Indian Specialty Chemicals Sector Report

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

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

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

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
+91-22-66121272
Rohan Gupta
+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

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%
Emkay Research
July 3, 2014
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
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

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
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
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
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
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
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
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
Emkay Research
July 3, 2014
FY11
FY12
FY13
FY14
CAGR
22%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

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
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.
Emkay Research
July 3, 2014
11
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
Exhibit 14: Regional share of global specialty chemical industry
Others
1%
Europe
30%
Asia Pacific
37%
USA
32%
Emkay Research
July 3, 2014
12
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%
Emkay Research
July 3, 2014
13
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
Cosmetic chemicals
Water chemicals
Textile chemicals
Plastic additives
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%
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
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
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
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
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
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
Emkay Research
July 3, 2014
16
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%
Others
5%
Auto
36%
Refinish
12%
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
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
Exhibit 22: Construction chemicals sub-segments
Others
31%
Repair & Rehab

9%
Admixtures
35%
Flooring
15%
Waterproofing
10%
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
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)
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
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
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
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
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
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
2009
2010
2011
2012
Share of global exports
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
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
Emkay Research
July 3, 2014
FY12
FY13
FY09
FY10
FY11
22

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
Emkay Research
July 3, 2014
23
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
Emkay Research
July 3, 2014
24
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
Emkay Research
July 3, 2014
25
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
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%

Aggregate revenue
Growth y-o-y
Aggregate EBITDA margins

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
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
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
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
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
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
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
Net Debt
Net Debt to Equity
Emkay Research
July 3, 2014
2.0
1.0
0.0
FY06
FY07 FY08 FY09
FY10
FY11 FY12
FY13 FY14
29
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
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
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
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

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
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
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

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
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
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
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)
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
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
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 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
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
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
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
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%
Exhibit 60: EBIT contribution by segment (FY13)
Pharma
3%
Specialty
chemicals
95%
Exhibit 61: EBIT contribution by segment (FY14)
Home &
personal
care
2%
Pharma
8%
Home &
personal
care
1%
Specialty
chemicals
91%
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
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
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
July 2, 2014
Rating
Not Rated
CMP
Rs919
Target Price
NA
EPS Chg (%)
NA
NA
Nifty
7,719
Sensex
Price Performance
1M
3M
Absolute
10
107
107
182
81
67
112
Rel. to Nifty
6M 12M

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
ATLP IB
Bloomberg
297

Face Value(Rs)
10
30
943/ 285
52 Week H/L
27/ 456
231,303
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

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
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
FY13A
20,631
2,726
13.2
1,198
+91-22-66121248
FY14A
24,578
3,637
14.8
2,192
Chetan Thacker
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%
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
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
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
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
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
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
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%.
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
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

Net debt
0.0
Net debt to equity
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
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.
30%
25%
20%
15%
10%
5%
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
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
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
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
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
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
-1
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)
Operating Cashflow
Capital expenditure
Free Cash Flow
Other income
Investments
Investing Cashflow
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
-134
-134
-178
-178
EV / Sales
2.0
1.7
1.5
1.3
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
Financing Cashflow
Net chg in cash
-106
-34
-38
63
Net Debt/ Equity
0.5
0.6
0.5
326
220
186
148
Net Debt/EBIDTA
1.5
1.7
1.3
0.8
220
186
148
211
90.7
95.8
90.0
87.7
Emkay Research
July 2, 2014
51
Vinati Organics
Return ratios and margins best in the industry
July 2, 2014
Rating
Not Rated
CMP
Rs326
Target Price
NA
EPS Chg (%)
NA
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

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
VO IB
Bloomberg
99
Face Value(Rs)
49

52 Week H/L
342/ 74
16/ 270
30,770
0.1

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
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
+91-22-66121248
(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%
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

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
Exhibit 80: Capital expenditure (Rs mn)
1200
1000
800
600
400
200
0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
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
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.
30%
25%
20%
15%
10%
5%
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
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

Net Debt
Emkay Research
July 3, 2014
Net debt to equity
4.0
2.0
0.0
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.
50%
40%
30%
20%
10%
0%
FY06
FY07
FY08
FY09
RoCE
FY10
FY11
FY12
FY13
FY14
RoE
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
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
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
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
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
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
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)
Operating Cashflow
Capital expenditure
Free Cash Flow
Other income
Investments
Investing Cashflow
-354
-608
-1,103
-220
Y/E Mar
Per Share Data (Rs)
DPS
Valuations (x)
138
957
646
-1,150
Interest Paid
-71
-92
-115
-181
-6
-10
-12
-12
EV / EBITDA

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
17
20
320
337
Net Debt/EBIDTA
1.0
1.4
1.6
0.5
20
320
337
453
88.8
108.4
100.9
54.1
Emkay Research
July 3, 2014
58

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July 3, 2014
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Indian Specialty Chemicals Sector Report

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INDIAN SPECIALITY CHEMICALS

Formulating for sustained growth

July 03, 2014

We believe that Atul Ltd, Aarti

Indian specialty chemicals

Specialty Chemicals Sector Report

Indian specialty chemicals

Your success is our success

Relative price chart

Aarti Industries (LHS)

Relative price chart

Atul Ltd (LHS)

Rel to Nifty (RHS)

Vinati Industries Organics

Relative price chart

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

Encouraging growth opportunity

Rel to Nifty (RHS)

Indian specialty chemical sector has emerged as one of the

Vinati Industries (LHS)

India gaining advantage over China unfolds export potential

Companies to benefit from sustained earnings growth re-rating potential

Rel to Nifty (RHS)

Emkay Global Financial Services Ltd.

Source: Company, Emkay Research

Specialty Chemicals Sector Report

Specialty Chemicals Sector Report

Indian specialty chemicals

EBITDA EBITDA Margin

Source: Company, Emkay Research

Specialty Chemicals Sector Report

Indian specialty chemicals

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

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

Paints and coatings

Flavors & fragrances

Home care surfactants

Specialty Chemicals Sector Report

Indian specialty chemicals

Growing domestic consumption offers enormous growth opportunity, while

Rise in GDP and

India gaining edge over China

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

Cost pressure on Chinese manufactures is favourable to India

Specialty Chemicals Sector Report

Indian specialty chemicals

Source: Emkay Research, Industry

Specialty Chemicals Sector Report

Indian specialty chemicals

India is slowly moving towards higher chemical exports than imports

Source: Emkay Research, Industry

Companies with presence in diversified segment and forward-integration

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

Specialty Chemicals Sector Report

Indian specialty chemicals

Financial performance to remain strong

Source: Company, Emkay Research

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

Exhibit 9: Aggregate revenues (Rs bn)

Exhibit 10: Aggregate PAT (Rs mn)

Source: Company, Emkay Research

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Specialty Chemicals Sector Report