Вы находитесь на странице: 1из 59

INDIAN SPECIALITY CHEMICALS

Formulating for sustained growth

July 03, 2014


Indian specialty chemical sector
has emerged as one of the key
beneficiary of high growth in end
user industry and growth is likely to
accelerate as India gains advantage
over China
The sector is expected to grow at a
CAGR of 17% in next 5 years as
exports have emerged as key
growth driver with encouraging
opportunities in domestic market
Companies with strong focus on
R&D, diversified product profile and
large customer base are likely to
benefit from this emerging growth
opportunities in medium to long
term

H
O O
O
N
H

We believe that Atul Ltd, Aarti


Industries and Vinati Organics to
emerge as winners with earnings
CAGR of 25-30% over next 2-3 years
and potential return of 50-80%

HN
O

Chetan Thacker
Research Analyst
chetan.thacker@emkayglobal.com
+91-22-66121272
Rohan Gupta
Senior Research Analyst
rohan.gupta@emkayglobal.com
+91-22-66121248

Indian specialty chemicals

Specialty Chemicals Sector Report

Contents
Investment rationale ................................................................................................................................................................................. 5
Financial performance to remain strong..................................................................................................................................................... 9
Valuations...............................................................................................................................................................................................10
Global specialty chemical industry to grow at a CAGR of 5-6% ................................................................................................................12
Indian specialty chemical industry has grown at a CAGR of 11-13% in the last 5 years..............................................................................14
Paints and coatings segment ............................................................................................................................................................17
Construction chemicals ......................................................................................................................................................................18
Colorants...........................................................................................................................................................................................19
Exports: Emerge as a new growth opportunity..........................................................................................................................................20
Specialty chemical and base chemicals: The key differentiators................................................................................................................26
Indian specialty chemical players: Riding the wave...................................................................................................................................28
Risk and Concerns..................................................................................................................................................................................31
Financial snapshot of Specialty Chemical Companies ..............................................................................................................................32

Companies
Aarti Industries Steady growth with stable margins ...............................................................................................................................33
Atul Ltd. Product innovation, cost rationalization are the key .................................................................................................................43
Vinati Organics Return ratios and margins best in the industry ..............................................................................................................52

Emkay Research

July 3, 2014

Emkay

Indian specialty chemicals


Formulating for sustained growth

Your success is our success

July 3, 2014

Aarti Industries
Price Performance
(%)

1M

3M

6M 12M

Absolute

35

77

125

176

Rel. to Nifty

29

54

82

108

Source: Bloomberg

Relative price chart


175

Rs

40

152

24

129

106

-8

83

-24

60
May-13

Jul-13

Sep-13

Nov-13

Aarti Industries (LHS)

Jan-14

Mar-14

-40
May-14

Atul Ltd.
Price Performance
1M
10

3M
107

81

Rel. to Nifty

6M 12M
107 182
67

112

Source: Bloomberg

Relative price chart


725

Rs

70

630

50

535

30

440

10

345

-10

250
May-13

Jul-13

Sep-13

Nov-13

Atul Ltd (LHS)

Jan-14

Mar-14

-30
May-14

Rel to Nifty (RHS)

Source: Bloomberg

Vinati Industries Organics


Price Performance
(%)
Absolute

1M
25

3M
11

Rel. to Nifty

19

-3

6M 12M
66 219
34

141

Source: Bloomberg

Relative price chart


300

Rs

120

256

88

212

56

168

24

124

-8

80
May-13

Jul-13

Sep-13

The sector is expected to grow at a CAGR of 17% in next 5


years as exports have emerged as key growth driver with
encouraging opportunities in domestic market
Companies with strong focus on R&D, diversified product
profile and large customer base are likely to benefit from this
emerging growth opportunities in medium to long term
We believe that Atul Ltd, Aarti Industries and Vinati Organics
to emerge as winners with earnings CAGR of 25-30% over next
2-3 years and potential return of 50-80%

Encouraging growth opportunity

Rel to Nifty (RHS)

Source: Bloomberg

(%)
Absolute

Indian specialty chemical sector has emerged as one of the


key beneficiary of high growth in end user industry and growth
is likely to accelerate as India gains advantage over China

Nov-13

Vinati Industries (LHS)

Jan-14

Mar-14

-40
May-14

Indias specialty chemical sector is likely to deliver a growth of 17-18% on the back of
buoyant domestic demand and encouraging export opportunities. This sector has posted a
growth of 12-15% in the last 4-5 years, while increase in end-user demand on the back of
growing base of the middle-class, growing consumption intensity; as Indias per capita
consumption of specialty chemicals is low; and improving standards for consumption in
various industries offers enormous growth potential.

India gaining advantage over China unfolds export potential


China has been scoring higher than India in the chemical industry (fourth largest exporter
globally), but our analysis of leading Chinese manufacturers indicates increasing cost
pressure in China. Factors such as appreciating currency (Yuan appreciation against US
dollar), increasing cost of labour & power, and tightening pollution control norms have
diluted the cost advantages enjoyed by Chinese manufacturers earlier. India is rightly
placed to benefit from this emerging opportunity and can register multifold growth in exports
market going forward.

Finding winners Atul Ltd., Aarti Industries and Vinati Organics may benefit
In our view, the companies with a diversified product and client portfolio with high degree of
forward- integration are likely beneficiaries of this sustained growth opportunity in the
industry. Going forward, the companies that have been investing in strengthening their
R&D capabilities and meeting pollution control norms are more likely to benefit. Though
specialty chemicals is a wide industry, with companies having a distinct profile, expertise
and specialization, our initial screening suggests that companies like Atul Ltd., Aarti
Industries and Vinati Organics are well equipped to benefit from this compounding growth
story. Our interaction with the management provides us concrete growth plans.

Companies to benefit from sustained earnings growth re-rating potential


We believe the current valuation of the sector does not factor in complex nature of the
industry and strong entry barriers enjoyed by this sector. These companies command
stable margins, with an expected PAT growth of 25-30% and return ratios (RoCE) of 1822%. On the one hand, we see an earnings growth of 25-30% per annum over the next 2-3
years and also foresee a re-rating opportunity in this sector.

Rel to Nifty (RHS)

Source: Bloomberg

Chetan Thacker
chetan.thacker@emkayglobal.com
+91-22-66121272
Rohan Gupta
rohan.gupta@emkayglobal.com
+91-22-66121248

Emkay Global Financial Services Ltd.

Company snapshot
RoCE

RoE

CMP

Market Cap
(Rs bn)

D/E

(%)

(%)

P/E

EBITDA

P/B

Upside

Aarti Industires

219

19,400

1.1

17.0

20.0

11.9

7.1

2.2

50-60%

Atul Limited

921

27,300

0.3

27.7

25.7

12.4

8.3

2.9

60-80%

Vinati Organics

322

15,900

0.2

30.3

31.3

18.7

11.0

5.2

50-70%

Company

EV/

Potential

Source: Company, Emkay Research

Specialty Chemicals Sector Report

Specialty Chemicals Sector Report

Indian specialty chemicals


Exhibit 1: Financial Snapshot
Year

Revenue

EBITDA EBITDA Margin

APAT

EPS

RoCE

D/E

P/E

EV/EBITDA

P/BV

Aarti Industries
FY11

14,572

2,021

13.9

815

10.6

13.9

1.3

20.5

11.5

3.3

FY12

16,769

2,529

15.1

1,033

13.1

14.7

1.3

16.7

9.9

2.9

FY13

21,000

3,650

17.4

1,344

17.0

16.8

1.4

12.8

7.6

2.3

FY14

26,325

4,015

15.3

1,624

18.3

17.0

1.1

11.9

7.1

2.2

CAGR (FY11-14)

22%

26%

26%

20%

Expected Growth

22-25%

25-30%

Atul Limited
FY11

15,851

2,038

12.9

902

30.4

19.0

0.5

30.2

14.9

4.8

FY12

18,048

2,174

FY13

20,631

2,726

12.0

911

30.7

17.3

0.6

29.9

14.3

4.2

13.2

1,198

40.4

20.0

0.5

22.8

11.3

FY14

24,578

3,637

3.6

14.8

2,192

73.9

28.0

0.3

12.4

8.3

CAGR (FY11-14)

16%

21%

2.9

34%

34%

Expected Growth

<20%

25-30%

Vinati Organics
FY11

3,290

761

23.1

520

10.5

34.5

0.5

31.0

22.2

11.2

FY12
FY13

4,503

978

21.7

548

11.1

29.9

0.8

29.4

17.9

8.6

5,567

1,241

22.3

687

13.9

26.0

0.8

23.5

14.6

FY14

6.7

6,961

1,529

22.0

862

17.4

30.3

0.2

18.7

11.0

5.2

CAGR (FY11-14)

28%

26%

18%

18%

Expected Growth

22-30%

25-30%

Source: Company, Emkay Research

Emkay Research

July 3, 2014

Specialty Chemicals Sector Report

Indian specialty chemicals

Investment rationale
Specialty chemical sector offers attractive growth opportunity
Export opportunity and growing
domestic consumption for end
user industry offers attractive
growth opportunity for domestic
specialty chemical companies

Specialty chemicals are high-value/low-volume chemicals known for end-use applications,


unlike commodity chemicals, where the focus is on high volume and cost efficiency.
Specialty chemicals provide the required solution to meet customer application needs and
is a knowledge-driven industry, with raw materials cost (a % of sales) much lower than for
commodity chemicals. Driven by customer orientation and backed by knowledge-driven
processes, we believe established players in this industry will benefit from emerging growth
opportunity in the specialty chemical sector.

Globally specialty chemical sector accounts for ~22% of the total chemical
industry and has grown at a CAGR of 3.7%
The global specialty chemical industry size is pegged at around $740bn (FICCI Specialty
Chemical report and 12th Five-Year Plan document) accounting for roughly 22% of the
global chemical industry. This industry has grown at a CAGR of 3.7% during 2006-11,
despite contracting by around 7% in 2009, due to the global financial crisis. Going forward,
the industry is expected to grow at a CAGR of about 5.4% annually to reach $970bn by
FY16. Asia-Pacific and the Middle Eastern countries are expected to contribute to the bulk
of the future growth for the sector.

The growth of Indian specialty chemical sector has been higher at 13%...
Indian
specialty
chemical
industry has grown at 13%
CAGR in the last 5 years, with
growth expected to accelerate
to 17% driven by stronger
domestic growth and stable
exports

The Indian specialty chemical industry size is pegged at $17.7bn (excluding agrochemicals
and dyes & pigments). The growth in India has been higher than the world average. The
high rate of growth for the segment is driven by faster growth in end-user industries such
as paints & coatings, specialty polymers, and home care surfactants, among others.

While the same is expected to accelerate further to 17% (FY12-17E)


Though Indian specialty chemical sector has demonstrated strong growth of around 13%,
industry growth is expected to accelerate further, as FY12-17E CAGR is pegged at 17%
(source FICCI, Ex Colourants and Agrochemicals). This is supported by both domestic
and export opportunities. We expect the encouraging growth opportunity in sectors like
paints & coatings, specialty polymers, construction chemicals and water chemicals to
support the higher industry growth.
Exhibit 2: India specialty chemical industry sub-segment
Industry

FY11

FY14E

FY17(P)

Growth

Paints and coatings

3.6

5.4

8.2

15%

Specialty polymers

2.3

3.5

5.3

15%

Construction chemicals

0.6

0.7

1.4

15%

Paper chemicals

0.4

0.5

0.9

14%

I&I cleaners

0.2

0.3

0.5

16%

Others

5.7

8.7

13.2

15%

Plastic additives

0.9

1.2

1.7

11%

Textile chemicals

0.8

1.1

1.5

11%

Water chemicals

0.6

0.9

1.1

11%

Cosmetic chemicals

0.5

0.7

0.9

10%

Flavors & fragrances

0.4

0.6

0.8

12%

Printing inks

0.4

0.6

0.8

12%

Rubber chemicals

0.2

0.3

0.4

12%

Agro chemical

3.8

5.3

7.7

12%

Home care surfactants

1.1

1.7

1.7

8%

Colourants

3.4

4.5

6.0

10%

24.9

36.2

52.1

13%

Total
Source: Emkay Research, Industry

Emkay Research

July 3, 2014

Specialty Chemicals Sector Report

Indian specialty chemicals

Growing domestic consumption offers enormous growth opportunity, while


emerging opportunities in exports to boost industry growth
Strong underlying factors such
as increasing demand for end
user industry, low consumption
intensity
and
tightening
standards and norms to drive
domestic growth

Increase in end-user demand with growing base of the middle-class, growing consumption
intensity, as Indias per capita consumption of specialty chemicals is low, and improving
standards for consumption are expected to support growth of the domestic industry.
Our interaction with various company management and industry experts suggest that India
is gaining popularity as an attractive hub for outsourcing. China had an edge over other
countries earlier and had been a preferred destination. However, appreciating currency
(Yuan appreciation against US dollar), increasing cost of labour & power and tightening
pollution control norms have diluted the cost advantage enjoyed by Chinese manufacturers
earlier. As exports offer an enormous growth opportunity, we believe India is well placed to
reap the benefit from it.
Exhibit 3: Growth drivers

Huge growth
potential for the
domestic export
market

World class
engineering and
strong R&D
capabilities

Rising power
cost and tightening
pollution control
norms in China

Rise in GDP and


purchasing
power

Low-cost
manufacturing

India gaining edge over China


Tightening export pollution
norms,
increasing
cost
pressures and appreciating
yuan provides an edge to India
over China as a favored
sourcing destination

China has emerged as a low-cost manufacturing destination for chemicals. Chinese


chemical exports grew at a CAGR of 20.5% over 2000-12, which increased from $12bn in
2000 to $113bn in 2012. As a result, Chinas share of global exports increased from 2% in
2000 to 6% in 2012. Although chemical exports from India, too, increased in the same
period, Indias export share in global chemical exports grew merely from 1% in 2000 to 2%
in 2012, with the countrys exports increasing from $4bn in 2000 to $35bn in 2012.

Cost pressure on Chinese manufactures is favourable to India


Our analysis of a few leading Chinese manufacturers indicate the rising cost pressure,
which the industry is going through. Deterioration in gross profit margins by around 300bps,
driven by cost increases and rising debt on the companys balance sheet has adversely
affected the fundamentals of Chinese manufactures. China has also lacked strong IPR
protection to proprietors, while India enjoys a strong IPR regime. In our view, this offers an
opportunity to Indian manufacturers.

Emkay Research

July 3, 2014

Specialty Chemicals Sector Report

Indian specialty chemicals


Exhibit 4: GoI Initiatives

Infrastructure

Make PCPIRs
a reality
Provide
infrastructure
support to the
industry by
constructing
roads, ports
and other
similar
facilities

R&D and
Technology

Feedstock

Implementation
of strategy for
sourcing and
allocation of
feedstock

Setting up of
technology upgradation fund
of USD100
million
Allocation of
10 percent
share of the
USD1 billion
National
Innovation
Fund to
chemicals

Sustainability

Development
of the first set
of chemical
usage
standards for
the industry
addressing
key issues
related to
water supply,
environmental
impact, raw
materials
supply, safety
over lifecycle,
and energy
use

Regulations

Committee to
frame
regulatory
structure and
eliminate
redundancies
Rationalisation
of taxes and
duties for the
sector (to be
implemented
by 2014)
Setting up of a
national
chemical
inventory

A small shift from China to India can lead to big-size opportunity for India
Indian chemical industry size is
equivalent to Chinese global
exports, thus a small shift can
provide significant opportunity
for Indian players

China has emerged as the fourth largest exporter of chemicals (Germany ranks first,
closely followed by the US and Belgium) and accounts for about 6% to global trade, with
estimated exports of US$113bn in FY12. This is as against Indias total consumption of
US$100bn of chemicals. With Indias smaller share of a mere 2% of global trade, we
believe that even a small shift in opportunity from China to India can lead to a significant
opportunity for India in the export market. We project that if Indias market share increases
from 2% to 4% by FY17, the export market can increase from US$35bn (in FY12) to
US$140bn.
Exhibit 5: India Chemical export opportunity ($bn)

$140bn

140 $bn

105 $bn

4%

70 $bn
2%
35 $bn

$70bn
$35bn
2012

2017E

Source: Emkay Research, Industry

Note Since specific data on global trade of specialty chemicals is not available, we have used overall
commodity chemicals to understand the broader industry trends.

Emkay Research

July 3, 2014

Specialty Chemicals Sector Report

Indian specialty chemicals

India is slowly moving towards higher chemical exports than imports


Indian chemical exports have
been growing at a faster clip
vis--vis
imports
thereby
reducing the trade gap

Our analysis of the available data on export/import of chemicals indicates that India is
slowly moving towards higher exports than imports. The countrys exports increased at a
CAGR (FY09-12) of 23%, while import growth is slower at 18%. This is as against 25%
growth witnessed in exports (FY03-08), while imports during this period increased at a
much sharper rate of 38%. We believe this emerging trend is clear indication of replacing
imports by domestic production, and we expect the trend to continue.
Exhibit 6: India-Exports and imports ($ bn)

50
40
30
20
10
0
2006

2007

2008

2009
Export

2010

2011

2012

Import

Source: Emkay Research, Industry

Companies with presence in diversified segment and forward-integration


are likely beneficiaries of this sustained growth opportunity
Companies with diversified
portfolio and strong forward
integration to benefit going
forward

Specialty chemicals cater to the needs of various sectors, with varied specific requirements
and customization. Paints and dyes, pigments, construction chemicals, agro chemicals,
pharma, etc., are the key user industries. We believe the companies having a presence in
diversified segments mitigate the risk of single-sector dependency. They also cater to
larger customer base and enjoy leadership in their respective field of specialization.
Forward-integration helps companies in better utilization of by-products and ensures stable
margins. The companies that are equipped with such characteristics have an edge over
others and are likely to benefit from the sustained growth opportunity in the sector.
Exhibit 7: Sizing growth opportunity by segment

20%
18%

Construction
chemicals

Paints and
coatings

Paper
chemicals

Growth

16%
14%
12%

Specialty
polymers

10%
8%

Home care
surfactants

Specialty
polymers

Rubber
chemicals Flavors &
fragrances
Plastic
additives

Cosmetic
chemicals

I&I cleaners

Printing inks
Water
chemicals

6%
Entry barriers
Source: Company, Emkay Research

Strong R&D capabilities backed by investment in complying pollution norms


to bear fruit in the future
Being a knowledge-driven industry, specialty chemicals industry focuses on R&D. Hence,
improvement in processes and improving efficiency are the mantra for success. Of late,
pollution control norms have been tightened in India, and hence securing approvals for new
facilities are getting tough. The unorganized sector or companies that are not fully
equipped to meet such norms are most likely to face challenges in operating their plants.
As a result, we believe that companies that have been significantly investing in green
chemistry are better placed to reap the benefit in the future.

Emkay Research

July 3, 2014

Specialty Chemicals Sector Report

Indian specialty chemicals

Financial performance to remain strong


Domestic industry on capex mode to benefit from this growth opportunity
High capex intensity in the last
three years provides high
revenue growth visibility

Domestic companies have accelerated their capex plans to benefit from this growth
opportunity. We have analyzed the financial performance of the three leading players in the
sector: Atul Ltd., Aarti Industry and Vinati Organics. All these players have accelerated the
investment in the sector in last 2 years, driven by strong growth opportunity in the sector.
Our interactions with the management of the companies suggest that there are attractive
growth opportunities for both domestic and exports.
Exhibit 8: Aggregate capex (Rs bn)

7
6
5
4
3
2
1
0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Previous five-year revenue CAGR at 14%, while margin expansion of 200bps


boosted profitability
On an aggregate basis (based on three companies covered in our analysis), they have
reported a revenue CAGR of 16% (FY09-14), while their aggregate EBITDA margins have
improved by 200bps to 17% over the same period.

Free cash flow generation in the sector to remain limited; however, earnings
growth is the key
Free cash flow generation to
remain limited as companies
continue to invest for future
growth

The specialty chemical sector is characterized by high investments, as the industry enjoys
an asset turnover of 1.5-2.5x. Further, with continuous investments in working capital to
meet the demand of growing industry, we expect free cash flow generations of industry
players to remain limited. However, we believe, attractive growth opportunities in the sector
will keep the top line growth buoyant, while margins are likely to improve further.

Exhibit 9: Aggregate revenues (Rs bn)

Exhibit 10: Aggregate PAT (Rs mn)

70

5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0

60
50
CAGR
17%

40
30
20
10
0
FY06

FY07

FY08

FY09

FY10

Source: Company, Emkay Research

Emkay Research

July 3, 2014

FY11

FY12

FY13

FY14

CAGR
22%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14


Source: Company, Emkay Research

Specialty Chemicals Sector Report

Indian specialty chemicals

Valuations
Valuation of the specialty chemicals sector must consider complex nature
of the industry
Valuations for the sector do not
consider the complex nature of
the industry which provides
stable margins in stark contrast
to other base chemicals

In our view, the knowledge and process-driven specialty chemical sector enjoys strong
entry barriers and benefits from high degree of customer stickiness. This is also reflected in
stable margins of the industry players unlike commodity chemicals, where margins suffer
from the cyclicality of the product. Though the specialty chemical industry need not go
through strict and stringent regulatory approvals like in the case of pharma, agrochemicals
or food industry, it supplies critical materials used in these industries. These highvalue/low-volume products contribute a small percentage of the total cost of the endproduct. But they enjoy a high level of clients stickiness.

Exhibit 11: Comparative industry valuations


Organic

Inorganic

Dyes &

Specialty

Parameters

Pharma CRAMS

Agrochemicals

chemicals

chemicals

Chlor Alkali

Pigments

Chemicals

Entry Barriers

Very strong

Very strong

Weak

Weak

Weak

Weak

Very strong

High

High

Low

Low

Low

Low

Low

Toll

Toll / open

Open markets

Open markets

Toll / open

arrangements

Open markets

Open markets to

manufacturers

Low

Low

Low

Regulatory
approvals
Customer profile

Customer stickiness Very high

End product pricing

Very high

sticky customers

arrangements

Moderate

Very high

Fixed

Fixed

Fixed

Fixed

arrangements

arrangements

arrangements

arrangements

with pass on

with market

with pass on

forces

clause

Market driven

Market driven

Market driven

clause
1 to 3 supplier

1 to 3 supplier

No of suppliers

with main supplier with main supplier

for same product

catering 70-80%

catering 70-80%

of requirement

of requirement

2-2.5x

2x

2 to 4 suppliers
Many suppliers

Many suppliers

Many suppliers

Many suppliers

key supplier
catering 85-90%

Financial metrics
Asset turnover

0.8-1.4x

0.8-1.4x

0.8-1.4x

1-1.5x

2-2.5x

Return ratios

22-30%

20-25%

12-20%

12-20%

12-20%

15-20%

18-22%

EBIDTA margins

18-22%

15-18%

5-20%

5-20%

5-20%

10-18%

15-18%

Sector valuations
P/E

15-20x

14-22x

6-12x

6-10x

6-10x

6-10x

10-12x

EV/EBIDTA

8-10x

8-12x

4-7X

4-6X

4-6X

4-6X

6-9x

Source: Emkay Research

Current valuations provide re-rating opportunity


Current valuations do not
consider the complex nature of
the industry which provides a
re-rating opportunity

We believe that supported by strong entry barriers, high level of customer stickiness, stable
margins and high process and knowledge-dependency, it should enjoy a valuation
premium over commodity chemicals. The sector valuation should reflect high and stable
return ratios at 18-22% enjoyed by established players and encouraging growth opportunity
of 20-30% at the bottom line. In our view, at current valuations of 12-15x for the companies
covered offers scope for a re-rating along with earnings growth.

Sector is poised for strong growth; companies like Atul Ltd., Aarti industries
and Vinati organics to emerge as clear winners
Sector is poised for strong
growth both on top line and
bottom line thereby providing
re-rating opportunity

Emkay Research

July 3, 2014

We are convinced that the specialty chemical sector offers strong growth opportunity in
medium-to-long term, and companies with a presence in diversified segments, a large
customer base and leadership in their areas of expertise, along with significant investments
in meeting pollution control norms, are likely to emerge as clear winners in the sector. In
our opinion, among such companies, players like Atul Ltd., Aarti Industry and Vinati
Organics offer strong growth potential, and are likely to report revenue growth of 20-25%
per annum and a PAT growth of 25-30% for the next 3-4 years.

10

Indian specialty chemicals

Specialty Chemicals Sector Report

Exhibit 12: Comparative analysis


Company

Aarti Industry

Key strength

Growth drivers

Leader in benzene based chemistry and

Invested significantly in previous two

enjoys the benefit of complex plant

years in new plant and expected to reap

structure. Diversified product portfolio and

the benefit in near term. Operating

sticky customers helps to mitigate the risk

leverage to drive profitability and return

of volatility in revenues and earnings

ratios

Enjoys leadership position in fast growing


segment of aromatics. Significant
Atul Ltd

presence in other markets like colours,


crop protection etc helps product
diversification.

Financials
Expect revenue growth of 20-22% and
driven by margin expansion PAT growth
of 26-28%. With improved asset turnover,
ROCE is likely to go up to 20%+

Thrust on branded formulations in

Expect revenue growth of 20%+pa and

agrochemicals, introductions of new

margin expansion on back of

products coming off patent and focus on

improvement in product mix with growing

enhancing cost efficiencies

share of branded portfolio.

It has limited product portfolio but enjoys


leadership position worldwide in its key
Vinati Organics

products like IBB and ATBS used


primarily in pharma and paints and

Improved utilisation of existing facilities in


leading products like IB, IBB and ATBS

Asset turnover ratio to improve as


utilisation level at new facilities remains at
~60%.

construction chemicals.
Source: Emkay Research

Emkay Research

July 3, 2014

11

Specialty Chemicals Sector Report

Indian specialty chemicals

Global specialty chemical industry to grow at a CAGR of 5-6%


The global specialty chemical industry size is pegged at around $740bn (FICCI Specialty
Chemical report and 12th Five-Year Plan document) accounting for 20-22% of the global
chemical industry.
Specialty chemicals are defined as a group of relatively high-value/low-volume chemicals
known for their end-use applications and/or performance-enhancing properties. In contrast
to base or commodity chemicals, specialty chemicals are recognized for what they do and
not what they are. Specialty chemicals provide the required solution to meet the
customer application needs. It is a highly knowledge-driven industry, with raw material
costs (measured as percentage of net sales) much lower than that of commodity
chemicals. The critical success factors for the industry include understanding of customer
needs and product/application development to meet them at a favourable priceperformance ratio.
Global
specialty
chemical
accounts for ~22% of global
chemical market size and is
expected to grow at a CAGR of
5.4% to reach $970bn by FY16

Global specialty chemicals have grown at a CAGR of 3.7% during 2006-11, despite
contracting by around 7% in 2009, due to the global financial crisis. Going forward, the
industry is expected to grow at a CAGR of about 5.4% annually to reach $970bn by FY16.
Asia-Pacific and Middle Eastern countries are expected to contribute to the bulk of the
future growth for the sector.
Exhibit 13: Global specialty chemical size ($ bn)

1200
1000
800
600
400
200
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Emkay Research, Industry

Exhibit 14: Regional share of global specialty chemical industry

Others
1%
Europe
30%

Asia Pacific
37%

USA
32%
Source: Emkay Research, Industry

Emkay Research

July 3, 2014

12

Specialty Chemicals Sector Report

Indian specialty chemicals

Fine chemicals sub-segment has the largest share, followed by paints &
coatings
Fine chemical and paint and
coating segment account for
~52% of global specialty
chemical market

Globally, the fine chemicals sub-segment has the largest share of 29%, followed by paints,
coatings and surface treatments, which have a share of 23%. Advance polymer, adhesives
and sealants have a share of 19%.
Exhibit 15: Share by segment: Global specialty chemicals

Others
8%
Pigments & Inks
10%

Fine chemicals
29%

Additives
11%
Advanced
polymer,
adhesives and
sealants
19%

Paints, coatings
and surface
treatment
23%

Source: Emkay Research, Industry

Emkay Research

July 3, 2014

13

Specialty Chemicals Sector Report

Indian specialty chemicals

Indian specialty chemical industry has grown at a CAGR of 1113% in the last 5 years
Indian
specialty
chemical
market size is pegged at
~$36bn FY14E and has grown
at a CAGR of 11-13% in the
last 5 years

The Indian specialty chemical industry-size is pegged at $17.7bn


(excluding
agrochemicals and dyes & pigments). The high rate of growth for the segment is driven by
faster growth in end-user industries such as paints & coatings, specialty polymers, and
home care surfactants, among others.
Unlike global markets, paints & coatings sub-segment accounts for about 20% of the
industry-size, followed by specialty polymers, which accounts for a 13% share.
Exhibit 16: Indian specialty chemical-share by sub-segment (FY11)

Printing inks
Paper chemicals
Flavors & fragrances
Cosmetic chemicals
Water chemicals
Construction chemicals
Textile chemicals
Plastic additives
Home care surfactants
Specialty polymers
Paints and coatings
Others

2%
2%
2%
3%
3%
3%
5%
5%
6%
13%
20%
34%
0%

5%

10%

15%

20%

25%

30%

35%

40%

Source: Emkay Research, Industry

Growth rate for the sector is


expected to accelerate to 17%
CAGR in the next 5 years
driven by domestic and export
opportunity

Emkay Research

July 3, 2014

Growth rate to remain strong at around 17% (CAGR) in the next 5 years
The Indian specialty chemicals sector is expected to grow at a faster clip of 17% (CAGR)
during FY11-17 (ex-agro chemicals and colourants), driven largely by higher growth of the
end-user industry such as paints & coatings, specialty polymers, construction chemicals,
and paper chemicals.

14

Indian specialty chemicals

Specialty Chemicals Sector Report

Exhibit 17: Specialty chemical industry sub-segment


Sub-Segment

Growth Driver

User Industry

Paints and coatings

Has grown at 1.5-2x GDP growth rate with a CAGR of 13.5% in


the last five years and growth is likely to remain 15%+

Construction, Automotive

Specialty polymers

Growth in plastic demand resulting from increased usage in


packaging, construction and automotive sectors

Packaging, Automotive

Construction chemicals

Current expenditure on admixtures in India stands at very low


relative to other countries

Infrastructure, Real Estate

Paper chemicals

Paper industry is expected to report growth of 8-10% on growing


demand

Printing, Packaging

Textile chemicals

Textile industry significantly benefited from currency depreciation


and has strong growth potential

Apparel, Technical textile

Water chemicals

Water treatment and purification is growing need with scarce water


resources and growing urbanization

Industrial water, municipal water

The market for personal care ingredients is becoming increasingly


sophisticated and increasing awareness and evolving consumers
driving growth

Bath & Shower, hair care

Cosmetic chemicals

Flavors & fragrances

India has lagged behind in synthetic flavors and fragrance and is


rapidly catching up

Food processing, Personal care

Agro chemical

Strong growth in CRAMS and domestic agrochemicals industry as


india's pesticide consumption remains at lower level

Agriculture, Exports

Home care surfactants

Though surfactant industry is highly penetrated, growth is


primarily driven by increasing consumption

Laundry care, dishwashing

Colorants

Exciting opportunities in exports market as exports contribute


around 85% of total consumption

Textile, Exports

Emkay Research

July 3, 2014

15

Indian specialty chemicals

Specialty Chemicals Sector Report

Faster growth rate of the sector in the coming years to be


driven by the following factors
Increase in end-user demand
Increase in domestic growth to
support stronger growth for the
end user industry of paints,
construction,
home
care,
specialty polymers etc

Increase in GDP in the medium term is expected to lead to a significant increase in the size
of the Indian middle-class. According to the 12th Five-Year Plan document, the size of
middle-income households is expected to increase from 31mn in 2008 to 148mn in 2030.
This will not only lead to a faster rate of urbanization, but it will also result in a significant
rise in consumption, creating increased demand for end-user industries.

Increase in consumption intensity


Increase
in
consumption
intensity to drive growth as per
capita consumption of specialty
chemical remains low

Compared to other advance countries, the Indias per capita consumption of specialty
chemicals is low, which provides ample growth opportunity in the medium-to-long term.
Segments such as construction additives and construction chemicals currently form a very
small proportion of the specialty chemical industry compared to global averages, which
provides ample room for consumption growth in the medium-to-long term.
For example, concrete admixtures improve the fluidity of concrete, provide a smoother,
more even finish, and help avoid cracks. Consequently, concrete admixtures can help
reduce maintenance and repair costs, and therefore, the total cost of ownership of
construction projects in India. Indias current expenditure on admixtures is only $ 1/ m3 of
concrete, compared to $ 2/ m3 in China and $ 4.5/ m3 in US. This is primarily due to the
lack of awareness of admixtures in the Indian construction industry. With increasing
demand for higher quality construction and increasing awareness of concrete admixture
benefits, the industry could double the intensity of admixture consumption in India.

Improving standards for consumption


The government plays a crucial role is setting standards for products in a particular country.
Standards are policy-driven and evolve along with growth and evolution of the country. As
the size of a nation grows, policies for consumption standards improve, as consumers
become more aware of what they are consuming and its impact. Measures such as BharatIV for reduced emission and water treatment guidelines, among others, lead to
improvement in standards. This, in turn, fuels demand for specialty chemicals, which can
be leveraged to achieve these standards. Given that India is still a young developing
country, there are various areas in which it lags behind developed nations as far as setting
high quality standards are concerned. This in itself is expected to lead to a sustained
increase in consumption of specialty chemicals as the policy environment evolves to
achieve higher standards of consumption.
Exhibit 18: End-user industry growth drivers
Sector

Demand drivers
Increasing urbanization middle-income households expected to increase

Paints and coatings

from 31mn in 2008 to 148mn in 2030


High replacement demand at 45-50%
Increasing per capita income

Textiles

Increasing Indian exports: Exports have increased at a CAGR of 8% over


2000-12 from $11.6bn to $29.1bn
Increasing rate of urbanization and higher disposable income

Construction

Current expenditure on admixtures (construction chemicals) in India stands


at $1 per metric cube vs. $2 per metric cube in China and $4.5 per metric
cube in the US

Home care

Penetrated category leading to moderate growth

Source: Emkay Research

Emkay Research

July 3, 2014

16

Specialty Chemicals Sector Report

Indian specialty chemicals

Paints and coatings segment: Continue to remain on a faster


growth trajectory
Paints and coatings accounts
for ~15% of the domestic
specialty chemical industry

The Indian paints industry can be broadly classified into Decorative Paints and Industrial
Paints. Decorative paint caters to the residential and commercial buildings accounting for
70% of total paint industry. Enamels are the most widely followed by distempers and
emulsions. Industrial paints account for 70% of the paint industry and are primarily used in
automobiles, auto ancillaries, consumer durables, containers etc.

Exhibit 19: Decorative Paints: share of sub-segment

Exhibit 20: Industrial Paints: share of sub-segment

Marine
10%
Exterior
25%

Powder
13%

Interior
75%

Protective
24%

Source: Emkay Research, Industry

Others
5%
Auto
36%

Refinish
12%

Source: Emkay Research, Industry

Industry overview:
Demand growth to be driven by
overall pick up in domestic
activity as the Indian paint
industry has been growing at
1.5-2x GDP growth

The Indian paint industry size is pegged at ~5.4bn (FY14) is dominated by organized
players which account for 80% of the industry. The Indian paint industry has been growing
at 1.5-2x GDP growth rate with a CAGR of 13.5% in the last five years. The decorative
segment is dominated by Asian Paints followed by Berger and Kansai Nerolac. Kansai
Nerolac is the leader in industrial paints followed by Berger and Asian PPG. The industry is
expected to grow at a faster pace with expected recovery in GDP growth.
In the last decade, the industry has witnessed a sharp shift from unorganized to organized
with the entry of organized players in the low cost distempers and enamels. While solvent
enamels are still popular in India, a shift has been seen in favor of water based paints.
Keeping the environment concern in mind, companies are coming up with new lead free
and low VOC products. There is also a perceptible shift towards usage of organic pigments
in premium paints with heavy metal pigments being phased out. Companies which adapt to
these trends could grow successfully in the paints market.

Demand drivers remain intact:


Underlying demand drivers
remain largely intact with low
per capita consumption and
growth in end user industry

Despite slowdown in the recent years, the underlying demand drivers for the segment
remain largely intact which is expected to translate into faster growth going forward.

Emkay Research

July 3, 2014

Low per capita consumption: Per capita consumption of paints in India is very low at
1.25 kg against 38kg in Singapore, 25.8kg in USA and 2.5 kg in China. This provides
ample growth opportunity as the personal disposable incomes keep increasing
Growth in automotive sector: Growth of automotive paints is directly linked to the
growth of both passenger and commercial vehicles. The growth has been impacted in
the recent years, however, with revival in demand on the anvil, industrial paints
segment should grow in-line with the growth in the automotive segment
Untapped rural market: Consumption of paints in the rural markets is significantly low,
however, with rising rural incomes and conversion of homes from kuccha to pakka
houses, paint demand is expected to increase going forward
Rapid urbanization and increasing personal disposable incomes

17

Specialty Chemicals Sector Report

Indian specialty chemicals

Construction chemicals: Gaining significance


Low usage intensity to drive
faster
growth
for
the
construction chemical industry

Construction chemicals are chemical compounds used in existing construction projects to


speed construction work or in new projects to provide durability and strength to structures.
The chemicals though increase the cost of the project by 2-5% but with multi-fold benefits.
Certain chemical products help in minimizing the quantity of cement and water used.
Construction chemicals can be broadly categorized as follows:
Exhibit 21: Construction chemical sub segments

Construction Chemicals

Concrete
Admixtures

Waterproofing
chemicals

Flooring
compounds

Repair &
Rehabilitation

Miscellaneous

Source: Emkay Research, Industry

Exhibit 22: Construction chemicals sub-segments

Others
31%

Repair & Rehab


9%

Admixtures
35%

Flooring
15%

Waterproofing
10%
Source: Emkay Research, Industry

Industry structure
The construction chemical market is highly competitive with an increasing number of global
construction companies making a foray into manufacturing operations in India. The overall
market is fairly consolidated but there is considerable fragmentation of individual products
and application areas. The top 5 players account for 50% of the market. Key players in
construction chemical industry include BASF and Pidilite Industries along with other private
players such as Sika India Pvt Limited and SWC Pvt Limited.
Construction chemical industry
in India at a nascent stage
compared to other developing
and developed countries

The construction chemical industry per se in India is still in its nascent stage as compared
to other countries such as China ($8bn market) and other larger developed and developing
countries. The industry size is small due to lack of consumer awareness and constructors
preference for low cost chemicals. In the past there has been considerable change in the
market share of companies with medium sized and regional manufacturers gaining
considerable market share.

Strong structural demand drivers provide high growth visibility:

Emkay Research

July 3, 2014

Growth in end user market: Current stock of physical infrastructure is insufficient to


meet the current needs of the country which points to sustained spending required in
developing new physical infrastructure stock. According to the 12th Five Year Plan, the
country needs cumulative infrastructure spending of $1 trn which in itself provides long
term growth visibility for construction chemicals industry
Increased penetration: Increasing awareness about quality of construction materials
such as performance enhancing products among customers and builders is likely to
fuel faster growth for the segment
Changing regulatory environment and increasing compliance to international
manufacturing standards: Regulatory changes such as energy efficient buildings,
green buildings will drive the demand for innovative protective coatings and safe
chemicals. Further as more and more construction companys move towards
complying with international standards, it will fuel demand for performance enhancing
and low polluting construction chemicals.

18

Specialty Chemicals Sector Report

Indian specialty chemicals

Colorants: Gaining global market share


Colorants have inherent element of value addition to a wide variety of products like textiles,
leather, paper, food products, cosmetics, plastic, paints, inks and high tech applications like
optical data storage, solar cells, medical diagnostics, security inks, lasers etc. The colorant
sub segments comprise of dyes and pigments.
The pigment market is estimated at ~$970mn out of which carbon black and TiO2 accounts
for 90% of the total pigment demand. Globally, there has been a structural shift in the
industry with manufacturing base of colorants shifting from Europe, USA and Japan to
Asian countries such as China, India, Taiwan, Thailand and Indonesia. India and China
have gained global prominence as far as colorants are concerned while India now has an
edge over China due to tightening pollution norms in China, an area in which Indian
manufacturers were more or less compliant with tight pollution control norms.
Indian exports in the colorant
industry gaining dominance as
Chinese players impacted by
tighter pollution control norms
where in India has been largely
compliant

Given these structural changes, exports have grown at a faster clip as compared to
domestic industry. Out of the total industry size of $3.4bn (FY11), exports accounted for
~68% of the market at ~$2.3bn. There has been a significant growth in exports which have
increased from a mere $30mn in 1990 to $2.3bn in FY11. During the last decade, exports
have grown at a CAGR of 14.5% and are expected to grow at a relatively faster clip going
forward.
Exhibit 23: Exports of colorants ($bn)

6
4.9

5
4
3

2.3

2
1

0.6

0
FY01

FY11

FY17(P)

Source: Emkay Research, Industry

Industry overview:
The world market of colorants stood at ~$27bn comprising of dye, pigments and
intermediaries. During the last decade, the global industry has grown at 2-3% p.a,
however, Asian growth for Asian countries has been faster due to shifting manufacturing
bases. The share of India in the global colorant markets stood at 12.5% and is expected to
increase as export sales grow faster than global growth.
The Indian dyestuff industry is highly fragmented and characterized by a large number of
players in the unorganized sector. The industry comprises of about 950 units with 50 units
being large scale and organized while the remaining being small scale and largely
unorganized. Textiles account for ~60% of the domestic demand for dyestuff while the
remaining is shared between leather, paper and other consumer industries.
As far as pigments are concerned, the main consumer industries are printing inks, paints,
plastics, rubber etc which account for 70% of the end use. Pigments are broadly classified
as organic (70%) and inorganic (30%). Large portion of the organic pigments produced is
exported.

Shift towards specialty products:


Given the commodity nature of the industry and over supply in installed capacities, global
manufacturers are focusing more on specialized products which command a premium
pricing and provide value addition. As a result, global manufacturers are investing in R&D
to improve specialty end of their portfolio. There is growing global trend towards providing
colour solutions rather than just colorant. Further, tightening global environment norms
(such as REACH), the industry is moving towards low effluent high performing products.
Emkay Research

July 3, 2014

19

Specialty Chemicals Sector Report

Indian specialty chemicals

Exports: Emerge as a new growth opportunity


Structural eastward shift of global chemical industry continues
Structural eastward shift of the
chemical industry continues
benefiting China and India

The size of the global chemical industry is pegged at $3.8trn in FY10, which grew at a
CAGR of 7% annually over 2001-11. The industry is witnessing a gradual eastward shift for
the following two key factors: (i) increase in consumption in the emerging markets of Asia
and (ii) to leverage greater manufacturing competitiveness of emerging Asian economies.
Over the past 10 years, the share of Asia in the global chemical industry has increased
from 31% in 1999 to 52% in 2011. China has emerged as a leader in the global chemical
industry accounting for roughly 27% of the total production in value terms, with the industrysize pegged at around $1trn.

Repositioning of Indian specialty chemical industry


Indian Specialty chemical is on transition phase and is likely to reposition itself as a
strategic partner for growth in knowledge based, processed driven chemicals. This change
is likely widen prospects for the industry as various leading global players look for
opportunities to join hand with Indian manufacturers.
Exhibit 24: Changing perception about Indian Chemical industry

1900-2000

2000-2005

Commodity
Supplier

2009 and
beyond

2006-2008

Outsourcing
Hub

Potential
End-use Market

Strategic
Partner

Basic chemicals
focus

Basic chemicals
focus

Specialty
chemicals focus

Knowledge
chemicals focus

Low
investments and
R&D

R&D for process


optimization

Growth in R&D
investments

Product focus in
R&D

Increased focus
on domestic
market

Global outlook

focus on exports

Outsourcing
initialization

Transforming as
strategic partner

Growth in
outsourcing

Source: Industry, Emkay Research

The market-size of Indias chemical industry is pegged at $108bn, representing 3% of the


global market size. The Indian chemical industry has significant potential to capture a larger
global pie due to the growing domestic demand and attractiveness as a manufacturing
base. According to the 12th Five-Year Plan, the Indian chemical industry is expected to
grow at a CAGR of 11% between FY12 and FY17 to reach a size of $224bn.

India gaining strategic advantages over China, which can aid in faster
growth
Clearly, China has taken a lead over India as far as the global chemical industry is
concerned, primarily due to the vast government support and clear cost advantages.
However, there have been structural shifts in China, which have forced global players to
look at India as an emerging manufacturing destination:
China
has
identified
58
chemicals to act upon to reduce
pollution, shifting its focus from
pollution control to pollution
elimination

Emkay Research

July 3, 2014

Tightening of pollution control norms in China: Growing levels of pollution in China


have forced the government to act strictly against polluting industries. This has led to
increased pressure on high-polluting sectors to implement corrective actions, which
have led to an increase in capex, thereby reducing their competitiveness.
Appreciation in Yuan: The structural appreciation of the Yuan ever since it was
allowed to float in a range has been critical in restoring the lost competitiveness of the
Indian manufacturing sector. The steady appreciation in Yuan is expected to continue.
Yuan has appreciated by around 10% in the last 5 years.

20

Indian specialty chemicals

Specialty Chemicals Sector Report

INR depreciation: While Yuan has appreciated steadily in the last 5 years, INR, on the
other hand, has depreciated by 22% in the same period, which is beneficial for
companies looking to shift manufacturing locations. The inverse movement in the
currencies implies that on relative terms, INR has depreciated by 36% vis--vis Yuan.
Weaker IPR protection: India has a much stronger track record in IPR protection
compared to China, which makes it a better fit as far as R&D-intensive, early
technology lifecycle production is concerned. According to the International Property
Rights Index report 2013, Indias standing in terms of both IPR and legal rights is better
than that of China. In terms of ranking, India stood at 55 out of 130 countries globally,
while China stood at 59 out of 130 with respect to IPR. On legal rankings, too, India
fairs better than China, with a ranking of 71 of 130 compared to 76 for China.

The Indian Government has announced a number of measures to improve competitiveness in the sector

Industrial licensing has been abolished for most sub-sectors (except a small list of hazardous chemicals)
Approval is granted for FDI up to 100 per cent in the chemicals sector
The government is continuously reducing the list of reserved chemical items for production in the small-scale sector, thereby facilitating
greater investment in technology up-gradation and modernisation
Policies have been initiated to set up integrated Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIR). PCPIR will be
an investment region spread across 250 square kilometres for manufacturing of domestic and export-related products of petroleum,
chemicals and petrochemicals
New initiatives are likely to attract large investments, both domestic and foreign, with requisite improvements in infrastructure and
competition

Source: Emkay Research, Industry

China Estimating the size and opportunity


Global chemical exports stood at around $2trn in 2012 dominated by developed economies
of Germany, the US and Belgium.
In the last decade, China has emerged as a dominant player in the global chemical
industry, both in terms of domestic consumption and exports. The country has emerged as
the 4th largest exporter in 2012 as against 2006 ranking of 10.
Exhibit 25: Country ranking for global chemical exporters
Country

2012

2006

Germany

United States

Belgium

China

10

France

Netherlands

Switzerland

United Kingdom

Japan

Ireland

10

India

18

21

Source: Emkay Research, Industry

China continued to exert dominance in the last decade, while India lagged
behind
China dominated India in
chemical exports, though India
gaining relative market share as
pollution control norms and
appreciating
yuan
impact
relative competitiveness

Emkay Research

July 3, 2014

China has emerged as the largest chemical market in the world on the back of growing
consumption and higher exports. Similar to other manufacturing sectors, China has
emerged as a low-cost manufacturing destination for chemicals. As a result, Chinese
chemical exports grew at a CAGR of 20.5% over 2000-12, which increased from $12.1bn in
2000 to $113.5bn in 2012. The Chinese share of global exports during the period increased
from 2% to 6% in 2012.

21

Specialty Chemicals Sector Report

Indian specialty chemicals

Although chemical exports from India, too, increased in the same period, the Indian
chemical exports were not able to capture a larger pie of global exports. Indias export
share in global chemical exports increased from 1% in 2000 to 2% in 2012, with the
countrys exports increasing from $4.3bn in 2000 to $34.5bn in 2012.
Exhibit 26: China exports ($ bn) and Share of global exports

Exhibit 27: India exports ($ bn) and Share of global exports

140

7%

120

6%

100

5%

80

4%

60

3%

40

2%

20

1%

0%
2006

2007

2008

2009

China Export

2010

2011

40
35
30
25
20
15
10
5
0

2012

2%

1%

0%
2006

2007

2008

India Exports

Share of global exports

Source: Emkay Research, Industry

2009

2010

2011

2012

Share of global exports

Source: Emkay Research, Industry

Increase in cost puts pressure on margins of Chinese players


Our analysis of top 8 Chinese
chemical players clearly shows
increasing
cost
pressures.
EBITDA margins of top 8
players contracted by ~300bps
between FY09 to FY13

Chinese chemical manufacturers have witnessed significant pressure on margins in the last
3-4 years on the back of increase in cost pressures. EBITDA margins of top-8 players
contracted from 9% in FY09 to 6% in FY13. The contraction in margins has been driven by
contraction in gross profit margins from 10% in FY09 to 7% in FY13. On the other hand,
debt of top-10 players increased significantly from $7.8bn in FY08 to $16.6bn in FY13.
Consequently, the debt-to-EBITDA ratio deteriorated from 5x in FY09 to 6x in FY13. PAT
margins, too, have been under pressure and deteriorated from 4% in FY09 to 2% in FY13.

Exhibit 28: Aggregate EBITDA Margin (Top 8)

Exhibit 29: Aggregate Gross Margin (Top-8)

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

12%
10%
8%
6%
4%
2%
0%
FY09

FY10

FY11

FY12

FY13

Source: Emkay Research, Bloomberg

FY09

FY10

FY11

FY12

FY13

FY12

FY13

Source: Emkay Research, Bloomberg

Exhibit 30: Aggregate PAT Margin (Top-8)

Exhibit 31: Aggregate Debt to EBITDA (Top-8)

5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%

8.0
6.0
4.0
2.0
0.0
FY09

FY10

FY11

Source: Emkay Research, Bloomberg

Emkay Research

July 3, 2014

FY12

FY13

FY09

FY10

FY11

Source: Emkay Research, Bloomberg

22

Specialty Chemicals Sector Report

Indian specialty chemicals


Exhibit 32: Debt-to-Equity (Top-8)

1.4
1.2
1.0

0.9

0.9

0.9

FY10

FY11

1.2

1.1

FY12

FY13

0.8
0.6
0.4
0.2
0.0
FY09

Source: Bloomberg, Emkay Research

Increasing cost pressures in China, currency appreciation and lower IPR


protection provide opportunity to Indian firms
Increasing cost pressures in
China, appreciating Yuan and
lower IPR protection provide
opportunity to Indian firms

Indian chemical players, who have been at a disadvantage earlier due to higher costs of
operations and infrastructure bottlenecks, are all set to garner higher market share from
their Chinese counterparts both in domestic and export markets. A steady increase in cost
structures in China (both labour and power cost), tightening pollution control norms,
currency appreciation and lower IPR protections provide an opportunity to Indian players to
achieve a higher share of global chemical exports trade.
Further, India currently imports roughly $5.6bn (FY13) worth of inorganic and organic
chemicals from China. Although the pace of chemical imports from China reduced
considerably in FY13, with chemical imports growing at 9% yoy in FY13 as against 18% in
FY12. For the first 9 months of FY14, Indian chemical imports from China stood at an
annualized $6bn, which signifies an even slower growth of 7% yoy, which points to
reducing dependence on Chinese imports.
Put together, Indias imports from China and the total Chinese exports to rest of the world
together point to a $114-bn opportunity, which is equivalent to the size of the Indian
chemical industry. Thus, these underlying shifts in macro factors provide ample
opportunities to domestic chemical industry players.
Exhibit 33: India import of chemicals from China ($ bn)

7.0

30%

6.0

25%

5.0

20%

4.0

15%

3.0

10%

2.0

5%

1.0
0.0

0%
FY09

FY10

FY11

FY12

Chemical imports from China

FY13

FY14

Growth y-o-y

Source: Emkay Research, Industry

Emkay Research

July 3, 2014

23

Indian specialty chemicals

Specialty Chemicals Sector Report

China takes stern measures to address environmental challenges


China has taken stern measures to address growing environmental pollution across various industries and residential waste disposal.
Continuing with its Energy and Climate Goals, the Chinese government has taken various measures and initiatives to reduce pollution.
These measures are targeted across the board and not only to specific sectors or industries. State Council has released the Energy Saving
and Low Carbon Development for 2014-2015 Action Plan in the month of May-14 to further its Five Year Plan objectives. The salient
features of the action plan are as follows:
Exhibit 34: Salinet features of the Action Plan
China Energy Saving and Low Carbon Development for 2014-15 Action Plan
Sector

Initiatives

Steel

Reduction of capacity production by 15 million tonnes by the end of 2015

Cement

Reduction of capacity production by 100 million tonnes by the end of 2015

Plate glass

Reduction of capacity production by 20 million tonnes (in weight cases) by the end of 2015

Coal

Coal share of energy to decrease


Beijing, Tianjin, the Yangtze River Delta region and the Pearl River Delta region need to
achieve negative growth, to return to 2012 consumption levels
Non-fossil fuel to comprise 11.4% of primary fuel consumption by end of 2015
Coal-fired boilers are to be ugraded and some closed

Autos

6 million old vehicles to be phased out in 2014

Incinerators

Residential solid waste that is incinerated must have dioxin emissions below 0.1

Soil, construction material and normal industrial waste that is incinerated (more than 100

nanogram per cubic meter


metric tons processed) must keep dioxin levels below 0.1 nanogram per cubic meter
Current incinerators must comply with the standards by 1 January, 2016 and facilities
built after this must comply from the date they begin operation

Pollution control headlines


Strengthen Environmental Impact Assessment (EIA) Process

EIAs are to be strictly implemented


The plan discusses the addition of a punitive tariff policy to the already existing tiered

Punitive Pricing, Penalties & Green Financing

pricing scheme. Companies that lag in energy savings could be charged more. Green
financing is also encouraged as is the improvement of sewage treatment fees and more
research into sludge treatment & wastewater treatment costs
he plan maps the installation of desulphurisation and denitrification equipment by province.

Air emissions reduction

It also pushes to strengthen the management of hydroflurocarbons emissions and accelerate


their destruction
The plan specifies by the end of 2015 the daily processing capacity urban sewage

Urban sewage

treatment will be 16 million tonnes

Water emissions reduction

For boilers, incinerators & some refineries, new limits to be set for COD, total phosphorus,
total nitrogen, ammonia nitrogen and other heavy metal pollutants, such as mercury

Source: Emkay Research, Industry

Emkay Research

July 3, 2014

24

Specialty Chemicals Sector Report

Indian specialty chemicals

Export revenues have grown at a faster clip for leading players


Our analysis of leading Indian
specialty chemical companies
shows that export revenues
have grown at a relatively faster
clip of ~18% CAGR as
compared
to
domestic
revenues

Specialty chemical companies have witnessed robust growth in the last 5-6 years, driven
by both exports and domestic revenues. Total revenues for the three leading domestic
specialty chemical companies, Atul Limited, Aarti Industries and Vinati Organics, have
grown at a CAGR of 15% over FY06-13. Export revenues have grown at a faster clip of
17.7% in the same period, while domestic revenues have grown at a CAGR of 14.%. The
share of export revenues has increased from 45% in FY06 to 50% in FY13.
Exhibit 35: Aggregate revenue and share of exports

50

52%

40

50%
48%

30

46%

20

44%
42%

10

40%

38%
FY06

FY07

FY08

FY09

Aggregate revenue

FY10

FY11

FY12

FY13

Exports as a % of revenue

Source: Company, Emkay Research, Capita Line

Currency depreciation has aided in faster revenue growth in FY13


Faster growth in exports is also driven by currency depreciation in the recent fiscals. Export
revenues for the leading three companies have grown at a faster clip of 28.7% yoy in FY13.
The sector has been in a sweet spot in the past couple of fiscals on account of currency
depreciation, as adjustment in pricing is with a lag, which has helped these companies
register faster growth in exports.
Exhibit 36: Aggregate export revenue and yoy growth

25

40%

20

30%
20%

15

10%
10

0%

-10%

-20%
FY06

FY07

FY08

FY09

Aggregate export revenue

FY10

FY11

FY12

FY13

Growth y-o-y

Source: Company, Emkay Research, Capita Line

Emkay Research

July 3, 2014

25

Specialty Chemicals Sector Report

Indian specialty chemicals

Specialty chemical and base chemicals: The key differentiators


Exhibit 37: Key Differentiators: Specialty and base chemicals
Differentiation

Specialty Chemical

Base chemical

Market Structure

Oligopoly

Competitive

Basis of differentiation

R&D capability

Pricing

Quality consistency
Timeliness of delivery

Type of product

Customized products

Standard Products

Customer stickiness

High

Low

Nature of contract

Customer approval systems and process are highly elongated


Tedious approval processes with high quality and consistency requirement

Customers look for lower price suppliers,


as products are standardized

Switching suppliers is difficult due to long approval processes

Long-term volume contracts with clauses for pass-through of cost escalation Short term contracts
de-escalation

Core strategy for success

High process R&D capability

Cost leadership strategy

Margin profile

Stable margins due to escalation de-escalation clauses in contract

Volatile margins depended on chemical cycle

Benefits of scale economies

Limited due to large number of low volume high value products

Significant due to standardized products

Source: Emkay Research

Exhibit 38: Limited revenue contraction in the financial crisis years

70
60

Exhibit 39: Stability in margins due to oligopolistic structure

40%

18%

30%

16%

50
40

20%

30

10%

14%
12%
10%

20
0%

10
0

-10%

8%
6%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14


Aggregate revenue

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Growth y-o-y

Source: Company, Emkay Research, Capita Line

Aggregate EBITDA margins


Source: Company, Emkay Research, Capita Line

The key difference between specialty chemical and base chemical industries is the fact that
the latter is much more cyclical in nature, due to a large number of players manufacturing
standardized products. The key to succeed in such a business is cost leadership. This has
been evident by the fact that the global chemical industry has witnessed an eastward shift,
especially China, which now accounts for around 27% of global chemical industry.
Specialty chemicals in this respect differ significantly from base chemicals due to limited
number of players, competing purely on the basis of knowledge of chemistry and consistent
quality as opposed to the base chemical industry. The key differentiators between the base
and specialty chemical industry are as follows:

R&D-focused industry
Unlike base chemical industry,
specialty chemical industry is
R&D focused which acts as an
entry barrier

The specialty chemical industry is a knowledge-based sector competing on the basis of


R&D capabilities and understanding of chemistry, rather than one with a standardized
product approach for base chemicals. Specialty chemicals, as highlighted above, are
chemicals differentiated on the basis of what they do, rather than what they are, which
translates into low-volume/high-value products, as these products are intermediaries for the
final product performance, which can greatly vary depending on the purity and chemistry of
the intermediate products.
Companies in this space compete on the basis of their R&D capability and quality
consistency as opposed to pure cost-based competition as in the case of base chemicals.

Emkay Research

July 3, 2014

26

Indian specialty chemicals

Specialty Chemicals Sector Report

Stickiness of customers
Focus on delivering quality with
consistency which leads to a
sticky customer profile as
compared to base chemical
companies which compete
purely on cost leadership

Customer approval systems and process are highly elongated as far as specialty chemicals
are concerned, as customers need to be certain about the following two key aspects while
freezing on their suppliers: (i) quality of the product ensuring that products exactly meet
specifications and (ii) consistency of order delivery.
The long approval processes thus lead to a high level of customer stickiness as opposed to
base chemicals. This is also evident from the fact that despite a year-on-year contraction in
revenues of 8% in FY10 for the leading three specialty chemical companies, revenues
surpassed the pre-crisis levels in FY11.

Oligopolistic nature of the industry


Limited number of suppliers
globally for each product leads
to an oligopolistic industry
structure

Given the long gestation period, R&D focus requirement and lower volumes, the number of
suppliers are limited. This leads to an oligopolistic structure for the industry, with a few
players manufacturing these products. Advantages of economies of scale are limited, as
the industry largely deals in low volume products. As a result, companies have limitation in
terms of size that they can achieve.
Further, given the key role that these chemicals play in the performance of the end-product
buyers typically restrict the number of suppliers to two or three, which provides better
bargaining power to suppliers. As a result, most players have a high proportion of long-term
contracts vis--vis short-term contracts as in the case of base chemicals.

Long-term contracts ensure lower margin volatility


Long term contracts ensure low
volatility of margins due to
cost/benefit pass through

The long-term contracts signed between customers and suppliers provide for better terms
of trade for both parties. Given that most of these long-term contracts would have passthrough clauses for raw material costs; margins for specialty chemical players are typically
stable unlike base chemicals. While on the one hand it limits the ability of the company to
sustain high levels of margins, as most benefits would be passed on to end-customer, on
the other, it protects companies from large volatility in raw material prices.
Benefits of this arrangement were clearly visible in the post-crisis years, wherein despite
contraction in almost all chemical realizations; margins for the leading three specialty
chemical players remained stable.

Emkay Research

July 3, 2014

27

Specialty Chemicals Sector Report

Indian specialty chemicals

Indian specialty chemical players: Riding the wave


Revenue growth driven by both exports and domestic business
Revenues for the three leading
companies analyzed by us
have grown at a CAGR of 17%
between FY06-FY14 driven by
both domestic and export
revenues

Indian specialty chemical players have been the key beneficiaries of the underlying growthdrivers. The leading three specialty chemical players, Aarti Industries, Atul Ltd. and Vinati
Organics, have witnessed a cumulative revenue growth of 17% (CAGR) over FY06-14.
Their exports grew at a faster clip of 18% (CAGR) during the period FY06-13, while
domestic revenues increased at a CAGR of 14% in the same period.
Exhibit 40: Aggregate domestic and export revenues (Rs bn)

70

52%

60
50

50%
48%

40

46%

30

44%

20
10

42%
40%

38%
FY06

FY07

FY08

FY09

Aggregate revenue

FY10

FY11

FY12

FY13

FY14

Exports as a % of revenue

Source: Company, Emkay Research, Capita Line

Sustained capex drives volume growth


Sustained capex to drive
revenue growth, capex intensity
has increased in the last 3
years

The faster revenue growth has been driven by sustained capex in the last 6-7 years. The
three leading players have cumulatively spent Rs21bn between FY07 and FY14 in
augmenting its capacities, both by means of setting up new capacities and debottlenecking existing capacities. The capex spend has been higher in FY12, FY13 and
FY14, with the three companies cumulatively spending a total of Rs14bn the benefits of
which will continue to accrue going forward.
Exhibit 41: Aggregate capex (Rs bn)

7
6
5
4
3
2
1
0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Emkay Research, Company, Capita Line

Operating leverage aids in gradual margin expansion


Given the oligopolistic nature of the industry, with long-term supply arrangements, gross
margins and EBITDA margins have remained steady between FY06 and FY14. Despite the
global financial crisis in FY08, EBITDA margins remained stable in the range of 15-16%.
EBITDA margins have been supported by operating leverage, which has ensured stable
margins, despite a steady increase in raw material costs. RM costs have expanded by
around 500bps between FY06 and FY13, while operating leverage has led to a reduction in
employee cost and other expenses as a percentage of revenue, aiding in stable margins.

Emkay Research

July 3, 2014

28

Specialty Chemicals Sector Report

Indian specialty chemicals

Exhibit 42: Cost components as a percentage of total income

70%
60%
50%
40%
30%
20%
10%
0%
FY06

FY07

FY08

Employee cost

FY09

FY10

P&F cost

FY11

Other expenses

FY12

FY13

RM cost

Source: Company, Emkay Research, Capita Line

Working capital requirement has increased in tandem with revenue growth


Working capital cycle has been
managed well by the three
companies thereby not straining
cash flows

The working capital requirement has increased in tandem with revenue growth. Despite
high revenue growth, the companies have focused on working capital management,
leading to a reduction in debtor days from 74 days in FY06 to 63 days in FY14, while
inventory days decreased from 85 days in FY06 to 81 days in FY14. Payable days have
remained steady at ~45 days. Thus, working capital days has witnessed a gradual
improvement reducing from 117 days in FY06 to 100 days in FY14.
Exhibit 43: Working capital cycle (number of days)

100
80
60
40
20
0
FY06

FY07

FY08

FY09

Debtor days

FY10

FY11

Inventory days

FY12

FY13

FY14

Creditor days

Source: Company, Emkay Research, Capita Line

Leverage position comfortable, despite sustained capex


Overall leverage position for the
three
companies
remains
comfortable below 1x net debt
to equity

Overall, leverage for the companies has remained comfortable, despite the sustained
capex, as the capex has been funded by a mix of internal accruals and debt. Net debt has
increased from Rs6.5bn in FY06 to Rs 13bn in FY14; however; net debt-to-equity has
improved from 1.2x in FY06 to 0.6x in FY14. Net debt-to-EBITDA has improved from 3.7x
in FY07 to 1.4x in FY14, while the interest coverage ratio has improved from 3.1x in FY07
to 5.4x in FY14.

Exhibit 44: Aggregate Net debt and net debt-to-equity

16.0

Exhibit 45: Aggregate Interest coverage ratio

1.4
1.2

12.0

6.0
5.0

1.0

8.0

0.8

4.0

0.6

3.0

0.4

4.0

0.2
0.0

0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Net Debt

Net Debt to Equity

Source: Company, Emkay Research, Capita Line

Emkay Research

July 3, 2014

2.0
1.0
0.0
FY06

FY07 FY08 FY09

FY10

FY11 FY12

FY13 FY14

Source: Company, Emkay Research, Capita Line

29

Specialty Chemicals Sector Report

Indian specialty chemicals

Stable dividend payout ratio


Companies have a stable
dividend pay out ratio of 2025%

The dividend payout ratio for the sector has broadly remained stable, with a consistent
history of dividend payments. The dividend payout ratio has remained in the range of 1820% in the last few years. With the exception of Atul Ltd., the dividend payout has
improved for Vinati Organics and Aarti Ltd. from 12% and 24% in FY11 to 18% and 28% in
FY13, respectively.
Exhibit 46: Aggregate dividend payout ratio

30%
25%
20%
15%
10%
5%
0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Source: Company, Emkay Research, Capita Line

Return ratios have shown steady improvement, due to improving margins


RoCE and RoE has improved
from 10% and 9% in FY07 to
22% each in FY14

Return ratios at an aggregate level for the sector have improved steadily on the back of
higher revenue growth and margin improvements. RoCE, at an aggregate level, has
increased from 10% in FY07 to 22% in FY14, while RoE improved from 9% in FY07 to 22%
in FY14. The improvement in RoCE has been sharpest for Vinati Organics from 14% in
FY07 to 36% in FY14, driven largely by faster growth and improved margins. The RoCE
was Atul Ltd. has increased from 9% in FY06 to 28% in FY14.
Exhibit 47: Aggregate RoCE and RoE

25%
20%
15%
10%
5%
0%
FY06

FY07

FY08

FY09

FY10

RoCE

FY11

FY12

FY13

FY14

RoE

Source: Company, Emkay Research, Capita Line

Sector is poised for strong growth; companies like Atul Ltd., Aarti industries
and Vinati organics to emerge as clear winners
We are convinced that the specialty chemical sector offers strong growth opportunity in
medium-to-long term, and companies with a presence in diversified segments, a large
customer base and leadership in their areas of expertise, along with significant investments
in meeting pollution control norms, are likely to emerge as clear winners in the sector. In
our opinion, among such companies, players like Atul Ltd., Aarti Industry and Vinati
Organics offer strong growth potential, and are likely to report revenue growth of 20-25%
per annum and a PAT growth of 25-30% for the next 3-4 years.

Current valuations provide re-rating opportunity


We believe that supported by strong entry barriers, high level of customer stickiness, stable
margins and high process and knowledge-dependency, it should enjoy a valuation
premium over commodity chemicals. The sector valuation should reflect high and stable
return ratios at 18-22% enjoyed by established players and encouraging growth opportunity
of 20-30% at the bottomline. In our view, at current valuations of 12-15x for the companies
covered offers scope for a re-rating along with earnings growth.
Emkay Research

July 3, 2014

30

Indian specialty chemicals

Specialty Chemicals Sector Report

Risk and Concerns


Significant currency appreciation
Significant appreciation in the currency could impact growth as competitive advantages vis-vis China could reduce thereby slowing the pace of shifting of volumes from China to
India. Further, some of the products are priced on IPP which also could be impacted by
significant currency appreciation.

Slow down in end user industry growth


The slow down in growth of end user industry such as paints & coatings, specialty
polymers, construction chemicals etc could impact the overall growth for the sector.

Slow down in global growth


The slow down in global growth could impact the performance of the industry adversely as
exports contribute significantly to the overall industry revenues. Any slow down in the
global growth impacting the end user industry growth will have an adverse impact on the
overall growth for the sector.

Tightening pollution control norms in the company


Companies have invested significantly in pollution control equipments; however, any further
tightening of the pollution control norms across the country or by state Pollution Control
Boards could have a negative impact on account of increase in capital allocation for
meeting the tighter environmental guidelines. Further, product specific restrictions may also
impact performance of specific companies.

Emkay Research

July 3, 2014

31

Indian specialty chemicals


Exhibit 48: Financial snapshot of Specialty Chemical Companies
FY11-14
Rs mn
FY14
CAGR
Export
Company
Sales PAT EBIDTA % Sales
PAT MCAP share ROCE
Aarti Inds.

25987

1487

15.6%

22%

31%

17751

47%

18.3

Atul Ltd

23065

2128

16.6%

15%

33%

26528

48%

29.8

Balaji
Amines

6101

335

15.3%

21%

8%

1974

24%

18.2

BASF India

44187

1279

6.4%

13%

3%

37839

11%

12.8

Clariant
Chemical

14350

1668

17.5%

14%

-18%

22484

28%

19.8

Deepak
Nitrite

12574

383

9.0%

23%

14%

9826

43%

10.2

Guj
Fluorochem

11349

744

22.5%

5%

-34%

49792

56%

20.8

8292

641

25.1%

19%

13%

8551

88%

5.0

Himadri
Chemical

13629

-391

8.5%

25%

-170%

9700

6%

3.5

India
Glycols

28686 -1195

1.6%

21%

-267%

4060

36%

12.5

Hikal

Jayant Agro
Org.

6560

373

11.9%

-17%

28%

1835

81%

18.7

Navin
Fluo.Intl.

4472

507

20.1%

-14%

-40%

6055

30%

9.5

Omkar
Spl.Chem.

2096

146

18.4%

25%

13%

2458

29%

16.9

Savita Oil
Tech

20582

897

8.5%

10%

-6%

9028

18%

18.2

SRF

34021

2165

15.6%

4%

-23%

28951

33%

15.6

Sudarshan
Chem.

10225

344

12.5%

13%

-15%

4965

37%

10.0

Thirumalai
Chem.

10276

36

5.9%

10%

-42%

952

6%

26.0

6873

862

23.6%

29%

18%

15532

60%

Vinati
Organics

Specialty Chemicals Sector Report

P/E Company profile


Diversified product profile with leadership position in benzene
11.9
based chemistry
12.5 Leading player in colours, Agrochemicals, Dyes
Leading manufacturers of aliphatic amines in India. BAL has
5.9 been consistently adding capacities and fine tuning process to
provide quality products at lowest cost to the customers.
Manufactures polymers, tanning agents, leather chemicals and
29.6 auxiliaries, crop protection, textile chemicals, construction
chemicals etc along with many other specialty chemicals
Leading specialty chemicals companies with leadership in
13.5
Pigments, biocides for Paints and Master batches
It has portfolio of wide spectrum of products with diverse
applications
ranging
from
Agrochemicals,
Rubber,
25.6
Pharmaceuticals, Paper, Textile, Detergent, Colourants,
Petrochemicals to Specialty and Fine Chemicals.
Leading manufacturer of Polytetrafluoroethylene (PTFE) resin
66.9 at Dahej, India, HCFC22 at its Ranjitnagar Plant and caustic
soda
Engaged in R&D, manufacturing and marketing of fine
chemicals for the pharmaceutical and agrochemical industries.
13.3 Collaborate with innovator companies and offer solutions in
contract
research,
custom
synthesis
and
custom
manufacturing.
Leveraging on its carbon competence to accelerate its growth
in eight growing and profitable businesses- coal tar pitch,
chemical oils, carbon black, naphthalene, advanced carbon
24.8
material, corrosion protection, naphthalene sulphonate and
power
Manufactures green technology based bulk, specialty and
-3.4 performance chemicals and natural gums, spirits, industrial
gases, sugar and nutraceuticals.
Emerging global oleochemical company with leadership in the
4.9
castor-based specialty chemicals
Part of the Mafatlal Group with presence in refrigerant gas,
specialty chemical, inorganic fluorides and CRAMS business.
12.0
Fluorine based specialty products fined application in pharma,
crop protection, hydrocarbon and fragrances.
Company is primarily engaged in the production of specialty
16.8 chemicals and pharma intermediates. Manufacture a range of
organic, inorganic and organo inorganic Intermediates
Three product groups, where the company is present are transformer oils, liquid paraffins / white oils and lubricating oils.
10.1
Apart from this has presence in wind power with 48MW
capacity
Manufacturer of chemical based industrial intermediates covers
Technical Textiles, Fluorochemicals, Specialty Chemicals,
13.4 Packaging Films and Engineering Plastics. SRF has grown to
become a highly backward integrated producer of refrigerants,
chlorinated solvents and specialty chemicals.
It is specialised in colors and chemicals and has acquired a
14.4 strong position in the segment with over 35% market share and
is the largest pigment supplier
It manufactures many critical Industrial Chemicals like Maleic
Anhydride, Fumaric Acid and Malic Acid and various Fine
26.7
Chemicals and Derivatives. Today TCL ranks among the
largest producers in the world in all its core products.

27.2 18.0 Leading manufacturer of IBB and ATBS

Source: Emkay Research, Capital Line

Emkay Research

July 3, 2014

32

Aarti Industries
Steady growth with stable margins

Your success is our success

July 2, 2014

Rating
Not Rated
CMP
Rs218

Target Price
NA

EPS Chg (%)

NA

Target Price change (%)

NA

Nifty

25,812

Price Performance
(%)

1M

n
3M

6M 12M

Absolute

35

77

125

176

Rel. to Nifty

29

54

82

108

Source: Bloomberg

Relative price chart


Rs

40

152

24

129

106

-8

83

-24

60
May-13

7,719

Sensex

175

Jul-13

Sep-13

Nov-13

Aarti Industries (LHS)

Jan-14

Mar-14

-40
May-14

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector

Speciality Chemicals
ARTO IB

Bloomberg

443

Equity Capital (Rs mn)

Face Value(Rs)

89

No of shares o/s (mn)

221/ 62

52 Week H/L
Market Cap (Rs bn/USD mn)

19/ 323

Daily Avg Volume (No of sh)

116,543

Daily Avg Turnover (US$mn)

0.3

Promoters

Dec'13 Sep'13

60.9

60.8

60.5

FII/NRI

0.1

0.1

N/A

Institutions

8.1

7.8

7.7

Private Corp

1.2

1.2

1.1

29.8

30.1

30.7

Public

Improved product mix with high margin businesses like


pharma and performance chemicals will drive topline,
EBITDA margin expansion though remains a key
Management is confident of 20-25% annual revenue growth
driven by higher asset utilization and margin improvement.
Ongoing capex of ~Rs3bn is likely to support future growth
Balance sheet continues to remain relatively leveraged,
though manageable. RoCE saw a gradual improvement from
11% in FY07 to 18% in FY13

Process-driven production facility benefits from forward-integration


Aarti Industries is one of the leading players in dyes, pigments, agrochemicals,
pharmaceuticals & rubber chemicals. It is a strategic supplier for various multinational
companies. A significant portion of its production capabilities is process-driven and not
based on a particular product. This gives Aarti Industries the flexibility to change its input
mix and manufacture different products, thereby resulting in optimum utilization of
production capabilities. The companys ability to convert by-products into commercially
viable product is one of its key strengths.

Change in product mix and operating leverage to improve margins


A diversified product portfolio supported by backward- and forwardintegration, with
flexible production facilities, helps the company to enjoy stable EBITDA margins of 1517%. We believe a change in product mix (as the company focuses more on highmargin hydrogenation products) and operating leverage in its pharma business would
support margin expansions going forward.

Sustained capex drives revenue growth


Aarti Industries sustained capex in the form of capacity expansion and integration has
helped the company to report a revenue/PAT CAGR (FY11-14) of 21%/26%. However, a
significant capex of around Rs7bn in the previous 3 years is likely to benefit in the near
term. Further, the company has chalked out a capex plan of Rs3bn over the next 1-2
years (which is likely to be met through internal accruals), which will support future
revenue growth.

Stock offers 50-60% return opportunity, valuations protects downside risk

Shareholding Pattern (%)


Mar'14

Aarti industries with its diversified product basket, and


presence across performance chemicals , agrochemicals,
home & personal care and pharma is likely to benefit from its
thrust on forward-integration in benzene-based chemistry

Source: Bloomberg

We believe Aarti Industries complex model, supported by strong integration, leads to


stable margin profile. Recent investment in performance chemicals and pharma are
likely to boost revenue growth in the near term. We expect Aarti Industries to benefit
from encouraging opportunities in specialty chemicals industry. The company is likely to
report a 22-25% revenue growth, leading to a 25-30% PAT growth over next 2-3 years.
Current valuations at P/E of 10x and EV/EBITDA of around 6x FY14 earnings protect
downside risks.

Chetan Thacker

YE-

Net

chetan.thacker@emkayglobal.com

Mar

Sales

(Core)

(%)

+91-22-66121272

(Rsmn)

Financial Snapshot (Consolidated)


EBITDA

EPS
APAT

EPS

RoE

EV/

(Rs) % chg

(%)

P/E

EBITDA

P/BV

FY11A

14,572

2,021

13.9

815

10.6

19.0

16.9

20.5

11.5

3.3

Rohan Gupta

FY12A

16,769

2,529

15.1

1,033

13.1

22.9

18.8

16.7

9.9

2.9

rohan.gupta@emkayglobal.com

FY13A

21,000

3,650

17.4

1,344

17.0

30.2

20.0

12.8

7.6

2.3

+91-22-66121248

FY14A

26,325

4,015

15.3

1,624

18.3

7.9

20.0

11.9

7.1

2.2

Emkay Global Financial Services Ltd.

33

Company Update

Emkay

Aarti Industries

Company Update

A leading play in performance chemicals


Large customer base with
diversified product offering acts
as a key differentiator for the
company

Aarti Industries is one of the leading players in dyes, pigments, agro-chemicals,


pharmaceuticals & rubber chemicals. It is a strategic supplier for various multinational
companies. The company has acquired world-class expertise in the development and
manufacture of these chemicals. Aarti Industries is among the largest producers of
benzene-based basic and intermediate chemicals in India. Supported by a strong R&D
team and 16 manufacturing units across Maharashtra and Gujarat, the company
manufactures more than 125 products. It is the largest manufacturer of chloro benzenes,
nitro chloro benzenes, chloro anilines and nitro anilines in India and ranks among top-3
global manufacturers.

Strong growth of end-user industry ensures buoyant growth


End user industry growth
expected to remain buoyant at
15-20% driven by strong
underlying structural drivers

The end user industry for Aarti Industries primarily includes dyestuff, pigments, pharma
intermediaries, specialty chemicals etc. We believe the growth in the end-user industry is
likely to remain buoyant, and these industry segments are likely to post a 15-20% annual
growth in the medium term. The companys ability to supply a bouquet of products and
regular introduction of new products is expected to keep the growth momentum intact.

Its process driven production facility benefits from forward-integration


A significant portion of Aarti Industries production capabilities is process-driven and not
based on a particular product. This gives the company flexibility to change its input mix and
manufacture different products, thereby resulting in optimum utilization of production
capabilities. The companys ability to convert by-products into commercially viable product
is one of the key strengths enjoyed by it. It has invested significantly in backward- and
forwardintegration, which has helped improve its product profile and margin expansions.
Exhibit 49: Production Process

Source: Company

Emkay Research

July 3, 2014

34

Aarti Industries

Company Update

Exhibit 50: Optimal utilization of by-products


By-products
Steam From Sulphuric Acid Plant
Dilute Hydrochloric Acid

Gainful Usage
Power

generation

(6MW

Power

Plant)

&

distillation

(ONCB/PNCB)
Chloro Sulfonic Acid / Calcium Chloride (Lumps as well as
Granules)

Dilute Sulphuric Acid from Nitration

Single Super Phosphate (SSP) fertilizer

Dilute Sulphuric Acid

Di Calcium Phosphate (Nutrients)

Source: Company, Emkay Research

Sticky customer base reduces the risk of volatile earnings and ensures
stable margins
Sticky customer base due to
long and tedious approval
process acts as a strong entry
barrier

Being a manufacturer and supplier of key chemical intermediate products that find endusage as inputs for further processing, Aarti Industries has a typically prolonged customer
lifecycle. The customer lifecycle begins with a rigorous testing process, followed by the final
approval of a product. Given the varied end-use usages of clients, product requirements
vary from customer to customer even for similar products. The typical time taken from the
testing process to the final approval of the product is 1-2 years. As a result, customers are
particularly sticky.
Typically, customer contracts are volume contracts, with pricing being decided on a
quarterly basis. This re-pricing arrangement ensures that the company is able to maintain
stable margins, despite volatility in input prices, as it is able to pass on the cost push
pressures, while at the same time shares the benefits of lower input costs.

Emkay Research

July 3, 2014

35

Aarti Industries

Company Update

Business segments
Specialty chemical Volume-led growth is the key
Growth to be driven by better
utilization
of
recently
commissioned
capacity
expansions for NCB and
hydrogenation

The specialty chemicals segment of the company consists of erstwhile performance


chemical segment and agri-intermediary segment. Growth of the companys performance
chemical segment is expected to be driven by higher volume. Increasing capacity at its
hydrogenation facility and expansion plan at toluene-based chemistry are likely to support
revenue growth in this segment. The management believes that it will be able to increase
its market share in its chloro benezene segment as Lanxes (a significant player in this
segment) has exited from this product. Aarti Industries expects to capture 15,000-20,000mt
of incremental sales, out of a total opportunity of 70,000-75,000mt.
The company is confident about a compounding growth of 18-20% in this segment, as
demand from user industry remains buoyant. It has already chalked out capex plans to
support this revenue growth.

Strong opportunity in agro-chemicals


Agro chemical sector provides
strong opportunity both in
domestic and export markets

The agri-intermediaries sector is witnessing a structural shift, with more and more suppliers
looking at India as a key sourcing destination as opposed to China. The key reasons for
this underlying shift are increasing cost of emission control and steady appreciation in the
yuan. These factors are expected to play to the benefit of our country, subsequently,
leading to an increase in the number of customers perceiving India as a sourcing
destination. Given that the company already works with large global multinational
companies in the agro-chemical space, we expect the segment to witness steady growth
going forward. Exports constituted roughly 60% of agri-intermediary sales in FY13
(adjusting for SSP revenues), compared with around 45% in FY12. With this trend likely to
continue, we expect the segment to maintain steady growth in the medium term.
Exhibit 51: Specialty chemical segment: Revenue (Rs mn) and EBIT margins

25000

20%

20000

15%

15000
10%
10000
5%

5000
0

0%
FY06

FY07

FY08

FY09
Revenue

FY10

FY11

FY12

FY13

FY14

EBIT Margin

Source: Company, Emkay Research

Pharmaceutical To benefit from operating leverage


Growth to be driven by higher
sales in the regulated markets
of US and Europe

Aatri Industries is a relatively new entrant in this segment and hence it offers significant
growth opportunity on a low base. Currently, the company has four API and intermediaries
manufacturing units. While two of them are USFDA-approved, the other two units are
WHOGMP-approved. The company manufactures APIs for anti-hypertensive, antiasthamatic, anti-cancer and anti-thalassaemic products. Further, its backward-integrated
process model ensures that it does not have to rely on China for sourcing intermediaries for
production of APIs, thereby contributing to its relatively high margin.

Operating leverage and faster


growth to lead to significant
improvement in margins for the
segment from ~12% in FY14 to
20-25% in the next three years

As the utilization for this segment has been low, the company has been focusing on
improving volumes in this segment. Margins have been steadily improving, but are still
lower than the projected margins of 20-25%. With the increase in volumes, the
management expects operating leverage to aid in significant improvement in segment
margins. Margins for the segment have expanded significantly in FY14 to 12% from 5% in
FY13, with revenues increasing by 33% yoy in FY14, a trend that is expected to sustain
going forward.
The management expects revenues for this segment to increase at a CAGR of 20-25%
going forward in the medium term, along with expansion in margins from 12% currently to
20-25% in the medium term. The margin expansion will also aid in the overall improvement
in consolidated margins.

Emkay Research

July 3, 2014

36

Aarti Industries

Company Update

Exhibit 52: Pharma segment: Revenue (Rs mn) and EBIT margin

3000

15%

2500

10%

2000

5%

1500

0%

1000

-5%

500

-10%

-15%
FY06

FY07

FY08

FY09
FY10
Revenue

FY11
FY12
EBIT Margin

FY13

FY14

Source: Company, Emkay Research

Home and personal care This non-performing segment may be


discontinued
The companys home and personal care segment continues to remain under pressure, due
to lower margins and sluggish volumes. Management has taken certain initiatives to
improve margins for the segment, including commissioning of a spray-dryer project and
changing the product mix. However, the performance of this segment is expected to remain
sluggish.

Sustained capex drives revenue growth


Sustained capex of ~Rs3bn
provides medium term revenue
visibility

Sustained capex in the form of expansion of the NCB capacity, debottlenecking and
forward-integration into higher-margin hydrogenation products have aided in revenue
growth. The company has maintained a steady pace of capex during FY07-14, with the
capex being broadly back-ended in nature. Of the Rs11.5bn invested in previous 8 years
around 70% has been invested in previous 3 years. The expansion of the NCB capacity
and debottlenecking of the hydrogenation capacity have attracted a large share of capex,
and the benefit of the same is likely to accrue in the medium term.

Exhibit 53: Planned capex for the next 15-18 months


Capex Plans
Major Projects

Details

Hydrogenation unit at Jhagadia

Expansion of polymer intermediate

300

Nitration Unit at Jhagadia

Expansion into Toulene Chemistry

600

Chlorination & Calcium Chloride Granulation at Vapi

500

Ongoing Nitration & Pigment


Intermediate at Vapi

Expansion into base Chlorination


Capacity and also for Calcium Chloride
Granulation Unit

Debottlenecking and Expansion


Setup of New Caffiene unit, Addition of Block for intermediates and

Pharmaceuticals

Debottlenecking of USFDA Unit

Home & Personal Care Chemicals


Maintenance capex

Expected Outlay (Rs mn)

Debottlenecking and Expansion for switch in Product Mix

200
600
200
600

Total outlay for 12-18 months

3,000

Source: Company, Emkay Research

Emkay Research

July 3, 2014

37

Aarti Industries

Company Update

Revenue growth is likely to remain robust


Aarti Industries has delivered revenue CAGR of 16% (FY06-14), with all the segments
contributing to the topline growth. Revenue growth has been driven by both domestic and
export revenues. However, export revenues have grown at a faster pace compared to the
overall growth. Management is confident that the current trend will continue in the medium
term, as the full impact of capex completed in FY13 and FY14 are expected to accrue
going forward. Further, the companys additional capex plan of Rs3bn provides growth
visibility beyond FY15 and FY16.
Exhibit 54: Capex (Rs mn)

Exhibit 55: Gross asset turnover

5000

2.50

4000

2.00

3000

1.50

2000

1.00

1000

0.50
0.00

0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

FY14

Source: Emkay Research, Company

Source: Emkay Research, Company

Exports opportunities to remain encouraging


Exports contribute around 50% to the companys revenues (increased from less than 40%
in the last 3 years). We believe that with a strong association with various multinational
companies, its export business would continue to offer attractive opportunities.
Exhibit 56: Revenue (Rs mn) and share of exports

30000

50%

25000

40%

20000

30%

15000
20%

10000

10%

5000
0

0%
FY06

FY07

FY08

FY09
FY10
FY11
FY12
Revenue
Share of export

FY13

FY14

Source: Company, Emkay Research

EBITDA margins have remained stable


EBITDA
margins
have
remained broadly stable though
are expected to improve driven
by changing revenue mix with
higher contribution expected
from the pharma segment

Emkay Research

July 3, 2014

The companys EBITDA margins have remained stable in the range of 15-17%. The stable
margins are a result of high customer stickiness, which ensures that customer contracts
allow for pass-through of raw material cost volatility. Aided by revenue growth, EBITDA has
increased at a CAGR of 17% from Rs1.2bn in FY06 to Rs4bn in FY14.
The EBIT margins for the specialty chemical segment have witnessed a steady
improvement increasing from 13% in FY06 to 15% in FY14 while the pharmaceutical
segment margins have turned positive since FY12, witnessing significant improvement in
the last 3 years from 3% in FY12 to 12% in FY14. The improvement in performance of the
chemical segments margins is largely driven by a change in product mix, wherein the lowmargin commodity products, such as MCB, ODCB, PDCB and TCB, are being used on a
captive basis to further process these products, leveraging the benefits of forwardintegration. As a result, sales of low-margin first process products have steadily declined to
10%, while the value-added hydrogenation process products have climbed to 30% from 1520% clocked 5 years ago. The home & personal care segment margins continue to remain
a drag, with margins continuing to remain at low single digits.
38

Aarti Industries

Company Update

Exhibit 57: EBITDA margins

20%
15%
10%
5%
0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Changing revenue mix to drive margin expansion


Going forward, management expects margins to expand on the back of increasing revenue
from high value specialty chemical products and increasing share of pharmaceutical
revenues. Pharmaceutical revenues are expected to continue to improve sharply inching
towards the mid-20s in the medium term, which will drive improvement in consolidated
margins.
Exhibit 58: Revenue contribution by segment (FY13)

Pharma
9%

Exhibit 59: Revenue contribution by segment (FY14)

Home &
personal
care
7%

Pharma
10%

Home &
personal
care
6%

Specialty
chemicals
84%

Specialty
chemicals
84%
Source: Company, Emkay Research

Source: Company, Emkay Research

Exhibit 60: EBIT contribution by segment (FY13)

Pharma
3%

Specialty
chemicals
95%
Source: Company, Emkay Research

Exhibit 61: EBIT contribution by segment (FY14)

Home &
personal
care
2%

Pharma
8%

Home &
personal
care
1%

Specialty
chemicals
91%
Source: Company, Emkay Research

Balance sheet witnessed improvement with comfortable D/E


The companys balance sheet remains moderately leveraged, with debt-to- equity ratio at
1.1x. The net debt is expected to remain at the current level, as the company plans to
spend additional Rs3bn in the next 15-18 months to expand capacity. Further, with
sustained growth, the working capital requirement will also lead to increase in cash
requirement. Thus, we believe that D/E is likely to remain at the current level in the medium
term.

Emkay Research

July 3, 2014

39

Aarti Industries

Company Update

Exhibit 62: Net debt (Rs mn) and net debt-to-equity

10000

1.5

8000
1.0

6000
4000

0.5

2000
0

0.0
FY07

FY08

FY09

FY10
Net Debt

FY11

FY12

FY13

FY14

Net debt to Equity

Source: Company, Emkay Research

Improvement in margins drive gradual improvement in return ratios


Steady growth and stable margins have led to gradual improvement in return ratios; RoCE
and RoE. RoCE and RoE have witnessed gradual improvement from 11% and 9%
respectively in FY07 to 17% and 20%, respectively, in FY14. Going forward, we expect
return ratios to witness a gradual improvement with ramping up of the recently
commissioned capacities and steady improvement in margins. The increased asset
sweating and margin expansion will translate into higher return ratios in the medium term.
Exhibit 63: RoCE and RoE

30%
25%
20%
15%
10%
5%
0%
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Valuation and view: Expect 50-60% return


We believe Aarti Industries is well poised for growth, driven by emerging opportunities in
the specialty chemical industry. Its strong forward integration helps to maintain margins,
while its significant capex of roughly Rs7bn incurred in the recent years is likely to benefit
in the near future with the benefit of operating leverage. A concrete capex plan of Rs3bn is
likely to ensure revenue growth in the medium term. We believe the company is likely to
deliver a revenue growth of 22-25% over the next 2-3 years, with a PAT growth of 25-30%
during same period.
Current valuations with P/E of 10x and EV/EBITDA of around 6x FY14 earnings offer
valuation comfort. With an estimated earnings growth of 25-30%, we believe, that the stock
is likely to give returns of 50-60% over the next 2 years.

Emkay Research

July 3, 2014

40

Aarti Industries

Company Update

Company background
Aarti Industries is engaged in manufacturing of dyes, pigments, pharmaceuticals,
agrochemicals and rubber chemicals. It primarily produces benzene-based basic and
intermediate chemicals in India. Its subsidiaries include Aarti Corporate Services Ltd, Aarti
Healthcare Ltd. and Alchemie Europe Ltd.
The company has 16 manufacturing units spread across Gujarat and Maharashtra, besides
a research and development (R&D) facility. It operates in the US, Europe, Japan and India,
with corporate offices in Mumbai and representatives across the US and Europe.
The company operates in three segments: specialty chemicals, pharmaceuticals and home
& personal care chemicals. The company's products include para nitro chloro benzene
(PNCB), ortho nitro chlro benzene (ONCB), para dichloro benzene (PDCB), ortho dichloro
benzene (ODCB), nitro benzene, alkylated anilines and toluidines, chloro phenols, fluoro
compounds and bulk drug intermediates. Its customer list includes global chemical giants
such as BASF, Huntsman, Clariant, MAI, and Dow Chemicals, among others.

Management team

Emkay Research

July 3, 2014

Mr. Chandrakant Gogri Chairman: A Chemical Engineer from UDCT, is the


founder of Aarti group.
Mr. Rajendra Gogri Vice Chairman & Managing Director: A Chemical engineer
from UDCT, Mumbai, has also completed his Masters in Chemical Engineering from
IOWA University, US. He has many years of expertise in the areas of Operations,
Marketing and Financial Management.

41

Aarti Industries

Company Update

Key Financials (Consolidated)


Income Statement

Balance Sheet

Y/E Mar (Rsmn)

FY11A

FY12A

FY13A

FY14A

Y/E Mar (Rsmn)

FY11A

FY12A

FY13A

Net Sales

14,530

16,733

20,963

25,984

Equity share capital

384

396

396

443

12.0

15.2

25.3

24.0

Reserves & surplus

4,706

5,506

7,167

8,265

12,551

14,240

17,350

22,310

Net worth

5,090

5,901

7,563

8,708

Growth (%)
Expenditure
Employee Cost
Other Exp

404

471

654

788

93

33

43

43

1,485

1,309

1,753

Secured Loans

4,538

5,082

7,482

2,626

Unsecured Loans

2,160

2,944

3,229

6,868

Loan Funds

6,698

8,026

10,711

9,494

501

556

709

847

12,381

14,516

19,025

19,091

SG&A

Minority Interest

FY14A

985

991

1,434

2,021

2,529

3,650

4,015

Growth (%)

-1.9

25.2

44.3

10.0

Net deferred tax liability

EBITDA margin (%)

13.9

15.1

17.4

15.3

Total Liabilities
Gross Block

7,803

8,549

12,368

15,953

Less: Depreciation

3,682

4,115

5,631

6,517
9,437

EBITDA

Depreciation

498

549

828

885

1,522

1,980

2,821

3,130

10.4

11.8

13.4

11.9

Net block

4,121

4,434

6,737

110

Capital work in progress

185

544

687

562

718

954

1,178

Investment

764

936

954

1,172

PBT

960

1,262

1,868

2,061

Current Assets

8,879

10,684

13,382

16,092

Tax

291

362

538

540

Inventories

2,941

3,259

4,622

6,061

Effective tax rate (%)

30.3

28.7

28.8

26.2

Sundry debtors

3,325

4,070

4,290

4,432

Adjusted PAT

815

1,033

1,344

1,624

Cash & bank balance

128

105

124

148

Growth (%)

-2.3

34.6

47.7

14.3

Loans & advances

608

818

1,160

5,155

4.6

5.4

6.3

5.8

Other current assets

1,876

2,433

3,186

296

Current lia & Prov

1,568

2,083

2,735

7,610

Current liabilities

1,393

1,862

2,458

4,706

175

221

277

2,905

7,312

8,602

10,647

8,482

12,381

14,516

19,025

19,091

FY11A

FY12A

FY13A

FY14A

13.9

15.1

17.4

15.3

EBIT
EBIT margin (%)
Other Income
Interest expenses

Net Margin (%)


(Profit)/loss from JVs/Ass/MI

-9

-11

-10

-5

Adj. PAT After JVs/Ass/MI

815

1,033

1,344

1,624

E/O items

-20

-18

-4

Reported PAT

795

1,015

1,341

1,624

Net current assets

PAT after MI

815

1,033

1,344

1,624

Misc. exp

Growth (%)

19.0

26.7

30.2

20.9

FY11A

FY12A

FY13A

FY14A

PBT (Ex-Other income)

960

1,262

1,868

1,951

Profitability (%)

Depreciation

498

549

828

885

EBITDA Margin

Interest Provided

562

718

954

1,178

-2,494

-1,258

-1,874

-291

-362

-538

-1,110

470

2,262

5,173

Provisions

Total Assets

Key Ratios

Cash Flow
Y/E Mar (Rsmn)

Other Non-Cash items


Chg in working cap
Tax paid
Operating Cashflow
Capital expenditure
Free Cash Flow

Y/E Mar

Net Margin

4.6

5.4

6.3

5.8

ROCE

13.9

14.7

16.8

17.0

2,327

ROE

16.9

18.8

20.0

20.0

-540

RoIC

15.2

16.3

18.7

17.9

Per Share Data (Rs)

-622

-1,105

-3,962

-2,899

EPS

10.6

13.1

17.0

18.3

-1,732

-635

-1,700

2,274

CEPS

17.1

20.0

27.5

28.3

110

BVPS

66.3

74.6

95.6

98.3

2.0

3.3

4.3

4.3

Other income
Investments
Investing Cashflow
Equity Capital Raised

-622

-1,105

-3,962

-2,789

DPS
Valuations (x)

12

47

PER

20.5

16.7

12.8

11.9

2,313

1,328

2,685

-1,216

P/CEPS

12.7

10.9

7.9

7.7

-562

-718

-954

-1,178

P/BV

3.3

2.9

2.3

2.2

-6

-10

-12

-12

EV / Sales

1.6

1.5

1.3

1.1

Income from investments

EV / EBITDA

11.5

9.9

7.6

7.1

Others

Dividend Yield (%)

0.9

1.5

2.0

2.0

1,744

612

1,719

-2,360

Gearing Ratio (x)


1.1

Loans Taken / (Repaid)


Interest Paid
Dividend paid (incl tax)

Financing Cashflow
Net chg in cash

12

-23

19

24

Net Debt/ Equity

1.3

1.3

1.4

Opening cash position

116

128

105

124

Net Debt/EBIDTA

3.3

3.1

2.9

2.3

Closing cash position

128

105

124

148

Working Cap Cycle (days)

179.9

184.9

182.9

115.5

Emkay Research

July 3, 2014

42

Atul Ltd.
Product innovation, cost rationalization are the key

Your success is our success

July 2, 2014

Rating
Not Rated
CMP
Rs919

Target Price
NA

EPS Chg (%)

NA

Target Price change (%)

NA

Nifty

7,719

Sensex

Price Performance

1M

3M

Absolute

10

107

107

182

81

67

112

Rel. to Nifty

6M 12M

Relative price chart


Rs

70

630

50

535

30

440

10

345

-10

Jul-13

Thrust on product innovation, process automation and cost


rationalization, with sizable opportunities in high-growth/highmargin segments to boost profitability
Strong revenue/PAT growth of 16%/34% (FY10-14) is likely to
continue, as management is confident about a strong toplinedriven growth with sustained capex
We expect Atul Ltd to achieve a sustained PAT growth 25-30%
annually for the next 2-3 years, with stable return ratios. We
believe the stock offers a 60-80% return over the next 2 years

Product leadership, diverse customer base aid in revenue growth

Source: Bloomberg

250
May-13

25,812

(%)

725

Atul Ltds presence across sub-categories in specialty


chemicals supported by its product leadership and a large
customer base facilitates a steady revenue and earnings
growth

Sep-13

Nov-13

Atul Ltd (LHS)

Jan-14

Mar-14

-30
May-14

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector

Speciality Chemicals
ATLP IB

Bloomberg

297

Equity Capital (Rs mn)


Face Value(Rs)

10

No of shares o/s (mn)

30
943/ 285

52 Week H/L
Market Cap (Rs bn/USD mn)

27/ 456

Daily Avg Volume (No of sh)

231,303

Daily Avg Turnover (US$mn)

2.7

Mar'14

Growing presence in high-margin segment ensures PAT growth


Atul Ltds strong association with leading global players, coupled with its aggressive foray
in to segments like pharma and agrochemicals, is likely to boost its profitability going
forward. Its exports, which account for roughly 50% of its revenues, and the encouraging
opportunity in CRAMs business with the expected USFDA approval, would drive its
growth prospects in the near future. Its thrust on product innovation and automation are
likely to support margin expansion.

PAT growth of 34%, despite 16% revenue growth


Atul Ltd has registered revenue CAGR of 16% during FY11-14, while its PAT growth at
34% was much higher, largely driven by margin expansions, as the company has focused
on scaling up its efficiencies. Improvement in asset turnover, coupled with margin
expansions, has also led to improved return ratios, helping the company to achieve RoCE
of 28% in FY14. Management is confident about strong growth in the near future, and is
one of the key beneficiaries of high growth in specialty chemicals segment.

Stock at current level offers 60-80% return opportunity

Shareholding Pattern (%)


Promoters

Atul Ltd. is present across various sub-segments of the chemical industry, including crop
protection, aromatics, pharmaceuticals, colours and polymers. The diversified product
portfolio has helped the company to grow at a steady pace. It has a large portfolio of
around 1,350 products, with a diverse base of about 4,000 customers. Its leadership
position in aromatic products, such as p-Cresol, p-Anisic and p-Cresidine, has helped
register faster growth.

Dec'13 Sep'13

50.6

50.6

50.6

FII/NRI

1.5

1.4

1.4

Institutions

6.2

6.2

6.4

Private Corp

11.6

12.1

12.4

Public

30.1

29.8

29.3

Source: Bloomberg

Atul Ltds diversified product profile and R&D-focused approach with managements
thrust on driving efficiency make this company an attractive play in specialty chemicals
sector. With an expected PAT growth of 25-30% and RoCE sustaining at the current level
of around 28%, we believe the companys stock is expected to deliver a 60-80% return in
the next 2-3 years, driven by earnings growth. Valuation at current level at P/E of 12x and
EV/EBIDTA of 8x provide an upside opportunity.

(Rsmn)

Financial Snapshot (Consolidated)


YE-

Net

chetan.thacker@emkayglobal.com

Mar

Sales

(Core)

(%)

APAT

+91-22-66121272

FY11A

15,851

2,038

12.9

902

30.4

Rohan Gupta

FY12A

18,048

2,174

12.0

911

30.7

rohan.gupta@emkayglobal.com

FY13A

20,631

2,726

13.2

1,198

+91-22-66121248

FY14A

24,578

3,637

14.8

2,192

Chetan Thacker

Emkay Global Financial Services Ltd.

EBITDA

EPS

EPS

RoE

EV/

(Rs) % chg

(%)

P/E

EBITDA

P/BV

62.6

17.1

30.2

14.9

4.8

0.9

14.9

29.9

14.3

4.2

40.4

31.5

17.0

22.8

11.3

3.6

73.9

83.0

25.7

12.4

8.3

2.9

43

Company Update

Emkay

Atul Ltd

Company Update

Leading player with presence across sub-segments of specialty chemicals


Diversified product portfolio with
~1350 plus products and large
& diversified customer base of
~4000 customers provides
balanced growth

Atul Ltd., which has one of the most diversified product portfolios, boasts of 1350-plus
products in its portfolio. It claims to cater to more than 4000 customers. The company
caters to clients across segments, including adhesives, agriculture, animal feed,
automobile, chemicals, composites, construction, cosmetic, defense, dyestuff, electrical
and electronics, flavour and fragrance, food, glass, home care, horticulture, hospitality,
paint and coatings, paper, personal care, pharmaceutical, plastic, polymer, rubber, soap
and detergent, textile and tyre. To mange such a diverse product portfolio, the company
has divided these products in seven groups: aromatics, bulk chemicals, colours, crop
protection, floras, pharmaceuticals, and polymers.
Exhibit 64: Segmental revenue share

Polymers
21%

Crop protection
19%

Pharmaceuticals
11%

Color
18%
Bulk Chemicals
3%

Aromatics
28%

Source: Company, Emkay Research

Large customer base and diversified product portfolio help mitigate


volatility risk
Large customer base and
diversified product offering
helps mitigate risk

Atul Ltds vast customer base and broad product portfolio help the company to mitigate the
risk of concentration on a single industry, product or customer. A well-diversified product
portfolio also helps Atul Ltd to enjoy better margins, as it benefits from product and process
integration. A large number of customers, both domestically and globally, signify that the
companys reach and penetration, as well as its ability to cater to the need of the diverse
industries, will help boost its growth going forward.
Exhibit 65: Number of products and customers
Segment

Number of products

Number of customers served

Aromatics

37

356

26

205

Bulk Chemicals
Colors

695

324

Crop protection

76

1469

Floras

22

68

Pharma
Polymers

29

147

457

1032

Source: Company, Emkay Research

R&D focus, with thrust on product innovation, helped the company to


achieve leadership in various products
Being an R&D-driven company, Atul Ltds thrust on product innovation has made it a world
leader in various products. It enjoys world leadership in products like p-Cresol, p-Anisic
aldehyde, and p-Anisic alcohol, which find applications in aromatics. With its roots in the
colour business, it is one of the largest manufacturers of Vat dyes globally. In the crop
protection segment, Atul Ltd enjoys world leadership in 2,4-D acid and its derivatives along
with leadership in benzyl chloroformate. In the pharma segment, the company is the worlds
largest player in sulfone and dapsone, and phosgene-based specialty chemicals.

Emkay Research

July 2, 2014

44

Atul Ltd

Company Update

Exhibit 66: Leadership products


Segment

Product

Market share

Competition

FY14

(number of competitors)

User Industry
Dyestuff, Personal Care, Pharmaceutical,

Aromatics

p-Cresol

24% (World)

China (6), USA (1)

Aromatics

p-AA

70% (World)

Europe (1), India (2), China (1)

PI intermediate, Intermediate, Perfumery

Aromatics

p-AAl

90% (World)

China (2)

Perfumery, API intermediate

Aromatics

p-Cd

5% (World)

China (3), India (1)

Dye intermediate

Bulk chemicals

Resorcinol

25% (India)

Japan (1), USA (1), China (3)

Bulk chemicals

Anisole

22% (India)

India (3), China (3)

Plastic

Intermediate, API intermediate, Adhesion


promoter
API intermediate, Dye intermediate,
Intermediate

Colors

Vat dyes

15% (World)

Europe (1), China (4), India (1)

Colors

Sulphur Black

7% (World)

Europe(1), China (17) , India(1)

Crop protection

2,4 D and downstream products

12% (World)

Crop protection

Indoxacarb

7% (World)

USA (1), India (1)


China (5), India (3), Europe (1), Japan (2)

Pharma

Sulphones

45% (World)

Polymers

Epoxy resins & Epoxy hardeners

22% (India)

Textile
Textile
Herbicide
Insecticide
Adhesives, Paint and Coatings

Source: Company, Emkay Research

Increasing size with emphasis on automation and mechanization


Increasing automation and
mechanization helps improve
productivity and margins

Atul Ltd has significantly increased its size and operation without a proportionate increase
in overheads and staff cost. With the thrust on automation and mechanization, the sales
per employee increased to 0.85 in FY14 from 0.4 in FY08, while simultaneously the
employee cost (as % of sales) reduced by 160bps to 6.2% from 7.8% in FY08. Though
squeezing further operating leverage is unlikely, the company will continue to focus on cost
rationalization through automation and mechanization.
Exhibit 67: Sales per employee (Rs mn) and employee cost as a % of sales

10

10%

8%

6%

4%

2%

0%
FY09

FY10

FY11

Sales per employee (Rs mn)

FY12

FY13

FY14

Employee % of sales

Source: Company, Emkay Research

Future growth driven by all segments


Our segment-wise analysis indicates that Atul Ltd is well positioned to report strong growth
in the near-to-medium term driven by faster growth for the end user industries such as
paints & coatings, colorants, pharma and agro chemicals. The revenue CAGR of 15%
achieved in previous 10 years is likely to accelerate, as it benefits from its thrust on high
growth segments like pharma, and agrochemicals.

Aromatic and colour division present stable growth


Aromatics and colour division
present
stable
growth
opportunity

Emkay Research

July 2, 2014

Atul Ltds strategy to boost revenues across all segments is likely to result in an 18-22%
growth in the medium term. The aromatic segment is most likely to witness the benefit of its
vertical integration, and the companys increased focus on fragrance and flavour and
sunscreen. In the colour segment, exports offer a significant growth opportunity. As supply
constrains from China are enhancing pricing power of domestic players, Atul Ltd has
become one of the key beneficiaries of the same.

45

Atul Ltd

Company Update

Enhanced focus on brand business in agrochemical to expand margins


Atul Ltd has a diversified product basket, with undisputed leadership in manufacturing 2,4D scid, Benzyl chloroformate, sulfonylurea herbicides and Isoprothiolane. The company
has increased its thrust on the branded business, where it is likely to enjoy better margins.
Further, we believe, the herbicide segment is likely to grow faster than the overall growth in
agrochemicals industry, and the companys herbicide-heavy portfolio is likely to gain from
the same.

Exciting opportunities in CRAMs in Pharma and Agrochem strengthens


growth prospects
CRAM
business
provides
sustained growth opportunities
both in Pharma and Agrochem

The CRAMs business continues to offer strong growth potential. Atul Ltd through its ageold relationships is likely to reap the benefit of the same. The company is working with five
leading Japanese firms in pharma and agrochemicals on patented products. Though the
company is relatively new in the pharma segment (entered in 1999), it has become a world
leader in suplfone and dapsone. It is likely to get the USFDA approval very soon, which will
further strengthen its growth prospects.

Aromatics and performance chemicals supported revenue growth, while


exports continue to gain
Revenue growth of 12% CAGR
supported by both exports and
domestic market

The companys consolidated revenues registered a strong growth of 12% (CAGR) between
FY06 and FY14, driven largely by sustained capex and product leadership. The
performance and other chemical segments revenues grew at a faster clip of 21% (CAGR)
between FY10 and FY14. Aromatics, bulk chemicals, colour and polymers constituted the
chemicals segment. The growth has been fastest for the aromatics segment, with revenues
growing at a CAGR of 45% between FY10 and FY14. The companys life science
chemicals business (consists of crop protection and pharmaceuticals) clocked a CAGR of
17% between FY10 and FY14.
Exhibit 68: Revenue and share of exports

30000

60%

25000

50%

20000

40%

15000

30%

10000

20%

5000

10%

0%
FY06

FY07

FY08

FY09

FY10

Revenue

FY11

FY12

FY13

FY14

Export share

Source: Company, Emkay Research

Emkay Research

July 2, 2014

46

Atul Ltd

Company Update

Strong internal cashflows helped sustained capex


Strong internal cash flow
generation helps sustain capex
with capex intensity being high
in the last three years

Atul Ltd has been steadily deploying capital for capacity expansions and de-bottlenecking,
which has aided in sustained revenue growth. The company has spent a total of Rs6.4bn
during FY07-14. The capex intensity had been higher in FY12, FY13 and FY14, wherein
the company has expended a total of Rs3.6bn. The capex had partly been deployed to
expand the p-Cresol capacities, wherein the company remains a dominant global player.
Exhibit 69: Capex (Rs mn)

1800
1600
1400
1200
1000
800
600
400
200
0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Improvement in asset turnover drives operating leverage


Increased asset sweating helps
improve
asset
turnover
providing operating leverage

The companys thrust on driving efficiency through automation and mechanization has
improved its asset turnover (sales/gross block) to 1.9x by FY14 from 1.3x 5 years ago.
Product innovation and entry into newer segments like pharma and agrochemical
formulations and brand business has also supported improvement.
Exhibit 70: Gross block turnover ratio

2.0
1.5
1.0
0.5
0.0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

EBITDA margin improvement driven by operating leverage


Operating leverage leads to
sustained
and
gradual
improvement in margins of
~600bps between FY07 to
FY14

Atul Ltd has witnessed a significant margin expansion in the previous 5 years of 500bps to
14.8% by FY14. Margin expansion has been primarily driven by operating leverage and
cost rationalization. FY14 witnessed a 160bps improvement in margins to 14.8%.
Exhibit 71: EBITDA margins

16%
14%
12%
10%
8%
6%
4%
2%
0%
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Emkay Research

July 2, 2014

47

Atul Ltd

Company Update

Strong balance sheet and cashflow generation to ensure future capex is met
through internal accruals
Since the capex has been broadly funded through internal accruals, net debt has remained
stable at around Rs3bn since FY06. Consequently, the balance sheet strengthened, as the
net debt-to-equity ratio moved down from 1.2x in FY06 to 0.3x in FY14. The net debt-toEBITDA ratio has improved from 3.2x in FY06 to 0.8x in FY14, while the interest coverage
ratio grew from 3.5x in FY06 to 10.9x in FY14.
Exhibit 72: Net debt and net debt-to-equity ratio

Exhibit 73: Interest coverage ratio

5,000

1.4

12.0

1.2

4,000

10.0

1.0
3,000

0.8

2,000

0.6

8.0
6.0

0.4
1,000

4.0

0.2

2.0

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14


Net debt

0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Net debt to equity

Source: Company, Emkay Research

Source: Company, Emkay Research

Efficient working capital management supports cashflow


The companys working capital cycle has witnessed a significant improvement since FY06,
reducing from 131 days in FY06 to 81 days in FY14. Prudent working capital management
has resulted in a steady improvement in both debtor and inventory days, which improved
from 84 days and 102 days in FY06 to 65 days and 64 days in FY14. Payable days, on the
other hand, have remained stable through out the period. The working capital requirement
grew significantly slower compared to revenue growth, leading to improved cashflow
generation.
Exhibit 74: Working capital cycle

120
100
80
60
40
20
0
FY06

FY07

FY08

FY09

Debtor days

FY10

Inventory days

FY11

FY12

FY13

FY14

Creditor days

Source: Company, Emkay Research

Emkay Research

July 2, 2014

48

Atul Ltd

Improved margins and high


revenue growth leads to
significant
improvement
of
~1800-1900bps between FY07
to FY14

Company Update

Margin expansion, with improved asset turnover, leads to 28% ROCE


Atul Ltd has achieved ROCE of 28% in FY14, which is driven by its margin expansions and
improved asset turnover. Efficient working capital management also aided in expansion of
return ratios. RoCE increased from 9% in FY07 to 28% in FY14. RoE, on the other hand, it
increased from 9% in FY07 to 26% in FY14.
Exhibit 75: RoCE and RoE

30%
25%
20%
15%
10%
5%
0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Current valuation does not factor in sustained growth possibility, the stock
offers 60-80% growth opportunity
We believe Atul Ltds presence across sub-segments of specialty chemicals, along with a
diversified product portfolio and a large customer base makes the company an interesting
play in this segment. The company is well placed to benefit from emerging growth
opportunity in domestic as well as export markets, and is likely to post a revenue growth of
20%-plus in the medium term. Driven by margin expansions, the company is likely to
deliver a PAT growth of 25-30% in the next 2-3 years. At the current valuations of P/E of
12x and EV/EBITDA of 8x on FY14 earnings, we believe, the stock offers a 60-80% return
in the next 2-3 years on the back of earnings growth. With strong ROCE of 28% and free
cash flows, we see upside potential on the current valuation multiple.

Emkay Research

July 2, 2014

49

Atul Ltd

Company Update

Company Background
An integrated chemical company, a part of the Lalbhai Group, serving about 4,000
customers belonging to 27 industries across the world. The company is in the business of
manufacturing dyes and dye intermediates, agro-chemicals, aromatic like paraAnisaldehyde, epoxy resins and pharma intermediates.
The company sells ~1,400 products serving client across industries which includes
adhesives, agriculture, animal feed, automobile, chemical, composites, construction,
cosmetic, defence, dyestuff, electrical and electronics, flavour and fragrance, food, glass,
home care, horticulture, hospitality, paint and coatings, paper, personal care,
pharmaceutical, plastic, polymer, rubber, soap and detergent, textile and tyre industries.

Management Team

Emkay Research

July 2, 2014

Mr Sunil Lalbhai, Executive Director and Promoter: Chairman of the Board since
2007 and a Managing Director since 1984. Mr Lalbhai holds MS degree in Chemistry
from the University of Massachusetts and MS degree in Economic Policy and Planning
from Northeastern University.
Mr Samveg Lalbhai, Executive Director and Promoter: Director on the Board since
2000 and a Managing Director since 2001. Mr Lalbhai was a Managing Director in
Arvind Ltd before joining Atul in 2000. He holds BCom degree from Gujarat University.
Mr Bharathy Mohanan, Executive Director: Mr Bharathy Mohanan has been a
Whole-time Director since 2009. Mr Mohanan was Senior Manager Services in Isgec
John Thompson Ltd before joining Atul in 1992. He is also the Managing Director of
Atul Rajasthan Date Palms Ltd. He holds BSc (Engg Hon) degree from the University
of Calicut.

50

Atul Ltd

Company Update

Key Financials (Consolidated)


Income Statement

Balance Sheet

Y/E Mar (Rsmn)

FY11A

FY12A

FY13A

FY14A

Y/E Mar (Rsmn)

FY11A

FY12A

FY13A

Net Sales

15,319

17,924

20,429

23,983

Equity share capital

297

297

297

297

28.5

17.0

14.0

17.4

Reserves & surplus

5,409

6,244

7,246

9,189

13,813

15,874

17,904

20,940

Net worth

5,706

6,541

7,542

9,486

1,043

1,217

1,347

1,497

40

44

58

59

815

998

1,206

Secured Loans

1,819

3,597

3,697

1,195

Unsecured Loans

1,479

362

55

1,929

Loan Funds

3,298

3,959

3,752

3,124

230

228

273

371

Growth (%)
Expenditure
Employee Cost
Other Exp
SG&A

Minority Interest

FY14A

524

836

905

2,038

2,174

2,726

3,637

Growth (%)

43.5

6.7

25.4

33.4

Net deferred tax liability

EBITDA margin (%)

12.9

12.0

13.2

14.8

Total Liabilities

9,274

10,772

11,625

13,040

Gross Block

9,731

10,754

11,903

13,718

Less: Depreciation

5,826

6,317

6,842

7,424
6,294

EBITDA

Depreciation

386

440

514

583

1,652

1,734

2,213

3,055

10.4

9.6

10.7

12.4

Net block

3,905

4,436

5,061

363

Capital work in progress

359

662

659

263

433

349

334

Investment

851

749

667

628

PBT

1,389

1,301

1,864

3,083

Current Assets

7,534

8,739

9,250

11,235

Tax

492

350

583

881

Inventories

2,820

3,332

3,665

4,342

Effective tax rate (%)

35.4

26.9

31.3

28.6

Sundry debtors

2,900

3,589

3,517

4,371

Adjusted PAT

902

911

1,198

2,192

220

186

148

211

Growth (%)

61.3

6.0

34.8

71.9

1,083

997

1,219

1,291

5.7

5.3

6.2

9.0

511

635

701

1,021

Current lia & Prov

3,375

3,815

4,013

5,117

Current liabilities

2,854

3,297

3,551

4,629

521

518

462

488

4,159

4,925

5,237

6,118

EBIT
EBIT margin (%)
Other Income
Interest expenses

Net Margin (%)

Cash & bank balance


Loans & advances
Other current assets

(Profit)/loss from JVs/Ass/MI

-1

Adj. PAT After JVs/Ass/MI

902

911

1,198

2,192

E/O items

-67

-5

Reported PAT

836

914

1,193

2,192

Net current assets

PAT after MI

902

911

1,198

2,192

Misc. exp

Growth (%)

62.6

0.9

31.5

83.0

FY11A

FY12A

FY13A

FY14A

1,389

1,301

1,864

2,720

Profitability (%)

Depreciation

386

440

514

583

EBITDA Margin

Interest Provided

263

433

349

334

Net Margin

Chg in working cap

-955

-802

-306

Tax paid

-492

-350

-583

150

1,197

1,844

1,996

-207

-1,326

-1,147

-1,156

-57

-129

697

840

363

Provisions

Total Assets

9,274

10,772

11,625

13,040

FY11A

FY12A

FY13A

FY14A

12.9

12.0

13.2

14.8

Key Ratios

Cash Flow
Y/E Mar (Rsmn)
PBT (Ex-Other income)

Other Non-Cash items

Operating Cashflow
Capital expenditure
Free Cash Flow
Other income
Investments
Investing Cashflow
Equity Capital Raised

Y/E Mar

5.7

5.3

6.2

9.0

ROCE

19.0

17.3

19.8

27.7

-721

ROE

17.1

14.9

17.0

25.7

-881

RoIC

22.1

20.4

22.9

27.3

EPS

30.4

30.7

40.4

73.9

CEPS

43.4

45.5

57.7

93.5

BVPS

192.2

220.4

254.1

319.6

4.5

4.5

6.0

6.0

-207

-1,326

-1,147

-793

Per Share Data (Rs)

DPS
Valuations (x)

PER

30.2

29.9

22.8

12.4

347

661

-208

-628

P/CEPS

21.2

20.2

15.9

9.8

Interest Paid

-263

-433

-349

-334

P/BV

4.8

4.2

3.6

2.9

Dividend paid (incl tax)

-134

-134

-178

-178

EV / Sales

2.0

1.7

1.5

1.3

Income from investments

EV / EBITDA

14.9

14.3

11.3

8.3

Others

Dividend Yield (%)

0.5

0.5

0.7

0.7

-49

95

-735

-1,140

Gearing Ratio (x)


0.3

Loans Taken / (Repaid)

Financing Cashflow
Net chg in cash

-106

-34

-38

63

Net Debt/ Equity

0.5

0.6

0.5

Opening cash position

326

220

186

148

Net Debt/EBIDTA

1.5

1.7

1.3

0.8

Closing cash position

220

186

148

211

Working Cap Cycle (days)

90.7

95.8

90.0

87.7

Emkay Research

July 2, 2014

51

Vinati Organics
Return ratios and margins best in the industry

Your success is our success

July 2, 2014

Rating
Not Rated

CMP
Rs326

Target Price
NA

EPS Chg (%)

NA

Target Price change (%)

NA

Nifty

7,719

Sensex

25,812
n

Price Performance
(%)

1M

3M

6M 12M

Absolute

25

11

66

219

Rel. to Nifty

19

-3

34

141

Source: Bloomberg

Relative price chart


300

Rs

120

256

88

212

56

168

24

124

-8

80
May-13

Jul-13

Sep-13

Nov-13

Vinati Industries (LHS)

Jan-14

Mar-14

-40
May-14

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector

Speciality Chemicals
VO IB

Bloomberg

99

Equity Capital (Rs mn)

Face Value(Rs)

49

No of shares o/s (mn)


52 Week H/L

342/ 74

Market Cap (Rs bn/USD mn)

16/ 270

Daily Avg Volume (No of sh)

30,770

Daily Avg Turnover (US$mn)

0.1

Shareholding Pattern (%)


Mar'14
Promoters

Dec'13 Sep'13

75.0

75.0

75.0

FII/NRI

2.7

1.8

1.6

Institutions

0.9

0.8

0.9

Private Corp

0.9

1.0

1.2

20.6

21.3

21.3

Public
Source: Bloomberg

Vinati organics follows a product focused approach and aims


to achieve global leadership in each of its product supported
by cost-efficiency, leading to higher margins
Key products, IBB and ATBS, offer strong growth potential,
and investment in capex in capacity expansion of these
products ensures revenue growth in the medium term
Operating leverage is likely to drive margins and return
ratios in the near term while companys focus on driving
revenues from other products supports topline growth
Vinati Organics highest return ratios among peers to enjoy
valuation premium. Stock offers 50-70% return in next 2
years supported by earnings growth

Focused product approach drives faster revenue growth


Vinati Organics has a concentrated product portfolio, with four products contributing
around 90% to revenues. Unlike other specialty chemical companies covered in this
report, Vinati Organics shares a different vision and business profile. The company aims
to be amongst top-3 global manufacturers in each of its product, and boasts of costefficiency. As a result, in two of its key products, IBB and ATBS, it enjoys world
leadership. This product-based focus strategy has helped the company to register a
faster revenue growth of 36% (CAGR) during FY06-14. Its revenue growth has been
driven by both export and domestic revenues.

Margin expansion driven by capacity ramp-up


The companys EBITDA margin increased from 11% in FY06 to 22% in FY14, driven
mostly by increase in capacity utilization. Thus, EBITDA grew at a CAGR of 48% during
the same period. The company enjoys strong pricing power in its key products due to its
global leadership position in these products, thereby allowing it to command superior
margins within the specialty chemical space.

Strong cash generation helps capex


Strong revenue growth achieved by the company has been driven by sustained capex
which has been met largely through internal accruals. The capex in the previous 2 years
aimed at increasing ATBS and IBB capacity offers 20-25% revenue growth opportunity.
The company has further plans to invest Rs1-1.5bn in FY15 (in both existing products
and new products) to maintain medium-term growth.

Enjoys highest return ratios; hence premium valuation to continue


Vinati Organics enjoys the highest return ratios vis--vis its peers, with ROCE of 30%plus supported by higher margins (22-23%) and a higher asset turnover (2.5-3x). We
believe the near-term growth will be driven by increase in asset utilization and new
product launches. We foresee earnings growth of 25-30% per annum, with a further
improvement in ROCE. Based on the earnings growth opportunity, we expect the stock
to provide 50-70% returns over the next 2 years.

(Rsmn)

Financial Snapshot (Standalone)


YE-

Net

EBITDA

EPS

EPS

RoE

chetan.thacker@emkayglobal.com

Mar

Sales

+91-22-66121272

FY11A

3,290

761

23.1

520

10.5

FY12A

4,503

978

21.7

548

11.1

FY13A

5,567

1,241

22.3

687

FY14A

6,961

1,529

22.0

862

EV/

(Rs) % chg

(%)

P/E

EBITDA

P/BV

29.8

42.8

31.0

22.2

11.2

5.5

33.1

29.4

17.9

8.6

13.9

25.3

32.1

23.5

14.6

6.7

17.4

25.4

31.3

18.7

11.0

5.2

Chetan Thacker

Rohan Gupta
rohan.gupta@emkayglobal.com
+91-22-66121248

Emkay Global Financial Services Ltd.

(Core)

(%)

APAT

52

Company Update

Emkay

Vinati Organics

Company Update

Dominant market position in key products


Product focused strategy with
top two products contributing
~66% of total revenues

Vinati Organics has a strong portfolio of 14 products (of which it has a dominant global
position in two key products), which constitute roughly 90% of its revenues. It has gradually
scaled up its product portfolio from two products in 2001 to 14 products currently.
The company is the worlds largest manufacturer of iso-butyl-benzene (IBB), with a global
market share of 60% in 2012-13. The second key product in its portfolio is ATBS (2acrylamido-2-methylpropane sulfonic acid), wherein the company is the largest producer
globally and the only manufacturer in the country.

Exhibit 76: Revenue contribution by product (FY12)

Exhibit 77: Revenue contribution by product (FY13)

Others
9%
IB
8%

Others
11%
IB
10%

IBB
34%

NaATBS
15%

IBB
38%

NaATBS
13%
ATBS
34%

ATBS
28%

Source: Company, Emkay Research

Source: Company, Emkay Research

Exhibit 78: Key products


Product

Market position

Application / End usage

Relevance

Iso Butyl Benzene (IBB)

Largest manufacturer in the world

Pharmaceutical

The main raw material for Ibuprofen

with 60% market share

widely used drug in the US, Europe


and Asia

2-acrylamido 2-methylpropane

Largest manufacturer in the world

Water treatment chemicals,

Used in the manufacture of

sulphonic acid

with 40% market share and the only

emulsions for paint and paper

dispersants in water chemicals;

(ATBS)

manufacturer in the country

coatings, adhesives, textiles

Important ingredient to manufacture

auxiliaries and acrylic fibre,

polymers for Enhanced Oil Recovery

detergents and cleaners, oil field and

(EOR); Important for giving dye

mining chemicals, construction

receptability for acrylic fibre and other

chemicals

specific qualities

Agro-based chemicals, food

Used as an intermediate

IB

Largest manufacturer in the country

additives, antioxidants
HPMTBE

Largest manufacturer in the country

Pharmaceuticals, organo-metallic

Used as a speciality solvent

compounds
TBA

Only manufacturer in the country

TOA

Only manufacturer in the country

Thickeners, personal care, water

An important ingredient to increase

treatment, metal working fluid

viscosity of coatings and solutions

Personal care, adhesives and

An important ingredient in personal

enhanced oil recovery

care products like hair gel and


creams

Source: Company, Emkay Research

Sustained capex drives revenue growth


Vinati Organics has been in capex mode for the past 6-7 years, spending a total of Rs3.3bn
between FY07 and FY14 for capacity expansions and de-bottlenecking initiatives, which led
to a significant increase in capacities. Its ATBS capacities increased from 3000tpa in FY07
to 26000tpa, contributing around 40% of revenues in FY13, while IBB capacities grew from
10,000tpa in FY07 to 16,000tpa in FY13, constituting roughly 43% of FY13 revenues. The
company has additionally commissioned a 12,000tpa capacity of IB, which is used as
intermediate in the production of ATBS, which provides backward-integration.

Emkay Research

July 3, 2014

53

Vinati Organics

Company Update

Exhibit 79: Capacities (tpa)


ATBS
IBB

FY07

FY08

FY09

FY10

FY11

FY12

FY13

3,000

4,000

5,000

10,000

12,000

12,000

26,000

10,000

14,000

14,000

14,000

14,000

16,000

16,000

12,000

12,000

12,000

12,000

IB
Source: Company, Emkay Research

Exhibit 80: Capital expenditure (Rs mn)

1200
1000
800
600
400
200
0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

The capex, which was completed in FY14, has the potential to provide incremental
revenues of Rs5bn in the medium term.

Revenue share from non-key products to increase from 10% to 20%


Focus on product diversification
to help improve revenue share
of non-key products to increase
from 10% to 20%

Even though the company maintains its focus on achieving a leadership position in each of
its products, new product launches is likely to increase over the next 2 years for better
utilisation of by-products. As per the management, the revenue contribution from non-core
products is likely to increase from 10% in the current year to 20% over the next 2 years.
This will also support margin expansion.

Strong growth in exports boosted topline growth


Revenue growth driven by top 2
products IBB and ATBS, ATBS
to continue to drive growth

Revenues grew at a CAGR of 36% over FY06-14, driven largely by fast growth in both
domestic and export revenues. Domestic revenues clocked a CAGR of 25% in the same
period, while export revenues increased at a CAGR of 56%. Revenue growth has been
driven by a steady capex expansion for key products, ATBS and IBB.
Exhibit 81: Revenues (Rs mn) and share of exports

8000
7000
6000
5000
4000
3000
2000
1000
0

100%
80%
60%
40%
20%
0%
FY06

FY07

FY08

FY09
Revenue

FY10

FY11

FY12

FY13

FY14

Share of exports

Source: Company, Emkay Research

Hence, the share of exports gradually increased from 28% in FY06 to 65% in FY13 on the
back of faster growth in export revenues.

Emkay Research

July 3, 2014

54

Vinati Organics

Company Update

EBITDA margins increase driven by gross margin expansion and operating


leverage
Operating leverage and cost
leadership
helps
improve
EBITDA margins

The companys EBITDA margins witnessed a significant expansion, increasing from 11% in
FY06 to 22% in FY14. The margin expansion has been driven by both gross margin
expansion and operating leverage. Gross margins grew from 27% in FY06 to 40% in FY14.
The margin profile of the company is stable as evident from the fact that margin
contractions were not visible even during the post-crisis years of FY10 and FY11, signifying
higher pricing power for the company.
Exhibit 82: EBITDA margins

30%
25%
20%
15%
10%
5%
0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, Emkay Research

Working capital requirement increases in tandem with revenue growth


The working capital requirement has consequently risen in tandem with the increase in
revenues. However, the working capital cycle witnessed an improvement, with working
capital days reducing from 93 days in FY06 to 84 days in FY14.

Capex fueled by mix of debt and internal accruals


The companys net debt increased from Rs211mn in FY06 to Rs2bn in FY13 on the back of
an increase in capex, which has been funded by a mix of internal accruals and debt.
However, leverage ratios continue to remain healthy, with net debt-to-equity ratio at 0.2x in
FY14, witnessing marked improvement in FY14 compared to historical leverage of around
0.8x since FY06. Net debt-to-EBITDA has improved from 3.2x in FY06 to 0.5x in FY14,
while the interest coverage ratio improved from 5.3x in FY06 to 8.4x in FY14, signifying
improved financial strength.
Exhibit 83: Net debt and net debt-to-equity ratio

Exhibit 84: Interest coverage ratio

2500.0

1.0

16.0

2000.0

0.8

1500.0

0.6

10.0

1000.0

0.4

8.0

500.0

0.2

0.0

0.0

14.0
12.0

6.0

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14


Net Debt
Source: Company, Emkay Research

Emkay Research

July 3, 2014

Net debt to equity

4.0
2.0
0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, Emkay Research

55

Vinati Organics

Company Update

Faster growth, along with higher margins, drives return ratios


Strong revenue growth and
margin improvement leads to
significant
improvement
of
~2000bps in return ratios

Aided by faster revenue growth, along with a significant improvement in EBITDA margins,
RoCE and RoE of the company have witnessed a significant expansion. RoCE and RoE
improved from 9% and 7%, respectively, in FY06 to 30% and 31%, respectively in FY14.
Exhibit 85: RoCE and RoE

50%
40%
30%
20%
10%
0%
FY06

FY07

FY08

FY09
RoCE

FY10

FY11

FY12

FY13

FY14

RoE

Source: Company, Emkay Research

Vinati Organics margin profile and return ratios are best among its peers
Vinati Organics enjoys highest profit margins (EBIDTA margins of 22% and PAT margins of
12%) compared to its peers. Higher margins and a higher asset turnover (2.5x) lead to
higher return ratios, with RoCE of about 30%. Vinati also has the strongest balance sheet
among its peers, with net debt/equity of 0.2x. The company has also significantly improved
its working capital management, while its working capital cycle stood at a mere 54 days in
FY14.

Our view: Valuations do not factor in high return ratios and strong cash
generation; stock offers 50-70% return over 2 years
Though current valuations looked stretched at P/E of 17x and EV/EBIDTA of 10x FY14, we
believe the company is well poised to deliver a 22-30% revenue growth and a 25-30%
growth at the PAT level. Its investments in ATBS and IBB capacity are likely to benefit in
FY15/16.
Given the companys higher margins vis--vis its peers, the strong balance sheet and free
cash flow generation, we believe that premium valuations for the stock over it peers are
likely to continue. We expect the stock is likely to deliver a 50-70% return over the next 2
years on the back of earnings growth.

Emkay Research

July 3, 2014

56

Vinati Organics

Company Update

Company background
Established in 1989, Vinati Organics Ltd. (VOL) is a specialty chemical company producing
aromatics, monomers, polymers and other specialty products. With a limited product focus,
the company has emerged as the largest manufacturer of IBB (isobutyl benzene) and
ATBS. The company has manufacturing operations in two locations in Maharashtra: Raigad
and Ratnagiri.

Management team

Emkay Research

July 3, 2014

Mr Vinod Saraf, Managing Director: Founder of VOL. has an MBA degree from BITS
Pilani. He has a thorough knowledge of specialty chemicals. Prior to starting his own
venture, Mr. Saraf worked for about 25 years in the textile and petrochemical industry.
Ms. Vinati Saraf Mutreja - Executive Director: An experienced financial consultant,
Ms. Saraf has worked for leading companies in New York, US, before joining VOL in
2006. She has completed a dual degree in Bachelors of Science in Economics
(Finance) from the Wharton School and Bachelors in Applied Science, Biotech and
Pharmaceutical Development from the School of Engineering and Applied Sciences
from University of Pennsylvania.
Ms. Viral Saraf Mittal - Director-Corporate Strategy: She has rich experience of
working with organizations like Citi Bank and Ernst & Young. She became part of VOL
in 2009. She holds a Bachelors of Science degree in Economics (Finance and
Management) from the Wharton School, University of Pennsylvania. She is
responsible for formulating the corporate strategies at VOL.

57

Vinati Organics

Company Update

Key Financials (Standalone)


Income Statement

Balance Sheet

Y/E Mar (Rsmn)

FY11A

FY12A

FY13A

FY14A

FY11A

FY12A

FY13A

3,227

4,475

5,529

6,873

Equity share capital

99

99

99

99

39.2

38.7

23.6

24.3

Reserves & surplus

1,338

1,772

2,314

3,002

2,529

3,525

4,326

5,432

Net worth

1,437

1,870

2,412

3,101

Employee Cost

149

183

226

274

Other Exp

148

179

162

Secured Loans

SG&A

155

174

229

Unsecured Loans

EBITDA

761

978

1,241

1,529

Growth (%)

24.4

28.6

26.9

23.2

Net deferred tax liability

117

149

261

331

EBITDA margin (%)

23.1

21.7

22.3

22.0

Total Liabilities

2,324

3,746

5,046

4,655

Gross Block

1,487

1,887

3,417

3,769

375

444

516

669

1,112

1,443

2,901

3,042

360

568

141

101

32

79

128

27

1,074

1,956

2,299

2,351

Net Sales
Growth (%)
Expenditure

Depreciation

65

70

100

153

EBIT

696

908

1,141

1,376

EBIT margin (%)

21.2

20.2

20.5

19.8

92

71

92

115

181

625

816

1,026

1,286

Other Income
Interest expenses
PBT

Y/E Mar (Rsmn)

Minority Interest

Loan Funds

Less: Depreciation
Net block
Capital work in progress
Investment
Current Assets

FY14A

703

1,370

1,990

1,100

67

357

383

123

770

1,727

2,373

1,222

Tax

105

268

339

424

Inventories

350

430

546

466

Effective tax rate (%)

16.8

32.8

33.1

33.0

Sundry debtors

519

857

1,132

1,151

Adjusted PAT

520

548

687

862

Cash & bank balance

Growth (%)

29.8

5.5

25.3

25.5

Loans & advances

Net Margin (%)

15.8

12.2

12.3

12.4

Other current assets

20

320

337

453

186

350

283

278

Current lia & Prov

254

300

423

867

Current liabilities

151

160

237

660

Provisions

104

140

186

206

820

1,657

1,877

1,484

(Profit)/loss from JVs/Ass/MI

Adj. PAT After JVs/Ass/MI

520

548

687

862

520

548

686

862

Net current assets

PAT after MI

520

548

687

862

Misc. exp

Growth (%)

29.8

5.5

25.3

25.5

Total Assets

FY11A

FY12A

FY13A

FY14A

625

816

1,026

1,194

Profitability (%)

Depreciation

65

70

100

153

Interest Provided

71

92

115

181

Chg in working cap

-258

-505

-90

Tax paid

-105

-268

295

E/O items
Reported PAT

2,324

3,746

5,046

4,655

FY11A

FY12A

FY13A

FY14A

EBITDA Margin

23.1

21.7

22.3

22.0

Net Margin

15.8

12.2

12.3

12.4

ROCE

34.5

29.9

26.0

30.3

578

ROE

42.8

33.1

32.1

31.3

-339

-424

RoIC

43.2

38.7

31.6

32.3

53

603

1,680

-354

-608

-1,103

-311

EPS

10.5

11.1

13.9

17.4

-59

-555

-500

1,368

CEPS

11.8

12.5

15.9

20.6

92

BVPS

29.1

37.9

48.9

62.8

0.1

0.2

0.3

0.2

PER

31.0

29.4

23.5

18.7

P/CEPS

27.6

26.0

20.5

15.9

P/BV

11.2

8.6

6.7

5.2

5.2

3.9

3.3

2.5

22.2

17.9

14.6

11.0

0.0

0.1

0.1

0.1
0.2

Key Ratios

Cash Flow
Y/E Mar (Rsmn)
PBT (Ex-Other income)

Other Non-Cash items

Operating Cashflow
Capital expenditure
Free Cash Flow
Other income
Investments
Investing Cashflow
Equity Capital Raised

-354

-608

-1,103

-220

Y/E Mar

Per Share Data (Rs)

DPS
Valuations (x)

Loans Taken / (Repaid)

138

957

646

-1,150

Interest Paid

-71

-92

-115

-181

-6

-10

-12

-12

EV / EBITDA

Dividend paid (incl tax)


Income from investments
Others
Financing Cashflow
Net chg in cash

EV / Sales

Dividend Yield (%)

61

856

518

-1,344

Gearing Ratio (x)

300

18

116

Net Debt/ Equity

0.5

0.8

0.8

Opening cash position

17

20

320

337

Net Debt/EBIDTA

1.0

1.4

1.6

0.5

Closing cash position

20

320

337

453

Working Cap Cycle (days)

88.8

108.4

100.9

54.1

Emkay Research

July 3, 2014

58

Indian specialty chemicals

Specialty Chemicals Sector Report

Emkay Global Financial Services Ltd.


7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India
Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com
DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates
are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may
assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the
research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market
commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions
that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential
conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to,
or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use
would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this
document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless
otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom.
All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to,
copied or distributed to any other party, without the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of
Emkay or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination,
distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives
Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable,
although its accuracy and completeness cannot be guaranteed.

Emkay Research

July 3, 2014

59
www.emkayglobal.com