY11-FY16)
4.5% 4.0% 4.0% 4.0%
3.5% 3.0% 3.0%
2.5%
2.0%
1.5% 1.3%
1.0%
0.5%
0.0% India China Europe USA
Source: Bloomberg, Company, JM Financial Gradually, Indian companies are On the positive side, our detailed analysis of companies indicates a c.17% CAGR in R&D increasing R&D spends as they expenses by Indian specialty chemicals companies compared with 11%/7% by USA/Europe focus on CRAMS and new product during FY11-FY16. We believe that Indian specialty chemicals companies have realised the development need for increased investment in R&D (Exhibit 25).
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Exhibit 25. Increase in R&D expense India vs. developed countries – FY11-FY16
18% 17%
16%
14%
12% 11%
10%
8% 7%
6%
4%
2%
0% India US EUR
Source: Bloomberg, JM Financial
4.5 An ecosystem to support the industry and innovation Any manufacturing industry needs an environment that is conducive to conduct business and governments shoulder the primary responsibility to do so. Specifically in the context of the chemical industry, this includes:
Providing the necessary support (including education, legislation and infrastructure) for growth
This includes rules and infrastructure for effluent treatment since the chemicals industry can pollute air/water
Protecting and incentivising innovation since the specialty chemicals industry depends on R&D
We now analyse these 3 aspects: I. Provide the right environment for growth The Government of India has identified chemicals as one of the focus sectors under its ‘Make in India’ initiative. However, even prior to identifying chemicals under ‘Make in India’, Central Reverse SEZs, PCPIRs, ‘Make in and state governments had taken various measures to attract investment in the industry. India’ will drive the domestic The government established chemical hubs (Petroleum, Chemicals and Petrochemicals specialty chemicals industry Investment Regions – PCPIR) to provide the required ecosystem (raw material/market for intermediate producers, transportation, utilities, etc.) and a common effluent treatment plant (CETP) to ensure environment compliance. A CETP supports the industry and provides a balance between the needs of the industry and the safety of the local population. PCPIRs are being developed in Andhra Pradesh, Gujarat, Odisha and Tamil Nadu. PCPIRs already received investments worth USD 24.68bn until end-FY15, but the government believes they can Exhibit a. PCPIR scheme clusters attract investments up to c.USD 117.42bn.
Plastic parks scheme: Along similar lines, India’s government plans to set up plastic parks and provide grant funding up to 50% of the project cost with a ceiling of USD 5.97mn per project. Nearly 10 parks have been approved by the central government. State governments are also trying to support the chemical industry. Gujarat and Maharashtra already have a large chemical industry base, while the Telangana government is planning to set up exclusive clusters for the manufacture of plastics. These government efforts have already yielded results. There has been a significant increase in foreign direct investment (FDI) in the Indian chemical industry. During FY13-FY17, FDI equity flows recorded a CAGR of 56%.
Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 16 Indian Specialty Chemicals 28 September 2017
Exhibit 26. FDI equity inflows in the Indian chemical sector (In USD mn,FY13-FY17)
12000
9664 10000 9397 CAGR - 56%
8000
6000 56% increase in FDI due to overall 4738 4658 supportive ecosystem
4000
2000 1596
0 FY13 FY14 FY15 FY16 FY17
Source: DIPP, JM Financial
II. Impact of environment compliance costs – effluent treatment In the winter of 2015, Beijing was cloaked in smog with visibility of less than 200 meters. In January 2015, China’s Ministry of Environmental Protection cracked down on factories found to be in violation of its emission standards. Several chemical plants – especially unorganised and small units in the region – faced shutdowns, leading to uncertainty in production and a delay in exports. Consequently, Indian specialty chemicals companies benefitted, with some even exporting to China while Chinese exports declined (Exhibit 27).
Exhibit 27. Impact of China’s EPA crackdown – reduced chemical exports index
114 112 112
110
108 Reduced chemical exports index in China owing to shutdowns and 106 reduced production
Index 104 103 102 102
100
98
96 2013 2014 2015
Source: Bloomberg, JM Financial
We have assessed the environment compliance cost by analysing the annual reports of 30 Chinese specialty chemicals companies. We observed that only few of these companies were explicitly stating the effluent treatment cost, while others provided only environment protection fee (c.0.18% of sales) and sewage charges (c.1% of sales). Some key observations are that none of the Chinese companies stated the effluent treatment costs prior to FY13. This possibly highlights the lack of focus on environment/safety amongst Chinese specialty chemicals companies. There were several punitive actions by environment agencies – e.g. Zhejiang Longs, a Chinese specialty chemicals company, had to pay an environment damage fee of c.CNY 24mn in CY15 and also necessitated an investment of c.CNY 624mn in capital expenditure towards environment protection facility.
JM Financial Institutional Securities Limited Page 17 Indian Specialty Chemicals 28 September 2017
This resulted into an increase in effluent treatment costs for Chinese companies (those that started reporting effluent treatment costs explicitly) to 4-6% of their net sales in FY15-FY16. In comparison, Indian chemicals companies were broadly adhering to environmental norms by using either separate effluent treatment plants (ETPs) or common effluent treatment plants (widely used in Gujarat). The opex of ETPs would depend on the sub-sector; polluting sub-sectors such as colourants and textile chemicals would incur the highest costs. According to Dyestuff Manufacturers Association (DMAI), on an average, Indian companies were spending 5%-6% of the revenue and incurring capex of 8%-10% of the chemical plant, resulting in lower relative competitiveness. Exhibit 28 below compares effluent treatment costs for dyestuff companies in India and China.
Exhibit 28. ETP opex cost as a % of sales incurred by Chinese vs Indian companies*
5.2% 5.1% 5.00% 5.00% 5.0%
4.8%
4.6%
4.4% 4.4%
4.2%
4.0% FY15 FY16
China India
Source: Company, JM Financial *companies – Tsaker Chemical, Zhejiang Longs, Zhejiang Runtu Co, Lianhe chemical technology, Lier chemical, Jiangsu Chango
It is interesting to note that over FY11-FY14, the EBITDA margins of Chinese chemical companies grew from 16% to 21%, but fell c.5% over FY14-FY16 (Exhibit 29 below). We have previously analysed that during FY14-FY16, employee costs of Chinese companies increased only c.1%. Therefore, some of this compression in EBIDTA margin is likely due to Chinese chemicals companies are increased investment in effluent treatment plants and compliance with EPA norms. Indian investing in ETPs incurring capex companies were the biggest beneficiary of this as their EBITDA margins improved 5% during and 4%-6% opex the same period. Lower EBIDTA margins also impacted Chinese companies’ ROCE and ROE as both return ratios declined c.7% each (Exhibit 30).
Exhibit 29. Effect of environmental impact on companies’ EBITDA % - China vs. India
25% 21% 20% 19% 20% 19% 17% 16% 16% 16% 15% 15% 14% 14% Indian companies gained EBITDA 12% margins at the cost of Chinese 10% companies
5%
0% FY11 FY12 FY13 FY14 FY15 FY16
India China
Source: Bloomberg, Company, JM Financial
JM Financial Institutional Securities Limited Page 18 Indian Specialty Chemicals 28 September 2017
Exhibit 30. Effect of environmental impact on Chinese companies ROCE and ROE
25 22 21 20 19 20 17 16 17 17 14 15 13 13 12
10 Both ROCE and ROEs of Chinese companies declined due to 5 increased capex and opex in effluent treatment costs
0 FY11 FY12 FY13 FY14 FY15 FY16
ROCE ROE
Source: Bloomberg, Company, JM Financial
India’s cost of production for specialty chemicals is now lower (EBIDTA margins for FY16 and FY17 are higher) than China’s (FY16: Exhibit 29).
III. Regulations on protecting and incentivising innovation The specialty chemicals industry depends on innovation and investors would be reluctant to invest if IPR is not protected. Also, there should be legal remedies in case of any breaches. India, as a member of the WTO, recognises patents and the Indian legal system is considered reasonably fair. This encourages chemical companies to engage in contract research and manufacturing services (CRAMS) or contract synthesis and manufacturing (CSM). Such tie- ups depend primarily on the comfort of IPR protection. In India, chemical/agrochemical companies such as Navin Fluorine and PI Industries have used this strategy. It is worth noting that India and China’s IPR rankings are not substantially different (Exhibit 31). However, both countries have taken measures to improve their rankings, but India’s seems to have improved at a faster pace and reduced the gap.
Exhibit 31. IPR ranking India vs. China/US
70 61 60 59 60 56 55 54 52 52 48 50 46
40 India has improved its ranking from 60 in CY13 to 54 in CY17 30
20 17 17 15 15 14
10
0 2013 2014 2015 2016 2017
India China US
Source: IPR, JM Financial
This would potentially help Indian companies explore global opportunities and branch out beyond domestic markets, as discussed previously. We now dive deeper into the specialty chemicals segment to first understand the various sub- segments of specialty chemicals and then analyse each sub-segment. JM Financial Institutional Securities Limited Page 19 Indian Specialty Chemicals 28 September 2017 5. Specialty chemicals – An aggregate of distinct segments
Specialty chemicals can be classified either by end use or application; in this report, we consider both. Segments classified on the basis of end use are agrochemicals, construction chemicals, paints & coatings, personal care, polymer additives, textile chemicals and water treatment chemicals. Application-driven segments include colourants, flavours & fragrances, and surfactants. These industries cumulatively constitute c.80% of the specialty chemicals sector. The remaining 20% includes other segments such as paper chemicals, printing inks, industrial & institutional cleaners and rubber chemicals. The following table lists the major specialty chemicals segments, their domestic and global market sizes, growth rates as well as other key characteristics.
Exhibit 32. Specialty segments overview Segments Indian specialty % share of Indian specialty Indian specialty Global specialty Global specialty Product Adoptn Key end Impact of chemicals Indian chemicals chemicals chemicals chemicals differentn level markets consumer industry specialty industry industry market size growth rate standards market size chemicals growth rate expected (FY15 USD bn) (FY15-FY20) (FY15, USD mn) industry (FY15-FY20) market size (%,FY15) (FY20, USD mn)
Agrochemicals 4350 15.5% 8% 6392 57 3.2% Agri sector Medium
Textiles, Colourant 5400 19.3% 11% 9100 45.2 5% Leather, High
Paper
Construction Infrastructure, 610 2.2% 15% 1075 27.16 5.6% Medium Chemicals Real estate
Food Flavours & 700 2.5% 14% 6354 23.6* 5.1%* processing, High Fragrances Personal care
Paints and Construction, 5300 19% 10% 8536 110 3% High Coatings Automotive
Personal care 700 2.5% 14% 1348 13 4.3% FMCG High
ingredients
Pipes, White Polymer 477 1.7% 10.7% 793 50.6 5% goods Medium Additives automotive
Laundry care, Surfactants 3000 10.7% 13% 5527 29.2 5.4% Medium Dishwashing
Apparel, Textile 1250 4.5% 12% 2203 21.8 3.4% Technical Medium Chemicals textiles
Industrial & Water 458 1.6% 14% 882 24.5 4.5% Municipal High Treatment water
Source: UPL.TSMG and FICCI, Global Market Insights, Allied market research, MarketsandMarkets, Globe news wire, IAL consultants, Company, JM Financial *Based on CY
The Indian specialty chemicals market is smaller than global peers’ in most of the sub- segments. However, in some sub-segments (such as agrochemicals, colourants, paints & coatings) India accounts of 5%-10% of the respective global market sizes. India is also one of Agrochemicals, Colorants, Paints & the largest exporting countries for agrochemicals and colourants, and has significantly Coatings and Surfactants have boosted its market share over the years. grown to a sizeable market size Exhibit 33 illustrates the expected growth rate comparison of the domestic vs. global specialty chemicals segments.
JM Financial Institutional Securities Limited Page 20 Indian Specialty Chemicals 28 September 2017
Exhibit 33. Specialty chemical segments’ growth rate - India vs. Global 16% 14% 14% 14% 14% 13% 12% 12% 12% 11% 11% 10% 10% 8% 8%
6% 5% 6% 5% 5% 5% 4% 5% 3% 4% 3% 3%
2%
0% Agrochemicals Colourant Construction Flavours & Paints & Personal Care Polymer Surfactants Textile Cemicals Water Treatment Chemicals Fragrances Coatings Additives India Global
Source: Global Market Insights, Industry, JM Financial, Company
Exhibit 34. Specialty segments growth rate – An Analysis Estimated Exp. growth Expected Growth rate Drivers - growth Drivers - Segments Key Drivers - growth growth rate rate over FY15-FY20 Growth rate (FY10-15) rate (FY10-15) Multiple (x) (FY15-20) (driver multiple) (FY15-20) GDP 6.8% 1.32x 7.3% 10% Agrochemicals 9% Exports demand 12% 0.75x 9% 7% 8% Food demand 8% 1.13x 9% 10% GDP 6.8% 1.47x 7.3% 11% Textile industry 7% 1.43x 8.7% 12% Colourant 10% 11% Paints and coatings 12.9% 0.78x 12% 9% Global colorants 4.2% 2.38x 5% 12% Construction GDP 6.8% 2.06x 7.3% 15% 14% 12% Chemicals Real estate 10% 1.4x 11.2% 15.7% GDP 6.8% 1.5x 7.3% 11% Packaged food 15.6% 0.65x 16% 10% Beauty & personal Flavours & Fragrances 10.2% 13% 0.78x 16% 13% 14% Care sector Toiletries & 14% 0.73x 17.42% 13% Household care GDP 6.8% 1.37x 7.3% 10% Paints & Coatings 9.3% Automobile industry 5.5% 1.69x 4.9% 8% 10% Real estate 10% 0.93x 11.2% 10% GDP 6.8% 1.74x 7.3% 13% Personal Care 11.8% Beauty & personal 14% ingredients 13% 0.91x 16% 15% Care sector GDP 6.8% 1.47x 7.3% 11% Consumer durables 9% 1.11x 15% 17% Polymer Additives 10% 11% Automobile industry 5.5% 1.8x 4.9% 9% Real Estate 10% 1x 11.2% 11% GDP 6.8% 1.62x 7.3% 12% Beauty & personal 13% 0.85x 16% 14% Surfactants 11% Care sector 13% Toiletries & 14% 0.79x 17.42% 14% Household care GDP 6.8% 1.4x 7.3% 10.2% Textile Chemicals 9.5% 11.55% Textile industry 7% 1.43x 8.7% 12% GDP 6.8% 1.76x 7.3% 13% Urbanisation 2.37% 5.06x 2.32% 12% Water Treatment 12% 14% Water & waste water 14.7% 0.82x 10% 8.2% Capex by industry
Source: World bank, Bloomberg, FICCI-TSMG, Company, IBEF, IPA, PR News wire, CMIE, Ken research, JM Financial
Exhibit 34 indicates the major drivers that would boost growth rates in the specialty chemicals segment. Apart from the key drivers mentioned above, other notable factors Flavours & Fragrances, Personal common to most of the segments are increasing urbanisation, increasing per capita income, care, Surfactants and Construction growing middle class population (NCAER projected 267 million mid-income population in chemicals are the most attractive 2016 vs. 50 million in 2005), lower penetration ratio, increasing consumerism and segments premiumisation. However, there are other specific factors driving these segments. For instance, agrochemicals’ growth rate will also be affected by volatile weather (including the El Nino phenomenon and prolonged weak rainfall) as well as low agri-commodity prices. JM Financial Institutional Securities Limited Page 21 Indian Specialty Chemicals 28 September 2017
The following exhibit 35 provides a summary of major players in each specialty chemicals segment, with relevant financial parameters.
Exhibit 35. Summary of specialty chemicals players (FY11-FY16) Segment Company Key Products EBITDA % Profit % ROCE % ROE %
Rallis Crop protection chemicals 16% 9% 32% 21%
United Phosphorous Limited Agro chemicals 19% 8% 26% 18% Crop protection, Environmental Bayer Crop science 11% 8% 19% 20% Agrochemicals science Crop protection, Agri- PI Industries 18% 11% 26% 32% intermediates Dhanuka Crop protection chemicals 13% 9% 20% 19%
Aksharchem India Dyes and Pigments 10% 6% 26% 39%
Bodal Chemicals Dyes 12% 3% 5% 19%
Meghmani Organics Pigments & Agrochemicals 17% 3% 8% 6.5%
Colourant (Includes dyes Asahi Songwon Pigments 14% 8% 25% 20% and pigments) Aarti Industries Dyes and Pigments 16% 7% 25% 20%
Sudarshan chemicals Pigments 11% 4% 16% 18%
Atul industries VAT, Acid and Direct Dyes 14% 8% 22% 19%
Clariant Chemicals India Colorants 10% 5%* 11%* 15%* Admixtures, Joint sealants, Surface Fosroc India NA NA NA NA treatments Construction chemicals SIKA India Waterproofing, Tiling, Sealing NA NA NA NA Admixtures, Joint Sealants, BASF Construction NA NA NA NA Flooring and Waterproofing Personal wash, personal care, Flavours and fragrances Sachee Aromatics NA NA NA NA fabric care, incense sticks Electrodeposition coatings, primer Paints and coatings BASF Coatings India Ltd. NA NA NA NA surfacer Alpha lipolic acid, Cococin, Ellagic Sami labs NA NA NA NA Personal care Acid Vivimed Labs Oral, skin and Hair Care 17% 8% 17% 19%
Polymer additives Plastiblends Polymer additives masterbatches 10% 6% 18% 19%
Ultramarine & pigments Ltd. Surfactants and Pigments 18% 11% 22% 19%
Sunshield Chemicals Ltd. Surfactants and Anti-oxidants 7% 0% 13% 4% Surfactants Aarti home & personal care Surfactants NA NA NA NA Surfactants, Modifiers, Pearlising Galaxy Surfactants 11% NA NA NA agents, active ingredients Textile chemicals Fineotex Textile chemicals 15% 10% 29% 16%
Chembond Engineering and chemicals 10% 13% 30% 38% Water treatment Ion Exchange Engineering and chemicals 4% 1% 16% 7% Source: Bloomberg, Company annual reports, JM Financial *Clariant chemicals- one off data removed
Segments such as construction chemicals, flavours & fragrances, personal care, polymer additives and textile chemicals do not have many listed B2B companies and therefore, we are not covering these sub-segments. Additionally, paints and flavours & fragrances sub- segments are primarily driven by consumer preferences and are not covered in this report We now analyse the remaining sub-segments (agrochemicals, colourants, surfactants and water treatment) covering the global and domestic demand drivers, key domestic and global players, competitive scenario and long-term outlook for the remaining sub-sectors .
JM Financial Institutional Securities Limited Page 22 28 September 2017 India | Agrochemicals | Sector Report
Agroc hemicals
Growing need for innovation The agrochemicals sub-sector can be attractive to investors given India’s large rural economy Mehul Thanawala [email protected] | Tel: (91 22) 66303063 and the need to improve yields. The global crop protection market is currently valued at Pramod Krishna c.USD 57bn, of which revenue of c.USD 43bn came from proprietary off-patent and generic [email protected] | Tel: (91 22) 61781074 products. India’s agrochemical companies saw a 10% CAGR over FY13-FY17E, to record Alok Ranjan revenue of INR 296bn (USD 4.42bn) in FY17E. Almost 50% of this came from exports, while [email protected] | (+91 22) 6630 3073 the remaining was from India. We believe that Indian agrochemical companies can continue to grow 8%-9% domestically over the next few years based on factors such as an increase in rural spending, a consistent monsoon and improving farmer sentiment. Likewise, in exports,
Indian companies can continue to grow c.10% due to lower research and manufacturing costs, a rise in technically skilled manpower and products going off-patent. Therefore, while agrochemicals may not be the fastest growth sub-segment in specialty chemicals, a relatively large domestic manufacturing and market base provides it technically skilled manpower and an opportunity to grow.
Exports to witness CAGR of c.8%-9%: The global market for agrochemical products was valued at c.USD 63bn in CY14 (+13% since CY12). However, after CY14, the market began contracting due to a global slowdown caused by low commodity prices, significant currency headwinds, high channel inventories and a shift towards generics. Therefore, at end-CY16, the market stood at USD 57bn. In coming years, we believe Indian companies catering to the export market are well placed since the rising development costs for new molecules are benefitting low-cost research destinations; there is also a significant opportunity in manufacturing products that are going off-patent. Companies such as PI and SRF are already focusing on these opportunities.
And Indian market could support at 8%-9% CAGR: In India, the primary source of water is rainfall, with only c.46% of cultivated land being irrigated. Hence, the monsoon plays a very important role in agrochemical sales. Over the past few years, monsoon in India has been below normal, resulting in inventory backlog in the channel. While this inventory backlog could take some time to clear, we believe the outlook is broadly positive based on a) a likely normal monsoon in FY18, which could help clear inventory, b) increased government spending on rural India aimed at doubling farmers’ income over a 5-year period, c) improving farmer awareness on pesticide use and d) higher labour costs leading to increased use of herbicides to remove weeds. We elaborate on these factors in the following pages.
Key companies: To mitigate monsoon-related uncertainty specific to India-focussed companies, we prefer companies that are based in India but have a global presence. UPL remains our top pick in the segment on the back of the company’s integrated business model and well-diversified presence across the globe. Another company to focus on is PI Industries, with an order book of USD 1bn in the contract synthesis and manufacturing (CSM) business as well as a strong brand presence in India. We note that PI has corrected recently and therefore offers a good entry point. Other companies which could benefit are (i) Rallis, with its strong brand recall among farmers (TATA) and recent entry into the CSM segment and (ii) Dhanuka for its asset-light business model, which has allowed it to earn higher margins and ROEs than peers, as well as its strong brand positioning. JM Financial Research is also available on: Bloomberg - JMFR
JM Financial Institutional Securities Limited
Agrochemicals 28 September 2017
Market size and estimated growth Exhibit 36. Total agrochemicals market catered to by Indian players (FY17) (INR bn)
Source: GAVL DRHP, JM Financial
Exhibit 37. Domestic industry to record 8%-9% CAGR (INR bn) Exhibit 38. Export industry growth forecasts (INR bn)
Source: GAVL DRHP, JM Financial Source: GAVL DRHP, JM Financial
Global agrochemicals in need of innovation… - Rising costs of developing new molecules resulting in fewer product launches: Every crop protection product that reaches the market currently costs USD 286mn and takes 11 years (vs. 8 years in 1995) (Phillip Mcdougall) of research and development to ensure its safety and efficacy. Development costs have increased c.55% over the past decade. Additionally, the number molecules needed to be synthesised to launch one agrochemical product in the market has increased 3x over the past couple of decades.
Exhibit 39. Discovery and development costs of a new crop protection product
Source: Phillip Mcdougall, JM Financial
JM Financial Institutional Securities Limited Page 24 Agrochemicals 28 September 2017 Exhibit 40. Number of AIs launched over the years
18
16
14
12
10
8
6
4
2
0
2011
1951-1955 1956-1960 1961-1965 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010
Source: Data - Agronova, JM Financial - Increased herbicide/fungicide resistance: In recent years, pesticide resistance has increased with more weeds (c.479 unique cases) becoming resistant to herbicides. Key fungicides such as triazoles, strobilurins and SDHIs are also facing resistance. Rising weed resistance means gradual loss of pesticide efficacy and even the end of its life cycle; this increased the need for the development of alternatives.
Exhibit 41. Number of weeds with herbicide resistance to the respective modes of action
Source: UPL
Exhibit 42. Some common weeds that have developed resistance Pig weed Conzya Phalaris minor
Source: JM Financial
- Creating huge opportunities for Indian contract research companies: One of the key alternatives adopted by global innovators to reduce the research cost is to outsource part of the R&D to countries like India that have low-cost high-quality manpower. Indian companies such as SRF, PI, Navin Fluorine and Aarti are already catering to this niche demand.
JM Financial Institutional Securities Limited Page 25 Agrochemicals 28 September 2017
Also, branded generic sales by Indian companies to continue doing well: The rising potential in the proprietary off-patent and generic categories augurs well for revenue growth. In CY16, the global sales mix of patented, proprietary off-patent and generic pesticides were 25%, 30% and 45%, respectively. This implies that of the total sales value of USD 57bn in CY16, c.USD 43bn was driven by proprietary off-patent and generic pesticides. Also, another USD 3bn worth of patents are slated to expire by 2020. This provides non-research-oriented pesticide enterprises in countries such as India and China with a large amount of opportunities and market potential.
Long term outlook of the domestic business also remains strong due to: a) Increased government focus towards rural India…: India’s Prime Minister has targeted to double farmer incomes by 2022 and sharply 24% increased (to INR 1.8trn) allocation to the rural, agriculture and allied sector in the FY18 budget. The Government of India has targeted increased spends on (a) Irrigation - capex spending up 25% in FY17 and 21% in FY18E and an increase in the fund for irrigation from INR 200bn to INR 400bn, (b) Housing - PMAY targets to build over 5 million rural houses in FY18, almost 2x the run rate of 2-3 million annually and has increased the construction amount provided from INR 70,000 to INR 120,000 for the beneficiary household, (c) Crop insurance – The government plans to expand crop coverage from 30% of gross cropped area in FY17 (25% in FY16) to 40% in FY18 and 50% in FY19. These will also help improve farm incomes. b)…coupled with increasing farmer awareness on use of pesticides: In our interactions with dealers and farmers, we noted that farmers are increasingly becoming aware about the importance of using quality pesticides to improve yields. This is possibly due to increased farmer engagement programmes undertaken by organised players or through word of mouth. A study conducted by the National Centre for Biotechnology Information says that the growth of weeds reduces yields by 35%-71%; as per FICCI, 25-50% of crop losses in India are due to insect attacks. Proper use of agrochemicals can help reduce losses due to weeds and pest attacks and help farmers improve yield. This would be particularly important in crops where margins are low (fruits/vegetables). Hence, this trend of increased farmer awareness would benefit Indian agrochemical companies. c)… and rising share of fungicides and herbicides: India has a tropical climate resulting in higher pest incidences. Therefore, insecticides form the largest segment of crop protection, market followed by fungicides and herbicides. However, the share of insecticides saw a marginal decline from 58%/55% in FY13/FY14 to 54% in FY17. While insecticides are expected to continue to dominate the overall mix, the share of herbicides and fungicides could increase owing to rising labour costs, a shift in agriculture from cash crops to fruits and vegetables and government support for fruit and vegetable exports.
Exhibit 43. Share of fungicides and herbicides on the rise
Source: Industry, JM Financial
JM Financial Institutional Securities Limited Page 26 Agrochemicals 28 September 2017
Expect 8-10% domestic revenue growth for FY18: Though CY16 monsoon turned out to be normal after two years of poor rains, there were a number of headwinds that impacted agrochemical companies in FY17 such as (i) high channel inventories, (ii) scattered and uneven rainfall, (iii) low pest infestation and (iv) demonetization. While monsoon in CY17 has turned out to be deficient (-5.3% as of 22nd September), healthy rains towards the end of the season in South India (c.50% of sales for key companies) bodes well for the rabi season. We note 1HFY17 may be flat to marginally positive, with 2Q making up for the negative revenue growth of 1Q (caused by GST destocking). Overall, we expect high single digit YoY revenue growth for key domestic agrochemical companies for FY18.
Exhibit 44. Correlation between rainfall and agrochemical companies’ top-line growth
Source: Companies, JM Financial
Exhibit 45. Summary of key states State Market size Organized share
AP and Telangana INR 25-30bn 60%
Maharashtra INR 15-16bn 50%
Punjab INR 14-15bn 60%
Gujarat INR 9-10bn on the rise
UP low low
Source: JM Financial
Some other challenges persist, which if addressed could act as drivers: (i) Overdependence on rainfall: In India, rainfall is the primary source of water and only c.46% of land under cultivation is irrigated. Therefore, the fate of Indian agriculture is subject to the vagaries of the monsoon and so is the fate of agrochemical companies’ top-line growth, (ii) low farmer awareness on the right dosage of pesticide usage and quality of pesticides and low purchasing power and (iii) low agricultural yields due to poor soil quality, poor irrigation, etc. have discouraged farmers from using quality agri-inputs.
JM Financial Institutional Securities Limited Page 27 Agrochemicals 28 September 2017
Exhibit 46. Per hectare agrochemical usage is lowest in India (kg/ha) Exhibit 47. India has one of the lowest agricultural yields (tonnes/ha)
Source: Company, JM Financial Source: Company, JM Financial
Integrated players to benefit from new CIBRC regulations The Central Insecticides Board and Registration committee (CIBRC) in its 375th Meeting dated 19th May 2017, implemented a new set of guidelines encouraging indigenous manufacturing and in-line with the government’s ‘Make in India’ campaign. The new guidelines along with the possible implications are discussed in Exhibit 13. We believe the given set of guidelines are likely to give a big boost to domestic manufacturing and act as a beneficiary for players present across the value chain.
Exhibit 48. New guidelines and its implications New guideline Implication No new application of Registration under the category TI vs TIM (Technical import vs The regulation will negatively impact generic companies depending Technical indigenous manufacturing) shall entertained except for Technical import from heavily on imports for their technical sourcing. While some key new source. Registration under TI vs FIM is also proposed to be withdrawn, however in listed players importing technicals do so primarily under the in- view of the fact that the matter is pending in the Hon'ble HC of Gujarat, withdrawal of licensed model, companies without/with limited technical the same will be in concurrence of DAC &FW manufacturing facilities will have to undergo changes in their sourcing strategies (by either contracting with indigenous suppliers or by starting technical manufacturing on their own) and hence are likely to witness pressure in the near term
Import of formulated pesticides where the formulation is already registered for indigenous Companies importing formulations into India will be negatively manufacturing, shall be restricted to 75% of the average of three years of import from the impacted. However, most key listed players either formulate in- date of application. In case the Certificate of Registration of molecule of any registrant is house or import formulations under the in-licensed model. Hence less than three years old, import of pesticides shall be restricted to 75% on the basis of the impact of the same on key players is expected to limited to a data provided by the registrant for such period. smaller percentage of the portfolio.
No Certificate of Registration shall be issued to any company for import, if the applicant Not material possesses the Certificate of Registration of that product under indigenous manufacturing category. In case where registrant has registration certificate of indigenous manufacturing and import category the certificate of registration of import category shall be withdrawn.
Source: CIBRC, JM Financial
JM Financial Institutional Securities Limited Page 28 28 September 2017 India | Chemicals | Company Update
Navin Fluorine | BUY Expertise across the fluorine chain
Globally, fluorine has become a leading choice to carry active ingredients in pharma and Mehul Thanawala [email protected] | Tel: (91 22) 66303063 agrochemical applications, leading to rising interest in fluorine research. Navin Fluorine (I) Ltd Pramod Krishna (NFIL) is one of India’s largest manufacturers of fluorochemicals with over five decades of [email protected] | Tel: (91 22) 61781074 experience in the fluorine chain and a portfolio of over 60 fluorine-based products. NFIL is Alok Ranjan also the only Indian fluorochemical company to provide end-to-end services, from early-stage [email protected] | Tel: (91 22) 6630 research to building India’s first high-pressure, cGMP-compliant production facility. This gives NFIL a unique advantage to partner global companies. NFIL has consistently focused on moving up the value chain. We have a BUY rating on NFIL with a TP of INR 700. We estimate
FY17-19 earnings CAGR of 20% and value NFIL at 20x (1XPEG and DCF) FY19E EPS. NFIL operates in a resuscitating industry: Globally, the use of fluorine was frowned upon Recommendation and Price Target due to the ban on certain refrigeration gases (it was actually on chlorine and carbon in Current Reco. BUY Previous Reco. BUY the gas and not on fluorine). However, currently, 3 of 10 blockbuster drugs contain Current Price Target (12M) 700 fluorine and therefore, the use of fluorine in pharma and agrochemical has gained a lot Upside/(Downside) 6.0% of interest. A recent report by Solvay states that 40%-50% of new molecules being Previous Price Target 700 researched (for use in agrochemicals/pharma) contain some form of fluorine, since Change 0.0%
fluorine is 1) inert and 2) much more lipophilic (fat soluble) than hydrogen. Therefore, if Key Data – NFIL IN one replaces hydrogen with fluorine as an inert carrier, fluorine can enter membranes Current Market Price INR 660 much more easily, improving bio-availability of the active ingredient carried by fluorine. Market cap (bn) INR32.6/US$0.5 Free Float 55% A unique industry position: NFIL, one of the 4 listed fluorine-based companies in India, is Shares in issue (mn) 48.9 uniquely positioned to benefit from rising interest in the segment. It acquired Manchester Diluted share (mn) 48.9 3-mon avg daily val (mn) INR89.7/US$1.4 organics (which was engaged in theoretical research and gram-scale production) and is 52-week range 799/430 making an investment of c.INR 0.6bn in India’s first high-pressure fluorine-based plant in Sensex/Nifty 31,160/9,736 Dahej for multi-ton batch size. Thus, backward and forward integration would help NFIL INR/US$ 65.7 offer a unique advantage of offering end-to-end solutions. Price Performance Focus on high-value businesses such as CRAMS and specialty chemicals: NFIL has % 1M 6M 12M focussed on high-margin segments such as CRAMS and specialty chemicals, directing Absolute -0.3 11.4 41.7 most of its capex there. This led to the low-margin inorganic fluoride segment Relative* 1.1 4.6 28.3 * To the BSE Sensex contributing only c.17% to its FY17 revenue, while the high-margin specialty fluorochemicals and CRAMS segments contributed c.33% and 20%, respectively. We estimate this trend to continue, with CRAMS revenues currently recording a CAGR of 42% and remaining the fastest growing segment for NFIL, followed by specialty chemicals, with a growth rate of 13%. NFIL has also signed a JV with Piramal for the manufacture of fluorine-based molecules; this is likely to further add revenues of c.INR 1bn annually.
BUY and TP of INR 700: We forecast FY17-20 revenue/EBITDA/earnings CAGR of 18%/19%/20% and factor in a 40bps improvement in margins by FY19. We value NFIL at 20x FY19E EPS. Key risks to our call are a continued slowdown in agrochemicals and a rise in fluorspar prices (please refer to our initiating coverage note Navin Fluorine | Fluorinating across the value chain for more details).
Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 6,797 7,477 8,802 10,479 12,268 Sales Growth (%) 14.9 10.0 17.7 19.1 17.1 EBITDA 1,173 1,578 1,850 2,266 2,692 EBITDA Margin (%) 17.3 21.1 21.0 21.6 21.9 JM Financial Research is also available on: Adjusted Net Profit 835 1,178 1,288 1,716 2,009 Bloomberg - JMFR
JM Financial Institutional Securities Limited Navin Fluorine 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 6,797 7,477 8,802 10,479 12,268 Shareholders’ Fund 6,453 7,645 8,617 9,911 11,426 Sales Growth 14.9% 10.0% 17.7% 19.1% 17.1% Share Capital 98 98 98 98 98 Other Operating Income 0 0 0 0 0 Reserves & Surplus 6,356 7,547 8,519 9,813 11,328 Total Revenue 6,797 7,477 8,802 10,479 12,268 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 3,111 3,029 3,612 4,271 4,965 Minority Interest 0 0 0 0 1 Personnel Cost 806 921 1,058 1,250 1,455 Total Loans 816 703 603 503 403 Other Expenses 1,706 1,949 2,282 2,693 3,157 Def. Tax Liab. / Assets (-) 370 434 420 420 420 EBITDA 1,173 1,578 1,850 2,266 2,692 Total - Equity & Liab. 7,640 8,783 9,640 10,834 12,250 EBITDA Margin 17.3% 21.1% 21.0% 21.6% 21.9% Net Fixed Assets 3,073 4,598 3,444 3,739 4,003 EBITDA Growth 62.5% 34.5% 17.2% 22.5% 18.8% Gross Fixed Assets 4,614 6,202 5,322 5,922 6,522 Depn. & Amort. 225 299 288 319 349 Intangible Assets 7 3 3 3 3 EBIT 949 1,279 1,562 1,948 2,342 Less: Depn. & Amort. 1,752 1,917 2,191 2,497 2,833 Other Income 245 306 332 374 412 Capital WIP 204 311 311 311 311 Finance Cost 38 18 11 10 8 Investments 1,699 1,883 2,383 2,883 3,383 PBT before Excep. & Forex 1,156 1,567 1,883 2,312 2,747 Current Assets 4,770 4,594 5,469 6,017 6,875 Excep. & Forex Inc./Loss(-) 0 273 0 0 0 Inventories 755 1,127 1,314 1,558 1,787 PBT 1,156 1,840 1,883 2,312 2,747 Sundry Debtors 1,499 1,358 1,611 1,858 2,106 Taxes 321 456 629 680 806 Cash & Bank Balances 287 481 916 973 1,355 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 1,309 706 706 706 706 Assoc. Profit/Min. Int.(-) 0 0 -34 -83 -69 Other Current Assets 920 921 921 921 921 Reported Net Profit 835 1,384 1,288 1,716 2,009 Current Liab. & Prov. 1,903 2,292 1,656 1,805 2,010 Adjusted Net Profit 835 1,178 1,288 1,716 2,009 Current Liabilities 1,181 1,145 1,313 1,461 1,667 Net Margin 12.3% 15.8% 14.6% 16.4% 16.4% Provisions & Others 721 1,147 344 344 344 Diluted Share Cap. (mn) 48.9 48.9 48.9 48.9 48.9 Net Current Assets 2,868 2,302 3,813 4,212 4,865 Diluted EPS (INR) 17.1 24.1 26.3 35.1 41.1 Total – Assets 7,640 8,783 9,640 10,834 12,250 Diluted EPS Growth 52.9% 40.9% 9.3% 33.2% 17.1% Source: Company, JM Financial Total Dividend + Tax 205 340 317 422 494 Dividend Per Share (INR) 4.2 7.0 6.5 8.6 10.1 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 1,156 1,840 1,883 2,312 2,747 Net Margin 12.3% 15.8% 14.6% 16.4% 16.4% Depn. & Amort. 201 165 274 305 336 Asset Turnover (x) 0.9 0.9 0.9 1.0 1.0 Net Interest Exp. / Inc. (-) -245 -306 -332 -374 -412 Leverage Factor (x) 1.2 1.2 1.2 1.1 1.1 Inc (-) / Dec in WCap. -51 825 -1,090 -342 -271 RoE 13.5% 16.7% 15.8% 18.5% 18.8% Others 0 0 0 0 0 Taxes Paid -321 -456 -629 -680 -806 Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E Operating Cash Flow 740 2,068 106 1,221 1,593 Capex -341 -1,694 880 -600 -600 BV/Share (INR) 132.0 156.2 176.1 202.5 233.5 Free Cash Flow 399 374 986 621 993 ROIC 13.8% 17.1% 17.5% 22.0% 24.2% Inc (-) / Dec in Investments 14 -184 -500 -500 -500 ROE 13.5% 16.7% 15.8% 18.5% 18.8% Others -468 0 0 0 0 Net Debt/Equity (x) 0.0 -0.1 -0.1 -0.1 -0.2 Investing Cash Flow -795 -1,878 380 -1,100 -1,100 P/E (x) 37.6 26.7 24.4 18.3 15.7 Inc / Dec (-) in Capital 0 0 0 0 0 P/B (x) 4.9 4.1 3.7 3.2 2.8 Dividend + Tax thereon 29 -34 15 -48 -82 EV/EBITDA (x) 26.8 19.6 16.4 13.3 11.1 Inc / Dec (-) in Loans 204 -113 -100 -100 -100 EV/Sales (x) 4.6 4.1 3.5 2.9 2.4 Others -171 148 34 83 70 Debtor days 81 66 67 65 63 Financing Cash Flow 61 1 -51 -64 -112 Inventory days 41 55 55 54 53 Inc / Dec (-) in Cash 6 191 435 57 381 Creditor days 62 58 59 56 56 Opening Cash Balance 281 287 481 916 973 Source: Company, JM Financial Closing Cash Balance 287 477 916 973 1,355 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 30 Navin Fluorine 28 September 2017
History of Earnings Estimate and Target Price Recommendation History % FY19E EPS % Target % Date FY18E EPS (INR) Chg. (INR) Chg. Price Chg. Navin Fluorine 800 4-May-17 28.3 35.0 700 B B 700 27-Jul-17 26.3 -6.9 35.1 0.3 700 0.0 600 500 400 300 200 100 0
Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17
Target Price Navin Fluorine
JM Financial Institutional Securities Limited Page 31 28 September 2017 India | Chemicals | Company Update
PI Industries | HOLD Robust business model but near-term headwinds persist
After strong growth until mid-FY17 with CAGR of 43% over FY12-16, PI Industries’ CSM Mehul Thanawala [email protected] | Tel: (91 22) 66303063 business started slowing down due to the weak global agrochemical environment. This led to Pramod Krishna order deferrals by some key customers. In the domestic segment, weak monsoons in FY16 [email protected] | Tel: (91 22) 61781074 and FY17 as well as price erosion for one of its key products hurt revenues. Going forward, Alok Ranjan our long-term view of the stock remains positive backed by (i) the company’s strong order [email protected] | (+91 22) 6630 3073 book of USD 1bn in the CSM business with execution visibility of 3-4 years and (ii) a strong product portfolio in the domestic business with new product launches lined up, including the recent tie-up with BASF. However, there is near-term weakness due to the following: (i) while management has guided for a revival in CSM from 2HFY18, strong positive commentary is yet to come from key global innovators and (ii) the monsoon is missing expectations in India, Recommendation and Price Target with significant deficits key states and an overall uneven distribution of rainfall. Therefore, we Current Reco. HOLD maintain a HOLD rating on the stock with a TP of INR 750. We highlight that indications of Previous Reco. HOLD Current Price Target (12M) 750 revival in either of its segments would be key monitorables and positive triggers for the stock. Upside/(Downside) 0.0% CSM order book to help sustain growth momentum: Growth in the CSM segment Previous Price Target 750 entirely depends on the company’s relationships with global innovators and respect for Change 0.0%
IPR. PI has developed relationships over the years, and so, we expect PI to record a growth Key Data – PI IN rate of 18-20% from FY19-21 (assuming there will be a revival in this segment) and its Current Market Price INR750 market share in global agrochemical CRAMS to increase from 4% currently to 6-8% by Market cap (bn) INR103.2/$1.6 FY25. The CSM business has a fragmented market and over the years, several new players Free Float 41.7% have entered this segment. Hence, we believe very few companies in CSM will reach Shares in issue (mn) 137.59 Diluted share (mn) double-digit market share. PI has also announced that it is evaluating its entry in the 137.59 3-mon avg daily val (mn) INR167.7/US$2.6 pharma CSM segment; however, given the limited visibility, we do not include any 52-week range 964/674 potential revenue from the pharma CSM segment in our model. We note that a Sensex/Nifty 31,160/9,736 successful pharma CSM entry could provide a potential upside. INR/US$ 65.7
New product launches to determine growth outlook for domestic business: With Price Performance increasing competition for the herbicide Nominee Gold, PI’s future growth will be % 1M 6M 12M determined by new launches. PI already has a strong portfolio of in-licenced molecules, Absolute 3.0 -12.3 -9.9 Relative* 4.3 -18.9 -20.3 wherein it collaborates with global agrochemical companies for the manufacture and * To the BSE Sensex distribution of proprietary products in PI’s brand name. PI has further strengthened this
with a tie-up with BASF for the launch of 4 new 9(3) molecules in India, of which 3 were launched in 1Q18. CIBRC recently announced new guidelines, under which if a molecule has already been registered for indigenous manufacturing in formulation, its import will be subject to specific quantity permissions (SQPs). Bispyribac Sodium is the chemical name for PI’s blockbuster product Nominee Gold and PI used to import the formulation and could have been subject to SQP. However, it has now tied up with Kumiai Chemicals for the manufacture of Nominee Gold India, thus mitigating the risk.
HOLD with TP of INR 750: We forecast sales/EBITDA/PAT CAGR of 16%/16%/15% for FY18-20 and value PI at 19x Sep’18E EPS to arrive at a TP of INR 750. We have a HOLD rating on the stock.
Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 20,963 22,764 24,906 29,083 33,619 Sales Growth (%) 8.3 8.6 9.4 16.8 15.6 EBITDA 4,294 5,505 5,985 7,000 8,037 EBITDA Margin (%) 20.5 24.2 24.0 24.1 23.9 JM Financial Research is also available on: Adjusted Net Profit 3,097 4,573 4,450 5,041 5,849 Bloomberg - JMFR
JM Financial Institutional Securities Limited PI Industries 28 September 2017
Financial Tables (Standalone )
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 20,963 22,764 24,906 29,083 33,619 Shareholders’ Fund 11,547 16,089 19,626 23,506 28,298 Sales Growth 8.3% 8.6% 9.4% 16.8% 15.6% Share Capital 137 138 138 138 138 Other Operating Income 0 0 0 0 0 Reserves & Surplus 11,410 15,951 19,489 23,368 28,160 Total Revenue 20,963 22,764 24,906 29,083 33,619 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 11,583 11,631 12,600 14,685 16,941 Minority Interest 0 0 0 0 0 Personnel Cost 1,914 2,204 2,524 3,023 3,583 Total Loans 1,244 830 0 0 0 Other Expenses 3,172 3,425 3,797 4,375 5,058 Def. Tax Liab. / Assets (-) 375 -179 -179 -179 -179 EBITDA 4,294 5,505 5,985 7,000 8,037 Total - Equity & Liab. 13,166 16,739 19,447 23,327 28,118 EBITDA Margin 20.5% 24.2% 24.0% 24.1% 23.9% Net Fixed Assets 9,430 10,201 10,933 11,563 12,091 EBITDA Growth 16.0% 28.2% 8.7% 17.0% 14.8% Gross Fixed Assets 9,192 10,584 12,084 13,584 15,084 Depn. & Amort. 537 727 768 870 972 Intangible Assets 174 264 264 264 264 EBIT 3,756 4,778 5,217 6,130 7,066 Less: Depn. & Amort. 523 1,230 1,998 2,868 3,840 Other Income 349 358 364 416 630 Capital WIP 587 584 583 583 583 Finance Cost 96 72 19 0 0 Investments 11 840 1,839 3,839 6,839 PBT before Excep. & Forex 4,009 5,064 5,562 6,546 7,695 Current Assets 9,908 11,611 13,092 15,363 17,749 Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 3,948 4,320 4,813 5,620 6,496 PBT 4,009 5,064 5,562 6,546 7,695 Sundry Debtors 3,978 4,237 4,570 5,177 5,800 Taxes 912 491 1,112 1,506 1,847 Cash & Bank Balances 443 1,212 1,841 2,594 3,367 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 328 591 618 722 834 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 1,212 1,251 1,251 1,251 1,251 Reported Net Profit 3,097 4,573 4,450 5,041 5,849 Current Liab. & Prov. 6,183 5,912 6,418 7,439 8,562 Adjusted Net Profit 3,097 4,573 4,450 5,041 5,849 Current Liabilities 3,664 2,881 3,961 4,623 5,356 Net Margin 14.8% 20.1% 17.9% 17.3% 17.4% Provisions & Others 2,520 3,032 2,457 2,816 3,206 Diluted Share Cap. (mn) 137.9 137.7 137.7 137.7 137.7 Net Current Assets 3,725 5,698 6,674 7,924 9,187 Diluted EPS (INR) 22.5 33.2 32.3 36.6 42.5 Total – Assets 13,166 16,739 19,447 23,326 28,118 Diluted EPS Growth 34.2% 48.0% -2.7% 13.3% 16.0% Source: Company, JM Financial Total Dividend + Tax 511 663 912 1,161 1,057 Dividend Per Share (INR) 3.1 4.0 5.5 7.0 6.4 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 4,009 5,064 5,562 6,546 7,695 Net Margin 14.8% 20.1% 17.9% 17.3% 17.4% Depn. & Amort. -1,154 707 768 870 972 Asset Turnover (x) 1.8 1.5 1.3 1.3 1.3 Net Interest Exp. / Inc. (-) -253 -286 -345 -416 -630 Leverage Factor (x) 1.2 1.1 1.0 1.0 1.0 Inc (-) / Dec in WCap. 168 -1,205 -347 -497 -490 RoE 30.4% 33.1% 24.9% 23.4% 22.6% Others 0 0 0 0 0 Taxes Paid -903 -1,045 -1,112 -1,506 -1,847 Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E Operating Cash Flow 1,867 3,236 4,526 4,998 5,701 Capex -1,647 -1,478 -1,500 -1,500 -1,500 BV/Share (INR) 84.5 116.9 142.6 170.7 205.5 Free Cash Flow 220 1,758 3,026 3,498 4,201 ROIC 26.3% 31.7% 27.1% 28.6% 30.5% Inc (-) / Dec in Investments 10 -824 -1,000 -2,000 -3,000 ROE 30.4% 33.1% 24.9% 23.4% 22.6% Others 484 989 364 416 630 Net Debt/Equity (x) 0.1 0.0 -0.1 -0.1 -0.1 Investing Cash Flow -1,153 -1,313 -2,136 -3,084 -3,870 P/E (x) 33.5 22.6 23.2 20.5 17.7 Inc / Dec (-) in Capital 0 0 0 0 0 P/B (x) 8.9 6.4 5.3 4.4 3.7 Dividend + Tax thereon -511 -663 -912 -1,161 -1,057 EV/EBITDA (x) 24.3 18.8 17.0 14.4 12.5 Inc / Dec (-) in Loans 1 -487 -848 0 0 EV/Sales (x) 5.0 4.5 4.1 3.5 3.0 Others 0 0 0 0 0 Debtor days 69 68 67 65 63 Financing Cash Flow -510 -1,150 -1,761 -1,161 -1,057 Inventory days 69 69 71 71 71 Inc / Dec (-) in Cash 203 773 629 753 774 Creditor days 80 61 76 76 76 Opening Cash Balance 239 439 1,212 1,841 2,594 Source: Company, JM Financial Closing Cash Balance 443 1,212 1,841 2,594 3,367 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 33 PI Industries 28 September 2017
History of Earnings Estimate and Target Price Recommendation History FY18E FY19E Target Date % Chg. % Chg. % Chg. EPS (INR) EPS (INR) Price PI Industries 11-Jan-16 31.4 725 1000 900 H H H 16-Feb-16 30.4 -3.2 700 -3.4 H 800 H H H H 25-May-16 31.6 3.9 700 0.0 700 28-Jul-16 32.8 3.8 700 0.0 600 500 27-Oct-16 32.9 0.3 40.3 810 15.7 400 16-Feb-17 33.4 1.5 39.5 -2.0 830 2.5 300 17-May-17 38.6 15.6 43.4 9.9 810 -2.4 200 15-Aug-17 32.3 -16.3 36.6 -15.7 750 -7.4 100 0 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
Target Price PI Industries
JM Financial Institutional Securities Limited Page 34 28 September 2017 India | Chemicals | Company Update
SRF Ltd | BUY Ready to leverage its specialisation in Chemistry
SRF, a multi-business entity, has evolved from manufacturing tyre cord fabrics to developing Mehul Thanawala [email protected] | Tel: (91 22) 66303063 advanced fluorine-based intermediates and refrigerant gases (HFC-134a). This business shift, Pramod Krishna coupled with increased capital allocation to fluoro-specialties, has led to renewed revenue [email protected] | Tel: (91 22) 61781074 potential. Over the past few quarters, the weak global agrochemicals scenario led to lower- Alok Ranjan than-estimated growth in the specialty chemicals segment. However, recent management [email protected] | (+91 22) 6630 3073 guidance indicates a revival in the segment by end-FY18 on the back of reduced global inventory levels and new molecule developments. We therefore believe that the substantial capex incurred by SRF in its specialty chemicals segment would now start yielding results. This will also lead to margin expansions, aided by operating leverage and higher revenue contribution of the high-margin specialty chemicals business. In the interim, we expect SRF’s Recommendation and Price Target R-134a (in which it is the market leader) and technical textile businesses (key player in NTCF) Current Reco. BUY to provide growth support. We have a BUY rating on the stock with a TP of INR 1670. Previous Reco. BUY Current Price Target (12M) 1,670 New capex to drive growth: The Company has increasingly focused on expanding its Upside/(Downside) 9.7% specialty chemicals segment and for FY18, of the INR 10bn capex announced, c.70% has Previous Price Target 1,670 been allocated towards specialty chemicals. Of this, SRF expects to spend INR 700mn on Change 0.0%
its CGMP pharma plant, INR 1.8bn on a multi-purpose plant for the manufacture of Key Data – SRF IN agrochemicals AI for a specific customer and INR 850mn for the production of a molecule Current Market Price INR1522 (P-33) for the agrochemical industry in FY18. This focus on the specialty chemicals Market cap (bn) INR87.4/$1.3 segment, despite a challenging environment, will pay off when the environment Free Float 32.4% improves. It also indicates management’s strong confidence of a revival in the segment. Shares in issue (mn) 57.42 Diluted share (mn) SRF has announced a capex of c.INR 2.5bn to set up a 35,000MT BOPP film 57.42 3-mon avg daily val (mn) INR272.3/US$4.1 manufacturing plant in Indore. The plant is likely to be commissioned in 4QFY18 and 52-week range 1970/1351 generate 1.0x-1.3x asset turnover at full capacity utilisation. Sensex/Nifty 31,160/9,736 INR/US$ 65.7 Ref-gas to continue providing support; TTB remains a cash cow: SRF is the only domestic
manufacturer of 1,1,1,2-tetrafluoroethane (HFC-134a), a refrigerant gas with significantly Price Performance lower ozone depletion potential vs. other similar gases and no immediate commercially % 1M 6M 12M viable substitute visible. SRF increased its production capacity of HFC-134a from 5,000MT Absolute 4.9 -5.0 -13.8 to 12,500MT. Current demand for HFC-134a in India is c.8000MT, but export potential is Relative* 6.3 -11.6 -24.2 * To the BSE Sensex significantly high. In 2015, SRF acquired the brand ‘DYMEL’ and the process to make pharma-grade HFC-134a, which offers higher realisations at USD8/kg compared with USD5/kg for industrial grade. Therefore, not only will the refrigeration gas volume increase, but the realisation will also improve. SRF is also engaged in the manufacture of technical textiles (TTB), which primarily comprises tyre cord, belting, coated and laminated fabrics. The TTB segment has been generating FCF of INR2.0-2.5bn annually and will help invest into growing the businesses. BUY with TP of INR 1670: We forecast revenue/EBITDA/PAT CAGR of 13%/15%/19% for FY17-20 and value the specialty chemicals business at 10x, refrigerant gases at 8x and the remaining business at 6x EV/EBITDA to arrive at a TP of INR 1670. Key risks to our call are (i) a continued slowdown in agrochemicals and (ii) INR appreciation (management has indicated that a 1 INR appreciation against the USD would negatively impact SRF by c.INR150-200mn). Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 45,234 47,394 51,439 58,688 67,737 Sales Growth (%) 0.7 4.8 8.5 14.1 15.4 EBITDA 9,728 9,694 9,810 12,656 14,790 EBITDA Margin (%) 21.2 20.1 18.8 21.2 21.5 JM Financial Research is also available on: Adjusted Net Profit 4,299 5,150 4,753 6,857 8,686 Bloomberg - JMFR
JM Financial Institutional Securities Limited SRF Ltd 28 September 2017
Financial Tables (Consolidated )
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 45,234 47,394 51,439 58,688 67,737 Shareholders’ Fund 27,630 31,827 35,894 41,760 49,192 Sales Growth 0.7% 4.8% 8.5% 14.1% 15.4% Share Capital 584 584 584 584 584 Other Operating Income 693 824 870 957 1,053 Reserves & Surplus 27,045 31,242 35,309 41,176 48,607 Total Revenue 45,927 48,218 52,310 59,645 68,790 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 22,785 23,892 26,232 30,069 34,140 Minority Interest 0 0 0 0 0 Personnel Cost 3,863 4,338 4,707 5,130 5,592 Total Loans 21,297 19,774 17,774 12,774 8,774 Other Expenses 9,551 10,294 11,561 11,790 14,268 Def. Tax Liab. / Assets (-) 2,523 2,840 2,840 2,840 2,840 EBITDA 9,728 9,694 9,810 12,656 14,790 Total - Equity & Liab. 51,450 54,441 56,508 57,374 60,806 EBITDA Margin 21.2% 20.1% 18.8% 21.2% 21.5% Net Fixed Assets 42,300 46,635 48,362 45,043 45,564 EBITDA Growth 35.6% -0.4% 1.2% 29.0% 16.9% Gross Fixed Assets 70,083 75,977 79,977 82,977 86,977 Depn. & Amort. 2,750 2,834 2,879 3,319 3,479 Intangible Assets 49 49 49 49 49 EBIT 6,979 6,860 6,931 9,337 11,311 Less: Depn. & Amort. 29,950 32,784 35,663 38,982 42,461 Other Income 175 730 560 761 1,148 Capital WIP 2,117 3,393 4,000 1,000 1,000 Finance Cost 1,305 1,018 889 575 395 Investments 1,649 1,959 1,959 1,959 7,959 PBT before Excep. & Forex 5,849 6,572 6,602 9,523 12,064 Current Assets 20,291 20,991 23,247 28,843 27,143 Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 6,711 8,381 6,342 7,236 8,351 PBT 5,849 6,572 6,602 9,523 12,064 Sundry Debtors 5,145 6,569 5,919 6,753 7,794 Taxes 1,551 1,422 1,849 2,667 3,378 Cash & Bank Balances 3,892 961 5,907 9,775 5,918 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 115 143 143 143 143 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 4,428 4,937 4,937 4,937 4,937 Reported Net Profit 4,299 5,150 4,753 6,857 8,686 Current Liab. & Prov. 12,789 15,143 17,060 18,470 19,859 Adjusted Net Profit 4,299 5,150 4,753 6,857 8,686 Current Liabilities 7,364 8,388 10,305 11,715 13,104 Net Margin 9.4% 10.7% 9.1% 11.5% 12.6% Provisions & Others 5,425 6,755 6,755 6,755 6,755 Diluted Share Cap. (mn) 57.4 57.4 57.4 57.4 57.4 Net Current Assets 7,502 5,848 6,187 10,372 7,283 Diluted EPS (INR) 74.9 89.7 82.8 119.4 151.3 Total – Assets 51,451 54,441 56,508 57,375 60,806 Diluted EPS Growth 42.0% 19.8% -7.7% 44.2% 26.7% Source: Company, JM Financial Total Dividend + Tax 678 744 687 990 1,255 Dividend Per Share (INR) 9.8 10.6 9.8 14.1 17.8 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 5,849 6,572 6,602 9,523 12,064 Net Margin 9.4% 10.7% 9.1% 11.5% 12.6% Depn. & Amort. 2,750 2,834 2,879 3,319 3,479 Asset Turnover (x) 0.9 0.9 0.9 1.0 1.1 Net Interest Exp. / Inc. (-) -175 -730 -560 -761 -1,148 Leverage Factor (x) 2.1 1.9 1.7 1.5 1.4 Inc (-) / Dec in WCap. 4,809 -1,277 4,606 -318 -768 RoE 17.0% 17.3% 14.0% 17.7% 19.1% Others 0 0 0 0 0 Taxes Paid -1,551 -1,422 -1,849 -2,667 -3,378 Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E Operating Cash Flow 11,682 5,977 11,679 9,097 10,249 Capex -4,725 -5,893 -4,000 -3,000 -4,000 BV/Share (INR) 472.8 544.6 614.2 714.6 841.7 Free Cash Flow 6,957 84 7,679 6,097 6,249 ROIC 11.6% 11.7% 10.6% 15.2% 18.7% Inc (-) / Dec in Investments -1,076 -1,276 -607 3,000 0 ROE 17.0% 17.3% 14.0% 17.7% 19.1% Others -553 7 0 0 -3,000 Net Debt/Equity (x) 0.6 0.5 0.3 0.0 0.0 Investing Cash Flow -6,354 -7,162 -4,607 0 -7,000 P/E (x) 20.5 17.1 18.5 12.8 10.1 Inc / Dec (-) in Capital 1,045 -209 0 0 0 P/B (x) 3.2 2.8 2.5 2.1 1.8 Dividend + Tax thereon -678 -744 -687 -990 -1,255 EV/EBITDA (x) 10.6 10.8 9.9 7.0 5.8 Inc / Dec (-) in Loans -3,052 -1,523 -2,000 -5,000 -4,000 EV/Sales (x) 2.2 2.2 1.9 1.5 1.2 Others 175 730 560 761 1,148 Debtor days 41 50 41 41 41 Financing Cash Flow -2,509 -1,746 -2,127 -5,229 -4,106 Inventory days 53 63 44 44 44 Inc / Dec (-) in Cash 2,819 -2,931 4,946 3,868 -857 Creditor days 72 77 86 89 87 Opening Cash Balance 1,073 3,892 961 5,907 9,775 Source: Company, JM Financial Closing Cash Balance 3,892 961 5,907 9,775 8,918 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 36 SRF Ltd 28 September 2017
History of Earnings Estimate and Target Price Recommendation History FY18E FY19E Target Date % Chg. % Chg. % Chg. EPS (INR) EPS (INR) Price SRF Limited 4-Apr-16 101.5 1,450 2500 13-May-16 94.4 -7.0 1,380 -4.8 2000 B B B B 9-Aug-16 138.6 46.8 1,600 15.9 B B B 13-Nov-16 104.8 -24.4 139.7 1,760 10.0 1500 13-Feb-17 96.5 -7.9 139.6 -0.1 1,680 -4.5 1000 23-May-17 91.3 -5.4 135.5 -2.9 1,680 0.0 9-Aug-17 82.8 -9.3 119.4 -11.9 1,670 -0.6 500
0 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
Target Price SRF Limited
JM Financial Institutional Securities Limited Page 37 28 September 2017 India | Chemicals | Company Update
UPL Ltd | BUY A true Indian MNC
UPL has seen significant revenue growth over the past few years, making it outperform its Mehul Thanawala [email protected] | Tel: (91 22) 66303063 global peers, owing to 1) its balanced presence across geographies, product segments and Pramod Krishna crops; 2) its robust presence in high-growth countries such as Brazil and India (totalling 40% [email protected] | Tel: (91 22) 61781074 of revenues); 3) its presence across the value chain (R&D, registrations, manufacturing and Alok Ranjan marketing) with minimal dependence on outsourcing and 4) leveraging its global marketing [email protected] | (+91 22) 6630 3073 potential by launching the right products at the right time in a falling commodity price scenario. With global agrochemical players continuing to guide for near-term weakness, we expect UPL to continue outperforming the market. We highlight that UPL is in for a number of tailwinds in the coming quarter due to reversal of GST destocking, higher cotton acreages, a normal monsoon in India, improvement in agri-commodity prices in Brazil, higher sugar Recommendation and Price Target beet acreages in Europe, higher cotton acreages in North America and increased acceptance Current Reco. BUY of Glufosinate globally. We value UPL at 16x P/E and have a BUY rating on the stock, with a Previous Reco. BUY Current Price Target (12M) 950 TP of INR 950. Upside/(Downside) 23.4% Key growth triggers and strengths: (i) UPL has the approval and registration to Previous Price Target 950 indigenously manufacture 2 new products in the market (both combination products) Change 0.0%
named Mancozeb and Azoxystrobin; this could be a driver for revenue growth. (ii) The Key Data – UPLL IN company entered the biologicals segment in India, Africa, RO Asia and plans to introduce Current Market Price INR770 this in LATAM in FY18. For this, UPL will partner existing smaller players that manufacture Market cap (bn) INR391.2/$6.0 products with strong sales potential. Biologicals is the fastest-growing segment within Free Float 70.7% agrochemicals and is expected to reach USD 10bn in market size by 2020 (from USD 4bn Shares in issue (mn) 508.04 Diluted share (mn) currently). (iii) Herbicides became the largest segment for UPL (32% of revenues) in FY17. 508.04 3-mon avg daily val (mn) INR968.1/US$14.7 With growing weed resistance globally (weeds have developed resistance to 23 of 26 52-week range 903/584 known herbicide sites of action), the need for quality herbicides is increasing. UPL has a Sensex/Nifty 31,160/9,736 strong herbicide portfolio with products such as Lifeline and Interline in the US (weeds INR/US$ 65.7
have become resistant to Paraquat and these UPL products are a substitute for Paraquat) Price Performance and Shagun in India (targeting Phalaris minor in wheat). % 1M 6M 12M Absolute -7.6 6.1 12.6 Recent management commentary: (i) Management gave guidance of 12-15% revenue Relative* -6.2 -0.5 2.2 growth, 50-75bps improvement in margins, 20-22% tax rate, 90-110 days working * To the BSE Sensex capital and INR10bn of capex for the full-year FY18. Revenue growth is likely to be driven
by increased sugar beet acreages in Europe, the replacement of Paraquat with Glufosinate globally and an increase in cotton acreage in India and USA. (ii) Management expects commodity prices to remain depressed in FY18, thereby continuing to benefit generics companies. (iii) Global industry consolidation could result in merged companies focusing on consolidation/restructuring over the next 2-3 years, which could benefit companies such as UPL and allow it to capture further market share.
Revise TP to INR 950; maintain BUY: We value UPL at 16x FY19E EPS (peer average) and forecast FY17-19 revenue/earnings CAGR of 16%/22%. We roll forward to Sep’18 to arrive at a TP of INR 950. Key risks to our call are (i) currency fluctuations, especially a fall in the BRL, (ii) a rise in crude prices/technical prices and (iii) climatic vagaries.
Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291 Sales Growth (%) 16.2 16.1 14.9 16.2 17.2 EBITDA 23,950 29,852 37,290 44,430 53,356 EBITDA Margin (%) 17.0 18.3 19.9 20.4 20.9 JM Financial Research is also available on: Adjusted Net Profit 10,512 18,002 21,106 26,781 33,655 Bloomberg - JMFR
JM Financial Institutional Securities Limited UPL Ltd 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291 Shareholders’ Fund 58,881 73,158 90,599 1,13,410 1,43,094 Sales Growth 16.2% 16.1% 14.9% 16.2% 17.2% Share Capital 857 1,014 1,014 1,014 1,014 Other Operating Income 0 0 0 0 0 Reserves & Surplus 58,024 72,144 89,585 1,12,396 1,42,080 Total Revenue 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291 Preference Share Capital 0 0 0 0 0 Cost of Goods Sold/Op. Exp 67,805 78,162 89,197 1,03,670 1,21,519 Minority Interest 438 330 1,129 2,141 3,414 Personnel Cost 14,335 16,269 17,802 20,690 24,253 Total Loans 48,230 61,398 56,400 53,900 56,400 Other Expenses 34,392 38,835 43,100 49,004 56,164 Def. Tax Liab. / Assets (-) -5,093 -6,701 -6,701 -6,701 -6,701 EBITDA 23,950 29,852 37,290 44,430 53,356 Total - Equity & Liab. 1,02,456 1,28,186 1,41,427 1,62,751 1,96,208 EBITDA Margin 17.0% 18.3% 19.9% 20.4% 20.9% Net Fixed Assets 45,212 50,367 56,813 66,211 74,811 EBITDA Growth 1.6% 24.6% 24.9% 19.1% 20.1% Gross Fixed Assets 60,723 69,504 77,807 89,788 1,01,304 Depn. & Amort. 6,756 6,716 6,074 7,092 7,808 Intangible Assets 7,636 7,517 7,517 7,517 7,517 EBIT 17,194 23,136 31,216 37,338 45,548 Less: Depn. & Amort. 26,272 32,987 34,844 37,427 40,343 Other Income 3,157 4,436 2,712 3,386 3,814 Capital WIP 3,125 6,333 6,333 6,333 6,333 Finance Cost 7,041 7,351 7,309 6,844 6,844 Investments 1,603 2,050 2,050 2,050 2,050 PBT before Excep. & Forex 13,311 20,222 26,620 33,881 42,518 Current Assets 1,17,954 1,44,685 1,60,657 1,85,313 2,26,004 Excep. & Forex Inc./Loss(-) -1,291 -808 0 0 0 Inventories 37,866 41,559 51,339 59,670 69,943 PBT 12,020 19,414 26,620 33,881 42,518 Sundry Debtors 51,002 56,568 64,174 74,587 87,429 Taxes 1,648 1,888 4,525 5,897 7,400 Cash & Bank Balances 11,892 28,940 27,525 33,438 51,014 Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 4,558 3,444 3,444 3,444 3,444 Assoc. Profit/Min. Int.(-) 974 253 989 1,203 1,463 Other Current Assets 12,637 14,175 14,175 14,175 14,175 Reported Net Profit 9,398 17,273 21,106 26,781 33,655 Current Liab. & Prov. 62,312 68,916 78,092 90,823 1,06,657 Adjusted Net Profit 10,512 18,002 21,106 26,781 33,655 Current Liabilities 45,970 54,896 62,164 71,268 82,496 Net Margin 7.5% 11.0% 11.3% 12.3% 13.2% Provisions & Others 16,342 14,020 15,929 19,555 24,161 Diluted Share Cap. (mn) 509.4 509.2 509.2 509.2 509.2 Net Current Assets 55,642 75,769 82,564 94,489 1,19,348 Diluted EPS (INR) 20.6 35.4 41.4 52.6 66.1 Total – Assets 1,02,456 1,28,186 1,41,427 1,62,751 1,96,208 Diluted EPS Growth -23.3% 71.3% 17.2% 26.9% 25.7% Source: Company, JM Financial Total Dividend + Tax 2,140 2,170 3,665 3,970 3,970 Dividend Per Share (INR) 5.0 4.2 6.0 6.5 6.5 Source: Company, JM Financial
Cash Flow Statement (INR mn) Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 13,311 20,222 26,620 33,881 42,518 Net Margin 7.5% 11.0% 11.3% 12.3% 13.2% Depn. & Amort. 6,756 6,716 1,857 2,582 2,916 Asset Turnover (x) 1.3 1.3 1.3 1.3 1.3 Net Interest Exp. / Inc. (-) 7,041 7,351 7,309 6,844 6,844 Leverage Factor (x) 1.8 1.9 1.8 1.6 1.5 Inc (-) / Dec in WCap. -5,342 -4,687 -8,211 -6,012 -7,282 RoE 17.9% 27.3% 25.8% 26.3% 26.2% Others -1,371 -2,648 -1,690 -2,364 -2,792 Taxes Paid -4,092 -1,888 -4,525 -5,897 -7,400 Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E Operating Cash Flow 16,303 25,065 21,359 29,034 34,805 Capex -9,538 -11,871 -8,303 -11,981 -11,516 BV/Share (INR) 137.4 144.3 178.7 223.7 282.2 Free Cash Flow 6,765 13,195 13,056 17,053 23,288 ROIC 17.6% 21.1% 23.3% 24.4% 26.5% Inc (-) / Dec in Investments 332 -447 0 0 0 ROE 17.9% 27.3% 25.8% 26.3% 26.2% Others -7,405 1,480 1,500 2,174 2,602 Net Debt/Equity (x) 0.6 0.4 0.3 0.2 0.0 Investing Cash Flow -16,610 -10,838 -6,803 -9,807 -8,914 P/E (x) 38.0 22.2 18.9 14.9 11.9 Inc / Dec (-) in Capital 0 157 0 0 0 P/B (x) 5.7 5.4 4.4 3.5 2.8 Dividend + Tax thereon -2,134 -3,153 -3,665 -3,970 -3,970 EV/EBITDA (x) 18.2 14.5 11.5 9.5 7.6 Inc / Dec (-) in Loans 9,568 13,168 -4,998 -2,500 2,500 EV/Sales (x) 3.1 2.6 2.3 1.9 1.6 Others -5,333 -7,351 -7,309 -6,844 -6,844 Debtor days 133 127 125 125 125 Financing Cash Flow 2,101 2,821 -15,972 -13,314 -8,314 Inventory days 98 93 100 100 100 Inc / Dec (-) in Cash 1,794 17,049 -1,416 5,913 17,577 Creditor days 124 134 136 137 138 Opening Cash Balance 10,098 11,892 28,940 27,525 33,438 Source: Company, JM Financial Closing Cash Balance 11,892 28,940 27,525 33,438 51,014 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 39 UPL Ltd 28 September 2017
History of Earnings Estimate and Target Price Recommendation History FY18E FY19E Target Date % Chg. % Chg. % Chg. EPS (INR) EPS (INR) Price UPL Ltd. B 27-Nov-16 44.9 53.6 750 1000 B 900 26-Jan-17 44.1 -1.8 53.5 -0.2 750 0.0 B B 800 2-May-17 45.8 3.9 53.7 0.4 925 23.3 700 31-Jul-17 41.4 -9.6 52.6 -2.0 950 2.7 600 500
400 300 200 100 0 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
Target Price UPL Ltd.
JM Financial Institutional Securities Limited Page 40 28 September 2017 India | Colourants | Sector Report
Colourants
Selective focus to add colour to business The colourants industry has seen a notable transition globally with the manufacturing base Mehul Thanawala shifting from developed countries to Asia. Among Asian economies, India and China’s [email protected] | Tel: (91 22) 66303063 colourants industries have been major beneficies of this transition, becoming preferred Alok Ranjan suppliers to the global market. The transition was driven by the favourable factors such as [email protected] | (+91 22) 6630 3073 low labour, energy and regulation costs in these countries. In the last decade, we also saw a Pramod Krishna [email protected] | Tel: (91 22) 61781074 gradual transition from basic to specialty colourants chemicals on account of better margins and differentiation index of specialty colourants. The colourants industry is one of most polluting specialty chemicals industries, and thus, with reduced environmental arbitrage between India and China, and skilled employee costs favouring India in the long term, we believe the Indian specialty colourants industry looks stronger in the medium-to-long term. In this section, we present a detailed analysis on the Indian dyes and pigments industry and identify the high-value product groups (high-performance pigments and effect pigments) driving industry growth and enhancing overall margins. Growth in end-use industries boosting Indian colourants: Dyes and pigments are predominantly used in paints, coatings and textiles. The paints, coatings and textiles industries are expanding, with oders from rapidly-growing end-use industries such as automobiles, construction and fashion. We believe the govt.’s increased focus on housing will drive organic and inorganic pigments as these pigments (used in paints & coatings) are intrinsically linked to the growth of construction industry. End-use industries will benefit from strong economic growth and rising per capita income as well as increased discretionary spending. Exports another key driver: India’s colourants industry is highly fragmented, with several small companies in the commodities segment resulting in low profit margins. This has led to increased focus on high-performance pigments for value-added applications, largely catering to international markets. The industry has been a net exporter of dyes and pigments with exports constituting c.80% of domestic consumption. Despite the positive trade balance, the import value (INR/kg) for nearly 14 of 17 product groups is higher than the export. Thus, with increased penetration of new technology and focus on R&D, we believe there is enough room for Indian companies to foray into high-value colourants. Reduced environmental arbitrage between India and China: The colourants industry is the most polluting among speciality chemicals. Environmental crackdowns in China led to the shutdown of 375 polluting facilities in 2014, across manufacturing segments including dyes and textiles. Increasing regulatory compliance in China has forced small players out of the market. With excess capacity (67% utilisation) and compliance with international quality and environmental standards, we believe the Indian dyes and pigments industry will benefit in the short and long term. Import substitution between India and China will drive short-term benefits and increased sourcing diversification by importers will drive long-term benefits. Focus on high-margin HPPs & effect pigments to boost margins: HPPs and effect pigments lead to better performance, high margins and low environment impact. Indian pigment companies are moving from commodity pigments such as azo, blue and green pigments to HPPs and effect pigments, which is leading to improved margins. Sudarshan Chemicals is the only Indian company to operate in both these high-value pigments.
Increased R&D focus: Indian specialty chemicals companies are focussing on providing colour solutions rather than merely supplying colourants. This is leading to an increased focus towards providing integrated solutions to customers. Since structural factors favour JM Financial Research is also available on: Bloomberg - JMFR
JM Financial Institutional Securities Limited
Colourants 28 September 2017 1. Colourants 1.1Introduction It is difficult to say when colour itself was first developed, since even pre-historic caves have colour paintings; however, those were natural colours. The first synthetic colour was developed in 1856, when Perkin’s developed the first synthetic dye. This led to the birth of the European dyestuff industry, with these dyes being used as textile substrates. Colours add aesthetics to a variety of products (textiles, leather, paper, food, paints, cosmetics, data storage, medical diagnostics, etc.) and make them look attractive, increasing their ‘perceived’ value. While dyes and pigments per-se are basic chemicals, there are niches such as environment-friendly colourants and high-performance pigments, which give certain characteristics or performance enhancements and can be classified as specialty chemicals. In this report, we provide broad coverage of the colourants industry with special focus on specialty chemicals. Paints companies such Asian Paints are outside the purview of this report and the focus is only on dyes and pigments that are used to make masterbatches. 1.2Types of Colourants Colourants are broadly classified into dyes and pigments.
Exhibit 49. Classification of colourants
Source: FICCI-TSMG, JM Financial
Dyes: Dyes are aromatic organic compounds made primarily from Benzene, Toluene, Textiles, a major end-use industry, Naphthalene, Anthracene and Cyanuric chloride. Dyes are soluble substances that pass constitutes c.75% of the demand colour to the substrate. Their end-use industries include textiles, leather, paper, plastics, for dyes printing inks and edibles.
Exhibit 50. Dyes - Classification and its Application Group Application Azo Printing inks Exhibit a. Pigment application by segment Acid direct dyes Leather and woolen products Disperse dyes Synthetic fibers, Polyester Ingrain dyes Cotton Solvent dyes Colour organic solvents, hydrocarbon fuels, waxes, lubricants, plastics Reactive dyes Cellulosic fiber and fabric Sulphur dyes Cotton, cellulosic fiber VAT dyes Cotton, cellulosic and blended fiber
Source: Industry, JM Financial
Source: FICCI-TSMG, JM Financial Almost 75% of the dyes are used in the textile industry while c.20% are used in industries such as paper, adhesives, art supplies, food and beverages, ceramics, construction, cosmetics, glass and paints. Thus, the dye industry is primarily dependent on the textile industry. Dyes
JM Financial Institutional Securities Limited Page 42 Colourants 28 September 2017 can be further classified based on various criteria but the one used by the International Trade Commission (ITA) is the most followed. According to ITA, there are nearly 12 types of dyes. Among them, some are considered toxic/harmful and have been banned. Exhibit 50 Exhibit b.Pigments and its categories illustrates the major types of dyes and its applications. Types Categories
Pigments: Pigments are insoluble substances usually in powdered or granular form that Organic Quinacridone, Phthalocyanine, and improve the appearance or impart colour to the substrate by reflecting only certain light Azo rays due to selective wavelength absorption. Pigments are used to impart colour, hide the substrate, efface the existing colour and enhance the strength of the paint film. Pigments Inorganic Chromium oxide, Carbon black, are mainly used in industries such as paints & coatings (c.43%), plastics (c.27%) and Cadmium pigments, Iron oxide & Titanium pigments others such as inks, automobiles, emulsion paints and distempers (30%). Specialty Thermochromic, Fluorescent, Metallic & Light interference pigments Exhibit 51. Classification of pigments
Source: Company, Industry, JM Financial
Exhibit c. Organic pigments’ consumption by industry
5% 15%
20% 60%
Printing Inks Coatings Plastics Others
Source: FICCI-TSMG, JM Financial Source: IHS, JM Financial
Pigments can be broadly classified into organic and inorganic.
Organic Pigments (based on hydro-carbons): Organic pigments display brighter colours, Exhibit d. Volume split of inorganic colour higher colour strength, little toxicity and high resistance to weather and heat. Azo, pigments phthalocyanines (blue and green) and high-performance pigments (HPPs) are common organic pigments.. In terms of the global market share, azo/phthalocyanines/HPP & others accounts for 55%/20%/25% respectively.
Inorganic Pigments: Inorganic pigments are resistant to sunlight and chemical exposure and are more durable than organic pigments. Despite the durability, inorganic pigments are cheaper than organic pigments due to higher toxicity, duller colour and low tinting strength. For instance, export values of organic/inorganic pigments are c. INR 700/Kg/c.INR 100/Kg. (source: MoC&F).
Specialty pigments / High-Performance Pigments (HPPs): Specialty pigments/HPPs are characterised by effectiveness (technical performance), economy (benefits to the customer), ecology (environmental and toxicological safety) and higher margin (benefits to the companies). HPPs are used in automotive and engineering plastics segments. HPPs can be further segmented as organic and inorganic/metallic HPPs. As of 2015, organic Source: IHS, JM Financial
HPPs, which are more environment-friendly, had a higher market share that is expected to grow rapidly over the next five years. Companies focussing on HPPs will be preferred. Different HPP types & categories are listed below. High performance pigments and effect pigments – Better -Organic HPPs: Benzimidazolones, Quinacridones, Perylenes, Diketopyrrolopyrrole (DPP), realisations and lower competition Isoindolinone and Isoindoline -Inorganic HPPs: Bismuth Canadate, Cadmium Sulfide, Mixed Metal Oxides and Bismuth Ferrite.
JM Financial Institutional Securities Limited Page 43 Colourants 28 September 2017 2. Global colourants market - overview
The global colourants market transitioned from developed countries to Asia: Until the early 90s, USA, Europe and Japan used to contribute c.70% to global colourants’ production, but this has significantly fallen to below 50%, owing to factors such as increasing technology transfer, increased skilled labour costs, energy costs, effluent treatment costs, regulatory costs and growth in end-product demand. Global colourants market expected to grow at a moderate pace: The global market for colourants (comprising dyes, pigments and intermediates) was estimated at USD 45.2bn in FY15 and is expected to grow at a moderate pace of c.5% CAGR over FY15-FY20 to reach Global growth rate will remain USD 57.7bn. Growth has picked up marginally from an average CAGR of c.4.2% during moderate at c.5% CAGR over FY10-FY15. Of the USD 45.2bn, the pigment industry’s market size was c.USD 23bn. Growth FY15-20 in colourants will be led by the increasing use of specialty colourants, especially food colourants and hair colourants, and by the increasing demand for environment-friendly colourants. (source: markets&markets, PR Newswire, Meghmani annual reports).
Exhibit 52. Global colourants market (in USD bn)
Source: FICCI-TSMG, Markets & Markets, JM Financial Driven by increased purchasing power in developing markets and high-growing end-use segments such as food and hair colourants: On the back of strong growth in China and India, including infrastructure (and construction) growth, there is strong derived demand growth for pigments. Similarly, textiles being a labour intensive business moved to Asian countries and led to strong demand growth for dyes. Growth is also driven by rapidly expanding segments such as food (8.4% CAGR over FY10-15) and hair colour (9% CAGR over FY10- 15). Food and hair colour segments have seen rapid growth on account of increasing acceptance of processed food as well as changing fashion trends. There is a high link between colour and taste and most processed food loses its colour due to processing; thus colourants are facing increasing demand. Within this, the use of natural colourants is increasing. Some natural food colourants are carotenoids (used in dairy products – margarine and cheese), chlorophyll, anthocyanin (used for grapes, blueberries, and cranberries) and turmeric (added to mustard). High-performance colourants and niche products to drive future: Globally, textiles and construction industries will remain the major end-use industries for colourants, but demand for high-performance/environment-friendly colourants could grow faster. HPPs include both organic high-performance pigments and inorganic effect pigments. The global HPP demand was estimated at 162.8 kilo tons in 2015 with a market size of USD 4.56bn (Source: Globally, Food and hair colour will Sudarshan chemicals). The market is expected to post 3.81% CAGR in value terms and record high growth rate of 9% volume CAGR of 5.2% over FY15-FY21. Certain segments such as food colours and hair and 21% over FY17-FY21 colour could record CAGR of c.9% and 21% over FY17-FY21. Apart from that, the use of colourants in electronics (in LCDs, LEDs, solar cells and laser dyes) could also be an interesting niche. Therefore, companies that focus on high-performance/environment-friendly products could grow at a faster rate.
JM Financial Institutional Securities Limited Page 44 Colourants 28 September 2017 3. Indian colourants market - overview
Soon after the development of synthetic dyes in 1856, the Indian textile industry started using them. However, organic dyes were imported until the 1940s. India slowly emerged as the supplier of dyestuffs and intermediates, particularly in reactive, acid, direct and VAT dyes as well as some key intermediates. Indian colourants industry is growing at a double-digit pace: The value of the Indian colourants industry was estimated at c.USD 5.4bn in FY15 (Source: FICCI-TSMG). The industry recorded a CAGR of 10% over FY10-FY15 and is expected to continue to grow at 10-11% over FY15-FY20. The colourants industry is expected to record c.1.6x GDP growth led by high expected growth in end-use industries (1.86x GDP growth rate), low per-capita consumption (1/8th of Europe) and increasing production of high-value pigments such as HPPs and effect pigments. Growth is also likely to be led by exports, with nearly three product groups (azo dyes, pigment emulsion and reactive dyes) contributing c.72% of the exports by value (source: MoC&F). The installed capacity and production of colourants, as of CY16, was 452kT and 304kT, respectively (Exhibit 54). Exports contributed nearly 80% to total domestic consumption and c.15% to the global market, which reflects the growth potential of the overall industry.
Exhibit 53. Indian colourants Industry market size (USD bn)
Indian colourants industry expected to grow at 11% i.e. c.1.6 10% x India GDP growth rate over FY15-FY20E
Source: FICCI-TSMG, JM Financial
Exhibit 54. Indian dyes and pigments - Capacity and production (In 000’MT)
Impact of consolidation – Only 67% of the capacity utilised
Source: Ministry of chemicals and Fertilisers, JM Financial
JM Financial Institutional Securities Limited Page 45 Colourants 28 September 2017 Low per capita consumption & high growth in end-use industries key strengths: The per capita consumption of dyes in India/Europe/Japan is 50/400/300 grams, highlighting a domestic opportunity. Textiles is the largest consumer of dyestuffs and Asia is the fastest- growing textile market, with a CAGR of c.4% over FY10-15, followed by North America, Latin America and Western Europe. Therefore, it is not surprising that Asia leads dyestuff production both in terms of volume and value with a 42% share in global production; US/Europe contribute c.24% and 22%, respectively. Apart from textiles, printing inks, paints and plastics are the other segments driving growth in dyes/dye intermediates. On the pigments side, growth will be mainly driven by rising demand for paints and coatings from the construction industry, which is expected to grow at c.6% over FY15-20. Other segments driving demand for pigments are plastics, inks and cosmetics, which are expected to post low-double-digit growth in the domestic market and high-single-digit growth globally over FY15-20.
Exhibit 55. Dyes - Per capita consumption (In grams)
India has the lowest per capita dyes consumption among major chemical producing countries
Source: FICCI-TSMG, JM Financial
Exhibit 56. Growth rate of end-user industry (CAGR %, CY16-CY20E)
High expected growth rate of end- use industry – a key reason for high expected growth rate of colourants
Source: Industry, JM Financial
JM Financial Institutional Securities Limited Page 46 Colourants 28 September 2017 Exhibit 57. Indian dyes and pigments – Exports and Imports (‘000 'MT)
Source: Ministry of chemicals, JM Financial
Will lead to import substitution: During CY13-CY16, we imports rose by a meagre 1% YoY due to import substitution through a reduction in exports from a CAGR of 9% YoY (CY09- CY16) to 5% YoY (CY13-CY16). The major reason is environmental crackdowns in China that led to a shutdown of several domestic dye and pigment companies. This drove increased Indian colourants industry saw domestic sales by Indian companies, leading to a modest reduction in exports. The import substitution due to reduced implementation of stricter environmental laws in China could provide Indian manufacturers Chinese exports an opportunity to increase exports and gain global market share. Additionally, the export and import data (Source: Ministry of Chemicals & Fertilisers) of 17 dye and pigment product groups highlights that in the past 3 years, the growth rate of only two exported products is lower in comparison with 12 imported product groups, highlighting the reduction in imports. Increased focus on high-margin HPPs and effect pigments to drive margins: Since 80% of dyestuffs are commodities, duplication is easy and leads to reduced margins. However, in recent years, we have seen increasing attempts by major global manufacturers to move Companies with presence in HPPs towards the manufacture of specialised VAT dyes, HPPs, etc., which functions as specialty and effect pigments will be the products. Gradually, companies are focussing on the higher end of other dyes (eg. reactive most attractive dyes segment). The overall trend leans towards innovation, production range, quality and environment-friendly products.
JM Financial Institutional Securities Limited Page 47 Colourants 28 September 2017
4. Industry players and competitive analysis
The Indian colourants industry is highly fragmented and characterised by the co-existence of a small number of players in the organised sector (c.50 units) and a large number of small manufacturers (c.1000 units) in the unorganised sector. However, environmental concerns leading to the ban on certain dyes and pigments by developed countries, the set-up of effluent treatment plants and decreasing profitability have resulted in increasing consolidation among major industry players. However, this has led to low capacity utilisation at 67% owing to the exit of smaller players. Major domestic dyes and pigment companies are Atul Limited, Aarti Industries, Bodal chemicals, Kiri dyes, Clariant India, Sudarshan Chemicals, Meghmani Organics Ltd, Clariant India, Golchha pigments and Heubach India. Major global players are BASF SE (Germany), Clariant AG (Switzerland), Huntsman corporation (US), Lanxess AG (Germany) and Solvay SA (Belgium). The following table provides a snapshot of the major domestic and global colourants companies in India.
Exhibit 58. Snapshot of colourants companies (FY11-FY16) Revenue (FY16, Avg. Revenue Company Country Avg. EBITDA,% Avg. ROCE% Avg. ROE% in mn INR) Growth (CAGR %) Aarti Industries India 27796 14% 16% 25% 20%
Atul Limited India 25946 11% 14%% 22% 19%
Aksharchem India India 1877 17% 10% 26% 39%
Bodal Chemicals India 9099 10% 12% 5% 19%
Clariant India India 981 3.4% 9% 17.3% 13.5%
Meghmani Organics India 13559 5% 17% 8.4% 6.5%
Sudarshan Chemical India 13973 14% 11% 16% 18%
Asahi Songwon India 2239 4% 14% 17.6% 15.7%
Lily Group China 13627 12% 18% 18% 24%
Zhejiang Longs China 124211 16% 25% 17% 17%
Zhejiang Runtu China 43673 15% 28% 15% 14%
BASF SE Germany 796972 -2% 15% 18% 18.5%
Lanxess AG Germany 70275 0.12% 11% 9% 10%
Clariant AG Switzerland 398873 6% 12% 13% 7%
Solvay SA Belgium 161893 12% 16% 7% 5%
Huntsman corporation US 648824 4% 10% 9.5% 15%
Source: Bloomberg, Company, JM Financial
Among Indian companies engaged in the manufactur of dyes (Exhibit 58), Aksharchem is the leader in terms of superior financials compared to its competitiors. Aksharchem is the largest Aksharchem is a true colourant exporter of Vinyl Sulphone in India with c.45% share in exports of this product. However, it is company with presence in both also the largest player globally for CPC green pigments, with a global market share of c.10%. dyes (60%) and pigments (40%) Within the pigments segment, we have tried to identify the companies present in the high- margin organic pigment segment vs. inorganic. Companies with a product-mix tilted towards high-margin organic pigments such as high-performance pigments and effect pigments will see better margins. There is an excess capacity for the manufacture of pigments worldwide, resulting in lower margins, and thus companies that manufacture and trade in high-margin organic pigments such as high-performance pigments and inorganic effect pigments will be highly attractive. HPP’s and effect pigments are specialty pigments that can be used in automobiles and cosmetics.
JM Financial Institutional Securities Limited Page 48 Colourants 28 September 2017 Exhibit 59. High-value pigments - Indian companies High value pigments Company % Revenue
Organic pigments ( including HPP & effect pigments) Sudarshan chemicals 70%
Organic pigments Meghmani Organics 34%
Organic Pigments Asahi Songwon 100%
Organic Pigments Clariant India 90%
Source: Company, Industry, Bloomberg, JM Financial
Exhibit 60. Presence of Indian companies across the pigment chain Pigment Group Pigment type Companies
Inorganic Pigments
Titanium Dioxide Black & White Sudarshan Chemicals is the only Carbon Black Indian company making both Iron Oxide Sudarshan Chemicals high-performance pigments and Colour Chrome Oxide effect pigments
Chroma Pigments High performance inorganic Effect Pigments Sudarshan Chemicals pigments Organic Pigments
Azos Sudarshan Chemicals, Low-Medium Value Sudarshan Chemicals, Meghmani Pthalos Organics, Asahi Songwon, Clariant, Aksharchem High-value High Performance Pigments Sudarshan Chemicals
Source: Company, JM Financial
Exhibit 59 and 60 highlight the dominance of Sudarshan Chemicals in the pigments value chain. It is the only company that operates across various categories of organic pigments. Sudarshan Chemicals is the only Indian company to manufacture and sell effect pigments, which are specialty pigments used in cosmetics. Sudarshan Chemicals garnered c.90% of its revenue from pigments in FY17. Other notable companies are Meghmani Organics, Asahi Songwon and Clariant India.
Exhibit 61. Competitive dynamics of Indian colourants companies
Aarti Industries delivered the best revenue growth and EBITDA margin over FY11-FY16
Source: Company, JM Financial
Exhibit 61 highlights the companies with high average revenue growth and EBITDA margins (%), namely Aarti, Atul, Sudarshan Chemicals and Aksharchem.
JM Financial Institutional Securities Limited Page 49 Colourants 28 September 2017 Exhibit 62. Valuation metrics for colourants companies – based on consensus Company Country EPS P/E EV/EBITDA FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E Aarti Industries India 30.8 38.5 42.6 54.9 16.7x 19.9x 19.9x 15.4x 9.8x 11.8x 12.1x 9.9x
Atul Limited India 92.5 109 123 153.9 16.6x 21.9x 18x 14.4x 10.4x 12.8x 11.8x 9.2x
Aksharchem India* India 22.8 71 67 77.3 7.2x 10.2x 11.4x 9.9x 4.6x 6.6x 7.8x 6.6x
Bodal Chemicals India 7.9 11.8 12.2 14.8 9.3x 13.6x 14.8x 12.2x 6x 8.4x 8.2x 6.9x
Clariant India India 23.4 10.6 NA NA 25.8x 57x NA NA 14.8x 18.6x NA NA
Meghmani Organics India 3.24 3.45 4.9 5.8 7.0x 10.8x 16.4x 13.8x 4.04x 4.8x 7.4x 6.4x
Sudarshan Chemical India 10.1 14.9 16.7 22.4 9.4x 23.3x 22.5x 16.8x 6.3x 13.8x 12.3x 9.7x
Asahi Songwon* India 17.1 20.4 23.8 28.7 7.65x 13.6x 14.1x 11.7x 5.5x 8.0x 8.4x 7.1x
Lily Group China 0.76 NA NA NA 43x NA NA NA 29.8x NA NA NA
Zhejiang Longs China 0.62 0.69 0.78 0.88 14.8x 15.6x 13.83x 12.3x 12.8x 13.8x 12.2x 11.4x
Zhejiang Runtu China 0.86 1.11 1.27 1.43 18.5x 18x 15.74x 14x 11.4x 11.4x 10.4x 9.8x
BASF SE Germany 4.42 5.83 5.9 6.32 20x 14.4x 14.2x 13.3x 9x 7.8x 7.5x 7x
Lanxess AG Germany 2.1 3.84 4.42 5.2 29.7x 16.4x 14.23x 12.1x 7.6x 7.4x 7.2x 7.1x
Clariant AG Switzerland 0.78 1.24 1.4 1.5 22.5x 18.5x 16.5x 15.2x 10.6x 9.6x 8.9x 8.3x
Solvay SA Belgium 6 8.3 4.4 5.2 18.3x 14.8x 14x 13x 8.6x 7.6x 7.6x 7x
Huntsman corporation US 1.6 2.24 2.1 1.97 14.1x 12x 12.8x 13.6x 7.9x 8x 7.5x 6.1x Source: Company, JM Financial, * - Standalond data for these companies
The valuation chart of Indian colourant companies, along with their global peers, indicates that barring Aarti and Atul, others are still trading at a discount. Aksharchem, Bodal and Meghmani have the lowest valuation multiples.
Exhibit 63. Expected EPS growth (FY17-FY19E) Vs. ROE (FY19E)
Sudarshan is expected to deliver the highest ROE with best EPS growth
Source: Company, JM Financial
5. Outlook
With tremendous manufacturing capacity and sustained demand for high-performance products, the colourants segment is an attractive proposition for investors. Moreover, with reduced regulatory arbitrage, Indian companies will be favoured over their global peers. The key challenge for the industry will be to continuously innovate as product duplication is easy. Thus, companies focusing on new product development or improving product mix by through HPP’s and effect pigments will be successful in the long run.
JM Financial Institutional Securities Limited Page 50 28 September 2017 India | Chemicals | Company Update
Aarti Industries | Not Rated A perfect example of platform leveraging
Aarti Industries (Aarti) is a leading benzene-based integrated specialty chemicals Mehul Thanawala [email protected] | Tel: (91 22) 66303063 manufacturer with over 200 products, several clients globally and c.50% of revenue coming Alok Ranjan from exports. It is a highly diversified chemicals player with 3 business segments: specialty [email protected] | (+91 22) 6630 3073 chemicals (c.82% of FY17 revenue), pharmaceuticals (c.14% of FY17 revenue) and home & Pramod Krishna personal care (c.6% of FY17 revenue). The key end-use industries for its products are [email protected] | Tel: (91 22) 61781074 polymers additives (composite materials), dyes & pigments, pharma intermediates and agro chemicals, with revenue contribution of 15%-25%. Aarti’s business model is based on raw material prices plus margins, but it has consistently improved its margins with improving isomer balancing and product mix. It has also continuously increased the capacity of high- value-add processes, resulting in an improved product mix, and thus, better financial results. Management has guided for moderate volume and earnings growth of 10% in FY18. Unique positioning in India’s chemicals space: Aarti has a unique advantage vs. peers as its specialty chemicals segment is completely based on benzene and its derivatives. As a result of its expertise in the benzene value chain, it ranks among top3/top4/top2/top2 globally in chlorination/nitration/ammonolysis/hydrogenation and is the only player in India with Halex chemistry, leading to a 25%-40% market share across products.
High focus on specialty chemicals and improving product mix enhancing margins: The Key Data – ARTO IN company is focussed on improving its product mix by enhancing the capacity of high- Current Market Price INR875 Market cap (bn) value-add processes with a mix of debottlenecking and greenfield capex. Its gross block INR71.9/$1.1 Free Float 43.7% expanded 3x over FY12-17, resulting in increased capacities of high-value-add processes Shares in issue (mn) 82.12 such as hydrogenation (700 TPM in FY10 to 3000 TPM in FY17), PDA (250 TPM in FY15 Diluted share (mn) 82.12 to 1000 TPM in FY17), nitrochlorobenzene (60,000 TPA to 75,000 TPM), chlorination 3-mon avg daily val (mn) INR46.6/US$0.7 (65,000 TPA to 110,000 TPA). The resulting effect of this capex resulted in improved 52-week range 1040/582 Sensex/Nifty 31,160/9,736 EBITDA/PAT margin (15%/5% in FY12 to 20%/10% in FY17). INR/US$ 65.7
Ethylation unit and Toluene value chain to drive revenue growth – high focus on Price Performance agrochemicals: Aarti commenced commercial production of ethylation, which is used in % 1M 6M 12M herbicides and other agrochemicals. The company plans to diversify into the toluene Absolute 4.0 13.4 43.5 product chain (nitro toluene and derivatives) through a greenfield facility at Jhagadia. Relative* 5.4 6.8 33.1 * To the BSE Sensex Aarti will leverage its existing customer relationships to cross-sell toluene derivatives for their downstream use in the products serviced by the company (optical brighteners, agrochemicals, pigments and pharmaceuticals). Management has guided for a similar product margin as its benzene chain of products.
Multi-year contract with global agrochemicals company will improve margins: Aarti will supply a high-value agrochemical intermediary from FY20 to a global agrochemicals company. The project is expected to generate revenues of c.INR 40bn equally spread out over the contract term of 10 years. Aarti will invest c.INR 4bn in this project, driving both revenue growth and improved EBITDA margin as this project will have a higher EBITDA margin of c.40% compared with its current EBITDA margin of c.20%.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 20,963 26,325 29,080 30,066 31,617 Sales growth (%) 25.3 25.6 10.5 3.4 5.2 EBITDA 3,612 4,015 4,657 5,723 6,518 JM Financial Research is also available on: EBITDA (%) 17.2 15.3 16.0 19.0 20.6 Bloomberg - JMFR
JM Financial Institutional Securities Limited Aarti Industries 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Net sales (Net of excise) 20,963 26,325 29,080 30,066 31,617 Share capital 443 443 443 417 411 Growth (%) 25.3 25.6 10.5 3.4 5.2 Other capital 0 0 0 0 0 Other operational income Reserves and surplus 7,120 8,265 9,721 10,956 13,214 Raw material (or COGS) 11,219 15,033 18,321 17,678 17,433 Networth 7,563 8,708 10,164 11,373 13,625 Personnel cost 654 788 937 1,207 1,523 Total loans 8,045 9,421 10,674 12,332 14,357 Other expenses (or SG&A) 5,478 6,489 5,165 5,458 6,144 Minority interest 43 43 59 521 639 EBITDA 3,612 4,015 4,657 5,723 6,518 Sources of funds 15,651 18,171 20,897 24,226 28,621 EBITDA (%) 17.2 15.3 16.0 19.0 20.6 Intangible assets 1 1 0 4 21 Growth (%) 44.9 11.1 16.0 22.9 13.9 Fixed assets 11,997 14,400 16,480 20,426 26,138 Other non-op. income 38 110 55 59 37 Less: Depn. and amort. 5,262 6,138 6,812 7,971 9,189 Depreciation and amort. 828 885 820 985 1,225 Net block 6,737 8,262 9,669 12,460 16,970 EBIT 2,821 3,239 3,892 4,797 5,329 Capital WIP 687 1,174 1,930 3,130 2,695 Less: Finance Costs -954 -1,178 -1,380 -1,170 -1,173 Investments 954 1,172 1,392 413 470 Pre tax profit 1,868 2,061 2,513 3,627 4,156 Def tax assets/- liability -709 -847 -1,027 -1,271 -1,554 Taxes 538 540 610 946 881 Current assets 13,382 16,092 16,387 13,663 14,856 Add: Exceptional items 0 0 35 0 0 Inventories 4,622 6,061 5,517 4,952 5,714 Add: Extraordinary items 0 0 0 0 0 Sundry debtors 4,290 4,432 4,390 5,234 5,247 Less: Minority Interest -10 -5 -17 -112 -118 Cash & bank balances 124 149 337 290 285 Assoc. Profit/Min. Int.(-) 24 109 139 0 0 Other current assets 255 296 323 185 239 Reported net profit 1,344 1,624 2,059 2,569 3,158 Loans & advances 4,092 5,155 5,820 3,002 3,371 Adjusted net profit 1,344 1,624 2,032 2,569 3,158 Current liabilities & prov. 3,193 5,005 4,395 4,167 4,811 Margin (%) 6.4 6.2 7.0 8.5 10.0 Current liabilities 2,271 3,690 2,488 3,052 2,997 Diluted share cap. (mn) 443.00 443.00 443.00 416.60 410.60 Provisions and others 922 1,315 1,907 1,115 1,814 Diluted EPS (`) 15.17 18.33 22.94 30.83 38.45 Net current assets 10,189 11,087 11,992 9,496 10,044 Growth (%) 12.8 20.8 25.1 34.4 24.7 Others (net) -2,207 -2,679 -3,060 -2 -5 Total Dividend + Tax 8,470 10,703 3,588 1,237 1,171 Application of funds 15,651 18,171 20,897 24,226 28,621 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 1,344 1,624 2,059 2,569 3,158
Depreciation and amort. 1,276 876 673 1,159 1,218 Key Ratios -Inc/dec in working cap. -1,090 -163 -615 285 -830 Y/E March FY13A FY14A FY15A FY16A FY17A Others 10 0 16 462 118 BV/Share (`) 8.5 9.8 11.5 13.6 16.6 Cash from operations (a) 1,540 2,338 2,133 4,475 3,664 ROIC (%) 14.9 14.9 16.0 15.6 16.0 -Inc/dec in investments -19 -218 -220 979 -57 ROE (%) 20.0 20.0 21.5 23.9 25.3 Capex -3,721 -2,890 -2,835 -5,150 -5,294 Net Debt/equity ratio (x) 0.9 0.9 0.9 1.0 1.0 Others -877 -711 -101 2,165 276 Valuation ratios (x) Cash flow from inv. (b) -4,616 -3,819 -3,156 -2,006 -5,075 PER 57.7 47.7 37.7 28.4 22.8 Inc/-dec in capital 8,787 10,224 2,986 -123 265 PBV 102.5 89.0 76.3 64.1 52.7 Dividend+Tax thereon -8,470 -10,703 -3,588 -1,237 -1,171 EV/EBITDA 23.4 21.3 18.6 14.8 13.1 Inc/-dec in loans 2,165 1,376 1,253 1,658 2,026 EV/Sales 4.0 3.3 3.0 2.8 2.7 Others 612 609 561 -2,815 287 Turnover ratios (no.) Financial cash flow ( c ) 3,094 1,505 1,212 -2,517 1,406 Debtor days 75 61 55 64 61 Inc/-dec in cash (a+b+c) 19 24 189 -47 -5 Inventory days 80 84 69 60 66 Opening cash balance 106 124 149 337 290 Creditor days 74 90 50 63 63 Closing cash balance 124 148 337 290 285 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 52 28 September 2017 India | Chemicals | Company Update Company Name 28 September 2017
Aksharchem Ltd | Not Rated Colourful and expanding
Aksharchem (India) Ltd (Aksharchem) is one of India’s key players in the colourants industry. Mehul Thanawala [email protected] | Tel: (91 22) 66303063 It operates across 20 countries and has been one of the prime beneficiaries of the slowdown Alok Ranjan in China’s chemical industry. Aksharchem primarily manufactures two products: Vinyl [email protected] | (+91 22) 6630 3073 Suphone, a dye intermediate used to make dyes for the textile industry (c.60% of revenues) Pramod Krishna and CPC Green, a pigment used to make green colour used in the paint and automobile [email protected] | Tel: (91 22) 61781074 industries (c.40% of revenues). In Dec’16, Aksharchem announced a capex plan of INR 1.75bn to expand its current CPC Green facilities and add H-Acid and specialty chemicals.
Management expects these projects to be commissioned in 12-18 months from the date of announcement. We do not have a rating on stock.
Vinyl Sulphone (60% of revenues): Aksharchem is one of India’s largest manufacturers of
Vinyl Sulphone with a capacity of 650 TPM, which forms c.6.5% of the global capacity. The slowdown in China’s chemical industry over the past 1-1.5 years has helped
Aksharchem significantly expand its margins (from 10-12% in FY15 to c.30% in FY17). Given that Chinese companies are facing increasing wage and effluent treatment costs, management estimates sustainable margins of 15-20% for Vinyl Sulphone. Based on our
discussions with the company’s management we know that the company plans to increase capacity utilisation (from the current level of 73%).
CPC Green (c.40% of revenues): In FY15, Aksharchem acquired the CPC Green business Key Data – ADCH IN of Asahi Songwan; CPC Green is a product that generates steady margins of 15-20% Current Market Price INR732 annually and does not face competition from China. Aksharchem recently expanded its Market cap (bn) INR6.0/$0.1 capacity from 120TPM to 160TPM and, as per management, has 8% of the global market Free Float 32.5% share. The company intends to expand this capacity to 200TPM through a brownfield Shares in issue (mn) 8.20 project and add another 150TPM at a new greenfield site at Dahej. Diluted share (mn) 8.20 3-mon avg daily val (mn) INR16.0/US$0.2 52-week range 945/443 Expansion plans going forward: Aksharchem recently announced capex of INR 1.75bn Sensex/Nifty 31,160/9,736 for: (i) the expansion of its CPC Green facility from 160TPM to 200TPM in Phase I and to INR/US$ 65.7 350TPM in Phase II as well as backward integration into CPC Blue – Capex of INR 850mn; (ii) the manufacture of H Acid – a dye intermediary – for INR 250mn and (iii) the Price Performance manufacture of value-added precipitated silica (as part of specialty chemicals) for INR % 1M 6M 12M 650mn. Management expects a timeline of 12-18 months from the date of Absolute 3.6 -0.2 57.0 Relative* 5.0 -6.7 46.6 announcement (Dec’16) to execute these projects. * To the BSE Sensex
Financials: Aksharchem reported revenue/EBITDA/ PAT of INR 2,504mn/INR 795mn/INR 519mn, respectively, for FY17 thereby implying a CAGR of 14%/71%/85% during FY15-
FY17. We do not have a rating on the stock.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net Sales 902 1,390 1,921 1,784 2,504 Sales Growth 85.7 54.1 38.2 -7.1 40.3 EBITDA 61 327 273 322 795 JM Financial Research is also available on: 6.4 22.6 13.7 17.2 30.6 EBITDA Margin Bloomberg - JMFR
Profit & Loss (` mn) Balance Sheet (` mn) Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Net sales (Net of excise) 902 1,390 1,921 1,784 2,504 Share capital 50 50 73 73 73 Growth (%) 85.7 54.1 38.2 -7.1 40.3 Other capital Other operational income 56 59 77 93 93 Reserves and surplus 120 291 641 777 1,265 Raw material (or COGS) 706 812 1,258 1,093 1,254 Networth 170 341 715 850 1,338 Personnel cost 17 39 58 63 75 Total loans 140 92 240 311 289 Other expenses (or SG&A) 174 270 410 399 472 Minority interest EBITDA 61 327 273 322 795 Sources of funds 309 432 954 1,161 1,627 EBITDA (%) 6.4 22.6 13.7 17.2 30.6 Intangible assets 0 0 Growth (%) Fixed assets 265 325 793 851 952 Other non-op. income 1 1 22 13 58 Less: Depn. and amort. 110 119 245 287 334 Depreciation and amort. 12 12 39 42 47 Net block 155 206 548 564 619 EBIT 50 317 256 293 806 Capital WIP 0 4 18 40 89 Add: Net interest income -16 -11 -33 -34 -30 Investments 1 77 183 225 432 Pre tax profit 34 306 224 259 776 Def tax assets/- liability 0 -23 -67 -83 -110 Taxes -4 89 75 93 257 Current assets 275 406 699 706 976 Add: Extraordinary items 0 -16 12 0 0 Inventories 37 109 182 160 182 Less: Minority interest Sundry debtors 82 134 210 228 301 Reported net profit 38 201 160 166 519 Cash & bank balances 5 7 9 8 36 Adjusted net profit 38 212 152 166 519 Other current assets 0 0 0 0 2 Margin (%) 4.0 14.6 7.6 8.9 20.0 Loans & advances 151 156 299 310 454 Diluted share cap. (mn) 4.95 4.95 7.31 7.31 7.31 Current liabilities & prov. 129 246 444 307 378 Diluted EPS 7.68 40.52 21.91 22.76 71.00 Current liabilities 125 232 396 306 377 Provisions and others 4 14 47 2 1 Growth (%) (2.0) 4.3 (0.5) 0.0 2.1 Net current assets 146 161 255 399 598 Total Dividend + Tax 29 31 31 31 47 Others (net) 7 8 16 15 0 Source: Company, JM Financial Application of funds 309 432 954 1,161 1,627 Source: Company, JM Financial
Cash flow statement (` mn) Key Ratios Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Reported net profit 38 201 160 166 519 BV/Share (`) 34.2 68.9 97.7 116.3 183.0 Depreciation and amort. 11 10 126 42 47 ROCE (%) 19.5 60.1 25.3 17.9 39.3 -Inc/dec in working cap. 124 -18 16 -87 -24 ROE (%) 25.0 83.0 28.8 21.3 47.4 Others 0 0 0 0 0 Net Debt/equity ratio (x) 0.8 0.0 0.1 0.1 -0.1 Cash from operations (a) 173 193 302 121 542 Valuation ratios (x) -Inc/dec in investments 0 -76 -107 -42 -207 PER NA 19.2 35.6 34.3 11.0 Capex -2 -64 -483 -80 -150 PBV 22.8 11.3 8.0 6.7 4.3 Others -165 5 -109 -57 -146 EV/EBITDA 65.5 11.8 21.1 17.9 7.0 Cash flow from inv. (b) -168 -136 -698 -179 -503 EV/Sales 4.4 2.8 3.0 3.2 2.2 Inc/-dec in capital 26 2 244 0 16 Turnover ratios (no.) Dividend+Tax thereon -29 -31 -31 -31 -47 Debtor days 33 35 40 47 44 Inc/-dec in loans -1 -48 148 71 -22 Inventory days 15 29 34 33 27 Others -3 23 36 17 42 Creditor days 65 104 115 102 110 Financial cash flow ( c ) -7 -55 398 57 -11 Source: Company, JM Financial Inc/-dec in cash (a+b+c) -1 2 2 0 28 Opening cash balance 5 5 7 9 8 Closing cash balance 4 7 9 8 36 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 54 28 September 2017 India | Chemicals | Company Update
Asahi Songwon | Not Rated
The blue colour specialist
Asahi Songwon (Asahi) is a key player in the pigments industry and one of the largest Mehul Thanawala [email protected] | Tel: (91 22) 66303063 producers of CPC Blue crude (60% of revenues) and its derivatives in India with a combined capacity of 11,400TPA. Over the years, Asahi has increased focussed on the development of Alok Ranjan [email protected] | (+91 22) 6630 3073 high-performance pigments through forward integration and enhancing productivity to become more competitive and earn higher margins. Asahi’s pigment portfolio consists of 4 Pramod Krishna [email protected] | Tel: (91 22) 61781074 derivatives of CPC Blue Crude: Beta Blue 15.3 and 15.4, and Alpha Blue 15.0 and 15.1. The company has recently developed four new products (Phthalocyanine Blue 15.0 and 15.1, Orange 64 and Yellow 12) which it expects to commercialise in FY18. We do not have a rating on the stock.
CPC Blue Crude (60% of revenues): The global pigments market is valued c.USD 26bn
and is forecast to record a CAGR of 3.8% until 2023 (Research and Markets). Within the organic pigments space, India has emerged as a global hub for Phthalo pigments (green and blue). Pthalocyanine pigments are mainly used in the printing inks industry (around 40%) while the rest finds application across paints, plastics, textiles and paper industries. Asahi, with c.5% of the world’s organic pigment production, has evolved as one of the
leading manufacturers of blue pigments in India. Asahi earns nearly 72% of its revenue from exports. In FY17, the company commenced debottlenecking of its CPC Blue Key Data – ASAH IN capacity, which led to an increase in capacities by 13% and additional revenue generation Current Market Price INR305 of INR 330mn for FY17. The company aims to increase capacity utilisation going forward. Market cap (bn) INR3.7/$0.1 Free Float 26.4% Shares in issue (mn) 12.27 Forward integration to blue pigments: Asahi’s production process is vertically integrated, Diluted share (mn) 12.27 wherein CPC Blue Crude is the primary raw material for the production of blue pigments. 3-mon avg daily val (mn) INR11.2/US$0.2 The company’s product portfolio primarily consists of 2 variants of Beta Blue (15.3 and 52-week range 366/191 15.4) primarily used in the printing ink industry, and in FY16, the company added Alpha Sensex/Nifty 31,160/9,736 Blue to its portfolio. In FY17, the company developed 2 new variants of Beta Blue - 15.0 INR/US$ 65.7 for water based applications (inks, paint and textiles) and 15.1 for plastic applications. In addition to pthalocyanines, the company recently forayed into the Azo pigment space (wherein China is the global leader) with the development of Orange 64 and Yellow 12. Price Performance % 1M 6M 12M Financials: Asahi reported revenue/EBITDA/PAT of INR 2.5bn/INR 463mn/INR 250mn in Absolute -2.9 15.7 33.2 FY17 and has recorded a CAGR of 4%/14%/20% over FY15-FY17. The company’s focus Relative* -1.6 9.1 22.8 towards increasing the share of value-added products (pigments), cost efficiencies and * To the BSE Sensex
higher utilisations has resulted in strong margin expansion from 13% in FY14 to 18% in FY17. Key risk to its growth: (i) a slowdown in end-user industries such as plastics, housing and FMCG, (ii) crude price fluctuations – partly mitigated by vertical integration and (iii) exchange rate fluctuations (72% of revenues generated from exports).
Exhibit 1: Financial Summary (INR mn) Y/E March FY13 FY14 FY15 FY16 FY17 Net sales 2,322 3,020 2,395 2,239 2,571 Sales growth (%) -0.7 30.1 -20.7 -6.5 14.8 EBITDA 249 387 359 390 463 EBITDA (%) 10.7 12.8 15.0 17.4 18.0 Adjusted net profit 103 146 173 210 250 JM Financial Research is also available on: EPS (INR) 8.4 11.9 14.4 17.1 20.4 Bloomberg - JMFR
JM Financial Institutional Securities Limited Asahi Songwon 28 September 2017 Financial Tables (Standalone)
Profit & Loss (INR mn) Balance Sheet (INR mn) Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17 Net sales (Net of excise) 2,322 3,020 2,395 2,239 2,571 Share capital 123 123 123 123 123 Growth (%) -0.7 30.1 -20.7 -6.5 14.8 Other capital Other operational income Reserves and surplus 1,080 1,176 1,057 1,237 1,443 Raw material (or COGS) 1,424 1,918 1,382 1,215 1,389 Networth 1,203 1,299 1,180 1,360 1,566 Personnel cost 72 94 82 82 99 Total loans 612 708 427 427 339 Other expenses (or SG&A) 577 621 573 553 621 Minority interest EBITDA 249 387 359 390 463 Sources of funds 1,815 2,006 1,607 1,787 1,905 EBITDA (%) 10.7 12.8 15.0 17.4 18.0 Intangible assets 2 2 0 0 0 Growth (%) -42.8 55.5 -7.3 8.6 18.9 Fixed assets 1,299 1,563 1,253 1,303 1,382 Other non-op. income 5 6 9 36 11 Less: Depn. and amort. 273 338 308 372 443 Depreciation and amort. 53 67 61 67 71 Net block 1,028 1,227 945 932 939 EBIT 200 326 307 359 403 Capital WIP 174 70 8 58 102 Less: Finance Costs -49 -63 -48 -45 -28 Investments 143 159 179 257 257 Pre tax profit 151 263 260 314 375 Def tax assets/- liability -128 -190 -162 -174 -177 Taxes 48 95 87 104 125 Current assets 1,050 1,325 991 954 1,145 Add: Extraordinary items 0 -23 0 0 0 Inventories 238 320 288 194 281 Less: Minority interest Sundry debtors 485 680 427 510 635 Reported net profit 103 146 173 210 250 Cash & bank balances 19 23 27 26 26 Adjusted net profit 103 146 173 210 250 Other current assets 2 2 2 3 2 Margin (%) 4.5 4.8 7.2 9.4 9.7 Loans & advances 305 300 247 221 201 Diluted share cap. (mn) 12.25 12.28 12.00 12.26 12.27 Current liabilities & prov. 448 587 354 240 360 Diluted EPS (Rs) 8.44 11.89 14.42 17.10 20.39 Current liabilities 261 398 215 188 297 Growth (%) -54.0 40.9 21.3 18.6 19.2 Provisions and others 187 189 139 51 63 Total Dividend + Tax 33 52 50 29 44 Net current assets 602 738 637 714 785 Source: Company, JM Financial Others (net) 3 2 0 0 0 Application of funds 1,823 2,006 1,607 1,787 1,905 Source: Company, JM Financial
Cash flow statement (INR mn) Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17
Reported net profit 103 146 173 210 250 BV/Share (`) 98.2 105.8 98.3 110.9 127.6 Depreciation and amort. 52 65 -30 64 71 ROIC (%) 8.3 9.9 11.5 14.4 14.8 -Inc/dec in working cap. 48 -137 52 -103 -92 ROE (%) 8.6 11.2 14.7 15.4 16.0 Others 0 0 0 0 0 Net Debt/equity ratio (x) 0.4 0.4 0.2 0.1 0.0 Cash from operations (a) 204 74 195 170 229 Valuation ratios (x) -Inc/dec in investments -50 -17 -19 -79 1 PER 35.8 25.4 20.9 17.7 14.8 Capex -302 -160 374 -100 -123 PBV 3.1 2.9 3.1 2.7 2.4 Others -70 5 53 25 21 EV/EBITDA 16.7 10.9 10.7 9.9 8.1 Cash flow from inv. (b) -422 -171 408 -154 -101 EV/Sales 1.8 1.4 1.6 1.7 1.5 Inc/-dec in capital 0 0 0 0 0 Turnover ratios (no.) Dividend+Tax thereon -33 -52 -50 -29 -44 Debtor days 76 82 65 83 90 Inc/-dec in loans 206 96 -280 -1 -87 Inventory days 37 39 44 32 40 Others 22 65 -268 12 3 Creditor days 115 112 94 72 95 Financial cash flow ( c ) 195 109 -599 -18 -129 Source: Company, JM Financial Inc/-dec in cash (a+b+c) -23 12 4 -1 0 Opening cash balance 35 19 23 27 26 Closing cash balance 11 31 27 26 26 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 56 28 September 2017 India | Chemicals | Company Update
Atul Limited | Not Rated Well-diversified inching closer to global players
Atul limited (Atul) is a well-diversified chemical company with products falling under two Mehul Thanawala [email protected] | Tel: (91 22) 66303063 broad segments: life science chemicals (30% of FY17 revenue) and performance & other Alok Ranjan chemicals (70% of FY17 revenue). These two broad segments cater to several end-use [email protected] | (+91 22) 6630 3073 industries such as agriculture, textiles, construction, tyres, fragrances and pharmaceuticals. Pramod Krishna The major sub-segments (c.85% of FY17 revenue) driving Atul’s growth are aromatics (FY17 [email protected] | Tel: (91 22) 61781074 value/volume growth: 16%/23%), colours (FY17 value/volume growth: 3%/7%), crop protection (FY17 value/volume growth: 8%/23%) and polymers (FY17 value/volume growth: 7%/18%). The aromatics segment is one of Atul’s strongest segments on account of its market leadership in its 3 flagship products. Polymers is another major sub-segment driven by high growth in end-use industries. In this report, we will focus on the two major sub- segments – aromatics and polymers – which contributed c.29%/26% to FY17 revenue. Key Data – ATLP IN Highly-diversified business model: Atul is a highly-diversified chemical company with Current Market Price INR2239 about 900 products and 450 formulations, 6000 customers across 68 countries and 27 Market cap (bn) INR66.4/$1.0 end-use industries. The life science chemicals segment (c.30% of FY17 revenue) consists Free Float 57.0% of 3 sub-segments (aromatics-I, crop protection, APIs/API Intermediates and floras) and Shares in issue (mn) 29.66 Diluted share (mn) 29.66 caters to the pharmaceutical and agriculture industries. Performance and other chemicals 3-mon avg daily val (mn) INR58.4/US$0.9 (c.69% of FY17 revenue) consists of four sub-segments, (aromatics-II, bulk intermediates, 52-week range 2588/1880 colours and polymers) and caters to end-use industries such as fragrance and personal Sensex/Nifty 31,160/9,736 INR/US$ 65.7 care, cosmetic, dyes and tyres (growing 6% annually). Management plans to augment
growth by (i) deepening its presence in Africa and South America and (ii) introducing new Price Performance products and formulations. % 1M 6M 12M Absolute 10.5 -1.7 -3.0 Product market leadership a key driver for the aromatics segment: The aromatics segment Relative* 11.9 -8.2 -13.4 mainly caters to fragrance and personal care industries. The aromatics segment’s * To the BSE Sensex
sustained growth has taken place on the back of market leadership of its three flagship products, p-cresol, p-AA & p-AA1 that have 42%/75%/90% domestic market share, and the opportunity to participate in the global fragrance and personal care market valued at c.USD 34bn with a 4% growth rate. Management is focussing on (i) increasing manufacturing efficiencies, (ii) establishing capacity for fragrance intermediates and (iii) introducing new products through its Kilo lab. High growth in end-use industries and brand focus will drive the polymers business: The polymers sub-segment (96 products and 300 formulations) accounted for 26% of FY17 revenue and expanded (7%/18% in value/volume) on account of c.6% growth in the domestic epoxy market, which was driven by (i) 20% growth in paints & coatings (40% of epoxy applications) and (ii) high growth in other end-use industries - 12% in civil & construction, 8% in adhesives). Additionally, growth will be supported by (i) emerging segments such as defence, wind and recreation, (ii) conversion of commodity capacity to specialty, (iii) expansion plans of specialty resins and intermediates for sulphones and (iv) brand (Lapox) leveraging.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 20,429 24,578 26,564 25,946 28,339 Sales growth (%) 14.0 20.3 8.1 -2.3 9.2 EBITDA 2,491 3,637 4,013 4,592 5,095 EBITDA (%) 12.2 14.8 15.1 17.7 18.0 JM Financial Research is also available on: Adjusted net profit 1,161 2,192 2,407 2,742 3,230 Bloomberg - JMFR
JM Financial Institutional Securities Limited Atul Limited 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A
Net sales (Net of excise) 20,429 24,578 26,564 25,946 28,339 Share capital 297 297 297 297 297
Growth (%) 14.0 20.3 8.1 -2.3 9.2 Other capital 0 0 0 0 0 Other operational income Reserves and surplus 7,246 9,189 10,093 15,851 19,363 Raw material (or COGS) 11,582 13,343 14,454 13,267 14,355 Networth 7,542 9,486 10,390 16,148 19,659 Personnel cost 1,346 1,497 1,633 1,909 2,001 Total loans 3,259 3,124 2,346 2,797 1,450 Other expenses (or SG&A) 5,010 6,101 6,464 6,178 6,889 Minority interest 58 59 57 25 153 EBITDA 2,491 3,637 4,013 4,592 5,095 Sources of funds 10,860 12,669 12,792 18,970 21,262 EBITDA (%) 12.2 14.8 15.1 17.7 18.0 Intangible assets 15 4 2 1 238 Growth (%) 21.5 46.0 10.3 14.4 10.9 Fixed assets 11,765 12,812 12,815 8,153 11,607 Other non-op. income 166 363 103 389 572 Less: Depn. and amort. 6,711 7,112 7,680 658 1,608 Depreciation and amort. 514 583 603 661 954 Net block 5,069 5,703 5,137 7,496 10,236 EBIT 2,144 3,417 3,513 4,320 4,712 Capital WIP 652 591 1,121 1,804 590 Less: Finance Costs -334 -334 -257 -275 -252 Investments 667 628 661 3,819 4,314 Pre tax profit 1,810 3,083 3,256 4,045 4,461 Def tax assets/- liability -273 -371 -461 -658 -1,014 Taxes 583 881 994 1,302 1,227 Current assets 8,812 10,610 11,238 11,409 12,034 Add: Exceptional items 54 0 0 0 0 Inventories 3,665 4,342 4,153 4,278 4,301 Add: Extraordinary items 0 0 0 0 0 Sundry debtors 3,517 4,371 4,424 4,414 5,190 Less: Minority Interest -1 3 2 -1 -4 Cash & bank balances 149 211 366 220 283 Assoc. Profit/Min. Int.(-) -82 -13 143 0 0 Other current assets 175 374 256 1,045 798 Reported net profit 1,198 2,192 2,407 2,742 3,230 Loans & advances 1,307 1,313 2,039 1,452 1,463 Adjusted net profit 1,161 2,192 2,407 2,742 3,230 Current liabilities & prov. 4,455 4,797 4,623 4,498 4,430 Margin (%) 5.7 8.9 9.1 10.6 11.4 Current liabilities 2,916 3,251 2,722 3,151 3,375 Diluted share cap. (mn) 296.80 296.80 296.80 296.80 296.80 Provisions and others 1,539 1,546 1,901 1,347 1,055 Diluted EPS (`) 39.11 73.85 81.08 92.38 108.82 Net current assets 4,358 5,813 6,615 6,910 7,604 Growth (%) 1,120.8 88.8 9.8 13.9 17.8 Others (net) 388 305 -279 -402 -468 Total Dividend + Tax 8,516 11,044 3,972 1,593 1,518 Application of funds 10,860 12,669 12,792 18,970 21,262 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 1,198 2,192 2,407 2,742 3,230
Depreciation and amort. 493 401 568 -7,022 950 Key Ratios -Inc/dec in working cap. -34 -1,196 -394 314 -575 Y/E March FY13A FY14A FY15A FY16A FY17A Others 14 1 -2 -32 128 BV/Share (`) 25.4 32.0 35.0 54.4 66.2 Cash from operations (a) 1,672 1,398 2,578 -3,998 3,733 ROIC (%) 13.6 21.1 20.9 18.8 17.3 -Inc/dec in investments 82 39 -32 -3,159 -494 ROE (%) 16.5 25.7 24.2 20.7 18.0 Capex -1,116 -974 -531 3,979 -2,476 Net Debt/equity ratio (x) 0.3 0.2 0.1 -0.1 -0.2 Others 73 -197 -253 -756 -56 Valuation ratios (x) Cash flow from inv. (b) -960 -1,133 -816 64 -3,026 PER 57.3 30.3 27.6 24.2 20.6 Inc/-dec in capital 8,320 10,796 2,469 4,609 1,799 PBV 88.1 70.1 64.0 41.2 33.8 Dividend+Tax thereon -8,516 -11,044 -3,972 -1,593 -1,518 EV/EBITDA 27.7 18.9 16.9 14.2 12.4 Inc/-dec in loans -199 -136 -778 452 -1,348 EV/Sales 3.4 2.8 2.6 2.5 2.2 Others -355 180 675 320 422 Turnover ratios (no.) Financial cash flow ( c ) -749 -203 -1,606 3,788 -644 Debtor days 63 65 61 62 67 Inc/-dec in cash (a+b+c) -38 62 156 -146 63 Inventory days 65 64 57 60 55 Opening cash balance 186 149 211 366 220 Creditor days 92 89 69 87 86 Closing cash balance 149 211 366 220 283 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 58 28 September 2017 India | Chemicals | Company Update
Clariant Chemicals | Not Rated Diversified specialty player with a strong global foothold
Clariant Chemicals (India) Ltd (CCL) is a part of the Swiss-based Clariant Group, which is Mehul Thanawala [email protected] | Tel: (91 22) 66303063 globally one of the largest specialty chemicals companies (second largest pigments company) Alok Ranjan with sales of USD 6bn in CY16. CCL primarily operates in two segments: (i) Plastics and [email protected] | (+91 22) 6630 3073 coatings (93% of revenues) which include pigments, additives and masterbatches and (ii) Pramod Krishna specialty chemicals (7%) which include dyes, synthetic resins and coatings. Over the past few [email protected] | Tel: (91 22) 61781074 years, CCL has strategically reorganised its portfolio through divestment of low-margin businesses such as (i) textiles, paper and emulsion (TPE), (ii) leather services and (iii) industrial and consumer specialties (ICS), and instead focused on expanding inorganically (through the acquisition of M/s Plastichemix’s masterbatch business and Lanxess India’s carbon black business) and organically. We do not have a rating on the stock.
Plastics and coatings segment - P&C (93% of revenues): Under this segment, CCL
primarily operates in pigments (58% of P&C), masterbatches (40% of P&C) and additives.
It is one of the world’s leading providers of organic pigments that are used in paints, Key Data – CLRC IN plastics, fibres, detergents and cosmetics. The key innovative variants of pigments that Current Market Price INR573 Clariant manufactures are (i) dissolver dispersible pigments for paints, (ii) halogen-free Market cap (bn) INR13.2/$0.2 pigments for plastics, (iii) guaranteed limits of halogen in pigments for the electronic Free Float 15.8% industry and (iv) pigments with higher brightness and contrast for LCD and W-OLED Shares in issue (mn) 23.08 displays. The company’s masterbatch portfolio is a concentrated mixture of pigments Diluted share (mn) 23.08 3-mon avg daily val (mn) and/or additives dispersed in a polymer medium. In FY15, the company acquired M/s INR16.7/US$0.3 52-week range 840/560 Plastichemix Industries’ masterbach business which helped it improve its customer base Sensex/Nifty 31,160/9,736 and product portfolio in the segment. CCL has 4 manufacturing facilities in India for the INR/US$ 65.7 manufacture of masterbatches and has tie-ups with players in the fibre, consumer durables, packaging and healthcare industries. CCL is also a leading provider of non- Price Performance % 1M 6M 12M halogenated flame retardants, waxes and polymer additives. Absolute -2.1 -15.4 -24.3 Relative* -0.7 -22.0 -34.7 Specialty chemicals segment (7% of revenues): This segment includes performance * To the BSE Sensex
chemicals for personal care and industrial applications, oil and mining services and products that are used in textile, paper, emulsion and leather industries. CCL has entered supply agreements with Archroma India Pvt Ltd and Stahl India Pvt Ltd to manufacture and supply products for textile and leather industries. In FY16, the company sold its low- margin Industrial and Consumer Specialties business (ICS) to Clariant India Ltd, and subsequently entered a job work agreement to process and supply job-work products.
Financials: CCL reported sales/EBITDA/PAT of INR 981mn/INR 67mn/INR 24mn in FY17. Given that the company has undergone structural changes in the past 4-5 years, the figures are not comparable with historical numbers. Key risks to its performance are a slowdown in end-user industries, crude price/exchange fluctuations and regulatory risks.
Exhibit 1: Financial Summary (INR mn) Y/E March FY13 FY14 FY15 FY16 FY17 Net sales 10,963 12,479 10,460 11,400 9,810 Sales growth (%) 12.0 13.8 -16.2 9.0 -13.9 EBITDA 1,370 1,209 245 643 671 EBITDA (%) 12.5 9.7 2.3 5.6 6.8 Adjusted net profit 921 545 -2,403 409 245 JM Financial Research is also available on: EPS (Rs) 38.0 62.6 353.8 23.4 10.6 Bloomberg - JMFR
JM Financial Institutional Securities Limited Clariant Chemicals 28 September 2017 Financial Tables (Standalone) Profit & Loss (INR mn) Balance Sheet (INR mn)
Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17 Net sales (Net of excise) 10,963 12,479 10,460 11,400 9,810 Share capital 267 267 267 231 231 Growth (%) 12.0 13.8 -16.2 9.0 -13.9 Other capital
Other operational income Reserves and surplus 4,749 5,477 13,694 6,463 6,498 Raw material (or COGS) 6,528 7,710 7,205 7,413 6,155 Networth 5,015 5,744 13,960 6,694 6,729 Personnel cost 906 1,012 979 1,062 906 Total loans 0 0 95 0 0 Other expenses (or SG&A) 2,159 2,549 2,031 2,281 2,077 Minority interest EBITDA 1,370 1,209 245 643 671 Sources of funds 5,015 5,744 14,055 6,694 6,730 EBITDA (%) 12.5 9.7 2.3 5.6 6.8 Intangible assets 0 0 432 512 497 Growth (%) -9.5 -11.8 -79.7 162.1 4.3 Fixed assets 3,952 3,670 4,763 3,646 3,790 Other non-op. income 191 179 137 367 91 Less: Depn. and amort. 2,209 2,010 1,845 511 855 Depreciation and amort. 216 235 332 501 395 Net block 1,743 1,660 3,350 3,646 3,432 EBIT 1,345 1,153 50 510 367 Capital WIP 92 255 132 50 99 Less: Finance Costs -14 -18 -11 -7 -5 Investments 2,347 2,674 330 740 1,125 Pre tax profit 1,331 1,135 38 503 363 Def tax assets/- liability -54 -72 -104 -210 -180 Taxes 410 590 2,441 94 118 Current assets 4,033 4,527 14,612 4,575 4,673 Add: Extraordinary items 92 1,123 11,836 0 0 Inventories 1,623 1,456 1,634 1,421 1,556 Less: Minority interest Sundry debtors 1,483 1,692 1,606 1,766 1,730 Reported net profit 1,013 1,668 9,433 409 245 Cash & bank balances 143 226 10,115 289 318 Adjusted net profit 921 545 -2,403 409 245 Other current assets 34 76 41 101 63 Margin (%) 8.4 4.4 -23.0 3.6 2.5 Loans & advances 750 1,076 1,217 998 1,006 Diluted share cap. (mn) 26.66 26.66 26.66 17.47 23.06 Current liabilities & prov. 3,145 3,300 4,265 2,114 2,423 Diluted EPS (Rs) 38.00 62.55 353.82 23.42 10.61 Current liabilities 1,846 1,624 1,456 1,463 1,683 Growth (%) -66.7 64.6 465.7 -93.4 -54.7 Provisions and others 1,300 1,676 2,809 651 741 Total Dividend + Tax 640 1,248 4,479 210 692 Net current assets 888 1,227 10,347 2,461 2,249 Source: Company, JM Financial Others (net) 0 0 0 7 5 Application of funds 5,015 5,744 14,055 6,694 6,730 Source: Company, JM Financial
Cash flow statement (INR mn) Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17
Reported net profit 1,013 1,668 9,433 409 245 BV/Share (`) 188.1 215.4 523.6 383.2 291.8 Depreciation and amort. 118 -199 -166 -1,333 343 ROIC (%) 19.7 10.7 -65.8 8.0 3.9 -Inc/dec in working cap. -547 113 875 -2,100 211 ROE (%) 20.2 29.0 67.6 6.1 3.6 Others 0 0 0 0 0 Net Debt/equity ratio (x) -0.5 -0.5 -0.7 -0.2 -0.2 Cash from operations (a) 584 1,582 10,142 -3,024 799 Valuation ratios (x) -Inc/dec in investments 319 -328 2,344 -410 -385 PER 15.1 9.2 1.6 24.6 54.2 Capex -117 118 -1,402 1,119 -178 PBV 3.1 2.7 1.1 1.5 2.0 Others -84 -369 -106 159 30 EV/EBITDA 9.4 10.3 20.3 14.0 17.6 Cash flow from inv. (b) 118 -578 836 869 -533 EV/Sales 1.2 1.0 0.5 0.8 1.2 Inc/-dec in capital 0 0 0 -36 0 Turnover ratios (no.) Dividend+Tax thereon -640 -1,248 -4,479 -210 -692 Debtor days 49 49 56 57 64 Inc/-dec in loans 0 0 95 -95 0 Inventory days 54 43 57 46 58 Others -204 327 3,294 -7,366 454 Creditor days 176 156 216 104 144 Financial cash flow ( c ) -844 -921 -1,090 -7,706 -238 Source: Company, JM Financial Inc/-dec in cash (a+b+c) -142 83 9,888 -9,861 28 Opening cash balance 285 143 226 10,115 289 Closing cash balance 143 226 10,114 253 317 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 60 28 September 2017 India | Chemicals | Company Update
Meghmani Organics Ltd. | Not Rated Sailing across the CPC value chain
Meghmani Organics Limited (MOL) operates in three major segments: pigments (8% global Mehul Thanawala [email protected] | Tel: (91 22) 66303063 market share in Pthalocyanine), agrochemicals and basic chemicals (4th largest caustic chlorine Alok Ranjan player in India). MOL has vertically integrated facilities manufacturing CPC blue (upstream [email protected] | (+91 22) 6630 3073 product, also sold to other manufacturers) and final products (pigment blue and green). It Pramod Krishna has a strong presence in exports with c.69%/61% of pigments/agrochemicals (227 exports [email protected] | Tel: (91 22) 61781074 registrations in FY17 vs. 183 in FY16 in agrochemicals) revenue in FY17 coming from exports to c.75 countries. MOL expects its pigment business to do well on the back of its improving product mix and ramped-up Beta Blue plant. The domestic market will be driven by better Key Data – MEGH IN monsoons, which will drive the agrochemicals segment. Overall, MOL expects to deliver Current Market Price INR78 Market cap (bn) INR19.9/$0.3 better financial performance on the back of capacity expansion in high-margin businesses Free Float 31.0% coupled with improving capacity utilisation, a strong product base, improved demand Shares in issue (mn) 254.31 conditions and widening distribution channels. Diluted share (mn) 254.31 3-mon avg daily val (mn) INR344.8/US$5.2 Vertically integrated in pigment segment (c.34% of FY17 revenue): MOL is a global scale 52-week range 89/34 producer of Phthalocyanines pigments, with capacity of 31,000 MTPA (c.8% of global Sensex/Nifty 31,160/9,736 capacity). MOL’s product (pigment blue/green) is an organic pigment with better INR/US$ 65.7 performance and lower toxicity compared with inorganic pigments. Pigment Price Performance blue/pigment green (derived from CPC blue) have important properties: crystallising % 1M 6M 12M (brilliance and brightness) and non-crystallising non-flocculating (spread evenly)/non- Absolute 7.6 109.4 70.8 crystallising (maintain colour) and non-crystallising non-flocculating (spread evenly). These Relative* 8.9 102.8 60.4 are the three main properties required from a pigment and thus MOL can cater to a wide * To the BSE Sensex
range of applications. MOL has signed some long-term contracts recently. This coupled with growth in end-use industries could improve utilisation, with management guiding for better capacity utilisation (80% in FY18 vs. 65% in FY17). Additionally, the company has c.70 overseas distributors leading to direct presence in export markets (US, Europe, Indonesia and Dubai), which allows it to work closely with end-use customers.
Focus on agrochemicals segments (c.34% of FY17 revenue): In agrochemicals, MOL makes products such as pesticide intermediates, technical grade pesticides and pesticides formulations. MOL is trying to focus on relatively higher-margin contract manufacturing (CRAMS) by entering into agreements with new customers. With 29 indigenously developed technicals, the recent ban on the import of technicals will augur well for MOL.
Revenue growth to be driven by ongoing INR 5.4bn capex: MOL has undertaken capex of INR 5.4bn, which will be completed over 2-3 years. Of the INR 5.4bn, c.INR 4bn will be used to 1) set up a hydrogen peroxide project (25,000 TPA capacity), 2) expand its caustic soda plant (increase by 50% to 240,000 TPA) and 3) increase its captive power plant capacity from 60 MW to 90 MW. According to MOL, the first two projects are expected to add INR 3bn by FY21. The remaining INR 1.4bn will be used in its CMS (chloromethane) project, which is expected to add INR 1.2bn of revenue by FY19. The end-products of these projects are used in pharma and agrochemicals industries.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 10,585 11,783 12,942 13,322 14,229 Sales growth (%) -0.4 11.3 9.8 2.9 6.8 EBITDA 1,852 1,959 2,031 2,608 2,888 EBITDA (%) 17.5 16.6 15.7 19.6 20.3 JM Financial Research is also available on: Adjusted net profit 176 231 441 825 877 Bloomberg - JMFR
JM Financial Institutional Securities Limited Meghmani Organics Ltd. 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A
Net sales (Net of excise) 10,585 11,783 12,942 13,322 14,229 Share capital 254 254 254 254 254
Growth (%) -0.4 11.3 9.8 2.9 6.8 Other capital 0 0 0 1,263 1,547 Other operational income Reserves and surplus 4,766 4,927 5,261 6,058 6,930 Raw material (or COGS) 6,154 6,913 7,640 7,070 7,940 Networth 5,020 5,181 5,515 7,575 8,732 Personnel cost 488 575 725 579 648 Total loans 6,376 6,232 5,102 4,846 3,713 Other expenses (or SG&A) 2,091 2,336 2,545 3,065 2,754 Minority interest 797 924 944 0 0 EBITDA 1,852 1,959 2,031 2,608 2,888 Sources of funds 12,193 12,337 11,561 12,421 12,445 EBITDA (%) 17.5 16.6 15.7 19.6 20.3 Intangible assets 98 50 26 121 93 Growth (%) 17.1 5.8 3.7 28.4 10.7 Fixed assets 11,997 14,400 16,480 20,426 26,138 Other non-op. income 133 61 64 255 124 Less: Depn. and amort. 5,862 7,558 8,693 13,194 18,450 Depreciation and amort. 751 802 747 768 907 Net block 6,234 6,892 7,814 7,354 7,781 EBIT 1,234 1,218 1,348 2,095 2,105 Capital WIP 1,647 1,262 229 920 191 Less: Finance Costs -643 -676 -746 -631 -509 Investments 246 6 239 6 291 Pre tax profit 591 541 602 1,464 1,596 Def tax assets/- liability -202 -370 -471 -267 -285 Taxes 299 182 140 351 396 Current assets 7,012 8,194 6,947 7,512 7,422 Add: Exceptional items 0 0 -2 0 -38 Inventories 1,811 2,496 2,158 3,126 2,417 Add: Extraordinary items -9 -5 4 0 0 Sundry debtors 3,393 3,523 3,167 3,269 3,309 Less: Minority Interest -111 -127 -21 -288 -285 Cash & bank balances 99 373 156 110 102 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other current assets 182 216 176 691 1,245 Reported net profit 172 228 443 825 877 Loans & advances 1,528 1,586 1,290 315 349 Adjusted net profit 176 231 441 825 905 Current liabilities & prov. 2,698 3,497 3,341 3,200 3,013 Margin (%) 1.7 2.0 3.4 6.2 6.4 Current liabilities 1,462 1,736 1,434 1,779 1,635 Diluted share cap. (mn) 254.30 254.30 254.30 254.30 254.30 Provisions and others 1,235 1,761 1,907 1,420 1,378 Diluted EPS (`) 0.69 0.91 1.74 3.25 3.56 Net current assets 4,314 4,697 3,606 4,313 4,409 Growth (%) -94.8 31.1 90.9 87.0 9.7 Others (net) -46 -149 144 96 58 Total Dividend + Tax 8,232 10,345 3,118 642 686 Application of funds 12,193 12,337 11,561 12,421 12,445 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 172 228 443 825 877
Depreciation and amort. 3,880 1,696 1,135 4,501 5,256 Key Ratios -Inc/dec in working cap. 189 -541 391 -724 524 Y/E March FY13A FY14A FY15A FY16A FY17A Others 229 127 20 -944 0 BV/Share (`) 2.0 2.0 2.2 3.0 3.4 Cash from operations (a) 4,471 1,510 1,990 3,658 6,657 ROIC (%) 4.4 6.1 9.4 11.5 10.5 -Inc/dec in investments -50 240 -233 233 -285 ROE (%) 3.6 4.5 8.3 12.6 11.1 Capex -4,347 -1,969 -1,024 -4,732 -4,955 Net Debt/equity ratio (x) 1.2 1.1 0.9 0.6 0.4 Others 107 432 483 -28 -629 Valuation ratios (x) Cash flow from inv. (b) -4,290 -1,297 -775 -4,526 -5,869 PER NA 85.8 44.9 24.0 21.9 Inc/-dec in capital 8,320 10,278 3,009 1,876 966 PBV 39.5 38.3 36.0 26.2 22.7 Dividend+Tax thereon -8,232 -10,345 -3,118 -642 -686 EV/EBITDA 14.0 13.1 12.1 9.4 8.0 Inc/-dec in loans -594 -143 -1,130 -257 -1,132 EV/Sales 2.4 2.2 1.9 1.8 1.6 Others -16 271 -192 -156 56 Turnover ratios (no.) Financial cash flow ( c ) -522 61 -1,432 822 -797 Debtor days 117 109 89 90 85 Inc/-dec in cash (a+b+c) -341 274 -217 -46 -8 Inventory days 62 77 61 86 62 Opening cash balance 440 99 373 156 110 Creditor days 87 92 68 92 75 Closing cash balance 99 373 156 110 102 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 62 28 September 2017 India | Chemicals | Company Update
Sudarshan Chemicals | Not Rated Gearing up to become true global pigment leader
Sudarshan Chemicals Ltd. (Sudarshan) is globally the 5th largest pigment producer with a 5- Mehul Thanawala [email protected] | Tel: (91 22) 66303063 6% market share. In India, Sudarshan is the market leader with a c.35% market share. Alok Ranjan Sudarshan has strong presence in pigments (which accounts for c.90% of revenue) and is the [email protected] | (+91 22) 6630 3073 only pigment company to manufacture all types of organic (azo, pthalos and other high- Pramod Krishna performance pigments), inorganic and specialty (effect pigments and cosmetics) pigments. [email protected] | Tel: (91 22) 61781074 Over the past 11 years, Sudarshan has increased the revenue contribution from organic pigments (60% in FY05 to 75% in FY17), which are high-performance, high-margin and less th toxic. By 2020, Sudarshan aims to become the 4 largest player in the global pigment market with sales of c.USD 220-240mn on the back of high export focus (45% revenue in FY16, 12% CAGR in exports market), improving product mix using HPPs and effect pigments and high focus on R&D providing a pipeline of new products.
th 5 largest global pigment producer and domestic market leader: During the past 7 years, Sudarshan has improved its global rank in pigment producers from 20th to 5th and has also become the domestic market leader (35% market share). It evolved from a local player in
the 1990s to a global player as a result of its 4-phase strategy. In Phase-III (2008-20), it is th targeting to become 4 largest global pigment producer. This transformation took place on back of globalisation efforts (39% exports share in FY11 vs. 45% in FY16), continuous investments in pigments resulting in the introduction of new products and a gradual shift
from classical azo pigments to HPP and effect pigments. To boost its exports market share, it operates across Europe, North America, and China with sales teams and stocking points to enable faster service. Thus, in Phase IV (after 2020), it aims to become the Key Data – SCHI IN global market leader in pigments. Current Market Price INR365 Market cap (bn) INR25.3/$0.4 Free Float 29.4% Focus on high-realisation HPPs and effect pigments: The Company’s R&D team (located in Shares in issue (mn) 69.23 Sutarwadi, Pune) has nearly 50 scientists who have developed over 100 new products (in Diluted share (mn) 69.23 the past 7 years). These mainly include high-performance pigments, effect pigments and 3-mon avg daily val (mn) INR56.1/US$0.9 specialised azo pigments catering to automobile, engineering plastics, paints and 52-week range 459/261 Sensex/Nifty 31,160/9,736 cosmetics segments. This has led to Sudarshan becoming the only pearlescent effect INR/US$ 65.7 pigment producer in India (used in cosmetics). Management has focussed on high-value products and improved exports share, which has supported improvement in its EBITDA Price Performance margin (from c.8% in FY13 to c.13% in FY17), EPS (from c.INR 3 in FY13 to c.INR 15 in % 1M 6M 12M FY17) and ROCE (from c.8% in FY13 to c.19% in FY17). Absolute -1.6 5.5 -5.0 Relative* -0.2 -1.1 -15.4 Implementation of REACH Phase III will result in consolidation: REACH Phase III will be * To the BSE Sensex
implemented by June 2018, which will regulate all chemicals imported into the EU in quantities of over 1 ton per annum (TPA). This will result in an increase in compliance costs and may prevent smaller companies from supplying to the EU.
Key risks: A significant portion of Sudarshan’s revenue comes from exports. Therefore, a strengthening INR is a key risk to its performance.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 8,729 11,186 12,182 14,093 15,226 Sales growth (%) 9.1 28.2 8.9 15.7 8.0 EBITDA 778 1,291 1,286 1,674 1,990 EBITDA (%) 8.9 11.5 10.6 11.9 13.1 JM Financial Research is also available on: Adjusted net profit 220 351 544 699 1,034 Bloomberg - JMFR
JM Financial Institutional Securities Limited Sudarshan Chemicals 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Net sales (Net of excise) 8,729 11,186 12,182 14,093 15,226 Share capital 69 69 139 139 139 Growth (%) 9.1 28.2 8.9 15.7 8.0 Other capital 0 0 0 0 0 Other operational income Reserves and surplus 2,473 2,641 2,488 3,001 3,808 Raw material (or COGS) 4,943 6,537 7,306 8,178 8,664 Networth 2,543 2,710 2,626 3,140 3,946 Personnel cost 740 797 940 1,034 1,111 Total loans 3,813 3,689 3,834 3,926 3,425 Other expenses (or SG&A) 2,269 2,562 2,649 3,208 3,461 Minority interest 0 0 0 0 0 EBITDA 778 1,291 1,286 1,674 1,990 Sources of funds 6,355 6,399 6,460 7,065 7,371 EBITDA (%) 8.9 11.5 10.6 11.9 13.1 Intangible assets 121 127 248 209 188 Growth (%) -8.0 66.0 -0.4 30.1 18.9 Fixed assets 5,465 5,698 6,065 6,758 8,060 Other non-op. income 73 38 237 140 224 Less: Depn. and amort. 2,397 2,552 2,984 3,389 3,757 Depreciation and amort. 264 368 419 481 546 Net block 3,189 3,273 3,329 3,578 4,491 EBIT 587 961 1,104 1,333 1,668 Capital WIP 227 67 80 154 80 Less: Finance Costs -327 -407 -388 -343 -306 Investments 3 3 3 3 3 Pre tax profit 260 555 716 990 1,362 Def tax assets/- liability -252 -348 -364 -365 -469 Taxes 40 204 172 291 328 Current assets 5,382 5,941 6,707 7,160 7,532 Add: Exceptional items 0 0 0 0 0 Inventories 2,276 2,583 2,502 2,531 2,690 Add: Extraordinary items 0 0 0 0 0 Sundry debtors 2,101 2,583 3,172 3,529 3,535 Less: Minority Interest 0 0 0 0 0 Cash & bank balances 444 153 234 250 153 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other current assets 248 93 102 60 319 Reported net profit 220 351 544 699 1,034 Loans & advances 312 528 699 789 836 Adjusted net profit 220 351 544 699 1,034 Current liabilities & prov. 2,116 2,456 3,143 3,302 4,128 Margin (%) 2.5 3.1 4.5 5.0 6.8 Current liabilities 1,038 1,131 1,878 2,156 2,571 Diluted share cap. (mn) 6.92 6.92 13.85 13.85 13.85 Provisions and others 1,078 1,325 1,266 1,146 1,557 Diluted EPS (`) 31.81 50.65 7.85 10.09 14.93 Net current assets 3,266 3,484 3,564 3,858 3,404 Growth (%) -34.4 59.2 -84.5 28.5 47.9 Others (net) -78 -80 -152 -163 -139 Total Dividend + Tax 7,973 10,367 3,150 581 619 Application of funds 6,355 6,399 6,460 7,065 7,371 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 220 351 544 699 1,034
Depreciation and amort. 230 156 432 405 368 Key Ratios -Inc/dec in working cap. -513 -695 240 -109 251 Y/E March FY13A FY14A FY15A FY16A FY17A Others 0 0 0 0 0 BV/Share (`) 2.0 2.2 2.1 2.5 3.2 Cash from operations (a) -63 -189 1,215 995 1,653 ROIC (%) 9.6 10.0 13.4 14.4 18.0 -Inc/dec in investments 0 0 0 0 0 ROE (%) 8.8 13.3 20.4 24.2 29.2 Capex -1,192 -80 -500 -729 -1,207 Net Debt/equity ratio (x) 1.3 1.3 1.4 1.2 0.8 Others -32 187 -239 -169 105 Valuation ratios (x) Cash flow from inv. (b) -1,225 107 -739 -898 -1,102 PER 19.0 12.3 15.8 12.3 8.3 Inc/-dec in capital 7,859 10,184 2,523 396 391 PBV 295.3 284.8 293.9 245.9 195.6 Dividend+Tax thereon -7,973 -10,367 -3,150 -581 -619 EV/EBITDA NA 62.5 62.8 48.3 40.4 Inc/-dec in loans 1,430 -124 145 92 -501 EV/Sales 9.0 7.2 6.6 5.7 5.3 Others 43 98 87 12 80 Turnover ratios (no.) Financial cash flow ( c ) 1,359 -208 -396 -81 -648 Debtor days 88 84 95 91 85 Inc/-dec in cash (a+b+c) 72 -291 80 16 -97 Inventory days 95 84 75 66 64 Opening cash balance 372 444 153 234 250 Creditor days 77 63 94 96 108 Closing cash balance 444 153 234 250 153 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 64 28 September 2017 India | Surfactants | Sector Report
Surfactants
Increasing focus on “GREEN” solutions Surfactants are application-driven segment and widely used in home and personal care Mehul Thanawala products. According to Assocham, the size of India’s beauty, cosmetics and grooming market [email protected] | Tel: (91 22) 66303063 will touch USD 20bn by FY25 from USD 6.5bn in FY15. On the back of such high growth, the Alok Ranjan [email protected] | (+91 22) 6630 3073 Indian specialty surfactants market is expected to grow 13% over FY15-FY20. This will be Pramod Krishna driven mainly by the increased consumption of high-end home and personal care products, [email protected] | Tel: (91 22) 61781074 which will be further driven by (1) rising standards of living and changing consumer preferences, (2) increasing adoption of surfactants in a wide range of personal care products, (3) increasing adoption of new-age surfactants and bio-surfactants and (4) other drivers discussed in detail in this section. Upon analysing the competitive landscape of domestic and global players, we observe that the domestic market is largely fragmented, leading to low EBITDA margins. We therefore expect it to see some consolidation in the near-to-medium term. We believe that the Indian surfactants market will post low-teen growth in the near-to- medium term. However, long-term growth will be driven largely by increased adoption of sustainable ingredients such as bio-surfactants.
Growing personal and household care market and increasing adoption in other end-use industries: According to Euromonitor, household cleaning and personal care products’ value of sales grew 8.3% in CY15 to reach INR 1trn, due to increasing consumerism. The market size of rapidly-growing segments such as men’s grooming products expanded from USD 660mn in FY10 to USD 1,179mn in FY15, and is expected to grow 17% by FY20 (source: Techsci Research). On the back of the high growth in the personal and household care segments, the personal care surfactants market grew mid-to-high teens during FY13-FY17; this growth is expected to sustain and drive the specialty surfactants market. Surfactants-based face washes, hair creams and gels are increasingly gaining traction due to the ease of using the product, the ease of customising it and its cleansing ability. Additionally, surfactants are used in other end-use industries such as agrochemicals, textiles, water treatment and oil-field chemicals.
Increasing use of premium products: Premium products not only use high-price surfactants but also a higher percentage of surfactants (36.5%) compared with economy products (23.5%) (source: Stepan Company). The rising standard of living due to globalisation and the increase in per capita income (c.9.7% over FY16-FY17) is driving growth in the premium home and personal care segment. The men’s grooming segment (which falls under personal care) is expected to grow c.17% YoY and continue such growth momentum over FY17-FY21. Additionally, increased willingness to pay for the best brands and quality is driving growth in the surfactants market.
New age surfactants are replacing traditional ones: Methyl Ether Sulfonate (MES) is a natural (oleochemical) replacement for Linear Alkyl Benzene Sulfonate (LABS). On the back of excellent characteristics such as high purity, activeness, low volatile organic compound (VOC), gentleness on skin, low percentage of di-salt, suitability in both liquid/powder detergents, MES is becoming more popular than LABS. According to TSMG global report, MES market size will be c.1.2 MMT, which will be nearly one-third of LABS (c.3 MMT in FY14) market size in FY20.
Growing demand for bio-surfactants and fluoro-surfactants: Stringent environmental regulations (REACH) and demand for sustainable solutions are driving the demand for less toxic bio-surfactants and short-chain fluoro-surfactants globally. Demand for fluoro- surfactants is driven by its better performance in various application areas such as paints, coatings and specialty detergents. However, the Indian market is still at a nascent stage for products using natural surfactants. JM Financial Research is also available on: Bloomberg - JMFR
JM Financial Institutional Securities Limited
Surfactants 28 September 2017 1. Surfactants
Surfactant chemicals help break up stains and separate dirt from the surface being cleansed – Exhibit a. Surfactants be it cloth, hair or skin – and keep the dirt in a water solution to prevent it from being redeposited onto the surface it was removed from. In this report, we cover surfactant chemicals used in industries such as home care, personal care, health care, crop care, industrial and institutional cleaning. Surfactants are either derived from oleochemicals (natural vegetable oil) or petrochemicals (synthetic) raw material. Within the oleochemicals space, palm and coconut oil are the major sources. Exhibit 64 shows the difference between synthetic and bio-surfactants.
Exhibit 64. Comparison between synthetic and bio-surfactants Synthetic Bio-surfactants
Easy Availability Low Toxicity
Advantages Low Price Eco friendly
Broadened applications Goof Performance
Environmental concerns Technical constraints
Disadvantages Low performance Unskilled workforce
Volatile petroleum price Cost competitiveness
Source: Industry, JM Financial
Surfactants are broadly classified as anionic, cationic, non-ionic and amphoteric. The structure Source: JM Financial of the surfactants determines its functionality. Owing to their ionic properties, the four different types of surfactants have different applications, as discussed below:
Anionic surfactants: Have a negatively charged hydrophilic group. They are widely used in shampoos as well as laundry and dishwashing detergents. Exhibit b. Surfactants type – by substrate
Cationic surfactants: This is the smallest surfactants category in terms of volume and value and is used mainly in rinsing products and hair conditioners.
Non-ionic surfactants: Mainly used for grease removal as they do not carry an electrical charge, making them resistant to deactivation in water with high mineral content.
Amphoteric surfactants: The charge depends on the pH balance of water and is well- suited for personal care and household cleaning products. It has excellent dermatological properties and is frequently used in shampoos, skin cleansers and other cosmetics.
Exhibit 65. Surfactants types and uses Surfactants types Product types Property Use
Anionic Sulfate, Sulfonate, Phosphate Negative charge Shampoos
Quaternary Ammonium Cationic Positive charge Rinses and Hair conditioners Source: JM Financial compounds
Alkylphenol Ethoxylate, Non-ionic No charge Grease removers Sorbitan Ester Charge depends on pH Shampoos, skin cleansers, Amphoteric Phosphatidylcholine of water cosmetics
Source: Klinegroup, JM Financial
Specialty surfactants: Specialty surfactants are used as co-surfactants with commodity surfactants, as essential ingredients in a range of industrial and domestic products, and as key process aids in several sectors. Specialty surfactants are Methyl ester sulfonates, Alkyl New age surfactants are finding polyglycosides and Sulfosuccinates. applications in Agrochemicals, food processing and oil industries Specialty surfactants are used in the agriculture sector on a major scale, mainly as additives primarily in pesticides (eg. Glycine Technical Grade). Food processing and oil industries are other key markets for specialty surfactants, owing to the chemicals’ multi- functional properties. Apart from specialty surfactants, bio-surfactants are being increasingly used and are thus expected to lead growth in the surfactants market.
JM Financial Institutional Securities Limited Page 66 Surfactants 28 September 2017 2. Global surfactants market overview
The global surfactants market is valued at c.USD 29.2bn, with a growth rate of 5.4% over FY15-FY20E. Globally, synthetic surfactants account for a major share of the surfactants market, owing to their extensive use in various industrial and commercial products. On the basis of product types, anionic surfactants had the largest market share in CY16, accounting Anionic surfactants accounts 45% for c.45% of the market (source: Mordor Intelligence). However, the demand for bio-based of the surfactants market share surfactants is growing, owing to increased consumer inclination towards products made from natural feedstocks. On the basis of end-use segments, the largest application segment is detergents.
Exhibit 66. Global surfactants market size (In USD bn)
Source: Transparency Market Research, JM Financial Asia-Pacific leading surfactants demand: Accounting for 37% of global consumption, the Asia-Pacific region is the largest surfactants consumer, followed by North America (22%) and Europe (25%) owing to the presence of a large consumer base, growing economies and Asia-Pacific is a key market. changing consumer preferences towards beauty products. The Asia Pacific market is expected Account for 37% of global to post a CAGR of 6.1%, compared with sub-3% growth in developed countries over FY15- consumption and expected to post FY20. This is reflected in the increased investments in Asia by MNCs. For instance, Solvay 6.1% CAGR over FY15-FY20 (Belgium) is expanding its business in India and Singapore, Kao (Japan) now has surfactant and detergent plants in Indonesia and Clariant (Switzerland) has established a new facility in Indonesia.
Exhibit 67. Surfactants consumption by region – Asia Pacific leading Exhibit 68. Surfactants business growth rate by volume (%)
Source: IHS Markit, Industry, JM Financial Source: IHS Markit, GCIS, JM Financial
JM Financial Institutional Securities Limited Page 67 Surfactants 28 September 2017 There is increasing use of bio-surfactants owing to concerns on petrochemical-based materials. The bio-surfactants market size was c.USD 1.7bn in FY15, accounting for c.6% of the global surfactants market size (source: Global Market Insights).
Rising use of bio-surfactants will augment growth: High biodegradability and low toxicity, apart from strict govt. regulations, is driving the bio-surfactants market. Among bio- surfactant products, MES’ market size was c.USD 580mn in FY15. It is used in laundry detergents due to its biodegradability and tolerance for rigidity. APG bio-surfactants are expected to grow 4% over FY15-FY20 and are used in household-based detergents due to their dampness and superior foaming properties. Other bio-surfactants such as rhamnolipids, sophorolipids, and monoglycerides are also increasingly gaining market share. Some of green specialty surfactants available in the market include alkylpolyglucosides, glutamates and pentosides; however, they are more expensive than competing materials. Other specialty surfactants (fluoro-surfactants) becoming popular: The global fluoro- surfactants market was valued at c.USD 383mn in CY15 and is expected to reach c.USD 668mn by CY21 at a CAGR of 9.8% (source: Markets and Markets). Growth will be driven by its superior performance vs. other surfactants in various application areas such as paints, Fluoro-surfactants offer better coatings and specialty detergents. Moreover, stringent environmental regulations are wettability than normal surfactants increasing demand for less toxic, short chain fluoro-surfactants. Paints and coatings segment is the largest fluoro-surfactants application segment, since fluoro-surfactants have strong wetting and levelling properties. On the basis of product, the anionic segment is projected to record the highest CAGR during FY15-FY21. Among fluoro-surfactants product types, anionic surfactants have excellent wettability and permeability, besides better levelling. As a result, it is the preferred choice for paints and coatings.
JM Financial Institutional Securities Limited Page 68 Surfactants 28 September 2017 3. Indian surfactants industry overview
The domestic surfactants market size was c.USD 3bn in FY15, constituting c.11% of the Indian specialty chemicals market. It posted a CAGR of c.11% over FY10-FY15 and is expected to register high growth of 13% over FY15-FY20, to reach c.USD 5.53bn on the back of high growth in personal and household care products sales.
Exhibit 69. Indian surfactants industry size
Source: Industry, JM Financial
Increasing use of personal and household care products a key driver: According to ASSOCHAM, the beauty, cosmetics and grooming market will touch USD 20bn by FY25E Increasing usage of cosmetics will from USD 6.5 bn in FY15, on the back of factors such as the middle class’ rising disposable drive growth of high value income, the emergence of an aspirational class, a young population and increasing women’s surfactants participation in the workforce. The consumption of cosmetics among teenagers is also rising (c.68% of young adults feel that using grooming products boosts their confidence). Surfactants’ demand is additionally being driven by the increased use of high-value personal care products, since premium products use not only higher-priced surfactants but also a higher percentage of them.
Exhibit 70. Indian surfactants based on end use
Personal care is expected to grow by 16% over FY15-FY20, driving surfactants growth
Source: Company, Industry, JM Financial
The toiletries and household care market in India is expected to record a CAGR of 16-18% over FY15-FY20. Dish washing and floor cleaning liquids are the fastest growing segments in this category.
JM Financial Institutional Securities Limited Page 69 Surfactants 28 September 2017 Exhibit 71. Percentage of ingredients by functionality in economy and premium shampoo Ingredients/Functionality Economy Premium Carrier - - Surfactant 23.5% 36.5% Viscosity Adjuster 10% - Additives - - pH Adjuster - - Preservatives 0.1% -
Source: Stepan Company, JM Financial
Growing demand for new age surfactants, bio-surfactants and fluoro-surfactants: High biodegradability and low toxicity – apart from strict govt. regulations – are driving the bio- surfactants market. Stringent environmental regulations (REACH) and demand for sustainable solutions are driving the use of less toxic bio-surfactants and short-chain fluoro-surfactants. The demand for fluoro-surfactants is driven by its better performance in various application areas such as paints, coatings and specialty detergents.
JM Financial Institutional Securities Limited Page 70 Surfactants 28 September 2017 4. Industry players and competitive analysis
The Indian surfactants industry is highly fragmented with only a few organised players. Apart from Sunshield Chemicals, which was acquired by Solvay in 2012 and Ultramarine & Pigments Ltd., there are no other major listed players. We have considered eight companies across geographies for a comparative analysis. These are Sunshield Chemicals, Aarti Home and Personal Care (part of Aarti Industries), Galaxy Surfactants, Stepan Company, Croda International PLC, Kao Corp, Symrise AG, and Guangzhou Tinci Materials. The following table provides a snapshot of these eight surfactants companies.
Exhibit 72. Snapshot of surfactants companies (FY11-FY16) Revenue Avg. Revenue Avg. Avg. Avg. Company Country (FY16, Growth Summary of Business EBITDA,% ROCE % ROE% In mn INR) (CAGR %) Manufacture and sales of surfactants and Sunshield Chemicals Ltd. India 1,502 14% 7% 9% -1% anti-oxidants in domestic and international markets Portfolio consists of surfactants (58.45%), Ultramarine & Pigments Ltd. India 2,192 13% 18% 22.4% 19.2% pigments (28%) and ITES (12.28%). Portfolio includes surfactants, modifiers, pearlising Galaxy Surfactants India 18,014 4% 11% NA NA agents, UV filters and active ingredients Segment of Aarti Industries. Manufactures surfactants Aarti home & personal care India 1,504 10% 5% NA NA n catering to home & personal care & industrial applic Manufactures surfactants, polymers, specialty Stepan Company US 118,663 7% 10% 11% 15% products. 67% revenue from surfactants Operates in three segments: consumer care, Croda International PLC UK 113,327 8% 27% 32% 44% performance technologies and industrial chemicals Four fields of business – beauty care, human health KAO Corp Japan 902,873 7% 16% 17% 13% care, fabric & home care and chemicals Manufacture personal care functional ingredients Guangzhou Tinci Materials China 5,308 23% 19% 15% 15% including surfactants. Also ventured into batteries
Source: Bloomberg, Company, JM Financial
Exhibit 73. Valuation metrics for water treatment companies – based on consensus EPS P/E EV/EBITDA Company Country FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E Sunshield Chemicals Ltd. India -1 -7 NA NA NA NA NA NA NA 34x NA NA Ultramarine & Pigments Ltd. India 9 11 NA NA 12x 17x NA NA 8x 10x NA NA Stepan Company US 3.78 4.58 5.17 NA 21.3x 17.6x 15.6x NA 9.54x NA NA NA Croda International PLC UK 1 2 2 2 22x 21x 20x 19x 14x 14x 13x 12x KAO Corp Japan 253 280 301 323 21.8x 24x 22x 25x 11x 12x 11x 10x Guangzhou Tinci Materials China 1.23 1.43 1.9 2.4 34.3x 37.8x 28.6x 22.7x 27.4x 29.2x 22.8x 18.7x Source: Bloomberg, Company, JM Financial We have conducted a detailed competitive landscape analysis by analysing two sets of Ultramarine & pigments is companies over FY11-FY16. The first set contains only domestic companies while the second attractive, on the basis of valuation covers both domestic and foreign companies. ratio among its global peers Exhibit 74. Competitive landscape of surfactants – India (FY11-FY16)
Source: Bloomberg, Company, JM Financial Aarti home and personal care* is a segment of Aarti Industries. Galaxy surfactants* is a private company
JM Financial Institutional Securities Limited Page 71 Surfactants 28 September 2017 Exhibit 74 classifies the selected domestic specialty surfactant chemicals into four segments namely: performance segment (high growth %, high EBITDA %), growth segment (high growth %, low EBITDA %), laggard segment (low growth %, low EBITDA %) and mature segment (low growth % and high EBITDA %). The size of the bubbles indicates the companies’ FY16 revenues. Among the three companies analysed, Ultramarine & pigments falls in the performance segment as it has displayed high revenue CAGR of 14% and average EBITDA margin of 18% over FY11-FY16. Galaxy Surfactants recorded a high average EBITDA margin of 11% owing to strong operating performance, but lagged in terms of growth. A comparative analysis of surfactants companies globally (including in india) indicates that foreign companies are fairly diversified and operate on a higher scale vs. their Indian counterparts and have thus delivered high EBITDA margins. Among all the companies, Guangzhou Tinci Materials, Ultramarine & Pigments, Croda International and Kao Corp have delivered superior performance over the past five years.
Exhibit 75. Competitive landscape of surfactants – Global (FY11-FY16)
Source: Bloomberg, Company, JM Financial We believe that scale plays an important role in this segment and thus Indian surfactants need large investments for capacity expansion. Further, in the near-to-medium term, MNCs will be looking to enter the Indian market either through JVs or acquisitions.
JM Financial Institutional Securities Limited Page 72 Surfactants 28 September 2017 5. Key challenges and outlook
Key challenges facing the segment are (1) commoditisation and (2) environmental concerns. The commoditisation of specialty surfactants is one of the biggest concerns across the specialty chemicals industry. This is leading to reduced margins and lower shelf life of specialty surfactants. However, manufacturers are tweaking their business models by switching from merely supplying one type of surfactant to supplying different types, each customised for specific needs. This is achievable as different home and personal care brands focus on different functionalities. For example, within the hair care segment, different shampoos treat different concerns such as dandruff, breakage, dry scalp, etc. Environmental concerns and increasing demand for green products by consumers will lead to demand for ingredients either derived from vegetable oils or made using greener manufacturing processes. This trend is more pronounced in developed markets but is gradually picking up pace in developing markets. Thus, companies with products made from natural ingredients will be the ones to look out for. However, one has to remain cautious as natural refers to sustainable or renewable sources. However, it can lead to depletion and thus ingredients can harm the local ecosystem and may not be considered green. Hence, manufacturers of surfactants who use sustainable and/or renewable ingredients will be long- term winners, in our view.
JM Financial Institutional Securities Limited Page 73 28 September 2017 India | Chemicals | Company Update
Sunshield Chemicals | Not Rated Focus on improving operational efficiency
Sunshield Chemicals Limited (SCL) manufactures specialty chemicals such as surfactants and Mehul Thanawala anti-oxidants sold in domestic and international markets. SCL’s principal products are: (1) [email protected] | Tel: (91 22) 66303063 specialty surfactants, predominantly Ethylene Oxide (EO)-based products (2) specialty anti- Alok Ranjan oxidants for lubricants, polymers, rubber, tyres, latex and other segments and (3) other non- [email protected] | (+91 22) 6630 3073 EO technologies and customised blends. SCL was acquired by Solvay (Europe) in Dec’12 and Pramod Krishna [email protected] | Tel: (91 22) 61781074 this has helped SCL leverage Solvay’s global distribution and technical expertise. SCL expects improved performance on back of an increase in sales volume (growing 20%+) and manufacturing efficiency (upgradation of the Rasal plant).
Acquisition by Solvay in Dec’12: The Indian surfactants market was valued at c.USD 3bn
in FY15 and gew low-double digits to mid-teens over FY10-FY15. This attracted several
global players such as BASF, CRODA, and Solvay to India. After acquiring Rhodia Specialty Chemicals in 2010, Solvay consolidated its position in the Indian specialty surfactants market by acquiring a controlling stake in SCL in 2012. This has given SCL improved
technical skills and a global distribution channel to export its products.
Specialty chemicals finding application in multiple end-use industries: SCL manufactures a wide range of specially formulated and customised products such as wire insulation Key Data – SNCH IN enamels, colours, textiles, polymers, home care products, soaps and detergents. The Current Market Price INR252 major end-use industries are (1) agrochemicals – SCL provides solutions based on Market cap (bn) INR1.8/$0.0 Free Float 31.0% specialty surfactants that help increase the efficacy of pesticides; (2) coatings – SCL offers Shares in issue (mn) 7.35 surfactants that reduce the interface between liquid resin solutions and solid particles Diluted share (mn) 7.35 such as pigments and extenders; and (3) home and personal care - SCL provides multi- 3-mon avg daily val (mn) INR0.8/US$0.0 functional surfactants used in skincare products, detergents, etc. 52-week range 403/245 Sensex/Nifty 31,160/9,736 INR/US$ 65.7 Financial performance – is a turnaround near? SCL delivered revenue growth of 26%/10% in FY16/FY17 led by strong domestic sales growth (c.26%/23% in FY16/FY17) Price Performance on the back of volume growth (+28%). In the past, SCL has incurred losses on account of % 1M 6M 12M an increase in operating costs for plant upgrades and manufacturing excellence projects. Absolute -7.9 -7.3 -32.3 Relative* -6.5 -13.8 -42.7 Management expects these costs (capex of c.USD 6.2 mn) undertaken in FY16 to lead to * To the BSE Sensex benefits such as increased efficiency and productivity in future.
Dependence on a single or few suppliers is a key risk: SCL depends on ethylene oxide (EO), one of the key components of ethylene oxide condensates (EOC). EO is sourced only from one supplier currently – Reliance Industries Limited. However, EO produced by RIL’s petrochemical complex is also used for captive consumption by RIL to manufacture monoethylene glycol (MEG) for polyester fibres. This can lead to procurement risks for SCL. EO is not easy to import through sea/air due to its low boiling point and explosive nature. To mitigate this risk, SCL sources EO from multiple sites of RIL and has recently increased its storage facility by 40% to counter procurement risks.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 1,053 1,337 1,190 1,502 1,652 Sales growth (%) 11.7 26.9 -11.0 26.2 10.0 EBITDA 84 109 22 98 84 EBITDA (%) 8.0 8.1 1.8 6.5 5.1 JM Financial Research is also available on: Adjusted net profit 9 -4 -32 -8 -54 Bloomberg - JMFR
JM Financial Institutional Securities Limited Sunshield Chemicals 28 September 2017 Financial Tables (Standalone)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Net sales (Net of excise) 1,053 1,337 1,190 1,502 1,652 Share capital 74 74 74 74 74 Growth (%) 11.7 26.9 -11.0 26.2 10.0 Other capital 0 0 0 0 0 Other operational income Reserves and surplus 141 137 103 95 40 Raw material (or COGS) 732 959 863 1,006 1,136 Networth 215 211 176 168 114 Personnel cost 47 50 63 67 67 Total loans 287 561 745 1,010 833 Other expenses (or SG&A) 190 218 243 332 366 Minority interest 0 0 0 0 0 EBITDA 84 109 22 98 84 Sources of funds 501 771 921 1,178 946 EBITDA (%) 8.0 8.1 1.8 6.5 5.1 Intangible assets 0 0 0 0 0 Growth (%) 10.1 29.2 -80.2 356.7 -14.6 Fixed assets 542 524 531 1,065 1,059 Other non-op. income 2 4 7 30 2 Less: Depn. and amort. 187 188 224 272 319 Depreciation and amort. 25 23 33 55 60 Net block 355 336 308 793 739 EBIT 61 90 -4 74 26 Capital WIP 4 31 476 15 31 Less: Finance Costs -51 -36 -35 -108 -95 Investments 43 0 0 0 0 Pre tax profit 10 54 -39 -34 -68 Def tax assets/- liability 19 -50 -40 -14 0 Taxes 2 58 -7 -26 -14 Current assets 393 632 531 700 641 Add: Exceptional items 0 0 0 0 0 Inventories 114 138 203 277 225 Add: Extraordinary items 0 0 0 0 0 Sundry debtors 219 329 119 257 275 Less: Minority Interest 0 0 0 0 0 Cash & bank balances 5 27 2 21 12 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other current assets 9 48 43 0 0 Reported net profit 9 -4 -32 -8 -54 Loans & advances 46 89 164 146 129 Adjusted net profit 9 -4 -32 -8 -54 Current liabilities & prov. 308 172 342 293 428 Margin (%) 0.8 -0.3 -2.7 -0.6 -3.3 Current liabilities 132 146 166 250 218 Diluted share cap. (mn) 73.50 73.50 73.50 73.50 73.50 Provisions and others 176 26 176 43 211 Diluted EPS (`) 1.17 -0.56 -4.34 -1.14 -7.40 Net current assets 85 460 190 407 213 Growth (%) 751.5 -147.7 678.0 -73.7 547.6 Others (net) -5 -6 -11 -23 -37 Total Dividend + Tax 7,934 10,221 2,971 265 277 Application of funds 501 771 921 1,178 946 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 9 -4 -32 -8 -54
Depreciation and amort. 24 1 36 49 47 Key Ratios -Inc/dec in working cap. -33 -121 165 -126 1 Y/E March FY13A FY14A FY15A FY16A FY17A Others 0 0 0 0 0 BV/Share (`) 2.9 2.9 2.4 2.3 1.5 Cash from operations (a) 0 -124 169 -86 -7 ROIC (%) 9.5 -1.1 -0.4 1.7 2.0 -Inc/dec in investments 0 43 0 0 0 ROE (%) 4.1 -1.9 -16.5 -4.9 -38.6 Capex -15 -9 -452 -73 -9 Net Debt/equity ratio (x) 1.1 2.5 4.2 5.9 7.2 Others 101 -232 80 -72 185 Valuation ratios (x) Cash flow from inv. (b) 86 -199 -372 -146 176 PER NA NA NA NA NA Inc/-dec in capital 7,934 10,221 2,969 265 277 PBV 86.3 88.0 105.0 110.3 163.0 Dividend+Tax thereon -7,934 -10,221 -2,971 -265 -277 EV/EBITDA 24.8 21.9 NA 28.9 31.9 Inc/-dec in loans -89 274 184 265 -178 EV/Sales 2.0 1.8 2.2 1.9 1.6 Others 2 70 -4 -15 0 Turnover ratios (no.) Financial cash flow ( c ) -88 344 178 250 -177 Debtor days 76 90 36 62 61 Inc/-dec in cash (a+b+c) -2 22 -25 19 -9 Inventory days 40 38 62 67 50 Opening cash balance 8 5 27 2 21 Creditor days 66 55 70 91 70 Closing cash balance 5 27 2 21 12 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 75 28 September 2017 India | Sector | Company Update
Ultramarine & Pigments | Not Rated Specialising in sulphonation Ultramarine & Pigments Ltd (U&PL) specialises in the manufacture of inorganic pigments, Mehul Thanawala [email protected] | Tel: (91 22) 66303063 organic surfactants and dry mix detergents. It operates under 3 major verticals: (i) surfactants Alok Ranjan (62% of revenues), produced in various concentrations and forms, including alpha olefin [email protected] | (+91 22) 6630 3073 sulphonates and lauryl and lauryl ether sulphates; (ii) pigments (30% of revenues), with U&PL Pramod Krishna being one of the world’s largest manufacturers of ultramarine blue; and (iii) IT-enabled [email protected] | Tel: (91 22) 61781074 services (ITES) (12% of revenues), which includes its digital publishing and BPO businesses. Management aims to add more verticals, either in the existing businesses or new divisions, and double revenues over the next 5 years. We do not have a rating on the stock.
Surfactants (62% of revenues): The key products manufactured in this segment are (i)
Linear Alkyl Benzene Sulphonic Acid (LABSA), surfactants used for laundry products that
UP&L manufactures with high active content of 90% and 96% concentrations; (ii) Alpha olefin sulphonates (AOS), surfactants with high detergency, high dampness/foaming properties and compatible with hard water in India; U&PL specialises in the manufacture of ready-to-use liquid, paste or noodle surfactants depending on customer requirements; (iii) Sodium Lauryl Sulphate (SLS), surfactants that act as strong degreasers and hence are found in several industrial surfactant formulations including floor cleaners and (iv) Sodium Lauryl Ether sulphates (SLES), anionic surfactants used in personal care products such as shampoos, hand washes and body washes. In FY17, the company undertook a debottlenecking of its surfactants plant, leading to a 20% increase in capacity. U&PL’s sulphonation segment has registered a CAGR of 23% over the past 5 years. Key Data – UMP IN Current Market Price INR225 Pigments (30% of revenues): UP&L manufactures a variety of inorganic pigments with Market cap (bn) INR6.6/$0.1 end use in the paints, plastics, inks, laundries and cosmetics industries. Its key products Free Float 37.4% are (i) Ultramarine Blue, which has variety of applications, from chairs for the Beijing Shares in issue (mn) 29.18 Olympics to professional artist colours in Europe; it is widely used to make whites whiter, Diluted share (mn) 29.18 3-mon avg daily val (mn) INR4.6/US$0.1 to make greys and blacks more attractive and is a unique and attractive reddish blue; (ii) 52-week range 245/146 Ultramarine Violet, a variant of Ultramarine blue; (iii) Bismuth Vanadate Yellow, a non- Sensex/Nifty 31,160/9,736 toxic metal oxide alternative to lead and chromium based yellow pigments and (iv) mixed INR/US$ 65.7 metal based oxides (pigment green 50), cobalt blue (pigment blue 28) and titan brown Price Performance (pigment brown 24). UP&L’s pigments segment has posted a CAGR of 9% over the past % 1M 6M 12M 5 years Absolute 15.7 32.3 34.7 Relative* 17.1 25.7 24.3 Financials: UP&L saw revenue/EBITDA/PAT CAGR of 22%/30%/32% over FY15-FY17. * To the BSE Sensex Increased focus on higher value-added segments enabled UP&L to improve margins by
c.250 bps over the last 2 years to 20%. Key risks to its business are rising competition from the unorganised sector, shrinking demand for laundry and white washing applications and shortages in the availability of alpha olefin.
Exhibit 1: Financial Summary (INR mn) Y/E March FY13 FY14 FY15 FY16 FY17 Net sales 1,402 1,502 1,722 2,202 2,554 Sales growth (%) 3.0 7.2 14.6 27.9 16.0 EBITDA 209 251 294 374 501 EBITDA (%) 14.9 16.7 17.1 17.0 19.6 Adjusted net profit 121 144 188 274 324 JM Financial Research is also available on: EPS (`) 4.2 4.9 6.4 9.4 11.1 Bloomberg - JMFR
JM Financial Institutional Securities Limited Ultramarine & Pigments 28 September 2017 Financial Tables (Standalone)
Profit & Loss (INR mn) Balance Sheet (INR mn) Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17 Net sales (Net of excise) 1,402 1,502 1,722 2,202 2,554 Share capital 58 58 58 58 58 Growth (%) 3.0 7.2 14.6 27.9 16.0 Other capital Other operational income Reserves and surplus 805 863 936 1,087 1,411 Raw material (or COGS) 588 604 732 1,067 1,267 Networth 863 922 995 1,145 1,469 Personnel cost 253 279 323 362 333 Total loans 23 2 0 0 0 Other expenses (or SG&A) 351 369 373 400 453 Minority interest EBITDA 209 251 294 374 501 Sources of funds 886 924 995 1,145 1,469 EBITDA (%) 14.9 16.7 17.1 17.0 19.6 Intangible assets 4 3 2 2 3 Growth (%) -10.2 20.0 17.3 26.9 34.2 Fixed assets 933 977 994 1,167 1,279 Other non-op. income 38 31 17 50 22 Less: Depn. and amort. 531 571 614 644 683 Depreciation and amort. 58 56 32 32 41 Net block 405 408 381 525 598 EBIT 189 225 280 391 482 Capital WIP 24 13 16 21 2 Add: Net interest income -16 -10 -5 -1 -3 Investments 132 132 132 149 384 Pre tax profit 174 216 275 390 479 Def tax assets/- liability -54 -50 -58 -79 -101 Taxes 52 72 88 117 155 Current assets 629 718 856 835 940 Add: Extraordinary items 0 0 0 0 0 Inventories 116 182 204 207 254 Less: Minority interest Sundry debtors 239 219 219 266 341 Reported net profit 121 144 188 274 324 Cash & bank balances 112 127 164 119 155 Adjusted net profit 121 144 188 274 324 Other current assets 6 4 7 8 9 Margin (%) 8.7 9.6 10.9 12.4 12.7 Loans & advances 156 186 261 234 181 Diluted share cap. (mn) 29.25 29.19 29.21 29.19 29.19 Current liabilities & prov. 250 298 332 305 354 Diluted EPS (`.) 4.15 4.93 6.42 9.37 11.10 Current liabilities 37 75 109 166 225 Growth (%) -11.5 18.8 30.2 46.0 18.5 Provisions and others 214 223 224 139 130 Total Dividend + Tax 79 88 105 123 140 Net current assets 378 420 523 530 586 Source: Company, JM Financial Others (net) 0 0 0 0 0 Application of funds 886 924 995 1,145 1,469 Source: Company, JM Financial
Cash flow statement (INR mn) Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17 Reported net profit 121 144 188 274 324 BV/Share (`) 29.5 31.6 34.1 39.2 50.3 Depreciation and amort. 50 40 43 30 39 ROCE (%) 18.1 19.1 23.4 29.5 27.8 -Inc/dec in working cap. -63 2 12 -77 -73 ROE (%) 14.1 15.6 18.8 23.9 22.0 Others 0 0 0 0 0 Net Debt/equity ratio (x) -0.3 -0.3 -0.3 -0.2 -0.4 Cash from operations (a) 108 185 243 227 290 Valuation ratios (x) -Inc/dec in investments 0 0 0 -17 -235 PER 53.0 44.6 34.3 23.5 19.8 Capex -27 -31 -19 -179 -94 PBV 7.5 7.0 6.5 5.6 4.4 Others -42 -29 -78 26 52 EV/EBITDA 29.7 24.6 20.8 16.5 11.7 Cash flow from inv. (b) -69 -60 -96 -169 -277 EV/Sales 4.4 4.1 3.6 2.8 2.3 Inc/-dec in capital 0 0 0 0 0 Turnover ratios (no.) Dividend+Tax thereon -79 -88 -105 -123 -140 Debtor days 62 53 47 44 49 Inc/-dec in loans -35 -21 -2 0 0 Inventory days 30 44 43 34 36 Others 0 -2 -2 21 162 Creditor days 155 180 166 104 102 Financial cash flow ( c ) -113 -110 -109 -102 22 Source: Company, JM Financial Inc/-dec in cash (a+b+c) -74 15 37 -45 36 Opening cash balance 187 112 127 164 119 Closing cash balance 112 127 164 119 155 Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 77 28 September 2017 India | Water Treatment Chemicals | Sector Report
Water Treatment Chemicals
End-to-end solutions providers will prevail Rapid growth in the Indian economy has driven increased industrialisation across sectors and Mehul Thanawala [email protected] | Tel: (91 22) 66303063 thus led to growing urbanisation. A direct consequence of industrialisation is the increased Alok Ranjan need for the effective disposal of effluents. With strict environmental regulations, companies [email protected] | (+91 22) 6630 3073 have realised the urgent need for efficient water treatment solutions. Additionally, growing Pramod Krishna urbanisation has increased the need for municipal water and thus driven demand for water [email protected] | Tel: (91 22) 61781074 treatment chemicals. As a result, the Indian water treatment market recorded a 12% CAGR over FY10-FY15 and is likely to record c.14% CAGR over FY15-FY20. Demand will be mainly driven by industrial usage in the short term, but increased awareness on water safety as well as urbanisation will be key long-term growth drivers. We believe this segment will witness sustainable high growth rates in the medium-to-long term.
Industrial demand will remain the key driver in the near-to-medium term: Within the industrial sector, growth will be driven by water-intensive segments, like pulp, paper, oil and gas, chemical processing, mining, bio refining, power and municipal markets. Rapid industrialisation is leading to the increased chemicals demand for running manufacturing plants and their corresponding effluent treatment facilities resulting in to c.15% increase in capex (FY10-FY15) by the industry on water and waste water treatment.
Growing urbanisation, rising income levels/living standards & increased awareness will be the long-term driver: India’s urban population has increased c.2% in the last five years (CY11-CY16), leading to growing demand for municipal water supply. The penetration of municipal water supply is higher in the urban region and thus increased urbanisation will lead to increased demand for municipal water and therefore the use of water chemicals. Further, increased awareness about the quality of drinking water and health impact will lead to increased demand for and usage of water treatment chemicals. Additionally, rise in sales of packaged drinking water has driven demand.
Shift to advanced products: There has been increasing shift in the water treatment market towards more advanced products such as coagulants and flocculants from traditional products such as alum. Similarly, in the corrosion and scale inhibitor market, there is an ongoing shift from traditionally used heavy-metal-based products to ones that are more environment-friendly. Manufacturers are increasingly producing patented formulations with exclusive rights that offer customised solutions in a particular market.
Environment safety a priority: Stringent environmental regulations on the tapping of water and the discharge of effluents across industries are boosting the water treatment chemicals market. In the past two years, we have seen increased environmental regulations on polluting industries in China and other parts of world. Thus, water treatment chemicals would be widely used either in chemical processes or during discharge into receiving bodies. Changes in the regulatory environment such as the implementation of stricter effluent discharge norms have created significant hope for demand from industries as they adopt environment-friendly effluent treatment practices.
Integrated and sustainable water treatment solutions are the key: Majority of water treatment players are integrated and end to end water solutions providers. Companies providing water treatment solutions ranging from designing and building a water treatment plant to running and maintaining it (including supply of water chemicals) will be highly attractive. Sustainable solutions will further boost the segments as increased awareness among end users about the benefits of recycling water in the longer term will outweigh the capex incurred in the near term. JM Financial Research is also available on: Bloomberg - JMFR
JM Financial Institutional Securities Limited
Water Treatment Chemicals 28 September 2017 1. Water Treatment Chemicals 1.1Introduction Water treatment chemicals are used for a wide range of industrial, municipal and household water treatment purposes and in-process applications such as reducing effluent toxicity as well as controlling Biological Oxygen Demand (BOD) and Chemical Oxygen Demand (COD). Within the water treatment chemicals segment, there are two broad categories – basic or commodity chemicals and specialty chemicals. Commodity chemicals include alum, ferric sulphate, ferric chloride and polyaluminium chloride. These are less expansive but required in high volume. Specialty water treatment chemicals include antifoams, defoamers, biocides, disinfectants, boiler water chemicals and industrial cleaning chemicals, among others. The exhibit below highlights the various product groups for water treatment chemicals.
Exhibit 76. Water treatment chemicals – An overview Product Groups Applications End-use Industries Biocides and disinfectants
Coagulants and flocculants Industrial Refineries
pH adjustors and water Institutional Power Water Treatment
Chemicals Softeners Commercial Mining
Defoamers Private Paper & Textiles
Defoaming agent and Others
Source: TSMG - FICCI, JM Financial 1.2Types of water treatment chemicals Water treatment chemicals are generally classified either on the basis of type or end-use. On the basis of type, they can be classified into coagulants, flocculants, biocides, disinfectants, defoaming agents, pH adjusters, scale inhibitors, corrosion inhibitors, cooling water treatments, etc.
Exhibit 77. Water treatment chemicals – Market share % (FY15)
Source: FICCI-TSMG, Industry, Company, JM Financial
Coagulants and flocculants are the largest segment with 38% market share. They are used for waste water management and are replacing traditional products such as alum. Common coagulants and flocculants used for water clarification include aluminium sulphate, ferric chlorite, and polyaluminium salts. Driven by high growth in industrial and municipal water treatment, coagulants and flocculants are likely to grow at the fastest rate within this space.
Biocides and disinfectants are the second largest segment with a 19% market share. Biocides such as chlorine, sodium hypochlorite, calcium hypochlorite and chlorine dioxide are used as disinfecting agents. Biocides can be classified into specialty and commodity
JM Financial Institutional Securities Limited Page 79 Water Treatment Chemicals 28 September 2017 biocides. Biodegradable biocides are available these days in accordance with demand for the use of green, environment-friendly chemicals.
Defoaming agents form the third largest segment, with a 7% market share. Chemicals used are the polymers of acrylic acid and silicone oils and their derivatives.
pH adjusters form 5% of water treatment chemicals. These include alkalis, acids, lime, and caustic soda that are used for water softening.
Corrosion and scale inhibitors such as chromates, nitrates, molybdates and other specialty chemicals are used in boiler and cooling water systems. Water treatment chemicals can also be classified on the basis of end use. The key end-use segments can be divided into industrial usage, institutional usage, commercial and private applications. Industrial and bulk applications include waste water management, cleaning of rivers and enhancing the efficiency of industrial equipment. The end-use industries are large power plants, refineries and fertiliser factories to pharmaceuticals, food and beverages, electronic and automobile companies. Within the industry, water treatment chemicals are mainly used for the treatment of water in boilers, cooling towers and effluents from industries and sewage treatment plants. 1.3Key operations in water treatment Iron and aluminium ions are excellent flocculation and coagulation agents for use in water treatment. They are used in the preparation of drinking water, treatment of municipal and industrial wastewater and the processing of sludge.
Precipitation: Precipitation examples include the removal of phosphate and hydrogen sulphide. Phosphates are a persistent problem in wastewater and act as nutrients for algae. Phosphates can be effectively removed from water flows by using chemical precipitation. By adding iron or aluminium salts to water, phosphates precipitate and settle together with the biological sludge. The presence of sulphur in sewage water is a potential risk and can lead to the formation of toxic hydrogen sulphide gas. By adding iron chloride, the sulphide precipitates, thus eliminating this potential danger.
Coagulation and flocculation: Floating particles, which do not settle of their own accord, can be made to do so by neutralising their electric charge. Colloidal particles have a negative charge of the metal ions of iron and aluminium. As a result, the particles coagulate to form flocs, which are large enough to settle. The entire process is a combination of the right metal salts, the precise dosage and the pH of the water.
JM Financial Institutional Securities Limited Page 80 Water Treatment Chemicals 28 September 2017 2. Global water treatment market overview
The global water treatment market is growing moderately at 4.5%: The global market size of water treatment chemicals is c.USD 24.5bn in FY15 and is expected to post a CAGR of c.4.5% over FY15-FY20 to reach a market size of c.USD 30.5bn. In terms of global usage, North America and in particular the United States uses specialty water treatment chemicals more intensively than Europe and Japan, particularly organic coagulants and flocculants. In Market for water treatment terms of water treatment chemicals type, corrosion inhibitors occupied the highest share of chemicals in North America and c.23% on account of increasing industrialisation and technology development. As expected, Europe is well established and the power generation segment occupied the highest share of c.30% in the industrial water mature treatment chemicals market as large amounts of treated water are required to produce electricity (source: Markets and Markets, Allied Market Research, PR Newswire, FICCI-TSMG).
Exhibit 78. Global water treatment chemicals market
Source: Allied market research, JM Financial
Asia Pacific leads growth, especially China and India: The Asia Pacific region occupied the highest share of c.31% of the total water treatment chemicals market, with China (expected CAGR of 10% over FY15-FY20) and India (expected CAGR of 13.8% over FY15-FY20) being major countries contributing to growth. Rapid industrialisation and population growth, coupled with scarcity in pure and clean drinking water, are significant factors responsible for Asia-Pacific accounts for 31% of the growth of the water treatment chemicals market in the Asia Pacific region. Companies global market and is expected to have forayed into the Asia Pacific region due to the increasing use of water treatment grow at c.6% chemicals for industrials as well as municipal water. The Asia Pacific market was valued at c.USD 7.6bn in 2015 and is expected to post a CAGR of 5.6% over FY15-FY22. North America is the second most lucrative market for new entrants. Increasing demand for water treatment chemicals from the industrial sector and growing government regulations for water recycling are the key factors fuelling the growth of the water treatment chemicals market in this region.
JM Financial Institutional Securities Limited Page 81 Water Treatment Chemicals 28 September 2017 3. Indian water treatment industry overview
In India, the largest consumer of water has been irrigation, which accounts for c.76% of total water consumption. Industrial, household and other segments constitute 24% of the total Indian water treatment chemicals consumption. The industrial and municipal water treatment sectors are driving the growth of industry market size is only 1.86 % water chemicals in the short term and long term, respectively. In India’s water treatment of global industry market size; chemicals market, corrosion and scale inhibitors accounted for a significant share in revenue Chinese market is c.8.2% of terms due to robust demand from power utilities and oil refineries. The opportunity in the global market Indian water treatment market can be assessed from the fact that the estimated sewage generation in the country was c.61,754 MLD in 2015 as against sewage treatment capacity of c. 22,963 MLD. Thus, nearly 62% of untreated sewage is discharged directly into nearby water bodies (source: Central Pollution Control Board). Moreover, the decreasing availability of water and rising environmental concerns are likely to drive expansion in the municipal water treatment market in India over the next decade. Indian water treatment chemicals market to post double-digit growth: The Indian water treatment chemicals market posted a CAGR of 12% over FY10-FY15 to reach USD 458mn, constituting c.2% of the Indian specialty chemicals industry’s size. Operating from a lower base, the market size of water treatment chemicals is expected to post a CAGR of c.13.8% over FY15-FY20 to reach USD 874mn in FY20. Urbanization, increasing population, and rapid industrialization will lead to increase in demand for water by c.20% within the next decade.
Exhibit 79. Indian Water Treatment Chemicals market (USD mn)
CAGR 12%
Source: FICCI-TSMG, JM Financial
Industries to drive short-term growth: The customer base of water treatment chemicals is widespread across diverse industries, from large power plants, refineries and fertiliser factories to pharmaceuticals, food and beverages, electronic and automobile companies. Five key industrial sectors (Pulp & paper, Distillery, Sugar and Textile and Tannery) contribute 118 Pulp and paper sector contributes tonnes per day of pollution load. Most of the sewage and industrial effluents remain highest quantity of BOD load untreated in India. Also, various industries operating in the country are expected to come up (65%) and effluent discharge with a number of brownfield and greenfield expansions over the next five years. The (55%) to rivers Petroleum, Chemical and Petrochemicals Investment Region (PCPIR) and Delhi-Mumbai corridor are expected to boost investments in the country’s industrial sector over the next decade, which would augment the demand for water treatment, thereby boosting the water treatment chemicals market.
Environmental concerns driving companies to go green: On 22Feb’17, the Indian Supreme Court directed all industrial units across the country to set up effluent treatment plants within three months. According to industry reports, nearly 30% of industrial waste water is not treated before release and thus, this ruling presents an enormous opportunity for the Indian water treatment industry to boost its earnings. The country’s Central Pollution Control Board
JM Financial Institutional Securities Limited Page 82 Water Treatment Chemicals 28 September 2017 (CPCB) has been expressing its concerns about the rising pollution in ground water and major rivers in India. All these factors culminate in presenting a very positive future for the water treatment industry in India. The market is also expected to be driven by export-oriented industries such as mining, food processing, chemicals, petrochemicals and textiles. Additionally, China’s EPA crackdown on its polluting industries has presented an opportunity to Indian water treatment companies to provide end-to-end effluent treatment solutions or to export water treatment chemicals.
Growing urbanisation, increasing awareness and rising living standards to drive long-term demand: India’s urban population has increased c.2% over CY11-CY16 to reach c.412 mn people, leading to growing demand for municipal water. Emphasis of the Govt. on creating 100 smart cities will also lead to huge anticipated demand of water. Overall, India is expected to add c.404mn new urban dwellers between CY15-CY50. For the past ten years, the quality of water has also been deteriorating across the country owing to the rapid urbanisation. Additionally, there has been increased awareness among urban users about recycling water. These factors have led to increasing demand for water treatment chemicals. However, there is increasing demand for the low-quantity use of chemicals for treatment purposes. Thus, we will see increased demand for specialty water treatment chemicals vs. traditional chemicals such as alum and ferric chloride. In developing countries like India, chemical water purification is conducted at the household level to provide safe drinking water. However, in urban areas of developing countries, this is generally done at the municipal level by civic authorities or by water management organisations. Thus, we believe that urbanisation will be a key long-term growth driver.
Exhibit 80. Indian urban population (% of total)
Source: World Bank, JM Financial
Continued investments by MNCs to participate in high growth Indian market: The importance of the Indian water treatment market can be assessed from the recent investment by Solenis, a leading global specialty chemicals company, to establish a direct channel for industrial water treatment. Having served this region for over 16 years through the joint venture with Chembond, Solenis decided to have a dedicated team of experienced Namami Gange is massive project professionals in place to manage the needs of the industrial water treatment market in India. announced in 2014 with an Under National Water Monitoring Programme, C.275 rivers out of 445 rivers are identified as allocated budget of c.USD 3.12bn polluted. Additionally, with increased focus by Govt. on projects like Swacch bharat and for 5 years Namami Gange (cleaning the Ganges by 2020), we will witness increased interest from MNC’s. These projects are vast and will attract players having competencies from water monitoring, to water management and treatment.
JM Financial Institutional Securities Limited Page 83 Water Treatment Chemicals 28 September 2017 4. Industry players and competitive analysis
The Indian water treatment chemicals market is highly competitive and mainly has integrated players such as private companies, MNCs, as well as joint ventures that either provide end-to- end water solutions or are in the process of expanding in the value chain. This also implies that most water treatment companies have their own water chemical manufacturing capabilities as well. Around 70% of the market is dominated by the organised sector, largely water management multinationals and large-scale domestic companies such as Nalco chemical India limited, Thermax Limited, Chembond and Ion Exchange India Limited. These companies have a diverse product portfolio and a strong distribution network to cater to the Indian market. Within India, the western region of the country is expected to continue its dominance in terms of the consumption of water treatment chemicals on account of existing and upcoming oil and gas, pharmaceutical and chemical manufacturing facilities. Among Indian companies, raw material and labour are the major cost drivers. Following exhibits highlights the competitive landscape of companies.
Exhibit 81. Snapshot of colourants companies (FY11-FY16) Revenue (FY16, Avg. Revenue Company Country Avg. EBITDA,% Avg. ROCE% Avg. ROE% in mn INR) Growth (CAGR %) Chembond Chemicals* India 2,710 5% 10% 23%* 17%*
Ion Exchange India 8,694 9% 4% 16% 7%
Ecolab Inc USA 883,697 23% 10% 26% 39%
Kemira Finland 175,747 4% 12% 5% 19%
Source: Bloomberg, Company, JM Financial *FY14 and FY15 not considered.
Exhibit 82. Competitive dynamics of Water treatment companies
Source: Company, JM Financial
Exhibit 83. Valuation metrics for water treatment companies – based on consensus EPS P/E EV/EBITDA Company Country FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E
Chembond Chemicals India 115 6 10 11 2x 32x 23x 20x 16x 9x NA NA
Ion Exchange India 11 20 NA NA 28x 19x NA NA 9x 7x NA NA
Ecolab Inc USA 4 5 5 6 27x 28x 24x 22x 15x NA 14x 13x
Kemira Finland 1 1 1 1 20x 15x 12x 12x 8x 8x 7x 6x Source: Bloomberg, Company, JM Financial
JM Financial Institutional Securities Limited Page 84 Water Treatment Chemicals 28 September 2017 5. Outlook
Despite the presence of several global players in the water chemicals space, Indian companies have also grown and are exporting innovative solutions across the world. Unlike certain other specialty chemicals segments in India, water treatment chemicals largely form an organised market with integrated players. With water projects and solutions providers having established in-house water chemical manufacturing capabilities, it would be imperative for pure-play companies to either integrate forward or develop strong partnerships with solutions providers. Key trends such as the shift from traditional (alum) to technically advanced products (coagulants and flocculants), followed by rising demand for environment-friendly chemicals in the wake of stricter government regulations and growing urbanisation indicates a positive outlook for the water treatment chemicals segment. Thus, the high projected growth rate of c.14% over FY15-FY20 can be easily achievable and even surpassed. While growing scarcity of usable water is limiting industry growth, this situation has offered a lucrative opportunity to water treatment companies. Overall, companies that manufacture and supply water treatment chemicals will be best served by transforming from pure-play chemical manufacturers to end-to-end service providers. They could capitalise on the opportunity offered by urban bodies in India that are moving to the “Build-Own-Operate-Transfer” model for water treatment management, either by building their own capabilities or through partnerships. Another critical success factor could be working closely with regulatory bodies such as pollution boards to understand and implement evolving environmental regulations governing water safety.
JM Financial Institutional Securities Limited Page 85 28 September 2017 India | Chemicals | Company Update
Ion Exchange | Not Rated An integrated water solutions provider
Ion Exchange (India) Ltd. (IEIL) is a leading player in water, waste water treatment and Mehul Thanawala environmental solutions catering to diverse segments such as infrastructure, industry, [email protected] | Tel: (91 22) 66303063 institutions, municipal, homes and communities. IEIL also manufactures ion exchange resins Alok Ranjan [email protected] | (+91 22) 6630 3073 and specialty chemicals for water and waste water treatment as well as non-water Pramod Krishna applications. Its business can be segregated in to three verticals: engineering (60% of [email protected] | Tel: (91 22) 61781074 revenue), chemicals (30%) and consumer products (10%). IEIL’s long-standing and evolving technology and application knowledge as well as strong focus on R&D has helped it generate 50 patents and more than 100 commercialised products. IEIL is highly focussed on increasing its presence domestically and globally with key projects in Sri Lanka and growth in the resins market in North America. Key Data – ION IN Current Market Price INR483 Engineering business – key projects driving the business: IEIL has healthy order book of Market cap (bn) INR7.1/$0.1 c.USD 309mn including a Sri Lankan water supply project (EPC) worth USD 194mn, Free Float 47.6% funded by the World Bank. Although its revenue growth has been sluggish, posting 1.5% Shares in issue (mn) 14.67 over FY12-FY16, realisations from the Sri Lanka project increased its revenue by c.25% Diluted share (mn) 14.67 3-mon avg daily val (mn) INR5.2/US$0.1 over FY16-FY17. Management expects the Sri Lankan project’s execution to accelerate its 52-week range 638/254 revenue growth over the next three years (FY18-FY20). Over the next 3-5 years, IEIL Sensex/Nifty 31,160/9,736 expects better traction of projects from the Centre, state and municipal levels from FY18. INR/US$ 65.7 Moreover, better margins are also expected due to significant improvement on the Price Performance execution of orders from smaller and medium segments and exports. % 1M 6M 12M Chemicals business – an organised play: IEIL’s chemicals division has posted c.16% CAGR Absolute -10.0 20.8 69.5 Relative* -8.6 14.2 59.1 over FY10-FY17. The organised sector caters to c.80% of the water treatment chemicals * To the BSE Sensex market and thus gross margins (c.30%-35%) are fairly attractive compared with the other
two segments. IEIL offers a complete range of water treatment chemicals, specialty chemicals and customised chemical treatment programmes as a part of its treatment solutions. The capex in its chemicals business was c.USD 2.34bn Cr in FY17 and management has guided for similar capex in FY18. Management is confident it can maintain its revenue growth momentum on the back of continued capex and USFDA approval for its resins plant at Ankleshwar.
Consumer business – revival on the cards: IEIL’s water management solutions extend beyond industries to homes, hotels and hospitals under the brand name Zero B, which is positioned towards the premium end of the market as the company does not want to enter the highly-competitive economy segment. Although the consumer segment has lost ground over the past few years, management is planning to revive the business by focussing on the expansion of ground water treatment solutions by tailoring products to meet the requirements of specific markets.
Industry outlook favours IEIL: According to Central Pollution Control Board, India does not have the capacity to treat c.63% of sewage. Thus, the Indian waste water management industry is expected to record a CAGR of c.8-10% over FY15-FY20. With increasing environment-related concerns, capex on water and waste water infrastructure is going to increase, resulting in a significant opportunity for integrated players such as IEIL.
Financial Summary (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Net sales 8,573 7,930 8,005 8,711 10,241 Sales growth (%) 18.6 -7.5 0.9 8.8 17.6 EBITDA 492 341 466 556 776 EBITDA (%) 5.7 4.3 5.8 6.4 7.6 JM Financial Research is also available on: Adjusted net profit 141 46 98 153 284 Bloomberg - JMFR
JM Financial Institutional Securities Limited Ion Exchange 28 September 2017 Financial Tables (Consolidated)
Income Statement (INR mn) Balance Sheet (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A Net sales (Net of excise) 8,573 7,930 8,005 8,711 10,241 Share capital 130 141 141 141 142 Growth (%) 18.6 -7.5 0.9 8.8 17.6 Other capital 0 0 0 0 0 Other operational income Reserves and surplus 1,377 1,381 1,420 1,560 1,837 Raw material (or COGS) 5,850 5,434 5,222 5,636 6,618 Networth 1,507 1,522 1,561 1,701 1,979 Personnel cost 980 965 975 1,102 1,217 Total loans 704 890 769 798 907 Other expenses (or SG&A) 1,250 1,190 1,342 1,417 1,630 Minority interest 76 78 85 62 63 EBITDA 492 341 466 556 776 Sources of funds 2,287 2,491 2,415 2,561 2,949 EBITDA (%) 5.7 4.3 5.8 6.4 7.6 Intangible assets 9 19 15 13 13 Growth (%) 55.8 -30.7 36.7 19.4 39.4 Fixed assets 2,006 2,005 2,062 2,334 2,537 Other non-op. income 47 48 43 65 58 Less: Depn. and amort. 1,004 1,088 1,232 1,318 1,429 Depreciation and amort. 123 106 121 126 133 Net block 1,011 936 845 1,030 1,121 EBIT 416 284 388 496 700 Capital WIP 15 12 144 21 332 Less: Finance Costs -156 -136 -150 -149 -163 Investments 27 26 24 25 30 Pre tax profit 260 148 239 346 537 Def tax assets/- liability -70 -60 -39 -36 -33 Taxes 114 100 124 177 251 Current assets 5,555 5,382 5,517 5,815 8,287 Add: Exceptional items 0 0 0 0 0 Inventories 724 755 793 814 1,109 Add: Extraordinary items 0 0 0 0 0 Sundry debtors 3,579 3,484 3,582 3,630 4,405 Less: Minority Interest 5 2 17 16 3 Cash & bank balances 260 238 262 334 1,669 Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other current assets 2 3 3 5 5 Reported net profit 141 46 98 153 284 Loans & advances 990 902 877 1,032 1,099 Adjusted net profit 141 46 98 153 284 Current liabilities & prov. 4,341 3,855 4,113 4,299 6,811 Margin (%) 1.6 0.6 1.2 1.8 2.8 Current liabilities 3,478 3,155 3,162 3,314 3,960 Diluted share cap. (mn) 129.80 140.90 140.90 141.20 142.30 Provisions and others 862 700 951 985 2,851 Diluted EPS (`) 10.89 3.24 6.93 10.84 19.92 Net current assets 1,214 1,527 1,404 1,516 1,477 Growth (%) 1,126.6 -70.3 114.3 56.4 83.7 Others (net) 90 51 37 6 23 Total Dividend + Tax 8,046 10,263 3,103 468 541 Application of funds 2,287 2,491 2,415 2,561 2,949 Source: Company, JM Financial Source: Company, JM Financial
Cash Flow Statement (INR mn) Y/E March FY13A FY14A FY15A FY16A FY17A
Reported net profit 141 46 98 153 284
Depreciation and amort. 141 85 144 86 111 Key Ratios -Inc/dec in working cap. 279 -259 -130 84 -425 Y/E March FY13A FY14A FY15A FY16A FY17A Others 4 2 7 -23 1 BV/Share (`) 11.6 10.8 11.1 12.0 13.9 Cash from operations (a) 565 -127 119 300 -29 ROIC (%) 12.4 4.4 8.0 10.7 21.9 -Inc/dec in investments 22 2 1 0 -5 ROE (%) 9.8 3.0 6.3 9.4 15.4 Capex -268 -7 -185 -147 -514 Net Debt/equity ratio (x) 0.3 0.4 0.3 0.3 -0.4 Others -365 -75 277 -123 1,799 Valuation ratios (x) Cash flow from inv. (b) -611 -81 92 -271 1,280 PER 44.3 NA 69.7 44.5 24.2 Inc/-dec in capital 8,040 10,232 3,043 456 535 PBV 41.6 44.7 43.6 40.1 34.7 Dividend+Tax thereon -8,046 -10,263 -3,103 -468 -541 EV/EBITDA 13.6 21.8 15.6 13.0 7.8 Inc/-dec in loans 143 187 -121 28 109 EV/Sales 0.8 0.9 0.9 0.8 0.6 Others -19 30 -7 28 -19 Turnover ratios (no.) Financial cash flow ( c ) 118 186 -188 43 84 Debtor days 152 160 163 152 157 Inc/-dec in cash (a+b+c) 72 -23 24 73 1,335 Inventory days 31 35 36 34 40 Opening cash balance 188 260 238 262 334 Creditor days 217 212 221 215 218 Closing cash balance 261 237 262 334 1,669 Source: Company, JM Financial Source: Company, JM Financial
JM Financial Institutional Securities Limited Page 87 Indian Specialty Chemicals 28 September 2017 Appendix 1 Specialty Chemicals – A special segment within chemicals
Specialty chemicals companies play in niche areas; they target a particular functional performance and are thus difficult to be replaced by other competitors. On the other hand, Specialty chemicals segment is the commodity chemical products of one supplier can be easily changed with another’s. increasingly attracting the Therefore, basic chemicals companies use cost-competitiveness and scale as their strategy attention of investors worldwide tool, whereas pure play specialty companies use innovation as a competitive strategy. The result of these strategies is evident in the comparative analysis of these two segments. In order to represent each segment of basic and specialty chemicals in the comparative analysis, we analysed 22 basic and 22 specialty companies. The 22 specialty companies includes various segments of specialty chemicals such as dyes and pigments, agro and Basic chemicals focus on cost pharma intermediates, agrochemicals, rubber chemicals, colourants, fluoro-chemicals, etc. competitiveness and scale; We analyse these companies on qualitative and quantitative parameters (based on financial specialty chemicals focus on R&D, data between FY11-FY16) to highlight differences between basic and specialty chemicals. new product launches Exhibit 84. Basic chemicals vs. Specialty chemicals – An analytical comparison Parameters Basic Chemicals Specialty Chemicals Qualitative
Product type Specification based Performance/functional product
Structure Simple molecular Single molecule/formulation
Production Continuous Mainly batch
Price determination Supply – demand balance Performance Medium to high volume products with lower Low to medium volume products with Volume and Value price realisations higher price realisations Value addition Low to medium Medium to high Specialty companies outperformed Plants/Facilities Costly, not able to vary product Small, inexpensive, able to switch products basic chemicals on nearly all the parameters. Labor requirements Minimal, rely on automation Costly, rely on innovation Strong R&D leading to new product Access to secure and cost-efficient raw Key Success Factors development, high performance-to-price material, operational efficiency ratio Quantitative (FY11-FY16)
Revenue Growth (CAGR) 6% 15%
Raw material cost to sales 62% 54%
R & D expense to sales ~0% ~1-2%
Employee cost to sales 5% 7% Specialty chemicals: higher gross EBITDA margin 11% 15% margins, profit margins, ROCE and Profit Margin 4% 8% ROE ROCE 12% 24%
RONW 11% 20%
Source: Company, JM Financial
Exhibit 84 clearly illustrates the financial superiority of specialty chemicals when compared with basic/diversified chemicals. On average, raw material costs as a percentage of sales are 8-9% lower compared with specialty chemicals, mainly on account of high value addition leading to higher realisations. For example, in the fluorine value chain, price of PTFA powder ranges at INR 700-1300/kg, nearly 35x-65x the price of raw material, fluorspar which is sold at INR 20/kg. Gross margins of specialty chemicals companies are typically higher but get partially offset by higher R&D and employee expenses due to higher focus on new product development. Also, EBITDA and profit margins are higher in the specialty chemicals segment owing to higher gross margins and lower power and fuel costs. Overall, specialty chemicals can be characterised as a sector which exhibits high growth, high margins and delivers better returns on capital employed and equity.
JM Financial Institutional Securities Limited Page 88 Indian Specialty Chemicals 28 September 2017 Appendix 2 Specialty chemicals – Transitions, worth looking at Introduction Over the past 4-5 decades, at various stages, various countries have led the specialty chemicals business. US led the industry after World War II until the late 1980s, manufacturing chemicals for use in oil field services, electronics, plastics, etc. Gradually, Europe took over and dominated the business mainly through exports, while the US and Japan remained key producers. However, with trade liberalisation, technology transfer, reducing economic barriers and rapid economic growth in developing countries, the specialty chemicals industry expanded rapidly in China, especially after it joined the WTO in Dec’01. The high growth The industry initially saw a seen in China’s specialty chemicals industry may be attributed to low labour costs, low energy leadership change from the US to and regulatory costs (compared with developed markets) and a highly-developed basic Europe chemicals segment. Although China has seen strong growth in the specialty chemicals US/Europe/Japan remained major segment, recent structural changes have reduced its competitiveness and gradually, India players until the 2000s maybe able to emerge as a fast-growing specialty chemicals hub. In this Appendix, we try and understand what drove this change – why did the US become the leader and why then did the industry move to other regions? We analysed the cycle of the specialty chemicals industry in developed countries such as the US and Japan as well as Europe (comprising 8 large exporters: Germany, France, Italy, the UK, Spain, Netherlands, Belgium and Poland). We also highlight its gradual shift towards growing Asian countries such as China and India. 1.US led the specialty chemicals industry: Pre-1990 US led the specialty chemicals industry on the back of cheap raw material: During the 1980s, the US accounted for approximately half (46%) of global sales of specialty chemicals clearly In the 1980s, the US domestic highlighting its predominance. Western Europe accounted for 34% and Japan accounted for market accounted for 46% of 15%. We note that the US had easy access to raw material (including energy) as it was one global sales of the world’s largest producers of oil. Thus the first driver (low raw material costs) made the US the global leader in specialty chemicals. Also, we note that in those early days, most of the specialty chemicals were used oilfield work and electronics; therefore, the demand centre was also the US. Electronics chemicals was the fastest growing segment, with demand being driven by its use in plasma processing Europe and Japan were the second materials, materials for photovoltaic cells, conformal coatings, etc. In 1983, the diagnostic and third largest markets in chemicals segment in the US generated revenue of c.USD 4.5bn, with a 10% annual growth specialty chemicals rate. Demand for oilfield chemicals was directly dependent on demand for crude petroleum and these chemicals grew c.21% during 1978-1982 (Exhibit 85).
Exhibit 85. US high-growth specialty chemicals segments (1983)
Electronic chemicals led growth on the back of a boom in integrated circuit manufacturing
Source: Industry, JM Financial
JM Financial Institutional Securities Limited Page 89 Indian Specialty Chemicals 28 September 2017 The following exhibit illustrates the trade balance, demand and production data and the specialty chemicals segments contributing to high growth rates.
Exhibit 86. US demand, trade and production data of specialty chemicals - 1983 (in USD bn)
US specialty manufacturers mainly focussed on catering to domestic demand
Source: JM Financial
It is pertinent to note from the above exhibit that the US was not importing specialty chemicals but was largely manufacturing them. This provided a strong demand base for US producers of specialty chemicals. Thus, the second factor (domestic demand) also supported US specialty chemicals industry the US’ specialty chemicals industry. Moreover, the average growth rate for the US speciality posted 5% CAGR in 1983 chemicals industry was c.5% during 1983, one of the highest among major manufacturers. The US also enjoyed the remaining 3 factors: innovation, strong IPR and relatively low focus on environment (leading to lower compliance costs). 2.Emergence of Europe as major specialty chemicals export hub – 1990-2002 Gradually, Europe started to make inroads in the US domestic market: We note that even during the early 1980s, Europe was the second largest region for specialty chemicals, but had slowly started gaining global leadership. In 1983, US specialty chemicals exports were 7x the value of its imports, but import was growing 2x export growth. Around this period (early-to-mid 1980s), three factors started impacting the specialty chemicals industry: 1) the oil shocks of the previous decade (1973 and 1979) possibly resulted High dependency on imported in declining profitability for European companies, which were more dependent on imported feedstock pushed European firms crude; 2) in the US, there was increased focus on pollution (the last major refinery in the US – towards specialty chemicals >1,00,000 barrels/day – was built in 1977); and 3) the US started becoming increasingly dependent on imported crude (Exhibit 87).
Exhibit 87. US net imports of crude oil and petroleum products (1000 barrels per day) 16000
14000
12000
10000
8000
6000
4000
2000
0
Jan-1981 Jan-2001 Jan-1973 Jan-1977 Jan-1985 Jan-1989 Jan-1993 Jan-1997 Jan-2005 Jan-2009 Jan-2013 Jan-2017
Sep-1987 Sep-1975 Sep-1979 Sep-1983 Sep-1991 Sep-1995 Sep-1999 Sep-2003 Sep-2007 Sep-2011 Sep-2015
May-1974 May-1994 May-1982 May-1986 May-1990 May-1998 May-2002 May-2006 May-2010 May-2014 May-1978 Source: JM Financial
JM Financial Institutional Securities Limited Page 90 Indian Specialty Chemicals 28 September 2017 These three factors led to: 1) increased cost of raw material for US companies, thus making the US lose the strategic advantage to Europe and 2) increased regulatory/effluent treatment costs for US companies. Therefore, by by late-1980s and early-1990s, the US lost its leadership in specialty chemicals, while European firms emerged as major specialty chemicals players, especially in terms of exports. Europe – despite some hiccups – maintained the lead for the next decade: By 1991, Europe was the largest producer of specialty chemicals (38% of the global export market share). However, its market share declined sharply by c.7% during 1991-1995 (Exhibit 88) due to factors such as the disintegration of the Soviet Union and reunification of Germany. However, its strengthening trade links with Eastern Europe’s low cost (wage and production) countries such as Poland and Czech Republic helped recover the falling exports market share. The global economy also did well in the late 1990s with the US economy growing 5.1% during 1995-2000. The weakening of the EUR further helped Europe gain global market share in the early 2000s. Hence, Europe broadly maintained a share of >30% till about 2005.
Exhibit 88. Specialty chemicals export market share (%)
Europe lost the maximum market share vs. the US and Japan
Source: Oxford Economics, JM Financial
3.Declining competitiveness of Europe & the emergence of China as the fastest- growing specialty chemicals manufacturer – 2002-2012
China’s WTO entry and other factors led to a sharp decline in Europe’s market share: China was granted the permanent most favoured nation status by the US in 2000 and this was shortly followed by its entry into the WTO. This opened up a vast market with cheap labour and much less regulatory and compliance costs, resulting in Europe/US losing nearly 6%/2% of the world’s export market share at the expense of China/India, who gained c.6%/c.1.5%, a trend expected to continue over the years. Among developed countries, US/Europe were losing exports market share, but Japan kept its market share intact as it benefitted from the geographical proximity to fast-growing markets such as China, leading to strategic benefits of reduced transportation costs and time. Among the three developed regions, Europe lost significant market share not due to the slow growth in its destination market, but mainly due to the deterioration of its competitiveness. Europe’s declining competitiveness trend was seen not only in the specialty chemicals segment but also in the overall chemicals sector. Exhibits 89-91 show that Europe lost its domestic and ROW market share.
JM Financial Institutional Securities Limited Page 91 Indian Specialty Chemicals 28 September 2017 Exhibit 89. EU losing share in the domestic chemicals market (EUR bn)
EU lost 6% chemicals market share in the domestic market
81%
Source: Cefic, JM Financial
Exhibit 90. EU losing share in ROW chemicals market (EUR bn)
EU lost 3.3% chemicals market share in ROW market
Source: Cefic, JM Financial
Exhibit 91. EU chemical sales: a falling share in a growing market
Mature market, ageing population, declining competitiveness affected Europe’s share in overall sales of chemicals
Source: Oxford economics, Cefic, Industry, JM Financial
As shown in exhibit 91, Europe’s share of global chemical sales decreased significantly from 32% in CY93 to 17% in CY13, mainly due to the dilution effect, which continued over a
JM Financial Institutional Securities Limited Page 92 Indian Specialty Chemicals 28 September 2017 period of time. Growth in post-recession Europe remains slow, mainly due to its mature markets and ageing population. Exhibit 92 also illustrates the increase in the consumption of chemicals in emerging markets compared with Europe. The resulting market share loss in domestic and export sales points at Europe’s declining competitiveness and China’s increased penetration in Europe and the US markets.
Exhibit 92. Chemicals consumption - emerging economies saw fastest growth (2003-2013)
Source: Cefic, JM Financial We assessed the competitiveness of Europe’s specialty chemicals industry using parameters such as energy costs, labour costs, R&D expenses, regulatory burdens, proximity to high- growth markets and currency movements.
Energy costs: While the energy cost impact is higher in basic chemicals, even downstream sectors are affected due to the rising cost of basic chemicals, which are used as feedstock. Costs of energies such as natural Since Europe’s basic chemicals companies depend on imports for most of the feedstock, it gases and basic chemicals affected leads to lower competitiveness vs. the US and China (closer proximity to the Middle East). competitiveness Overall, the specialty chemicals industry also felt the heat of the high energy costs that plagued the basic chemicals industry.
Labour costs: Labour costs have been instrumental in driving the specialty chemicals industry’s transition from the West to the East. Labour data reveals that Europe’s chemical sector wages are significantly higher than the US’. While the gap with Japan has all but disappeared, the gap with the US has been widening since 2010. China’s labour costs have rapidly risen, but on a very low base vs. Europe and the US. This made China increasingly attractive to global players.
Exhibit 93. Hourly wages in major producers of chemicals
In 2012, the labour cost in China was only 7% of Europe’s
Source: Oxford economics, Cefic, JM Financial
Research and Development: R&D is an important driver of competitiveness in the specialty chemicals sector. However, there has been a steady decline in R&D activity over the past 20 years in the developed world. In Europe, the decline has been fairly steady, from about 2.75% of the sector output in CY92 to 1.5% in CY12. As expected, Japan has
JM Financial Institutional Securities Limited Page 93 Indian Specialty Chemicals 28 September 2017 demonstrated higher R&D intensity than others. However, China increased its R&D spending dramatically in the early 2000s as it entered the WTO. Moreover, R&D spending in absolute terms is growing more rapidly in China than it is in developed countries.
Exhibit 94. R&D spending in major producers of chemicals (in %)
R&D spending in Europe declined to 1.25% of output during 1992- 2012
Source: Oxford economics, Cefic, JM Financial
Regulatory costs: Among major specialty chemicals producing countries, China has the lowest regulatory burden and Europe the highest. Over the past 7 years, the US’ regulatory burden has also risen. A further granular analysis indicates that within Europe’s Compared with China, US and chemicals industry, agrochemicals (c.16% of value added) and specialty chemicals (c.23% Japan, Europe had the highest of value added) have the highest regulatory burdens. During CY03-CY13, compliance regulatory burden in 2013 costs were driven by the introduction of REACH regulations in CY07 and CLP in CY08. Energy legislations also contributed to the rising costs, especially after CY12. This led to doubling of regulatory costs.
Exhibit 95. Business regulatory burden - CY13
Source: Oxford economics, World economic forum, JM Financial
We believe the decline in Europe’s competitiveness vs. the US and China was led by the multiple parameters discussed above. Despite decreasing cost competitiveness, Europe could have maintained its exports market share had it continued on the path of innovation. Therefore, product and process innovation are critical factors for Europe/US to deliver maximum value to customers and compensate for cost disadvantages vs. China and India. China rising as a growth leader: During the end of the 1990-2013 period, China emerged as one of the fastest growing specialty chemicals manufacturers. This was driven by the growth
JM Financial Institutional Securities Limited Page 94 Indian Specialty Chemicals 28 September 2017 in its basic chemicals industry, its entry in to the WTO in CY01 and the gradual shift from basic to specialty chemicals. China grew c.13% over CY08-CY16. The parameters discussed above will remain critical, helping identify the next leader in the specialty chemicals segment. Overall, this period saw a decline in Europe’s competitiveness and the emergence of China as the next leader.
Key reasons for Europe’s reduced exports share – Declining competitiveness
Exhibit 96. Europe regulatory cost – Specialty, Agrochemicals & basic chemical sector
Within chemicals, agrochemicals and specialty chemicals incur the highest regulatory costs
Source: Cefic, JM Financial 4.Emergence of India on the specialty chemicals map: Post 2013 Specialty chemicals industry moves towards emerging markets: From the tri-polar (US, Europe and Japan) specialty chemicals producing world in the 1990s, we have moved to a multi- platform chemicals producing world, where regions are competing for investments. Over the Specialty chemicals industry saw years, other countries recognised the strategic importance of the specialty chemicals industry the transition from a tri-polar to and thus China and India have made successful efforts to build large and increasingly multi-polar world sophisticated production facilities. The reasons for the emergence of developing countries are energy, feedstock advantages, cost effectiveness, increasing focus on R&D and end-use market growth. India rapidly closing the gap: In the current scenario, India looks similar to what China used to be in the specialty chemicals market during the early 2000s. While it has remained in China’s shadow for long, it gradually is emerging out of it with its own structural benefits and the spillover effect of China’s declining competitiveness. India has a c.35% labour cost advantage over China. Moreover, India’s labour cost growth rate was only 6% vs. 20% in China over FY06-FY15. In terms of market penetration, India’s specialty chemicals usage is at India has emerged as the fastest a nascent stage, with the penetration level of some segments below 0.2%. For example, growing major specialty chemicals India’s current expenditure on admixtures is only USD 1/m3 vs. USD 2/m3 in China and USD manufacturer 4.5/m3 in USA Similarly, the usage of pesticides in India is 0.58kg/ha compared with 2kg/ha in China. Also, according to an NCAER survey, the Indian middle class could grow from 31 million households in 2008 to 148 million households by 2030 with 4x consumption power. Additionally, India’s urban population is expected to increase by 275 million people by CY30. The above factors will result in consumption-led double-digit growth in key end markets. We have analysed India’s competitiveness on various competitive parameters in our main section.
In summary, Asian economies will drive growth in the specialty chemicals industry. In order to participate in the growth of emerging markets, the US and Europe should either have export competitiveness or thorough investments in these growing markets. We observe that the second route has been most productive and favourable for these US/European companies.
JM Financial Institutional Securities Limited Page 95 Indian Specialty Chemicals 28 September 2017 Appendix 3 Oleochemicals: Driving consumers towards GREENER products Oleochemicals are derived from natural oils and fats taken from animals and plants. Growing demand for green products and sustainable solutions, coupled with regulatory changes in recent times, has brought oleochemicals into focus. Oleochemical-based products are Exhibit a. Expected increase in oleochemical becoming popular across specialty chemicals segments owing to their advantages including production (2016-2025) their eco-friendly image, low toxicity and fine dermatological compatibility. Oleochemicals are mainly used in personal and household care products, pharmaceuticals, food and beverages. With constant growth of raw material availability and emerging end use in areas such as bio- lubricants and surfactants, the global oleochemicals market is expected to reach c.USD 26bn by end-CY19, with a c.4.2% CAGR over CY14-CY19. By region, Asia-Pacific is the production leader and the fastest growing market. We believe oleochemicals will continue to grow at a faster rate but may face challenges such as feedstock unavailability and growing number of alternative uses for its raw materials
Asia-Pacific to be the production leader – India emerges as a frontrunner: Asia-Pacific will remain the major manufacturer of oleochemicals due to widespread availability of raw Source: Industry, JM Financial material and consequent up-stream integration for all major companies. Apart from production, Asia-Pacific is the fastest growing oleochemicals market, with consumption recording c.5.1% CAGR during CY14-CY19. Within Asia-Pacific, India is a key market Exhibit b. Oleochemcial route with market size of c.USD 1.6bn in FY15, expected to grow at c.5% over FY15-FY20 due to increasing consumption of oleochemical-based products such as personal care items and detergents. Therefore, there is also potential for new installed capacities for the manufacture of oleochemcials in India.
Higher crude oil prices will boost oleochemicals capacity: In CY15, fatty acids and alcohols ranked #1 and #2 in terms of market share by type in the global oleochemicals segment. The production capacity for fatty alcohols and fatty acids was only 4.5 million and 11.5 million tonnes, respectively in CY15. A capacity increase for both will be strongly influenced by crude oil prices (synthetic alcohols). Higher crude oil prices will drive the demand for alternate sources of raw materials for personal and household care products, leading to a focus on increasing oleochemicals’ capacity. Additionally, major capacity
additions are likely in the Asia-Pacific region owing to high dependence on crude oil Source: JM Financial imports and the expanding market for oleochemicals-based products.
Emerging applications to drive rapid expansion: Oleochemicals are gaining popularity Exhibit c. Global oleochemical market among companies that manufacture lubricants, polymers and surfactants. The use of biolubricants will help bypass the high cost of disposing synthetic lubricants. Biolubricants have a c.3% market share and industry reports indicate that by FY20, it will account for 9% of the market, implying a CAGR of 19%. Like biolubricants, biopolymers are substituting synthetic polymers. Although the biopolymers market is in the infancy stage, it is expected to post a CAGR of 40% to reach c.20mn tonnes by FY20, accounting for 7% of the global polymers market. Among surfactants, Methyl Ether Sulphonate (MES) is an oleochemical-based substitute for the commonly-used Linear Alkyl Benzene Sulfonate (LABS). MES’ performance is better than LABS due to excellent characteristics such as high purity and active level with no volatile organic compound. Source: Industry, JM Financial
Challenges ahead: The key challenge for the oleochemicals segment is linked to the affordability of oleochemical-based products. Oleochemical prices are affected by: (1) Feedstock availability – Feedstock availability is a key concern for companies operating in the oleochemicals segment or those planning to enter it. Historically, 12%-14% of the world’s vegetable oil production has been used to manufacture oleochemicals. Oleochemicals’ production depends on favourable climatic conditions and only geographies such as India, Malaysia and Indonesia offer climates suitable for palm tree plantations. (2) Alternative uses of vegetable oil: Increased requirement of biodiesels (derived from vegetable oils) could push price of vegetable oil. Thus, manufacturers of chemicals may find it less attractive to use oleochemicals vs. petroleum feedstocks.
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APPENDIX I
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