Ambit-Chemicals POSITIVE A Never Before World-22-04-2020 08-29-53

Chemicals
POSITIVE
THEMATIC SPECIALTY CHEMICALS April 22, 2020
A never before world Key Recommendations
Indian chemicals players will benefit from expanding specialty chemicals PI Industries BUY
market globally led by growing new applications alongside Target Price: Rs1,600 Upside 21%
manufacturing shifts from China due to reliability and transparency woes
Navin Fluorine BUY
and EU due to ageing workforce, innovation focus, and M&As.
Specialized engineering/chemistry talent availability in India would drive Target Price: Rs1,800 Upside: 27%
replication of IT/Pharma (unlike Textiles!) in chemicals. Managements SRF BUY
investing in (i) building product capabilities like chemistry platforms,
Target Price: Rs3,700 Upside: 21%
process engineering; (ii) manufacturing infrastructure like compliances
on QSHE and accreditations; and (iii) superior client engagement while Aarti Industries BUY
entering multiple application areas will help recreate Infy/TCS/Sun/Divis Target Price: Rs1,000 Upside: 9%
in the next decade. PI and SRF outscore peers on management capability,
capital allocation and ability to handle scale. Aarti and NFIL are Sudarshan BUY
promising as they upgrade on organizational capabilities. Target Price: Rs500 Upside: 19%
Macros support Indian chemical players Vinati Organics BUY
Specialty Chemicals is a big USD750bn industry growing at 5%. Large part is Target Price: Rs1,000 Upside: 15%
getting commoditized (profitability pressure) while new parts are being added
(innovation pressure), driving rise of outsourcing of manufacturing in the last
decade and would continue. Loss of China (25% share) as reliable partner and
continued shifts from EU/Japan (17%/7% share) mean share of India (3%) will PI, SRF and NFIL are our top picks
rise meaningfully. Availability of talent in chemistry and engineering will act to Sales CAGR FY22 PE FY20 RoCE
India’s advantage (similar to IT/Pharma) offsetting lower competitiveness on
(FY20-23) on TP post tax
scale/utilities/infra. COVID-19 is a new catalyst with many countries asking their
companies to move supply chains out of China. PI Inds 22% 30.6 18%
SRF 19% 17.3 15%

Indian companies would need to move into multiple application areas
Aarti 21% 20.3 11%
Upgrading QSHE compliances, investments in process/engineering capabilities Sudarshan 12% 18.3 15%
and building well-incentivized management teams will be crucial to build this
NFIL 28% 31.3 12%
business. Companies would need to be truly independent on supply chain
(backward integrate/diversify RM sources). They would also need to enter new Vinati 24% 21.2 26%
growth areas beyond agri/pharma and build own proprietary technologies which Source: Ambit Capital Research
may require R&D bolt-ons for acquiring clients and product offerings. Capital
allocation record would be key given capex will remain high. PI, SRF, Aarti, NFIL
are our favourites on this count.
Similarities in growth, macros, RoCE and multiples with Pharma
Chemical companies in India are broadly similar in revenue size as pharma (DRL,
Cipla, Lupin, Sun, Aurobindo) in 2002. All of them registered growth of 15-27%,
reaching revenues of US$1-2bn over the next decade as exports ramped up and
traded at 20-25x 1-year fwd P/E of. All adopted slightly different business models
but macros (strong demand for generics in US/Europe) benefited the top players.
It is only now that many are being separated. COVID-19 will accelerate the
macro theme and benefit the companies which can capture the opportunities.
Multiples to remain steady due to earnings visibility and healthy RoCE
PI/SRF (Chemicals) and Aarti will cross US$1bn revenues over FY23/FY24.
Thereon they need to build more growth engines. PI has articulated growth path Research Analysts
beyond agrochem CSM into pharma and other fine chemicals. Aarti has set up
Ritesh Gupta, CFA
specialized R&D for more downstream benzene and other customised products.
SRF is looking at fluoropolymers and also becoming a more end-to-end AI player ritesh.gupta@ambit.co
vs just providing intermediates. Navin Fluorine already has growth engines in +91 22 6623 3242
pharma and agro and adding few more beyond them. These would deliver RoCE Prasenjit Bhuiya
of 15-20%, reinvest most cash in growth and deliver 16%/18% revenue/PAT
prasenjit.bhuiya@ambit.co
CAGR over next decade. High visibility on growth, steady RoCE and good
governance would keep multiples steady at 20-30x 1-year fwd P/E. +91 22 6623 3132
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
sutharshan.k@kotak.com 2020-04-22 Wednesday 17:06:24

Chemicals
Global market: Changing Landscape

Global chemicals market is growing at 5% CAGR (vs. 3% GDP growth in 2019)
with increasing capacity shifts from US and Europe to China and India.
Developed world’s chemicals manufacturers (primarily Europeans) have been
a) undertaking M&As to consolidate on higher margin specialty products and
b) undergoing portfolio rejigs to shift from generics and high-EHS exposure
segments. Increased pace of M&As has led to stretched balance sheets and
lower investments in manufacturing as product cycles are getting shorter.
Mounting pressure on EHS, rising complexities in synthesis of molecules and
competition from generic players will aid in outsourcing of manufacturing to
Indian players. A few Indian players with product/process development and
manufacturing capabilities along with EHS and respect for IP protection will
be the likely beneficiaries.
Emerging global trends

We identify the key trends emerging in the global chemicals sector and how these
impact India, particularly the outsourcing pattern. Globally, chemical companies are
undergoing a) consolidation (for example: top three agrochemicals have 60%+ share
in 2019 vs. six players in 2015), b) portfolio restructuring (divesting commoditizing
portfolio and buying specialities), and c) de-risking supply chain from China. India is
emerging as a key beneficiary of these patterns. We also later highlight which
companies are in a position to benefit from these tailwinds.
Exhibit 1: Globally, the chemicals sector has been consolidating
Year Acquirer Target Deal value (USD bn)
2016 Bayer AG Monsanto 65.7 After a series of M&As, global
2016 China National Chemical Corp Syngenta 45.5 chemical companies are under
2018 International Flavors & Fragrances Frutarom Industries 6.7
pressure to generate returns to
shareholders by improving margins
2017 Solvay Cytec Industries Inc 6.1
and growth rates
2016 Lonza Group Capsugel Sarl 5.5
2015 DuPont de Nemours Inc Dow Silicones Corp 4.8
2018 UPL Arysta 4.2
Performance Materials
2016 Evonik Industries 3.8
division, Air Products
2016 BASF Chemetall GmbH 3.2
2019 Nippon Paint Holdings Co Ltd Dulux Group 2.9
2016 China National Chemical Corp Adama Agricultural Solutions 1.4
Source: Bloomberg, Ambit Capital Research
Globally, portfolio rejigs drive balance sheet pressure

Besides the global consolidation, companies have also been undergoing portfolio
restructurings and rebalances. These portfolio rejigs are done with the aim to a) focus
on core operations while divesting commodity portfolio or not-so-green chemistry
portfolios, b) increase profitability by getting into specialty products, and c) increase
flexible of asset deployment.
In the last few years, many global MNCs divested their non-core portfolios. Akzo To keep manufacturing asset base
Nobel divested its Specialty Chemicals business and Lonza carved out its Specialty light, Syngenta and Bayer divested
Ingredients segment (LSI) etc. Companies are also entering new verticals to chase their plants to Indian company
growth; for e.g., Lanxess entered a new vertical called Consumer Protection Deccan Finechemicals a few years
Chemicals. back
April 22, 2020 Ambit Capital Pvt. Ltd. Page 2

Chemicals
This effectively brings global chemical players with stretched balance sheets and new
war heads of integrating M&As but also helps them look at rationalizing their
manufacturing costs dispassionately. Unlike the past, the relative life cycle of products
is shortening, reducing the amount of time available to innovators to capitalize on
manufacturing skills. This is also leading to rise of specialized manufacturing services
players which have done well in the recent past such as Lonza, Saltigo, PI, Divi’s,
Deccan Finechemicals, etc.
Exhibit 2: A few examples of global chemicals players that have undergone portfolio restructuring
Particulars Year Segment restructured Remarks
Clariant has agreed to sell its masterbatch business to PolyOne for USD1.6bn in
Clariant 2020 Masterbatch business
order to concentrate on its personal and home care businesses.
Merger of Dow and
Separate entity for Dow and Dupont first merged together and then divided themselves into three
Dupont
2019 Agrochemicals, Specialty segments: Corteva (focusing on agrochemicals), DuPont (Specialty Products), Dow
and split into three
Products and Materials Science (Materials science).
companies
Lonza Group in 2019 had announced that it will carve out its Specialty
Specialty Ingredients business
Lonza Group 2019 Ingredients segment (LSI). LSI has Microbial-control solutions and specialty
carved out
chemical services. Lonza had earlier divested its water care business.
Evonik signed an agreement to sell its Methacrylates business to Advent
Evonik 2019 Methacrylates business International (a private equity firm) for EUR3bn in 2019 in order to focus on
specialty chemicals.
BASF agreed to sell its global pigment business to DIC in 2019 for a consideration
BASF 2019 Pigment business
of EUR1.15bn as it looks to move away from the pigment business.
Huntsman is selling its chemical intermediates businesses (includes surfactants
Huntsman 2019 Surfactant business and derivatives of ethylene oxide and propylene oxide [PO]) to Indorama
Ventures.
Akzo Nobel sold its specialty chemical business (Nouryon) to The Caryle Group
Akzo Nobel 2018 Specialty chemicals business
for an enterprise value of USD12.5bn to focus on its paints and coatings business.
Solvay completed acquisition of Cytec in 2015 for USD6bn. Cytec Industries is a
Solvay 2015 Cytec specialty chemicals company serving aerospace, agriculture, automotive, defence
sectors.
Source: Company, Ambit Capital Research
Exhibit 3: BASF’s presentation indicates the churn in product portfolios of global MNCs. This means that manufacturing
focus gets limited as a lot more management bandwidth is spent on turning around the acquisition, product portfolio
management and need for much more agility

Chemicals
Shift in capacities from EU/Japan to India/China a secular trend

As Western players face increasing pressure from rival producers and local players try
to capture a larger share of the global market, global specialty chemical companies
are trying to find new ways to compete. Manufacturing is the first thing these global
majors look to outsource to remain competitive. Given rising costs related to labour,
initial setup expenses, and stricter environmental compliance, manufacturing
capacities in global countries are being shut down. Most of these capacities are being
transferred to manufacturing captives or third-party manufacturers in India/China.
Most of the specialty chemical segments except for Pharmaceuticals have been
laggards in outsourcing their manufacturing needs vs. base chemical players. This
trend is catching up with the changing mindset of these global innovators.
Exhibit 4: Europe’s market share in global chemical sales Exhibit 5: …driven by significant ramp-up in capital
has dropped significantly; China was the biggest spending in chemicals by China while Europe and Japan’s
beneficiary in the last decade… shares have reduced
2008 2018 2008 2018

36%
50% 45%
27% 40%
29%
22% 30%
18% 20%
17% 16%
16% 20% 12%
11% 12% 13% 11%
8% 3%
7% 3% 10% 10% 4%
2% 3% 4% 2%
5%
4% 3% 0%
Rest of
NAFTA
China
EU
S.Korea
Japan
India
Asia
EU NAFTA Japan S.Korea India Rest of China
Asia
Source: CEFIC, Ambit Capital Research Source: CEFIC, Ambit Capital Research
As the shift of manufacturing capacities takes place from Europe/China to other

geographies, we believe different segments will be preferred in different market. We
broadly classify the chemical sector into three categories - Petrochemicals, Specialty
chemicals and Base chemicals. India would be a beneficiary of global specialty
chemicals play off a low base given its talent base, low manufacturing costs and
respect to IP protection laws.
Exhibit 6: India won’t gain traction in Petrochemicals or base chemicals but would be
a beneficiary in specialty chemicals
Country expected to benefit from shifts out of Europe and China
The Middle East likely to gain share given considerable investments towards forward
Petrochemicals
integration from Oil majors
Specialty Europe is incrementally outsourcing to India. China will also emerge as an innovator
chemicals itself but would lose its share as a supplier.
China would remain competitive due to better RM availability, scale and efficiency of
Base chemicals the industry; some areas where Indian players are already there may benefit as
Chinese industry cost structures themselves have gone up.
Source: Ambit Capital Research

Chemicals
Exhibit 7: Global Specialty market is expected to grow at a Exhibit 8: Indian specialty chemicals sector is expected to
CAGR of 5% in 2017-21 grow at 13% CAGR over FY18-23
FY18-23 expected CAGR of specialty chemicals

Global specialty chemicals market size as of
region wise 13%
2017 ($bn)
950
745
7%
577
5%
3%
2% 1%
China North Western Japan India Global

2012 2017 2022F
America Europe
Source: Aarti Industries, Ambit Capital Research. Note: This estimate is before Source: Aarti Industries, Ambit Capital Research. Note: This estimate is before
disruptions related to coronavirus and can see some revisions. disruptions related to coronavirus and can see some revisions.
De-risking the supply chain from China

Some key outsourcing trends by global MNCs based on what global companies are
highlighting and our interactions with experts:
Major MNCs are trying to de-risk their supply chains by diversifying their RM Global companies would de-
procurement away from China (amongst the developing countries). During the past risk their procurement from
decade, China aggressively added chemical capacities and became the largest China and India stands to gain
exporter (amongst the developing countries) to MNCs. However, various experts we from this shift.
talked to believe that as risks associated with Chinese exports are increasing
(domestic slowdown, IP threat, currency volatilities, consistent disruptions and India is at an advantageous
tightening controls), MNCs are increasingly preferring India over China for their raw position as it already has
material supplies. There is also an increase trend of specific governments (ex. Japan regulations in place which cover all
and US) asking their companies to pull out from China. For details of the takeaways concerns raised by the Chinese
from an industry expert who has worked with Bayer and Syngenta, click here. government in its fight against
pollution. India has been well
ahead when it comes to
US Trade War and COVID-19 are accelerating shift away from China regulations and is looking at
COVID-19 has renewed talks of Japanese firms reducing their reliance on China as a becoming world class. Certain
manufacturing base. The Japan government’s panel on future investment last month norms of India are even stricter
discussed the need for manufacturing of high-added value products to be shifted than in the US and Europe.
back to Japan, and for production of other goods to be diversified across Southeast Japanese and US companies
Asia. Japanese focus on relationships rather than cost competitiveness. Ten years incrementally prefer Indian
back they had no presence in India but through acquisitions or organically they have suppliers. But, China has lower
built a reasonable presence in India. fixed costs for assets, electricity and
water than India but has higher
Sourcing strategies of most of the global agrochemical MNCs vary but labour costs and higher risk of theft
Indians are incrementally becoming strategic partners. of intellectual property.
Focus is on both strategic as well as tactical sourcing. The strategy which prevails in
tactical sourcing is cost competitiveness. These players float the product development
need in the entire market and then pick up one that provides top quality at the most
competitive cost. On other hand, some players start working with outsourcing
partners right since the molecule discovery (such as with PI). The partner helps right
from setting up the first commercial scale process to putting up large scale
manufacturing for the molecule. This predominantly happens in case of newly
invented molecules.

Chemicals
Divested segments create opportunity for Indian

players like Sudarshan and UPL
Indian players would benefit from reducing focus of European innovators from lower-
margin or high-EHS-sensitivity products. Indian players have a large opportunity to
gain share from business which are turning lower margin for European business due
to lower manufacturing (operating as well as capex) costs and manpower costs. These
are resulting in lower sales and marketing, technical support, product servicing costs.
Over the years, amongst Indian companies, UPL benefited from increased
genericisaition of market and took advantage of products where MNCs exited due to
EHS-related issues (such as Mancozeb). Sudarshan too has been benefiting from
growing disinterest of Clariant (looking to divest pigment portfolio) and BASF (already
divested pigments portfolio) into this market. The company has ramped up its R&D
capabilities and built a sales and marketing network across US and Europe.
Exhibit 9: Sudarshan Chemicals has better EBITDA margins Exhibit 10: UPL has similar margins compared to FMC
than Clariant India despite having a completely generic portfolio (until FY17)
Sudarshan Chemicals Clariant India 24%

UPL FMC
17% 22%
15% 20%
13% 18%
11% 16%
9% 14%
7% 12%
5% 10%
FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, Ace Equity, Ambit Capital Research Source: Company, Ambit Capital Research. Note: UPL has completely generic
product portfolio while FMC has been focusing more on new molecules. FMC
acquired Dupont’s portfolio including Rynaxypyr in FY18.
Exhibit 11: BASF presentation highlights optimization of capex across business segments and consistent need to improve
the product portfolio through M&As. More M&A focus ideally should drive lower manufacturing capex to facilitate balance
sheet flexibility. Note the plans to do low capex in agricultural solutions.
Source: BASF presentation, Ambit Capital

Chemicals
Agrochemical market presents an interesting case study

The global agrochemical market is USD56bn post sharp correction over CY14-CY17
and resuming growth in CY18. ~40% of this is accounted for by raw materials,
implying a RM procurement market size of US$22bn. Of this, 50% is manufactured
in-house by key agrochemical players themselves and the rest is outsourced. Half of
total outsourcing is contract manufacturing (USD5bn) and the rest is building blocks
(USD5bn). Out of this total USD5bn outsourcing market, China accounts for USD2-
2.5bn, East Europe ~2-2.5bn, and India USD600-700mn per annum. The largest
companies (Lianhe Tech) in China would have a size of USD600-700mn. Among
global innovators, Syngenta and Bayer are the biggest outsourcers to China. In
Europe, outsourcing is done to companies like Saltigo, Lonza and Solvay.
Exhibit 12: Extent of outsourcing for raw material varies across MNCs
100% 100% 90%

90% 85%
80%
70%
60%
50% 40% 40%
40% 30%
30%
20% 10%
10%
0%
FMC Arysta Syngenta Bayer BASF DuPont American
Chemical
Companies
Source: Primary Data Expert, Ambit Capital Research
Rising complexities support entry barriers for more skilled CSM players
Globally molecules are turning more complex again, leading to more complex
manufacturing capabilities and hence the need for more specialized manufacturers
too has been increasing.
 Process technology is becoming critical as molecular structures have become
heavier and much more complex. Most of the old products are now being
replaced with more complex chemistries.
 Call on technology capabilities for partners have gone up from 1-3 reactions to
6-10 reactions also due to reduced reliance on multiple suppliers. Hence, the
required chemistry capabilities for manufacturing partners have gone up
meaningfully.
 Going forward, major component of cost will be for complex technologies and
not raw material unlike today. Indian companies can gain from this opportunity
by being service/technology providers.
 Outsourcing partnerships will focus on increasing RoI per product (internal cost
efficiency). Outsourcing partners with deep technical expertise stand to benefit.

Chemicals
Exhibit 13: Imidaclorpid (innovated by Bayer) – one of the Exhibit 14: Its replacement Rynaxypyr (from Corteva and
old insecticides but still one of the largest generics now FMC) is very complex
Source: Ambit Capital Research Source: Ambit Capital Research
Exhibit 15: Bayer’s Tetraniliprole (competing to Rynaxypyr) is even more complex and
heavy on fluorination

Chemicals
China chemicals industry changing rapidly

The rising global chemicals supplier, China has been hit by three major
issues – tighter environmental regulations, trade war with US and virus-
related disruption. While the trade wars (given the recent renegotiations
between US and China) and virus-related disruptions are transient, these do
expose vulnerabilities of a heavy China-dependent supply chain. To top these
concerns, blasts such as in Jiangsu have further raised concerns around
sustainability of such manufacturing supply chains. That said, we believe that
the shift would be gradual and a lot dependent on Indian companies’ own
capabilities to capitalize on these opportunities.
Tighter environment regulations in China
China’s chemical industry has been one of the key contributors to its GDP growth.
According to China’s state council information, Chinese chemical industry contributed
13.8% of the national GDP in 2018. Share of China’s contribution to global
chemicals by value have increased to 40% in 2018 from 24% in 2010. This increase is The 13th five year plan for 2016-20
driven by large investments and R&D. This was further aided by government subsidies has environment as one of the key
and relaxed environment regulations. However, 2016 proved to be a turning point as themes with strict implementation
environment concerns became the important concern for the Chinese government. guidelines
The strict implementation of environmental norms in 2016-17 resulted into shortages
and steep price rise for many chemicals. Trade tension with USA and slowdown in
economy led to partial relaxations of restrictions resulting in improved availability and
moderation of prices. However, the blast in March 2019 in Jiangsu triggered severe
restrictions including permanent closure of some chemical parks which led to major
short term price increase and shortages. In another development Chinese
government declared some areas of Yangtze River as protective zone in order to
protect the river. No factories are allowed within the one kilometre of the river
impacting the chemical industries established in those areas.
Exhibit 16: Series of disruptions in China has led to unpredictability among global MNCs
Events Date Remarks
China had shut (fully or partially) many of its polluting manufacturing units (chemical plants, power stations and
Beijing Olympics 2008
foundries) for over a month to improve the environment quality before the Beijing Olympics.
Government Chinese government had passed '10 Measures for Environmental Protection' and set targets to reduce the emissions
2013
measures from heavily polluting industries by 30% by end of 2017.
China ordered at least 255 Shanghai-based industrial facilities, including part of a major oil refinery operated by
G20 summit Jun, 2016
Sinopec Corp, to shut for 14 days to reduce pollution ahead of the G20 summit.
The 13th five-year plan covering the period of 2016-20 resulted in heightened focus of Chinese government on
13th five year
July, 2017 environment. The plan also highlighted shifting of chemical production to chemical parks and also reducing the
plan
number of parks.
China had closed many of its manufacturing units for two months to cut emissions in order to prevent smog and
Winter shutdown 2017 and 2018
promote blue sky.
The series of tariffs imposed by US on China led to many MNCs look for alternative to China in order to diversify
Trade war 2018-2019
their supply chains away from China.
A major explosion at a chemical plant in Chenjiangang Chemical Industry Park resulted in death of more than 78
Jiangshu Blast Mar-19
people. Chinese government closed the entire region which led to sharp increase in product prices.
After two consecutive years of winter shutdown, Chinese government didn't go ahead with winter shutdown in 2019.
Coronavirus 2020
But coronavirus led to prolonged shutdown after Chinese New Year, disrupting supply chains and logistics.
The key regulatory changes in China were:

 Shifting of chemical production to dedicated chemical parks covering 90% of the
plants from current 50%.
 Restriction on existing number of chemical parks and strict rules for particular
substances.
 Restriction of plants near the Yangtze river with no factories can be established
within 1km of the river.
 Introduction of environmental tax; reduction in capital outflow to the chemicals
sector.
In addition to above regulations, there were further provincial-level measures
depending on the industry concentration and pollution level of the provinces. In order

Chemicals
to implement the regulations, the Chinese government conducted nationwide rounds

of inspections.
Exhibit 17: What is our view of what’s happening in China?
Phase 3: Focus on hi-tech chemicals
Phase 1: Growth at any cost Phase 2
 Focused on building high-tech capabilities
 Focus on growth at any cost  Pollution control measures being
 Moving away from being factory for the world to self-
 Free capital flowing into the sector, lot of implemented
sustenance and move towards being innovation
interest subvention from banks  Incremental emphasis on fuel getting leaders
 Export incentives replaced from coal to LNG
 Build larger corporation with balance sheet strength
 Easy regulatory permissions to set up;  Stronger compliances
 Acquires business for technology – ex: ChemChina’s
growth and employment generation  Focus on quality of growth vs. quantity of acquisition of Syngenta
focused growth
 Banks charging higher interest rates
Exhibit 18: Provincial-level measures significantly increased in some of the key chemicals zones in China
Key Zones Key chemicals Measures taken
Hebei
 Specialty Chemicals  Implemented new emission limits on water pollutants in July 2018 which are expected to reduce chemical
 Agro intermediates oxygen demand by ~33% and ammonia nitrogen emissions by ~58% from the chemical firms in the province.
 Jiangsu province came under intense scrutiny following the blast and number of listed chemical companies
like Nanjing Chemical Fibre, Lianhe Chemical Technology and Jiangsu Yabang Dyestuff were found to be
 Dyes intermediates violating environment regulation (Reuters, 7 May, 2018).
Jiangsu
 Resins  Jiangsu province government plans to close 30 industrial parks comprising chemical plants and thousands of
 Herbicides individual plants. This can possibly result in survival of only ~2,000 plants by 2021 out of ~7,000 plants
 Agro intermediates (Global Times, 11 April, 2020).
 Jiangsu province aims to boost use of cleaner fuel like natural gas and phasing out more than 2GW of coal-
based power plants (Reuters, 18 Oct, 2018).
 Specialty Chemicals
 Shandong province has a goal of reducing the number of chemical parks in the province to 100.
Shandong  Shandong has low share of chemical companies located in chemical parks (37%) and high share of GDP
 Dyes intermediates
depending on chemical industry.
 Zhejiang province is seeing tighter regulations and closure of chemical plants which are not in compliance
Zhejiang  Specialty Chemicals with the environmental regulations.
 Zhejiang has prohibited opening of new chemical parks in the province.
Over the longer term, we see the following structural changes in the industry:
 Rising costs of doing business in China: The earlier business model in China
was based on low cost vs. other countries. With increase in environment
regulations, cost of compliance with these regulations has jumped. For example,
shift to cleaner sources of energy like natural gas from coal will increase energy
costs. Moreover, labour costs are already high compared to India.
Exhibit 19: China’s coal consumption has been on a Exhibit 20: Labour costs are significantly higher in China vs.
downtrend while gas consumption is increasing India
Coal consum (LHS) Natural Gas consum (RHS) India China

7
2,200 30 6
2,000 25 5
USD/hour
cub ft/day bn
1,800 20 4
TOE mn
1,600 15 3
1,400 10 2
1,200 5 1
1,000 0 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: CEIC, Ambit Capital Research Source: Cefic, Trading economics, Ambit Capital Research
 Preference of global players to de-risk from China: The sudden spike in

intermediates due to closure of chemical plants forced many global players to
geographically diversify away from China. This was accelerated by the trade
tension between China and the US.

Chemicals
 Tightening of financial availability: China’s main bank supervisor decreed in

2014 that it would control investment in oversupplied industries, including part of
chemical industry. This led banks in 2015 to tighten rules governing eligibility to
loans in oversupplied sectors. Banks have shifted over the past two years to
demand more collateral, terminate loans prematurely, and refuse to renew loans, India a growing force; China’s cost
putting chemical companies at a further disadvantage in borrowing. Chemicals advantage eroding
companies also get charged an above-average market interest rate.
The Indian specialty chemicals space
 Change in environment policies: The environmental policy aims to move has largely been driven by value
chemical production from its current configuration, in which many tens of advantages offered by specific players
thousands of chemical plants are scattered across urban industrial and residential with a) superior processes, b) RM
advantage led high backward-
areas. New regulations are having limited impact on big upstream petrochemical
integration, and c) better impurity
and chemical intermediates and polymer plants, most of which are built with profile. Opportunities in volume- and
appropriate emissions controls and waste treatment facilities. The sever impact scale-based products have largely
has been on thousands of smaller plants that make specialty chemicals, from bypassed domestic companies. A key
coatings and dyestuffs and pesticides to food ingredients and surfactants. These trend that favours India is gradual
are typically privately owned operations often lacking appropriate waste erosion in China’s cost advantage, due
management capabilities and located in urban areas. The move to shut down out to: (1) increase in capital costs driven by
of- compliance plants have affected large numbers of these small operations, but adherence to stricter effluent treatment
the impact on overall chemical output has been less severe. norms, (2) increasing labor cost, and (3)
reduction of government subsidies.
 Chinese regulations are getting tighter and incremental supply will be at an
elevated cost base. Chinese supply may take 5-8 years to resume with more
innovation and cleaner process but their cost advantage is clearly over. They will
not be able to dump products that they could do earlier. The number of
producers will come down and hyper-competition will end.
 Implementation of a national chemical inventory, substance volume
bands and tracking are now similar to EU REACH. First round inspection
from July 2016 to Dec 2017 covered 31 provinces, 29,000 cases and detention of
1830 people. Fines worth CNY 1.43bn were levied on all non-compliant firms.
Second round of inspection run over 2018-20. Going forward, Chinese
government plans to organize inspection with focus for specific industries.
 Anti-China feeling post COVID-19: An expert we spoke with believes anti-
China feelings due to the global virus spread and ensuing economic damage are
increasing. The urgency to reduce dependence on China will reinforce India as a
valuable partner. Most of his customers, the expert revealed, have been
appreciative of the measures taken by India in restricting the impact of the virus
so far. The expert believes it will likely create opportunities not only for
agrochemicals but also for pharmaceuticals and specialty chemical players in
India. For e.g., API shortage is opening up opportunities like backward
integration for Indian players that are dependent on China.
China’s cost structures are unlikely to go back to where they were
The potential of a resumption of Chinese supply fuelled by a slowdown in China’s
economic growth is a key concern raised by multiple investors for our China to India
capacity shift argument. Industry participants believe this is unlikely given these
factors:
 Centrally driven regulations: Regulations have become increasingly stringent
in China with most environmental directives being implemented by the
central government and not the provinces like earlier. Chinese President,
Mr Xi Jinping, has made it clear that environmental protection is of paramount
importance and even precedes economic growth.
 Entrepreneurs are backing off in absence of free capital: Secondly, most
owner-driven enterprises in China are reluctant to re-invest profits earned
in the last 20 years in environmental compliance, especially when their second
generation is not keen on running the business. Growing constraints over
cheap capital and focus on compliance is diminishing attractiveness of
expansion.

Chemicals
China is moving towards more innovation than volumes

Recent supply disruptions in China have raised concerns among all the innovators
who sourced from there.
 They are now being forced to consider other alternative suppliers and also
diversify their regional exposure by keeping 2-3 suppliers from every region. Most
companies were over dependent on China prior to this. Considering this scenario,
India is emerging as a potential alternative due to cheap labour, availability of
good talent and increased reliability.
 Secondly, manufacturing as a whole will experience a shift from China to
India over the next decade as China turns into a developed economy and
focusses more on innovation.
Both rising cost structures are further adding to the woes of already lower
margins
A 2016 McKinsey research suggests that margins in specialty chemicals in China are
structurally lower than other parts of the world: the average EBITDA margins of
specialty chemical companies operating in China—both local players and
international companies—is about four percentage points lower than the global
industry average,
Overcapacity and intense competition underpinned by fragmentation of industry
players are common factors seen in many products and market segments in China’s
specialty chemical sector.
Exhibit 21: China’s margins are lower than rest of the world companies even in
specialty chemical segments
Note: Link to the report, Source: Mckinsey, Ambit Capital Research

Chemicals
Exhibit 22: Chinese peers of PI like Lianhe Chemical has Exhibit 23: Asset turnover of Indian players PI and Deccan
faced plant closures and also margin pressures are better than Chinese peers like Lianhe
Lianhe Chem PI Ind Deccan Chem Lianhe Chem PI Ind Deccan Chem
30% 3.1
25% 2.6
2.1
20%
1.6
15%
1.1
10% 0.6
5% 0.1
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Bloomberg, Ace Equity, Company Source: Bloomberg, Ace Equity, Company
But we refrain from painting a broad brush

We continue to believe China has substantial advantages due to its massive
infrastructure, resilient and efficient work force and raw material advantages in
multiple cases. We believe it would continue to remain a base chemicals hub,
however in certain specialty chemicals where RM integration isn’t so strong, some
Indian companies may benefit due to their higher focus on EHS, ability/significant
efforts over last few years to backward integrate, and provide strong comfort on IP
protection.
What are the advantages that India has?
 Complex chemistries: India is strong when it comes to complex chemistry (multi
step synthesis) which is required in the manufacturing of Knowledge Chemicals –
Pharma and Agro & Biotech. Some Indian vendors have done quite well in
delivering very complex molecules as well, which has impressed global clients like
BASF. India has a good quality of chemists and engineers with reasonable
analytical abilities.
 Specialised unit operations: India is specialised in specific unit
operations/synthesis, e.g. Fluorination. India is strong in complex chemistry
(multi-step synthesis) given decent presence of building blocks. One area, for
example, is fluorine chemistry (used in agro/pharma) which is getting
incrementally used in all agro/pharma products. Most of the new age
Agro/Pharma molecules involve fluorine chemistry given resistance management
etc. India has been one of the most open countries to globalisation and hence IP
protection and transparency metrics have been better.
 Good QSHE compliances: India (good companies) give preference to safety and
adhere to environmental norms
 Risk mitigation: Many MNCs like BASF don’t put all eggs in one basket (China).
To mitigate risk, they give sourcing share to Indian companies as well.
 Cost is also a determining factor in sourcing from India, other than China.
India is still cheaper compared to EU/US companies or sometimes better than
China. (Aarti export Chloro chemicals to China, though it’s a volume game)
 The stricter norms imposed by Chinese Government also made some
sourcing companies to look to India for chemicals.
India advantage: Not just cost but also ability to do complex molecules

Chemicals
Exhibit 24: Summary of opportunities for Indian chemical players
Import substitution (e.g: Deepak Rising Costs/Compliances in

Nitrite, Aarti & Vinati) Europe/US (e.g: SRF, NFIL, PI)
Multiple
opportunities for
Indian specialty
chemical players
Improvement in feedstock
Need for alternative to China
availability

Chemicals
Growth narrative for the sector is secular

and more than a China story
Indian chemical companies (PI, SRF, Aarti, NFIL) have grown handsomely at
13-27% CAGR over FY15-20E, consistently generating 15%+ RoCEs while at
the same time reinvestment continues to be on an upward trajectory. We
believe China has been one of the many catalysts and future growth for the
sector is not solely dependent on China. Going ahead, we believe companies
can continue to grow at similar level as a) they foray into new segments, b)
feedstock availability improves in India, and c) outsourcing by global players
continues to rise. Players with right mix of infrastructure for manufacturing,
client handling and R&D capabilities will be the key beneficiaries. We prefer
exporters like PI, SRF, Aarti and NFIL over domestic-focused players
(Dhanuka, Insecticides) or consumer ingredient players (Galaxy, SH Kelkar)
given their process capabilities, resulting in limited competition and ability to
grow in new avenues (like NFIL’s new segment in HPP).
Exhibit 25: Chemical companies have grown revenues at 14% CAGR over FY10-19 along with improving returns on capital
300 Revenue EBITDA margins (%) Pre tax RoCE (%) 24%
250 22%
20%
200
18%
Rs bn
150
16%
100
14%
50 12%
- 10%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Note:1) We have taken PI Industries, SRF, Aarti Industries, Atul, Vinati, Sudarshan, Navin Fluorine, Deepak Nitrite, Neogen and NOCIL for the calculation. 2)
During FY11-13, NFIL and SRF received carbon credits which boosted margins. Source: Company, Ambit Capital Research
Exhibit 26: At the same time, total capital employed by the Exhibit 27: Exports as % of total revenues has increased to
sector in FY19 was 4 times vs. FY10 51% in FY19 vs. 35% in FY10
Capital employed Pre-tax RoCE Total exports (Rs bn) as % of total revenue
250 24% 140 55%
22% 120
200 50%
20% 100
150 80 45%
18%
16% 60 40%
100
14% 40
50 35%
12% 20
0 10% - 30%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Company, Ace Equity, Ambit Capital Research. Note: We have taken Source: Company, Bloomberg, Ambit Capital Research. Note: We have
Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak, Nocil, Vinati and Neogen taken Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak and Nocil for
chemicals for calculation. calculation.
Attractive growth and RoCE sustained even pre-China

Many investors argue the sustainability of recent earnings track record of these
companies and think of them as a short-term plays. We would like to highlight that
most of these companies were growing quite well even before measures in China
related to pollution controls started to play out.

Chemicals
Exhibit 28: Aarti has grown at 12% CAGR over last 10 Exhibit 29: Atul has grown at a CAGR of 13% over the last
years despite Chinese competitors and being in ten years
commodity segments
Exports India Pre-tax RoCE Exports India Pre-tax RoCE
50 22% 45 35%
21% 40
40 35 30%
20%
30
30 19% 25%
Rs bn
Rs bn
25
18% 20
20 20%
15
17%
10 10 15%
16% 5
0 15% 0 10%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Company, Ambit Capital Research Source: Company, Ambit Capital Research
We expect growth to remain robust going forward too

We expect the top 5 players to compound their earnings at 15-25% over next decade
driven by: a) improved cost competitiveness vs. Chinese players, b) continued ramp-
up in capabilities of Indian suppliers, and c) increased innovation and cost pressures
driving increased propensity of outsourcing by global majors. Chemicals has more
than 70 listed companies; some of them have started to pick up or reach a critical
size which should give more comfort to investors on their longevity.
Exhibit 30: Indian companies are having multiple growth factors
Drivers Companies benefiting from the same
European MNCs exiting certain chemical segments Globally, chemical companies are exiting pigments, wood chemicals, and rubber chemicals due
due to cost pressure to cost pressures. Companies like Sudarshan would benefit.
European MNCs exiting certain chemical segments Dyes, certain old agrochemicals like Mancozeb/Triazoles. Companies like Bodal, UPL, Astec
due to EHS pressure benefited.
With increased hassles on cost and ability to invest in heavy capex, many chemical companies
Growing outsourcing by global players
manufacturing outsourcing is picking up. Companies like PI, SRF, and Aarti are benefiting.
Indian player gaining share in chemicals sourcing With growing issues in China, many companies have started to outsource more to India while
from China reducing their sourcing from China.
Indian companies into specialized chemistries (The Companies like SRF and Navin Fluorine are benefiting from their strong capabilities on
knowledge advantage) fluorination.
Indian buyers also prefer Indian suppliers. Likes of Vinati Organics are incrementally targeting
Indian companies growing due to import substitution
these opportunities.
Companies like SRF are taking Chinese manufacturers head on, on products like refrigerants
Indian companies taking Chinese head-on despite RM advantage enjoyed by Chinese players. Companies like UPL too have better
competitiveness on products like organophosphates due to their historical strengths on product.
Companies like BASF are investing in putting out base chemical products in
India which should improve RM capabilities
 BASF buys $250mn worth of products from India and it expects that number to
grow.
 BASF is doing a feasibility study for a $2bn investment in Mundra for acrylics
value chain in partnership with Adani group. Butyl acrylate is an imported
product, which has huge demand from the paints industry. It is a 150kt market,
out of which 50kt is imported
 Crude MDI (used to make polyurethane) prices have been quite volatile and have
significantly impacted the Dahej plant’s profitability. Crude MDI is imported and
typically has a 90-day holding period, which causes inventory losses.

Chemicals
Exhibit 31: Strengths and weaknesses of Indian chemical companies - Businesses with good mix of credible promoters
(growth hungry and good capital allocators) taking care of macro decisions and quality professionals taking care of micro
execution will do well; strong second generation in promoter-driven firms necessary to build futuristic business while
bringing in fresh ideas
Strength Weakness
Ability to build relationship with global clients, impeccable track record
PI Ind Attrition at senior level management
on execution and IP protection
Atul Wide range of chemistry capabilities Perceived lack of aggression
Aarti Good player with capabilities in Benzene chemistry Lack of cutting edge technology
Sudarshan Ramp-up in capabilities for specialty pigments Execution has been patchy over recent years
Vinati Good history on capital allocation and focus on green chemistries High product concentration
Ability to gain scale still need to be watched out
Navin Fluorine Expertise in fluorination
for
Camlin Fine sciences Good growth through backward and forward integration High WC cycle; mid of capex cycle
SRF Strong chemistry capabilities in fluorination driving high margins Asset efficiency has been weak
Weaker bargaining power against clients; limited
Galaxy Surfactants Relationships with FMCG majors ability to gain incremental share in SLS/SLES (key
two products)
Rallis Good parentage and credible professional management Limited aggression in execution
Tata Chemicals Significant and steady cash generation in Soda Ash business Weaker capital allocation
Base business is a relative commodity though
Alkyl Amines Leadership in amines, good promoter and credible second generation
they are going more downstream
UPL Good execution over the years; ability to turn around M&As High leverage on balance sheet
Exhibit 32: Capex by chemicals players have more than doubled in 2019 vs. 2015
Capex (Rs bn, LHS) Capex to CFO (RHS)

40 2.0
35
30 1.5
25
20 1.0 Many players have invested
aggressively and continue to invest
15
to tap the opportunity
10 0.5
5
0 -
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Note: We have taken Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak, Nocil, Vinati for calculation. Source:
Company, Ambit Capital Research
Exhibit 33: We highlight some of the big capital expenditure plans by chemicals companies
Company Year Remarks
PI has approved QIP of Rs20bn and intends to use this in three areas: a) organic business growth through further
PI Industries 2020 expansion, b) scale-up of newer and niche technologies, and c) diversifying into adjacent verticals through CDMO, CSM
in pharmaceuticals and other specialty chemicals, nutraceuticals and imaging chemicals.
Sudarshan has also increased its capex intensity and plans do a capex of Rs5,000mn over FY20-21E with major part for
Sudarshan Chemicals 2020
the revenue generation (~70%) and rest for backward integration which will drive margin improvement.
SRF has guided for a capex of Rs8,500mn for FY21 as it plans to set up an MPP plant for agrochemicals for Rs2,380mn
SRF 2020
over the next 8-12 months. SRF also plans to invest Rs650mn for HFC's Phase 1.
Navin Fluorine 2019 NFIL announced a capex program of Rs4.5bn to be spent over a period of two three years.
Aarti has already spent Rs8.3bn in 9MFY20 and expects to spend a total amount of Rs10bn in FY20. Capex is directed
Aarti Industries 2019-20 towards two projects in Dahej (LT contracts, both commissioning by 4QFY20), specialty chemicals chlorination complex in
Jhagadia and new R&D center. Aarti had in 2019 raised Rs7.5bn through QIP for capex and expansion purposes.
Adani has signed an MoU in late 2019 with Adnoc, BASF and Borealis for setting up a USD4bn chemical complex at
Adani Group and BASF 2019 Mundra in Gujarat by 2024. Earlier Adani had signed agreement with BASF to establish a JV with an investment of about
USD2bn.
Reliance in 2019 announced its agreement with ADNOC to sign an agreement to explore the development of an
Reliance and ADNOC 2019 ethylene dichloride (EDC) plant in Abu Dhabi. This can provide low cost ethylene feedstock to produce EDC (input for
PVC)

Chemicals
Exhibit 34: SRF’s specialty chemicals continues to scale up Exhibit 35: Similarly, PI has grown its CSM segment
(revenues up 18% CAGR, FY14-19) as it deploys capital revenues at a CAGR of 17% over FY14-19
Chemical Sales (Rs bn) EBIT (Rs bn)

Asset turnover CSM revenue (Rs bn) % of total revenue
30 0.6 20 68%
66%
25
0.6 15 64%
20 62%
60%
15 0.5 10
58%
10 56%
0.5 5 54%
5
52%
- 0.4 0 50%
FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY19
Many Indian companies will foray into new areas to

chase growth
We believe companies like PI, SRF, Aarti and Navin have been targeting to get into
multiple new products and application areas. This would improve the target market
size and hence longevity of the growth these businesses have.
Exhibit 36: Capabilities required for successful contract Exhibit 37: Contract manufactures will likely go beyond agr
manufacturer remain the same size in segments like electronic materials etc.
15 $bn
Compliance to
global
standards for
manufacturing 10 10 10 10
7.5
Deep
Chemistry 5
Capabilities
1
Confidentiality
/respect for IP
Coatings (Niche
Water Treatment &

Packaging
Surface Treatment
Electronic Materials
Oilfield Services
Agricultural
Flavors & Fragrances
Cleaning Solutions
Applications)
Quick
Turnaround/R
eliability of
supplies

Chemicals
Exhibit 38: Companies ticking all three boxes will be able to move from one area to multiple areas quickly
Key capability areas Capabilities
 Ability to consistently find new products
R&D/product development  Develop command on new chemistries
 Incrementally optimise existing processes to improve margins
 Fast scale-up of new plants and then running them efficiently
Manufacturing
 Compliance to local and global regulations on EHS
 Safety adherence and avoid plant disruption due to maintenance/regulatory issues
 Consistently improving plant utilisation and asset turns to improve RoCE
 To protect customer IP
 Ensure reliability of supply even in supply chain disruptions
Client engagement  Maintain transparency over cost structures and compliance
 Reduce lead times from query to delivery
 Build offices and marketing teams across the world
Exhibit 39: Efforts taken by these companies to get into new areas; battery chemicals is another major area being focused
on by most of these players
Company Areas
 PI has significantly ramped up its R&D capabilities, and has proven ability to run manufacturing assets smoothly and efficiently
alongside having innovator partnerships with more than 18 clients.
PI Industries
 PI is now looking to foray into new sectors such as pharmaceuticals, and neutraceuticals, beyond their existing strengths in
agrochemicals.
 SRF is building its strengths across key verticals, such as refrigerants, packaging films, fluoro specialty chemicals and now fluoro
polymers too.
SRF
 In all these categories they have built a global presence (Ex: in packaging they are in India, Europe, South Africa, Thailand) and
continuously upgrading product portfolios (ex: entry into fourth generation refrigerants.
 Aarti entered Toluene value chain two years ago and aims to replicate entire benzene derivatives block in Toluene
Aarti  From a catalogue-based company, they are focusing on entry into contract manufacturing too with innovators. They have now
partnered with Bayer-Monsanto, BASF and SABIC for contract manufacturing.
 They have started a design centre (in Vadodara) and R&D centre (in Navi Mumbai) to focus on developing new competencies.
 The company entered CRAMS pharma business with the acquisition of Manchester Organics.
Navin Fluorine  NFIL has also entered High Performance Product (HPP) segment signing a contract worth Rs29bn spanning over seven years (~40%
of FY20 revenues will be added every year). NFIL will supply the product for the MNC with both the product and the technology
being heavily patented.
PI/SRF are trying to transition from agrochemicals to pharma: Agrochemicals

are more about cost and Pharma is about compliances
While chemical entities can be surprisingly similar across pharma and agrochemicals
(see exhibits below), agrochemical players are far more obsessed on costs (given the
high volume usage) though regulatory strictness such as USFDA isn’t there for
agrochemicals. We believe some of the Indian chemical players like PI and SRF have
plants which are equally good in terms of compliance.
NFIL forayed into a new vertical through Rs29bn contract over 7 years
NFIL is opening a completely new vertical in High Performance Product (HPP). NFIL in
Feb 2020 won a new contract worth Rs29bn with an MNC spanning over 7 years. The
product and technology is heavily patented and production is expected to start
towards end of FY22E. This will add, on an annual basis, ~40% of FY20 revenues
each year. This contract win shows the future potential size of the business and NFIL’s
growing capabilities and client management skills. For more details, please see our
detailed initiation on NFIL here.

Chemicals
Exhibit 40: Many agrochemicals are similar to pharma Exhibit 41: Molecule structures too are similar for pharma
drugs drugs
Pesticide (Class) Can Treat Disease Like
Endothall (Herbicide) Malaria
Glyphosate (Herbicide) Malaria
Acetyl CoA inhibitors Heart Disease, Cancer and anti-

(Herbicide) inflammatory
Epothilone (Fungicide) Hypertension
Imdazolinones (Herbicides) Hypertenstion
Suflonylureases (Herbicide) Cancer
Triazolopyrimidines
Cancer
(Fundgicide)
Source: Galchimia, Ambit Capital Research
Source: Galchimia. NTBC is the drug Nitisone.
Case studies highlighting some of the Indian chemical companies’

technological advancements
SRF –Turning into a formidable refrigerants story Navin Fluorine – Emergence onto Pharma CRAMS
 SRF has significantly expanded its product portfolio. It is preparing itself
for blends in refrigerants which would continue to do well even when the  Navin Fluorine entered into the CRAMS segment in 2011. It started
base products would get phased out. Apart from having technology for with a pilot plant with reactor capacity of 100 to 500 litres to serve
some new-age refrigerants/blends (R1234yf, R32, R125, R410a), SRF is innovator drug companies for new molecules which are getting
also building scale in more commodity products (R134a). Exploring other launched and the maximum production was up to ton level. As NFIL’s
usages for refrigerants getting phased out over the next few years for customer projects started moving towards commercial production, it
other purposes (such as metered dosage inhalation for R134a and expanded to a multi-ton plant with total reactor capacity of 32KL
backward integration of R22 as a feedstock for specialty chemicals) is varying from 500L to 3,000L.
also a key strategy for sustainable expansion in the category.
 The refrigerant gas market in India is one-tenth that of the US and
should continue to grow at a healthy double-digit rate. SRF doesn’t have
any organised competition in the refrigerant market in India except for
 NFIL set up another CRAMS unit in its Dewas facility from Dec’2019
which will help it to take large scale projects where molecules are in
R22, which is being phased out. Raw material availability risks are being
commercialization stage. NFIL uses its fluorination expertise to
addressed with SRF looking to procure Fluorospar from South Africa,
collaborate with global innovators. Recently then won a Rs27bn
Vietnam and Mexico. Today SRF’s costs are comparable to Chinese
contract with a European major in non-agro/pharma applications.
players across all key refrigerants. They have presence across all key
products in refrigerants.
 NFIL acquired 51% stake in Manchester Organics Limited, UK (MOL) in
 SRF will set up an R1234yf plant in 2024 or so as the application patent 2011. MOL plays an important role as many of the CRAMS projects
by Dupont/Honeywell would get over by then. Commercial demand for originate from MOL. It helps in new customer acquisitions especially
the product too would have picked up by then. SRF is also developing for customers who would be reluctant to come to India for their newer
capabilities for other next generation refrigerants such as HFOs. molecules. In 2016, NFIL also acquired the remaining 49% stake in
MOL.

Chemicals
Prefer chemical exporters over domestic

suppliers/consumer ingredient players
We believe global suppliers have a better opportunity to grow vs. domestic suppliers.
The market growth has been slower at 8-10% across consumer chemical suppliers,
domestic agrochemicals players, etc. Most consumer chemical players like SH Kelkar,
Galaxy Surfactants, Advanced Enzymes, BASF India, and Clariant Chemicals have
grown slower than export peers. Domestic agrochemical peers such as Rallis,
Dhanuka, Insecticides India and Bayer Crop Science India too have struggled.
Exhibit 42: PI, NFIL, SRF and Vinati scores over other players like domestic suppliers/consumer ingredients
Key Comp Pricing Reinvest
Export business Size Peers
Geographies intensity Power opport
Agrochemicals; contract manufacturer for Rs25bn by FY20; grown at a North America, Deccan Fine,
PI Ind
global innovators CAGR of 19% over FY15-20 Japan and Europe Saltiago, Lianhe
Chemicals business is Rs29bn;
Intermediates/contract manufacturing for
SRF grown at a CAGR of 18% over Europe, US NFIL, Aarti
agrochemicals, pharma, refrigerants
FY15-20
Exports contributed Rs20bn in
Intermediates for agrochemicals, pharma, America, US, SRF, NFIL,PI,
Aarti FY19 (42% of revenues); grown
dyes, pigments, etc. China, Japan Atul
at 8% CAGR FY15-19
Key products: ATBS (oil field mines, water
Exports business is ~Rs7bn; Exports ~70%
Vinati treatment, etc.), IBB (intermediate for Atul, Lubrizol,
70% of FY19 revenues of revenues
ibuprofen), IB (antioxidants, fragrances)
Contract manufacturing of key
Specialty Chem is Rs3bn
intermediates for Pharma innovators;
NFIL growing at 14% CAGR; CRAMS US, Europe PI, SRF
intermediates for agrochemicals and
is Rs1.8bn
pharma players
Intermediates for agrochemicals, pharma, Exports is Rs21bn; growing at US, Europe, Brazil, Aarti, Vinati,
Atul
dyes, pigments, etc. 12% CAGR over FY15-19 Middle-East Fairchem
Exports is Rs6.8bn; growing at Europe and North Clariant, DIC,
Sudarshan Exports organic/inorganic/effect pigments,
22% CAGR over FY14-19 America Asahi
~50% of the India business is
Galaxy Surfactants for HPC (consumer ingredients) AMET, US
exported
Flavours (major) and Fragrances Exports is small and mainly via Givaudan,
SH Kelkar ASEAN, MENA
(consumer ingredients) inorganic expansion Symrise, IFF
Agrochemicals; key export products are
Exports is 33% of the business
Metribuzin, Pendimethylene, Acephates. Asia, America, and Dhanuka,
Rallis and growing at 7% CAGR over
Contract manufacturing for some Africa Insecticides
FY15-10
intermediates.
Rallis,
Dhanuka Agrochemicals; exports is small portion Exports is small portion
Insecticides India
Insecticides
Agrochemicals; exports is small portion Exports is ~5% of total revenues Rallis, Dhanuka
India
Source: Company, Ambit Capital Research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Exhibit 43: Exporters like PI, SRF, Aarti have grown faster Exhibit 44: Consumer chemicals like SH Kelkar and
at a CAGR of 15-22% during FY14-19 Fairchem have grown slower at a CAGR of 0-10%
PI Ind SRF Aarti Industries SH Kelkar Galaxy Surfactants FairChem

50% 100%
80%
19%
EBITDA growth rate
30% 60%
22%
15% 40% 2%
10% 20% 10%
0%
0%
FY14
FY15
FY16
FY17
FY18
FY19
CAGR FY14-19
FY14
FY15
FY16
FY17
FY18
FY19
CAGR FY14-19
-10% -20%
-40%
-30% -60%
Source: Company, Ambit Capital Research Source: Ace Equity, Ambit Capital Research
On margins, in general MNCs have struggled in India primarily due to higher amount
of profits being booked with the parent entity. Domestic agrochemical players too
have struggled with their margins while exporters have reported better margins.
Consumer chemical companies have reported range-bound margins.

Chemicals
Exhibit 45: Exporters like PI, SRF and Aarti’s margins have Exhibit 46: …while margins of consumer chemicals have
improved over the years… remained range-bound
SH Kelkar Galaxy Surfactants

PI SRF Aarti
FairChem
25% 25%
20%
20%
15%
10%
15%
5%
10% 0%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Company, Ambit Capital Research Source: Ace Equity, Ambit Capital Research
Exhibit 47: Evolution of chemical exporters - PI and SRF perfected their models fast given early focus on exports while NFIL
is also following them; Aarti and Atul are catching up equipped with their diverse chemistry/client capabilities
Aarti PI SRF NFIL Vinati Atul Sudarshan
Ventured into
Made
Focus on QSHE Specialty chemicals Turnaround of
Scale build-up, Struggle with technological
2000- and R&D; Start of Specialty business in 2000, company;
entry into new ATBS; success in advancement,
2005 commercial chemicals R&D earlier was into improved asset
chemistry areas IBB through tie-up with
success is limited commodity discipline
DIC, Japan
products
Gradual
Expansion of client Growing client attainment of Set-up new R&D
Focus on backward Improvement in Focusing on
2005- base, ramp-up of base; expansion process and facility, more
integration and margins; global process efficiencies
2010 capacities, growing into new chemistry engineering capital deployed in
forward integration tie-ups and exports
product complexity areas capabilities; early specialty business
client wins
Rapid growth Entered CRAMS in
Growing focus on Infrastructure Success with ATBS; Focus on QSHE; Increasing share of
2010- phase; Investments 2011, building
QSHE; cross-sector build-out in Dahej; cross-sector client reduction in exports and
2015 in Jambusar relationships with
client wins rapid scale-up wins effluent discharge capacity ramp-up
infrastructure innovators
Agrochemical
Aggressive capex,
Growing focus on slowdown but Diversification into
capability building Aggressive growth
R&D; aggressive focus on margin Pharma; Aggressive growth Increasing share of
2015 and gaining scale capex on new
growth capex in expansion; Aggressive growth capex in building high value-added
onwards through big products, such as
building growing focus on capex in building infrastructure products like HPPs
contracts/forays IB derivatives, PAP
infrastructure expansion beyond infrastructure
into new verticals
pharma

Chemicals
Exhibit 48: Benchmarking key exporters – We expect growth to be fairly good across all key players like
PI/SRF/Aarti/Atul/Vinati/Sudarshan/NFIL
Product capabilities/ Nature of Client Switching
Promoters Risks
R&D competition engagement barriers
Domestic peers such
Promoters are as SRF, Deccan to
Strong capabilities on
involved in day-to-day some extent Navin,
process engineering
PI operations backed by Laxmi Organics; High High
and in general Product/Client
a strong team of European peers such
delivering AIs concentration risks; agri
professionals as DSM, Saltigo,
cycle
Lianhe (Chinese)
Professionals run day-
to-day operations; Domestic peers such
Strong capabilities on Product/Client
promoters take capital as Navin Fluorine and
SRF process engineering on High Medium concentration risks; agri
allocation decision; European peers such
fluorination cycle
high culture of as Dupont, Honeywell
grooming people
Medium; large part of
Benzene derivatives;
Technocrat promoters Wide set of local and business is contingent RM volatility, pricing
Aarti going more Low
run the businesses global peers on being lowest cost competition
downstream
supplier
Professionals run day- Medium; large part of
Wide set of product
to-day operations; Wide set of local and business is contingent RM volatility, pricing
Atul portfolio across 10 sub- Low
promoters take capital global peers on being lowest cost competition
segments
allocation decision supplier
Process-led innovation;
Promoters run the
doesn’t specialize in High; but customer will Alternative products
businesses backed by Limited molecules and High due to
Vinati any specific process but switch if a low cost which offer same
a team of limited competition limited suppliers
good at identifying alternative comes efficacy
professionals
good processes
Clariant and BASF are Pigments are critical
Earlier was a low-cost
Technocrat promoters large; competition is part of identity; difficult
supplier; significantly
run the business limited but has been High for HPPs; low for to switch; economic
Sudarshan improved R&D High for HPPs
backed by a team of formidable; now commodities cycles do impact auto
capabilities on specialty
professionals competition is facing demand but packaging
pigments
cost challenges demand remains steady
Professionals run day-
Strong capabilities on Domestic peers such Pricing competition,
to-day operations; High with pharma
Navin Fluorine process engineering on as Navin Fluorine and High with Pharma product failures at client
promoters take capital clients
fluorination European peers end
allocation decision
Big will become bigger: PI, SRF and NFIL are our top picks
Similar to IT services sector (top 5 accounts for 48% of IT services industry) which had
multiple entrants but only a few which became large ones, we expect the same to
happen in Indian chemicals industry. Many of the companies would fail to scale up
on one of the parameters below and would falter. In Indian chemicals space too
companies which remain in a status quo on upgrading product capabilities, have no
tolerance on QSHE, don’t cut corners on engineering capabilities and are developing
proprietary technology platforms, shall continue to become bigger.
Exhibit 49: Market share of top IT companies in 2005 Exhibit 50: Market share of top IT companies in 2019
TCS, 13% TCS, 15%
Infosys,
8% Infosys,
Others, Others, 9%
63% 52%
Wipro, 8%
Wipro, 6%
HCL Tech,
4% HCL Tech,
6%
Cognizant
Cognizant
, 3%
, 12%

Chemicals
Focus on creating right building blocks to

capture growth
While growth avenues will continue to come up, only players with focus on
R&D/capability development and QSHE will likely be able to capitalize on
these opportunities in the long run. Globally, companies are focusing on
sustainable supply chains and procurement policy, which makes companies
with better QSHE standards have significant advantage. Companies
cognizant of this fact have started meaningful investments in R&D (~20%
CAGR in past five years) and infrastructure related to QSHE. In fact, expenses
related to QSHE account for ~25% of plant expenses for some of the Indian
players. These parameters will become crucial in separating the winners
from the rest in the specialty chemicals. Companies which are (i) R&D-driven
leading to innovative products have more stringent emission norms (like
Zero Liquid Discharge, low carbon footprint) and (ii) essentially more
resource-efficient will likely create more value for shareholders.
Most of the big specialty chemical players in India started as SMEs and then gradually
developed capabilities (products and R&D) and intangible aspects (board and
processes). It will be difficult to generalize the average time taken across the sector to
move from one stage to another. Companies like PI and SRF were initially less
focused on factors like R&D/QSHE whereas Vinati’s focus from the beginning has
been on R&D and process efficiencies.
Exhibit 51: Evolution of a successful chemicals company in India
Product portfolio R&D QSHE Inducting talent Credible Board
Most of the chemical Invested in R&D Investments in Hired experienced Mix of credible
companies started as capabilities: gradual building global professionals from people from finance,
a SME. manufacturer expansion of standard QSHE larger sales, R&D, ex senior
of 1 or 2 small chemistry companies/MNCs management of
chemicals capabilities Accreditation by customers
Usually 2-4% of sales; Ecovadis or Management team
Gradually evolved Employee cost CAGR Responsible care function of old Moving beyond
into multi product of 12-20% loyalists and friends and family
entities in 3-10 years 10-50 people R&D Clean track record on seasoned resources board
of evolution quite common; PI safety; certificates from other
and SRF have 100- from regular client companies
200 people R&D audits
Beefing up of talent key to chemical companies’ ecosystem

As Indian chemical companies grew bigger, they realized the importance of building
a professional team to manage key functions and started to hire experienced
professionals from larger companies/MNCs. The specialty chemicals sector as a
whole has seen jump in the employee expenses. Employee expenses have grown at a
CAGR of 14% in the past five years and contributed 6.7% of total revenues in FY19
vs. 6.1% in F14. This is at a time when the revenue of the sector has grown at a
CAGR of 12% in the last five years
Talents from top institutes like IITs/IIMs are hired. For example, PI Industries and Aarti
Industries started the journey of professionalizing the management and hired many
IIT/IIM graduates who later on went on to become the backbone of second tier
management. Companies are also now focusing on training and developing
employees skill sets.

Chemicals
Exhibit 52: Employee costs of specialty chemicals industry Exhibit 53: Employee costs as % of sales have been rising
have grown at a CAGR of 14% even when sales grew at a CAGR of 9%
20,000 9.0%
18,000 8.0%
16,000 7.0%
14,000
6.0%
Rs mn
12,000
5.0%
10,000
8,000 4.0%
6,000 3.0%
4,000 2.0%
FY14
FY15
FY16
FY17
FY18
FY19
FY14
FY15
FY16
FY17
FY18
FY19
Note: Companies included are PI Ind, SRF, Aarti, Atul, Vinati, Sudarshan, Note: Companies included are PI Ind, SRF, Aarti, Atul, Vinati, Sudarshan,
Navin, Deepak, Neogen, Nocil and Fine Organics. Source: Company Ambit Navin, Deepak, Neogen, Nocil and Fine Organics. Source: Company Ambit
Capital Research Capital Research
Significant ramp-up in R&D/capabilities

Earlier, specialty chemicals sector in India benefitted from the cost arbitrage
opportunities it provided vs. its global peers. China grabbed major pie of the
chemical sector where scale and size of the manufacturing is crucial. Many of these
companies having realized the importance of R&D, have ramped up their R&D
capabilities. Indian companies like PI Industries, SRF and Navin Fluorine have been
able to gain share where process knowledge is more important than scale. R&D
spend of Indian companies usually varies between 2-4% of sales and a team of 10-
50 people is quite common in the good companies. PI Industries, for example has a
pool of ~350 scientists. Aarti is setting up 50,000sq ft. R&D and innovation complex
which will house 150 scientists and engineers in addition to its existing facilities.
Exhibit 54: R&D initiatives are gaining traction
R&D expenses in past
Companies R&D capabilities and initiatives
5 years
 PI has a pool of 350 scientists, process chemists and analytical chemists, including 80 Doctorates
 Dedicated R&D centre in Udaipur having recognised by department of Science and Technology -
PI Industries Government of India with all modern equipment and facilities with utilities to support wide range of
 Rs3,310mn chemical reactions
 Analytical labs at process development centre
 SRF has R&D facilities at Bhiwadi and Chennai in the field of Fluorochemicals and Specialty Chemicals
with 170+ patents filed to date and 400+ people in R&D
SRF  Rs4,637mn  SRF has developed more than 100 molecules and has engineering lab for complex molecules
development and scale-up
 Established three R&D centers with two focused on R&D initiatives for Pharmaceutical APIs and the other
for Chemicals
 Aarti is in the process of establishing another 50,000 sq. ft. R&D and innovation complex which will
house 150 scientists and engineers
Aarti Industries  Rs1,397mn  The new complex will comprise of an R&D centre, a scale up facility, an innovation center, and
dedicated labs for process safety, effluent treatment and flow chemistry
 This new complex will double Aarti's R&D capabilities and will help in developing new and niche value-
added products
 Established Navin Research Innovation Center (NRIC) comprising analytical labs in Surat; State of art
Navin Fluorine  Rs830mn R&D approved by DSIR led by qualified and experienced chemistry teams of PhDs and Post Doctorals
Sudarshan  Sudarshan has R&D centre near Pune with over 50 chemists and technicians supported by additional 50
Chemicals  Rs810mn chemists in the R&D and quality control labs in Roha & Mahad

Chemicals
Exhibit 55: R&D expenses have increased at 20% CAGR Exhibit 56: Research and Innovation spending share by
between FY14-19 EU, Japan, US have decreased while India’s has
increased
3,500 2008 2018

3,000 35% 31.0%
30% 27.4% 26.3%
2,500
23.3%
25%
19.7% 20.7%
Rs mn
2,000
20% 16.3%
1,500 15%
9.7% 6.2%
1,000 10% 4.8%
3.3% 6.5%
5% 3.1% 2.8%
500
0%
0
EU
S.Korea
RoW
Japan
India
USA
China
FY14
FY15
FY16
FY17
FY18
FY19
Source: Ambit Capital Research. Note: PI Ind, SRF, Aarti, Atul, Sudarshan, Source: Cefic, Ambit Capital Research
Navin, Deepak, Neogen, Nocil and Fine organics are included for the
calculation.
Besides ramping up R&D capabilities, companies are also looking for acquisitions and
JVs with technology companies. This is helping not only in enhancing capabilities but
also getting more attention from global customers. Navin Fluorine’s acquisition of JVs and technology transfer will be
Manchester Organics enhanced its capabilities to handle more complex chemistries the way forward for many of the
related to fluorine and widen its specialty chemicals portfolio. Global players also companies
look for credible partners in order to have infrastructure for the launch of innovative
molecules in India. In 2016, PI Industries formed JV with Japanese agrochemicals
company Mitsui Chemicals and intends to leverage its understanding and reach of
Indian agriculture. We believe this will be the way forward for specialty chemicals
companies as they look for generating bigger and more meaningful opportunities.
We expect these partnerships to increase as more players build capabilities.
Exhibit 57: Indian chemicals players are also partnering with global players
Company Year Remarks
Navin has entered into a ~Rs2,900mn contract with a global company to manufacture and supply a High Performance
NFIL 2020 Product (HPP) for a period of seven years. Both the technology and the product are heavily patented and the final
technology is transferred to NFIL by its partner.
Bharat Rasayan entered into a Joint Venture agreement with Nissan Chemical Corporation (NCC) for agrochemicals.
Bharat Rasayan 2020
This will help NCC to expand its manufacturing base in India.
Aarti and SABIC had signed a supply contract worth Rs100bn for a period of 20 years for supply of high value specialty
Aarti and SABIC 2018
chemicals intermediate.
Atul has a partnership with Akzo Nobel to access its hydrogenation technology for monochloroacetic acid (MCA)
Atul Chemicals 2017
production in India. MCA is a vital ingredient in agrochemicals, adhesives and pharmaceuticals.
NFIL had entered into an agreement with Honeywell for small scale manufacturing of the new generation refrigerant
gas HFO 1234 yf used in vehicle air conditioning systems globally. However, management recently announced that
NFIL and Honeywell JV 2016
they have discontinued this project on ground of scalability opportunities. NFIL is discussing three new opportunities
with Honeywell on the same assets where the possibility of commercialisation is high.
PI with Kumiai PI and Kumiai have partnered to manufacture bispyribac sodium, one of the flagship products of Kumiai. PI also has a
2017/
Chemicals and Mitsui JV with Mitsui chemicals. It also had partnered with Sony to set up research centre for carrying out research in synthetic
2016
Chemicals organic chemicals for application in electronics industry. This however could not deliver the required results.
Building credible corporate governance

One of the pushbacks which Indian chemicals companies used to get is the lack of an
independent board of directors. The quality of the board is gradually changing as is Companies are evolving into
evident from the improvement in board composition of some of the companies like PI professionally managed from
Industries, Vinati and Aarti. For example PI at an early stage started to focus on family run businesses
quality of board; Raj Raul (ex-Bayer), Venkat Sohoni (ex-Tata Rallis, Novartis) and
Bimal Raizada (ex-Ranbaxy) were some directors during FY10-11.

Chemicals
Exhibit 58: Independent members with technical background are inducted in the board
Companay Name Background
 PhD in Medical Microbiology from University of Calcutta and completed his post-doctoral research at
Brookhaven National Lab, USA and Max Planck Institute, Germany.
PI Industries Dr. T. S. Balganesh
 Awarded an honorary doctoral degree from the University of Uppsala, Sweden
Possesses more than three decades of experience in antibacterial drug discovery
 Currently, he holds the position of President and a Director on the board of GangaGen
Biotechnologies Pvt. Ltd., Bangalore
 Vice Chancellor of Institute of Chemical Technology (ICT).
Aarti Industries Ganapati D Yadav  With numerous honours and distinctions he has authored over 300 original research papers in 51
cross-disciplinary international peer-reviewed journals
 Pharmaceutical professional with technical background and has worked with organisations such as
Cipla, Lupin, Watson, Marksans, Alembic & Emcure pharmaceuticals for the past 32 years.
Aarti Industries Dr. Vinay G Nayak
 Specialised in the areas of Manufacturing, Quality, R&D, compliance and Regulatory Affairs both for
API and formulation manufacturing.
 Professor of Green Chemistry and sustainability Engineering Department of Chemical Engineering
Institute of Chemical Technology. Has 32 years of experience in the research, design and
Vinati Organics Dr. M Lakshmi Kantam
development of catalysts for innovative green and economical processes for chemical industry
 Served as Director at CSIR-IICT, Hyderabad
 Holds M.S degree in chemistry from USA and also M.S degree in Economic planning & policy from the
Navin Fluorine Mr. S.S. Lalbhai Boston University of US
 An industrialist having varied experience of over 29 years in chemicals and general management.
Deepak Nitrite Mr. S.K. Anand

 Has a rich experience of 46 years in the field of Project Management, Corporate Planning, Quality
Management, etc. in Petrochemicals, refining and other allied industries
 Has held various top-level positions in leading multinational companies
Deepak Nitrite Dr. Richard H. Rupp  He is well-acquainted with the USA, European, Asian and Indian subcontinent markets
 Holds a Ph.D in Chemistry from the University of Karlsruhe, Germany, and has completed a
programme for Executive Development from IMD at Lausanne, Switzerland
 He has a bachelor’s degree with a gold medal from the University of Kanpur; he also has a masters’
in chemical engineering from the IIT, Kanpur, and a doctor in philosophy from the University of
Neogen Chemicals Prof. Ranjan Malik
Wisconsin-Madison, USA
 He is currently an Emeritus Fellow at the IIT, Bombay
Exhibit 59: Preference for Big 4 as auditors is increasing

Company name Auditors Company name Auditors
PI Industries Price Waterhouse Chartered Accountants LLP Sudarshan Chemicals B S R & Associates, LLP*,
SRF B S R & Co. LLP* Atul SPANJ & Associates
Vinati Organics M. M. NISSIM & CO Deepak Nitrite Deloitte Haskins & Sells, LLP
Aarti Industries Kirtane & Pandit LLP, Neogen Chemicals M/s. JMT & Associates,
Navin Fluorine Price Waterhouse Chartered Accountants LLP Fine Organics M/S B Y & Associates
*Note: KPMG carries out its auditing work in India through BSR & Co LLP; Source: Company, Ambit Capital Research
No shortcuts on environment and safety

One of the biggest risks for the chemicals industry is from violations of safety
standards. Violation of safety norms can lead to not only financial damage but also
reputational damage. It can lead to multiple repercussions from both the customers
and investors. As discussed earlier, Jiangsu blast incident in China has been an eye
opener for chemical companies worldwide and forced them to take Environment and
Safety in a very serious manner. Globally, companies are looking to procure Globally companies are adopting
intermediates from players that have better environments and safety standards in sustainable procurement policy
place in order to make their supply chains more sustainable. Most of the global
innovator companies have strong audit processes for vendor selection.
Incidents like the blast in PI’s Jambusar plant and closure of SRF’s plant in Dahej by
the government due to non-compliance highlight the importance of improving EHS
standards and complying with global standards. Many companies, as a result, are
PI is undertaking research on new
proactively taking initiatives to do business in a more sustainable approach. Terms
synthesis routes which are less
like Zero liquid discharge (ZLD), emission intensity, and carbon footprint are getting
pollution intensive.
featured in company objectives. PI has one of its objectives to undertake research on
new synthesis routes which are less polluting. Aarti Industries has achieved ZLD for
eight of its units and aims to achieve ZLD in all its units.

Chemicals
Exhibit 60: EHS initiatives of chemical companies continue to ramp up

Companies EHS initiatives
 Scored 80 out of 100 in the ECOVADIS Survey in the "Safety, Labour & Human Rights" worldwide
PI Industries
 Rated as ‘Gold category Supplier
 Top 7 supplier companies globally from a group of 171 registered suppliers in the Pesticides & Other Agrochemical sector
 Aims to achieve Zero Liquid Discharge (ZLD) for its units
 Achieved Zero Liquid Discharge (ZLD) for 8 out of 11 divisions with 2 divisions achieving ZLD status in FY19
Aarti Industries  Installation of STOPs and RO plants for treatment of rejected water
 Two facilities, USFDA approved
 Reduced direct GHG emissions by 21.5% and absolute electricity consumption by 4%

SRF
 Increasing share of renewable energy with 528KWh of electricity through solar was produced in FY17
 Around 54% of the Fluorspar used in FY16 and 70% in FY17 was obtained by recycling ETP sludge
 More than 50% of waste water was recycled in Dahej unit during FY16 and FY17
Vinati Organics
 Rated GOLD by EcoVadis towards sustainability performance and was in the top 2% of suppliers assesses by EcoVadis in all
categories
 Reduction of COD at source through continuous improvement like distillation and solvent recovery
Sudarshan Chemicals  Initiatives like expansion of ETP, installation of Anaerobic Hybrid Reactor (AHR) etc. taken to reduce greenhouse gases
 REACH registration of 43 colorants
Exhibit 61: PI And Vinati are the top players while others are also moving fast in
terms of investments in capabilities/QSHE
Investments in Focus on Quality of Inducting
Overall
R&D/capabilities QSHE board talent
PI Ind
SRF
NFIL
Vinati
Aarti
Sudarshan
Source: Ambit Capital Research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Chemicals
Valuations rich but will sustain

Indian specialty chemicals space would continue to witness a strong earnings
trajectory (potentially faster than 24% EBITDA CAGR witnessed over FY10-
FY19) alongside healthy RoCEs as proven in the past of ~18% which should
sustain existing multiples. We note next 5 years could be very interesting for
few Indian players as consistent disruption in China have reached an
inflection point towards moving large amount of supplies to India. All these
companies would be able to reinvest their cash flows at good RoCEs which
should keep their multiples healthy. Most of these companies have topline
size of < US$300mn which makes them right candidates to scale more than
3-4x of their current size. We also note that the top leaders have also been
looking to enter new segments beyond agri and pharma which also pulls the
market opportunity ceiling for them and would elongate the sustenance of
this high growth phase. While sector valuations have turned punchy at ~25x
2yr fwd EPS (vs. 10-15x 5 years back), but are in-line with valuations that
pharma peers enjoyed in the past in their growth phase.
Valuations would sustain due to steady growth rates

Chemical sector has seen a meaningful valuation re-rating over last 6 years as
investors realized the earnings compounding potential of the sector. While multiple
re-rating may be difficult, earnings momentum would continue to remain strong led
by new contract wins in existing areas and entry into new application areas by Indian
suppliers. Their growth would entirely be a function of their ability to a) upgrade their
capabilities – on process engineering as well as manufacturing infrastructure b) offer
strong compliances as well as reduce their RM exposure to China c) building their
capability to manage the growth. We continue to believe macro opportunity
continues to remain quite strong and any company’s growth longevity is going to be
entirely a function of internal factors than external factors.
Exhibit 62: Chemicals sector P/E multiples have rerated over the years
Many of the companies started Multiples started getting re rated Multiples further re rate d as Valuations corrected marginally
transitioning from volume based products as the companies attained scale Chinese chemical industry went from 2018 as earnings started to
to high value products. Companies and share of value added products under disruptions due to pollution normalise from a relatively soft
moslty run by promoter family gradually increased. Companies grew their curbs and major accident in 2016-18 base for agrochemical
focused on R&D , QSHE and sales at a CAGR of ~12% during Jiangshu plant. Sales have grown exporters. Multiples are likely to
professionalising management FY13-16. at 16% CAGR over FY16-19. settle between 20-25x on trailing
35 basis similar to pharma players
30
Trailing 12m PE
25
20
15
10
5
Oct-18
Oct-19
Oct-15
Oct-16
Oct-17
Oct-13
Oct-14
Oct-11
Oct-12
Apr-20
Apr-18
Apr-19
Apr-17
Apr-15
Apr-16
Jul-19
Jan-20
Apr-12
Apr-13
Apr-14
Jul-17
Jan-18
Jul-18
Jan-19
Apr-11
Jan-16
Jul-16
Jan-17
Jul-14
Jan-15
Jul-15
Jan-13
Jul-13
Jan-14
Jan-11
Jul-11
Jan-12
Jul-12
Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind, SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite in our
calculations.

Chemicals
Exhibit 63: …as sector earnings trajectory has remained Exhibit 64: ..along with increase in CFO and capex while
upwards net debt to equity has come down
PAT (Rs mn) YoY growth CFO (Rs bn, LHS) Capex (Rs bn, LHS)
3 yr rolling YoY growth Net debt to equity
13,000 40 1.1
50%
35 1.0
8,000 30% 30 0.9
25 0.8
10% 20 0.7
3,000
15 0.6
-10%
10 0.5
1QFY13
3QFY13
1QFY14
3QFY14
1QFY15
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18
3QFY18
1QFY19
3QFY19
1QFY20
3QFY20
-2,000 -30% 5 0.4
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind, Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind,
SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite in SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite
our calculation. in our calculation.
Lot of similarities with IT and Pharma emergence

We note that while the opportunity is large, only a few promoters would be able to
capitalize on it. Very similar to the IT sector in India, we expect these companies to
evolve over the next few years in terms of capabilities and revenue diversification.
China-related issues are akin to Y2K issues which opened doors for Indian IT
companies. Over the years, these chemical companies will build capabilities in
multiple areas similar to their IT peers. Requirement of quality talent/chemists is an
important criterion.
While most of the pharma companies focus on end-markets, most of the chemicals
companies are B2B suppliers and hence can be termed more as chemicals
manufacturing services (similar to IT services) than pharma.
Exhibit 65: Chemicals companies are closer to IT and Pharma evolution
Chemicals comparison to IT and Pharma
 Chemical companies consistently need to build product capabilities and invest in getting perfection on new
technology platforms while expanding suite of tools.
R&D/product capabilities
 Pharma APIs are more a challenge on compliance where chemicals on agro side have challenges on keeping the
costs low given the high amount of volumes that are consumed
People capabilities  Quality talent pool of chemists/engineers is required. This is similar to IT and Pharma both.
 Compliances in Pharma are stronger. Pharma is always under stricter regulatory restrictions; Chemicals while
Compliances regulatory pressures are relatively lower on plant hygiene, customer audit do warrant similar levels of plant levels.
Compliances on emissions are equally important for both Pharma and Chemicals.
IP sensitivity
 IP sensitivity is very high in IT. Indian pharma does more of generics and hence IP sensitivity isn’t that high barring
the CRAMS model. For some companies like PI, IP sensitivity is quite high.
 Like any of the large organisations, ability to manage multi-cultural clients, currency exposures do become quite
important.
Ability to build and manage
large organisation
 Ability to grow organisational capabilities in sync with revenue growth of the companies too become important.
 Timeliness and accuracy of delivery is a very important part of the business similar to IT/Pharma and hence having
an ability to manage organisations become critical.

Chemicals
Exhibit 66: Many pharma companies in 2005, similar to Exhibit 67: Net earnings of the companies also grew at a
chemical companies in size, have consistently reported healthy pace
high revenue growth
CAGR 2005-2015 CAGR 2011-2015 CAGR 2005-2015 CAGR 2011-2015
46% 29%
50% 30% 26% 26%
40% 38% 25% 24% 24%
40% 25% 22% 21% 21%
31% 29%
26% 28% 25% 20% 17% 17%
30%
18% 20% 13%
15%
20% 12%
10%
10%
0% 5%
0%
0%
IPCA
Torrent
Divis
Aurobindo
Cadila
Lupin
IPCA
Torrent
Divis
Aurobindo
Cadila
Lupin
Source: Bloomberg, Ambit Capital Research Source: Bloomberg, Ambit Capital Research
We have always liked specialty chemicals as a space to be in given healthy growth

prospects, RoCE and cash generation. While multiples have turned expensive at ~20x
FY21 EPS, a strong EPS CAGR of ~20% can wash down these multiples very quickly.
We note that while the opportunity is large for Indian specialty chemicals players,
capable beneficiaries are relatively limited in light of lack of vision by most of the
promoters. The attributes, as discussed earlier, are aggressively investing in R&D to
build new process capabilities, investment in capacities ahead of time, zero tolerance
on QSHE non-compliances, focus on quality and building global relationships. We
think PI, SRF and Aarti potentially can benefit meaningfully from new investments
coming into India. Vinati is on a ‘once in a decade’ product introduction cycle which
can meaningfully change its scale over the next few years. We think earnings for
these companies are not a function of price movements (due to capacity shutdowns in
China) but steady expansion in volume to growing preference for these players given
their capabilities in product and QSHE compliance. We reiterate our BUY on PI, SRF,
Aarti, NFIL and Vinati Organics. Sudarshan and UPL are global plays across pigments
and agrochemicals space.
Exhibit 68: PI, the most expensive stock in our coverage, has been trading at similar level to Divis (which also has FDA
risks); NFIL has also closed the gap recently as it ramped up its CRAMS and got new HPP contract
45 NFIL PI Divis
40
35
12m fwd consensus PE
30
25
20
15
10
5
0
Oct-19
Oct-17
Oct-18
Oct-15
Oct-16
Oct-13
Oct-14
Apr-19
Apr-16
Apr-17
Apr-18
Apr-15
Jul-19
Jan-20
Apr-13
Apr-14
Jul-17
Jan-18
Jul-18
Jan-19
Jul-15
Jan-16
Jul-16
Jan-17
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Source: Bloomberg, Ambit Capital research

Chemicals
Exhibit 69: Divis: Sales have grown at healthy rates and Exhibit 70: Divis: Net income has also followed a similar
moderated when it faced FDA issues in 2017 trajectory
Sales (Rs bn) % YoY YoY 3yr avg PAT (Rs bn) % YoY YoY 3yr avg
60 60% 14 60%
50 50% 12 50%
10
40 40% 40%
8
30 30% 30%
6
20 20% 20%
4
10 10% 2 10%
0 0% - 0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Exhibit 71: PI sales growth has picked up after a blip in Exhibit 72: PI’s reinvestment rate has also increased while
FY18 the company remains debt free
Sales (Rs bn) YoY growth Series3 CFO (Rs mn) Capex (Rs mn) Net D/E
35 40%
4,500 1.2
30 35%
4,000 1.0
30% 3,500
25 0.8
25% 3,000
20 0.6
20% 2,500
0.4
15 2,000
15% 0.2
10 1,500
10% 0.0
1,000
5 5% 500 -0.2
- 0% - -0.4
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E
Exhibit 73: NFIL is also ramping up its sales Exhibit 74: NFIL’s reinvestment rate is also picking up
while company remains net cash positive
Sales (Rs bn) YoY growth YoY 3 yr avg Capex CFO Net D/E
12.0 50% 2,500 0.1

10.0 40% 0.1
2,000
0.1
8.0 30% 0.1
1,500
6.0 20% 0.0
1,000 0.0
4.0 10%
-
500
2.0 0% (0.0)
- (0.0)
- -10%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: Ambit Capital Research. Note: NFIL had received carbon Source: Company, Ambit Capital Research
credits(~R4sbn) during FY10-13 which resulted in higher sales.

Chemicals
Exhibit 75: Divis R&D expenses has grown at a CAGR of 8% Exhibit 76: PI and NFIL have been increasing their R&D
over FY15-19 expenses and are higher (% of sales) than Divis
R&D expenses (Rs mn) as % of revenues PI R&D (Rs mn) NFIL R&D (Rs mn)
as % of revenues (PI) as % of revenues (NFIL)
600 1.6%
1000 6%
1.4%
500 5%
1.2% 800
400 4%
1.0%
600
300 0.8% 3%
0.6% 400
200 2%
0.4%
100 200 1%
0.2%
0 0.0% 0 0%
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: Company, Ambit Capital Research Source: Company, Ambit Capital Research. Note: For PI, we have taken
CSM revenues for calculating R&D expenses as % of revenues.
Exhibit 77: Pharma sector P/E - Multiples didn’t see any meaningful de-rating between FY10-15 when growth visibility
remained strong
TTM roling PE (LHS) TTM rolling EPS growth (YoY, RHS)

40 120%
100%
35
80%
30
60%
25 40%
20%
20
0%
15
-20%
10 -40%
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin, Cadilla, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit Capital
Research
Exhibit 78: Pharma sector revenue grew at a fast pace Exhibit 79: Similar was the trend for pharma sector
before it started to moderate since FY15 earnings as well
Revenue (Rs bn) YoY growth PAT (Rs bn) YoY growth
1,400 60% 200 100%

1,200 50% 80%
1,000 40% 150 60%
40%
800 30%
100 20%
600 20%
0%
400 10% 50 -20%
200 0% -40%
- -10% 0 -60%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin, Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin,
Cadila, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit Cadila, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit
Capital Research Capital Research

Chemicals
Relative valuations
Valuations within the chemical sector also have gradually polarized with markets
strongly differentiating between export players with better growth visibility and
domestic players. Growth cyclicality of domestic agrochemical players (like Dhanuka,
Rallis) drives multiples to nearly 50% discount to export players (PI Industries, SRF,
Navin Fluorine). Multiples of Aarti and Atul are at a marginal discount due to chances
of realisations coming off for some of their products and relative commodity-like
nature of their portfolios. However, we note Aarti and Atul also are upgrading
themselves now.
Contract manufacturers are likely to remain the most expensive given growth
and longevity
This segment has worked quite well for Indian players which focused on early global
partnerships rather than competing in the same space as global peers. Process
innovation and chemistry capabilities seem to have been the forte of Indian chemicals
players. Indian players that have combined this with trust and low-cost manufacturing
capabilities have done quite well. The likes of PI, SRF and Aarti all started small and
then eventually scaled up as their capabilities developed.
Exhibit 80: Contract manufacturers like PI has generally traded higher vs. Aarti and Vinati
45 PI IN Vinati Aarti
12m fwd consensus PE
40
35
30
25
20
15
10
5
Aug-18
Aug-19
Aug-16
Aug-17
Aug-14
Aug-15
Jun-18
Jun-19
Oct-19
Oct-17
Oct-18
Jun-14
Jun-15
Jun-16
Jun-17
Oct-14
Oct-15
Oct-16
Feb-20
Feb-17
Feb-18
Feb-19
Apr-20
Feb-15
Feb-16
Apr-18
Apr-19
Dec-19
Apr-15
Apr-16
Apr-17
Dec-17
Dec-18
Dec-16
Dec-14
Dec-15
Source: Bloomberg, Ambit Capita Research
Exhibit 81: Competitive benchmarking- Contract manufacturing players are best placed in Indian chemicals space
NFIL PI Industries Divis Laboratories
PI is majorly into Agrochemicals and is Divis caters to Custom Synthesis of
Application NFIL caters to both Pharmaceuticals and
trying to enter the Pharmaceuticals APIs and Intermediates for global
area Agrochemicals.
segment. pharmaceutical innovator companies.
PI is one of the few players for the end-to- Divis is a big player in pharma custom
NFIL started CRAMS in 2011 and is still in
end Active Ingredients (AI) projects for synthesis and six out of the top ten
Scale nascent stage with a revenue of Rs1,780mn in
global agrochemical players. Its revenue big pharma companies are associated
FY19.
from CSM in FY19 was Rs18,800mn. with Divis.
NFIL is building its capabilities in CRAMS with
more R&D and infrastructure development. Its
PI has proved its capabilities in
focus remains fluorine and is likely to be Divis has some attractive chemistry
agrochemicals, however, it hasn't been very
Capabilities benefited as use of fluorine keeps on increasing skills which make it differentiated vs.
successful in entering pharma
in pharmaceuticals. It also has the advantage of other peers.
intermediates.
being backward integrated for some of the RMs
used for CRAMS.
NFIL is presently doing grams to tonnes. The Shift in capacities and USFDA-related
PI is expected to continue to grow its CSM
future growth will depend on the challenges for vertically-integrated
Future growth segment driven by commercialisation of
commercialisation of its molecules and its ability players would create opportunities for
new molecules.
to manufacture in multi-tons. Divis.
R&D is still at a nascent stage when compared to Does end-to-end manufacturing for
Knowledge Does complex chemistries and is into
Divi’s which has taken up much more complex agrochemicals API but limited presence in
Architecture pharma APIs.
products and end-to-end API. pharma.

Chemicals
Exhibit 82: Benchmarking contract manufacturing peers on CRAMS/fine chemicals business - All a play on chemistry skills,
manufacturing asset hygiene and client relationships (trust, transparency and deeper engagement)
Product capability Manufacturing capability Client engagement Overall
Good chemistry capabilities; Manufacturing assets are good. Works with global agrochem Has been an agro CRAMS player, trying to
more of a generalist than a Barring one recent incident on innovators; no presence into get into pharma. Differentiated model of
PI Industries
specialist; now moving towards safety, clean track record on generics; most of it is agri no conflict with generics players and
proprietary capabilities QSHE clients largely patented molecules
Works with global agrochem Novelty lies in fluorination; recently
Specialised fluorination
Good 100-acre complex at innovators and a few pharma transitioned to full AI products too;
capabilities, now expanding into
SRF Limited Dahej – integrated facility for ones; limited final products manufacturing assets are integrated and
more chemistry platform; more
all fluorine-based products with agri clients, large state-of-the-art; developed cGMP facilities
on the aromatic fluorination
fluorinated intermediates too
Specialized fluorination cGMP approved plants Novelty lies in fluorination. Largely been
NFIL Works with global innovators
capabilities; more focused on differentiate Navin from peers; into pre-commercial stage fluorinated
CRAMS/Specialty/ in pharma, including Roche,
specialised intermediate for manufacturing location spread products supply; one molecule got
Performance Novartis, Hetero
CRAMS across three places commercialised recently
More of generalist on Pharma Novelty lies in chemistry platforms;
APIs; also into select generic API Relatively better track record on Works with pharma significant command over novel
Divis
where they have advantages on USFDA compliance innovators and generics chemistries like Chiral reactions; into both
chemistry CRAMS and very old generics
Low cost manufacturers and distributors

UPL (in agrochemicals) and Sudarshan (in pigments) are key examples of those
capitalizing on opportunities where phase of extreme innovation in new products
gradually subsided. They entered with better cost capabilities and ability to serve the
markets better. We would like to note that costs are not just for manufacturing but
also for sales and marketing where Indian companies have had lower cost structures.
Typically, in this segment, Indian companies start with 400-500bps better margins
which help them to invest in offering better prices and compete despite having under-
scale sales and marketing operations. In many generics spaces, Indian companies
score due to better ability to service and provide customisations even in lower margin
products due to lower cost structures.
Commodity chemical plays haven’t worked well
In the thick of China constraints, product realisations witnessed a sharp increase
which benefited some of the Indian players. While old prices are not likely to come
back, many companies witnessed a sharp increase in realization which may
rationalize as supply side challenges normalize. This is specifically true for companies
where product prices tend to be governed by demand-supply equations. Companies
like NOCIL continue trade at lower multiples due to such concerns despite being
strong players in their space. Multiples for Aarti and Atul are at a discount to contract
manufacturers like PI and Navin Fluorine due to similar reasons.
Incumbents in high innovation space or FMCG suppliers haven’t worked
Most of the relatively underperforming chemical companies in India have been stuck
in extremely high innovation categories where they didn’t have capabilities to
compete with the R&D might of global majors.
 Fragrances is an interesting space from that perspective, where SH Kelkar
struggled to compete with Givaudan, Firmenich, IFF and gradually lost market
share in more profitable customers to them in Indian markets.
 Within Enzymes too, Advanced Enzymes too has struggled vs. the likes of
Novozymes.
 Camlin’s foray into anti-oxidant blends has met with limited success as well.
Domestic agri-inputs too hasn’t worked as a story
Domestic agrochemical players’ (Rallis, Dhanuka, Insecticides India) growth has
remained under pressure over the last few years with weaker cash flows alongside
pressure on margins. While growth rates seem to have revived in FY20, we don’t see
a growth case of more than 15% for most of the industry players even in an upcycle.
While these stocks can be traded in and out, we don’t see a reason to be structurally
bullish on these names (barring likes of Bayer Cropscience given strong product
support from the parent) given weaker product differentiation and consequent
weaker pricing power. That said FY21 is looking promising here given better Rabi
output, good water levels and likely dole-outs by government.

Chemicals
Exhibit 83: IBAS Framework –PI and SRF scores highest on all the four metrics
Atul Aarti Vinati SRF PI
Very strong on process
Quite a long history and innovation – greener and
wide presence across cheaper. This is quite Very strong capabilities in
Limited at an absolute PI’s strength lies in speed
different chemical unique given that they fluorination; expanding
scale. Good in terms of to bring the product to
segments but process don’t quite specialise in a across other chemistries
Innovation engineering efficiencies market. Not quite an
innovation has been specific chemistry area. as well. Strong culture of
and addition of innovator but an efficient
limited; the company has Very good at backward innovation comes in from
downstream products executor
generally stuck to its and forward integration its old businesses as well
existing product lines and consequently doing
cost innovation
Relatively weaker
Credible brand with
compared to SRF/PI but
multiple customers across Very strong brand in Very strong brand and
caters to a much wider Very strong brand among
different segments. limited set of products it well recognised through
client base vs SRF/PI. clients. As an employer
However, depth of does. Ranks in top 5 customer awards. As an
Brand Improvements on QSHE too recognised as a good
relationships is still percentile in vendor employer too recognised
and growing capabilities brand to work with in the
somewhat middling on rankings such as as a good brand to work
on product front would industry
the vendor to partner Ecovadis with in the industry
drive sharp improvement
scale for clients
hereon in our view
Promoter family is a
Wide set-up with technocrat and offers Focused on professional
Very strong culture and
different CEOs managing ample techno- management right since
sense of purpose Well-managed company;
different businesses, but management capabilities the beginning. Promoter
amongst people. Clear sharp execution
possibly not within the family. Aarti involvement limited in
vision of the promoter capabilities; strong
decentralised in a true has focused on day-to-day operations
Architecture drives steady but quality capital allocation. Always
sense. Ethical and improving professional
execution. Good capital had a strong board and
compassionate culture talent and is improving. Asset discipline is a
allocation. Seemingly has effectively utilised it
but not aggressive Not so great at an weakness. Strong 1st and
lacks ambition to grow to build capabilities
enough to capitalise fully absolute level but clearly 2nd line of managers is
beyond the existing track
on growing opportunities going in the right the strength of SRF.
direction
High quality human
Well-engineered
capital; very strong R&D
Widest matrix of Benzene-derivative
team and years of
chemistry capabilities manufacturing facilities.
operational excellent High quality human
and client base. It also Technocrat promoters Strong relationships with
experience through capital; Good
Strategic Asset has a big infrastructure in and a capable second- clients; partnerships with
technical textiles and relationship with
Valsad. The question is generation looking global R&D institutes
packaging films business; Japanese clients
how aggressively Atul is forward to steer the
world class
able to use it. business into second
manufacturing
orbit
infrastructure at Dahej
Has been a good
PI has perfected the
executor in a semi-
business model. Has got
commodity business and
everything – chemistry
has gradually built on
capabilities, engineering
value-added products. It Slow and steady
Wide set of product Strong at R&D and skills, strong capital
has got a good execution. Possibly the
capabilities but infrastructure. Asset allocation, wide talent
Overall reputation in a wide set best company in this
somewhat less discipline is weak from base, ambitious
of clients. Improvement space gradually looking
aggressive. an investor point of view promoter, strong set of
in architecture will to gain scale
guiding principles.
gradually create a
Widening client base
stronger brand and
beyond agri will drive
increase intimacy with
long-term scalability
clients.
Exhibit 84: NFIL scores high in product capabilities and global orientation while its position in capital efficiency and
scalability is improving
Capital Product/Process Global Cash
Margins Scalability Total Score
Efficiency Capabilities orientation conversion
PI Industries
SRF Ltd
Navin Fluorine International Ltd
Vinati Organics Ltd
Aarti Industries Ltd
Atul Ltd
Sudarshan Chemicals
Source: Company, Ambit Capital Research; Note: - Highest; - Relatively more; - Average; - Lowest

Chemicals
Exhibit 85: NFIL is just behind PI and SRF in our coverage universe due to growth
visibility and improving RoCE
30.0%
Vinati
Avg ROCE (FY20-23E)
PI
25.0%
20.0%
Sudarshan
15.0%
NFIL
SRF
10.0%
Aarti
5.0%
12.0% 17.0% 22.0% 27.0%
Revenue CAGR (FY20-23E)
Source: Ambit Capital Research; Note: Bubble size indicates the current market cap and dotted bubbles indicate
positioning based on FY19 RoCE, revenue CAGR (FY20-23E) and current Market Cap.
Exhibit 86: What are built into our target prices?

CMP FY22 PE TP FY22 PE (CAGR FY20-23) (CAGR FY24-30) Discount Terminal FY20 FY20 RoCE
(Rs) on CMP (Rs) on TP Sales EBITDA Sales EBITDA rate growth D/E Post tax
PI IND 1,450 26.1 1,700 30.6 22% 27% 14.9% 16.1% 0.0 17.8% 1,450 26.1
SRF 3,403 14.7 4,000 17.3 19% 19% 8% 10% 0.5 14.8% 3,403 14.7
Aarti 933 18.9 1,000 20.3 21% 24% 11% 12% 0.5 11.4% 933 18.9
Sudarshan 423 15.4 500 18.3 12% 19% 13% 15% 0.5 14.6% 423 15.4
NFIL 1,454 25.3 1,800 31.3 28% 37% 20% 20% 0.0 12.3% 1,454 25.3
Vinati 870 18.4 1,000 21.2 24% 22% 14% 14% -0.1 26.0% 870 18.4
Source: Ambit Capital Research. SRF/Aarti’s capex investment plans drive our growth estimates beyond FY24. So LT growth numbers will increase as more capex
plans get rolled out.
Exhibit 87: We upgrade TP for PI Ind, SRF and Aarti by slightly tweaking our long
term growth estimates
New Old Sales CAGR FY24-30 EBITDA CAGR FY24-30
TP Rs TP Rs New Old New Old
PI IND 1,700 1,600 14.9% 14.7% 16.1% 15.8%
SRF 4,000 3,700 7.9% 7.4% 9.6% 9.1%
Aarti 1,000 900 11.3% 11.1% 12.5% 12.1%
Source:Ambit Capital Research

Chemicals
Consensus estimate movements: PI/SRF/NFIL/Vinati

better at delivering on earnings expectations
FY17/FY18 earnings downgrades for PI/SRF were due to slowdown in global
agrochemicals markets along with ongoing M&As which delayed new contracts.
Exhibit 88: PI Ind’s consensus EBIT estimates Exhibit 89: SRF’s consensus EBIT estimates
FY17 EBIT FY18 EBIT FY19 EBIT FY17 EBIT FY18 EBIT FY19 EBIT
FY20 EBIT FY21 EBIT FY20 EBIT FY21 EBIT
9,000 16,000
8,000 14,000
7,000 12,000
Rs mn
Rs mn
6,000 10,000
5,000 8,000
4,000 6,000
May-16
May-17
May-18
May-19
Sep-16
Sep-17
Sep-18
Sep-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
May-16
May-17
May-18
May-19
Sep-16
Sep-17
Sep-18
Sep-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Exhibit 90: NFIL’s consensus EBIT estimates Exhibit 91: Aarti’s consensus EBIT estimates
FY20 EBIT FY21 EBIT FY20 EBIT FY21 EBIT
3,500 12,000
3,000 10,000
2,500
Rs mn
Rs mn
8,000
2,000
6,000
1,500
1,000 4,000
May-16
May-17
May-18
May-19
Sep-16
Sep-17
Sep-18
Sep-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
May-16
May-17
May-18
May-19
Sep-16
Sep-17
Sep-18
Sep-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Exhibit 92: Vinati’s consensus EBIT estimates Exhibit 93: Sudarshan’s consensus EBIT estimates
FY20 EBIT FY21 EBIT
2,500
6,000
2,300
5,000
4,000 2,100
3,000 1,900
2,000 1,700
1,000 1,500
May-16
May-17
May-18
May-19
Sep-16
Sep-17
Sep-18
Sep-19
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
May-18
Nov-18
May-19
Nov-19
Mar-18
Mar-19
Mar-20
Sep-18
Sep-19
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20

Chemicals
Exhibit 94: PI and NFIL are well-positioned from perspective of COVID-19 disruption and the long term
Ambit CMP TP Up Mcap Free Median CAGR (FY20-22E) PE (x) EV/EBITDA (x) RoE (%) Share Price (%)
Name
rating (`) 12m (USD) Float DTV 3m Sales EBITDA EPS FY21 FY22 FY21 FY22 FY21 FY22 1M 3M 1Y
Agrochemicals and agro inputs
UPL BUY 346 675 95% 3,431 64% 24.6 11% 20% 45% 10.2 6.5 7.7 5.9 13 18 15% -39% -45%
Coromandel Intl NR 520 NA NA 1,978 36% 1.9 7% 8% 10% 15.0 13.2 10.1 9.2 22% 22% -6% -13% 21%
Bayer CropScience NR 3,920 NA NA 2,287 26% 0.9 11% 17% 18% 29.5 25.2 23.0 20.1 22% 22% 12% -4% -7%
BASF India NR 1,060 NA NA 596 23% 0.6 5% 15% 278% 40.8 27.5 16.0 16.0 6% 8% -6% 5% -24%
Rallis India SELL 197 185 -6% 497 40% 1.2 11% 15% 17% 18.3 15.8 11.3 9.8 14% 15% 5% -15% 26%
Bharat Rasayan NR 6,125 NA NA 338 21% 0.3 NA NA NA 14.0 NA 9.7 NA 25% NA 7% -3% 42%
Kaveri seeds NR 363 NA NA 285 48% 0.6 11% 12% 11% 8.8 7.9 6.3 5.6 22% 21% 6% -24% -22%
Dhanuka NR 420 NA NA 259 25% 0.2 10% 15% 14% 13.5 11.8 10.1 8.9 19% 19% 30% -7% 9%
Gujarat State Fertiliser NR 42 NA NA 219 32% 0.4 4% 59% 120% 5.8 4.6 5.2 4.4 4% 5% 14% -51% -59%
Insecticides India NR 395 NA NA 106 20% 0.1 9% 14% 16% 5.9 5.3 4.9 4.4 17% 16% 38% -31% -39%
Specialty Chemicals
PI Industries BUY 1,400 1,700 21% 2,511 44% 3.8 23% 28% 27% 33.0 25.2 22.0 16.8 0 0 17% -3% 39%
SRF BUY 3,307 4000 21% 2,468 39% 14.8 28% 25% 16% 20.4 14.3 12.0 9.1 18% 22% 3% -8% 36%
Aarti Ind BUY 916 1000 9% 2,073 56% 3.5 20% 25% 25% 27.0 18.7 16.1 12.0 16% 20% 19% 6% 17%
Atul NR 4,466 NA NA 1,720 49% 2.2 13% 12% 10% 19.0 16.7 12.6 11.1 18% 18% 7% 3% 28%
Vinati Organics BUY 866 1,000 15% 1,156 26% 1.1 29% 26% 22% 25.5 18.4 19.4 13.7 13% 18% 10% -18% 0%
Navin Fluorine BUY 1,419 1800 27% 911 29% 2.8 22% 29% 31% 31.0 24.7 20.9 15.9 17% 18% 20% 32% 104%
Fine Organics NR 2,050 NA NA 816 24% 0.5 17% 18% 20% 31.2 25.8 21.7 18.4 29% 27% 12% -8% 57%
Sudarshan BUY 406 500 23% 365 36% 1.2 11% 18% 6% 19.2 14.8 10.6 8.9 20% 22% 10% -15% 23%
Galaxy Surfactants SELL 1,318 1050 -20% 607 16% 0.4 7% 11% 14% 21.0 18.0 13.0 11.5 19% 19% 12% -11% 31%
Commodity Chemicals
Solar Ind NR 851 NA NA 1,000 25% 0.3 17% 15% 17% 25.2 20.2 15.0 12.9 0 0 -12% -27% -21%
Tata Chemicals SELL 249 210 -16% 825 62% 6.7 9% 12% 7% 7.1 5.3 4.6 3.7 6% 8% 9% -24% -4%
Deepak Nitrite NR 450 NA NA 796 69% 4.8 5% -3% -4% 12.3 11.2 8.1 7.5 27% 24% 19% 15% 72%
NOCIL NR 81 NA NA 174 48% 1.7 17% 19% 12% 9.5 7.6 5.9 4.8 11% 12% 26% -33% -42%
GHCL NR 108 NA NA 133 70% 0.6 4% 5% 7% 2.5 2.3 2.4 2.3 17% 16% 20% -48% -56%
Oriental Carbon & Black NR 619 NA NA 80 59% 0.1 10% 12% 3% 8.0 7.7 5.5 4.8 15% 14% 4% -41% -45%
Source: Bloomberg, Ambit Capital research. Note: NR= Not Rated; NA= Not Applicable; Covered stocks are based on Ambit estimates; Not-rated stocks have
Bloomberg estimates, priced as of21st April, 2020

Chemicals
Summary recommendations
PI, SRF, and Navin Fluorine are our top picks in the space.
Exhibit 95: Companies worth considering in Indian Chemicals space
Management/Succession
Play on Product capability Asset capability Client engagement
Planning
Proven track record in
Company is into business Mr. Jai Shroff has taken
relatively stable
Medium; focusing on a to farmers; Arysta (UPL’s aggressive M&A bets to build
Global dominance on geography like India
UPL Ltd. balance of cost and recent acquisition) will global distribution and still has
global agrochemicals while competition
product help ramp up client many good years to lead the
struggles with supply
engagement organisation
chain issues from China
Company already has
Focused on developing Mr. Mayank Singhal is known
flawless manufacturing
Global chemicals proprietary to be a tough taskmaster and
infrastructure in India; Very high – well respected
PI Industries contract manufacturer technologies and had a single-minded focus on
now looking to further by clients for IP protection
for innovators getting into molecule building IP-led business with
diversify manufacturing
development global innovators
locations
Targeting even Well regarded by clients Mr. Ashish Bharat Ram has
innovative spaces in for quality (two-time focused on focusing on value-
Multiple industry play refrigerants; focused Infrastructure quality in Deming prize winner) and added products with high
SRF Limited
akin to Dupont on internal R&D and Dahej is extremely good consequently has only A- quality and more profitable
product development lister clients across grades with multiple businesses
across segments being run by professionals
Company has been Mr. Rajendra Gogri has focused
Fragmented
Focused on gaining supplier to multiple MNC on transitioning the business
manufacturing
share of Europe and clients for commodities from a commodity-like business
Multiple industry play infrastructure across
Aarti Industries China; capabilities are across key segments. The to more specialty business by
akin to Lanxess India. Investments in EHS
medium on chemistry engagement has lot more improving QSHE, building R&D
have stepped up
and high on cost width though depth is and design, professionalising
meaningfully
catching up the management.
Company has been
Focused on gaining supplier to multiple MNC Succession planning is the only
share of Europe and Has an entire city on its clients for commodities key risk to otherwise a great
Multiple industry play
Atul Ltd. China; capabilities are own; EHS track record across key segments. The business. Promoters have done
akin to Lanxess
medium on chemistry has been strong engagement has lot more well in building business
and high on cost width though depth is without taking too many risks.
catching up
Global chemicals Good capabilities; EHS Well incentivised professionals
Company’s uniqueness
contract manufacturer Strong chemistry track record is good; run the business. Though key
Navin Fluorine lies in relationships with
for chemical capabilities manufacturing is divided man risks prevail when
pharma innovators
innovators as per various segments professionals transition
Good standing in India Promoters have focused on
Well respected on EHS; though in advanced building the business in a slow
Medium; focusing on a
Sudarshan Global market-share Pigments though is stages to build client but steady manner. Mr. Rajesh
balance of cost and
Chemicals play on pigments generally more polluting relationships with global Rathi is the identified successor
product
space majors in autos and and will run the business for
consumer goods next few years.

Chemicals
Catalysts and risks for the sector

Catalysts
New emerging areas: Some Indian companies have or are trying to foray into new
chemical verticals which are completely different from their existing ones. These
ventures have the potential to significantly alter the size of the business. For e.g.,
NFIL entered a completely new segment – High Performance Product (HPP) – which is
expected to add ~40% of FY20 revenues in FY23. PI has been trying to enter new
areas other than agrochemicals and has been working on some proprietary
technologies as well. Aarti is getting into downstream products for Benzene
derivatives to get into more complex applications.
Desire to diversify supply chains away from China: The coronavirus disruption
has led to rising anti-China feelings and need to have supply chains independent of
China. High-quality Indian chemicals companies will likely benefit in specialty
chemicals as MNCs will prefer India as a outsourcing partner for certain specialty
products/intermediates over China. We note that such shifts won’t happen in basic
and petrochemicals given weaker feedstock advantages for Indian players.
Currency depreciation: INR depreciation may benefit Indian exporters like PI and
NFIL (indirectly as currency is usually a pass-through) in improving competitiveness.
SRF (more so for non-specialty chemicals exports), Vinati, Aarti and Atul benefit
directly from rupee depreciation.
Feedstock availability will boost competitiveness: Lack of feedstock availability
has been one of the biggest challenges for Indian chemical players. According to
McKinsey, Indian chemicals companies/sector can benefit from the increase in the
focus on petrochemicals in India by several global oil and gas majors as they are
looking for downstream opportunities.
Risks
Rise of protectionism: Coronavirus has globally led to both supply chain disruptions
and demand softening. These can lead to rise in protectionism both in order to have
less supply chain disruptions risk and to promote investments closer to home. In such
a scenario, growth might be adversely impacted.
Demand slowdown: Worldwide lockdowns and closure of industries have led to
significant demand weakening. If this persists for long, there will be impact from end-
users. Although many of the chemicals are used in defensive category, prolonged
demand slowdown will dent chemical companies’ growth and future expansion plans.
Supply side challenges: Extension of lockdowns or increase in severity of COVID-
19 spread in India may lead to further delays in capacity ramp-up. As of now most of
the companies have been ramping up their capacities as lockdowns ease for
manufacturing units. Companies will have to put more efforts on supporting their
Indian suppliers.

Chemicals
PI Industries
On a trajectory of its own
What does the company do?
PI works with global agrochemical innovators on manufacturing of their patented
molecules. It helps find the right manufacturing process and improve them over a
period of time to further cut costs. This business accounts for ~70% of revenues. They
also distribute agrochemicals in-licensed from global agrochemical MNCs in India
taking care of registration, formulation, marketing and distribution. This business
accounts for 30% of the revenues.
How to we expect them to evolve over next 10 years
We expect PI to evolve into a chemicals manufacturing giant with expanding presence
into both wider set of chemistries as well as application areas. Business model will
also expand from dedicated contract manufacturing (entire IP is dedicated to clients)
to own IP creation through proprietary technologies. They are likely to strengthen
their partnership-based approach with innovators and have expanded into research
process too with innovators in addition to manufacturing and registrations (likely to
be an engagement driver than revenue driver though). They would foray into areas
like pharmaceuticals, neutraceuticals, etc. through acquisitions and/or on organic
efforts basis. While the base CSM business will grow at ~16% CAGR over the next
decade, proprietary technologies and foray into new application areas can drive 400-
500bps top up to this earnings CAGR and would drive potential upside to our LT
growth estimates.
Exhibit 96: What differentiates PI with other chemical companies
Advantage Description
 Non-compete business model with global innovators; in-licensing model for domestic business than launching generics.
Non-compete business
model and respect for IP  Currently in-licensed molecules account for more than 65% of domestic business and are likely to go up gradually.
 In the long history of ~20 years of being in the CSM business, PI hasn’t had any instance of potential IP violations.
 Experience of commercialising more than 30 molecules over last 20 years including some really complex ones (over 15
Strong track record in
steps).
execution capabilities
 Solid pipeline of more than 20 molecules which are in various stages of commercialisation.
 3Cs: Cost, compliance and capacities (global standard) are well taken care of.
Good experience in  In-house capabilities and immense experience in process research, plant engineering, efficient manufacturing and
chemistry and process product registration.
engineering  Command over multiple complex chemistries makes suitable for complex intermediates.
 Impeccable standards on the environmental safety and emission standards of global innovators.
 Strong relationships with the innovators (18+ innovators), including a mix of Japanese, European and US clients.
Long-term relationships
with clients  Customer trust on timely deliveries, quality control and ability to manage various volatilities.
 Well rated with sustainability ratings such as Ecovadis (Gold) and Responsible Care.
 With substantial scale-up on process capabilities, PI clearly has much more cost advantage vs other domestic players.
Cost advantage
 Most of the company’s plants are multi-product facilities which lead to improved utilisation of its plants.
 A large set of PI’s competition is based in developed countries wherein PI and other Indian players have a clear cost
advantage.
Source: Company, Ambit Capital
Exhibit 97: PI’s investments into capability building could make it the fastest growing
chemicals player in next decade

Chemicals
Upgrade our TP to Rs 1,700(vs. Rs1,600 earlier)

We roll forward our estimates to FY21 and slightly tweak to increase our long term
growth estimates given our belief that PI will continue to dominate the custom
manufacturing in agrochemicals and the possibility of entering in new segments. As a
result our TP increases to Rs1,700 from Rs1,600 earlier. Our FY21-23E estimates
remain unchanged.
What do we think about the management and their capital allocation?
PI has been extremely conservative on capital allocation always utilizing the
manufacturing capacities with-in 12-18 months of commissioning delivering 20%+
post tax RoCEs consistently. Their on-ground execution has been great as also visible
into building some great brands such as Nominee Gold, Osheen and now Akira.
Ethically too they have the cleanest business model which is completely non-compete
with innovators. This is also visible in the fact that 95% of their CSM business (70% of
overall revenues) is patented molecules and 60% of their domestic business is
innovator licensed.
Management has also kept a high quality board right since inception comprising
industry veterans with expertise across various technical and business functions. In
addition, senior management team is made up of all qualified professionals barring
one member from the promoter family. They have also rewarded employees with
ESOPs and industry-best compensation. The only challenge so far has been a higher
turnover amongst top leadership team which management is now trying to address.
What is the impact of COVID-19?
Given PI draws 100% of revenues from agrochemicals, we believe they are relatively
more defensive. PI has already been able to ramp up their plants to 50-60%
utilization and hence less likely to be impacted by supply-side disruptions as well. 15-
20 days of sales loss can be made up over the year in FY21 as order book continues
to remain healthy.
Exhibit 98: PI’s market and capability evolution have gone hand in hand

Chemicals
Summary Financials - PI Industries

Profit and loss statement
Rs. Mn FY18 FY19 FY20E FY21E FY22E
Revenue 22,771 28,409 33,267 40,749 50,398
Total expenses 17,837 22,645 26,322 32,045 39,011
EBITDA 4,934 5,764 6,945 8,704 11,387
EBITDA Margin % 21.7% 20.3% 20.9% 21.4% 22.6%
% Growth -11% 17% 20% 25% 31%
Depreciation 830 930 1,281 1,513 1,708
EBIT 4,105 4,834 5,664 7,191 9,679
Interest Expenditure 53 50 112 520 798
Other income 602 595 655 1,119 1,321
PBT 4,654 5,379 6,206 7,790 10,202
Provision for taxation 979 1,277 1,489 1,948 2,551
Adjusted PAT 3,676 4,101 4,717 5,843 7,652
% Growth -20% 12% 15% 24% 31%
Reported PAT 3,676 4,102 4,717 5,843 7,652
EPS (Rs) 26.7 29.7 34.2 42.4 55.5
Balance Sheet
Share capital 138 138 138 138 138
Reserves and surplus 18,984 22,710 26,005 30,636 37,076
Total Networth 19,122 22,848 26,143 30,774 37,214
Loans 463 99 5,099 4,876 4,653
Deferred tax liability (net) (252) (127) (127) (127) (127)
Sources of funds 19,333 22,820 31,115 35,523 41,740
Net block 9,957 11,839 17,508 18,995 20,286
Capital work-in-progress 899 1,828 1,828 1,828 1,828
Investments 1,607 2,540 2,540 2,540 2,540
Total Current Assets 13,515 15,214 18,944 23,844 31,341
Current Liabilities 6,029 7,996 8,303 10,282 12,854
Provisions 340 415 1,212 1,212 1,212
Current liabilities and provisions 6,369 8,411 9,514 11,493 14,066
Net current assets 7,145 6,803 9,429 12,350 17,275
Application of funds 19,333 22,820 31,115 35,523 41,740

Chemicals
Cash flow statement

PBT 4,655 5,379 6,206 7,790 10,202
Depreciation 830 930 1,281 1,513 1,708
Interest paid (net) 53 50 112 520 798
CFO before change in WC 5,200 6,595 6,945 8,704 11,387
Change in working capital (1,043) (1,542) (1,286) (900) (1,079)
Direct taxes paid (963) (1,177) (1,489) (1,948) (2,551)
CFO 3,194 3,876 4,550 5,856 7,757
Net capex (1,696) (3,675) (6,950) (3,000) (3,000)
Net investments (375) 379 - - -
Interest received 266 193 655 1,119 1,321
CFI (1,805) (3,198) (6,296) (1,881) (1,679)
Proceeds from borrowings (364) (399) 5,000 (223) (223)
Change in share capital - 75 (210) - (0)
Interest & finance charges (53) (59) (112) (520) (798)
Dividends paid (662) (832) (1,212) (1,212) (1,212)
CFF (1,060) (1,215) 3,466 (1,954) (2,233)
FCF 1,161 624 2,339 4,360 8,206
Key ratios
FY18 FY19 FY20E FY21E FY22E
Revenue growth 0.0 24.8 17.1 22.5 23.7
EBITDA growth (10.8) 16.8 20.5 25.3 30.8
PAT growth (20.0) 11.6 14.9 23.9 31.0
EBITDA margin 21.7 20.3 20.9 21.4 22.6
EBIT margin 18.0 17.0 17.0 17.6 19.2
Net margin 16.1 14.4 14.2 14.3 15.2
RoCE 20.4 19.6 17.8 18.7 21.4
RoIC 23.8 24.4 23.3 24.8 30.0
RoE 20.7 19.5 19.2 20.5 22.5
P/E (x) 58.4 52.4 45.5 36.8 28.1
P/B(x) 11.2 9.4 8.2 7.0 5.8
EV/EBITDA(x) 43.4 37.2 30.8 24.6 18.8
EV/EBIT(x) 52.2 44.3 37.8 29.8 22.1
PBT margin 20.4% 18.9% 18.6% 19.1% 20.2%
Valuation ratios
FY18E FY19E FY20E FY21E FY22E
PBT margin (%) 20.4 18.9 18.6 19.1 20.2
Net profit margin 16.1 14.4 14.2 14.3 15.2
Dividend pay-out ratio (%) 15.0 16.8 30.0 17.7 13.5
Net debt/Equity(x) -0.0 -0.1 -0.2 -0.1 -0.1
RoCE (post-tax) (%) 20.4 19.6 17.8 18.7 21.4
RoIC (%) 23.8 24.4 23.3 24.8 30.0
Working Capital Turnover 6.6 7.3 8.2 9.2 10.2
Gross Block Turnover 2.0 2.1 1.8 1.7 1.9

Chemicals
SRF Limited
India’s mini Dupont
Thoughts on growth for next decade
We expect SRF to evolve itself into a wider chemicals play expanding into refrigerants,
specialty chemicals (agri as well as pharma), solvents and fluoropolymers (likely to
get commissioned in FY22). Their capabilities and backward integration in
fluorination are their biggest strength. All of their operations are well integrated at
one facility in Dahej which gives them the scale advantage. We expect SRF’s specialty
chemicals revenue to grow at 25% CAGR over the decade led by forays into pharma
intermediates and other spaces, diversifying away from agrochemicals which form
90% of their revenues in this business.
Refrigerants business would benefit from growing distribution capabilities across Even in commodity portfolios, SRF
the globe – Middle East, Thailand, South Africa, US etc. A wider product portfolio differentiates itself on product
comprising R134a, R32, R125, R410a and R1234yf (waiting for the patent expiry) and grades, quality assurance,
low cost manufacturing in Dahej would make SRF a global player through their brand relationships with top-tier clients
‘Floron’. Solvents are another opportunity where SRF can play the import substitution and management depth to
opportunity. Many of these solvent products are byproducts of existing processes and manage these businesses. SRF’s
provide scale to the overall business. Refrigerants would also be a play on China commodity businesses are strong
substitution in US and other developed markets. China has over 50% market share in cash generators providing them
old generation refrigerants like R134a which SRF can substitute. We note SRF is further growth capital
equally competitive with Chinese now on pricing.
Fluoropolymers are another opportunity that SRF is pursuing which has large
market potential. SRF’s R&D capabilities can help it target specialty grades of the
polymer which can support overall growth. The growing chemicals revenues (given
rising scale across all the four businesses) from Dahej complex would also support
overall margin expansion. We note Dupont has built a high-end specialty
fluoropolymers business spanning across multiple industry segments.
While Technical Textiles would gradually lose relevance in the overall profitability
pie (15% of FY20 EBIT), SRF is likely to continuously invest in the packaging films
business (~30% of overall EBIT in FY23). With diversified presence across Thailand,
South Africa, Hungary and India (Indore), SRF can be a strategic supplier to various
MNCs (like Nestle, Unilever, Pepsico, etc.) globally. It has also been focusing on
being in the more value-added solution (rather than just supplying BOPET/BOPP
commodity grades).
Upgrade our TP to Rs 4,000(vs. Rs3,700 earlier)

We slightly tweak to increase our long term growth estimates primarily driven by
SRF’s chemicals business given increasing applications of fluorine and fluorinated
polymers and SRF’s capability to capitalise on these opportunities. As a result our TP
increases to Rs4,000 from Rs3,6700 earlier. Our FY21-23E estimates remain
unchanged.
What do we think about management?

We believe de-centralisation of business management is the biggest strength of SRF.
SRF promoters have focused on capital allocation while leaving the day to day
business management to professional CEOs (good academic pedigrees, SRF veterans
with over 1.5-2 decades spent in the same business) who run each line of business
separately. While promoters focus on macro opportunities, capital allocation and
overall hygiene of the business, management teams continue to focus on micro
pieces such as driving cost efficiencies in the business, building superior client
engagements and continuous evolvement of product mix. Across the businesses, SRF
has been able to cater to the best of the clients offering best of grades possible in the
category. Their quality assurances and reliability of supply work in their favour. This
explains their superior operation cash generation (1 day WC cycle, OCF 2.5x of PI
with similar market cap) despite being in multiple commodity B2B businesses.

Chemicals
We continue to see SRF being present in a mix of commodity and specialty

businesses. Aggressive capital investments (most of operating cash flows get
reinvested into the businesses) are a drag on RoCE but also help the company grow
well (6x PAT growth over FY14-FY20). The company’s balance sheet remains
comfortable (0.5x Net Debt to Equity) and RoE is healthy at ~20%. We envision SRF
to be India’s Dupont given presence across different business lines.

We expect Technical Textiles (exposure to autos) and refrigerants (exposure to autos
and domestic room ACs) to be impacted due to loss of 1Q sales. Refrigerants would
revive gradually as two thirds of demand is replacement. Specialty chemicals would
face challenges due to supply constraints and may suffer a loss of a month of sales.

Chemicals
Summary Financials - SRF

(Rs mn) FY18 FY19 FY20 FY21 FY22

Revenue 55,890 76,938 74,021 93,590 114,802
YoY growth 16% 38% -4% 26% 23%
Total expenses 46,828 63,375 59,620 76,546 92,365
EBITDA 9,062 13,564 14,401 17,044 22,438
yoy growth -7% 50% 6% 18% 32%
Net depreciation / amortisation 3,158 3,669 4,019 4,563 5,051
EBIT 5,904 9,895 10,381 12,481 17,386
Net interest and financial charges 1,239 2,016 1,955 1,662 1,483
Other income 1,151 401 855 807 729
PBT 5,817 8,280 9,282 11,626 16,632
Provision for taxation 1,200 1,853 186 2,325 3,326
Adjusted PAT 4,617 6,427 9,096 9,301 13,306
yoy growth -10% 39% 42% 2% 43%
EPS (Rs) 80.4 112 158 162 232
Balance Sheet
Rs mn FY18 FY19 FY20 FY21 FY22

Share capital 584 585 585 585 585
Total Networth 35,645 41,293 49,934 58,027 69,604
Loans 27,580 33,073 27,073 24,073 21,573
Deferred tax liability (net) 2,914 3,420 3,420 3,420 3,420
Sources of funds 66,139 77,785 80,427 85,519 94,596
Net block 51,216 56,094 58,983 64,073 66,495
Capital work-in-progress 5,588 7,536 7,536 7,536 7,536
Investments 1 1 1 1 1
Long term loans and advances 308 341 341 341 341
Provisions 380 441 381 381 381
Net Long Term Assets - 3,185 3,185 3,185 3,185

Chemicals
Cashflow statement
Rs mn FY18 FY19 FY20 FY21 FY22

PBT 5,817 8,269 9,282 11,626 16,632
Depreciation 3,158 3,669 4,019 4,563 5,051
Interest paid (net) 1,239 2,016 1,955 1,662 1,483
Change in working capital (1,693) (3,165) 1,142 (1,969) (2,004)
Direct taxes paid (1,176) (1,502) (186) (2,325) (3,326)
CFO 6,995 8,956 15,357 12,750 17,107
Net capex (12,829) (10,526) (6,909) (9,653) (7,473)
Net investments 840 332 - - -
Interest received 48 45 855 807 729
CFI (11,953) (10,142) (6,053) (8,846) (6,744)
Proceeds from borrowings 7,079 (3,000) (3,000) (3,000) (3,000)
Change in share capital - (9,145) 0 0 0
Interest & finance charges paid (1,299) (2,241) (1,955) (1,662) (1,483)
Dividends paid (689) (694) (455) (1,208) (1,729)
CFF 4,951 2,458 (8,409) (5,871) (5,712)
FCF (5,833) (1,570) 8,448 3,097 9,634
SRF: Key ratios

EBITDA margin (%) - ex. OI 16.2% 17.6% 19.5% 18.2% 19.5%
EBIT margin (%) - ex. OI 10.6% 12.9% 14.0% 13.3% 15.1%
PBT margin (%) 10.4% 10.8% 12.5% 12.4% 14.5%
Net profit margin 8.3% 8.4% 12.3% 9.9% 11.6%
Dividend payout ratio 14.9% 5.0% 5.0% 13.0% 13.0%
Net debt to Equity (x) 0.7 0.7 0.5 0.4 0.2
Working capital turnover NM 132.8 71.4 428.0 422.3
Gross block turnover 1.0 1.2 1.0 1.2 1.3
Pre-tax CFO/EBITDA 0.6 0.5 1.1 0.6 0.6
Capex/post-tax CFO 1.8 1.2 0.4 0.8 0.4
Pre-tax RoCE 12.2% 15.5% 14.8% 16.3% 20.8%
RoE 13.7% 16.7% 19.9% 17.2% 20.9%
Valuation ratios
EPS (Rs) 80.4 111.9 158.4 162.0 231.7
BVPS (Rs) 621 719 870 1,011 1,212
DPS (Rs) 4.8 6.8 18.0 25.7 88.7
P/E (x) 41.0 29.5 20.8 20.4 14.2
P/BV (x) 5.3 4.6 3.8 3.3 2.7
EV/EBITDA (x) 23.7 15.8 14.9 12.6 9.6
EV/EBIT (x) 36.4 21.7 20.7 17.2 12.3
Price/Sales (x) 3.4 2.5 2.6 2.0 1.6

Chemicals
Aarti Industries
What does Aarti do?
Aarti Industries is a leading player in Benzene-based derivatives, enjoying global
market share of about 25-40% amongst various products. Aarti is promoted by first-
generation technocrats who are chemical engineers from a reputed university (UDCT
Mumbai). Wide client relationships (for every possible application of its product),
backward/forward integrated processes, and expertise on profitable downstream
products create strong entry barriers. Aarti has been able to grow its EBITDA/PAT at
19%/25% CAGR over the last decade while maintaining dividend payout of
~25%.See our initiation here.
Thoughts on growth over the next decade
While base product growth in Benzene derivatives would come down to high single
digits (vs. ~15% witnessed in the last decade), incremental growth would come from Aarti’s is undertaking aggressive
a) going more downstream for Benzene derivatives; b) deepening of capabilities in capacity expansion in both existing
Toluene derivatives – hydrogenation, chlorination block addition etc.; c) contract chemicals (Nitrobenzene,
manufacturing revenues ramp-up – Monsanto/SABIC/BASF, etc.; and d) benefits in Chlorobenzene, and PDA) and
pharma given new API launches and import substitution from China. Significant their downstream products while
augmentation on QSHE (20% of last 5 years’ capex spent on QSHE) and human entering into new areas such as
talent (new design centre in Vadodara and R&D centre in Mumbai) add to the ability Toluene derivatives (Nitration,
to expand into newer chemistries and contract manufacturing revenues. Unlike Chlorinaton, Ethylation).
PI/SRF, Aarti is already well diversified in its chemicals business which provides it with
existing client relationships beyond agri/pharma.
Exhibit 99: Employee costs have increased at a CAGR of Exhibit 100: R&D expenses have increased at a CAGR of
25% over FY10-19 25% over FY10-19
R&D expenses (INRm) as % of Sales

Employee costs (Rsm) as % of Sales
500 1.4%
2,500 6%
1.2%
5% 400
2,000 1.0%
4% 300
1,500 0.8%
3% 0.6%
1,000 200
2% 0.4%
500 100
1% 0.2%
- 0% 0 0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Upgrade our TP to Rs 1,000(vs. Rs900 earlier)

We slightly tweak to increase our long term growth estimates to reflect Aarti’s
increasing capabilities in both Specialty Chemicals and Pharmaceuticals segment. As
a result our TP increases to Rs975 from Rs900 earlier. We also reflect the low crude
prices in our estimates which will lower the inventory costs and hence reducing the
working capital for Aarti. Our FY21-23E estimates remain unchanged.
Aarti’s promoters are technocrats with engineering graduates from top tier institutes
like UDCT and IITs. Management has made two key changes over the last decade: a)
strengthened compliances on QSHE by investing over Rs2.5bn and b)
professionalized management teams. Aarti has been the most aggressive in hiring
senior talent across functions (hired PI’s CTO Prashant Potnis as CTO, Design Head
Bhaskaran R from SRF, Manoj Sharma as Head of HR from Aditya Birla and Vedanta).
There is a commendable desire to change the culture where otherwise top
management team largely comprised 5 members from the Gogri family, 2 from other

Chemicals
promoter families and 3-4 old employees. Fragmented manufacturing presence

Gujarat/Maharashtra instead of having integrated operations at one place is a
challenge though, which Aarti would have to address. We believe the promoters have
shown strong intent to build a world class organization whose execution is in progress
and so far quite credible. We expect RoCE (currently 15%) to upgrade by 300-400bps
over next decade as it builds a more profitable downstream chain under Benzene
derivatives alongside other custom products.
Exhibit 101: Adding more top talent: Aarti added 20-30% new employees in FY19 for
the top 3 brackets (Senior Leader, Leader, Manager)

COVID-19 is likely to impact Aarti’s P&L given 50% exposure is to non agri/pharma
segments. Lower crude prices may provide some cushion to earnings and lower the
WC investments given Benzene forms ~75% of RM. Sharp rupee depreciation is
another benefit of the same.

Chemicals
Summary Financials – Aarti Industries

Profit and loss FY18 FY19 FY20E FY21E FY22E

Revenue 36,993 47,055 44,371 52,577 64,155
yoy growth 17% 27% -6% 18% 22%
Total expenses 30,426 37,404 34,986 41,645 49,505
EBITDA 6,567 9,651 9,384 10,932 14,650
yoy growth 0% 47% -3% 16% 34%
Net depreciation / amortisation 1,358 1,627 1,661 1,982 2,262
EBIT 5,210 8,024 7,913 9,159 12,597
Net interest and financial charges 1,307 1,825 1,074 1,566 1,644
Other income 21 21 190 209 209
PBT 3,924 6,220 6,839 7,593 10,953
Provision for taxation 759 1,085 1,368 1,670 2,410
Adjusted PAT 3,165 5,135 5,471 5,922 8,543
yoy growth 6% 46% 9% 8% 44%
EPS (Rs) 21.3 31.0 31.4 34.0 49.0
Balance Sheet
Rs mn FY18 FY19 FY20E FY21E FY22E

Share capital 407 433 433 433 433
Total Networth 15,784 27,621 33,523 39,149 47,265
Loans 19,208 21,356 22,373 23,489 23,633
Deferred tax liability (net) 1,774 2,003 2,003 2,003 2,003
Sources of funds 36,920 51,134 58,053 64,795 73,054
Net block 19,979 22,832 31,730 36,748 41,486
Capital work-in-progress 4,362 7,990 7,990 7,990 7,990
Investments 472 647 647 647 647
Provisions 310 439 439 439 439

Chemicals
Cash flow statement
Cash flows (Rs mn) FY18 FY19 FY20E FY21E FY21E

PBT 4,290 6,220 6,839 7,593 11,013
Change in working capital (2,633) (1,186) 919 (1,298) (4,178)
Direct taxes paid (988) (1,178) (1,368) (1,670) (2,423)
CFO 3,349 7,287 8,935 7,963 8,049
Net capex (6,141) (8,000) (9,000) (7,000) (7,000)
Net investments 34 0 0 0 0
Interest received - - - - -
CFI (6,104) (7,979) (8,810) (6,791) (6,791)
Proceeds from borrowings 5,192 2,149 1,017 255 (550)
Change in share capital (985) 7,500 - - -
Interest & finance charges paid (1,317) (1,825) (1,074) (1,566) (1,584)
Dividends paid (100) (252) (821) (1,184) (2,148)
CFF 2,791 7,571 (878) (2,495) (4,282)
FCF (2,792) (713) (65) 963 1,049
Key ratios
EBIT margin (%) - ex. OI 14.1% 17.1% 17.8% 17.4% 19.6%
PBT margin (%) 10.6% 13.2% 15.4% 14.4% 17.2%
Dividend payout ratio 2% 5% 15% 20% 25%
Net debt to Equity (x) 1.2 0.5 0.5 0.4 0.4
Working capital turnover 5.1 3.6 2.7 3.7 4.4
Capex/post-tax CFO 1.8 1.1 1.0 0.9 0.9
Pre-tax RoCE 19.6% 20.9% 15.6% 16.1% 20.8%
RoE 23.5% 23.2% 18.1% 16.8% 21.0%
Valuation parameters
EPS (Rs) 21.3 31.0 31.4 34.0 49.3
BVPS (Rs) 97.1 169.9 189.3 216.5 253.4
DPS (Rs) 0.5 1.6 4.7 6.8 12.3
P/E (x) 43.0 29.5 29.1 26.9 18.6
P/BV (x) 9.4 5.4 4.8 4.2 3.6
EV/EBITDA (x) 26.6 4.7 5.0 4.2 3.5
EV/EBIT (x) 33.5 18.1 18.6 16.0 11.9
Price/Sales (x) 4.0 3.2 3.6 3.0 2.5

Chemicals
Navin Fluorine
NFIL – A play on fluorination
NFIL, with >5 decades of expertise in fluorine, gradually rose in the fluorination
value chain building presence across refrigerants and inorganic fluorides (1967),
specialty chemicals (2000) and CRAMS (2011). Brisk business pick-up in FY14-19
(22% PAT CAGR) was led by CRAMS success. It boasts of MNC clients like Novartis,
Roche, Honeywell, Bayer and others. NFIL is in a sweet spot given its capabilities,
growing fluorine opportunities across categories and limited competition. Newly won
HPP contract of Rs29bn, spanning 7 years (40% of FY20 revenues), indicates future
size of the business. See our initiation here.
Where do we think the company will go over next decade?
We expect NFIL to become a US$1bn revenue player by FY30 vs. US$150 currently
largely driven by success in pharma CRAMS, specialty chemicals, entry into new
generation refrigerant gases and entry into new areas of fluorination.
 Focus on trinity of products, platforms and partnerships: The business will
grow on three axes: Products – refrigerants could be a potential opportunity
(HFCs, applications as industrial gases), expanding products in specialty
chemicals; Platforms – chemistry and engineering capabilities are key for building
CRAMS and new age business; Partnerships – contract manufacturing
opportunities with innovators.
 Looking abroad to enhance R&D capabilities: NIFL will augment R&D teams
not only in India but also abroad. Management is cognizant of incremental
competition for quality R&D talent in the country and hence wants to build an
R&D centre outside India as well to get higher quality talent.
 Adding growth verticals: NFIL is exploring opportunities beyond existing
verticals to leverage fluorination capabilities. They have recently entered
polycarbonates with an MNC which would be their fifth vertical. They can also
look at specialty grades within fluoropolymers. NFIL is also looking to get into
product intermediates which are into fluorination and around fluorination.
 Building management bandwidth: As NFIL is aggressively chasing new
projects across agri, pharma and other new domains, it is also looking to add
talent across key verticals. Our checks suggest senior level hiring from other
chemical companies including SRF, PI, etc. across design, R&D, engineering, sales
functions etc. To attract talent NFIL has been offering ESOPs right from the
manager level.
 Focused on being a leading material sciences company: NFIL will transition
from a chemicals company to a material sciences company. Amongst the three
categories, bulk, fine and performance chemicals, they may tilt more on the
performance chemicals side.
NFIL has been undergoing a transition. The third generation of Mafatlal family,
Vishad Mafatlal, took over the reins of the company from May 2016. It has also
undergone changes in the top management (new MD and CFO). Mr. Radhesh
Welling joined NFIL in December 2018 as Managing Director after spending four
years in Laxmi Organics. NFIL has a strong and capable second line of management
with vast industry experience heading different verticals. We believe that the company
under the leadership of Radhesh is focused on attracting credible talent at the
professional and senior level to run the business. We expect meaningful increase in
aggression (capability building and hiring right people) and continued investments in
building R&D and manufacturing infrastructure. NFIL is likely to remain a
professionally driven firm with capital allocation decisions to remain with promoters.
To that extent, CEO departure could be a key risk for the company.
NFIL’s management team has given a vision on transitioning from fine chemicals
company to performance Chemicals Company. To augment the same they are
looking to build management bandwidth as well as augment R&D capabilities.

Chemicals
Exhibit 102: NFIL has significantly increased both Exhibit 103: NFIL‘s employee expense as a percentage of
employee benefit expenses and cost per employee sales is one of the highest in the industry
Employee benefit expenses (LHS) FY19 employee expenses as % of sales (RHS)

Avg. cost per employee (RHS)
1.4 1.8 6.0 14%
1.2 1.6 5.0 12%
10%
RS bn
1.0 1.4 4.0
in Rs mn
8%
Rs bn
0.8 1.2 3.0
0.6 1.0 6%
2.0
0.4 0.8 4%
1.0 2%
0.2 0.6
- 0%
- 0.4
SRF PI IN Atul Aarti NFIL Vinati
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Exhibit 104: NFIL has been increasing its R&D expenses Exhibit 105: NFIL’s R&D expenses as a percentage of sales
is next to PI Industries
R&D expenses (Rs mn) % of sales
250 3.0% FY19 R&D expenses Avg R&D as % of sales (FY17-19)
200 1,200 4%
2.5%
1,000 3%
150 3%
800
2.0%
Rs mn
2%
100 600
2%
1.5% 400
50 1%
200 1%
0 1.0%
- 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19
SRF PI In Aarti Atul NFIL


NFIL’s inorganic fluorides business (~20%/15% of revenues/EBITDA) will be mostly
impacted as it is exposed to the domestic steel and glass industry. Refrigerants
business will have marginal impact as NFIL supplies R22 which has undergone two
phases of supply cuts, resulting in low supply. Specialty chemicals and CRAMS will
remain resilient as they cater to end-segments like pharma and agrochemicals.

Chemicals
Summary Financials – NFIL


Total operational revenue 9,127 9,959 10,587 12,454 15,870
Gross Profit 5,104 5,194 5,801 6,887 8,776
Employee expenses 1,105 1,155 1,275 1,445 1,724
Power and fuel expenses 524 567 602 704 897
Other expenses 1,286 1,283 1,403 1,538 1,941
EBITDA 2,188 2,190 2,521 3,200 4,215
EBITDA margins 24.0% 22.0% 23.8% 25.7% 26.6%
Depreciation 398 275 339 405 533
EBIT 1,790 1,914 2,182 2,795 3,682
Interest (12) (8) (5) (39) (104)
Net recurring income 327 169 359 284 242
PBT (Before non-recurring income) 2,105 2,075 2,536 3,040 3,820
Non recurring income 560 169 (76) - -
Taxes 840 770 812 778 978
PAT reported 1,825 1,474 1,648 2,262 2,842
PAT (adjusted) 1,265 1,306 1,724 2,262 2,842
EPS adjusted (in Rs) 37 30 33 46 58
Balance sheet

Share capital 99 99 99 99 99
Total Networth 9,835 10,724 11,878 13,461 15,451
Loans 42 - - - -
Deferred tax liability (net) 308 348 348 348 348
Sources of funds 10,185 11,073 12,226 13,809 15,799
Net block 2,818 2,850 3,377 4,142 5,233
Capital work-in-progress 201 393 1,093 2,143 2,543
Investments 1,892 2,058 2,058 2,058 2,058
Cash and bank balances 374 370 331 457 445
Sundry debtors 1,556 1,727 1,764 2,076 2,645
Inventories 1,138 1,119 1,259 1,465 1,867
Loans and advances 118 48 48 48 48
Other long term assets 1,994 2,163 2,159 2,154 2,148
Net Long Term Assets 1,737 1,932 1,928 1,923 1,917

Chemicals
Cash flow statement

PBT 2,665 2,244 2,460 3,040 3,820
Depreciation 398 275 339 405 533
Interest paid (net) (30) (4) (354) (245) (138)
Change in working capital (157) (615) 72 (347) (516)
Direct taxes paid (497) (719) (812) (778) (978)
CFO 1,694 902 1,705 2,075 2,720
Net capex (487) (616) (1,562) (2,215) (2,018)
Net investments (1,363) (243) (1,203) (1,931) (1,776)
CFI (390) (683) (541) (18) (957)
Proceeds from borrowings (59) (85) (41) 700 -
Change in share capital 31 21 - - -
Interest & finance charges (12) (8) (5) (39) (104)
Dividends paid (350) (611) (494) (678) (853)
CFF (390) (683) (541) (18) (957)
Key ratios

EBIT margin (%) - ex. OI 19.6% 19.2% 20.6% 22.4% 23.2%
PBT margin (%) 23.1% 20.8% 24.0% 24.4% 24.1%
Dividend payout ratio 19.5% 41.9% 30.0% 30.0% 30.0%
Net debt to Equity (x) (0.0) (0.0) (0.0) 0.0 0.0
Working capital turnover 5.2 4.7 5.1 5.2 5.4
Capex/post-tax CFO 29% 68% 92% 107% 74%
Pre-tax RoCE 18.4% 17.6% 18.4% 21.1% 24.5%
RoE 20.1% 14.3% 14.6% 17.9% 19.7%
Valuation parameters
Valuation parameters FY18 FY19 FY20E FY21E FY22E

EPS (Rs) 37.0 29.8 33.3 45.8 57.5
BVPS (Rs) 199.7 217.0 240.4 272.4 312.7
DPS (Rs) 7.2 12.5 10.0 13.7 17.3
P/E (x) 36.5 45.3 40.5 29.5 23.5
P/BV (x) 6.8 6.2 5.6 5.0 4.3
EV/EBITDA (x) 28.9 28.9 25.1 19.8 15.0
EV/EBIT (x) 35.4 33.1 29.0 22.7 17.2
Price/Sales (x) 7.3 6.7 6.3 5.4 4.2

Chemicals
Broader thoughts on COVID-19 disruption

We expect moderate COVID-19 impact on our chemicals coverage universe. A large
part of the coverage caters to global agriculture (largest piece for Indian listed
chemicals stocks), pharma and FMCG. Demand challenges are likely lower for these
sectors than automotive, consumer durables, energy, electronics, etc. Supply-side
challenges (plant shutdowns for Indian players) are the key challenge. Ongoing
supply chain shifts from China should continue to benefit Indian players as lockdowns
end and possibly would intensity due to COVID-19 impact. This would aid earnings
growth while underlying end market growth remains challenging. We had recently
cut earnings by 15%/7% for FY21/FY22 given delay in capex, logistical challenges
and impact of weaker end-market growth globally. See detailed note here.
Exhibit 1: Revenue exposure to geographies and end-markets of companies in our coverage
Geography/Exposure Segments Remarks
PI Industries
 PI is likely to be less impacted due to the defensive nature of Agrochemicals.
 India: 34%  Ramp-up of new molecules, such as Pyroxasulfone (launch in Brazil and India recently) and
 Asia (ex-India) 14% Tetraniliprole (replacement for Imidaclorpid) would support overall revenue growth.
Agrochemicals: 100%
 North America: 39%  Three new plants coming up (vs. 8-9 plants now): one in 4QFY20, one in 1Q/2Q and one in
 Europe: 10% 4QFY21. Integration of Isagro’s capacities which would further boost overall manufacturing assets.
Demand has remained very strong, driving momentum in capex.
SRF
 Refrigerants segment’s end-customers are air conditioners and refrigerators, chillers and
 India: 55%
automobiles. This segment will be impacted due to slowdown in automobiles though market-share
 South Africa: 4%
gains from China in R134a/R125 will support volume growth.
 Germany: 4%  Refrigerants: 13%
 Specialty chemicals’ end-customers are agrochemicals (major), pharmaceuticals and industrial
 USA: 5%  Specialty Chemicals: 21%
chemicals. This segment is going to be less impacted.
 Thailand: 3%  Technical textiles: 19%
 Technical textiles cater to auto and industrial applications (like conveyor belts in industries like coal
 Switzerland: 3%  Packaging films: 37%
and cement, machines etc.) and will get badly hit.
 Belgium: 3%
 Packaging films are used in FMCG/packaged goods, which should see more usage due to hygiene
 Others: 23%
concerns.
Vinati
 IBB is used as core intermediate for ibuprofen and perfumes.
 IBB: 17%  ATBS has multiple uses – oilfield mines (~25%), water treatment (~40%), emulsions for paints and
 India: 27%
 ATBS: 54% paper coatings.
 Outside India: 73%
 IB: 9%  IB is used in antioxidants, fragrances and perfumes, insecticides and pesticides.
 Butylated Phenols are used in agri and pharma.
Aarti Industries
 Agrochemicals is 25-30% of total
 India: 58%  Pharmaceuticals: 17%  Polymer additives is 15-20% of total
 Outside India: 42%  Specialty Chemicals: 83%  Pharmaceuticals is 25-30% of total
 Dyes, pigments and printing inks is 15-20% of total
Sudarshan Chemicals
 India: 57%  Key end-user industries are paints and coatings used in auto, home painting, plastics, ceramics, etc.
 Pigment
 Outside India: 43% This is likely to be sharply impacted.
UPL
 UPL might get impacted in the near term due to disruptions in labour force and raw materials in
 LatAm: 42%
some geography; however, the base too is extremely soft due to sharp declines in US/Europe in
 Europe: 13%
2019; USDA expects US acreage to improve this year.
 Rest of the World: 19%  Agrochemicals
 Latam soybean exports to benefit from revival of China demand (impact of African swine flu in the
 North America: 13%
base).
 India: 13%
 Fall in emerging market currencies would impact the profitability.
Tata Chemicals
 India: 36%
 Soda Ash: 57%
 Asia (ex India): 10%  Key end-users of soda ash are glass and detergent industry. Around 60% of soda ash revenue comes
 Sodium bicarbonate: 6%
 Europe: 15% from America. Glass is used in home building as well as FMCG (beverages). Home building demand
 Salt: 12%
 Africa: 3% will be affected while detergent and beverages industries are resilient.
 Agrochemicals: 25%
 America: 35%
Galaxy Surfactants
 FMCG usage, in toothpaste and shampoos, is likely to be resilient.
 India: 36%  Performance surfactants: 63%
 Specialty products may face some challenges.
 Outside India: 64%  Specialty products: 37%
 Rise in palm prices may impact profitability.
Rallis India
 India: 67%
 Asia: 19%  Agrochemicals and seeds  Demand is resilient given presence in domestic agri-inputs.
 America: 11%
Navin Fluorine
 Refrigerants:29%  Inorganic fluorides will see impact of domestic industry slowdown due to corona-related disruptions.
 India: 52%  Inorganic fluorides:21% Refrigerants will be less impacted due to supply restriction of R22.
 Outside India: 48%  Specialty Chemicals:31%  Specialty chemicals and CRAMS will have minimal impact due to exposure to Agrochemicals and
 CRAMS:19% Pharmaceuticals and contract nature of the business.

Chemicals
Appendix
Exhibit 106: Revenue grew 14% CAGR over last decade though that doesn’t capture the increased share of value-added
products which has driven sharper EBITDA growth
Rs mn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10 yr CAGR 5 yr CAGR
Alkyl Amines Chemicals 1,582 1,969 2,150 2,359 2,880 3,659 4,461 4,764 4,836 5,006 6,162 8,464 16% 14%
Aarti Industries 8,989 14,613 13,012 14,257 16,323 20,576 25,984 28,614 29,562 31,146 37,593 46,595 12% 12%
Atul Ltd 10,281 12,023 11,920 15,319 17,767 20,429 24,578 26,564 25,946 28,339 32,402 40,378 13% 10%
Camlin Fine Science 813 1,041 1,403 1,717 3,352 3,736 5,087 5,583 4,893 5,284 7,101 8,781 24% 12%
Dhnuka Agritech 3,809 4,455 4,898 5,275 5,807 7,369 7,838 8,271 8,528 9,524 9,753 10% 6%
Deepak Nitrite 4,681 5,724 5,324 6,661 7,847 10,108 12,638 13,168 13,642 13,536 16,107 26,752 17% 16%
Fine Organics 6,146 6,596 7,893 8,563 10,603
Meghmani Organics 5,937 7,914 8,163 10,451 10,622 10,585 11,783 12,942 14,530 14,229 18,033 20,880 10% 12%
Navin Fluorine 2,881 4,156 4,292 4,297 7,219 5,482 4,843 5,900 6,778 7,396 9,072 9,877 9% 15%
NOCIL 3,599 4,654 4,360 4,480 4,768 4,854 5,936 7,160 7,078 8,074 9,768 10,304 8% 12%
National Peroxide 1,094 1,350 1,219 1,816 1,547 2,129 2,359 1,957 2,334 2,322 3,054 4,013 12% 11%
Plastiblends India Ltd 1,572 1,673 2,103 2,769 3,411 4,090 4,658 4,944 5,182 5,453 5,678 6,269 14% 6%
Phillips Carbon Black Ltd 10,760 12,326 16,957 21,868 22,807 22,761 24,702 18,941 19,270 25,579 35,286 13% 9%
PI Industries 4,174 4,633 5,425 7,177 8,770 11,484 15,869 19,370 20,963 22,768 22,771 28,409 20% 12%
Rallis India 6,746 8,367 8,787 10,862 12,749 14,582 17,466 18,218 15,147 16,635 17,909 19,840 9% 3%
Sudarshan Chemicals 3,944 4,578 5,870 7,175 7,945 8,679 11,145 12,117 13,973 12,494 13,056 14,531 12% 5%
SRF Ltd 16,835 20,230 24,987 33,914 39,809 37,689 39,927 44,924 45,927 48,218 55,890 76,927 14% 14%
Ultramarine Pigment 599 833 910 1,178 1,360 1,402 1,502 1,716 2,192 2,554 2,774 3,069 14% 15%
Vinati Organics 1,463 1,905 2,321 3,169 4,421 5,417 6,873 7,590 5,782 6,258 7,287 11,076 19% 10%
Total 75,191 110,230 119,026 149,456 177,933 193,516 225,237 254,216 252,574 265,403 308,325 391,804 14% 12%
Source: Bloomberg, Ambit Capital Research
Exhibit 107: As the share of value-added products has increased faster, driving EBITDA growth at 16% CAGR over last
decade
Rs mn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10 yr CAGR 5 yr CAGR
Alkyl Amines Chemicals 254 319 352 313 457 585 849 874 956 937 1,162 1,631 18% 14%
Aarti Industries 1,258 2,489 2,062 1,981 2,493 3,612 4,015 4,657 5,663 6,515 6,914 9,630 14% 19%
Atul Ltd 706 1,485 1,441 1,960 2,265 2,594 3,722 4,085 4,607 5,186 5,050 7,668 18% 16%
Camlin Fine Science 167 176 126 155 311 470 616 847 918 282 126 687 15% 2%
Dhnuka Agritech 479 581 778 795 865 1,276 1,370 1,462 1,699 1,661 1,460 12% 3%
Deepak Nitrite 381 828 496 562 610 693 1,177 1,340 1,611 1,355 1,964 4,139 17% 29%
Fine Organics 1,139 1,458 1,455 1,640 2,302
Meghmani Organics 637 1,355 1,243 1,464 1,692 1,931 1,684 2,054 2,913 2,978 4,537 5,552 15% 27%
Navin Fluorine 384 1,006 1,460 1,125 2,581 914 666 732 1,173 1,588 2,150 2,184 8% 27%
NOCIL 99 652 571 521 349 210 624 1,138 1,396 1,592 2,654 2,927 16% 36%
National Peroxide 274 416 331 919 480 674 639 226 359 700 1,450 2,263 18% 29%
Plastiblends India Ltd 187 175 195 291 322 314 475 508 593 639 549 603 13% 5%
Phillips Carbon Black Ltd (54) 1,795 2,237 2,337 1,087 709 1,555 1,652 2,391 3,951 6,141 54%
PI Industries 354 650 886 1,152 1,479 1,809 2,890 3,727 4,312 5,533 4,935 5,764 24% 15%
Rallis India 591 1,109 1,449 1,915 2,030 2,106 2,613 2,771 2,290 2,636 2,645 2,409 8% -2%
Sudarshan Chemicals 288 505 832 855 849 786 1,322 1,263 1,742 1,841 1,873 2,108 15% 10%
SRF Ltd 3,707 4,363 6,967 9,465 9,667 6,567 4,913 7,175 9,625 9,694 9,081 13,567 12% 23%
Ultramarine Pigment 200 187 193 237 245 218 261 294 376 498 602 702 14% 22%
Vinati Organics 261 339 580 697 968 1,154 1,529 1,864 1,998 2,170 1,993 4,036 28% 21%
Total 9,748 16,478 21,560 26,629 29,929 26,589 29,981 37,617 45,106 49,688 54,933 75,774 16% 20%
Source: Ace Equity, Ambit Capital Research

Chemicals
Exhibit 108: Players have been investing aggressively to tap the opportunity: Annual run-rate of capex has become close
to 3x over FY15 to FY19
Rs mn FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Alkyl Amines Chemicals 178 229 108 189 147 240 263 410 353 660 1,356 695
Aarti Industries 566 711 629 691 1,331 2,348 2,909 3,031 4,665 5,302 6,148 7,936
Atul Ltd 622 675 189 506 1,306 4 1,153 1,848 3,720 2,167 1,430 2,084
BASF India 301 408 285 925 1,798 3,876 6,009 2,071 919 850 671 841
Camlin Fine Science 40 46 110 129 144 212 363 282 671 308 193 694
Dhnuka Agritech 42 169 54 52 298 308 256 316 199 65 61
DCM Shriram 3,796 4,008 952 928 669 775 951 1,044 3,506 4,451 3,797 8,509
Deepak Nitrite 52 236 137 228 1,397 1,862 969 1,061 867 2,962 6,223 2,555
Fine Organics 655 277 149 403 818
Meghmani Organics 698 3,214 1,418 1,034 1,088 1,086 927 600 946 710 2,456 3,780
Navin Fluorine 217 141 193 480 620 172 186 623 179 1,764 487 616
NOCIL 167 232 67 292 933 921 280 90 142 600 3,449 5,704
National Peroxide 60 44 46 210 342 42 564 360 13 68 110 781
Plastiblends India Ltd 146 98 55 33 72 78 41 198 810 264 186 93
Phillips Carbon Black Ltd 1,092 2,435 943 1,568 940 1,402 411 343 389 407 944 2,327
PI Industries 285 329 362 971 1,178 1,510 645 1,692 3,215 1,419 1,697 3,685
Rallis India 269 656 1,030 1,314 570 465 591 605 607 585 483 338
Sudarshan Chemicals 236 203 285 822 875 1,207 309 567 851 1,356 873 1,016
SRF Ltd 1,740 4,237 3,622 2,190 5,713 7,042 7,995 5,118 5,876 6,740 13,002 10,564
Ultramarine Pigment 43 130 24 139 103 36 52 28 169 101 197 189
Vinati Organics 171 397 347 357 609 1,558 294 568 766 1,141 766 2,061
Total 10,678 18,469 10,970 13,059 19,888 25,133 25,220 21,449 29,256 32,203 44,935 55,345
Source: Ace Equity, Ambit Capital Research

Chemicals
Institutional Ownership has been increasing

Exhibit 109: FII and DII shareholding in PI Industries has Exhibit 110: SRF’s FII shareholding has increased while
increased over the years DII has remained at similar levels
FII DII FII DII
25% 21.0%
19.0%
20% 17.0%
15% 15.0%
13.0%
10% 11.0%
9.0%
5%
7.0%
0% 5.0%
Aug-15
Jun-14
Nov-13
Oct-16
May-17
Mar-16
Sep-12
Feb-12
Sep-19
Feb-19
Apr-13
Dec-10
Jul-11
Dec-17
Jan-15
Jul-18
Aug-15
Jun-14
Nov-13
Oct-16
May-17
Mar-16
Sep-12
Feb-12
Sep-19
Feb-19
Apr-13
Dec-10
Jul-11
Dec-17
Jan-15
Jul-18
Source: Ace Equity, Ambit Capital Research Source: Ace Equity, Ambit Capital Research
Exhibit 111: FII and DII shareholding in Aarti Industries Exhibit 112: For Atul, FII and DII have increased their
has increased over the years holdings
FII DII FII DII

18.0% 25.0%
16.0%
14.0% 20.0%
12.0%
15.0%
10.0%
8.0% 10.0%
6.0%
4.0% 5.0%
2.0%
0.0% 0.0%
Aug-17
Aug-19
Aug-11
Aug-13
Aug-15
Apr-16
Apr-18
Apr-12
Apr-14
Dec-18
Dec-14
Dec-16
Dec-10
Dec-12
Aug-17
Aug-19
Aug-11
Aug-13
Aug-15
Apr-18
Apr-14
Apr-16
Apr-12
Dec-16
Dec-18
Dec-10
Dec-12
Dec-14
Source: Ace Equity, Ambit Capital Research Source: Ace Equity, Ambit Capital Research

Chemicals
Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building / Aviation (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 amandeep.grover@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 6623 3295 ashwin.mehta@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 basudeb.banerjee@ambit.co
Darshan Mehta E&C / Infrastructure / Aviation (022) 66233174 darshan.mehta@ambit.co
Deep Shah Media / Telecom / Oil & Gas (022) 66233064 deep.shah@ambit.co
Dhruv Jain Mid-Caps (022) 66233177 dhruv.jain@ambit.co
Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 karan.khanna@ambit.co
Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Kushagra Bhattar Healthcare (022) 66233062 kushagra.bhattar@ambit.co
Nikhil Mathur, CFA Healthcare (022) 66233220 nikhil.mathur@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Prasenjit Bhuiya Agri & Chemicals (022) 66233132 prasenjit.bhuiya@ambit.co
Prateek Maheshwari Cement (022) 66233234 prateek.maheshwari@ambit.co
Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 ritesh.gupta@ambit.co
Satyadeep Jain, CFA Metals & Mining (022) 66233246 satyadeep.jain@ambit.co
Shreya Khandelwal Banking / Financial Services (022) 6623 3292 shreya.khandelwal@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Udit Kariwala, CFA Banking / Financial Services (022) 66233197 udit.kariwala@ambit.co
Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 varun.ginodia@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Singapore
Srinivas Radhakrishnan Singapore +65 6536 0481 srinivas.radhakrishnan@ambit.co
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co
Babyson John Database (022) 66233209 babyson.john@ambit.co

Chemicals
PI Industries Ltd (PI IN, BUY) Navin Fluorine International Ltd (NFIL IN, BUY)
1,800 1,800
1,600 1,600
1,400
1,400 1,200
1,200 1,000
1,000 800
800 600
400
600 200
400 0
Jun-17
Jun-18
Jun-19
Mar-17
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Jun-17
Jun-18
Jun-19
Mar-17
Mar-18
Mar-19
Mar-20
Dec-17
Dec-18
Dec-19
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
PI Industries Ltd Navin Fluorine International Ltd
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
SRF Limited (SRF IN, BUY) Vinati Organics Ltd (VO IN, BUY)
4,500 1,400
4,000 1,200
3,500
3,000 1,000
2,500 800
2,000 600
1,500 400
1,000
500 200
0 0
Jun-17
Jun-18
Jun-19
Jun-17
Jun-18
Jun-19
Mar-17
Mar-18
Mar-19
Mar-20
Mar-17
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
Dec-17
Dec-18
Dec-19
SRF Ltd Vinati Organics Ltd
Aarti Industries Ltd (ARTO IN, BUY) Sudarshan Chemical Industries (SCHI IN, BUY)
1,200 700
1,000 600
500
800
400
600 300
400 200
100
200
0
Jun-17
Jun-18
Jun-19
Mar-17
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
0
Jun-17
Jun-18
Jun-19
Mar-17
Mar-18
Mar-19
Mar-20
Sep-17
Sep-18
Sep-19
Dec-17
Dec-18
Dec-19
Sudarshan Chemical Industries

Aarti Industries Ltd

Chemicals
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. AMBIT Capital Private Ltd. research is disseminated and available
primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager, Merchant Banker, Research Analyst and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.
2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital and its affiliates/ group entities may or may not subscribe to any and/ or all the
views expressed herein and the statements made herein by the research analyst may differ from or be contrary to views held by other parties within AMBIT group.
3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of
this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss
howsoever directly or indirectly, from any use of this Research Report.
4. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions
in place between AMBIT Capital/ such affiliate and the client.
5. This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report as such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
7. Ambit Capital Private Limited is registered (SEBI Reg. No.- INH000000313) as a Research Entity under the SEBI (Research Analysts) Regulations, 2014.
Conflict of Interests
8. In the normal course of AMBIT Capital’s or its affiliates’/group entities’ business, circumstances may arise that could result in the interests of AMBIT Capital or other entities in the AMBIT group
conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and
that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account
trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise and maintains an arms – length distance
from such areas, at all times. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT
Capital’s services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
10. The AMBIT group may, from time to time enter into transactions in the securities, or other derivatives based thereon, of companies mentioned herein, and may also take position(s) in accordance
with its own investment strategy and rationale, that may not always be in accordance with the recommendations made in this Research Report and may differ from or be contrary to the
recommendations made in this Research Report.
Ownership & Material Conflicts of Interest:

i. Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have or have had positions, may “beneficially own” as determined in accordance with Section 13(d) of the
Exchange Act, 1% or more of the equity securities or may conduct or may have conducted market-making activities or otherwise act or have acted as principal in transactions in any of these securities
or instruments referred to herein.
ii. Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have managed or co-managed a public offering of securities or received compensation for investment banking
services or expects to receive or intends to seek compensation for investment banking or consulting services or serve or have served as a director or a supervisory board member of a company
referred to in this research report.
iii. As of the date of this research report Ambit America Inc. does not make a market in the security reflected in this research report.
Additional Disclaimer for Canadian Persons

(i) About AMBIT Capital:
11. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.
12. AMBIT Capital's head office or principal place of business is located in India.
13. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
14. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
15. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
16. Name and address of AMBIT Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.
(ii) About AMBIT America Inc.:
17. Ambit America Inc. is not registered in Canada
18. Ambit America Inc. is resident and registered in the United States.
19. The name and address of the Agent For Service in Quebec is: Lavery, de Billy, L.L.P., Bureau 4000, One Place Ville Marie, Montreal, Quebec, Canada H3B 4M4.
20. The name and address of the Agent For Service in Toronto is: Sutton Boyce Gilkes Regulatory Consulting Group Inc., 120 Adelaide Street West, Suite 2500, Toronto, ON Canada M5H 1T1.
21. A client may have difficulty enforcing legal rights against Ambit America Inc. because it is resident outside of Canada and all substantially all of its assets may be situated outside of Canada.
Additional Disclaimer for Singapore Persons

22. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
23. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”).” Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.

Chemicals
Additional Disclaimer for UK Persons

24. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be
reproduced, redistributed or copied in whole or in part for any purpose.
25. This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit”). Ambit is regulated by the Securities and Exchange Board of India and is
registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. Ambit is an appointed representative of Aldgate Advisors Limited which is authorized and regulated by the
Financial Conduct Authority whose registered office is at 16 Charles II Street, London, SW1Y 4NW.
26. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(5) (persons who have professional experience in matters relating to investments) or Article
49(2)(a) to (d) (high net worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended).
27. Ambit is not a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity with SEC Rule
15a-6.
28. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes
should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any
such other jurisdictions.
29. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be
reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently
verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.
30. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’
individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment
decisions. Further information is available upon request. No member or employee of Ambit accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or
indirectly, from any use of this report or its contents.
31. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.
32. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add
to or dispose of any such securities (or investment). Ambit and its affiliates may from time to time render advisory and other services, solicit business to companies referred to in this Report and may
receive compensation for the same. Ambit has a restrictive policy relating to personal dealing. Ambit has controls in place to manage the risks related to such. An outline of the general approach
taken in relation to conflicts of interest is available upon request.
33. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or
in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment
banking or underwriting services for or relating to those companies.
34. Ambit may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this report you
agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the
interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected.
However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.
Additional Disclaimer for U.S. Persons

35. The Ambit Capital research report is solely a product of AMBIT Capital Pvt. Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a
broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts.
36. Ambit Capital is the employer of the research analyst(s) who has prepared the research report.
37. Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”).
38. Ambit America Inc. does not accept or receive any compensation of any kind directly from US Institutional Investors for the dissemination of the AMBIT Capital research reports. However, Ambit
Capital Pvt. Ltd. has entered into an agreement with Ambit America Inc. which includes payment for sourcing new MUSSI and service existing clients based out of USA.
39. Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to
Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst.
40. In the United States, this research report is available solely for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. This research
report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility
for this research report and its dissemination in the United States.
41. This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital
research report shall neither distribute the original nor a copy to any other person in the United States. In order to receive any additional information about or to effect a transaction in any security or
financial instrument mentioned herein, please contact a registered representative of Ambit America Inc., by phone at 646 793 6001 or by mail at 370, Lexington Avenue, Suite 803, New York,
10017. This material should not be construed as a solicitation or recommendation to use Ambit Capital to effect transactions in any security mentioned herein.
42. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information
contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or
responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of
this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and
market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this
document, you agree to be bound by all the foregoing provisions.
Disclosures
43. The analyst (s) has/have not served as an officer, director or employee of the subject company.
44. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
45. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
46. Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from Bayer Cropscience Ltd., and Vinati Organics Ltd. in the past 12 months.
Analyst Certification
The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers
and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
© Copyright 2020 AMBIT Capital Private Limited. All rights reserved.

Ambit-Chemicals POSITIVE A Never Before World-22-04-2020 08-29-53

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Ambit-Chemicals POSITIVE A Never Before World-22-04-2020 08-29-53

Загружено:

Авторское право:

Доступные форматы

Chemicals

A never before world Key Recommendations

SRF 19% 17.3 15%

sutharshan.k@kotak.com 2020-04-22 Wednesday 17:06:24

Global market: Changing Landscape

Emerging global trends

Globally, portfolio rejigs drive balance sheet pressure

April 22, 2020 Ambit Capital Pvt. Ltd. Page 2

Source: Company, Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 3

Shift in capacities from EU/Japan to India/China a secular trend

2008 2018 2008 2018

As the shift of manufacturing capacities takes place from Europe/China to other

April 22, 2020 Ambit Capital Pvt. Ltd. Page 4

FY18-23 expected CAGR of specialty chemicals

China North Western Japan India Global

De-risking the supply chain from China

April 22, 2020 Ambit Capital Pvt. Ltd. Page 5

Divested segments create opportunity for Indian

Sudarshan Chemicals Clariant India 24%

Source: BASF presentation, Ambit Capital

April 22, 2020 Ambit Capital Pvt. Ltd. Page 6

Agrochemical market presents an interesting case study

100% 100% 90%

Source: Primary Data Expert, Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 7

Source: Ambit Capital Research Source: Ambit Capital Research

Source: Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 8

China chemicals industry changing rapidly

The key regulatory changes in China were:

April 22, 2020 Ambit Capital Pvt. Ltd. Page 9

to implement the regulations, the Chinese government conducted nationwide rounds

Coal consum (LHS) Natural Gas consum (RHS) India China

 Preference of global players to de-risk from China: The sudden spike in

April 22, 2020 Ambit Capital Pvt. Ltd. Page 10

 Tightening of financial availability: China’s main bank supervisor decreed in

April 22, 2020 Ambit Capital Pvt. Ltd. Page 11

China is moving towards more innovation than volumes

Note: Link to the report, Source: Mckinsey, Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 12

But we refrain from painting a broad brush

April 22, 2020 Ambit Capital Pvt. Ltd. Page 13

Exhibit 24: Summary of opportunities for Indian chemical players

Import substitution (e.g: Deepak Rising Costs/Compliances in

Source: Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 14

Growth narrative for the sector is secular

250 24% 140 55%

Attractive growth and RoCE sustained even pre-China

April 22, 2020 Ambit Capital Pvt. Ltd. Page 15

We expect growth to remain robust going forward too

April 22, 2020 Ambit Capital Pvt. Ltd. Page 16

Capex (Rs bn, LHS) Capex to CFO (RHS)

April 22, 2020 Ambit Capital Pvt. Ltd. Page 17

Chemical Sales (Rs bn) EBIT (Rs bn)

Many Indian companies will foray into new areas to

Water Treatment &

Flavors & Fragrances

Source: Ambit Capital Research Source: Ambit Capital Research

April 22, 2020 Ambit Capital Pvt. Ltd. Page 18

PI/SRF are trying to transition from agrochemicals to pharma: Agrochemicals

April 22, 2020 Ambit Capital Pvt. Ltd. Page 19