31 May 2021
SECTOR UPDATE
INDIA SPECIALTY CHEMICALS
India Specialty Chemicals
SHAKING UP THE STATUS QUO
Structural growth for
Indian players on rising
'China plus one' strategy
India’s specialty chemicals
industry is a decadal growth
opportunity
Our top picks: CRAMS/CSM
players (Navin Fluorine and
PI Industries) & UPL
31 May 2021
SECTOR UPDATE
INDIA SPECIALITY CHEMICALS
TABLE OF CONTENTS
INDIA SPECIALITY CHEMICALS
03
Introduction
04
Key charts
Dayanand Mittal
Dayanand.Mittal@jmfl.com
Tel: (+91 96) 1938 8870
Krishan Parwani
Krishan.Parwani@jmfl.com
Tel: (+91 96) 6209 5500
MAIN THEMES
10
India’s Specialty Chemical Industry is a decadal growth opportunity
20
India’s Specialty Chemicals Industry to witness growth across segments
23
Agrochemicals – Immense growth potential
29
Fluorochemicals – Adoption on the rise
32
CRAMS/CSM business provides long term growth visibility
We acknowledge the support
of Prashanth Kamath in the
preparation of this report.
COMPANIES
34
UPL — Uniquely Placed (BUY, TP INR 1,000)
47
PI Industries — Ever Resilient ‘PI’e (BUY, TP INR 2,995)
58
SRF — Adaptive chemistry at work (BUY, TP INR 7,600)
73
Navin Fluorine — Fluor’intined the chemistry (BUY, TP INR 3,760)
85
Galaxy Surfactants — Specialty care opportunity fully priced in (HOLD, TP INR 3,360)
95
Fine Organics — Go – Green chemistry (HOLD, TP INR 3,160)
104
Anupam Rasayan — Right Place at the Right Time (HOLD, TP INR 780)
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Page 2
31 May 2021
SECTOR UPDATE
INDIA SPECIALITY CHEMICALS
Shaking up the Status Quo
We believe India’s specialty chemicals industry is a decadal growth story; hence, it is still not late to participate in the value-creation
process. India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness, driven by: a) the availability of lowcost labour (vs. China); b) lower regulatory costs (China’s tightening environmental norms have raised its regulatory costs); c) rising
availability of low-cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D expertise. India’s specialty
chemicals industry is expected to continue to clock a 12% CAGR until CY25 (as seen over CY14-19; this is higher than the 6.4% CAGR
expected for the global industry). This would be led by: a) robust domestic consumption growth (given India’s low per capita
consumption); b) rising import substitution (on account of the government’s favourable policy measures); and c) strong growth in
exports (due to rising adoption of the ‘China plus one’ strategy by global MNCs).
We prefer CRAMS (contract research and manufacturing services) / CSM (custom synthesis manufacturing) players as they provide longterm growth visibility. Hence, our top picks are: a) Navin Fluorine (NFIL) and PI Industries (PI) due to their strong presence in
CRAMS/CSM markets; and b) UPL due to its robust growth outlook, reducing debt concerns and attractive valuations. NFIL offers
complex fluorination expertise to pharma players as a part of its CRAMS business while PI could repeat its agrochem CSM success in
pharma/other specialty chemicals businesses. We also assume coverage with: a) BUY on SRF due to rising contribution from the
chemicals business; b) HOLD on Galaxy Surfactants (Galaxy) and Fine Organics (FOIL) on valuations; and c) we initiate on Anupam
Rasayan (ARIL) with HOLD on the recent sharp ~50% rally in share price.
We prefer CRAMS/CSM players as they provide long-term
growth visibility
Navin Fluorine and PI are our top picks due to their strong
presence in CRAMS/CSM market
UPL also our top pick due to robust growth outlook,
reducing debt concerns and attractive valuations
HOLD on Galaxy and FOIL on valuations; Initiate on ARIL
with HOLD given recent sharp rally
UPL is uniquely placed to register a healthy 13%/23%
EBITDA/PAT CAGR over FY21-23E on account of: a) revenue and
cost synergies arising from the Arysta acquisition; b) robust 9%
revenue CAGR over FY21-23E aided by an R&D-backed product
pipeline coupled with new product launches from recent
collaborations; and c) lower interest costs led by reduced debt.
Further, UPL is trading at attractive valuations of 7.8X FY23E
EV/EBITDA (vs. the pre-Arysta acquisition 5-year average multiple
of ~9.5X). We assume coverage with a BUY rating (TP of INR
1,000/share).
We assume coverage on SRF with a BUY (SoTP-based TP of INR
7,600, implying 27X FY23E EPS) due to its continuous
investments in the chemicals business and R&D, which has made
it one of the leading fluorine-based specialty chemicals players.
Increasing contribution from the chemicals business is likely to
improve overall earnings growth. Hence, we expect SRF to
demonstrate Revenue/EBITDA/PAT CAGR of 25%/19%/18%
over FY21-23E.
We assume coverage on Galaxy with a HOLD rating (TP INR
3,360, based on 30x FY23E EPS) as we believe current valuations
largely capture: a) the strong medium-term growth visibility in
the performance surfactants segment; b) tie-ups for additional
specialty care volumes with global MNCs and local majors; and
c) positive operating leverage arising from the ramp-up in
additional capacities.
Although we believe FOIL is the clear winner of the rising
adoption of green chemicals, current valuations leave limited
upside, in our view. Hence, we assume coverage on FOIL with a
HOLD (TP INR 3,160, based on 35x FY23E EPS).
ARIL is one of the country’s leading CSM players in speciality
chemicals and had long-term relationships with 15 MNCs at
end-Sep’20. Drawing comfort from its long-term contracts, we
forecast sales/EBITDA/EPS CAGR of 32%/41%/86% over FY2123E. Given the recent sharp rally in share price, we await a
better entry point and initiate with a HOLD (TP of INR 780 based
on 32x FY23E EPS).
India has been marking its presence in the global CRAMS market
where it commands ~6% market share (at USD 11.5bn in CY19,
of USD 200bn global market). India’s CRAMS market is likely to
post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global
market). India’s CRAMS market caters to: a) Pharmaceuticals
(45%); b) Agrochemicals (35%); and c) Personal care and other
industries (20%). CSM is a niche segment within the CRAMS
space and caters to patented products that require more R&D
efforts. We believe Indian CRAMS/CSM players are well set to
benefit as more innovators shift focus on core competencies and
outsource production via long-term contracts to low-cost
manufacturing destinations such as India. These long-term
contracts provide long-term revenue growth visibility compared
with other specialty players. Navin fluorine and PI Industries are
our top picks as both have a strong presence in the CRAMS
market.
JM Financial Institutional Securities Limited
NFIL’s timely diversification from the legacy refrigerant and
inorganic fluoride business has driven margin expansion and
overall growth. NFIL’s growth prospects seem even brighter with
higher contribution from specialty chemicals and CRAMS
segments on account of long-term contract and capacity
expansions. NFIL’s CRAMS business is 100% pharma-focused.
We value the company at INR 3,760 (based on 40x FY23E EPS)
and assume coverage with a BUY rating.
PI is currently India’s largest CSM player in the agrochemicals
space and its order book size has grown ~15x over the last 10
years. Moreover, its entry into performance, fine chemicals along
with pharma APIs/intermediates is likely to put it in the league of
global CSM players offering services across segments. We
estimate PI to demonstrate 25% earnings CAGR over FY21-23E.
We value the company at INR 2,995 (based on 40x FY23E EPS)
and assume coverage with a BUY.
Page 3
Specialty Chemicals
31 May 2021
Key charts
Exhibit 1. Global speciality chemicals industry size (USD bn): expected
to post a 6.4% CAGR over CY20-25
Exhibit 2. India’s speciality chemicals industry size (USD bn); it is
expected to post a ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14
CY19
CY25
Source: FICCI, JM Financial
Source: FICCI, JM Financial
Exhibit 3. Global CRAMS market likely to reach USD 322bn by CY24E
(USD bn)
Exhibit 4. Indian CRAMS market likely to reach USD 20.3bn by CY24E
(USD bn)
Source: ARIL DRHP
Source: ARIL DRHP
Exhibit 5. Competitive landscape of various sub-segments of the Indian specialty chemicals industry
Intermediate for APIs
Agrochemicals
Dyes and Pigments
Plastic additives
Electronic chemicals
Food/Feed additives
Neutraceuticals
Rubber Chemicals
Flavours and Fragrances
Global specialty chem
Global m arket China Exports as India Exports as
exports (USD bn, CY18) CAGR CY18-CY23
% of Global
% of Global
77
6-7%
11%
4%
72
2-3%
17%
6%
66
2-3%
12%
5%
15
3-4%
8%
1%
15
4-5%
22%
0%
12
2-3%
19%
2%
10
4-5%
46%
2%
5
2-3%
27%
2%
5
3-4%
46%
12%
China Exports
(USD bn, CY18)
8.5
12.2
7.9
1.2
3.3
2.3
4.6
1.4
2.3
India Exports
(USD bn, CY18)
3.1
4.3
3.3
0.2
0
0.2
0.2
0.1
0.6
India Exports as
% of China
36%
35%
42%
13%
0%
11%
4%
7%
26%
Source: IHS Chemicals, IHS Global Insights, UN Comtrade, JM Financial
JM Financial Institutional Securities Limited
Page 4
Specialty Chemicals
31 May 2021
Investment thesis
We believe India’s specialty chemicals industry is a decadal growth story; hence, it is still not
late to participate in the value-creation process. India is emerging as a fast-growing specialty
chemicals hub on a rise in its competitiveness, driven by: a) the availability of low-cost labour
(vs. China); b) lower regulatory costs (China’s tightening environmental norms have raised its
regulatory costs); c) rising availability of low-cost feedstock for Indian players; and d) India’s
strong IP protection and improving R&D expertise. India’s specialty chemicals industry is
expected to continue to clock a 12% CAGR until CY25 (as seen over CY14-19; this is higher
than the 6.4% CAGR expected for the global industry). This would be led by: a) robust
domestic consumption growth (given India’s low per capita consumption); b) rising import
substitution (on account of the government’s favourable policy measures); and c) strong
growth in exports (due to rising adoption of the ‘China plus one’ strategy by global MNCs).
We prefer CRAMS (contract research and manufacturing services) / CSM (custom synthesis
and manufacturing) players as they provide long-term growth visibility. Hence, our top picks
are: a) Navin Fluorine (NFIL) and PI Industries (PI) due to their strong presence in CRAMS/CSM
markets; and b) UPL due to its robust growth outlook, reducing debt concerns and attractive
valuations. NFIL offers complex fluorination expertise to pharma players as a part of its
CRAMS business while PI could repeat its agrochem CSM success in pharma/other specialty
chemicals businesses. We also assume coverage with: a) BUY on SRF due to rising
contribution from the chemicals business; b) HOLD on Galaxy Surfactants (Galaxy) and Fine
Organics (FOIL) on valuations; and c) we initiate on Anupam Rasayan (ARIL) with HOLD on
the recent sharp ~50% rally in share price.
India’s Specialty Chemical Industry is a decadal growth opportunity
China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry, which was
valued at ~USD 805bn in CY19. However, India has a limited ~4% share (or ~USD 32bn).
Further, around 25% of the total production of specialty chemicals is exported globally,
amounting to a total USD 200bn in CY19. China is the leading exporter of specialty
chemicals with exports of USD 35bn in CY19, representing ~18% of the overall exports of
specialty chemicals. India has done relatively well in exports of specialty chemicals, which
came in at USD 12bn-15bn in CY19, but still only constitutes 6-7% of total global exports of
specialty chemicals.
Exhibit 6. Global speciality chemicals industry size (USD bn): expected
to post a 6.4% CAGR over CY20-25
Exhibit 7. India’s speciality chemicals industry size (USD bn); it is
expected to post a ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14
CY19
Source: FICCI, JM Financial
CY25
Source: FICCI, JM Financial
India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness,
driven by: a) the availability of low-cost labour (vs. China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); c) rising availability of lowcost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise.
JM Financial Institutional Securities Limited
Page 5
Specialty Chemicals
31 May 2021
Indian specialty chemicals industry is expected to continue to post a 12% CAGR until CY25
(as seen during CY14-19 and higher than the 6.4% CAGR expected for the global industry)
due to: a) robust domestic consumption growth; b) rising import substitution; and c) strong
export growth. India’s per capita consumption of specialty chemicals is only USD 23/year (in
value terms) vs. the global average of USD 100/year, which should support domestic
consumption growth. The government’s favourable policy measures should support the
industry with rising import substitution. Further, a large growth opportunity has opened up
after Covid-19 disruptions due to rising adoption of the ‘China plus one’ strategy by several
global MNCs to realign their supply chains. This is likely to boost exports of specialty
chemicals.
India’s Specialty Chemicals Industry to witness growth across segments
Key sub-segment of India’s speciality chemicals industry are: a) Agrochemicals (constituting
29% of the industry); b) Dyes and pigments (22%); c) Surfactants (6%); and d) Food &
fragrance (7%) among others. Indian players have penetrated well in the exports space in API
intermediates, Agrochemicals, Dyes and Pigments and Flavour and Fragrance segments.
Further, the rising adoption of the ‘China plus one’ strategy by various global MNCs augurs
well for future growth opportunities in these segments where India could penetrate deeper
and catch up with China on a global level.
Exhibit 8. Competitive landscape of various sub-segments of the Indian specialty chemicals industry
Market size
(USD Bn)
CY14-19
CAGR
Agrochemicals
9.2
10.0%
12.0%
18.2
Agriculture sector
Dyes and Pigments
7.0
7.3%
10.0%
12.4
Textiles, leather, & paper
F&F and Nutra
Ingredients
2.4
16.1%
17.1%
6.2
Surfactants
2.0
6.4%
11.0%
3.7
1.8
10.4%
11.5%
3.5
Apparel, technical textiles
1.4
13.5%
15.0%
3.2
Infrastrucure, real estate
1.3
12.8%
10.0%
2.3
Pipes, White goods
automotive
1.0
15.5%
15.0%
2.3
FMCG
1.9
Industrial & municipal
w ater
Segm ent
Textile chemicals
Construction chemicals
Polymer additives
Personal care
chemicals
Water chemicals
: High
0.8
14.9%
CY19-25E
CY25E expected
CAGR
m arket size (USD Bn)
15.0%
Key end m arkets
Entry
barriers
Product
specialisation
Presence of End m arket
Overall
scaled up
grow th
attractiveness
Indian players potential
Food processing,
personal care
Laundry care,
dishw ashing
: Medium
Source: FICCI, JM Financial
Agrochemicals – Immense growth potential
The Indian agrochemicals market (at USD 9.2bn or ~15% share of the global agrochemicals
market worth USD 62.5bn) is the largest sub-segment of the specialty chemicals industry and
posted a 10% CAGR over CY14-19, driven by robust domestic demand and rising exports.
With ~50% of production being exported, India is one of the largest agrochemical exporters
globally. India’s agrochemicals industry has immense growth potential and is expected to
clock a 12% CAGR to reach USD 18.1bn by CY25 (vs. a 6.6% CAGR expected for the global
market) led by: a) a robust growth outlook for domestic agrochemical demand due to rising
demand for food security and to minimise the current 15-20% crop losses; b) tapping of a
large export opportunity driven by its rising cost competitiveness and improving R&D
expertise; c) favourable government policies to double famer incomes; and d) significant
potential to rise up the value chain.
Fluorochemicals – Adoption on the rise
India’s Fluorochemicals (fluorine-based chemicals) market has been supported by the growth
witnessed in Fluorocarbons due to the rising need for refrigeration systems in residential,
industrial and commercial segments. Further, the next leg of growth is being driven by rising
use of fluorine-based chemicals in pharma and agrochemical intermediates, with 30-40% of
new molecules added every year being fluorine based. This is on account of the higher
stability and efficacy that fluorine-based molecules provide.
JM Financial Institutional Securities Limited
Page 6
Specialty Chemicals
31 May 2021
India’s fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching ~USD
450mn in CY20. Further, rising use of fluorochemicals in pharma and agrochemicals
segments is likely to help the segment clock a 14% CAGR to reach USD 880mn by FY25.
Further, the Indian Hydrogen fluoride market, which is the principal industrial source of
fluorine, is largely consolidated, with SRF being the largest producer (40% of the market)
followed by Navin Fluorine (26%). Hence, although the adoption of Fluorochemicals is on the
rise, there are only a handful of players in India which can take advantage of this change
given the industry has strong entry barriers.
We prefer CRAMS/CSM players (Navin Fluorine and PI Industries) and UPL
India has been marking its presence in the global CRAMS market where it commands ~6%
market share (at USD 11.5bn in CY19, of USD 200bn global market). India’s CRAMS market
is likely to post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global market). India’s
CRAMS market caters to: a) Pharmaceuticals (45%); b) Agrochemicals (35%); and c) Personal
care and others industries (20%). CSM is a niche segment within the contract manufacturing
space and caters to patented products that normally require more R&D efforts.
Exhibit 9. Global CRAMS market likely to reach USD 322bn by CY24E
(USD bn)
Exhibit 10. Indian CRAMS market likely to reach USD 20.3bn by
CY24E (USD bn)
Source: ARIL DRHP
Source: ARIL DRHP
We believe that Indian CRAMS/CSM players are well set to benefit as more and more
innovators shift focus on core competencies and outsource production via long-term
contracts to low-manufacturing cost destinations such as India. These long-term contracts
also provide long-term revenue growth visibility compared with other specialty players.
Hence, NFIL and PI are our top picks due to their strong presence in CRAMS/CSM markets.
NFIL offers complex fluorination expertise to pharma players as a part of its CRAMS business
while PI could repeat its agrochem CSM success in pharma/other specialty chemicals
businesses. Further, UPL is also our top pick due to its robust growth outlook, reducing debt
concerns and attractive valuations.
Exhibit 11. Valuation summary
M.Cap
Rating TP (INR)
(INR bn)
UPL
620
BUY
1,000
PI
389
BUY
2,995
SRF
384
BUY
7,600
Navin Fluorine
162
BUY
3,760
Galaxy Surfactants
108
HOLD
3,360
Fine Organics
103
HOLD
3,160
Anupam Rasayan
76
HOLD
780
Com pany
FY21
20.2
53.7
31.7
64.4
35.3
80.1
93.0
P/E (x)
FY22E FY23E
16.2
13.4
41.9
35.2
29.1
22.8
55.3
34.6
31.2
26.5
41.1
33.7
45.3
31.2
FY21
3.0
7.3
5.5
9.7
8.2
12.5
7.4
P/B (x)
FY22E FY23E
2.5
2.2
6.4
5.5
4.7
4.0
8.5
7.0
6.8
5.6
10.0
8.0
4.7
4.2
EV/EBITDA (x)
FY21 FY22E FY23E
9.8
8.4
7.2
37.9
27.9
22.5
18.5
16.4
13.2
50.6
40.9
26.1
23.1
20.2
17.7
46.9
27.9
22.2
43.8
27.2
20.7
FY21
15.3
18.1
20.3
16.2
25.3
16.8
9.5
ROE (%)
FY22E FY23E
16.9
17.6
16.5
16.9
17.6
19.1
16.4
22.2
23.7
23.2
26.9
26.4
13.5
14.1
Source: Bloomberg, JM Financial
JM Financial Institutional Securities Limited
Page 7
Specialty Chemicals
31 May 2021
Navin Fluorine (NFIL): Fluor’intined the chemistry (BUY, TP INR 3,760): Over the years, NFIL
has emerged as a preferred partner when it comes to fluorination chemistry in both
agrochemicals and pharma spaces. Its timely diversification from the legacy refrigerant and
inorganic fluoride business has driven margin expansion and overall growth. In our view,
NFIL’s growth prospects seem even brighter with higher contribution from specialty chemicals
and CRAMS segments on account of long term contract and capacity expansions. We assume
coverage with a BUY rating (TP of INR 3,760 based on 40x FY23E EPS).
PI Industries: Ever Resilient ‘PI’e (BUY, TP INR 2,995): PI currently is India’s largest CSM player
in the agrochemicals space. Its order book size has grown ~15X over the last 10 years. Due to
its impeccable execution capabilities in this space, it has become a preferred CSM partner for
global agrochemicals innovators. Moreover, its entry into performance, fine chemicals along
with pharma APIs/intermediates would likely put it in the league of global CSM players
offering services across segments. We estimate PI to demonstrate 25% earnings CAGR over
FY21-23E. We value the company at 40X FY23E EPS (at a ~25% premium to its 3-year
average) to arrive at a TP of INR 2,995 and assume coverage with BUY.
UPL: Uniquely PLaced (BUY, TP INR 1,000): UPL became the fifth largest global agrochemical
company post Arysta acquisition. It has presence in over 138 countries with strong domain
expertise in: a) complex synthesis and sourcing of Active Ingredients; b) burgeoning presence
in branded generics; and c) farmer logistics and distribution services. We believe UPL is
uniquely placed to register a healthy 13%/23% EBITDA/PAT CAGR over FY21-23E on
account of a) revenue and cost synergies arising out of the Arysta acquisition; b) robust 9%
revenue CAGR over FY21-23E aided by R&D backed product pipeline coupled with new
product launches from recent collaborations; and c) lower interest cost led by reduced debt.
In our view, UPL is trading at attractive valuations of 7.8X FY23E EV/EBITDA (significantly
lower compared to pre-Arysta acquisition 5-year average multiple of ~9.5X 1-year forward
EV/EBITDA). We assume coverage with BUY rating with TP of INR 1,000/share.
SRF: Adaptive chemistry at work (BUY, TP INR 7,600): SRF has over the years adapted well
from being a tyre cord fabrics manufacturer to become one of the leading fluorine based
specialty chemicals player. Its continuous investments in chemicals business and R&D have
laid a good platform for the future growth. Increasing contribution from chemicals business is
likely to improve overall earnings growth. Hence, we expect SRF to demonstrate
Revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY21-23E. We value SRF on SoTP basis
and arrive at a TP of INR 7,600 (implying 27X FY23E EPS). We assume coverage with a BUY.
Galaxy Surfactants: Specialty care opportunity fully priced in (HOLD, TP INR 3,360): Galaxy
Surfactants (Galaxy) has gradually diversified from being a pure high-volume low-margin
performance surfactants player to a low-volume high-margin specialty care ingredients
manufacturer. We expect the company to clock an EPS CAGR of ~20% over FY20-23E, on
the back of a ramp-up of additional capacities and margin expansion arising from an
improved product mix and positive operating leverage. We assume coverage on Galaxy with
a HOLD rating and a TP of INR 3,360/share, based on 30x FY23E EPS.
Fine Organics: Go – Green chemistry (HOLD, TP INR 3,160): Fine organics (FOIL), over the
years, with its strong focus on R&D has become one of the leading players of vegetable oilbased additives for plastic, food, and cosmetics. With rising demand for environment-friendly
products by customers, oleochemical products are being readily accepted in the market.
Although we believe FOIL is the clear winner of the rising adoption of green (low toxic)
chemicals (which would aid in off-take of incremental capacity and provides long term
growth visibility), current valuations leave limited upside, in our view. Hence, we assume
coverage with a HOLD rating and value the company at 35x FY23E EPS (in-line with 3-year
average multiple) arrive at a TP of INR 3,160.
Anupam Rasayan: Right Place at the Right Time (HOLD, TP INR 780): Anupam Rasayan (ARIL)
is one of the country’s leading CSM player in life science related speciality chemicals. ARIL’s
focus on upgrading processes has allowed it to manufacture products in an energy and costefficient manner by utilising continuous processes for which the company has developed
innovative methods in-house. Drawing comfort from its long-term contracts, we forecast
sales, EBITDA and EPS to post 32%, 41%, and 86% CAGR, respectively, over FY21-23E.
Although we like the structural growth story of CSM business, sharp ~50% rally in share
price in last one month leaves limited upside in near term. Hence, we wait for a better entry
point and initiate on ARIL with a HOLD rating (TP of INR 780 based on 32x FY23E EPS).
JM Financial Institutional Securities Limited
Page 8
Specialty Chemicals
31 May 2021
Structural earnings growth potential drives our constructive view (despite rich
valuations)
Many Indian speciality chemical companies are trading at rich valuations due to the strong
rally in share prices in last 1-2 years, which may limit near-term upside. However, we maintain
constructive view on the sector from a medium to long-term perspective due to expectation
of 12-13% CAGR in the industry over the next 5-7 years (given strong industry tailwind as
discussed above). Hence, we believe that Indian specialty chemical companies are likely to
maintain their strong >15% revenue and earnings growth, as witnessed in the last 3-5 years,
given their strengthening competitive positioning and increased R&D focus.
Exhibit 12. Speciality chemicals companies peers valuation comparison
Company
M.Cap
(USD Bn)
1.1
2.2
1.5
5.3
4.0
3.5
1.3
2.5
1.3
2.7
0.3
Anupam Rasayan
Navin Fluorine
Galaxy Surfactants
SRF Ltd
Aarti Industries
Atul Ltd
Fine Organic
Vinati Organics
Balaji Amines
Alkyl Amines
Neogen Chemicals
EV/EBITDA
FY22E
33.9
40.2
22.0
16.9
19.2
19.3
25.2
29.7
18.9
47.9
27.0
FY21
44.4
49.4
24.9
20.2
24.0
22.2
30.6
36.2
21.9
51.1
37.0
FY23E
27.2
26.6
19.5
14.1
19.2
19.3
25.2
29.7
18.9
41.1
21.0
FY21
88.5
56.7
38.2
27.8
42.4
33.4
41.8
54.9
33.4
74.8
73.2
P/E (x)
FY22E
44.9
56.7
33.3
27.8
42.4
28.9
35.7
40.6
28.5
68.9
45.5
FY23E
34.9
37.9
29.1
23.1
32.3
28.9
35.7
40.6
28.5
59.5
34.6
FY21
5.1
10.0
8.2
5.8
8.5
6.8
12.6
12.4
11.1
24.6
NM
P/B (x)
FY22E
4.7
8.7
6.9
4.9
6.6
5.7
10.3
10.0
8.8
19.5
NM
FY23E
4.2
7.4
5.8
4.1
5.6
4.9
8.3
8.3
7.1
NM
NM
FY21
7.8
15.0
23.2
19.4
16.7
18.4
19.6
19.8
27.9
39.7
18.4
ROE (%)
FY22E
11.0
16.2
22.3
18.5
19.2
18.1
25.3
23.6
25.6
31.8
25.9
FY23E
12.8
20.8
21.6
18.9
19.6
17.9
25.8
24.0
23.6
29.7
26.4
Source: Bloomberg, JM Financial
Exhibit 13. Agrochemical companies peers valuation comparison
Company
UPL
Rallis India
PI Industries
Dhanuka Agritech
Insecticides India
Bayer Crop Science India
Godrej Agrovet
Sharda Chemicals
Astec Lifesciences
Bayer AG
FMC
Nufarm
M.Cap
(USD Bn)
8.6
0.8
5.5
0.6
0.1
3.3
1.5
0.4
0.4
62.7
FY21
10.2
17.5
35.4
15.8
7.5
29.1
21.3
6.8
21.3
7.7
EV/EBITDA
FY22E
8.9
14.6
30.1
13.8
6.3
24.6
16.7
6.1
16.8
7.2
FY23E
8.0
12.5
24.9
12.4
5.4
21.8
14.8
5.4
16.8
7.2
FY21
15.5
22.5
43.7
NM
13.5
34.1
25.7
13.4
33.9
9.0
P/E (x)
FY22E
15.5
22.5
43.7
18.5
11.0
33.0
25.7
13.4
33.9
8.1
FY23E
13.2
19.4
36.0
16.8
9.5
28.8
22.6
12.1
28.1
8.1
FY21
3.0
3.8
7.4
5.3
1.4
8.4
5.3
2.0
8.6
1.4
P/B (x)
FY22E
2.6
3.4
6.4
4.4
1.2
7.0
4.5
1.7
6.9
1.6
FY23E
2.3
3.0
5.5
3.6
1.1
6.0
4.0
1.5
5.5
1.4
FY21
15.9
15.0
18.0
26.7
10.5
21.3
16.0
14.3
22.9
17.2
ROE (%)
FY22E
18.6
15.7
15.5
25.1
11.9
23.1
18.4
13.7
21.5
19.4
FY23E
18.8
16.3
16.3
23.1
12.3
22.5
19.2
13.9
21.4
23.4
15.0
13.4
12.3
11.4
16.3
14.4
13.0
4.6
4.3
3.8
28.8
28.7
30.6
1.4
7.1
6.4
6.3
34.2
19.9
18.2
0.9
0.9
0.9
3.0
4.9
5.0
FY21
0.8
2.3
2.8
11.2
5.3
6.4
1.3
2.7
2.2
2.6
0.3
PAT (INR bn)
FY22E
FY23E
1.7
2.2
2.8
4.2
3.2
3.6
13.8
16.8
7.0
9.2
7.6
8.7
2.1
2.6
3.9
4.8
2.8
3.2
2.8
3.3
0.5
0.6
Source: Bloomberg, JM Financial
Exhibit 14. Speciality chemicals companies financials comparison
Company
Anupam Rasayan
Navin Fluorine
Galaxy Surfactants
SRF Ltd
Aarti Industries
Atul Ltd
Fine Organic
Vinati Organics
Balaji Amines
Alkyl Amines
Neogen Chemicals
FY21
8
12
27
80
46
37
11
9
13
12
3
Sales (INR bn)
FY22E
FY23E
10
12
14
20
31
35
100
118
57
69
46
52
14
16
13
17
17
20
14
17
5
6
Sales CAGR (%)
FY21 - FY23E
24.6
31.8
13.2
21.2
23.0
18.8
18.9
34.8
23.6
19.6
29.7
FY21
1.9
3.1
4.3
20.2
10.1
9.1
2.1
3.4
3.5
3.8
0.6
EBITDA (INR bn)
FY22E
FY23E
2.5
3.1
3.8
5.7
4.9
5.5
24.3
29.1
13.0
16.2
10.9
12.5
2.9
3.6
5.0
6.1
4.2
4.9
4.1
4.7
0.9
1.1
EBITDA Margins (%)
FY21
FY22E
FY23E
25
25
26
26
27
28
16
16
16
25
24
25
22
23
23
25
24
24
18
21
22
38
38
37
27
25
25
33
29
28
19
19
20
EBITDA CAGR (%)
FY21 - FY23E
27.7
36.3
13.0
19.9
26.5
17.2
31.2
33.4
18.4
11.5
32.9
PAT CAGR (%)
FY21 - FY23E
65.2
35.0
14.8
22.6
31.2
16.7
39.1
32.9
21.7
12.1
45.4
Source: Bloomberg, JM Financial
Exhibit 15. Agrochemical companies financials comparison
Sales (INR bn)
Company
UPL
Rallis India
PI Industries
Dhanuka Agritech
Insecticides India
Bayer Crop Science India
Godrej Agrovet
Sharda Chemicals
Astec Lifesciences
FY21
383
24
45
14
14
41
62
23
6
FY22E
422
27
55
16
15
45
73
25
7
Sales CAGR (%)
FY23E
458
31
65
17
17
49
82
28
8
FY21 - FY23E
9.3
13.7
20.1
12.1
9.3
9.7
14.4
11.5
19.3
EBITDA (INR bn)
FY21
83.2
3.3
10.6
2.6
1.4
7.8
5.6
4.1
1.1
FY22E
95.9
4.0
12.4
2.9
1.7
9.2
7.2
4.6
1.4
FY23E
106.9
4.6
15.0
3.3
1.9
10.4
8.1
5.2
1.7
FY21
22
14
23
19
10
19
9
18
20
EBITDA Margins (%)
FY22E
FY23E
23
23
14
15
23
23
19
19
11
11
21
21
10
10
18
19
20
21
EBITDA CAGR (%)
FY21 - FY23E
3.7
3.9
-0.7
0.5
7.6
5.3
5.0
1.0
4.0
PAT (INR bn)
FY21
31.0
2.3
7.4
2.0
0.8
5.8
3.0
2.1
0.7
FY22E
40.4
2.7
9.0
2.3
1.0
7.2
4.1
2.3
0.8
PAT CAGR (%)
FY23E
47.7
3.1
11.0
2.5
1.2
8.2
4.7
2.6
1.0
FY21 - FY23E
24.2
17.2
21.8
11.2
19.6
18.8
24.4
10.2
21.4
Source: Bloomberg, JM Financial
JM Financial Institutional Securities Limited
Page 9
Specialty Chemicals
31 May 2021
India’s Specialty Chemical Industry is a decadal growth
opportunity
China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry, which was
valued at ~USD 805bn in CY19. However, India has a limited ~4% share (or ~USD 32bn).
Further, around 25% of the total production of specialty chemicals is exported globally,
amounting to a total USD 200bn in CY19. China is the leading exporter of specialty
chemicals with exports of USD 35bn in CY19, representing ~18% of the overall exports of
specialty chemicals. India has done relatively well in exports of specialty chemicals, which
came in at USD 12bn-15bn in CY19, but still only constitutes 6-7% of total global exports of
specialty chemicals.
India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness,
driven by: a) the availability of low-cost labour (vs. China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); c) rising availability of lowcost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise. India’s specialty chemicals industry is expected to continue to clock a 12% CAGR
until CY25 (as seen over CY14-19; this is higher than the 6.4% CAGR expected for the
global industry). This would be led by: a) robust domestic consumption growth (given India’s
low per capita consumption); b) rising import substitution (on account of the government’s
favourable policy measures); and c) strong growth in exports (due to rising adoption of the
‘China plus one’ strategy by global MNCs).
Overview of the Global and Indian speciality chemicals industry
The chemicals industry can be classified into two categories based on value addition: a)
basic/bulk chemicals (inorganic, organic and petrochemicals) and b) specialty chemicals
(including agrochemicals and fertilisers). Basic chemicals use natural gas, naphtha, salt,
carbonates and several ores as their feedstock whereas specialty chemicals primarily use basic
chemicals as their feedstock. Basic chemicals (or commodity chemicals) are produced and
used in bulk quantities with no major product differentiation among several manufacturers
and sales are primarily driven by price. However, specialty chemicals are usually produced in
batches, produced/used in small quantities and sales are driven by performance. Hence, basic
chemicals focus on cost competitiveness and scale while specialty chemicals focus on R&D
and new product launches; this results in superior margins and is less capex intensive.
Exhibit 16. Typical end-to-end process flow chart of basic and specialty chemicals
Source: EY, JM Financial
JM Financial Institutional Securities Limited
Page 10
Specialty Chemicals
31 May 2021
The global chemicals industry is large, with sales of around USD 4.0tn in CY19. It is estimated
to post a 6.2% CAGR and reach USD 5.7tn by CY25. Currently, China dominates the global
chemicals industry with ~37% market share whereas India’s share stands at a mere ~4%.
This is evident from India’s per capita chemical consumption, which remains significantly
lower at USD 103/year vs. USD 1,066/year in China and USD 2,265/year in Germany. The
anticipated growth in the global chemicals market is likely to come primarily from the APAC
region, which is estimated to grow at ~7-8% a year, faster than the mature markets.
Exhibit 17. China dominates the global chemicals market (valued at ~
USD 4tn in CY19) with ~37% share
Others, 23%
China, 37%
Exhibit 18. Base chemicals constituted ~80% of global chemicals
market at USD 3.2tn in CY19; speciality chemicals’ share is 20%
Specialty
chemicals,
USD
800bn,
20%
India, 4%
South
Korea, 5%
Base
chemicals ,
USD
3,200bn,
80%
Japan, 5%
US, 13%
EU, 16%
Source: Industry, JM Financial
Source: Industry, JM Financial
In CY19, sales of basic chemicals came in around USD 3.2tn (or ~80% of the overall
chemicals industry) while sales of specialty chemicals constituted the remaining ~USD 800bn
(or ~20% of the overall chemicals industry). The global speciality chemicals industry posted a
5.7% CAGR over CY14-19 and it is estimated to post a 6.4% CAGR to reach ~USD 1.2tn by
CY25, led by growth in the APAC region.
Exhibit 19. Global speciality chemicals industry size (USD bn):
expected to post a 6.4% CAGR over CY20-25
Exhibit 20. Global specialty chemicals industry break-up by end use
for CY19 (USD 800bn)
1,171
1,200
Agrochemicals,12%
Others, 31%
900
Food
additives,
9%
805
Construction
, 9%
610
600
F&F
Ingredients,
4%
Electronic,
8%
300
Nutra
Ingredients,
5% Surfactants,
5%
0
CY14
CY19
Source: FICCI, JM Financial
JM Financial Institutional Securities Limited
CY25
Water, 6%
Dyes and
pigments,
5%
Polymer
additives,
6%
Source: FICCI, JM Financial
Page 11
Specialty Chemicals
31 May 2021
India's chemicals industry stood at ~USD 180bn in CY19 with the specialty chemicals industry
contributing ~USD 32bn or ~18% of the total chemicals industry. India’s per capita
consumption of specialty chemicals is only USD 23/year (in value terms) vs. the global average
of USD 100/year. The Indian specialty chemicals industry posted a CAGR of ~12% over
CY14-19 driven by a rise in domestic demand from end-user segments and robust export
growth. It is expected to continue to grow, posting a CAGR of +12% until CY25. Key subsegments of India’s speciality chemical industry are: a) Agrochemicals (constituting 29% of
the industry); b) Dyes and pigments (22%); c) Surfactants (6%) and d) Food & fragrance
(7%), among others.
Exhibit 21. Indian speciality chemicals industry size (USD bn): expected to continue to post
~12% CAGR over CY20-25
80
64
60
40
32
18
20
0
CY14
CY19
CY25
Source: FICCI, JM Financial
Exhibit 22. India’s specialty chemicals industry break-up by end use for CY19 (USD 32bn, 4%
of global)
Water, 3%
Nutra - functional
Ingredients, 3%
Others, 9%
Agrochemicals,
29%
Personal care, 3%
Construction, 4%
Polymer, 4%
Textiles, 6%
Dyes and
Pigments, 22%
F & F - base
ingredients, 7%
Surfactants, 6%
F&F - functional
ingredients, 4%
Source: FICCI, JM Financial
JM Financial Institutional Securities Limited
Page 12
Specialty Chemicals
31 May 2021
Rise in China’s dominance of the global chemicals industry over the past two
decades
Over the past 4-5 decades, various countries have led the global chemicals (and speciality
chemicals) industry driven by: a) availability of low-cost feedstock; b) labour and other cost
competiveness; c) relatively low environmental compliance costs; d) focus on R&D and
innovation; and e) domestic demand potential. The US led the industry until the late 1980s,
manufacturing chemicals for domestic use in the oil & gas industry as well as other sectors.
Gradually, Europe took over and dominated the business mainly through exports, while the
US and Japan remained key producers. However, the chemicals industry expanded rapidly in
China, especially after it joined the WTO in Dec’01, due to trade liberalisation, technology
transfer, eased economic barriers, rising cost competitiveness and rapid growth in developing
countries.
Over the past two decades, China and other Asian countries captured market share in the
chemicals industry from developed countries. EU’s total chemicals sales came in at EUR
529bn in CY08 (26.5% market share) and demonstrated only modest a 0.7% CAGR over
CY08-18 to EUR 566bn in CY18 (16.9%). Similarly, North America and Japan lost market
share by 6.0% and 1.6%, respectively, primarily to China, whose market share rose by a
massive 17.6%. China became a leader with ~36% market share, with sales coming in at
EUR 1.2tn in CY18 (12.7% CAGR over CY08-18).
Exhibit 23. Sharp rise in China’s market share over the past two decades to ~36% in CY18
Source: CEFIC, JM Financial
CY08
CY08
JM Financial Institutional Securities Limited
Rest of world
China
Rest of Asia*
India
CY18
Source: CEFIC, JM Financial
India
0%
South Korea
0
EU
13%
Rest of world
350
China
25%
Rest of Asia*
700
South Korea
38%
Japan
1,050
NAFTA
50%
EU
1,400
Japan
Exhibit 25. It became the market leader with ~36% share
NAFTA
Exhibit 24. China’s chemicals sales (EUR bn) rose ~3x over CY08-18
CY18
Source: CEFIC, JM Financial
Page 13
Specialty Chemicals
31 May 2021
China was able to gain market share from EU, North America and Japan due to its: a) high
capex for adding feedstock capacities; b) increased R&D spends; and c) rise in exports.
a) China has incurred high capex for adding feedstock capacities: During CY08-18, China
focused primarily on capacity expansions of basic chemicals (ethylene, propylene, butadiene,
benzene, toluene, PX and menthol) as it added ~45% of incremental global capacity. As per
Sinopec, China’s capacity expansions are likely to ramp up further over CY21-25E and would
account for 69% of global capacity addition of petrochemicals at 25mmt. This is evident
from China’s capital spending in the chemicals industry, which jumped sharply from EUR
31bn in CY08 (29.3% of global) to EUR 87bn in CY18 (45.1% of global).
Exhibit 26. Boom in Chinese petchem capacity additions in the past 15-20 years
32
80%
69%
55%
24
60%
44%
45%
16
40%
8
20%
11%
0
0%
CY96-00
CY07-09
World (mmtpa)
CY12-13
CY18-19
China (mmtpa)
CY21-25E
China as % of global (RHS)
Source: Sinopec, JM Financial, Note: basic chemicals including ethylene, propylene, butadiene, benzene, toluene, PX and
menthol
Exhibit 28. China accounted for 45% of global capital spending
100
50%
75
38%
50
25%
25
13%
CY18
CY08
Source: CEFIC, JM Financial
ROW
India
Latin America
Japan
South Korea
Rest of Asia
EU
China
RoW
India
Latin America
Japan
Rest of Europe
0%
Rest of Europe
CY08
South Korea
Rest of Asia
EU
NAFTA
China
0
NAFTA
Exhibit 27. China’s capital spending jumped to ~EUR 87bn in CY18
CY18
Source: CEFIC, JM Financial
b) China’s robust growth in R&D spends helped capture market share: As highlighted earlier,
specialty chemicals are performance driven and require advanced research and innovation
due to their very nature. China has already captured a ~37% market share in global sales of
basic chemicals. To increase its market share in specialty chemicals, China’s R&D spending
rose almost 4x from EUR 2.5bn in CY08 to EUR 11.8bn in CY18, making it the largest
spender for innovation with 27.4% of global spends. China’s R&D expenses as a % of sales
increased from 0.7% in CY08 to 1.0% in CY18 whereas India’s R&D spends remained
stagnated at 1.6% of sales during the same time.
JM Financial Institutional Securities Limited
Page 14
Specialty Chemicals
31 May 2021
CY08
CY18
RoW
RoW
India
South Korea
Japan
EU
CY08
Brazil
0%
Switzerland
0
India
13%
South Korea
3
Japan
25%
China
6
Brazil
38%
Switzerland
9
USA
50%
China
12
USA
Exhibit 30. China became the largest spender for innovation,
accounting for 27.4% of global R&D spends
EU
Exhibit 29. China’s R&D spending (EUR bn) rose almost 4x from EUR
2.5bn in CY08 to EUR 11.8bn in CY18
CY18
Source: CEFIC, JM Financial
Source: CEFIC, JM Financial
Exhibit 31. China’s R&D expenses as a % sales rose in line with the EU and South Korea’s
numbers
3.9% 3.9%
4%
3%
1.8%
1.5%
2%
1.6%1.6%
1.6%
1.3%
1.0%
0.7%
1%
South Korea
CY08
India
Japan
EU
China
0%
CY18
Source: CEFIC, JM Financial
c) China boosted its exports to increase market share: China’s exports grew substantially
during CY07-17 (11.8% CAGR) and it accounted for 15% of global exports of chemicals in
CY17 (at EUR 103bn). China’s major export destinations are the EU (13.2% of total exports),
US (10.5%), Japan (6.7%) and the rest of Asia (46.4%).
CY07
JM Financial Institutional Securities Limited
CY07
Rest of world*
Brazil
India
Saudi Arabia
CY17
Source: CEFIC, JM Financial
Saudi Arabia
0%
Japan
0
EU
13%
Rest of world
75
Brazil
25%
India
150
Japan
38%
China
225
USA
50%
EU
300
China
Exhibit 33. It gained a 5.4% market share from the EU and USA
USA
Exhibit 32. China’s CY07-17 exports (EUR bn) saw an 11.8% CAGR
CY17
Source: CEFIC, JM Financial
Page 15
Specialty Chemicals
31 May 2021
Strengthening competitiveness of India’s specialty chemicals industry
China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry (valued at
~USD 805bn in CY19), while India has a limited ~4% share (or ~USD 32bn). Further, of USD
200bn of global specialty chemicals exports in CY19, China was the leader with exports of
USD 35bn in CY19 (or ~18% of global exports). India has done relatively well in exports of
specialty chemicals, which came in at USD 12bn-15bn in CY19, but still only constitutes 67% of the total global exports of specialty chemicals.
India is emerging as a fast-growing specialty chemicals hub due to rise in its competitiveness
driven by: a) availability of low cost labour (vis-à-vis China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); and c) rising availability of
low cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise. Indian specialty chemicals industry is expected to continue to grow at a 12%
CAGR until CY25 (like witnessed during CY14-19 and higher than 6.4% CAGR expected for
the global industry) due to its: a) robust domestic consumption growth; b) rising import
substitution; and c) strong exports growth. India’s per capita consumption of specialty
chemicals is only USD 23/year (in value terms) vs. the global average of USD 100/year, which
should support the domestic consumption growth. While government’s favourable policy
measures should support the industry by rising import substitution. Further, huge growth
opportunity has opened up post Covid-19 disruption due to rising adoption of China plus
one strategy by many global MNCs for realignment of their supply chain. This is likely to
boost exports of specialty chemicals.
Exhibit 34. Global speciality chemicals industry size (USD bn):
expected to post a 6.4% CAGR over CY20-25
Exhibit 35. Indian speciality chemicals industry size (USD bn): expected
to continue to post ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14
CY19
CY25
Source: FICCI, JM Financial
Source: FICCI, JM Financial
Exhibit 36. India’s chemical output stood at USD125bn in CY18
Exhibit 37. It could reach USD 240bn at 9.8% CY18-25E
USD bn
320
USD bn
200
65
56
240
240
147
150
240
125
~38% of
consumption
100
assumed to
reduce to
~26% of
consumption
-34
~27% of
production
160
-65
assumed at a
similar level of
~27% of
prodcution
80
50
0
0
CY18
Production
CY18 Import
CY18 Export
CY18
Consumption
Source: FICCI, IHS markit, Oxford economics, ASI,MSIP, CEFIC, NAS, MSIP, CEFIC, BCG
JM Financial Institutional Securities Limited
CY25E
Production
CY25E Import CY25E Export
CY25E
Consumption
Source: FICCI, IHS markit, Oxford economics, ASI,MSIP, CEFIC, NAS, MSIP, CEFIC, BCG
Page 16
Specialty Chemicals
31 May 2021
Steep rise in China’s labour costs vis-à-vis those for India’s chemicals players
China’s chemicals sector’s output boomed during CY09-18, but came at a steep cost; China’s
labour costs jumped ~2.5x during that period to USD 5.1/hour (vs. USD 2.1/hour). This steep
rise in China’s labour costs has given Indian players a slight edge to compete against China as
the hourly wage rate in India during CY09-18 grew ~1.6x to USD 2.0/hour (vs. USD
1.2/hour). Further, there is adequate supply of skilled labour in India, strengthening India’s
R&D capabilities. However, India’s labour cost advantage is partly offset as labour productivity
is ~1.8x lower in India vs. China, according to several studies.
Exhibit 38. China’s hourly wage increased ~2.5x compared with ~1.6x
in India during CY09-18
6.0
Exhibit 39. India is emerging as a hub for the manufacture of
chemicals with adequate supply of skilled labour
5.1
5.0
4.6
4.3
4.5
4.0
2.9
3.0
2.4
1.6
1.6
1.7
1.7
CY13
CY14
CY15
1.6
CY12
1.5
1.5
CY11
2.1
CY10
USD/hour
3.6
3.3
1.8
1.9
2.0
1.2
China
CY18
CY17
CY16
CY09
0.0
India
Source: CEFIC, UNIDO, CRISIL, MS, Industry, JM Financial
Source: DGCIS, Department of Chemicals and Petrochemicals, JM Financial
China’s tightening environmental norms are raising its regulatory costs
China has seen significant tightening in environmental norms since Jan’2015 with the 13th 5
year plan (2016-20) focussing on green development as one of its five key development
concepts. This was followed by strict implementation with frequent surprise inspections in
2016 and penalties and/or temporary plant closures for violations. An environment tax was
also introduced in 2018, penalising companies with high emissions and linking pollution with
tax. In 2018, ~40% of China’s chemical manufacturing capacity was temporarily shut down
for safety inspections, with over 80,000 manufacturing units fined for breaching emission
limits. Further, chemical production is aggressively being relocated to dedicated chemical
parks (covering 90% of the plants vs. 50% currently) with smaller plants to be relocated by
2020 and larger ones by 2025 to help control emissions and waste disposal.
Further, Chinese companies have seen higher environment costs as the Chinese government
has mandated the construction of effluent treatment plants and imposed green tax on the
chemicals industry to combat pollution. China’s new Soil Pollution Prevention and Control
Law came into effect in Jan’19 whereby the non-compliant party can be penalised up to CNY
2mn on the principle of “polluters pay”. The law also adopts the protection-first approach
whereby third-party authentication will be required to justify pollution prevention methods
adopted by the owner. This may make land buying costly and increases operating expenses
for regular inspection and maintenance of land in use.
The rising emphasis on China’s environmental protection is a structural shift driven by rising
income levels of Chinese people and their growing awareness of living conditions in other
countries. Hence, this led to: a) significant rationalisation of Chinese chemical manufacturing
capacity; and b) a sustained and major increase in environmental compliance expenses and
hence cost structure for Chinese companies. This has helped to significantly narrow down the
cost differential between Indian and Chinese chemical companies and is resulting in the
emergence of India as another key major chemical manufacturing hub.
JM Financial Institutional Securities Limited
Page 17
Specialty Chemicals
31 May 2021
Supportive policies to capitalise on rising adoption of ‘China plus one’ strategy
The past few years have exposed the vulnerabilities of a China-dependent chemicals supply
chain owing to tightening environmental norms, rising labour/environmental/other costs and
high risk of IP threats. Further, several production disruptions due to frequent plant blast
accidents (Jiangsu in Mar’19) and closure of chemical units (govt banning chemical
manufacturing along the Yangtze River) have impacted the supply chain of global players.
Hence, most MNCs are implementing a ‘China plus one’ strategy to de-risk their supply
chains by diversify operations and raw material procurement to countries such as India,
Vietnam, etc. The diversification process has further accelerated due to the US-China trade
war and the ongoing Covid-19 led disruption. Japan’s incentives to companies shifting base
from China highlights its focus to reduce dependence on China.
India’s chemical companies stand favourably placed to take advantage of this structural realignment of global supply chains owing to: a) its stringent environmental norms; b)
availability of skilled manpower and lower labour and other costs; c) rising availability of lowcost feedstock; d) strong IP protection; and e) improving R&D expertise. Though India also
faces threat from environmental concerns and tightening norms, most large organised
players strictly comply with this norms and are making investments in safety health &
environment (SH&E) to ensure plant sustainability. Hence the threat is limited to smaller
players and may be an opportunity for larger players to capture the market.
Policy focus incentivising ‘Make-in-India’ for import substitution and export promotion: Indian
speciality chemical companies depend heavily on imports, primarily from China, to meet
feedstock requirements. However, they are gradually reducing this dependence on China and
substituting imports by manufacturing key intermediates locally. Further, robust growth in
domestic demand from end-user segments provides immense scope for import substitution,
enabling India to expand its global market share. Additionally, there is a rising opportunity for
Indian companies with a proven track record to be a preferred destination for global
innovators looking to outsource their manufacturing operations to strategic partners. Hence,
this could translate into an increase in contract manufacturing from India as can already be
seen for several Indian chemical companies.
To capitalise on the opportunity created by the rising adoption of the ‘China plus one’
strategy, Indian government has announced various policies incentivising ‘Make-in-India’ for
the chemical sector. The aim is import substitution, export promotion and reduced
dependence on imports for key feedstock/intermediate/active ingredients. Policy measures
include a) a Production Linked Incentive (PLI) scheme as part of the 'AatmaNirbhar Bharat’
package to increase self-reliance and make India a chemical manufacturing hub; b) antidumping duties in few chemical products; and c) a reduced corporate tax rate to incentivise
global/domestic companies to expand their India operations. Hence, the Dept. of Chemicals
and Petrochemicals expects India’s chemical capacity to increase to 37mmt by FY25 (from
33mmt in FY19) coupled with a gradual rise in capacity utilisation to 92% by FY25E (from
85% in FY19). This implies potential output CAGR of ~3.6% over FY19-25E (same as seen
over FY13-19). This comes after India’s share of global chemical output stagnated at ~2.5%
since CY08 (like for China in CY96).
India chemical output (USD bn)
60%
Capacity (mmt)
Capacity Utilisation (%) (RHS)
FY25E
0
FY24E
70%
FY23E
10
FY22E
80%
FY21E
20
FY20E
CY18
India as % of global (RHS)
Source: Department of Chemicals and Petrochemicals, NSSO, BCG, JM Financial
JM Financial Institutional Securities Limited
CY17
CY16
CY15
CY14
CY13
CY12
1.0%
CY11
0
CY10
1.5%
CY09
40
CY08
2.0%
FY19
2.1%
90%
FY18
2.1%
80
30
FY17
2.5%
2.4%
FY16
2.4%
FY15
2.5%
FY14
120
3.0%
2.6%
FY13
160
Exhibit 41. India’s chemical production could post a 3.6% CAGR due
to capacity addition and a rise in utilisation
40
100%
FY12
Exhibit 40. India’s chemical production accounted for merely ~2.5%
of global production over CY08-18
Pro duction (mmt)
Source: DGCIS, Department of Chemicals and Petrochemicals, JM Financial
Page 18
Specialty Chemicals
31 May 2021
Rising availability of low-cost feedstock could reduce import dependence for Indian players
India’s specialty chemicals segment faces challenges while sourcing feedstock domestically as
most of it is consumed for bulk polymer; it therefore has to rely heavily on imports. This is
evident from India’s chemical trade deficit, which widened to USD 25bn in FY19 compared
with USD 8bn in FY11, due to imports rising to USD 56bn in FY19 (from USD 30bn in FY11).
Owing to lack of capacity, India’s primary imports are petrochemicals (valued at ~USD 30bn).
Of this, intermediates constitute 60% (~USD 18bn). This high dependence of imports has
resulted in higher feedstock costs for India’s speciality chemicals industry and has hence hurt
its competitiveness. Hence, as discussed above, the government has been enacting various
policy measures to increase self-reliance and reduce dependence on imports for key
feedstock as part of its 'AatmaNirbhar Bharat’ package.
Exhibit 42. India’s chemicals trade deficit widened to USD 25bn in FY19
USD bn
60
56
49
43
45
37
40
40
40
39
34
30
30
28
28
FY12
FY13
29
29
28
28
FY14
FY15
FY16
Imports
Exports
FY17
31
22
15
0
FY11
FY18
FY19
Source: Ministry of Chemicals and Petrochemicals, JM Financial
However, industry estimates suggest that India could reduce its reliance on imports by as
much as ~USD 11bn by: a) investing in building blocks that could eliminate imports of
Methanol, Acetic Acid, Styrene, EDC, VCM, etc. and b) setting up on-purpose propane
dehydrogenation (PDH) units that could eliminate imports of phenol, acetone, acrylic acid,
etc. Exhibit 28 highlights that net imports of key chemicals and petrochemicals came in at
USD 5.9bn in FY19; this can be gradually reduced by boosting domestic production.
Exhibit 43. India’s net imports of key chemicals and petrochemicals
USD bn
Polyvinyl chloride (PVC)
Styrene
Methanol
Acetic Acid
Vinyl Chloride Monomer (VCM)
Phenol
Mono Ethylene Glycol (MEG)
Ethylene dichloride (EDC)
Total
FY12
1.0
0.8
0.4
0.3
0.3
0.2
0.7
0.1
3.8
FY13
1.4
1.0
0.5
0.4
0.3
0.3
0.7
0.1
4.5
FY14
1.4
1.1
0.6
0.4
0.3
0.3
0.8
0.2
5.1
FY15
1.4
0.9
0.5
0.4
0.3
0.3
0.8
0.2
4.8
FY16
1.4
0.8
0.5
0.3
0.3
0.2
0.8
0.2
4.5
FY17
1.5
0.8
0.4
0.3
0.3
0.3
0.9
0.1
4.6
FY18
1.7
1.0
0.6
0.4
0.4
0.3
0.7
0.2
5.2
FY19
2.1
1.1
0.8
0.6
0.4
0.3
0.3
0.2
5.9
Source: Ministry of Chemicals and Petrochemicals, JM Financial
JM Financial Institutional Securities Limited
Page 19
Specialty Chemicals
31 May 2021
India’s Specialty Chemicals Industry to witness growth across
segments
Key sub-segment of India’s speciality chemicals industry are: a) Agrochemicals (constituting
29% of the industry); b) Dyes and pigments (22%); c) Surfactants (6%); and d) Food &
fragrance (7%) among others. Indian players have penetrated well in the exports space in API
intermediates, Agrochemicals, Dyes and Pigments and Flavour and Fragrance segments.
Further, the rising adoption of the ‘China plus one’ strategy by various global MNCs augurs
well for future growth opportunities in these segments where India could penetrate deeper
and catch up with China on a global level.
India’s specialty chemicals industry (which stood at ~USD 32bn in CY19, accounting for 4%
of the global industry) is rapidly expanding. This is taking place as India is emerging as a fastgrowing specialty chemicals hub, taking advantage of huge opportunity created due to the
rise in its competitiveness vis-à-vis Chinese peers. Hence, India’s specialty chemicals industry is
expected to continue to post a CAGR of +12% until CY25 (vs. 6.4% expected for the global
specialty chemicals industry). This would be driven by a) robust domestic consumption
growth; b) rising import substitution; and c) strong exports growth.
Specialty chemicals are mainly used to add value to the finished product and are hence
primarily sold on a B2B basis. Key sub-segment of India’s speciality chemicals industry, based
on end use, are: a) Agrochemicals (constituting 29% of the industry); b) Dyes and pigments
(22%); c) Surfactants (6%) and d) Food & fragrance (7%) among others.
Exhibit 44. India’s speciality chemicals industry size (USD bn); it is
expected to post a ~12% CAGR over CY20-25
Exhibit 45. India’s specialty chemicals industry break-up by end use
for CY19 (USD 32bn, 4% of global)
Source: FICCI, JM Financial
Source: FICCI, JM Financial
Exhibit 46 highlights the attractiveness of various key segments within the Indian specialty
chemicals industry.
Agrochemicals: This is the largest sub-segment of India’s speciality chemicals industry (at USD
9.2bn) and is expected post +12% CAGR to reach USD 18.1bn by CY25 (vs. 10% CAGR in
the last 5 years). Key reasons for this are: a) a robust growth outlook for domestic demand
given the low consumption vs. global norms (resulting in 15-20% crop losses in India); b) a
large export opportunity and c) the government’s favourable policy measures to double
famer incomes.
Surfactants: This segment is expected to post an 11% CAGR over the next 5 years owing to
rising penetration of home and personal care products, such as cleaning agents and
detergents. This segment is characterised by a large number of unorganised players who
cater to unbranded soap and detergent manufacturers.
JM Financial Institutional Securities Limited
Page 20
Specialty Chemicals
31 May 2021
Flavours and Fragrances and Nutraceutical segments: Growth in this segment would be
driven by demand for products such as, deodorants, room fresheners and perfumed soaps, as
well as processed food. This is dominated by organised players due to the need for significant
R&D and innovation expertise.
Personal care and water chemicals: This is one of the fastest growing segments in the
industry due to rapid growth in the Indian cosmetics and personal care products market as
well as rising demand for water purification and waste water management. Entry barriers are
high due to the R&D expertise and product innovation required for specialised products.
Dyes and pigments: This is the second largest sub-segment (at USD 7.0bn) and is expected to
post a 10% CAGR until CY25E (vs. a 7.3% CAGR in the last 5 years), driven by growth in
textiles, leather and paper segments. Given the polluting nature of the manufacturing
process, stringent environmental compliance standards and the ability to offer value addedhigh performance solutions are key success factors.
Construction chemicals: This segment’s growth in India is driven by housing and
infrastructure projects. It is largely dominated by organised players with a healthy mix of
domestic players and MNCs. Concrete admixtures (40%) account for the majority of the
construction chemicals market in India, followed by adhesives and sealants (20%) and water
proofing chemicals (15%).
Polymer additives: This segment is witnessing robust growth owing to strengthening end-user
markets such as consumer durables, pipes, wires and cables and packaging. The ability to
provide high-margin products, diversification of product portfolio and strong customer base
holds key.
Exhibit 46. Competitive landscape of various sub-segments of the Indian specialty chemicals industry
Market size
(USD Bn)
CY14-19
CAGR
Agrochemicals
9.2
10.0%
12.0%
18.2
Agriculture sector
Dyes and Pigments
7.0
7.3%
10.0%
12.4
Textiles, leather, & paper
F&F and Nutra
Ingredients
2.4
16.1%
17.1%
6.2
Surfactants
2.0
6.4%
11.0%
3.7
1.8
10.4%
11.5%
3.5
Apparel, technical textiles
1.4
13.5%
15.0%
3.2
Infrastrucure, real estate
1.3
12.8%
10.0%
2.3
Pipes, White goods
automotive
1.0
15.5%
15.0%
2.3
FMCG
1.9
Industrial & municipal
w ater
Segm ent
Textile chemicals
Construction chemicals
Polymer additives
Personal care
chemicals
Water chemicals
: High
0.8
14.9%
CY19-25E
CY25E expected
CAGR
m arket size (USD Bn)
15.0%
Key end m arkets
Entry
barriers
Product
specialisation
Presence of End m arket
Overall
scaled up
grow th
attractiveness
Indian players potential
Food processing,
personal care
Laundry care,
dishw ashing
: Medium
Source: FICCI, JM Financial
JM Financial Institutional Securities Limited
Page 21
Specialty Chemicals
31 May 2021
Which verticals have fared well and are likely to bode well for India? Within the specialty
chemicals exports space, India has penetrated well in:
a) API intermediates: Global exports of API intermediate were at ~USD 77bn in CY18 with
India’s share of global export being at ~4% vs ~11% for China. Global API intermediates
market is expected to post a 6-7% CAGR till CY23.
b) Agrochemicals: Global exports of agrochemicals were at ~USD 72bn in CY18 with India’s
share of global export being at ~6% vs ~17% for China. Global agrochemicals market is
expected to post a 2-3% CAGR till CY23.
c) Dyes and Pigments: Global exports of Dyes and Pigments were at ~USD 66bn in CY18 with
India’s share of global export being at ~5% vs ~12% for China. Global Dyes and Pigments
market is expected to post a 2-3% CAGR till CY23.
d) Flavours & Fragrances: Global exports of Flavours & Fragrances were at ~USD 5bn in CY18
with India’s share of global export being at ~12% vs ~46% for China. Global Flavours &
Fragrances market is expected to post a 3-4% CAGR till CY23.
Further, the rising adoption of ‘China plus one’ strategy by various global MNCs for
realignment of their supply chain is likely to bode well for API intermediates, Agrochemicals,
Dyes and Pigments segments where India could penetrate deeper and catch up with China
on a global level. India is also rapidly catching up in plastic additives and food/feed additives
segments. Moreover, though small, flavours and fragrances market could also provide an
opportunity for Indian players to increase their presence on a global scale.
Exhibit 47. Competitive landscape of various sub-segments of the Indian specialty chemicals industry
Intermediate for APIs
Agrochemicals
Dyes and Pigments
Plastic additives
Electronic chemicals
Food/Feed additives
Neutraceuticals
Rubber Chemicals
Flavours and Fragrances
Global specialty chem
Global m arket China Exports as India Exports as
exports (USD bn, CY18) CAGR CY18-CY23
% of Global
% of Global
77
6-7%
11%
4%
72
2-3%
17%
6%
66
2-3%
12%
5%
15
3-4%
8%
1%
15
4-5%
22%
0%
12
2-3%
19%
2%
10
4-5%
46%
2%
5
2-3%
27%
2%
5
3-4%
46%
12%
China Exports
(USD bn, CY18)
8.5
12.2
7.9
1.2
3.3
2.3
4.6
1.4
2.3
India Exports
(USD bn, CY18)
3.1
4.3
3.3
0.2
0
0.2
0.2
0.1
0.6
India Exports as
% of China
36%
35%
42%
13%
0%
11%
4%
7%
26%
Source: IHS Chemicals, IHS Global Insights, UN Comtrade, JM Financial
JM Financial Institutional Securities Limited
Page 22
Specialty Chemicals
31 May 2021
Agrochemicals – Immense growth potential
The Indian agrochemicals market (at USD 9.2bn or ~15% share of the global agrochemicals
market worth USD 62.5bn) is the largest sub-segment of the specialty chemicals industry and
posted a 10% CAGR over CY14-19, driven by robust domestic demand and rising exports.
With ~50% of production being exported, India is one of the largest agrochemical exporters
globally. India’s agrochemicals industry has immense growth potential and is expected to
clock a 12% CAGR to reach USD 18.1bn by CY25 (vs. a 6.6% CAGR expected for the global
market) led by: a) a robust growth outlook for domestic agrochemical demand due to rising
demand for food security and to minimise the current 15-20% crop losses; b) tapping of a
large export opportunity driven by its rising cost competitiveness and improving R&D
expertise; c) favourable government policies to double famer incomes; and d) significant
potential to rise up the value chain.
Significant growth potential in the Indian Agrochemicals space
India is currently in a ‘food surplus’ stage with rising production of food grains and
horticulture. India is the 2nd largest food grain producer in the world after China, with
production posting a 3.3% CAGR over FY15-20, reaching 287mmt in FY20 (cereals made up
~90% of overall production and the rest came from pulses); it is further estimated to post a
~2.4% CAGR to reach 355mmt by 2030. Additionally, India’s horticulture production
continues to exceed food grain production due to increasing demand for fruits and
vegetables and its more remunerative nature vs. large crop farming. Horticulture production
posted a CAGR of 2.4% over FY15-20, reaching 320mmt in FY20 (fruits and vegetables
together constituted ~90% of total horticulture production).
Exhibit 48. Food grains, oilseeds and horticulture production in India (mmt)
Source: Department of Agriculture Cooperation and Farmer Welfare, JM Financial * FY20 data is provisional
Despite currently being net surplus in production, Indian agriculture continues to face the
following major challenges:
a) Ensuring food security for India’s growing population (to ~1.7bn by 2050 from ~1.3 bn
growing at ~1.3% CAGR) and meeting globally accepted nutrition standards;
b) Declining arable land and soil fertility as well as rising shortage of labour for the agriculture
sector due to a boost in urbanisation;
c) Low productivity per hectare due to lack of awareness for proper agrochemical use and
small landholdings;
d) High dependence on the monsoons and unpredictable weather patterns; and
e) High post-harvest losses.
India needs to not only raise its agricultural output, but also boost productivity to ensure the
country’s food and nutritional security. India’s yield per hectare is significantly lower than the
global average (at 3tn/hectare vs. the global average of 4tn/hectare) primarily due to lower
use of agrochemicals, low-quality seeds and degrading soil quality.
JM Financial Institutional Securities Limited
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Specialty Chemicals
31 May 2021
India’s use of agrochemicals is only 0.6 kg/hectare vs. US (2.5 kg/hectare), China (13.1 kg/
hectare), Japan (11.8 kg/ hectare) and Brazil (6 kg/ hectare), as well as other Latin American
countries. This has resulted in higher crop losses. Agrochemicals play a major role in
increasing crop yields by 20-30%; hence, growth in the use of agrochemicals to play a critical
role in improving farm productivity by preventing crop losses.
Exhibit 49. India’s crop yield is significantly lower versus global peers
(tn/hectare)
Exhibit 50. India’s agrochemical consumption still very low versus
global peers (kg/hectare)
Source: OECD, FICCI, JM Financial
Source: FAOSTAT, FICCI, JM Financial
The global agrochemicals market posted a 5.2% CAGR in the last 5 years and was valued at
USD 62.5bn in CY19; it is expected to post a 6.6% CAGR over next 5 years to reach USD
86bn by CY24. The Asia-Pacific region (primarily India, China, Indonesia and Australia)
dominates regional demand for agrochemicals due to the high level of agriculture needed to
feed the growing and already-high population. Europe and North America are also high
demand centres for agrochemicals with major imports of active ingredients from China.
Exhibit 51. The global agrochemicals industry is expected to post a
6.6% CAGR to reach USD 86bn by CY24
Exhibit 52. Global agrochemicals
geography (USD 62.5bn in CY19)
industry
Source: Frost & Sullivan Research, Anupam Rasayan DRHP
Source: Frost & Sullivan Research, Anupam Rasayan DRHP
-
segmentation
by
The Indian agrochemicals market (at USD 9.2bn) is the largest sub-segment of specialty
chemicals industry and posted a 10% CAGR over CY14-19, driven by robust domestic
demand and rising exports. India is the 4th largest producer and is one of the largest
exporters of agrochemicals in the world (~50% of India's agrochemical production is
exported).
JM Financial Institutional Securities Limited
Page 24
Specialty Chemicals
31 May 2021
The agrochemicals industry in India is expected to post a 12% CAGR to reach USD 18.1bn by
CY25 led by: a) a robust growth outlook for domestic agrochemical demand; b) tapping of
huge export opportunity; c) favourable government policies to double famer incomes; and d)
significant potential to rise up the value chain.
Exhibit 53. India’s agrochemicals industry is expected to post a 12%
CAGR to reach USD 18.1bn by CY25
Exhibit 54. India’s agrochemicals market by export destinations (2019)
Source: CEFIC, JM Financial
Source: FICCI, Industry research, JM Financial
Robust growth outlook for domestic agrochemical demand
There is immense scope for growth in domestic demand as consumption of agrochemicals in
India is still low vs. peers globally on a per hectare basis. USA and global consumption is ~5x
that of India’s and Japan/China consume ~20x the agrochemicals consumed by India. Indian
crop yield losses are higher at 15-20% on account of weeds, pests, diseases and rodents; this
can be minimised through efficient use of agrochemicals.
The Indian agrochemicals market has historically been dominated by insecticides (53%)
because of the country’s tropical climate and the kind of crops produced (rice and cotton),
whereas globally, herbicides hold the largest share (44% of the market). Rice accounts for
the maximum (26%-28%) share of agrochemical consumption in India followed by cotton
(18%-20%). However, growth in herbicides and fungicides is estimated to outpace the
growth in insecticides in India on account of: a) rising farm labour costs, which have made
the manual removal of weeds uneconomical; and b) robust growth in horticulture cultivation,
which increase adoption of herbicides and fungicides.
Exhibit 55. India’s agrochemical industry break-up
Exhibit 56. Global agrochemical industry break-up (CY19)
Source: FICCI, Industry research
Source: UPL, JM Financial
JM Financial Institutional Securities Limited
Page 25
Specialty Chemicals
31 May 2021
Huge export opportunity for Indian agrochemical industry
India has become one of the largest exporters of agrochemicals in the world, with ~50% of
its agrochemical production being exported. India’s export growth has been driven by its
rising cost competitiveness on lower manufacturing costs, availability of skilled manpower,
high quality standards meeting global norms due to improving R&D expertise and strong
environmental, health and safety compliance, among others.
Exhibit 57. Key agrochemical exporters (USD bn in CY19)
Source: World’s Top Exports, FICCI, JM Financial
There exists further scope for improved export opportunities via tie-ups with innovators for
new as well as existing products. Further, Indian players could benefit as there exists a strong
pipeline of ~19 agrochemicals active ingredients worth ~USD 4.2bn going off-patent during
2019-26 (refer to Exhibit below). With a number of products coming off patent, it would
provide companies with significant opportunities to develop off-patent/generic active
intermediates. This is likely to create a large opportunity for export growth for India’s
agrochemicals industry.
Exhibit 58. Key agrochemicals active ingredients going off-patent in 2019-26
Molecules
Bixafen
Chlorantraniliprole
Cyantraniliprole
Cyprosulfamide
Fenpyrazamine
Flubendiamide
Fluopicolide
Flupyram
Fluxapyroxad
Isopyazam
Mandipropamid
Penflufen
Penthiopyrad
Pinoxaden
Pyriofenone
Pyroxsulam
Sedaxane
Thiencarbazone-Methyl
Valifenalate
Inventor
Bayer Crop Science
Dupont De Nemours
Dupont De Nemours
Dupont De Nemours
Sumitomo Chemicals
Nihon Nohyahu, Bayer Crop Science
Bayer Crop Science
Bayer Crop Science
BASF
Sygenta AG
Sygenta AG
Bayer Crop Science
Mitsui Chemicals
Sygenta AG
Ishihara
Dow Agrochemicals
Sygenta AG
Bayer Crop Science
Belchim
Opportunity size 2019 (USD Mn)
1200
1500
700-900*
650-800*
200-300*
700-900*
400-500*
250-350*
450-500*
300-350*
60
50-100*
600-700*
681
200-400*
400-450*
350-400*
900-950
500-600*
Source: Frost & Sullivan Research, India Pesticides DRHP *estimates on best efforts basis
JM Financial Institutional Securities Limited
Page 26
Specialty Chemicals
31 May 2021
Government’s favourable policy measures to double famer incomes
The Indian government is implementing various reforms, including new farm laws and
schemes such as Fasal Bima Yojna and Kisan Credit Card, to expedite growth in the
agriculture sector; the objective is to double farmer incomes by 2022. Indian agriculture
sector is expected to generate robust growth in the next few years due to increased
investment in infrastructure such as irrigation facilities, warehousing and cold storage. Some
other key agricultural reforms include a) free trade for agricultural produce across country, as
against limitation of sale through APMCs earlier; b) exclusion of various categories from the
Essential Commodities Act, which would enable better supply chain management; and c) an
increase in outlay for previously announced schemes such as the crop insurance scheme,
launch of direct income support by way of PM-Kisan Samman Nidhi, etc.
Improvement in farmer incomes is likely to translate into additional spends on agrochemicals
for improvement in farm productivity; hence is expected to boost demand for agrochemicals.
The government is also trying to promote higher margin businesses such as horticulture and
floriculture by encouraging more exports to likely ensure that farmers are more inclined to
use crop protection measures.
Significant potential to rise up the value chain
The global agrochemicals value chain comprises: a) raw material suppliers (both
petrochemical derivatives as well as natural feedstock); b) active ingredient/technical grade
manufacturers; c) formulators producing end products; d) distributors; and e) end use
customers.
Exhibit 59. Agrochemicals - value chain
Source: Frost & Sullivan Research, Anupam Rasayan DRHP
The key success factors for agrochemical players are:
a) Backward integration of technical active ingredients, which would help formulators
strengthen their margin profiles;
b) A comprehensive product portfolio to cater to the agrochemical needs of farmers; and
c) A strong distribution network, which plays critical role in maximising reach to the
fragmented farmer base.
The process of discovering a new molecule involves a significant amount of time (+10 years)
and capital investment (+USD 300mn). Further, the development of new active ingredients
has also declined due to stringent regulations in the industry. Moreover, Indian agrochemical
players spend on R&D activities is low at ~2% of revenue vs. global majors who spend 6-10%
of revenue on R&D. Hence, only some global majors have been able to successfully focus on
building R&D expertise.
JM Financial Institutional Securities Limited
Page 27
Specialty Chemicals
31 May 2021
India’s agrochemicals industry is highly fragmented with over 150 active ingredient
manufacturers, more than 1,000 formulators and +200 thousand companies engaged in
distribution. However, is dominated by large organised players owing to the need for robust
R&D capabilities for innovation of improved and safer molecules for domestic and export
markets while small unorganised players are more focussed on the manufacturing of offpatented generic molecules. Bayer holds the largest market share in India’s crop protection
chemicals market (11% market share) followed by Syngenta (7%) and UPL (7%).
Exhibit 60. Indian agrochemicals market - segmentation (CY19)
Exhibit 61. Global agrochemicals market - segmentation (CY19)
Source: FICCI, Industry research * Others refers to Corteva, PI, Dhanuka, Sumitomo, etc
Source: Frost & Sullivan Research, Anupam Rasayan DRHP
Key risks for the Indian agrochemicals segment:
a) The agrochemicals business is cyclical in nature and subject to climatic volatility with
seasonal variations. Unfavourable local and global weather conditions (such as drought,
floods, cyclones and natural disasters) may have an adverse effect on business.
b) Further, any change in government policies towards the agriculture sector, a reduction in
subsidies/incentives provided to farmers, export restrictions on crops, etc. could adversely
impact farmer incomes hence their ability to spend on agrochemical products.
c) The rising use of alternative pest management and crop protection measures such as biotechnology products, pest resistant seeds or genetically modified crops may reduce demand
for agrochemical products. However, companies are trying to address environment-related
concerns by increasingly focussing on producing eco-friendly products such as bio-fertilisers,
micronutrients, bio-stimulants, bio-pesticides and other organic products.
JM Financial Institutional Securities Limited
Page 28
Specialty Chemicals
31 May 2021
Fluorochemicals – Adoption on the rise
India’s Fluorochemicals (fluorine-based chemicals) market has been supported by the growth
witnessed in Fluorocarbons due to the rising need for refrigeration systems in residential,
industrial and commercial segments. Further, the next leg of growth is being driven by rising
use of fluorine-based chemicals in pharma and agrochemical intermediates, with 30-40% of
new molecules added every year being fluorine based. This is on account of the higher
stability and efficacy that fluorine-based molecules provide.
India’s fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching ~USD
450mn in CY20. Further, rising use of fluorochemicals in pharma and agrochemicals
segments is likely to help the segment clock a 14% CAGR to reach USD 880mn by FY25.
Further, the Indian Hydrogen fluoride market, which is the principal industrial source of
fluorine, is largely consolidated, with SRF being the largest producer (40% of the market)
followed by Navin Fluorine (26%). Hence, although the adoption of Fluorochemicals is on the
rise, there are only a handful of players in India which can take advantage of this change
given the industry has strong entry barriers.
Robust growth outlook for fluorine-based chemicals; pharma and agrochemicals
driving the next leg of growth
Fluorocarbons are mainly used as refrigerants. With global warming, temperatures are rising
and creating the need for refrigeration systems in residential, industrial and commercial
segments (mostly in the automotive industry). This has driven significant growth in the
fluorochemicals market. Additionally, lifestyle changes have boosted demand for refrigerators
and cooling systems.
Over the past few years, fluorine-based chemicals have gained traction in the space of
pharma and agrochemical intermediates with 30-40% of new molecules added every year
are fluorine based. This is on account of higher stability and efficacy that fluorine based
molecules provides. Pharmaceuticals is among the fastest growing sub-segments as adding
fluorine significantly improves the pharmacological properties of a drug in terms of potency,
allowing smaller doses to be effective. Further, fluorochemicals are vital ingredients for
pesticides and herbicides and have replaced bromomethane (which is toxic for the
environment). Fluoride-derived chemicals are used as fumigants to reduce pest infestation of
stored grains and certain other food products.
However, fluorocarbons are highly regulated globally due to their impact on the ozone layer
and greenhouse emissions. Hence, the Montreal Protocol came into effect in 1987 to
regulate their use globally. The protocol requires all countries to freeze the consumption of
ozone depleting substances (such as HCFCs, R-12 and R-22) at baseline levels from 2013,
further start reducing 10% from the 2015 baseline levels going forward. It then mandates
subsequent steps for reduction, leading to a 97.5% phase-out by 2030 and complete phaseout by 2040. Hence, emissive use is reducing and non-emissive use is likely to continue to be
permitted going forward. Emissive applications include foams, solvents, mobile ACs
(transport segment), stationary ACs (residential and commercial), aerosols, etc. Further, there
is focus on R&D to develop innovative eco-friendly products.
JM Financial Institutional Securities Limited
Page 29
Specialty Chemicals
31 May 2021
Exhibit 62. R-22 phase out plan as per the Montreal Protocol
Source: Ministry of Environment, Forest and Climate Change, JM Financial
Growth outlook robust for India’s Fluorocarbons industry – led by pharma and
agrochemicals
The Indian fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching
~USD 450mn in CY20. The largest share is held by fluorocarbons, followed by
fluoropolymers. India is a tropical country with one of the lowest penetrations of ACs,
resulting in immense potential for growth, which is also driven by increasing per capita
income, urbanisation and spending power of the middle class.
Additionally, fluorine-based organic and inorganic chemical products are becoming
increasingly popular in the Indian market, which is among the largest API manufacturers
globally. It is estimated that up to 20% of pharmaceuticals in the market or in clinical
development contain a fluorine atom and that 30% of key blockbuster drugs contain
fluorine. Moreover, 50% of agrochemical molecules developed recently contains fluorine.
Industry experts estimate that 1 in 3 new APIs in future would be based on fluorine
chemistry.
Hence, India’s fluorochemicals market is expected to post a CAGR of 14% in coming years to
reach USD 880mn by FY25, the steepest growth in the global market.
Exhibit 63. India’s Fluorochemicals Market (USD mn)
Source: SRF DRHP, JM Financial
JM Financial Institutional Securities Limited
Page 30
Specialty Chemicals
31 May 2021
Exhibit 64. Key growth drivers for the Indian Fluorochemicals market – segregated by industry segment
Segm ents
Key Grow th Drivers
a) Indian API sector is now grow ing at a promising rate due to its research-based processes, low cost
operations and availability of skilled manpow er
b) To meet the global demand, many international players are now integrating w ith Indian companies
a) Many of the key technical grade pesticides are made in India, and w ith many global customers looking to move
Agrochemicals
aw ay from China, India w ill be a key destination of production as w ell as consumption.
a) India being an agrarian economy, there is an increased need for cold storage facilities
Refrigeration
b) Grow th in industrial as w ell as commercial refrigeration requirements for processed products
a) Out of 53.3mn middle class households – only 52% have ACs giving high scope for grow th
Air Conditioning
b) High rise buildings, shopping complexes, malls, hypermarkets w hich are grow ing in tier tw o cities increasing
requirements of AC
a) Grow th in urbanization and use of consumer electronics across all economic segments is driving grow th for
Electrical and Electronics the industry
b) Preference for smart homes and smart offices is also accelerating the grow th
a) Exports from India is expected to drive grow th especially for component and ancillary manufacturing segments
Automobiles
b) Increasing emphasis on electric vehicles and smart vehicles.
a) Other applications like coatings, cookw are, textiles, medical appliances are in niche stage but being
Others
accelerated by grow th in Infrastructure and urbanization
Pharmaceuticals
2020-2025
(CAGR)
11-12%
7-8%
9-10%
10-12%
8-9%
5-7%
7-8%
Source: SRF, JM Financial
The principal industrial source of fluorine is Hydrogen fluoride (HF). The Indian HF market is
largely consolidated, with SRF being the largest producer, accounting for 40% of the market.
Other major producers of HF are Navin Fluorine (26%), Tanfac Industries (21%) and Gujarat
Fluorochemicals (13%). Hence, although the adoption of Fluorochemicals is on the rise, only
handful Indian players (as discussed above) can take advantage of this change as the industry
possesses following entry barriers:
a) Complex chemistry: Fluorine’s strong reactivity makes it extremely difficult to segregate in
any compound and it requires stringent reaction conditions. Hence, needs players to have
extensive experience in the reaction chemistry segment.
b) High capital requirements from safety perspective and for raw materials: The fluorine
business requires significant investments from safety perspective given fluorine’s reactivity.
There is also significant investment required to ensure sustainable supplies of raw materials,
given the high dependence on imports.
c) Need to develop high-quality R&D expertise: There is a need to make investments to
develop R&D expertise for the manufacture of specialty Fluorochemicals, which would be
used to make innovative products in the agrochemicals and pharmaceuticals industries.
d) Stringent regulatory compliance: Fluorine products are highly regulated in production,
trade and use. Hence, very few companies are capable of maintaining stringent regulatory
standards.
JM Financial Institutional Securities Limited
Page 31
Specialty Chemicals
31 May 2021
CRAMS/CSM business provides long-term growth visibility
India has been marking its presence in the global CRAMS market where it commands ~6%
market share (at USD 11.5bn in CY19, of USD 200bn global market). India’s CRAMS market
is likely to post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global market). India’s
CRAMS market caters to: a) Pharmaceuticals (45%); b) Agrochemicals (35%); and c) Personal
care and others industries (20%). CSM is a niche segment within the contract manufacturing
space and caters to patented products that normally require more R&D efforts. We believe
that Indian CRAMS/CSM players are well set to benefit as more and more innovators shift
focus on core competencies and outsource production via long-term contracts to lowmanufacturing cost destinations such as India. These long-term contracts also provide longterm revenue growth visibility compared with other specialty players.
Custom synthesis and manufacturing (CSM) needs more research and development (R&D)
efforts compared with contract research and manufacturing services (CRAMS) as contract
manufacturers produce patented products, wherein each patented product’s manufacturing
can be unique (requiring unique infrastructure). CSM is more of niche segment within the
contract manufacturing space and attracts higher margins than contract research and
manufacturing services of generic molecules. With the increasing infrastructure of contract
synthesis in India, more foreign players with patented products are expected to manufacture
active molecules. As a result, the valuation for CSM or patented businesses is relatively
higher, resulting in higher growth potential of custom synthesis and manufacturing services
in the contract synthesis sector.
Global CSM market likely to register a 10% CAGR over CY19-24E: The global CSM market
was valued at USD 200bn in CY19 and is anticipated to reach USD 322bn by CY24E (10%
CAGR), driven by a) the development of new active ingredients, b) innovators shifting focus
to core competencies and c) outsourcing of production to low-cost manufacturing
destinations. Custom synthesis and manufacturing is used for contract synthesis of
agrochemical technical grades or active ingredients, intermediates and specialty chemical
products along with other fine chemicals, including active pharmaceutical ingredients.
Exhibit 65. Global CSM market likely to reach USD 322bn by CY24E
360
Exhibit 66. Indian CSM market likely to reach USD 20.3bn by CY24E
24
322.1
20.3
270
18
200.0
180
11.5
12
142.6
7.2
90
6
0
0
CY14
CY19
Source: ARIL DRHP
JM Financial Institutional Securities Limited
CY24E
CY14
CY19
CY24E
Source: ARIL DRHP
Page 32
Specialty Chemicals
31 May 2021
India CSM market likely to deliver a 12% CAGR over CY19-24E: The India CSM market was
valued at USD 11.5bn for CY19 for specialty chemicals, and is anticipated to reach USD
20.3bn by CY24E (12% CAGR) driven by a) the increasing contract manufacturing trend for
fine chemicals and niche specialty chemicals in India; b) global companies preferring
investment in contract manufacturing in India; and c) India being a low-cost manufacturing
destination with a skilled labour force. Almost 80% of the Indian specialty CRAMS market is
captured by fine chemicals (by value) which are nothing but single molecule compounds
widely used across crop protection chemicals and API industries. These single molecule
compounds are mainly active ingredients in either agrochemical or pharmaceutical
formulation. Agrochemical contract manufacturing in India accounts for a 35% market share
with predominantly export-led demand.
Exhibit 67. Global CSM market by region, 2019
6%
Exhibit 68. India CSM market by application industries, 2019
Others (Personal
Care & Speciality
Chemicals),
20%
2%2%
12%
Pharmaceuticals,
45%
37%
15%
Agrochemicals,
35%
26%
North America
Europe
China
APAC
India
Source: ARIL DRHP
JM Financial Institutional Securities Limited
Middle East and Africa
Others
Source: ARIL DRHP
Page 33
31 May 2021
India | Chemicals | Company Update
UPL Ltd | BUY
Uniquely PLaced
UPL became the 5th largest global agrochemicals company after its acquisition of
Arysta. It is present in over 138 countries with: a) domain expertise in complex synthesis
and sourcing of active ingredients; b) a burgeoning presence in branded generics; and c)
best-in-class farmer logistics and distribution services. We believe UPL is uniquely placed
to register a healthy 13%/23% EBITDA/PAT CAGR over FY21-23E on account of a)
revenue and cost synergies from the Arysta acquisition; b) robust 9% revenue CAGR
over FY21-23E aided by its R&D-backed product pipeline coupled with new product
launches from recent collaborations; and c) lower interest costs on reduced debt. In our
view, UPL is trading at attractive valuations of 7.8X FY23E EV/EBITDA (significantly lower
compared with the pre-Arysta 5-year average multiple of ~9.5X 1-year forward
EV/EBITDA). We assume coverage with a BUY rating and TP of INR 1,000/share.
Likely to sail through Arysta acquisition swiftly: UPL has grown through a slew of 40+
successful acquisitions over the past 25 years. Though its recent Arysta acquisition had
disrupted the balance sheet with net debt/EBITDA reaching 6.8x/3.2x/2.2x in
FY19/FY20/FY21, it helped UPL to achieve cumulative revenue and cost synergies of USD
443mn and USD 235mn, respectively. It is further looking to achieve cost synergies of USD
200mn p.a and revenue synergies of USD 350mn p.a. Hence, we believe UPL is likely to sail
through this acquisition rather swiftly owing to synergies arising from Arysta’s presence in
Europe, Latin and North America.
Strong R&D backed pipeline with new launches in sight: UPL currently has 14-15 new
products in late-stage development, which collectively have peak risk adjusted revenue
potential of USD 4.5bn. Moreover, from the new product pipeline, management expects
80% of sales from differentiated solutions and 20% from post-patent solutions. This, in our
view, should help UPL earn higher gross margins. Further, the company expects to launch
several formulations based on recent active ingredients tie-ups (with FMC in Mar’21 and Meiji
in May’21), which bodes well for future growth.
Debt no longer a concern: We believe UPL’s net debt-to-EBITDA is likely to drop to 1.6X in
FY22 and 1.0X in FY23 on robust operating cash flows owing to the strong uptick in
commodity prices. Moreover, we derive comfort from the fact that management would try to
keep the net debt-to-EBITDA at ~1.0X, consistent with past practices.
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 6209 5500
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
BUY
1,000
23.2%
Key Data – UPLL IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR812
INR620.2/US$8.6
63%
764.0
764.0
INR6,308.6/US$87.1
826/388
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
33.5
26.6
6M
94.3
66.8
12M
107.5
30.9
Estimate revenue/EBITDA/PAT CAGR of 9%/13%/23% over FY21-23E; BUY with TP of INR
1,000/share: We estimate UPL’s consolidated EBITDA to register a 13% CAGR over FY21-23E
on a) a 9% CAGR over FY21-23E and b) a 159bps EBITDA margin expansion as gross margins
normalise to pre-Arysta levels. Further, in our view, UPL’s PAT is likely to register a 23%
CAGR over FY21-23E owing to the decline in interest costs. We value UPL’s consolidated
business at a 9.5X 1-year EV/EBITDA (in-line with its pre-Arysta acquisition 5-year average
multiple of ~9.5X on account of its current high net debt-to-EBITDA) to arrive at a Mar’22 TP
of INR 1,000/share. We assume coverage with a BUY rating.
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
2,18,370
24.7
38,130
17.5
18,534
24.3
-10.8
10.0
15.6
33.5
4.2
23.3
0.7
FY20A
3,57,560
63.7
68,220
19.1
22,668
29.7
22.3
9.2
13.4
27.4
3.2
12.6
0.5
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
3,86,940
8.2
84,320
21.8
30,696
40.2
35.4
12.6
15.3
20.2
3.0
9.8
1.2
FY22E
4,23,828
9.5
97,565
23.0
38,380
50.2
25.0
13.4
16.9
16.2
2.5
8.4
1.0
FY23E
4,63,914
9.5
1,08,446
23.4
46,207
60.5
20.4
14.8
17.6
13.4
2.2
7.2
1.2
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
UPL Ltd
Strong R&D backed product pipeline
UPL has 48 manufacturing locations across 11 countries and a formulations portfolio of
1,283 products with over 12,400 registrations. UPL derived ~80% of FY20 revenues from
branded products. It has showcased a strong R&D pipeline over the years with consistent new
products, along with established post-patent active ingredients such as Glufosinate
(Herbicide), Azoxystrobin (Fungicide), Mancozeb (Fungicide), Cypermetrin (Insecticide),
Metribuzin (Herbicide), Sulfentrazone (Herbicide) and Pendimethalin (Herbicide). The postpatent market is a rapidly-growing vertical and UPL is well-positioned to capture a significant
share through product differentiation and cost efficiency processes. Since its acquisition of
Arysta Lifesciences in Feb’18, UPL has successfully consolidated and integrated various
elements of the value chain. Arysta - being a leader in the bio-stimulants space – would boost
UPL’s position as a Tier-1 CPC and bio-solutions company with end-to-end offerings from
seeds to post-harvest products.
Exhibit 1. UPL’s product registrations have picked up pace
Exhibit 2. UPL’s new post-patent active ingredients’ potential
12
6.0
15,000
13,600
12,400
9
4.5
6
3.0
3
1.5
12,000
9,000
5,934
6,000
4,692
6,181
4,976
0
0.0
2020
3,000
2021
2022
2023
2024
2025
Market Value (USD bn)
FY15
FY16
FY17
FY18
FY19
FY20
Source: Company, JM Financial
Number of Active Ingredients (RHS)
Source: Company, JM Financial
UPL’s R&D spends rose gradually over FY15-19. It has over 20 R&D facilities and more than
750 R&D professionals, as at end-FY21. Given its strong background in product registrations,
UPL’s R&D division is likely to be able to generate IPs with new mixtures and formulations and
its scale and SG&A efficiency would help reduce costs. Its granted patents increased to 1,266
in FY20 (vs. 1,023 in FY19). It currently has 14-15 new products in late-stage development,
which have a peak risk adjusted revenue potential of USD 4.5bn. Of this, the company
expects peak risk adjusted revenue of USD 2.5bn in the next 5 years. Moreover, from the
new product pipeline, management expects 80% of sales from differentiated solutions and
the remaining 20% from post-patent solutions. This, in our view, should help UPL earn
higher gross margins.
Exhibit 3. Product pipeline of UPL’s post-patent active ingredients
Product type
Herbicides
Insecticides
Fungicides
BioStimulants
Seed treatments
Total
Early stage
5
10
15
4
4
38
Late stage
1
3
7
2
1
14
Total
6
13
22
6
5
52
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 35
31 May 2021
UPL Ltd
Moreover, industry estimates suggest that between CY19 and CY26, 19 active ingredients
are expected to go off-patent with an opportunity size of ~USD 4.2bn. This should bode well
for generic players such as UPL, which primarily deals in off-patent branded products. A few
of these molecules could have an annual opportunity size of USD 300-400mn.
Exhibit 4. Key agrochemicals active ingredients going off-patent in 2019-26
Molecules
Bixafen
Chlorantraniliprole
Cyantraniliprole
Cyprosulfamide
Fenpyrazamine
Flubendiamide
Fluopicolide
Flupyram
Fluxapyroxad
Isopyazam
Mandipropamid
Penflufen
Penthiopyrad
Pinoxaden
Pyriofenone
Pyroxsulam
Sedaxane
Thiencarbazone-Methyl
Valifenalate
Inventor
Bayer Crop Science
Dupont De Nemours
Dupont De Nemours
Dupont De Nemours
Sumitomo Chemicals
Nihon Nohyahu, Bayer Crop Science
Bayer Crop Science
Bayer Crop Science
BASF
Sygenta AG
Sygenta AG
Bayer Crop Science
Mitsui Chemicals
Sygenta AG
Ishihara
Dow Agrochemicals
Sygenta AG
Bayer Crop Science
Belchim
Opportunity size 2019 (USD Mn)
1200
1500
700-900*
650-800*
200-300*
700-900*
400-500*
250-350*
450-500*
300-350*
60
50-100*
600-700*
681
200-400*
400-450*
350-400*
900-950
500-600*
Source: Frost & Sullivan Research, India Pesticides DRHP *estimates on best efforts basis
Exhibit 5. UPL’s R&D spends have risen gradually between FY15-19
2,300
4%
1,725
3%
2.5%
2.2%
2.3%
1,150
2%
2.1%
575
1.3%
1.3%
0
1%
Total R&D expenditure (INR mn)
FY20
FY19
FY18
FY17
FY16
FY15
0%
R&D as % of stand-alone sales (RHS)
Source: Company, JM Financial
Exhibit 6. UPL expects risk adjusted peak revenue of USD 2.5bn in next 5 years
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 36
UPL Ltd
31 May 2021
With the Arysta acquisition, UPL successfully optimised its manufacturing footprint and
increased procurement efficiency. It also strengthened its R&D efforts by in-sourcing R&D
activities to boost efficiency and expanded its bandwidth to access new technologies. At endFY21, UPL had achieved cumulative revenue and cost synergies of USD 443mn and USD
235mn, respectively. It further is looking to achieve cost synergies of USD 200mn p.a. and
revenue synergies of USD 350mn p.a.
Exhibit 7. Arysta acquisition likely to bring further revenue and cost synergies
Source: Company, JM Financial
In Mar’21, UPL announced a long-term collaboration with FMC for its Rynaxypyr active
ingredient (AI). Under this agreement, FMC will provide UPL access to products containing
this AI. This means: a) UPL will be able to use this AI for development of formulations and
market around the world; and b) UPL will toll manufacture this AI for FMC in India for the
India market. FMC’s revenues from its two key diamide-class molecules – Rynaxypyr and
Cyazypyr were ~USD 1.6bn in CY19, as per its annual report. Hence, FMC’s global revenues
from Rynaxypyr are likely to have reached ~USD 800-900mn in 2020 (given that its global
sales were USD 500mn in 2011 - see here).
Further, FMC’s India sales from formulations containing this AI were estimated ~INR 15.4bn
in 2016 and are likely to have reached INR 20bn by 2020 (click here). Management in its
FY21 presentation highlighted that with this new AI, the company will be able to develop
value-added solutions; it currently has 17 formulations in the pipeline. Management also
indicated that it intends to launch several formulations in various Latin American and African
countries as early as FY22.
Exhibit 8. FMC’s Rynaxypyr and Cyazypyr revenues were ~USD 1.6bn in CY19
Source: FMC, JM Financial
Exhibit 9. Some of FMC’s Chlorantraniliprole (Rynaxypyr)’s patents have validity untill 2030-2035
Source: FMC, JM Financial
JM Financial Institutional Securities Limited
Page 37
31 May 2021
UPL Ltd
Latin America growth to pick up pace
Latin America is a key market for UPL as the region contributes ~36% to overall revenues. In
Latin America, it has 10 plants, 5 R&D facilities and a portfolio of 516 products. Within Latin
th
America, UPL has become the 4 largest player in Brazil and number 1 player in Mexico and
Columbia. As Brazil is the world’s largest exporter of coffee, soybeans, crop-based ethanol,
cotton, corn, rice and sugarcane, majority of its key brands Unizeb (fungicide), Zartan
(Herbicide), and Lancer gold (insecticide) are targeted towards these crops.
In the 4QFY21 conference call, management highlighted that soybean prices have risen
further due to a cold winter (soybean prices have risen continuously since Mar’20 due to dry
weather). Moreover, corn prices have jumped to the highest level ever in the last 8-9 years.
Given that soybean and corn remain two of the most important crops for Brazil, farmers
should look to increase their soy and corn acreage, in our view. On the back of this, we
expect UPL’s Latin America revenues to demonstrate 12% CAGR over FY21-23E.
Additionally, in FY22, management is looking to launch formulations of Chlorantraniliprole
(patented Technical collaboration with FMC) in Brazil, Mexico, and several other several
countries. This bodes well for the company’s volume growth in the LatAm region.
It is important to note that in FY21, as farmers’ incomes rose, the company was able to hike
prices to offset currency depreciations in the region. Hence, we believe that as crop prices
remain firm, the company will be able to hike prices to offset any a) adverse currency
movements and b) rise in commodity prices.
Exhibit 10. Latin America revenues to demonstrate 12% CAGR over FY21-23E
240
95%
100%
180
75%
120
50%
25%
60
26%
24%
25%
8%
12%
12%
5%
0
LatAm revenues (INR bn)
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY15
FY16
0%
YoY growth (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 38
31 May 2021
UPL Ltd
UPL’s operations in India are spread across key agricultural states, with strong focus on AP,
Maharashtra, Kerala, TN and Punjab. UPL has continuously focused on India with increased
farmer engagements and new product introductions. Its key products are Ulala (insecticide),
Phoskill (insecticide), Saaf (fungicide) and Sathi (herbicide); all have a high brand pull. UPL’s
India operations accounted for 11% of overall revenues in FY20. We expect UPL’s India
revenues to demonstrate an 11% CAGR over FY21-23E.
Exhibit 11. India revenues to demonstrate an 11% CAGR over FY21-23E
60
24%
22%
18%
30
12%
12%
11%
10%
15
8%
11%
8%
6%
India revenues (INR bn)
0%
FY23E
FY21
FY20
FY19
FY18
FY16
FY15
FY17
3%
0
FY22E
INR bn
45
YoY growth (%) (RHS)
Source: Company, JM Financial
Key crops for UPL in EU are sugar-beet, wine, and oilseeds. Europe contributed 17% of UPL’s
FY21 revenue. In FY21, UPL’s Europe revenue experienced a sharp uptick from new product
launches, such as Argos and Fazor, which are plant growth regulators mainly used on
potatoes. Hence, we estimate UPL’s EU revenues to demonstrate a 7% CAGR over FY21-23E
on account of: a) continued growth momentum from new product launches; b) robust
growth of differentiated and sustainable solutions; and c) synergies arising from the Arysta
acquisition. We estimate RoW revenues to witness a 7% CAGR over FY21-23E due to the
continued strong momentum of Glusifonate in South-East Asia.
Exhibit 13. RoW revenues to demonstrate a 7% CAGR over FY21-23E
100
104%
75
78%
50
52%
Europe revenues (INR bn)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
YoY growth (RHS) (%)
RoW revenues (INR bn)
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
0%
FY16
0
FY15
-10%
INR bn
0
FY23E
26%
FY22E
25
FY21E
30%
FY20
20
FY19
70%
FY18
40
FY17
110%
FY16
60
FY15
INR bn
Exhibit 12. Europe revenues to witness a 7% CAGR over FY21-23E
80
150%
YoY growth (RHS) (%)
Source: Company, JM Financial
Page 39
31 May 2021
UPL Ltd
North America contributed 15% to UPL’s FY21 revenue. For UPL, key crops in the North
American market are tree nuts, fruits, vegetables, and aquatics with key brands being
Manzate, Surflan, Asail, Penncozeb, and Microthiol. UPL has been growing its presence in the
American Midwest, a region where soybean, corn and wheat are predominant. We expect
UPL’s North America revenues to witness a 7% CAGR over FY21-23E due to its strengthening
presence on account of the Arysta acquisition.
Exhibit 15. Geographical revenue break-up
NorthAm revenues (INR bn)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
YoY growth (%) (RHS)
India
Europe
North America
Latin America
FY23E
FY22E
FY21
FY20
0%
FY19
0%
FY18
0
FY17
25%
FY16
16%
FY23E
18
FY22E
50%
FY21
32%
FY20
36
FY19
75%
FY18
48%
FY17
54
FY16
64%
FY15
100%
72
FY15
INR bn
Exhibit 14. North America revenues to register 7% CAGR over FY2123E
ROW
Source: Company, JM Financial
Page 40
31 May 2021
UPL Ltd
Debt no longer a concern
Due to the Arysta acquisition, UPL’s gross debt had sharply jumped to INR 289bn in FY19; as
a result, its net debt-to-EBITDA rose to a staggering 6.8X in FY19. However, management
has made consistent efforts to reduce debt through: a) part pre-payments of existing loans
and b) effective cost controls. On account of these measures, UPL’s net debt-to-EBITDA fell to
2.2X in FY21 (slightly below the management guidance of less than 2X). Going forward, we
believe UPL’s net debt-to-EBITDA is likely to drop to 1.6X in FY22 and 1.0X in FY23 led by
robust operating cash flows owing to the strong uptick in commodity prices. Moreover, we
derive comfort from the fact that management would try to keep the net debt-to-EBITDA at
~1.0X, consistent with past practices.
Exhibit 16. Net debt to EBITDA likely to come down to 1.0X by FY23E
8.0
6.8
6.0
4.0
3.2
2.2
2.0
1.6
1.5
0.7
1.1
1.0
FY17
FY18
1.0
0.0
FY15
FY16
FY19
FY20
FY21E
FY22E
FY23E
Source: Company, JM Financial
Low working capital cycle to sustain
Prior to the Arysta acquisition, UPL’s net working capital (NWC) cycle remained at 100-130
days (during FY16-18). However, after the acquisition, it dropped to 97 days in FY20 and 90
days in FY21. This decline in NWC was mainly on account of a decrease in i) inventory days to
89 in FY21 (vs. 93-98 days in FY16-18) and ii) receivable days to 119 in FY21 (vs. 126-133
days in FY16-18). We believe this decline in receivable and inventory days is sustainable as
synergies arising out of the Arysta acquisition would help keeping inventory in check while
rising farmer incomes bode well for receivable days.
Exhibit 17. Net working capital cycle is likely to remain at 90 days in FY22-23E
240
195
180
128
120
110
106
103
97
90
90
90
FY21
FY22E
FY23E
60
0
FY15
FY16
Inventory days
FY17
FY18
FY19
Receivable days
FY20
Payable days
Net working capital
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 41
31 May 2021
UPL Ltd
Key Assumptions and Estimates
Exhibit 18. Segment-wise revenue contribution and expected growth
INR m n
Geographical sales (INR m n)
India
Europe
North America
Latin America
ROW
Total
YoY grow th (%)
India
Europe
North America
Latin America
ROW
Total
% of total
India
Europe
North America
Latin America
ROW
Total
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
26,219
20,326
22,594
34,063
17,704
1,20,905
26,960
19,250
26,120
42,730
25,420
1,40,480
29,630
21,480
28,880
53,960
29,170
1,63,120
31,890
23,050
30,830
56,920
31,090
1,73,780
34,540
57,520
49,670
1,10,740
63,690
3,16,160
38,280
57,140
56,350
1,37,640
68,150
3,57,560
46,770
64,220
56,910
1,48,630
70,440
3,86,970
52,382
68,715
60,894
1,66,466
75,371
4,23,828
58,144
73,525
65,156
1,86,441
80,647
4,63,914
3%
-5%
16%
25%
44%
16%
10%
12%
11%
26%
15%
16%
8%
7%
7%
5%
7%
7%
8%
150%
61%
95%
105%
82%
11%
-1%
13%
24%
7%
13%
22%
12%
1%
8%
3%
8%
12%
7%
7%
12%
7%
10%
11%
7%
7%
12%
7%
9%
19%
14%
19%
30%
18%
100%
18%
13%
18%
33%
18%
100%
18%
13%
18%
33%
18%
100%
11%
18%
16%
35%
20%
100%
11%
16%
16%
38%
19%
100%
12%
17%
15%
38%
18%
100%
12%
16%
14%
39%
18%
100%
13%
16%
14%
40%
17%
100%
22%
17%
19%
28%
15%
100%
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 42
31 May 2021
UPL Ltd
110
64%
9%
68%
10%
54%
8%
400
Thousands
Exhibit 20. EBITDA margins to improve gradually to 23% by FY23E
500
Thousands
Exhibit 19. Revenue growth to remain at 9% CAGR over FY21-23E
28%
23%
83
20%
20%
18%
23%
22%
18%
21%
19%
17%
41%
300
25%
16%
55
14%
28
7%
0
0%
27%
16%
7%
200
Net revenue (INR bn)
YoY growth (RHS) (%)
EBITDA (INR bn)
Source: Company, JM Financial
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
FY23E
0%
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
100
FY15
14%
EBITDA margin (%) (RHS)
Source: Company, JM Financial
Exhibit 21. PAT margins to improve to 10% by FY23E
Exhibit 22. ROEs and RoCEs to improve after dip in FY19-20
52
14%
30%
11%
23%
26
7%
15%
13
4%
0
0%
10%
11%
39
12%
9%
9%
8%
8%
7%
PAT (INR bn)
PAT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
RoE
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
0%
FY16
8%
FY15
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
6%
RoCE
Source: Company, JM Financial
Page 43
31 May 2021
UPL Ltd
Valuation
We estimate UPL’s consolidated EBITDA to register a 13% CAGR over FY21-23E on account
of a) 9% revenue CAGR over FY21-23E and b) 159bps EBITDA margin expansion owing to
the normalisation of gross margins to pre-Arysta levels. Further, in our view, UPL’s PAT is
likely to register a 23% CAGR over FY21-23E on account of a decline in interest costs. We
value UPL’s consolidated business at a 9.5X 1- year EV/EBITDA (in-line with its pre-Arysta
acquisition 5-year average multiple of ~9.5X on account of the current high net debt-toEBITDA) to arrive at a Mar’22 TP of INR 1,000/share. We assume coverage with a BUY rating.
Exhibit 23. We value UPL at INR 1,000/share
FY23 EBITDA (INR
EV/EBITDA
bn)
m ultiple (x) Value (INR bn) Value (INR/share)
UPL consolidated
Less: Net Debt
Equity value including m inority
Less: Minority interest
Equity value
108
9.5
1,046
109
937
173
764
1,369
143
1,227
227
1,000
Source: JM Financial, Company
Exhibit 24. UPL 1-year forward P/E ratio
1,000
16.5.x
750
12.0x
500
7.0x
250
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Exhibit 25. UPL 1-year forward P/B chart
Exhibit 26. UPL 1-year forward EV/EBITDA chart
1,000
1,000
2.5x
750
8.0x
750
6.5x
1.7x
500
500
4.7x
1.0x
250
250
0
May-17
May-18
May-19
Source: Company, JM Financial
JM Financial Institutional Securities Limited
May-20
May-21
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Page 44
31 May 2021
UPL Ltd
Company profile
th
UPL is the 5 largest agrochemical company in the world, after the acquisition of Arysta
Lifesciences. UPL is a global leader in global food systems, with revenue of USD 3.1bn, UPL is
now present in 130+ countries with market access to 90% of the world’s food basket. UPL
offers an integrated portfolio of both patented and post-patent agricultural solutions for
various arable and specialty crops, including biological, crop protection, seed treatment and
post-harvest solutions covering the entire crop value chain.
Board of Directors
- Mr. Rajnikant Shroff, Chairman and Managing Director
- Mr. Jai Shroff, Global Group CEO
- Mr. Vikram Shroff, Director
- Mr. Arun Ashar, Director
- Mr. Pradeep Goyal, Independent Director
- Dr. Reena Ramachandran, Independent Director
- Mr. Hardeep Singh, Independent Director
- Dr. Vasant Gandhi, Independent Director
JM Financial Institutional Securities Limited
Page 45
31 May 2021
UPL Ltd
Financial Tables (Consolidated)
Income Statement
(INR mn)
Balance Sheet
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
2,18,370
3,57,560
3,86,940
4,23,828
4,63,914
24.7%
63.7%
8.2%
9.5%
9.5%
0
0
0
0
0
Total Revenue
2,18,370
3,57,560
3,86,940
4,23,828
4,63,914
Preference Share Capital
Cost of Goods Sold/Op. Exp
1,09,040
1,87,430
1,90,960
2,03,437
2,20,359
Minority Interest
Personnel Cost
20,950
33,910
37,120
40,832
44,915
Total Loans
Other Expenses
50,250
68,000
74,540
81,994
90,193
Def. Tax Liab. / Assets (-)
EBITDA
38,130
68,220
84,320
97,565
1,08,446
EBITDA Margin
17.5%
19.1%
21.8%
23.0%
23.4%
EBITDA Growth
8.8%
78.9%
23.6%
15.7%
11.2%
Gross Fixed Assets
Depn. & Amort.
9,690
20,120
21,730
23,172
24,465
EBIT
28,440
48,100
62,590
74,393
Other Income
2,400
550
1,780
Finance Cost
9,630
14,810
PBT before Excep. & Forex
21,210
33,840
Sales Growth
Other Operating Income
Y/E March
Shareholders’ Fund
Share Capital
Reserves & Surplus
FY20A
FY21E
FY22E
FY23E
1,46,450
1,92,820
2,08,870
2,44,961
2,79,975
1,020
1,530
1,530
1,530
1,530
1,45,430
1,91,290
2,07,340
2,43,431
2,78,445
0
0
0
0
0
33,580
33,120
36,930
47,600
57,567
2,63,830
2,73,710
2,21,460
2,12,040
1,77,040
18,840
8,330
8,850
11,505
15,079
Total - Equity & Liab.
4,62,700
5,07,980
4,76,110
5,16,105
5,29,661
Net Fixed Assets
1,86,340
1,85,110
1,84,980
1,86,626
1,81,028
0
0
0
0
0
Intangible Assets
0
0
0
0
0
83,982
Less: Depn. & Amort.
0
0
0
0
0
2,399
3,026
Capital WIP
11,660
10,590
8,990
8,990
8,990
20,600
15,083
12,645
Investments
11,560
12,080
11,780
11,780
11,780
43,770
61,709
74,363
Current Assets
4,22,000
4,84,200
4,89,780
5,29,604
5,63,529
Excep. & Forex Inc./Loss(-)
-4,510
-6,230
-2,380
-2,618
-2,880
Inventories
PBT
16,700
27,610
41,390
59,091
71,483
Sundry Debtors
Taxes
1,650
5,860
6,860
14,477
17,513
Cash & Bank Balances
Extraordinary Inc./Loss(-)
0
0
0
0
0
Assoc. Profit/Min. Int.(-)
860
4,050
6,660
8,270
9,997
Reported Net Profit
14,470
17,760
28,710
36,404
Adjusted Net Profit
18,534
22,668
30,696
38,380
Net Margin
8.5%
6.3%
7.9%
Diluted Share Cap. (mn)
764.0
764.0
764.0
92,700
78,500
94,220
1,04,506
1,14,390
1,18,120
1,18,670
1,25,910
1,39,341
1,52,520
28,510
67,520
48,530
63,708
74,569
510
400
550
550
550
Other Current Assets
1,82,160
2,19,110
2,20,570
2,21,500
2,21,500
44,033
Current Liab. & Prov.
1,57,200
1,73,410
2,10,430
2,11,906
2,26,676
46,207
Current Liabilities
95,590
1,08,640
1,39,030
1,45,141
1,58,320
9.1%
10.0%
Provisions & Others
61,610
64,770
71,400
66,765
68,356
764.0
764.0
Net Current Assets
2,64,800
3,10,790
2,79,350
3,17,699
3,36,853
Total – Assets
4,62,700
5,07,980
4,76,110
5,16,105
5,29,661
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
8.5%
6.3%
7.9%
9.1%
10.0%
Asset Turnover (x)
0.7
0.7
0.7
0.8
0.8
Leverage Factor (x)
2.6
3.0
2.6
2.3
2.1
15.6%
13.4%
15.3%
16.9%
17.6%
FY23E
Diluted EPS (INR)
24.3
29.7
40.2
50.2
60.5
Diluted EPS Growth
-10.8%
22.3%
35.4%
25.0%
20.4%
Total Dividend + Tax
4,080
3,060
7,640
6,189
7,486
5.3
4.0
10.0
8.1
9.8
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
16,840
27,640
41,810
59,121
71,513
Depn. & Amort.
9,690
20,120
21,730
23,172
24,465
Net Interest Exp. / Inc. (-)
8,260
13,950
18,670
12,684
9,619
Dividend Per Share (INR)
(INR mn)
FY19A
Loans & Advances
Source: Company, JM Financial
Source: Company, JM Financial
Cash Flow Statement
Inc (-) / Dec in WCap.
(INR mn)
-5,640
30,500
-2,140
-11,730
-5,434
Others
-2,050
3,370
-700
-2,655
-3,574
Taxes Paid
-3,540
-8,190
-7,250
-14,477
-17,513
Dupont Analysis
RoE
Operating Cash Flow
23,560
87,390
72,120
66,115
79,076
Key Ratios
Capex
-13,700
-14,750
-16,190
-24,981
-25,000
Y/E March
FY19A
FY20A
FY21E
FY22E
Free Cash Flow
9,860
72,640
55,930
41,134
54,076
BV/Share (INR)
191.7
252.4
273.4
320.6
366.5
Inc (-) / Dec in Investments
4,270
-90
-280
0
0
ROIC
10.0%
9.2%
12.6%
13.4%
14.8%
Others
-3,10,250
-11,590
-4,540
0
0
ROE
17.6%
Investing Cash Flow
-3,19,680
-26,430
-21,010
-24,981
-25,000
0
0
0
0
Inc / Dec (-) in Capital
Dividend + Tax thereon
15.6%
13.4%
15.3%
16.9%
Net Debt/Equity (x)
1.6
1.1
0.8
0.6
0.4
0
P/E (x)
33.5
27.4
20.2
16.2
13.4
0
0
0
0
0
P/B (x)
4.2
3.2
3.0
2.5
2.2
2,19,660
-16,670
-43,640
-13,662
-37,969
EV/EBITDA (x)
23.3
12.6
9.8
8.4
7.2
69,280
-5,080
-23,490
-8,484
-1,995
EV/Sales (x)
4.1
2.4
2.1
1.9
1.7
Financing Cash Flow
2,88,940
-21,750
-67,130
-22,146
-39,964
Debtor days
197
121
119
120
120
Inc / Dec (-) in Cash
-10,810
38,980
-19,270
15,738
10,861
Inventory days
155
80
89
90
90
Opening Cash Balance
39,070
28,260
67,240
47,970
63,708
Creditor days
191
129
151
156
157
Closing Cash Balance
28,260
67,240
47,970
63,708
74,569
Source: Company, JM Financial
Inc / Dec (-) in Loans
Others
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 46
31 May 2021
India | Chemicals | Company Update
PI Industries | BUY
Ever Resilient ‘PI’e
PI Industries (PI) currently is India’s largest CSM player in the agrochemicals space.
Its order book has grown ~15x over the last 10 years and its impeccable execution
capabilities in this space have made it a preferred CSM partner for global
agrochemical innovators. Moreover, its entry into performance and fine chemicals
along with pharma APIs/intermediates is likely to put it in the league of global CSM
players offering services across segments. We expect PI to demonstrate 25%
earnings CAGR over FY21-23E. We value the company at 40x FY23E EPS (at a
~25% premium to its 3-year average 1-year forward multiple) to arrive at a TP of
INR 2,995 and assume coverage with a BUY rating.
CSM order book to sustain growth momentum: Over the years, PI has established itself as a
strong CSM player. Its order book has seen a staggering rise to USD 1.5bn in FY20 (from a
meagre ~USD 100mn in FY10). PI’s CSM revenues have witnessed a 14%/20%CAGR over
FY14-17/FY17-20. It has been able to achieve this phenomenal growth on account of its
strong R&D expertise. Its R&D expenses saw a healthy 33% CAGR over FY15-20. We expect
PI’s CSM revenues to post a 24% CAGR over FY21-23E, primarily on account of a) improved
capital efficiency driven by slowdown of capex intensity; b) a significant ramp-up of
additional capacity; and c) better utilisations led by continuous process improvements.
Domestic Agro-chemicals business – niche product portfolio, a key differentiator: Due to its
niche product portfolio, PI has set up high entry barriers in the domestic business. We expect
PI’s domestic agrochemicals sales to witness an 11% CAGR over FY21-23E and reach INR
15.5bn by FY23E on account of a) likely substantial contribution from Londax power
(herbicide for rice) and Awkira (herbicide for wheat) in coming years; b) synergies from
IsAgro’s domestic distribution channel; and c) sustained contribution from other older inlicensed products where it still enjoys a significant market share due to in-licensing/comarketing.
25% earnings CAGR over FY21-23E — BUY: We value the company at 40x FY23E EPS (at a
~25% premium to its 3-year average 1-year forward multiple) to arrive at a TP of INR 2,995
and assume coverage with a BUY rating. Our premium to its historical and current valuation
is justified on account of a) its entry into performance, fine chemicals and pharma segments,
which would be likely put PI in the league of global CSM players offering services across
segments; b) increased contribution from its domestic operations on account of IsAgro
acquisition and new product launches; and c) increased utilisation of two of its plants (which
are currently at 50-70% utilisation) and two more plants (MPP5 and MPP 10) coming onstream in the next 2-3 years.
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
BUY
2,995
14.9%
Key Data – PI IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR2,606
INR394.9/US$5.5
51%
151.7
148.0
INR1,117.1/US$15.4
2,795/1,500
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
1.5
-3.7
6M
17.9
1.2
12M
64.1
3.4
Key risks: a) slowdown in the global agrochemicals industry; b) any order
deferrals/cancellations; and c) overcoming the acquisition hurdle of suitable pharma assets by
utilising the QIP proceeds effectively to achieve its desired asset turns of 1.5-2.0x
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
28,409
24.8
5,731
20.2
4,077
29.5
17.2
19.5
19.5
88.3
15.8
68.9
0.2
FY20A
33,068
16.4
6,977
21.1
4,423
32.0
8.5
18.0
18.0
81.4
13.6
57.2
0.2
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
42,762
29.3
9,851
23.0
7,189
48.6
51.6
22.2
18.1
53.7
7.3
37.9
0.2
FY22E
55,581
30.0
13,394
24.1
9,433
62.2
28.0
25.3
16.5
41.9
6.4
27.9
0.2
FY23E
66,953
20.5
16,390
24.5
11,226
74.0
19.0
27.8
16.9
35.2
5.5
22.5
0.3
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
PI Industries
Custom Synthesis - Growth to continue in medium term
PI offers custom synthesis and manufacturing (CSM) services to a few major global
agrochemical players. The primary difference between typical CRAMS and CSM is the
differentiation of products. Under CSM, molecules (in most cases, patented molecules) are
synthesised as per customer needs while under CRAMS, generic/off-patent molecules are
developed using contractual research and manufacturing agreements. Due to this, CSM
requires higher R&D efforts compared with CRAMS. Since CSM is only focused on selective IP
products, the whole process of new product development, scale-up and then
commercialisation takes about 2 years.
Over the years, PI has established itself as a strong CSM player in Japan and Germany. Its
order book has seen a staggering rise to USD 1.5bn in FY20 (from a meagre ~USD 100mn in
FY10). Apart from this, there are several other spot contracts that it takes on an annual basis.
However, going forward, management does not foresee a substantial increase in its order
book as the commitment of assets built up is already in place, which provides revenue
visibility for the next 3-4 years. Moreover, its order book has not seen any reduction despite
the significant supply ramp-up which underpins order inflows.
PI’s CSM revenues have witnessed a 14%/20%CAGR over FY14-17/FY17-20. It has been able
to achieve this phenomenal growth on account of its strong R&D expertise. Its R&D expenses
have witnessed a healthy 33% CAGR over FY15-20.
Exhibit 1. PI’s CSM sales as a % of order book has been at 20-23%
1,600
36%
33%
1,200
23%
23%
27%
21%
19%
19%
800
18%
400
9%
0
0%
FY15
FY16
FY17
Order book (USD mn)
FY18
FY19
FY20
CSM sales (USD mn)
CSM sales as % of order book (RHS) (%)
Source: Company, JM Financial
Exhibit 2. Lifecycle of a molecule
Source: Hikal, JM Financial
JM Financial Institutional Securities Limited
Page 48
31 May 2021
PI Industries
Exhibit 3. R&D expenses have witnessed a healthy CAGR of 33% over FY15-20
1,800
7.3%
8%
1,350
6%
4.6%
3.5%
3.6%
900
450
2.9%
4%
1.5%
2%
0
Total R&D expenditure (INR mn)
FY20
FY19
FY18
FY17
FY16
FY15
0%
R&D as % of sales (RHS)
Source: Company, JM Financial
This has also enabled the company to commercialise a higher number of molecules every
year. During FY18/19/20, 4/3/5molecules were commercialised. During FY20, PI synthesised
and developed 48 new molecules. Of these, 18 molecules were successfully scaled up for
development and 6 molecules were transferred to the next stage. Going forward,
management has indicated commercialisation of ~15-20 new molecules over the next two
years on account of increased inquiries and R&D pipeline.
PI’s CSM exports revenues started picking up after it got several breakthroughs in 2013 in the
form of Pyroxasulfone (for Kumiai), Flubendiamide (for Bayer), and so on. Pyroxasulfone was
developed by Kumiai chemicals (with which PI had formed a JV) and it has been the biggest
blockbuster molecule for PI till date as it sales roughly comprise 30-35% of CSM sales
currently. Further, Flubendiamide is a diamide insecticide, which was co-developed by Bayer
(with Nihon Nohyaku). Its global sales reached USD 443mn in 2016. However, after China
banned this molecule’s use on rice in 2016, sales have dropped drastically. Flubendiamide’s
patent has expired recently in Nov’19. Moreover, PI registered a number of technical for
exports consistently during 2014-18 despite the global slowdown in the agrochemicals
industry.
Exhibit 4. PI’s Technical exports registrations over last ten years
Approval Date
Technical
Nov-09
Fenoxanil
May-11
Kresoxim Methyl
May-11
Orasastrobin
Jan-13
Pyroxasulfone
Apr-13
Methidathion
Jul-13
Ethion
Sep-13
Flubendiamide
May-14
Tefruyltrione
Apr-15
Pemethrin
Jun-15
Lambda Cyhalothrin
Jun-15
Propiconazole
Dec-15
Metominostrobin
Feb-16
Bispyribac Sodium
Sep-17
FlazaSulfuron
Sep-18
2,4-D Dimethyl Amine Salt
Type
Fungicide
Fungicide
Fungicide
Herbicide
Insecticide
Insecticide
Insecticide
Herbicide
Insecticide
Insecticide
Fungicide
Fungicide
Herbicide
Herbicide
Herbicide
Source: CIBRC, JM Financial
JM Financial Institutional Securities Limited
Page 49
31 May 2021
PI Industries
PI has been continuously upgrading its existing capacities with the help of technology
developed in-house. In FY20, PI had commissioned two new plants (worth INR 3bn-3.5bn),
which were running at ~50-70% capacity utilisations at end-3QFY21. At the same time, it is
continuously looking at increasing the utilisations of these two plants. Moreover, two more
multi-product plants (MPP) are likely to come on-stream in the next 2-3 years, of which MPP5 is likely to be commissioned in 2HFY22 (delayed due to an accident last year).
We expect PI’s CSM revenues to see a 24% CAGR over FY21-23E, primarily on account of a)
improved capital efficiency driven by a slowdown in capex intensity; b) significant ramp-up of
additional capacity; and c) better utilisations led by continuous process improvements.
Exhibit 5. CSM sales likely to see a 24% CAGR over FY21-23E
50,000
40%
37%
35%
37,500
30%
25%
24%
24%
19%
25,000
20%
13%
12,500
10%
9%
CSM sales (INR mn)
0%
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
0
FY15
1%
YoY growth (%) (RHS)
Source: Company, JM Financial
Exhibit 6. Geographical break-up of PI’s overall revenues
100%
75%
8%
6%
3%
5%
3%
8%
23%
14%
4%
10%
22%
39%
50%
22%
29%
42%
40%
36%
38%
14%
25%
4%
8%
37%
34%
26%
26%
0%
FY16
FY17
India
Asia (excluding India)
FY18
North America
FY19
Europe
FY20
RoW
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 50
31 May 2021
PI Industries
Concentration risk likely to fade; inorganic acquisition risk
remains
Currently, PI’s top 5 customers (of 12-15 products) constitute 80-85% of CSM revenues.
Hence, to reduce the concentration risk in terms of both customers and products, PI has over
the years been trying to diversify and foray into other segments such as pharmaceuticals,
nutraceuticals, etc. On the basis of the available technology, management has indicated that
it is starting to enter the API/intermediates space and would like to replicate the success
achieved in the agrochemicals space.
Further, the majority of PI’s upcoming production capacity (at the expense of INR 6bn) at its
Jambusar plant is largely focused towards performance, fine and specialty chemicals; this
indicates that it is actively looking beyond agrochemicals.
Exhibit 7. PI’s expected production capacity coming up at its Jambusar plant
Product category
Performance chemicals
Fine Chemicals
Herbicides and intermediates
Pyrazoles
Insecticides and intermediates
Fungicides and intermediates
Fluorospecialty chemicals
Pharma intermediates
Specialty chemicals
Other R&D products
Total
Capacity (MTPA)
13,000
7,500
5,650
5,500
4,800
3,550
2,000
1,000
1,000
240
44,240
Number of products
2
13
17
1
12
8
1
1
5
1
61
Source: Company, Environmental clearance, JM Financial
PI has already started supplying advanced intermediates for Covid-19 drugs and is working
on pharma intermediates on a commercial scale with more than 10 products. PI is still
evaluating the percentage allocation of the recent QIP proceeds of INR 20bn to the pharma
business. To provide a jump start to its pharma segment, it is looking to acquire suitable
pharma assets. It remains to be seen how management overcomes the acquisition hurdle and
whether it is able to achieve desired asset turns of 1.5-2.0x. This, in our view, is a key risk.
However, we draw comfort from management’s guidance of ~20-25% revenue contribution
from pharma in the next 3-4 years.
Exhibit 8. PI’s key competitors in the CSM space
Company
Country
Corporate Structure/Listing
Crop Protection
Saltigo
Germany
Subsidiary of Lanxess - A listed Company in Germany
√
DPx Holdings Austria
Patheon
√
Lonza
Switzerland Listed
√
CABB (Finland)UK
Not listed
√
PI Industries India
Listed in BSE and NSE
√
CSM Activities
Pharmaceuticals
√
√
√
√
×
Specialty Chemicals
√
√
√
√
×
Source: Company, Industry, JM Financial
JM Financial Institutional Securities Limited
Page 51
31 May 2021
PI Industries
Domestic Agro-chemicals business: niche product portfolio
PI, with over 70,000 retail outlets and 10,000 distributors, has ~6% market share in the
domestic agrochemicals business. PI’s domestic products have a significantly lower presence
in the southern belt where the company has been trying to increase its footprint. With the
recent acquisition of IsAgro, PI is going to utilise IsAgro’s strong distribution network for the
horticulture segment and expects to benefit by cross leveraging the marketing channels of
PI and IsAgro.
In the domestic market, PI focuses on manufacturing and/or marketing of agrochemicals
through a) In-licensing of newly launched or patented molecules from multinational
innovators to register and market agrochemicals in India; b) manufacturing and marketing
of branded generic agrochemicals; and c) co-market early stage lifecycle agrochemicals
using its countrywide marketing set up in India. In-licensing gives PI a competitive
advantage by giving access to newly launched or patented products. In-licensed products
account for ~60-65% of PI’s agrochemical sales.
In FY19, PI entered the sugarcane protection segment with the launch of Cosko and
strengthened its position in the rice and chilli protection segment, with the launch of
Fantom. In FY20, PI launched two new products including a wheat herbicide Awrika
(Pyroxasulfone, for phalaris minor weed which had developed resistance to existing
herbicides). Over the next few years, it intends to rationalise low-margin products and focus
on products for rice, wheat, sugarcane, cotton and soybean crops.
In 1HFY21, PI launched Londax Power, which is originally a DuPont product (divested to
Kumiai). For the Indian market, PI is the exclusive distributor of this brand. It also launched
Shield, which is developed through in-house R&D of an existing molecule with new
innovative formulation that has been specifically launched for disease control in rice. Going
forward, PI expects to launch 25 products over next 5 years for row and horticulture corps.
Exhibit 9. PI’s product portfolio in the domestic market
Year
1HFY21
FY20
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY10
Brand
Tehnicals
Londax
Bensulfuron Methyl 0.6% + Pretilachlor 6% GR
Shield
Iprobenfos
Awkira
Pyroxasulfone
Cosko SC
Rynaxypyr
Fantom
Picoxystrobin 6.78% + Tricycloazole 20.33%
Cosko
Rynaxypyr
Header
Pyraclostrobin
Fender
Fluxapyroxad 6.25% + Epoxiconazole 6.25%
Visma
Pyraclostrobin 12.8% + Boscalid 25.2%
Humesol
Humic Acid 18% +Fulvic Acid 1.5%
Elite
Topramezone
Legacee
Fenoxaprop-p-ethyl
Vibrant
Thiocyclam Hydrogen Oxalate
Biovita
Ascophyllum Nodosum
Perido
Propiconazole
Keefun
Tolfenpyrad
Bunker
Pendimethlin
Melsa
Pinoxaden
Pimix
Metsulfuron methyl 10% + Chlorimuron etyhl 10%
Osheen
Dinotefuran
Fluton
Flubendiamide
Cuprina
Copper Oxychloride
Clutch
Pyraclostrobin 5% + Metiram 55%
Sanipeb
Propineb
Wicket
Clodinafop-propargyl
Oval
Acephate
Nominee Gold Bispyribac Sodium
Product type
In-licensed (Kumiai)
Branded generic
In-licensed (Kumiai)
Co-marketed (FMC)
Category
Herbicide
Fungicide
Herbicide
Insecticide
Fungicide
Co-marketed (FMC)
Insecticide
Co-marketed (BASF)
Fungicide
Co-marketed (BASF)
Fungicide
Co-marketed (BASF)
Fungicide
Specialty
Co-marketed (BASF)
Herbicide
Co-marketed
Herbicide
In-licensed (Nippon)
Insecticide
In-licensed
PGR
Fungicide
In-licensed
Insecticide
Branded generic
Herbicide
Co-marketed (Syngenta) Herbicide
Co-marketed
Herbicide
In-licensed (Mitsui)
Insecticide
In-licensed (Nichino)
Insecticide
Branded generic
Fungicide
Co-marketed (BASF)
Fungicide
Co-marketed
Fungicide
Branded generic
Herbicide
Branded generic
Insecticide
In-licensed (Kumiai)
Herbicide
Crops
Rice
Rice
Wheat
Cotton, corn, ground nut, chilli
Rice & Chilli
Fruits & vegetables
Cotton, wheat, maize
Multiple
Cotton, wheat, maize
Multiple
Maize
Rice
Rice
Multiple
Rice, Wheat, Groundnut, Soybean, Tea
Cabbage, Okra
Rice, Wheat, Cotton, Soybean
Wheat
Rice
Rice, cotton
Rice, cotton, cabbage, tomato, pigeon pea
Fruits & vegetables
Tomato, Potato, Grapes
Horticulture crops
Wheat
Cotton, sunflower
Rice
Source: Company, JM Financial, Industry
JM Financial Institutional Securities Limited
Page 52
31 May 2021
PI Industries
PI - due to its niche product portfolio - has set up a high entry barriers in the domestic
business. We expect PI’s domestic agro chemicals sales to witness a 11% CAGR over FY2123E and reach INR 15.5bn by FY23E on account of a) likely substantial contribution from
Londax power (herbicide for rice) and Awkira (herbicide for wheat) in the coming years; b)
synergies arising out of IsAgro’s domestic distribution channel; and c) sustained
contribution from other older in-licensed products where it still enjoys a significant market
share due to in-licensing/co-marketing.
Exhibit 10. PI’s domestic sales likely to witness 11% CAGR over FY21-23E
18,000
50%
39%
13,500
30%
20%
21%
9,000
12%
2%
10%
10%
-10%
4,500
-10%
Domestic sales (INR mn)
FY23E
-30%
FY22E
FY21
FY20
FY19
FY18
-13%
FY17
FY16
0
FY15
-13%
YoY growth (%) (RHS)
Source: Company, JM Financial
Key risks for this segment:
a) The agriculture industry is seasonal and cyclical in nature and subject to the vagaries of
nature to the extent of monsoon and prevailing climatic conditions. Unfavourable
weather/climatic conditions, poor rainfall, seasonal fluctuations and commodity crop price
variations could adversely affect the company.
b) Agri-input activities could be adversely affected by the introduction of alternative pest
management and crop protection measures such as bio-technology products, pest resistant
seeds or genetically modified crops.
c) If any global innovator, from whom in-licensing is done, establishes a presence in the
Indian market, opportunity will be lost.
JM Financial Institutional Securities Limited
Page 53
31 May 2021
PI Industries
Key Assumptions and Estimates
Exhibit 11. Segment wise Revenue contribution and expected growth
INR m n
Segm ental Revenue (INR m n)
Domestic
CSM
Total
Revenue YoY grow th (%)
Domestic
CSM
Total
Revenue contribution (%)
Domestic
CSM
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
10,669
11,634
22,303
9,245
12,728
21,973
9,448
14,385
23,833
8,534
14,553
23,087
10,356
18,053
28,409
9,000
24,660
33,660
12,550
33,220
45,770
14,056
41,525
55,581
15,462
51,491
66,953
20.4%
19.2%
19.8%
-13.3%
9.4%
-1.5%
2.2%
13.0%
8.5%
-9.7%
1.2%
-3.1%
21.4%
24.0%
23.1%
-13.1%
36.6%
18.5%
39.4%
34.7%
36.0%
12.0%
25.0%
21.4%
10.0%
24.0%
20.5%
48%
52%
42%
58%
40%
60%
37%
63%
36%
64%
27%
73%
27%
73%
25%
75%
23%
77%
Source: Company, JM Financial
We expect PI to demonstrate a 25% revenue CAGR over FY21-23E while strengthening of
EBITDA margins due to positive operating leverage on account of better utilisation is likely to
aid EBITDA to demonstrate a 29% CAGR over FY21-23E.
Exhibit 12. PI’s overall revenue to witness 25% CAGR over FY21-23E
70
40%
Exhibit 13. PI’s EBITDA margins to rise steadily over FY21-23E
16,000
23%
29% 30%
20%
53
30%
35
20%
21%
16%
20%
16%
18%
21%
12,000
23%
28%
24%
21% 23% 24%
20%
8,000
14%
4,000
7%
0
0%
8%
18
10%
Gross Sales (INR Bn)
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
FY23E
0%
FY22E
FY21
FY20
FY19
FY18
FY16
FY15
0
FY17
2%
YoY Growth % (RHS)
EBITDA (INR mn)
Source: Company, JM Financial
EBITDA Margin % (RHS)
Source: Company, JM Financial
Exhibit 14. PAT is likely to demonstrate 25% CAGR over FY21-23E
12,000
Exhibit 15. ROE and ROCE are likely to remain at ~17%
20%
19%
17% 17%
17%
34%
15%
9,000
14%
14%
13%
15%
28%
10%
PAT (INR mn)
RoE
PAT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
22%
FY15
FY23E
FY22E
10%
FY21
0%
FY20
0
FY19
16%
FY18
5%
FY17
3,000
FY16
10%
FY15
6,000
RoCE
Source: Company, JM Financial
Page 54
31 May 2021
PI Industries
Valuation
We value the company at 40x FY23E EPS (at ~13-14% premium to its 3-year average 1-year
forward multiple) to arrive at a TP of INR 2,995 and assume coverage with BUY. Our
premium to its historical and current valuation is justified on account of a) entry into
performance, fine chemicals and pharma segments, which would put PI in the league of
global CSM players offering services across segments; b) increased contribution from the
domestic market on account of IsAgro acquisition and new product launches; and c)
increased utilisation of two of its plants (which are currently at 50-70% utilisation) and two
more plants (MPP5 and MPP 10) coming on-stream in the next 2-3 years.
Exhibit 16. PI 1-year forward P/E chart
3,000
42.0x
2,250
32.0x
1,500
21.0x
750
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Exhibit 17. PI 1-year forward P/B chart
Exhibit 18. PI 1-year forward EV/EBITDA chart
3,000
3,000
29.0x
6.5x
2,250
2,250
5.0x
1,500
20.0x
1,500
4.0x
750
0
May-17
15.0x
750
May-18
May-19
Source: Company, JM Financial
JM Financial Institutional Securities Limited
May-20
May-21
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Page 55
31 May 2021
PI Industries
Company profile
Founded in 1946 as Mewar Oil & General Mills Ltd, PI Industries is a market leader in the
agrochemical market with a unique business model across the entire value chain from R&D
and distribution, to providing innovative solution services.
PI Industries has a broad Agrochemical portfolio pipeline from generic pesticides to focused
speciality products. It also has a robust services suite comprising of R&D, CSM and end-toend distribution services.
Exhibit 19. PI Industries' R&D and Manufacturing facilities
Location
Udaipur, Rajasthan
Panoli Unit 1, Ankleshw ar, Gujarat
Panoli Unit 2, Ankleshw ar, Gujarat
Jambusar Unit 1, Jambusar, Gujarat
Jambusar Unit 2, Jambusar, Gujarat
Panoli , Ankleshw ar, Gujarat (Manufacturing facility of
Isagro)
Type of Facility
R&D plant
Kilo plant
Pilot plant
Manufacturing of intermediates and
active ingredients
Formulations and w arehouse
Manufacturing of intermediates and
active ingredients
Manufacturing of intermediates and
active ingredients
Manufacturing of intermediates and
active ingredients
Source: Company, JM Financial
Board of Directors
-
Mr. Narayan K. Seshadri, Independent Non-Executive Chairman
-
Mr. Mayank Singhal ,Vice Chairman and Managing Director
-
Dr. Raman Ramachandran , Managing Director & CEO
-
Mr. Rajnish Sarna , Executive Director
-
Dr. K.V.S Ram Rao, Executive Director
-
Mr. Arvind Singhal ,Non Independent - Non Executive Director
-
Mrs. Ramni Nirula, Independent Non-Executive Director
-
Dr. T.S. Balganesh, Independent Non-Executive Director
-
Mr. Pravin K. Laheri, Independent Non-Executive Director
-
Ms. Lisa J Brown, Independent Director, Independent Director
JM Financial Institutional Securities Limited
Page 56
31 May 2021
PI Industries
Financial Tables (Standalone)
Income Statement
(INR mn)
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
28,409
33,068
42,762
55,581
66,953
Shareholders’ Fund
22,747
26,368
52,910
61,371
71,442
Sales Growth
24.8%
16.4%
29.3%
30.0%
20.5%
Share Capital
0
0
0
0
0
Total Revenue
28,409
33,068
42,762
55,581
66,953
Cost of Goods Sold/Op. Exp
15,502
18,128
23,865
30,959
37,293
Personnel Cost
2,625
3,113
3,659
4,446
Other Expenses
4,551
4,850
5,387
EBITDA
5,731
6,977
9,851
EBITDA Margin
20.2%
21.1%
23.0%
EBITDA Growth
16.5%
21.7%
41.2%
Depn. & Amort.
926
1,332
4,805
Other Income
Finance Cost
138
138
152
152
152
22,609
26,230
52,758
61,220
71,290
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
5,335
Total Loans
99
5,077
2,574
74
-2,426
6,782
7,935
Def. Tax Liab. / Assets (-)
-127
145
741
930
1,154
13,394
16,390
Total - Equity & Liab.
22,719
31,590
56,225
62,376
70,171
24.1%
24.5%
Net Fixed Assets
13,667
18,964
21,321
26,272
30,168
36.0%
22.4%
Gross Fixed Assets
14,732
20,784
24,417
30,270
35,936
1,603
1,939
2,317
Intangible Assets
350
393
493
536
579
5,645
8,248
11,456
14,072
Less: Depn. & Amort.
2,959
4,270
5,873
7,815
10,132
600
479
1,133
1,166
857
Capital WIP
59
180
281
44
-39
PBT before Excep. & Forex
5,346
5,944
9,100
12,577
14,968
Excep. & Forex Inc./Loss(-)
0
0
0
0
0
PBT
5,346
5,944
9,100
12,577
Taxes
1,269
1,521
1,911
Extraordinary Inc./Loss(-)
0
0
Assoc. Profit/Min. Int.(-)
0
4,077
Other Operating Income
EBIT
Reported Net Profit
Reserves & Surplus
1,544
2,057
2,284
3,281
3,786
Investments
1,229
4,542
21,671
19,154
19,154
Current Assets
16,424
17,413
25,625
33,149
40,361
Inventories
5,357
7,199
9,652
10,888
13,115
14,968
Sundry Debtors
6,618
5,483
6,206
9,137
11,006
3,144
3,742
Cash & Bank Balances
831
1,092
972
7,117
9,003
0
0
0
Loans & Advances
543
643
138
1,062
1,280
0
0
0
0
Other Current Assets
3,075
2,995
8,657
4,945
5,957
4,423
7,189
9,433
11,226
Current Liab. & Prov.
8,601
9,329
12,392
16,199
19,513
11,329
Adjusted Net Profit
4,077
4,423
7,189
9,433
11,226
Current Liabilities
5,141
5,538
8,280
9,405
Net Margin
14.4%
13.4%
16.8%
17.0%
16.8%
Provisions & Others
3,460
3,791
4,112
6,794
8,184
Diluted Share Cap. (mn)
138.1
138.1
148.0
151.7
151.7
Net Current Assets
7,823
8,084
13,233
16,950
20,848
Total – Assets
22,719
31,590
56,225
62,376
70,171
Diluted EPS (INR)
29.5
32.0
48.6
62.2
74.0
Diluted EPS Growth
17.2%
8.5%
51.6%
28.0%
19.0%
Total Dividend + Tax
739
802
759
971
1,156
Dividend Per Share (INR)
4.4
4.8
5.1
6.4
7.6
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
5,346
5,944
9,100
12,577
14,968
Depn. & Amort.
926
1,311
1,603
1,942
2,317
Net Interest Exp. / Inc. (-)
-541
-299
-221
-1,122
-896
Source: Company, JM Financial
Source: Company, JM Financial
Cash Flow Statement
Inc (-) / Dec in WCap.
Others
Taxes Paid
(INR mn)
-1,329
-224
-1,071
2,428
-2,012
0
0
-575
0
0
-1,144
-1,025
-1,555
-2,956
-3,518
Dupont Analysis
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
14.4%
13.4%
16.8%
17.0%
16.8%
Asset Turnover (x)
1.3
1.2
1.0
0.9
1.0
Leverage Factor (x)
1.0
1.1
1.1
1.0
1.0
19.5%
18.0%
18.1%
16.5%
16.9%
FY23E
RoE
Operating Cash Flow
3,258
5,707
7,281
12,870
10,860
Key Ratios
Capex
-3,737
-6,607
-3,379
-6,893
-6,214
Y/E March
FY19A
FY20A
FY21E
FY22E
Free Cash Flow
-479
-901
3,902
5,977
4,646
BV/Share (INR)
164.7
191.0
356.8
404.9
470.9
Inc (-) / Dec in Investments
381
-3,313
-6,848
2,517
0
ROIC
19.5%
18.0%
22.2%
25.3%
27.8%
ROE
16.9%
Others
Investing Cash Flow
Inc / Dec (-) in Capital
600
479
-14,052
1,166
857
-2,756
-9,441
-24,279
-3,210
-5,357
0
0
14
0
19.5%
18.0%
18.1%
16.5%
Net Debt/Equity (x)
0.0
0.2
-0.2
-0.4
-0.4
0
P/E (x)
88.3
81.4
53.8
41.9
35.2
Dividend + Tax thereon
-739
-802
-607
-971
-1,156
P/B (x)
15.8
13.6
7.3
6.4
5.5
Inc / Dec (-) in Loans
-423
4,798
-2,032
-2,544
-2,461
EV/EBITDA (x)
68.9
57.2
37.9
27.9
22.5
Others
287
0
19,516
0
0
EV/Sales (x)
13.9
12.1
8.9
6.7
5.5
Financing Cash Flow
-876
3,996
16,891
-3,515
-3,617
Debtor days
85
61
53
60
60
Inc / Dec (-) in Cash
-373
261
-107
6,145
1,886
Inventory days
69
79
82
72
72
Opening Cash Balance
1,204
831
1,079
972
7,117
Creditor days
83
77
86
81
82
Closing Cash Balance
831
1,092
972
7,117
9,003
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 57
31 May 2021
India | Chemicals | Company Update
SRF Ltd | BUY
Adaptive chemistry at work
SRF has - over the years - adapted well from being a tyre cord fabrics manufacturer to
becoming one of the leading fluorine-based specialty chemicals players in the country.
Continuous investments in its chemicals business and R&D have laid a good platform for
future growth. Increasing contribution from the chemicals business is likely to improve
overall earnings growth. Hence, we expect SRF to demonstrate Revenue/EBITDA/PAT
CAGR of 25%/19%/18% over FY21-23E. We value SRF on an SoTP basis and arrive at a
TP of INR 7,600 (implying 27x FY23E EPS). We assume coverage with a BUY rating.
Chemicals business, strong R&D a growth propellant: We expect SRF’s chemicals business
revenues to witness a 25% CAGR over FY21-23E, led by a 25% CAGR in refrigerants, 20%
CAGR in industrial solvents and polymers and an 18% CAGR in speciality chemicals
segments. SRF’s unique ability to manufacture latest-generation refrigerants gives it an edge
in the refrigerant gas segment. Further, its foray into the poly tetra fluoro ethylene (PTFE)
space using R-22 as feedstock and additional chloromethane capacities bode well for the
industrial chemicals segment. Its existing client base and new product offerings are growth
drivers for the specialty chemicals business.
Packaging films margins to normalise: Revenues from its packaging films business are likely to
see a 27% CAGR over FY21-23E primarily led by: a) additional volumes from the Hungary
plant ramp-up; b) increased capacity utilisation at the Thailand plant; c) continued focus on
value-added-products (launched 4 new products in 1HFY21); and d) gradual contribution
from 60,000 tpa BOPP Indore line over the next 20 months (capex of INR 4.24bn). However,
going forward, management has guided for margins to normalise on account of: a)
additional capacities coming online and b) softening of BOPET prices, but commissioning of
the resin plant in Thailand is likely to offset the margin decline to some extent.
Gradual pick-up for technical textiles demand : Management highlighted that as at end1HFY21, TT plants were operating at full capacities and volumes improved on the back of
faster-than-expected recovery in the domestic tyre industry. Hence, we expect technical
textiles revenues to recover along with the recovery in the tyre industry and register 18%
revenue CAGR over FY21-23E, primarily on account of the low base of FY21. Going forward,
we expect technical textiles' margins to improve ~120bps in FY22-23E, primarily on the back
of the margin recovery seen in the latter half of FY21, led by a demand uptick from the
automobile industry and resultant full-capacity utilisations.
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
BUY
7,600
16.6%
Key Data – SRF IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR6,516
INR386.0/US$5.3
42%
57.4
58.3
INR1,415.7/US$19.5
6,999/3,370
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
1.4
-3.8
6M
26.9
9.0
12M
91.1
20.5
Increasing contribution from chemicals business to drive growth — BUY: We expect SRF to
demonstrate Revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY21-23E on the back of
increasing contribution from the chemicals segment; this is likely to offset the moderation in
packaging films’ margins. We value SRF on an SoTP basis to arrive at a target price of INR
7,600 (implying 27x FY23E EPS) and assume coverage on the stock with a BUY rating. Key
risks to our call are a downturn in agrochemicals or slowdown in SRF’s 2-3 key molecules,
which constitute 50-55% of specialty chemicals sales.
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
76,927
35.3
13,552
17.6
6,416
111.6
38.8
11.6
16.7
58.4
9.1
29.8
0.2
FY20A
70,621
-8.2
14,549
20.2
9,159
159.3
42.8
14.2
20.2
40.9
7.6
27.7
0.3
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
82,954
17.5
21,452
25.5
11,983
205.6
29.0
14.8
20.3
31.7
5.5
18.5
0.4
FY22E
1,06,526
28.4
24,500
23.0
13,063
224.1
9.0
14.4
17.6
29.1
4.7
16.4
0.4
FY23E
1,30,617
22.6
30,179
23.1
16,678
286.2
27.7
15.7
19.1
22.8
4.0
13.2
0.5
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
SRF Ltd
Chemicals business: strong R&D, a growth propellant
SRF’s chemicals business primarily consists of two sub-segments: i) Fluorochemicals (which
includes refrigerants, pharma propellants, and industrial chemicals); and ii) Fluoro-specialty
chemicals (which supplies intermediates to global agrochemical and pharmaceutical majors).
We expect SRF’s chemicals business revenues to witness a 25% CAGR over FY21-23E, led by
a 25% CAGR in refrigerants, 20% CAGR in industrial solvents and polymers and an 18%
CAGR in the specialty chemicals segment. SRF’s unique ability to manufacture latestgeneration refrigerants in-house gives it an edge in the refrigerant gas segment, while its
foray into poly tetra fluoro ethylene (PTFE) using R-22 as a feedstock and additional
chloromethane capacity bodes well for the industrial chemicals segment. Existing client
relationships and new product offerings are likely to be growth drivers for the specialty
chemicals business.
Exhibit 1. Chemicals revenue to see 25% CAGR over FY21-23E
60,000
70%
52%
45,000
50%
32%
30%
30,000
23%
25%
25%
30%
22%
15,000
10%
5%
Chemicals revenues (INR mn)
-10%
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
0
FY15
-6%
YoY growth (RHS) (%)
Source: Company, JM Financial
SRF’s chemicals business margins were impacted severely after FY16 on lower contribution
from the specialty chemicals business led by a slowdown in the global agrochemicals industry
(SRF’s end-consumer industry). However, its contribution has started rising since FY20 with
the recovery in the agrochemicals industry. We believe this continued recovery, along with a
better product mix in refrigerant and industrial segments, augurs well for overall EBIT margins
of chemicals, which are likely to improve to 22% by FY22-23E.
Exhibit 2. Chemicals EBIT margins are likely to improve to 22% by FY22-23E.
12,200
32%
24%
24%
22%
9,150
22%
24%
20%
19%
17%
16%
17%
FY23E
FY22E
FY16
Chemicals EBIT (INR mn)
FY21
0%
FY20
0
FY19
8%
FY18
3,050
FY17
16%
FY15
6,100
EBIT margin (RHS) (%)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 59
31 May 2021
SRF Ltd
SRF manufactures fluorine-based chemicals that help in performance enhancement of end
products and are used primarily in agrochemical/pharmaceutical industries. These fluorinated
compounds have acceptance as 35% of agrochemicals and 30% of modern pharmaceutical
drugs contain fluorine. SRF has built capabilities to provide complete support across the value
chain i.e. easy access to raw materials, in-house R&D, pilot production and dedicated plants
for commercial production. SRF has 2 R&D centres in India and had filed 205 patents (both
product and process) as at end-FY20; of these, 70 have been granted. These specialty
products are manufactured at 2 major locations - Bhiwadi in Rajasthan and Dahej in Gujarat.
Exhibit 3. Number of patents granted sharply rose to 70 in FY20
250
205
200
170
150
135
111
100
81
70
54
39
50
18
10
33
25
6
4
18
13
0
FY11
FY12
FY13 FY14 FY15
No of patents filed
FY16 FY17 FY18 FY19
No of patents granted
FY20
Source: Company, JM Financial
Exhibit 4. SRF’s R&D expenditure has seen a CAGR of 20% over
FY12-20
1,600
10.0%
Exhibit 5. SRF’s cumulative capex in the chemicals business has been
INR 47bn since FY06
50
47
45
8.0%
1,200
7.5%
6.6%
800
4.0%
4.5%
35
38
27
4.8%
4.5%
5.0%
4.3%
23
25
24
19
3.0%
2.5%
400
14
2.5%
10
13
0
2 2
0.0%
FY12
FY14
FY16
FY18
FY20
Total R&D expenditure (INR mn)
R&D as % of chemicals revenues (RHS) (%)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
3
5
5
6
0
FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20
Source: Company, JM Financial
Page 60
31 May 2021
SRF Ltd
Fluoro-specialty chemicals
SRF has developed strong entry barriers for other players in the specialty chemicals business
with its knowledge and expertise in handling and manufacturing fluorine-based molecules.
Key specialty products that SRF manufacturers are Meta Amino Benzotrifluoride (MABTF), 2Trifluoromethyl Benzamide, 3-Difluoromethyl-1-methyl-1H-pyrazole-4-carboxylic acid. The
raw materials mainly required in manufacturing the above-mentioned items are
Benzotrichloride, Trichloroacetyl chloride, Pyrazole acid, Sulphuric acid, Hydrofluoric acid,
Methanol and Sodium hydroxide. These products are supplied to global agrochemicals
players such as Syngenta, Bayer, etc.
SRF’s Fluoro-specialty chemicals’ revenues were severely impacted during FY15-18 due to a
slowdown in the global agrochemicals industry. However, with the revival in the industry,
revenues clocked a 69% CAGR over FY18-20. Going forward, despite the high base, we
expect specialty chemicals to register a healthy 18% revenues CAGR over FY21-23E on the
back of a) the growing need for global innovators to outsource R&D and/or production, b)
increasing demand of fluorine-based molecules from pharmaceutical and agrochemical
producers; and c) new capacities coming online.
Exhibit 6. Fluoro-specialty chemicals’ revenues likely to see a 18% CAGR over FY21-23E
44,000
INR mn
33,000
22,000
11,000
0
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
Source: Company, JM Financial
Refrigerant gases: SRF is the market leader of refrigerant gases in India with ~40% market
share. In the refrigerants space, SRF manufactures R-22, R-125, R-32, R-134a and several
other blends such as R-410a, R-407c, and proprietary R-467a (substitute of R-22), among
others. Of these, HFC-134a is the key product for which it is the sole manufacturer in India.
SRF has been using its fluorination expertise and continuously bringing in new blends such as
R-600a, and R-152a. During FY20, company has brought in an additional capacity of
~13,000 tpa of refrigerant gases at its Dahej plant taking it total capacity at Dahej to
~81,000 tpa.
Management highlighted that in 1HFY21, the refrigerant business’ performance was severely
impacted by a) weak demand from automobile and air-conditioning segments and b)
softening global refrigerant prices. Going forward, we expect the refrigerant gases business
to register a healthy ~25% revenues CAGR over FY21-23E on: a) faster recovery in demand,
in line with growth in passenger cars; b) contribution of additional capacity coming online
and debottlenecking of additional capacity; c) possibility of anti dumping duty (ADD) on R-32
(in the past, government had imposed ADD on import of R-134a from China in Jul’16); and
d) a continued rise in exports.
JM Financial Institutional Securities Limited
Page 61
31 May 2021
SRF Ltd
Exhibit 7. Refrigerant gases to register a 25% revenue CAGR over FY21-23E
16,000
INR mn
12,000
8,000
4,000
0
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
Source: Company, JM Financial
Industrial solvents: SRF currently manufactures industrial solvents such as chloromethane, trichloro ethylene, and per-chloro-ethylene which are used for de-greasing purposes by various
industries. We expect industrial solvents to clock 20% revenue CAGR over FY21-23E on
account of: a) planned chloromethane capacity expansion; and b) set-up of an integrated
facility for development of PTFE with a R22 plant as feedstock in Dahej.
Exhibit 8. Industrial solvents to register 20% revenue CAGR over FY21-23E
5,200
INR mn
3,900
2,600
1,300
0
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 62
31 May 2021
SRF Ltd
Packaging films business: margins to normalise
SRF is among the top 15 players in the global BOPET film supply in terms of installed capacity
(total tonnage). The company has plants in India at Kashipur, Indore SEZ and Pithampur DTA,
and overseas in South Africa, Thailand and Hungary. It provides packaging solutions to food
and non-food category of FMCG and industrial products and manufactures Bi-axially
Oriented Polyethylene Terephthalate (BOPET), Bi-axially Oriented Polypropylene (BOPP) films
and also offers a range of metalised and coated film products to its customers.
India’s packaging films industry has a several growth levers in place including: a) low percapita consumption (4.3 kg/person/annum); b) growing demand from the food processing
sector; c) increasing use from pharmaceutical packaging (due to barriers against moisture,
heat, flame, etc.); d) a shift towards flexible packaging driven by its high product-to-package
ratio and e) the recyclable nature of polyester. BOPET/BOPP films markets in India have been
valued at USD 1.1bn/1.4bn and are expected to post a 9.1%/8.4% CAGR over CY20-25E.
Exhibit 9. BOPET market in India is expected to post a 9.1% CAGR
over CY20-25E
Exhibit 10. BOPP market in India is expected to post a 8.4% CAGR
over CY20-25E
2.0
2.4
2.1
1.7
1.5
1.8
1.4
1.1
1.0
1.2
0.9
0.7
0.5
0.6
0.0
CY15
CY20E
0.0
CY25E
CY15
CY20E
CY25E
BOPET Film s
256
215
127
123
60
48
72
901
Other Film s/ Plastics
118
95
72
60
30
NA
32
407
Source: Company, JM Financial
Source: Company, JM Financial
Uflex industries and Jiangshu Shuangxing color plastic are some of the major players in the
BOPET market and Jindal PolyFilms, Vibac, Toray plastics, Treofan Group are a few of the
major players in the BOPP market. The following table lists out production capacities of Indian
players in India and overseas.
Exhibit 11. Indian players packaging films production capacities (‘000 tonnes)
Installed Capacity ('000 tonnes)
Uflex Limited
Polyplex Corporation Limited
Jindal Polyfilms Limited
SRF Limited
Ester Industries Limited
Garw are Polyster Limited
SML Films
Total
PET Resin/ Chips
NA
273
176
87
67
66
NA
669
Coated Film s
NA
24
14
7
NA
NA
NA
45
BOPP Film s
65
35
466
64
NA
12
NA
642
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 63
31 May 2021
SRF Ltd
The packaging films business is likely to see a 27% revenue CAGR over FY21-23E primarily
led by a) additional volumes from the ramp-up of the Hungary plant; b) increased capacity
utilisation of the Thailand plant; c) continued focus on value-added-products (launched 4
new products in 1HFY21); and d) gradual contribution from 60,000 tpa BOPP Indore line over
the next 20 months (capex outlay of INR 4.24bn).
Exhibit 12. Packaging films likely to see a 27% revenue CAGR over FY21-23E
56,000
50%
49%
41%
42,000
35%
30%
26%
26%
24%
28,000
20%
9%
14,000
5%
4%
Packaging films revenue (INR mn)
-10%
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
-2%
0
YoY growth (RHS) (%)
Source: Company, JM Financial
Packaging films’ EBIT margins have steadily risen through FY15-20 due to positive operating
leverage and value-added products. FY21E is likely to see record 28% margins due to supernormal price realisations in 1HFY21 on a pandemic-led demand spike. However, going
forward, management has guided for margins to normalise on account of a) additional
capacities coming online and b) softening of BOPET prices. However, commissioning of the
resin plant in Thailand is likely to offset the margin decline to some extent.
Exhibit 13. Packaging films EBIT margins are likely to normalise to 21% by FY22-23E
12,000
32%
27%
14%
6,000
24%
16%
14%
16%
13%
8%
Packaging films EBIT (INR mn)
FY23E
0%
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
0
21%
5%
FY15
3,000
21%
21%
9,000
EBIT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 64
31 May 2021
SRF Ltd
Technical textiles business: legacy continues
SRF’s technical textiles (TT) business involves the sale of nylon tyre cord fabrics (NTCFs),
polyester tyre cord fabrics, belting fabrics and polyester industrial yarn. NTCF is the key
product under this business segment (70-75% revenue) and its demand is facing a structural
downturn given the trend of radialisation in the tire industry,
as steel cords are widely
used in the production of radial tires. Other offerings in this segment are belting fabrics (used
in conveyer belts) and polyester industrial yarn (used in safety belts, fishnets, etc.).
Exhibit 14. SRF had 35% market share in India’s NTCF production of
135,000MT in CY19
Exhibit 15. SRF had 55% market share in India’s belting fabrics
production of ~21,000MT in CY19
27%
30%
35%
55%
15%
21%
17%
SRF Ltd
MIT
Century Enka
SRF Ltd
Imports
Source: Company, JM Financial
Other Local Manufacturing
Imports
Source: Company, JM Financial
SRF’s TT revenues declined over the years and capacities were underutilised due to a) the
global slowdown in the automobile industry and b) poor demand from both tyre cord fabric
and polyester industrial yarn segments. Given the unviable economics, the company was
forced to close its TT plant in Rayong, Thailand in FY20. Management highlighted that at
end-1HFY21, TT plants are operating at full capacities and volumes have improved on the
back of the faster-than-expected recovery in domestic tyre industry. Hence, we expect TT
revenues to recover along with the recovery in the tyre industry and register 18% CAGR over
FY21-23E, primarily on account of the low base of FY21.
Exhibit 16. Technical textiles revenues are likely to see 18% CAGR over FY21-23E
22,000
30%
22%
14%
16,500
15%
6%
-7%
-9%
-9%
5,500
-15%
Technical textiles revenue (INR mn)
FY23E
-30%
FY22E
FY21
FY19
FY18
FY16
FY17
-22%
FY15
0
0%
-6%
-7%
FY20
11,000
YoY growth (RHS) (%)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 65
31 May 2021
SRF Ltd
EBIT margins improved ~550bps during FY16-19 mainly on account of process innovation
and cost reduction. Margins were impacted in FY20 owing to currency appreciation and the
downturn in the automobile industry. Going forward, we expect TT margins to improve
~120bps over FY22-23E, primarily on the back of recovery in margins witnessed in FY21 led
by a demand uptick from the automobile industry and resultant full-capacity utilisations.
Exhibit 17. Technical textiles margins are likely to improve to 15.5% by FY22-23E
3,000
18%
15.5% 15.5%
15.1%
14.3%
14%
13%
2,250
14%
11%
10%
9.5%
FY23E
FY22E
FY16
Technical textiles EBIT (INR mn)
FY21
0%
FY20
0
FY19
5%
FY18
750
FY17
9%
FY15
1,500
EBIT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 66
31 May 2021
SRF Ltd
Key Assumptions and Estimates
Exhibit 18. Segment-wise Revenue and EBIT contribution and expected growth
INR mn
FY15
Segment revenues
Technical textiles
20,396
Chemicals
12,634
Packaging films
12,460
Others
1,208
Unallocated
91
Total
46,789
YoY growth (%)
Technical textiles
-7%
Chemicals
32%
Packaging films
41%
Others
-20%
Unallocated
33%
Total
12%
Revenue contribution (%)
Technical textiles
44%
Chemicals
27%
Packaging films
27%
Others
3%
Unallocated
0%
Segmental EBIT
Technical textiles
1,957
Chemicals
2,983
Packaging films
636
Others
1
Total
5,577
EBIT margins (%)
Technical textiles
10%
Chemicals
24%
Packaging films
5%
Others
0%
Total
12%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
19,050
16,398
13,606
1,309
71
50,434
20,102
17,214
14,092
730
43
52,181
18,388
16,114
17,823
4,573
49
56,947
17,349
24,454
26,533
2,716
57
71,109
13,576
29,750
26,040
2,783
54
72,203
12,401
36,447
32,917
2,320
87
84,172
15,129
45,559
42,792
3,132
87
1,06,700
17,247
56,948
53,063
3,445
87
1,30,791
-7%
30%
9%
8%
-22%
8%
6%
5%
4%
-44%
-40%
3%
-9%
-6%
26%
526%
15%
9%
-6%
52%
49%
-41%
16%
25%
-22%
22%
-2%
2%
-4%
2%
-9%
23%
26%
-17%
60%
17%
22%
25%
30%
35%
0%
27%
14%
25%
24%
10%
0%
23%
38%
33%
27%
3%
0%
39%
33%
27%
1%
0%
32%
28%
31%
8%
0%
24%
34%
37%
4%
0%
19%
41%
36%
4%
0%
15%
43%
39%
3%
0%
14%
43%
40%
3%
0%
13%
44%
41%
3%
0%
1,810
3,936
1,940
1
7,688
2,543
3,273
1,970
1
7,787
2,529
2,694
2,298
444
7,964
2,615
3,843
4,115
218
10,790
1,515
5,115
5,556
318
12,504
1,769
7,281
8,977
256
18,283
2,345
10,023
8,986
345
21,700
2,673
12,529
11,143
380
26,725
9.5%
24%
14%
0%
15%
13%
19%
14%
0%
15%
14%
17%
13%
10%
14%
15.1%
16%
16%
8%
15%
11%
17%
21%
11%
17%
14.3%
20%
27%
11%
22%
15.5%
22%
21%
11%
20%
15.5%
22%
21%
11%
20%
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 67
31 May 2021
SRF Ltd
Exhibit 19. SRF Revenue and Revenue Growth
136
Exhibit 20. SRF EBITDA and EBITDA Margin %
40%
35%
32,000
30%
23%
28%
102
17%
0%
5%
23%
28%
24,000
15%
16,000
12%
68
19%
15%
3%
26%
21%
20%
34
23%
26%
22%
18%
16%
8,000
18%
0
14%
Gross revenue (INR bn)
EBITDA (INR mn)
YoY growth (RHS) (%)
Source: Company, JM Financial
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY23E
-10%
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
0
FY15
-8%
EBITDA margin (%) (RHS)
Source: Company, JM Financial
Exhibit 21. SRF PAT and PAT margin
20,000
40%
Exhibit 22. SRF ROE and ROCE
24%
30%
18%
20%
12%
10%
6%
0%
0%
13%
15,000
12%
14%
13%
10,000
PAT (INR mn)
RoE
PAT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY23E
FY22E
FY21
FY20
FY19
FY15
8%
8%
FY18
10%
FY17
FY16
0
FY15
5,000 6%
9%
RoCE
Source: Company, JM Financial
Page 68
31 May 2021
SRF Ltd
Valuation
We expect SRF to demonstrate revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY20-23E
on the back of increasing contribution from chemicals segment which is likely to offset the
moderation in packaging films’ margins. We value SRF on an SoTP basis to arrive at a target
price of INR 7,600 (implying 27X FY23E EPS) and assume coverage on the stock with a BUY
rating.
Exhibit 23. We value SRF at INR 7,600 (implying 27X FY23E EPS)
Value (INR bn)
FY23 EBITDA (INR
bn)
Segm ents
Value (INR/share)
EV/EBITDA
m ultiple (x)
Technical Textile Business
3.2
6
20
351
Chemicals Business
16.6
19
315
5,407
Packaging Films Business
12.6
10
129
2,218
Others
0.4
6
3
48
Total Business EBITDA
33
468
8,024
Less: Gross Debt
30
517
Add: Cash & Cash Equivalents
5
93
TP
443
7,600
FY23E consolidated EPS
286
Im plied P/E m ultiple
27
Source: JM Financial
Exhibit 24. SRF 1-year P/E chart
7,000
29.0x
5,250
17.0x
3,500
12.0x
1,750
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 69
31 May 2021
SRF Ltd
Exhibit 25. SRF 1-year forward PB chart
Exhibit 26. SRF 1-year forward EV/EBITDA chart
7,000
7,000
17x
4.8x
5,250
5,250
3.5x
3,500
2.2x
1,750
0
May-17
11x
3,500
9x
1,750
May-18
May-19
Source: Company, JM Financial
JM Financial Institutional Securities Limited
May-20
May-21
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Page 70
31 May 2021
SRF Ltd
Company profile
SRF started off as Shri Ram Fibres in 1970 establishing its first plant in Manali in 1973
becoming one of the first companies in India to start manufacturing nylon tyre cords. Since
then SRF has diversified into Fluorochemicals, Speciality Chemicals, Engineering Plastics and
Packaging Films while expanding its product range in the Technical Textile business.
Exhibit 27. SRF’s manufacturing plants in India and overseas
Business Segm ents
Locations
Manufacturing Plants in India
Bhiw adi, Rajasthan
Product
Chemicals Business
Dahej, Gujarat
Speciality Chemicals: Intermediates for API/AI
Agrochemical Industry: Active Ingredients for Herbicides, Fungicides, Insecticides, etc.
Pharmaceutical Industry: Key starting materials for active pharmaceutical intermediates, contract manufacturing
of intermediates/AI for agro and pharma innovators. Also used as intermediates that find application in material
sciences, surface chemistry, etc.
Fluorochemicals: Refrigerants and indutstrial chemicals
Packaging films
business
Kashi, Uttarakhand
SEZ Indore, Madhya Pradesh
Pithampur, Madhya Pradesh
BOPET films
BOPET films and Polyethylene Terephthalene resin
BOPET films and BOPP films
Malanpur, Madhya Pradesh
Thiruvallur, Tamil Nadu
Manali, Tamil Nadu
Viralimalai, Tamil Nadu
Kashipur, Uttarakhand
Thiruvallur, Tamil Nadu
Manufacturing Plants Overseas
Duban, South Africa
Rayong, Thailand
Jasfenyszaru, Hungary
Nylon tyre cord fabric
Nylon tyre cord fabric, dipped nylon tyre cord fabric, polyester tyre cord fabric and polyester industrial yarn
Nylon tyre cord fabric and dipped nylon tyre cord fabric
Belting fabric
Laminated fabrics
Coated fabrics
Technical textiles
business
Other business
Packaging films
business
BOPP films
BOPET films
BOPET films
Source: Company, JM Financial
Exhibit 28. SRF’s R&D facilities
Locations
Bhiw adi, Rajasthan
Manali, Tamil Nadu
Manali, Tamil Nadu
Gurugram, Haryana
Indore, Madhya Pradesh
Facilities
Pilot Plant, Kilo Lab, R&D and Testing facility (analytical), Engineering Lab and associated effluent treatment plant facilities
General R&D, Exploratory R&D and Testing facility (analytical)
Pilot Plant, Testing facility and library
IT Softw are, Electronic Library and Computers
Pilot facility and Testing facility
Source: Company, JM Financial
Board of Directors
- Mr. Arun Bharat Ram, Chairman
- Mr. Ashish Bharat Ram, Managing Director
- Mr. Kartik Bharat Ram , Deputy Managing Director
- Mr. Pramod Gopaldas Gujarathi, Director
- Dr. Meenakshi Gopinath, Director
- Mr. Puneet Dalmia, Independent Director
- Mr. Tejpreet S. Chopra, Independent Director
- Mr. L. Lakshman, Independent Director
- Mrs. Bharti Gupta Ramola, Independent Director
- Mr. Yash Gupta, Independent Director
- Mr. Vellayan Subbiah, Independent Director
JM Financial Institutional Securities Limited
Page 71
31 May 2021
SRF Ltd
Financial Tables (Consolidated)
Income Statement
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
76,927
70,621
82,954
1,06,526
Sales Growth
35.3%
-8.2%
17.5%
0
1,473
1,046
Total Revenue
76,927
72,094
Cost of Goods Sold/Op. Exp
43,821
36,874
Personnel Cost
5,159
Other Expenses
EBITDA
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
1,30,617
Shareholders’ Fund
41,293
49,333
68,564
80,125
94,885
28.4%
22.6%
Share Capital
0
0
84,000
1,06,526
1,30,617
40,277
53,795
65,961
5,419
6,214
6,898
7,656
Total Loans
14,395
15,252
16,058
21,333
26,820
Def. Tax Liab. / Assets (-)
3,420
1,612
3,680
3,680
3,680
13,552
14,549
21,452
24,500
30,179
Total - Equity & Liab.
77,600
83,616
1,01,552
1,14,912
1,28,672
EBITDA Margin
17.6%
20.2%
25.5%
23.0%
23.1%
Net Fixed Assets
63,589
75,347
83,818
96,291
1,05,855
EBITDA Growth
49.5%
7.4%
47.4%
14.2%
23.2%
Gross Fixed Assets
66,633
75,106
94,379
1,12,379
1,28,379
Depn. & Amort.
3,669
3,886
4,531
5,527
6,436
Intangible Assets
1,089
1,185
1,124
1,124
1,124
EBIT
9,883
10,663
16,921
18,972
23,743
Less: Depn. & Amort.
11,668
14,876
19,407
24,934
31,370
Capital WIP
7,723
Other Operating Income
585
585
603
603
603
40,708
48,748
67,962
79,522
94,282
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
32,887
32,671
29,307
31,107
30,107
Reserves & Surplus
Other Income
401
491
545
0
0
7,536
13,933
7,723
7,723
Finance Cost
2,016
2,007
1,340
1,555
1,505
Investments
1,047
2,033
4,173
4,173
4,173
PBT before Excep. & Forex
8,269
9,147
16,127
17,417
22,237
Current Assets
34,243
31,245
41,121
46,513
55,313
Excep. & Forex Inc./Loss(-)
0
0
0
0
0
Inventories
12,247
12,012
14,658
18,823
23,080
PBT
8,269
9,147
16,127
17,417
22,237
Sundry Debtors
10,288
8,911
12,746
16,367
20,069
Taxes
1,853
-12
4,144
4,354
5,559
Cash & Bank Balances
1,896
1,164
2,820
425
1,267
Extraordinary Inc./Loss(-)
0
0
0
0
0
Loans & Advances
112
252
112
112
112
Assoc. Profit/Min. Int.(-)
0
0
0
0
0
Other Current Assets
9,701
8,906
10,785
10,785
10,785
Reported Net Profit
6,416
9,159
11,983
13,063
16,678
Current Liab. & Prov.
21,279
25,009
27,561
32,066
36,669
Adjusted Net Profit
6,416
9,159
11,983
13,063
16,678
Current Liabilities
14,010
12,225
16,923
21,428
26,031
Net Margin
8.3%
12.7%
14.3%
12.3%
12.8%
Provisions & Others
7,270
12,783
10,638
10,638
10,638
Diluted Share Cap. (mn)
57.5
57.5
58.3
58.3
58.3
Net Current Assets
12,964
6,237
13,560
14,448
18,644
Diluted EPS (INR)
111.6
159.3
205.6
224.1
286.2
Total – Assets
77,600
83,616
1,01,552
1,14,912
1,28,672
Diluted EPS Growth
38.8%
42.8%
29.0%
9.0%
27.7%
Source: Company, JM Financial
Total Dividend + Tax
832
1,185
1,378
1,502
1,918
Dividend Per Share (INR)
12.0
17.1
23.6
25.8
32.9
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
8,269
9,147
16,127
17,417
22,237
Depn. & Amort.
3,669
3,886
4,531
5,527
6,436
Net Interest Exp. / Inc. (-)
2,016
2,007
1,340
1,555
1,505
Source: Company, JM Financial
Cash Flow Statement
Inc (-) / Dec in WCap.
Others
Taxes Paid
(INR mn)
-3,165
-239
1,236
-3,283
-3,355
-329
-329
-2,963
0
0
-1,502
-1,427
-2,553
-4,354
-5,559
Dupont Analysis
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
8.3%
12.7%
14.3%
12.3%
12.8%
Asset Turnover (x)
1.1
0.9
0.9
1.0
1.1
Leverage Factor (x)
1.9
1.8
1.6
1.5
1.4
16.7%
20.2%
20.3%
17.6%
19.1%
RoE
8,957
13,045
17,717
16,863
21,265
Key Ratios
Capex
-10,564
-13,892
-12,144
-18,000
-16,000
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Free Cash Flow
-1,607
-847
5,573
-1,137
5,265
BV/Share (INR)
718.4
858.3
1,176.4
1,374.7
1,628.0
Operating Cash Flow
Inc (-) / Dec in Investments
332
-927
-1,887
0
0
ROIC
11.6%
14.2%
14.8%
14.4%
15.7%
Others
91
3,015
-966
0
0
ROE
16.7%
20.2%
20.3%
17.6%
19.1%
-10,142
-11,803
-14,997
-18,000
-16,000
Net Debt/Equity (x)
0.7
0.6
0.3
0.3
0.3
1
0
7,500
0
0
P/E (x)
58.4
40.9
31.7
29.1
22.8
Investing Cash Flow
Inc / Dec (-) in Capital
Dividend + Tax thereon
0
0
0
-1,502
-1,918
P/B (x)
9.1
7.6
5.5
4.7
4.0
2,677
3,205
-6,856
1,800
-1,000
EV/EBITDA (x)
29.8
27.7
18.5
16.4
13.2
Others
-467
-5,177
-1,709
-1,555
-1,505
EV/Sales (x)
5.2
5.6
4.7
3.7
3.0
Financing Cash Flow
2,211
-1,972
-1,065
-1,258
-4,423
Debtor days
49
45
55
56
56
Inc / Dec (-) in Cash
1,026
-731
1,656
-2,395
841
Inventory days
58
61
64
64
64
Opening Cash Balance
869
1,895
1,165
2,820
425
Creditor days
80
71
93
91
91
Closing Cash Balance
1,895
1,165
2,820
425
1,267
Inc / Dec (-) in Loans
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 72
31 May 2021
India | Chemicals | Company Update
Navin Fluorine | BUY
Fluor’intined the chemistry
Over the years, Navin Fluorine (NFIL) has emerged as a preferred partner when it
comes to fluorination chemistry in both agrochemicals and pharma spaces. Its
timely diversification from the legacy refrigerant and inorganic fluoride business has
driven margin expansion and overall growth. In our view, NFIL’s growth prospects
seem even brighter with higher contribution from specialty chemicals and CRAMS
segments on account of long term contract and capacity expansions. We value the
company at 40x FY23E EPS to arrive at a TP of INR 3,760, and assume coverage
with a BUY rating.
Specialty Chemicals – capacity expansion and new product launches to drive growth: We
estimate NFIL’s specialty chemicals revenues to witness 22% a CAGR over FY21-23E
(reaching INR 6.8bn in FY23E) factoring in: a) de-bottlenecking and improvement in capacity
utilisation; b) contribution from 2-3 product launches annually; and c) gradual contribution
from the recently-announced capex of INR 1.95bn. For the high performance products,
management expects revenue contribution to commence from 4QFY22E. However, we have
conservatively assumed revenue contribution of INR 4.5bn from the beginning of FY23E and
a full ramp-up by FY24E.
CRAMS business – capitalising on Pharma opportunity: NFIL is uniquely placed to capture the
USD 85bn global Contract Research and Manufacturing Services (CRAMS) opportunity. We
expect NFIL’s CRAMS revenues to witness a 25% CAGR over FY21-23E and reach INR 4.2bn
by FY23E (assuming 2.0x asset turn on total investment of INR 2.15bn at Dahej) from INR
2.8bn in FY21. We have based our assumptions on the fact that the company was able to
reach revenues of INR 1.7bn in FY20 on total capex of INR 1.0bn incurred until FY16.
Refrigerant gases – demand revival coupled with high-value products augurs well: We
estimate refrigerant gases revenue to witness a 14% CAGR in FY21-23E (reaching INR 2.7bn
in FY23E) driven by: a) the low base of FY21, b) price revival in both domestic and export
markets and c) increased use of R-22 as a feedstock to produce high-value products.
Inorganic fluorides on a strong growth path: NFIL’s inorganic fluorides business had been
adversely impacted by the pandemic due to lower capacity utilisation of its end-user
segments (primarily steel players and to some extent glass and oil & gas players). However,
due to a) robust growth in global steel prices and b) the low base of FY21, we expect NFIL’s
inorganics fluorides revenue to register a 17% CAGR over FY21-23E (to INR 2.7bn in FY23E).
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
BUY
3,760
17.0%
Key Data – NFIL IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR3,213
INR159.1/US$2.2
68%
49.4
49.5
INR1,080.6/US$14.9
3,659/1,470
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
-4.1
-9.0
6M
19.6
2.7
12M
115.8
36.0
BUY and a TP of INR 3,750: We estimate NFIL to demonstrate EPS CAGR of 36% over FY2123E. We assume coverage with a BUY rating and value the company at 40x FY23E EPS to
arrive at a TP of INR 3,760. Our valuation premium (compared with the 3-year average 1-year
forward multiple of 25x) is justified on account of i) strong visibility arising from incremental
CRAMS revenue; ii) contracted revenue from high-performance products; and iii) gradual
contribution from additional capacities. Key risks: a) cancellation/delay in off-take of its longterm contracts and b) a slowdown in the global agrochemicals industry
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
9,959
9.1
2,184
21.9
1,491
30.2
-17.2
23.8
14.5
106.5
14.8
71.2
0.4
FY20A
10,616
6.6
2,635
24.8
4,086
82.6
173.9
43.7
32.9
38.9
11.3
58.8
0.4
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
11,794
11.1
3,093
26.2
2,468
49.9
-39.6
15.0
16.2
64.4
9.7
50.6
0.2
FY22E
14,088
19.5
3,854
27.4
2,877
58.1
16.6
17.5
16.4
55.3
8.5
40.9
0.3
FY23E
21,548
53.0
6,040
28.0
4,595
92.8
59.7
26.5
22.2
34.6
7.0
26.1
0.4
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
Navin Fluorine
Specialty Chemicals – capacity expansion and new product
launches to drive growth
Fluorine-based chemicals, in the last few years, have gained traction in pharmaceutical and
agrochemical intermediates segments. NFIL used its fluorination expertise and ventured out
of the legacy refrigerant and inorganic fluoride businesses and commenced its specialty
chemicals business in 2000. NFIL’s key customers in this segment are Lupin, Dr Reddy’s,
Aurobindo, Bayer Crop, BASF and Syngenta, among others.
NFIL’s specialty chemicals business struggled during FY15-18 with mere 1.6% revenue CAGR
on account of the downturn in global agrochemicals (due to lower commodity prices) as well
as the domestic pharmaceutical industry as the company was not able to commercialise its
key molecules. However, NFIL generated 30% revenue CAGR for specialty chemicals over
FY18-20 driven by: a) engagements with new clients, b) superior pricing, and c) the
production of new molecules. The company expects the growth rate of specialty chemicals
revenue to pick up pace from FY23E after the completion of greenfield capex in FY22E.
Hence, we estimate specialty chemicals revenues to witness a 22% CAGR over FY21-23E
factoring in: a) de-bottlenecking and improvement in its capacity utilisation; b) contribution
from 2-3 new product launches annually; and c) gradual contribution from the recentlyannounced capex of INR 1.95bn.
Exhibit 1. Specialty chemicals revenues to witness 22% CAGR over FY21-23E
7,200
35%
33%
27%
25%
5,400
3,600
25%
19%
11%
-5%
20%
15%
-1%
FY23E
FY20
FY19
FY17
Specialty chemical revenue (INR mn)
FY22E
-5%
FY21
0
FY18
5%
FY16
1,800
YoY growth (RHS)
Source: Company, JM Financial
NFIL’s exports have contributed steadily towards total revenues and we believe exports would
capture a larger share and reach 46% of total revenues by FY23E as the company intends to
cater to the Japanese market where it has a relatively small presence. Japanese customers are
likely to a part of its multi-product plant (MPP) investment.
Exhibit 2. Specialty chemicals exports to rise gradually to 46% of total revenues
100%
37%
75%
46%
43%
54%
57%
FY16
FY17
38%
40%
42%
40%
44%
46%
62%
60%
58%
60%
56%
54%
FY18
FY19
FY20
FY21
FY22E
FY23E
Domestic
Exports
50%
63%
25%
0%
FY15
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 74
31 May 2021
Navin Fluorine
NFIL’s specialty chemicals product portfolio is well-diversified as it caters to different industries
including: a) pharmaceuticals (40%); b) agrochemicals (40%); and c) specialty pigments,
dyes, polymers and personal care (20%). Some of NFIL’s key products are benzo trifluorides
(~2100 tpa), bromo fluoro benzene (~1500 tpa), and fluoro toluenes (~1150 tpa).
Exhibit 3. NFIL’s specialty chemicals product portfolio is well-diversified across industries
Product nam e
Industry
2,4- Difluorobenzyl Amine
Pharmaceuticals
2-Amino-Benzotrifluoride
Crop protection/pharmaceuticals/Specialty pigments
2- Fluoro Nitrobenzene
Pharmaceuticals
2,3,5,6- Tetra fluorobenzyl alcohol
Crop protection/personal care
2,4 - difluorobenzoic acid
Pharmaceuticals
2- bromo fluoro benzene
Pharmaceuticals
2- fluoro phenol
Crop protection/pharmaceuticals
2-fluoro propionic acid
Pharmaceuticals
2- fluoro 4 bromo aniline
Crop protection/pharmaceuticals
2-Amino -5-Chloro Benzotrifluoride
Crop protection/Splty Pigment/Dyes
2-Bromo- 4- Fluoro Aniline
Crop protection/Pharmaceuticals
2-Chloro-4-Fluoro Toluene
Crop protection
2-Fluoro-5-Hydroxy Benzotrifluoride
Crop protection
2-Methyl-3(Trifluoromethyl) Aniline
Pharmaceuticals
3 - Fluoro Toluene
Crop protection/Pharmaceuticals
3 -Amino-Benzotrifluoride
Crop protection/Pharmaceuticals
3 -Bromo- 1,1,1-Trifluoroacetone
Pharmaceuticals
3 -Chloro Benzotrifluoride
Crop protection/Pharmaceuticals
3 -Chloro- 4- FluoroBenzotrifluoride
Crop protection
3- Amino- 4- Chloro Benzotrifluoride
Pharmaceuticals/Specialty Pigment/Dyes
3- Bromo-Benzotrifluoride
Pharmaceuticals
3- Hydroxy Benzotrifluoride
Crop protection/Pharmaceuticals
3-(Trifluoromethyl) Cinnamicacid
Pharmaceuticals
3-Chloro-2-Fluoro Benzoicacid
Pharmaceuticals
4 -Bromo-Benzotrifluoride
Pharmaceuticals
4 -Fluoro Aniline
Crop protection
4 -Fluoro Anisole
Pharmaceuticals
4 -Fluoro Benzaldehyde
Pharmaceuticals
4 -Fluoro Benzyl Chloride
Crop protection/Pharmaceuticals
4-Fluoro Nitrobenzene
Pharmaceuticals/Personal Care
4,4 -Difluro cyclohexane Carboxylic Acid
Pharmaceuticals
4,4’ – Difluoro Benzophenone
Pharmaceuticals/Hydrocarbon/Polymers/Personal Care
4- Bromo Fluoro Benzene
4- Fluoro Benzonitrile
4- Fluoro Benzyl Amine
4- Fluoro Phenol
4- Fluoro Toluene
4-Trifluoromethyl Salicylic acid
Benzotrifluoride
BF3 Acetic Acid
BF3 Etherate
BF3 Phenol
Crop protection/Pharmaceuticals
Crop protection/Pharmaceuticals
Pharmaceuticals
Crop protection/Pharmaceuticals
Crop protection/Pharmaceuticals
Pharmaceuticals
Crop protection/Pharmaceuticals/Specialty Pigment/Dyes
Pharmaceuticals/Flavours and Fragrences/Hydrocarbon/Polymers
Crop Protection/Pharmaceuticals/Flavours and
Fragrences/Hydrocarbon/Polymers
Crop Protection/Pharmaceuticals/Hydrocarbon/Polymers
BF3 THF
BF3. Acetonitrile
Boron Trifluoride(gas)
Fluoro Benzene
Methyl -2- Fluoropropionate
Crop protection/Pharmaceuticals
Crop protection/Pharmaceuticals
Pharmaceuticals/Hydrocarbon/Polymers
Crop protection/Pharmaceuticals
Pharmaceuticals
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 75
Navin Fluorine
31 May 2021
High performance products (HPP) – provides long-term visibility
NFIL has recently entered a 7-year revenue agreement contract amounting to USD 410mn
(cumulative over 7 years) as an exclusive supplier to the concerned client for this active
ingredient and final product. Management highlighted that initially it plans to completely rely
on the client for the patented technology. However, with time, it would like to improve the
process and bring in benefits for its existing product portfolio and help develop new
products.
The company is slated to invest USD 51.5mn in the manufacturing facility and USD 10mn in
its captive power plant through its wholly-owned subsidiary (Navin Fluorine Advanced
Sciences Limited) at Dahej. This project is going to be funded through a mix of internal
accruals and debt.
Management expects revenue contribution from this project to commence from 4QFY22E.
However, we have conservatively assumed revenue contribution from the beginning of FY23E
and a full ramp-up by FY24E.
Exhibit 4. NFIL’s High Performance Product (HPP) segment capacity expansion details
Source: Company
JM Financial Institutional Securities Limited
Page 76
31 May 2021
Navin Fluorine
CRAMS – capitalising on the Pharma opportunity
NFIL forayed into the CRAMS space in 2011 with an initial capital outlay of INR 0.4bn at
Dewas in MP. After this, the company further commissioned cGMP compliant facilities with
investments of INR 0.6bn in FY16 and INR 1.15bn in FY20. This has allowed NFIL to expand
its product offering from 2-3 compounds in FY19 and provide services such as pre-clinical
trials, clinical research and custom synthesis to global pharma innovators. The company has a
significant presence in EU through Manchester Organics (which it fully acquired in 2015).
NFIL’s CRAMS plant at Dahej is the world’s largest and India’s only high-pressure Sulphur
tetra fluoride (SF4) plant. At this plant, the company also has a proprietary hexafluoro
chemistry platform, which gives it a competitive edge to develop new molecules in future.
Since customers in this segment are global innovators catering to highly regulated markets
such as Europe and the US, the company conducts thorough audit and deliberations of the
pilot facility. This is where having a cGMP facility has a niche advantage over other facilities.
Management expects CRAMS revenue to grow to INR 4.7bn by FY23E (based on an asset
turn of ~2.2x on total investment of INR 2.15bn at Dahej). However, we have conservatively
assumed revenues to witness a 25% CAGR over FY21-23E and reach INR 4.4bn by FY23E
(assuming 2.0x asset turn). We have based our assumptions on the fact that the company
was able to reach INR 1.7bn of revenues by FY20 on total capex of INR 1.0bn incurred until
FY16. Hence, we believe the company is uniquely placed to capture a lucrative chunk of the
USD 85bn global CRAMS opportunity.
Exhibit 5. CRAMS revenues to witness 25% CAGR over FY21-23E
Exhibit 6. … led by 2.0x asset turns by FY23E
2.6
250% 2,400
4,400
1.4
1.3
1.6
2.8
2.0
20%
3,300
179%
175% 1,800
61%
2.1
1.8
87%
2,200
-31%
100% 1,200
-3%
1.2
1.4
1.4
30%
59%
CRAMS revenue (INR mn)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
YoY growth (RHS)
Fixed assets (INR mn)
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY23E
0.0
FY22E
0
FY21
-50%
FY20
0
FY19
0.7
FY18
600
FY17
25%
FY16
1,100
Asset turns (x)
Source: Company, JM Financial
Page 77
31 May 2021
Navin Fluorine
Refrigerant gas – demand revival coupled with high-value
products augurs well
NFIL introduced refrigerants into India in 1967 shortly after commissioning its manufacturing
plant in Surat, Gujarat. It was later backward-integrated into the manufacture of critical
intermediates, namely sulphuric and hydrofluoric acids. NFIL is primarily engaged in the
manufacture of R-22 with a capacity of 6,110 tpa after the incremental cut of 25% in Jan’20
(as per the Montreal protocol). Of this, ~44% is exported to the Middle East and South Africa
and the remaining is sold in India. NFIL’s customers for R-22 include premium AC
manufacturers such as LG, Samsung, Voltas and large industries like Reliance, Piramal,
Godrej, etc. NFIL also imports R-134a from China and sells it in India under the brand name
Mafron.
NFIL’s refrigerant gases business has been impacted by weak demand largely on account of:
a) the further 25% R-22 production cut in Jan’20 and b) lower exports due to a moderation
in prices. Management is exploring the non-emissive application of HCFCs and expects these
to drive future growth. Hence, we estimate the refrigerant gases business to witness a 14%
revenue CAGR in FY21-23E driven by: a) the low base of FY21; b) price revival in both
domestic and export markets; and c) increased usage of R-22 as a feedstock to produce highvalue products.
Exhibit 7. R-22 phase out plan as per Montreal protocol
Exhibit 8. NFIL’s R-22 production (tpa) phase-out plan
10,000
9,400
8,460
7,500
6,110
5,000
3,055
2,500
235
0
CY12
Source: Ministry of Environment, Forest and Climate Change, JM Financial
CY15
CY20
CY25
CY30
0
CY40
Source: Company, JM Financial
Exhibit 9. Refrigerant gases revenues to witness 14% CAGR over FY21-23E
3,200
35%
20%
2,400
20%
16%
15%
12%
1,600
8%
5%
-1%
800
Refigerant gases revenue (INR mn)
FY23E
-25%
FY22E
FY21
FY20
FY19
FY18
FY17
-20%
FY16
0
-10%
-6%
YoY growth (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 78
31 May 2021
Navin Fluorine
Inorganic fluorides on a strong growth path
NFIL has one of the largest Anhydrous Hydrofluoric (AHF) and Aqueous Hydrofluoric acid
manufacturing capacities in India at 30,000 TPA. NFIL is also one of the largest AHF
manufacturers in India. AHF is used for captive manufacture of various inorganic fluorides.
NFIL develops products as per customer needs and supplies primarily to industries such as
stainless steel, glass, oil & gas, abrasives, electronics, pharmaceuticals and agro-chemicals.
These products are primarily high volume in nature, with applications in standard processes.
NFIL’s inorganic fluorides business had been adversely impacted by the pandemic due to
lower capacity utilisation of its end-user segments (primarily steel players and to some extent
glass and oil & gas players). However, due to a) robust growth in global steel prices and b)
the low base of FY21, we expect NFIL’s inorganics fluorides revenue to register a 17% CAGR
over FY21-23E.
Exhibit 10. Inorganic fluorides revenues to register 17% CAGR over FY21-23E
2,800
40%
34%
2,100
25%
28%
23%
20%
15%
1,400
10%
5%
700
-5%
-7%
Inorganic fluorides revenue (INR mn)
FY23E
-20%
FY22E
FY21
FY20
FY19
FY18
FY17
0
FY16
-11%
YoY growth (RHS)
Source: Company, JM Financial
Exhibit 11. Key inorganic fluorides products
Product nam e
Aluminium fluoride
Industry
Frosting of bottles, oil w ell, sugar
Aluminium bi-fluoride
Anhydrous Hydrofluroic Acid
Dilute Hydrofluoric acid - 20% to 70%
Fluboric acid 50%
Hexafluroro Phosphoric Acid
HF Pyridine 55% and 70%
HF Urea
Mafrolite (Synthetic cryolite - crushed)
Potassium Bi Fluoride
Potassium Fluoride
Potassium flouro borate
Potassium flouro titanate
Sodium bi fluoride
Sodium fluoride
Electroplating, Sugar Industry, oil w ell drilling
Refigernat gases, oil refinery
Steel Industry/glass industry
Electroplating industry
Pharmaceuticals/atomic
Pharmaceuticals/atomic
Pharmaceuticals/atomic
Abrasive/Automobiles
Pharmaceuticals/atomic
Pharmaceutical intermediates/ agro chemicals
Foundry flux
Foundry flux/titanium
Tin plates
Toothplates/pharmaceutical intermediates
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 79
31 May 2021
Navin Fluorine
Key assumptions and Estimates
Exhibit 12. Segment-wise revenue contribution and expected growth
INR m n
Segm ental revenues
CRAMS
Specialty Chemicals
Inorganic Fluorides
Refrigerant Gases
High performance products
Total
YoY grow th (%)
CRAMS
Specialty Chemicals
Inorganic Fluorides
Refrigerant Gases
Total
Revenue contribution (%)
CRAMS
Specialty Chemicals
Inorganic Fluorides
Refrigerant Gases
High performance products
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
310
2,151
1,051
1,874
865
2,388
940
2,170
1,374
2,279
1,203
2,158
2,575
2,258
1,482
2,419
1,780
3,000
1,980
2,790
1,730
3,810
2,070
2,610
2,790
4,530
1,930
2,080
3,348
5,436
2,316
2,496
5,387
6,362
7,014
8,734
9,550
10,220
11,330
13,596
4,352
6,795
2,663
2,696
4,500
21,006
18%
38%
-7%
21%
20%
179%
11%
-11%
16%
18%
59%
-5%
28%
-1%
10%
87%
-1%
23%
12%
25%
-31%
33%
34%
15%
9%
-3%
27%
5%
-6%
7%
61%
19%
-7%
-20%
11%
20%
20%
20%
20%
20%
30%
25%
15%
8%
55%
6%
40%
20%
35%
14%
38%
15%
34%
20%
32%
17%
31%
29%
26%
17%
28%
19%
31%
21%
29%
17%
37%
20%
26%
25%
40%
17%
18%
25%
40%
17%
18%
21%
32%
13%
13%
21%
Source: Company, JM Financial
Exhibit 13. Revenue contribution of high-value products has been on the rise
INR m n
Revenue break-up
High Value Products
Legacy business
Total
YoY grow th
High Value Products
Legacy business
Contribution
High Value Products
Legacy business
Geographical break-up
Domestic
Exports
Geographical contribution
Domestic
Exports
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
2,461
3,253
3,654
4,833
4,780
5,540
7,320
8,784
15,647
2,926
5,387
3,110
6,362
3,361
7,014
3,902
8,734
4,770
9,550
4,680
10,220
4,010
11,330
4,812
13,596
5,359
21,006
32%
6%
12%
8%
32%
16%
-1%
22%
16%
-2%
32%
-14%
20%
20%
78%
11%
46%
54%
51%
49%
52%
48%
55%
45%
50%
50%
54%
46%
65%
35%
65%
35%
74%
26%
3,398
1,989
3,471
2,891
3,747
3,267
4,262
4,472
5,144
4,406
5,493
4,727
5,540
5,790
6,330
7,266
7,226
13,780
63%
37%
55%
45%
53%
47%
49%
51%
54%
46%
54%
46%
49%
51%
47%
53%
34%
66%
Source: Company, JM Financial Note: Legacy business refers to Inorganic Fluorides and Refrigerant Gases segment while High Value products business refers to CRAMS, Speciality Chemicals and High performance
products
JM Financial Institutional Securities Limited
Page 80
31 May 2021
Navin Fluorine
Exhibit 14. NFIL’s revenue to witness 22% CAGR over FY21-23E
22
56%
Exhibit 15. NFIL’s EBITDA margins likely to continue to expand
6,100
30%
53%
28%
27%
26%
17
42%
4,575
26%
25%
19%
23%
11%
22%
7%
28%
3,050
6
14%
1,525
0
0%
0
11
8%
18%
Gross revenue (INR bn)
FY23E
14%
FY22E
FY21
FY20
FY19
FY18
FY17
EBITDA (INR mn)
YoY growth (RHS) (%)
Source: Company, JM Financial
EBITDA margin (%) (RHS)
Source: Company, JM Financial
Exhibit 16. NFIL’s PAT and PAT margin to continue to be robust
5,000
Exhibit 17. NFIL’ RoE and RoCE likely to improve
40%
40%
30%
30%
20%
20%
1,250
10%
10%
0
0%
0%
38%
3,750
17%
21%
20%
19%
2,500
18%
16%
FY16
FY23E
FY22E
FY21
FY20
FY19
FY18
8%
FY17
FY16
15%
22%
20%
21%
15%
PAT (INR mn)
RoE
PAT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
12%
RoCE
Source: Company, JM Financial
Page 81
31 May 2021
Navin Fluorine
Valuation
We expect NFIL to demonstrate EPS CAGR of 36% over FY21-23E. We assume coverage with
a BUY rating and value the company at 40x FY23E EPS to arrive at a TP of INR 3,760. Our
valuation premium (compared with the 3-year average 1-year forward multiple of 25x) is
justified on account of i) strong visibility arising from incremental revenue from CRAMS; ii)
contracted revenue from high-performance products; and iii) gradual contribution from
additional capacities. Key risks: a) cancellation/delay in off-take of its long-term contracts; and
b) a slowdown in the global agrochemicals industry.
Exhibit 18. NFIL 1-Year forward P/E chart
5,500
4,125
60.0x
2,750
37.0x
1,375
9.0x
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Exhibit 19. NFIL 1-Year forward P/B Chart
Exhibit 20. NFIL 1-Year forward EV/EBITDA Chart
3,800
3,800
45.0x
9.7x
2,850
2,850
6.0x
1,900
1,900
950
22.0x
950
2.0x
0
May-17
May-18
May-19
Source: Company, JM Financial
JM Financial Institutional Securities Limited
May-20
May-21
9.0x
0
May-17
May-18
May-19
May-20
May-21
Source: Company, JM Financial
Page 82
Navin Fluorine
31 May 2021
Company profile
NFIL was established in 1967 and is one of the largest manufacturers of speciality
fluorochemicals. It belongs to the Padmanabh Mafatlal Group – one of India’s oldest
industrial houses. NFIL operates one of the largest integrated fluorochemical complexes in
India with manufacturing locations at Surat and Dahej in Western India and Dewas in Central
India. NFIL has four main strategic businesses namely: a) Refrigeration Gases; b) Inorganic
Fluorides; c) Speciality Fluorides and d) CRAMS.
Board of Directors
- Mr. Vishad P. Mafatlal, Chairman
- Mr. Radhesh R. Welling, Managing Director
- Mr. T.M.M. Nambiar, Non-Independent, Non- Executive Director
- Mr. A.K. Srivastava, Independent Director
- Mr. Pradip N Kapadia, Independent Director
- Mr. S.S.Lalbhai, Independent Director
- Mr. Sujal A. Shah, Independent Director
- Mr. S.G. Mankad, Independent Director
- Mr. H.H. Engineer, Independent Director
-
Mrs. Radhicka Haribhakti, Independent Director
-
Mr. Ashok Sinha, Independent Director
JM Financial Institutional Securities Limited
Page 83
31 May 2021
Navin Fluorine
Financial Tables (Consolidated)
Income Statement
(INR mn)
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
9,959
10,616
11,794
14,088
21,548
Shareholders’ Fund
10,724
14,122
16,339
18,775
22,667
Sales Growth
9.1%
6.6%
11.1%
19.5%
53.0%
Share Capital
0
0
0
0
0
Total Revenue
9,959
10,616
11,794
14,088
21,548
Cost of Goods Sold/Op. Exp
4,766
4,838
5,374
6,254
9,465
Personnel Cost
1,155
1,308
1,417
1,464
Other Expenses
1,855
1,835
1,910
2,516
Other Operating Income
99
99
99
99
99
10,626
14,023
16,240
18,676
22,568
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
2,185
Total Loans
0
0
0
0
0
3,857
Def. Tax Liab. / Assets (-)
348
0
207
167
167
22,834
Reserves & Surplus
EBITDA
2,184
2,635
3,093
3,854
6,040
Total - Equity & Liab.
11,073
14,122
16,546
18,942
EBITDA Margin
21.9%
24.8%
26.2%
27.4%
28.0%
Net Fixed Assets
3,256
4,040
4,716
6,274
8,017
EBITDA Growth
1.6%
20.7%
17.4%
24.6%
56.7%
Gross Fixed Assets
3,623
4,686
4,817
7,950
10,450
Intangible Assets
13
10
8
7
7
Less: Depn. & Amort.
773
1,044
1,058
2,049
2,806
Depn. & Amort.
275
370
442
576
757
1,908
2,265
2,651
3,278
5,283
Other Income
344
333
790
504
549
393
389
949
365
365
Finance Cost
8
20
18
18
18
Investments
4,836
1,954
991
4,785
5,285
PBT before Excep. & Forex
2,244
2,578
3,423
3,764
5,814
Current Assets
4,980
10,291
13,268
10,208
12,556
Excep. & Forex Inc./Loss(-)
0
0
155
0
0
Inventories
1,119
1,579
1,804
1,490
2,302
PBT
2,244
2,578
3,578
3,764
5,814
Sundry Debtors
1,727
1,124
2,759
2,235
3,453
Taxes
770
-1,436
1,108
958
1,292
Cash & Bank Balances
159
1,767
1,319
33
351
Extraordinary Inc./Loss(-)
0
0
0
0
0
Loans & Advances
48
45
48
48
48
Assoc. Profit/Min. Int.(-)
17
72
105
71
73
Other Current Assets
1,927
5,777
7,338
6,402
6,402
Reported Net Profit
1,491
4,086
2,575
2,877
4,595
Current Liab. & Prov.
1,999
2,164
2,429
2,325
3,025
Adjusted Net Profit
1,491
4,086
2,468
2,877
4,595
Current Liabilities
858
1,270
1,365
1,564
2,263
Net Margin
15.0%
38.5%
20.9%
20.4%
21.3%
Provisions & Others
1,141
894
1,064
762
762
49.4
49.5
49.5
49.5
49.5
Net Current Assets
2,981
8,128
10,839
7,883
9,532
Total – Assets
11,073
14,122
16,546
18,942
22,834
EBIT
Diluted Share Cap. (mn)
Diluted EPS (INR)
30.2
82.6
49.9
58.1
92.8
Diluted EPS Growth
-17.2%
173.9%
-39.6%
16.6%
59.7%
Total Dividend + Tax
619
715
394
440
704
Dividend Per Share (INR)
12.5
14.4
8.0
8.9
14.2
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
2,244
2,578
3,578
3,764
5,814
Capital WIP
Source: Company, JM Financial
Source: Company, JM Financial
Cash Flow Statement
(INR mn)
Depn. & Amort.
271
271
14
991
757
Net Interest Exp. / Inc. (-)
-344
-333
-790
-504
-549
Inc (-) / Dec in WCap.
Others
Taxes Paid
-615
-706
-1,255
1,626
-1,331
64
219
652
0
0
-719
-462
173
-958
-1,292
Dupont Analysis
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
15.0%
38.5%
20.9%
20.4%
21.3%
Asset Turnover (x)
0.9
0.8
0.7
0.8
1.0
Leverage Factor (x)
1.1
1.0
1.0
1.0
1.0
14.5%
32.9%
16.2%
16.4%
22.2%
FY23E
RoE
Operating Cash Flow
902
1,566
2,373
4,919
3,400
Key Ratios
Capex
-616
-1,077
-987
-2,550
-2,500
Y/E March
FY19A
FY20A
FY21E
FY22E
Free Cash Flow
286
489
1,386
2,369
900
BV/Share (INR)
216.9
285.5
330.1
379.3
458.0
Inc (-) / Dec in Investments
-2,717
-4,047
-3,423
-3,794
-500
ROIC
23.8%
43.7%
15.0%
17.5%
26.5%
Others
3,089
5,976
2,039
0
0
ROE
14.5%
32.9%
16.2%
16.4%
22.2%
Investing Cash Flow
-243
851
-2,371
-6,344
-3,000
-0.2
-0.2
-0.1
0.0
-0.1
0
0
0
0
0
P/E (x)
106.5
38.9
64.4
55.3
34.6
Inc / Dec (-) in Capital
Dividend + Tax thereon
Inc / Dec (-) in Loans
Others
Net Debt/Equity (x)
0
0
0
63
-155
P/B (x)
14.8
11.3
9.7
8.5
7.0
-704
-822
-465
5
0
EV/EBITDA (x)
71.2
58.8
50.6
40.9
26.1
20
12
14
71
73
EV/Sales (x)
15.6
14.6
13.2
11.1
7.3
Financing Cash Flow
-683
-809
-451
139
-82
Debtor days
63
39
85
58
58
Inc / Dec (-) in Cash
-25
1,609
-449
-1,286
318
Inventory days
41
54
56
39
39
Opening Cash Balance
184
159
1,767
1,318
32
Creditor days
33
45
45
47
48
Closing Cash Balance
159
1,767
1,318
32
350
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 84
31 May 2021
India | Chemicals | Company Update
Galaxy Surfactants | HOLD
Speciality care opportunity fully priced in
Galaxy Surfactants (Galaxy) has gradually diversified from being a pure high-volume
low-margin performance surfactants player to a low-volume high-margin specialty
care ingredients manufacturer. We expect the company to clock an EPS CAGR of
~20% over FY20-23E, on the back of a ramp-up of additional capacities and
margin expansion arising from an improved product mix and positive operating
leverage. We assume coverage on Galaxy with a HOLD rating and a TP of INR
3,360/share, based on 30x FY23E EPS.
Specialty care ingredients – to drive margin expansion: Galaxy manufactures ~160 specialty
care ingredients products, catering to sub-segments such as UV absorbers, preservatives,
preservative blends and mild surfactants. Specialty care sales volumes clocked a 7.3% CAGR
over FY14-17 and 9.1% CAGR over FY17-20; we expect a 6.7% CAGR over FY20-23E led
by: a) expansion of its specialty ingredients plant in Jhagadia, taking the total capacity to
~135,000 MT/annum (to be operational by 1QFY22) and b) focus on increasing the share of
the segment by adding newer product categories and blends, including tie-ups for additional
volumes with global MNCs and local majors.
Performance surfactants – steady growth to continue: The performance surfactant portfolio
has ~45 products of which key items include Sodium Lauryl Ether Sulphate (SLES), Fatty
Alcohol Sulphate (FAS) and Ethoxylated products. Performance surfactants volumes posted a
5.8% CAGR over FY14-17 and 7.5% CAGR over FY17-20. We expect a 7.6% CAGR over
FY20-23E on the back of: a) commissioning of the new performance surfactants line at
Jhagadia and multi-purpose plant at Tarapur by 1QFY22 (taking the total performance
surfactants capacity to ~301,000 MT/annum) and b) leveraging existing clientele and securing
supply for newer products due to proven quality and low cost.
Per-unit EBITDA margin is an accurate metric to look at: Management has emphasised that
the company’s raw material cost is a pass-through and hence per unit EBITDA margin is an
accurate metric to look at. Galaxy’s EBITDA margins have grown from INR 14.6/kg in FY14 to
INR 16.5/kg in FY20 due to a gradual rise in the proportion of high-margin specialty care
ingredients in the overall mix. We expect margins to post a 5.5% CAGR to INR 19.3/kg by
FY23E on account of: a) an improved product mix within both performance surfactants and
specialty care ingredients and b) positive operating leverage arising from the ramp-up of
additional capacity leading to higher capacity utilisations (from 71% at end-1HFY21).
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
HOLD
3,360
13.1%
Key Data – GALSURF IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR2,971
INR105.3/US$1.5
33%
35.5
35.5
INR118.0/US$1.6
3,350/1,201
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
5.3
-0.1
6M
53.2
31.5
12M
126.1
42.6
Expect EPS CAGR of 20% over FY20-23E – HOLD on valuation grounds: We assume
coverage on Galaxy with a HOLD rating and TP of INR 3,360/share, based on 30x FY23E EPS.
We believe current valuations largely capture: a) the strong medium-term growth visibility in
the performance surfactants segment; b) tie-ups for additional specialty care volumes with
global MNCs and local majors; and c) positive operating leverage arising from the ramp-up in
additional capacities. Moreover, improved RoCEs of ~22% by FY22-23E, compared with the
historical average of 20%, justify the premium over historical valuations.
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
27,630
12.2
3,576
12.9
1,952
55.1
23.5
20.5
24.5
54.0
12.0
30.1
0.2
FY20A
25,964
-6.0
3,689
14.2
2,304
65.0
18.0
20.2
23.7
45.7
9.9
29.3
0.5
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
27,334
5.3
4,578
16.8
2,982
84.1
29.4
22.9
25.3
35.3
8.2
23.1
0.4
FY22E
30,269
10.7
5,161
17.1
3,379
95.3
13.3
22.4
23.7
31.2
6.8
20.2
0.5
FY23E
33,087
9.3
5,741
17.4
3,972
112.0
17.6
23.4
23.2
26.5
5.6
17.7
0.6
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
Galaxy Surfactants
Specialty care ingredients – to drive margin expansion
Galaxy Surfactants, over the years, has gradually diversified itself from being a pure highvolume low-margin performance surfactants player to a low-volume high-margin specialty
care ingredients manufacturer. In the specialty care ingredients segment, the company
manufactures ~160 products catering to various sub-segments such as UV absorbers,
preservatives, preservative blends and mild surfactants. A few of its key products are: a) 2phenoxyethanol (preservative priced at ~USD 2-2.5/kg); b) Sodium methyl Lauryl Taurate
(mild surfactant priced at ~USD 6/kg); and c) Ethyl hexyl methoxy cinnamate (UV absorber
priced at ~USD 8.5-9/kg). These products are niche and premium in nature and have limited
competitive threat (oligopolistic for most products). This has allowed the company to improve
its margins in the past and is likely to continue to provide margin expansion ability in the long
run as well.
Specialty care product sales volumes clocked a 7.3% CAGR over FY14-17 and 9.1% CAGR
over FY17-20. However, specialty chemical volumes have been recently impacted as demand
for beauty products (UV-absorbing sunscreens, lipstick preservatives, etc.) fell due to the
pandemic. We expect Galaxy’s specialty care ingredient volumes to witness a 6.7% CAGR
over FY20-23E led by: a) expansion of its specialty ingredients plant at Jhagadia, taking the
total capacity to ~135,000 MT/annum (to be operational by 1QFY22 as per management
guidance) and b) the company’s focus on increasing the segment’s share by adding newer
product categories and blends, including tie-ups for additional volumes with global MNCs
and local majors.
Exhibit 1. Specialty care product sales volume likely to witness a 6.7% CAGR over FY20-23E
120
98
90
81
60
62
FY18
60
56
67
FY17
79
88
77
50
FY23E
FY22E
FY21E
FY20
FY19
FY16
FY15
0
FY14
30
Specialty care products sales volume (KT)
Source: Company, JM Financial
Mild surfactants and preservatives within specialty care on the rise
Management - in its FY20 Annual Report - highlighted that its offerings in preservatives
(paraben free) and mild (sulphate free) surfactants contributed ~INR 2.5bn and INR 1.0bn,
respectively, during the year . This indicates that preservatives and mild surfactants’ revenues
accounted for ~35% of total specialty chemicals’ revenues (INR 10.1bn) in FY20. It is
important to note that the company demonstrated a 26% revenue CAGR in the preservative
products category over FY09-20.
JM Financial Institutional Securities Limited
Page 86
31 May 2021
Galaxy Surfactants
Phenoxyethanol – one of its key successful products
In the preservatives products space, the company has highlighted that phenoxyethanol (used
in the home and personal care segment) forms a large part of its volumes and it currently
exports phenoxyethanol to several marquee MNCs such as P&G, L’Oreal, Johnson & Johnson,
Unilever, etc. The global phenoxyethanol market was valued at USD 95.8mn in CY13 and
Galaxy’s share in it was 12.7% (at USD 12.1mn). As per industry estimates, Galaxy’s
phenoxyethanol revenues demonstrated a 10.6% CAGR over CY13-19 and stood at ~USD
22mn in CY19 while the global phenoxyethanol market has only posted a ~2.3% CAGR to
reach ~USD 110mn. Hence, Galaxy grew its market share by ~7% during CY13-19 to reach
~20% at end-CY19. We expect this growth trend to continue led by: a) strong demand from
EU on account of the shift towards paraben-free preservatives and b) increasing demand
from India and AMET markets due to rising awareness and premiumisation.
Exhibit 2. Phenoxyethanol revenues demonstrated a 10.6% CAGR over CY13-19
24
21%
22
18
17%
12
12
13%
6
9%
0
5%
CY13
CY19
Phenoxyethanol revenues (USD mn)
Global market share (RHS) (%)
Source: Company DRHP, Industry, JM Financial
We believe that Galaxy has been able to place itself among global majors in a few specialty
care ingredient categories due to its continued focus on R&D. Its R&D expenditures have
been rising, posting an 8.3% CAGR over FY17-20 and constituting 1.5-2% of speciality
product sales. Currently, the company maintains 43 patents (16 in India, 15 in the US, 4 in
the EU and 2 each in China, Japan, Brazil and Russia).
Exhibit 3. Galaxy’s R&D expenditures have been rising consistently
1.9%
200
2.0%
1.8%
172
157
150
155
1.7%
135
1.5%
1.5%
100
1.0%
50
0.5%
0
0.0%
FY17
FY18
Total R&D expenditure (INR mn)
FY19
FY20
R&D as % of specialty product sales (RHS) (%)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 87
31 May 2021
Galaxy Surfactants
Performance surfactants – steady growth to continue
Galaxy Surfactants’ performance surfactant portfolio has ~45 products, of which key items
include Sodium Lauryl Ether Sulphate (SLES), Fatty Alcohol Sulphate (FAS) and Ethoxylated
products. These performance products are essential in all rinse-off formulations and are
therefore high-volume in nature. Essentially, performance surfactants are low-margin
products as: a) their formulations do not require much technical expertise (entry barriers are
low) and b) these products are largely commoditised and form an essential portion of raw
material costs for FMCG players, who buy them on a cost-plus contractual basis.
Performance surfactants’ volumes have been growing continuously, posting a 5.8% CAGR
over FY14-17 and 7.5% CAGR over FY17-20. Going forward, we expect this trend to
continue with performance products registering a 7.6% CAGR over FY20-23E on the back
of: a) commissioning of the new performance surfactants line at Jhagadia and multi-purpose
plant at Tarapur by 1QFY22 (taking the total performance surfactants capacity to ~301,000
MT/annum) and b) leveraging the existing clientele and securing supply for newer products
due to proven quality and low cost.
Exhibit 4. Performance surfactants’ sales volume likely to see a 7.6% CAGR over FY20-23E
200
179
169
153
150
131
135
144
99
FY15
FY16
100
97
FY14
115
97
FY23E
FY22E
FY21E
FY20
FY19
FY18
0
FY17
50
Performance surfactants sales volume (KT)
Source: Company, JM Financial
Exhibit 5. Specialty care volumes in the overall mix to continue to be steady ~35%
34%
37%
38%
35%
34%
37%
36%
35%
34%
35%
66%
63%
62%
65%
66%
63%
64%
65%
66%
65%
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
100%
75%
50%
25%
0%
Performance surfactants
Specialty care products
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 88
31 May 2021
Galaxy Surfactants
Per-unit EBITDA margin is an accurate metric to look at
Management has emphasised that the company’s raw material cost is a pass-through and
hence per unit EBITDA margin is an accurate metric to look at. Galaxy’s EBITDA margins have
grown from INR 14.6/kg in FY14 to INR 16.5/kg in FY20 due to a gradual rise in the
proportion of high-margin specialty care ingredients in the overall mix. We expect margins to
post a 5.5% CAGR to INR 19.3/kg by FY23E on account of: a) an improved product mix
within both performance surfactants and specialty care ingredients and b) positive operating
leverage arising from the ramp-up of additional capacity leading to higher capacity
utilisations (from 71% at end-1HFY21).
Exhibit 6. EBITDA margin (INR/kg) likely to post an 8% CAGR over FY20-23E
20.1
20.7
FY23E
15.3
FY17
15
14.7
FY16
16.7
14.6
19.6
FY22E
20
FY21E
25
16.5
14.6
12.4
10
FY20
FY19
FY18
FY14
0
FY15
5
EBITDA margin (INR/kg)
Source: Company, JM Financial
Timely capex likely to pave the way for future growth
Galaxy has been consistently looking at new avenues for growth. Management has indicated
likely capex of INR 1.2bn-1.5bn annually over FY21-23E on account of: a) its multi-purpose
plant at Tarapur; b) expansion of the specialty ingredients plant at Jhagdia; c) expansion of its
R&D plant at a cost of INR 250mn and d) maintenance capex of INR 300mn annually.
Exhibit 7. Capex is likely to remain at INR 1.2-1.5bn per annum over FY21-23E
2,800
2,100
1,400
700
0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E FY22E FY23E
Capex (INR mn)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 89
31 May 2021
Galaxy Surfactants
Key Assumptions and Estimates
Exhibit 8. Segment-wise Volume, Revenue and Realisation contribution and expected growth
Segm ental sales volum es (MT)
Performance surfactants
Specialty care products
Total
Volum e YoY grow th (%)
Performance surfactants
Specialty care products
Total
Segm ental revenue (INR m n)
Performance surfactants
Specialty care products
Others
Total
Segm ental revenue contribution (%)
Performance surfactants
Specialty care products
Others
Total
Revenue YoY grow th (%)
Performance surfactants
Specialty care products
Realisations (INR/kg)
Performance surfactants
Specialty care products
Total
Realisation YoY grow th (%)
Performance surfactants
Specialty care products
Total
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
97,211
56,163
1,53,374
98,775
59,718
1,58,493
1,15,392
62,087
1,77,479
1,30,596
66,833
1,97,429
1,35,337
79,374
2,14,711
1,43,521
80,716
2,24,237
1,53,039
80,644
2,33,682
1,68,710
87,613
2,56,323
1,78,832
98,127
2,76,959
-0.1%
11.9%
4.0%
1.6%
6.3%
3.3%
16.8%
4.0%
12.0%
13.2%
7.6%
11.2%
3.6%
18.8%
8.8%
6.0%
1.7%
4.4%
6.6%
-0.1%
4.2%
10.2%
8.6%
9.7%
6.0%
12.0%
8.1%
11,010
7,110
619
18,739
10,054
7,276
689
18,019
14,050
7,560
870
22,480
15,530
8,130
965
24,625
17,410
10,270
-50
27,630
15,870
10,150
-56
25,964
17,092
10,242
0
27,334
19,030
11,239
0
30,269
20,374
12,713
0
33,087
59%
38%
3%
100%
56%
40%
4%
100%
62%
34%
4%
100%
63%
33%
4%
100%
63%
37%
0%
100%
61%
39%
0%
100%
63%
37%
0%
100%
63%
37%
0%
100%
62%
38%
0%
100%
8.5%
13.9%
-8.7%
2.3%
39.7%
3.9%
10.5%
7.5%
12.1%
26.3%
-8.8%
-1.2%
7.7%
0.9%
11.3%
9.7%
7.1%
13.1%
113
127
122
102
122
114
122
122
127
119
122
125
129
129
129
111
126
116
112
127
117
113
128
118
114
130
119
8.6%
1.9%
6.2%
-10.1%
-3.8%
-6.9%
19.6%
-0.1%
11.4%
-2.3%
-0.1%
-1.5%
8.2%
6.4%
3.2%
-14.0%
-2.8%
-10.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.2%
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 90
31 May 2021
Galaxy Surfactants
Exhibit 9. Sales are likely to see 8.4% CAGR over FY20-23E
36
Exhibit 10. EBITDA margins likely to continue its upward trajectory
30%
6,000
17%
25%
17%
27
20%
13%
12%
11%
10%
18
-6%
9
15%
13%
12%
12%
10%
9%
5%
10%
17%
14%
4,500
20%
10%
3,000
10%
0%
1,500
5%
0
0%
Net sales (INR bn)
YoY Growth % (RHS)
EBITDA (INR mn)
Source: Company, JM Financial
FY23E
FY22E
FY21E
FY20
FY19
FY18
FY17
FY16
FY15
FY23E
FY22E
-10%
FY21E
FY20
FY19
FY18
FY17
FY16
0
FY15
-4%
EBITDA Margin % (RHS)
Source: Company, JM Financial
Exhibit 11. …which in-turn would improve PAT margin
Exhibit 12. RoCEs likely to improve in FY22E onwards
4,000
3,000
20%
32%
15%
24%
10%
16%
5%
8%
0%
0%
12%
9%
11%
11%
7%
2,000
6%
7%
PAT (INR mn)
PAT margin (%) (RHS)
Source: Company, JM Financial
JM Financial Institutional Securities Limited
RoE
FY23E
FY22E
FY21E
FY20
FY19
FY18
FY17
FY16
FY23E
FY22E
FY21E
FY20
FY19
FY18
FY17
FY16
0
4%
FY15
1,000
FY15
6%
RoCE
Source: Company, JM Financial
Page 91
31 May 2021
Galaxy Surfactants
Valuation
We assume coverage on Galaxy with a HOLD rating and TP of INR 3,360/share, based on 30x
FY23E EPS. We believe current valuations largely capture: a) the strong medium-term growth
visibility in the performance surfactants segment; b) tie-ups for additional specialty care
volumes with global MNCs and local majors; and c) positive operating leverage arising from
the ramp-up in additional capacities. Moreover, improved RoCEs of ~22% by FY22-23E,
compared with the historical average of 20%, justify the premium over historical valuations.
Hence, we await a better entry point.
Exhibit 13. Galaxy's 1-year forward P/E chart
3,900
320x
3,100
25.0x
2,300
1,500
15.0x
700
May-18
Nov-18
May-19
Nov-19
May-20
Nov-20
May-21
Source: Company, JM Financial
Exhibit 14. Galaxy's 1-year forward P/B chart
Exhibit 15. Galaxy's 1-year forward EV/EBITDA chart
3,900
3,100
3,900
5.5x
2,300
3,100
20.0x
2,300
13.0x
4.5x
1,500
3.0x
700
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
Source: Company, JM Financial
JM Financial Institutional Securities Limited
1,500
9.0x
700
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
Source: Company, JM Financial
Page 92
31 May 2021
Galaxy Surfactants
Company profile
Galaxy Surfactants was founded in 1940 and is one of the leading players in the Surfactants
and Specialty Care Ingredients space, exclusively focussing on catering to the Home and
Personal Care Industry. Galaxy caters to 1750+ customers in more than 75 countries with 5
plants in India, 1 in Egypt and another in the US.
Exhibit 16. Galaxy’s manufacturing facilities
Location
Num ber of facilities
Installed Capacity
Features
(MTPA)
Tarapur, Maharashtra
3
33,647
Batch processing plants for manufacturing all types of surfactants
Taloja, Maharashtra
1
1,53,741
One of the largest sulfation facilities in India, Galaxy also manufactures ethoxylates,
betaines, alkanoamides, fatty acid esters and syndet soap noodles at this complex
Jhagadia, Gujarat*
1
1,31,000
Suez, Egypt*
1
1,17,500
New Hampshire, USA
1
600
Located very close to ethylene oxide source. The company manufactures both
performance surfactants and speciality care products
This facility is close to the Suez Canal and is strategically positioned so as to address
the needs of markets in AMET, Europe and Americas
Ow ned by Tri-K Industries
Manufactures various grades of proteins for cosmetic applications
Source: Company, JM Financial, MTPA is Metric tonnes per annum * environmental clearances for expansion and additional land available at Jhagadia and Suez plants
Exhibit 17. Tier wise segregation of clientele
T1
Unilever, P&G, L'oreal,
Colgate, Revlon, etc.
Long term
T2
Dabur, Godrej, Emami,
Patanjali, etc.
Both long term and spot
Margin profile
Low and steady
Better than T1 clients
New product
approval tim e
Usually 2-3 years
Easier than T1 clients
Clients
Contracts
T3
Lotus, VLCC, etc.
Both long term and spot
High on account of
know ledge/process share
Company helps them w ith
end to end process
Source: Company, JM Financial
Board of Directors
- Mr. Unnathan Shehar, Managing Director
- Mr. S Ravindranath, Chairman and Non-Executive Independent Director
- Mr. K Ganesh Kamath, Executive Director
- Mr. K. Natarajan, Executive Director
- Mr. G. Ramakrishnan, Non-Executive Director
- Dr. Nirmal Koshti, Non-Executive Director
- Mr. Vaijanath Kulkarni, Non-Executive Director
- Mr. Uday K. Kamath, Non-Executive Director
- Shashikant Shanbhag, Non-Executive Director
- Mr. Subodh Nadkarni, Non-Executive Independent Director
- Dr. M G Parameswaran, Non-Executive Independent Director
- Mrs. Nandita Gurjar, Non-Executive Independent Director
JM Financial Institutional Securities Limited
Page 93
31 May 2021
Galaxy Surfactants
Financial Tables (Consolidated)
Income Statement
(INR mn)
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
27,630
25,964
27,334
30,269
33,087
Shareholders’ Fund
8,767
10,678
12,906
15,556
18,694
Sales Growth
12.2%
-6.0%
5.3%
10.7%
9.3%
Share Capital
0
0
0
0
0
Total Revenue
27,630
25,964
27,334
30,269
33,087
Cost of Goods Sold/Op. Exp
19,481
17,153
17,439
19,160
20,779
Personnel Cost
1,604
1,781
1,954
2,164
2,366
Total Loans
Other Expenses
2,969
3,341
3,362
3,784
4,202
Def. Tax Liab. / Assets (-)
Other Operating Income
355
355
355
355
355
8,413
10,323
12,552
15,201
18,340
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
2,532
3,196
1,530
530
0
271
240
240
240
240
18,934
Reserves & Surplus
EBITDA
3,576
3,689
4,578
5,161
5,741
Total - Equity & Liab.
11,570
14,114
14,676
16,326
EBITDA Margin
12.9%
14.2%
16.8%
17.1%
17.4%
Net Fixed Assets
5,988
8,111
8,598
9,040
9,362
EBITDA Growth
24.3%
3.2%
24.1%
12.7%
11.2%
Gross Fixed Assets
9,722
11,274
12,474
13,974
15,474
Depn. & Amort.
512
622
712
1,058
1,178
Intangible Assets
3,064
3,067
3,866
4,103
4,563
Less: Depn. & Amort.
Other Income
47
59
94
528
777
Finance Cost
300
238
142
113
29
2,811
2,888
3,818
4,518
5,311
EBIT
PBT before Excep. & Forex
Excep. & Forex Inc./Loss(-)
233
1,424
1,424
1,424
1,424
4,792
5,248
5,960
7,018
8,196
826
660
660
660
660
Investments
69
135
135
135
135
Current Assets
9,574
9,873
10,267
11,796
14,391
Capital WIP
0
0
0
0
0
Inventories
3,513
3,250
3,445
3,815
4,170
PBT
2,811
2,888
3,818
4,518
5,311
Sundry Debtors
4,268
4,394
4,643
5,142
5,620
Taxes
859
584
836
1,138
1,338
Cash & Bank Balances
257
545
1,123
1,783
3,545
Extraordinary Inc./Loss(-)
0
0
0
0
0
Loans & Advances
37
4
4
4
4
Assoc. Profit/Min. Int.(-)
0
0
0
0
0
Other Current Assets
1,500
1,679
1,052
1,052
1,052
Reported Net Profit
1,952
2,304
2,982
3,379
3,972
Current Liab. & Prov.
4,061
4,005
4,324
4,646
4,955
Adjusted Net Profit
1,952
2,304
2,982
3,379
3,972
Current Liabilities
3,069
2,936
3,203
3,525
3,834
Net Margin
7.1%
8.9%
10.9%
11.2%
12.0%
Provisions & Others
992
1,069
1,121
1,121
1,121
Diluted Share Cap. (mn)
35.5
35.5
35.5
35.5
35.5
Net Current Assets
5,514
5,868
5,943
7,150
9,437
Diluted EPS (INR)
55.1
65.0
84.1
95.3
112.0
Total – Assets
11,570
14,114
14,676
16,326
18,934
Diluted EPS Growth
23.5%
18.0%
29.4%
13.3%
17.6%
Source: Company, JM Financial
Total Dividend + Tax
213
496
447
507
596
Dividend Per Share (INR)
6.0
14.0
12.6
14.3
16.8
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
2,811
2,888
3,818
4,518
5,311
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Depn. & Amort.
494
456
712
1,058
1,178
Net Margin
7.1%
8.9%
10.9%
11.2%
12.0%
Net Interest Exp. / Inc. (-)
253
179
48
-415
-748
Asset Turnover (x)
2.5
2.0
1.9
1.9
1.8
Leverage Factor (x)
1.4
1.3
1.2
1.1
1.0
24.5%
23.7%
25.3%
23.7%
23.2%
FY23E
Source: Company, JM Financial
Cash Flow Statement
Inc (-) / Dec in WCap.
Others
Taxes Paid
(INR mn)
85
-103
502
-547
-525
0
0
0
0
0
-859
-584
-836
-1,138
-1,338
Dupont Analysis
RoE
Operating Cash Flow
2,784
2,836
4,245
3,476
3,877
Key Ratios
Capex
-1,789
-2,578
-1,200
-1,500
-1,500
Y/E March
FY19A
FY20A
FY21E
FY22E
995
257
3,045
1,976
2,377
BV/Share (INR)
247.3
301.2
364.0
438.8
527.3
0
0
0
0
1
ROIC
20.5%
20.2%
22.9%
22.4%
23.4%
23.2%
Free Cash Flow
Inc (-) / Dec in Investments
Others
46
-1
94
528
777
ROE
24.5%
23.7%
25.3%
23.7%
-1,743
-2,579
-1,106
-972
-722
Net Debt/Equity (x)
0.3
0.2
0.0
-0.1
-0.2
0
0
0
0
0
P/E (x)
54.0
45.7
35.3
31.2
26.5
Dividend + Tax thereon
213
496
-393
-468
-554
P/B (x)
12.0
9.9
8.2
6.8
5.6
Inc / Dec (-) in Loans
-388
664
-1,666
-1,000
-530
EV/EBITDA (x)
30.1
29.3
23.1
20.2
17.7
Investing Cash Flow
Inc / Dec (-) in Capital
Others
-886
-1,128
-502
-375
-309
EV/Sales (x)
3.8
4.1
3.8
3.4
3.0
Financing Cash Flow
-1,060
32
-2,561
-1,843
-1,393
Debtor days
56
62
62
62
62
Inc / Dec (-) in Cash
-19
288
577
661
1,763
Inventory days
46
46
46
46
46
Opening Cash Balance
276
257
545
1,123
1,783
Creditor days
46
45
48
48
48
Closing Cash Balance
257
545
1,123
1,783
3,546
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 94
31 May 2021
India | Chemicals | Company Update
Fine Organics | HOLD
Go - Green Chemistry
Fine organics (FOIL), over the years, with its strong focus on R&D has become one
of the leading players of vegetable oil-based additives for plastic, food, and
cosmetics. With rising demand for environment-friendly products by customers,
oleochemical products are being readily accepted in the market. Although we
believe FOIL is the clear winner of the rising adoption of green (low toxic) chemicals
(which would aid in off-take of incremental capacity and provides long term growth
visibility), current valuations leave limited upside, in our view. Hence, we assume
coverage with a HOLD rating and value the company at 35x FY23E EPS (in-line with
3-year average multiple) arrive at a TP of INR 3,160.
Unique positioning of FOIL gives it an edge: FOIL is the largest manufacturer of oleochemicalbased additives in India. It sits in a very unique position where it is competing based on its
technology developed in-house for process improvement and project implementation, giving
it an edge. FOIL is the largest producer of slip additives in the world.
Capacity expansion to support top line growth: FOIL has entered significant capacity
expansion phase in FY19-20, during which company added two plants at its Ambernath
facility, with capacities of 8,000 and 32,000 metric tonnes per annum (MTPA), which
boosted the company’s total production capacity to 101,300 MTPA. On top of that, in
Nov’20, company further commissioned 10,000 MTPA capacity at its Patalganga facility.
Moreover, additional capacity of 10,000 MTPA by FY22 is expected to come up on account
of its JV with Zeelandia. Management expects ramp-up of these facilities to be gradual and
all its plants to reach optimum utilisation by FY24E.
Imminent gross margin improvement draws comfort: Due to the pandemic, key raw materials
used by FOIL have witnessed sharp ~20-40% price increases. This, coupled with management
refraining from long-term contracts (owing to the pandemic) with its customers severely
impacted its gross margins, which were at 34% in 3QFY21 (down 820 bps YoY). However,
going forward, we expect margins to normalise gradually as the company re-negotiates the
margins on a cost-plus basis, starting 1QFY22.
Krishan Parwani
Krishan.Parwani@jmfl.com | Tel: (91 96) 62095500
Dayanand Mittal
Dayanand.Mittal@jmfl.com | Tel: (91 96) 1938870
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
HOLD
3,160
5.2%
Key Data – FINEORG IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR3,003
INR92.1/US$1.3
25%
30.7
30.7
INR269.5/US$3.7
3,569/1,852
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
7.7
2.1
6M
16.7
0.2
12M
56.2
-1.5
Expect EPS CAGR of 54% over FY21-23E – HOLD on valuation grounds: On the back of
additional production from recently-added capacities, we estimate FOIL’s revenues to register
a 22% CAGR over FY21-23E (and reach INR 16.8bn in FY23E). Normalcy in gross margins to
39% (vs. 35% in FY21) is likely to push EBITDA to register a 45% CAGR over FY 21-23E (and
reach INR 4.0bn in FY23E). As a result, FOIL’s EPS is likely to see a 54% CAGR over FY21-23E
(and reach INR 2.7bn in FY23E). Although we believe FOIL is the clear winner of the rising
adoption of green (low toxic) chemicals (which would aid in off-take of incremental capacity
and provides long term growth visibility), current valuations leave limited upside, in our view.
Hence, we assume coverage with a HOLD rating and value the company at 35x FY23E EPS
(in-line with 3-year average 1-year forward multiple) to arrive at a TP of INR 3,160.
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
(INR mn)
FY19A
10,440
20.7
2,223
21.3
1,290
42.1
27.3
25.5
28.1
71.4
18.1
41.5
0.2
FY20A
10,262
-1.7
2,361
23.0
1,665
54.3
29.1
32.1
29.2
55.3
14.6
38.5
0.3
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
11,213
9.3
1,921
17.1
1,149
37.5
-31.0
22.4
16.8
80.1
12.5
46.9
0.4
FY22E
14,094
25.7
3,225
22.9
2,238
73.0
94.7
35.4
26.9
41.1
10.0
27.9
0.4
FY23E
16,797
19.2
4,028
24.0
2,729
89.0
21.9
34.0
26.4
33.7
8.0
22.2
0.5
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
Fine Organics
31 May 2021
Primarily operates in two segments
FOIL primarily operates in a) Plastic additives and b) Food & Other additives. FOIL has a
diversified customer base with less than 4% of exposure to one particular customer.
a.
Plastic Additives
Plastic Additives provide key functionality to the end plastic product or to the processing
of plastic. Some key features/properties that can be imparted by additives to plastic or
plastic processing are:
i.
Anti-fog: Sometimes, a thin layer of moisture (or fog) forms on a plastic film,
reducing visibility inside, particularly in places such as a supermarket. Adding an
anti-fog additive to the plastic ensures that the fog does not stick to the film.
ii.
Filler dispersants: A solid material dispersed in a liquid requires an additive to make
the dispersion process easier and more stable (eg. adding carbon black to a tyre). It
needs to disperse properly to ensure consistency. A filler dispersant ensures that the
filler is dispersed properly in the plastic.
iii.
Pigment wetting agents: Wetting agents are chemicals that increase the spreading
and penetrating properties of a liquid by lowering its surface tension, that is, the
tendency of its molecules to adhere to each other. Thus, a pigment wetting agent
improves the spread/consistency of pigment on the base surface.
iv.
Flow improvers: As the name suggests, flow improvers improve the flow of the
plastic. The specific flow improver to be used would depend on the plastic (PE, PP,
PVC, etc).
v.
Anti-static additives: These are additives that prevent/reduce generation of static
electricity. These are useful in specific applications such as in oil and gas installations
or in specific weather conditions (cold and dry weather).
vi.
Plasticisers: Plasticisers are additives that increase/produce flexibility and reduce
brittleness. FOIL does not manufacture plasticisers.
vii.
Slip additives: These additives reduce friction between the plastic and a surface.
Thus, for example, they help faster release of plastic items from a mould. They work
when the additive migrates or moves to the surface of the article, creating a layer to
facilitate lesser friction.
viii.
Processing aids: Processing aids are designed to improve the melt processability and
handling of plastic or give finished articles improved aesthetic properties by
removing flow marks and dye lines, thereby improving the parts gloss and clarity.
ix.
Lubricants: Lubricants, as the name suggests, assist in the internal lubrication for the
resin and reduce friction between the polymer melt and the surface.
x.
Impact modifiers, stabilisers and flame retardants: FOIL does not manufacture these
additives.
We note that the above is just a broad classification of additives. The additive required
for one type of plastic/processing application may not work for a different plastic or for
an application at a different temperature or other processing parameters.
JM Financial Institutional Securities Limited
Page 96
Fine Organics
b.
31 May 2021
Food Additives
Food additives broadly comprise two types: direct and indirect. Direct food additives are
substances that are added to a food for a specific purpose, such as the addition of
refined wheat flour, sugar, yeast, etc. in bread. There can be indirect additives present
due to packaging, storage or other handling. Food additives are strictly regulated and
monitored by the government to ensure safe health of the people.
FOIL makes three kinds of food additives
c.
1)
Emulsifiers: An emulsifier is a substance used in food manufacturing to help
combine liquids of different viscosities. Thus, a bakery which makes a bread is
essentially mixing flour, sugar, yeast, etc. in a particular proportion to make dough.
An emulsifier ensures consistency of the mixture so that the texture, taste, look and
feel of the bread is uniform. Among FOIL’s products, emulsifiers form the largest
group (~24-26 products).
2)
Anti-fungal agents/preservatives: As the name suggests, one of the biggest
problems for ready-to-cook/pre-mixes is fungus. This is visible in bread and
consumers will not buy products with fungus. Using anti-fungal agents increases
the shelf life of the bread.
3)
Specialty products: FOIL has ~7-10 products in this group and some are made on
specific client requests. As an example, FOIL makes a cloudifier. A clouding agents
or cloudifier is a type of food additive used to make beverages such as fruit juices
look more cloudy and thus more natural-looking and visually appealing, typically by
creating an emulsion of oil droplets.
Other Additives
In this segment, FOIL makes various other additives that are used in rubber (eg. in the
wiper of a car) for the general purpose of reducing friction. Since this is a small segment
and is clubbed with food, we just highlight some applications below:
1)
Rubber additives: As stated above, this includes products such as additves for the
wiper of an automobile to reduce friction.
2)
Cosmetic and pharma additives: In cosmetics, fatty alcohols are used as emollients
and thickeners; they help improve the viscosity or thickness of creams and lotions.
3)
Animal feed applications: There is a lot of concern about the use of antibiotics in
animal feed. Natural vegetable oil-based products are a potential alternative and
FOIL is working on developing such products.
JM Financial Institutional Securities Limited
Page 97
31 May 2021
Fine Organics
Oleo chemicals – gaining traction
Demand for oleochemical-based products is a structural growth story: Oleochemicals are
biodegradable and less toxic than their petro-based counterparts. This makes oleochemicalbased products an attractive alternative to synthetic petrochemical products. With rising
demand for environment-friendly products by customers, oleochemical products are being
readily accepted in the market, assisted by increasing population and rapid economic growth.
FOIL is the largest manufacturer of oleochemical-based additives in India. It sits in a very
unique position where it is competing based on its technology developed in-house for
process improvement and project implementation, giving it an edge. FOIL is the largest
producer of slip additives in the world.
Exhibit 1. Comparison: Oleochemical-based additives vs. petrochemical-based additives
Parameter
Oleochemical-based additives
Petrochemical-based additives
Type
Natural
Synthetic
Raw material sources
Vegetable oil derivatives
Crude derivatives
Sustainability
Yes, sustainable source of raw material
No, fossil fuel derived raw material
Biodegradable
Yes, sustainable source of raw material
No
Environment friendly
Yes, sustainable source of raw material
No, fossil fuel derived raw material
Application in food
Yes
No
Application in polymer
Yes
No
Source: CRISIL Research, Industry
Capacity expansion to support top line growth
FOIL has historically grown cautiously based only on internal accruals and debt to fund any
capex. Typically, after adding capacity, FOIL has been able to fully utilise the capacity within
3-4 years. This has been feasible because, as discussed previously, FOIL first works with
customers to understand the challenges that they are facing, then develops an application
and then moves to production. Thus, by the time the production of a new product starts,
there is already a fair amount of understanding of demand and the target customer base is
ready and product has already been approved.
FOIL had entered significant capacity expansion phase in FY19-20 during which company
added two plants at its Ambernath facility, with capacities of 8,000 and 32,000 metric
tonnes per annum (MTPA), which boosted the company’s total production capacity to
111,300 MTPA. On top of that, in Nov’20, company further commissioned 10,000 MTPA
capacity at its Patalganga facility. Moreover, additional capacity of 10,000 MTPA by FY22 is
expected to come up on account of its JV with Zeelandia. Management expects ramp-up of
these facilities to be gradual and all its plants to reach optimum utilisation by FY24E.
Exhibit 2. FOIL’s capacity is likely to increase to 131,000MTPA by FY22E
140,000
131,300 131,300
111,300
116,300
105,000
55,900
FY17
64,300
55,900
FY16
70,000
69,300
35,000
FY23E
FY22E
FY21E
FY20
FY19
FY18
0
Installed capacity (MTPA)
Source: Company, JM Financial, MTPA: Metric tonne per annum
JM Financial Institutional Securities Limited
Page 98
31 May 2021
Fine Organics
Gross margins likely to improve with easing of RM prices
FOIL’s key raw materials are majorly fatty acids such as stearic acid (for manufacturing
Stearamide), erucic Acid (for manufacturing Erucamide), propionic acid, lactic acid, tartaric
acid, adipic acid, etc. These raw materials are usually imported from various countries such as
Malaysia, Sweden, Thailand, and Germany. Prices of these key raw materials are roughly in
the range of USD 1-1.5/kg.
Due to the pandemic, key raw materials used by FOIL have witnessed a sharp ~20-40% price
increases. This, coupled with management’s decision of not entering long term contracts
(owing to the pandemic) with its customers has severely impacted its gross margins, which
were at 35.2% in FY21 (vs. 40.9% in FY20 and 37.3% in FY19). However, going forward,
we expect margins to normalise gradually as the company is likely to re-negotiate the
margins on cost plus basis, starting 1QFY22.
Fine organics manufactures fatty amides such as stearamide, erucamide, oleamide, etc. from
fatty acids (stearic acid, erucic acid) using ammonia. In this process there is some ammonia
gas is released which is contained and converted into liquid. Apart from this, in this reaction,
only water is produced. Hence, minimal effluent treatment cost to treat this water.
Exhibit 3. Fine’s fatty amide manufacturing process
Source: Company, JM Financial
These amides are slip additives for which FOIL is the largest producer in the world. Hence, we
have tried to analyse gross margin of one of fine’s product erucamide. 0.99kg of erucamide
gets produced from 1kg of erucic acid and 0.05kg of ammonia (for simplicity, we have taken
unit quantities, actual process uses 10kg of erucic acid). Prior to the pandemic, gross margins
for erucamide would have been ~39% (assuming dated prices).
Exhibit 4. Mass balance of Erucamide production from Erucic Acid
Source: Company, JM Financial, prices taken do not represent current prices and are taken from open sources
Exhibit 5. Erucic acid prices have risen sharply since Oct’20
5,600
4,200
2,800
May-21
Apr-21
Mar-21
Feb-21
Jan-21
Dec-20
Nov-20
Oct-20
Sep-20
Aug-20
Jul-20
Jun-20
Apr-20
Mar-20
Feb-20
Jan-20
Dec-19
0
May-20
1,400
Erucic Acid Spot (USD/MT)
Source: Bloomberg, JM Financial
JM Financial Institutional Securities Limited
Page 99
31 May 2021
Fine Organics
Exhibit 6. FOIL’s gross margins to normalise after experiencing a dip in FY21
40%
4
38%
2
36%
0
34%
FY23E
FY21
FY20
FY19
FY17
FY16
Gross profit (INR bn)
FY22E
6
FY18
42%
FY15
8
Gross margin (%) (RHS)
Source: Company, JM Financial
Exhibit 7. Revival in EBITDA margins likely from FY22E
Exhibit 8. …which in-turn would improve PAT margins
11%
0
15%
0
8%
FY23E
FY20
FY17
EBITDA (INR mn)
PAT (INR mn)
EBITDA margin (RHS) (%)
Source: Company, JM Financial
FY23E
650
FY22E
18%
FY21
1,000
FY20
13%
FY19
1,300
FY18
20%
FY17
2,000
FY16
16%
FY15
1,950
FY22E
23%
FY21
3,000
FY19
18%
FY18
2,600
FY16
25%
FY15
4,000
PAT margin (%) (RHS)
Source: Company, JM Financial
Exhibit 9. ROCE vs ROE
36%
27%
18%
9%
RoE
FY23E
FY22E
FY21
FY20
FY19
FY18
FY17
FY16
FY15
0%
RoCE
Source: Company, JM Financial
JM Financial Institutional Securities Limited
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31 May 2021
Fine Organics
Valuation
On the back of additional production from recently added capacities, we estimate FOIL’s
revenues to register a 22% CAGR over FY21-23E (and reach INR 16.8bn in FY23E). While
normalcy in gross margins to 39% (vs. 35% in FY21) is likely to aid EBITDA to register a 45%
CAGR over FY 21-23E (and reach INR 4.0bn in FY23E). As a result, FOIL’s EPS is likely to see a
54% CAGR over FY21-23E (and reach INR 2.7bn in FY23E). Although we believe FOIL is the
clear winner of the rising adoption of green (low toxic) chemicals (which would aid in offtake of incremental capacity and provides long term growth visibility), current valuations leave
limited upside, in our view. Hence, We assume coverage with a HOLD rating and value the
company at 35x FY23E EPS (in-line with 3-year average multiple) arrive at a TP of INR 3,160.
Exhibit 10. FOIL 1-year forward P/E chart
4,000
47.0x
3,000
38.0x
2,000
20.0x
1,000
0
May-19
Nov-19
May-20
Nov-20
May-21
Source: Company, JM Financial
Exhibit 11. FOIL 1-year forward P/B Chart
Exhibit 12. FOIL 1-year forward EV/EBITDA Chart
4,000
4,000
36.0x
11.8x
3,000
3,000
9.2x
24.0x
2,000
2,000
5.0x
16.0x
1,000
0
May-19
1,000
Nov-19
May-20
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Nov-20
May-21
0
May-19
Nov-19
May-20
Nov-20
May-21
Source: Company, JM Financial
Page 101
31 May 2021
Fine Organics
Company profile
Fine Organics is a leading producer of specialty additives for foods, plastics, rubbers, paints,
inks, cosmetics, coatings, textile auxiliaries, lubes and several other specialty applications. Fine
Organics has a diversified base with expertise in i) Emulsifiers used for anti-fungal agents,
bread improvers, beverage clouding agents etc; ii) Oleochemistry used in Polyolefins,
Styrenics, Polyamides & other engineering polymers, Rubbers and Elastomers and 3) CosPha
(Cosmetic and Pharmaceuticals) applications which serve as base ingredients.
Exhibit 13. Fine’s manufacturing facilities
Location
Ambernath
Dombivili
Badlapur
Patalganga
Navi Mumbai (R&D centre)
Num ber of Facilities
3
1
1
1
1
Source: Company, JM Financial
Board of Directors
- Mr. Prakash Kamat, Executive Director and Chairman
- Mr. Mukesh Shah, Managing Director
- Mr. Jayen Shah, Executive Director and Chief Executive Officer
- Mr. Tushar Shah, Executive Director and Chief Financial Officer
- Mr. Bimal Shah, Executive Director
- Mr. Mahesh Sarda, Independent Director
- Mr. Prakash Apte, Independent Director
- Mr. Parthasarathi Thiruvengadam, Independent Director
- Mr. Kaushik Shah, Independent Director
- Mrs. Pratima Umarji, Independent Director
JM Financial Institutional Securities Limited
Page 102
31 May 2021
Fine Organics
Financial Tables (Standalone)
Income Statement
(INR mn)
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
10,440
10,262
11,213
14,094
16,797
Shareholders’ Fund
5,084
6,308
7,388
9,223
11,461
Sales Growth
20.7%
-1.7%
9.3%
25.7%
19.2%
Share Capital
0
0
0
0
0
Total Revenue
10,440
10,262
11,213
14,094
16,797
Cost of Goods Sold/Op. Exp
6,544
6,064
7,262
8,597
10,246
Personnel Cost
599
694
762
876
981
Other Expenses
1,074
1,143
1,268
1,395
1,542
Def. Tax Liab. / Assets (-)
4
-62
-73
-73
-73
EBITDA
2,223
2,361
1,921
3,225
4,028
Total - Equity & Liab.
6,219
7,160
7,882
9,717
11,955
EBITDA Margin
21.3%
23.0%
17.1%
22.9%
24.0%
Net Fixed Assets
1,845
2,226
2,222
3,227
4,170
EBITDA Growth
35.5%
6.2%
-18.6%
67.9%
24.9%
Gross Fixed Assets
2,464
4,192
4,453
5,926
7,472
Depn. & Amort.
174
347
468
467
603
Intangible Assets
3
9
5
5
5
2,048
2,014
1,453
2,758
3,425
Less: Depn. & Amort.
1,686
2,033
2,500
2,967
3,570
Other Income
202
205
170
260
250
Capital WIP
1,063
58
263
263
263
Finance Cost
18
48
61
28
28
Investments
231
489
525
525
525
2,232
2,172
1,562
2,990
3,647
Current Assets
5,017
5,847
6,735
7,657
9,177
Other Operating Income
EBIT
PBT before Excep. & Forex
Excep. & Forex Inc./Loss(-)
153
153
153
153
153
4,931
6,154
7,235
9,070
11,308
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
1,130
915
567
567
567
Reserves & Surplus
Total Loans
0
0
0
0
0
PBT
2,232
2,172
1,562
2,990
3,647
Taxes
942
507
413
753
918
Extraordinary Inc./Loss(-)
0
0
0
0
0
Loans & Advances
Assoc. Profit/Min. Int.(-)
0
0
0
0
0
Reported Net Profit
1,290
1,665
1,149
2,238
Adjusted Net Profit
1,290
1,665
1,149
2,238
Net Margin
12.4%
16.2%
10.3%
30.7
30.7
30.7
Diluted Share Cap. (mn)
790
1,195
1,089
1,544
1,841
Sundry Debtors
1,670
1,451
1,745
2,317
2,761
Cash & Bank Balances
1,031
2,056
2,564
2,459
3,239
0
0
0
0
0
Other Current Assets
1,526
1,145
1,336
1,336
1,336
2,729
Current Liab. & Prov.
874
1,401
1,598
1,692
1,918
2,729
Current Liabilities
562
918
1,128
1,221
1,447
15.9%
16.2%
Provisions & Others
312
483
471
471
471
30.7
30.7
Net Current Assets
4,143
4,445
5,136
5,965
7,259
Total – Assets
6,219
7,160
7,883
9,717
11,955
Diluted EPS (INR)
42.1
54.3
37.5
73.0
89.0
Diluted EPS Growth
27.3%
29.1%
-31.0%
94.7%
21.9%
Total Dividend + Tax
277
361
337
403
491
Dividend Per Share (INR)
7.5
9.8
11.0
13.1
16.0
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
2,232
2,172
1,562
2,990
3,647
Inventories
Source: Company, JM Financial
Source: Company, JM Financial
Cash Flow Statement
(INR mn)
Depn. & Amort.
171
347
468
467
603
Net Interest Exp. / Inc. (-)
-184
-157
109
232
222
Inc (-) / Dec in WCap.
Others
158
595
-166
-933
-515
Dupont Analysis
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
12.4%
16.2%
10.3%
15.9%
16.2%
Asset Turnover (x)
1.9
1.5
1.5
1.6
1.5
Leverage Factor (x)
1.2
1.2
1.1
1.1
1.1
28.1%
29.2%
16.8%
26.9%
26.4%
FY23E
RoE
0
0
-216
0
0
Taxes Paid
-942
-507
-415
-753
-918
Operating Cash Flow
1,436
2,449
1,343
2,003
3,039
Key Ratios
Capex
-816
-728
-466
-1,473
-1,546
Y/E March
FY19A
FY20A
FY21E
FY22E
Free Cash Flow
620
1,721
877
531
1,492
BV/Share (INR)
165.8
205.7
241.0
300.8
373.8
Inc (-) / Dec in Investments
-24
-275
4
0
0
ROIC
25.5%
32.1%
22.4%
35.4%
34.0%
Others
-124
79
60
0
0
ROE
26.4%
Investing Cash Flow
-964
-924
-402
-1,473
-1,546
0
0
0
0
Dividend + Tax thereon
-277
-361
-92
Inc / Dec (-) in Loans
594
-216
-347
Inc / Dec (-) in Capital
28.1%
29.2%
16.8%
26.9%
Net Debt/Equity (x)
0.0
-0.2
-0.3
-0.2
-0.2
0
P/E (x)
71.4
55.3
80.2
41.1
33.7
-403
-491
P/B (x)
18.1
14.6
12.5
10.0
8.0
0
0
EV/EBITDA (x)
41.5
38.5
46.9
27.9
22.2
Others
171
76
53
-232
-222
EV/Sales (x)
8.9
9.0
8.1
6.5
5.4
Financing Cash Flow
488
-500
-386
-635
-713
Debtor days
58
52
57
60
60
Inc / Dec (-) in Cash
960
1,026
555
-104
780
Inventory days
28
42
35
40
40
Opening Cash Balance
71
1,031
2,008
2,564
2,459
Creditor days
23
39
43
40
40
Closing Cash Balance
1,031
2,056
2,563
2,460
3,239
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 103
31 May 2021
India | Chemicals | Initiating Coverage
Anupam Rasayan | HOLD
Right Place at the Right Time
Anupam Rasayan (ARIL) is one of the country’s leading CSM player in speciality chemicals
with two distinct business verticals: a) life science-related specialty chemicals (~95% of
revenues in FY20) and b) other specialty chemicals. ARIL had long-term relationships with 15
MNCs at end-Sep’20; this has helped it expand its product offerings and geographic reach.
ARIL’s focus on upgrading processes has allowed it to manufacture products in an energy
and cost-efficient manner by utilising continuous processes for which the company has
developed innovative methods in-house. Further, it has expanded its commercialised product
portfolio from 25 items in FY18 to 34 in FY20 and 36 in 1HFY21. Drawing comfort from its
long-term contracts, we forecast sales, EBITDA and EPS to post 32%, 41%, and 86% CAGR,
respectively, over FY21-23E. We expect the company’s ROEs to demonstrate continuous
improvement and reach ~14% by FY23E (from ~10% in FY20 owing to front-ended capex).
Although we like the structural growth story of CSM business, sharp ~50% rally in share
price in last one month leaves limited upside in near term. Hence, we wait for a better entry
point and initiate on ARIL with a HOLD rating (TP of INR 780 based on 32x FY23E EPS).

Operates in an industry with high entry barriers: The CSM industry has significant entry
barriers, including customer validation and approvals, expectation from customers for
process innovation and cost reduction. ARIL, over the years, has established relationships
with various MNCs, such as, Syngenta, Sumitomo, and UPL Limited.

High visibility of long-term growth: ARIL completed a major leg of capex of ~INR 9.5bn
(including ~INR 2.1bn for backward integration) over FY16-20 to commission 2 new
facilities (in Jhagdia and Sachin). Hence, we expect ARIL’s revenue to reach INR 14.0bn by
FY23E (vs. INR 5.3bn in FY20) on a gradual ramp-up of additional capacity. Moreover,
ARIL has recently received an order of INR 11bn from a leading life sciences MNC and has
signed a letter of intent (LOI) for the it (click here). Under this agreement, it would
manufacture and supply 3 products for the next 5 years. This, along with its existing
contracts, gives us comfort on the company’s long-term growth potential

Margin expansion should further aid profitability: ARIL’s EBITDA margins are likely to
expand (after a possible moderation in FY21E) on higher-than-expected utilisation of
recently-commissioned facilities. EBITDA margins could further rise 0.5-1% in FY23E given
its recent decision to invest INR 430mn to set up a solar power plant, which, according to
the company, could result in annual cost savings of INR 100mn. Further, we expect ARIL’s
ROEs to improve to ~14% by FY23E on a) an improvement in its net working capital
cycle; and b) debt repayments of ~INR 5.6bn from recent IPO proceeds.

Initiate with a HOLD due to recent sharp run-up; await better entry point: Although we
like the structural growth story of CSM business, sharp ~50% rally in share price in last
one month leaves limited upside in near term. Hence, we wait for a better entry point and
initiate coverage on ARIL with a HOLD rating and TP of INR 780 (based on 32x FY23E
EPS). Key risks: a) High client concentration; b) inability to enter new or maintain existing
long-term CSM agreements; and c) high dependency on R&D.
Financial Summary
Y/E March
Net Sales
Sales Growth (%)
EBITDA
EBITDA Margin (%)
Adjusted Net Profit
Diluted EPS (INR)
Diluted EPS Growth (%)
ROIC (%)
ROE (%)
P/E (x)
P/B (x)
EV/EBITDA (x)
Dividend Yield (%)
Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 6209 5500
Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
Recommendation and Price Target
Current Reco.
Current Price Target (12M)
Upside/(Downside)
HOLD
780
2.4%
Key Data – ANURAS IN
Current Market Price
Market cap (bn)
Free Float
Shares in issue (mn)
Diluted share (mn)
3-mon avg daily val (mn)
52-week range
Sensex/Nifty
INR/US$
INR762
INR76.1/US$1.1
100%
99.9
86.2
INR0.0/US$0.0
850/472
51,423/15,436
72.4
Price Performance
%
Absolute
Relative*
* To the BSE Sensex
1M
19.0
12.9
6M
0.0
0.0
12M
0.0
0.0
(INR mn)
FY19A
5,015
46.9
931
18.6
492
6.6
0.2
5.3
10.2
115.5
11.2
88.9
0.0
FY20A
5,289
5.5
1,349
25.5
530
6.9
5.1
6.2
9.6
109.7
9.8
62.3
0.0
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited
FY21E
7,978
50.8
1,875
23.5
706
8.2
18.0
7.1
9.5
93.0
7.4
43.8
0.0
FY22E
11,067
38.7
2,782
25.1
1,678
16.8
105.2
10.9
13.5
45.3
4.7
27.2
0.0
FY23E
13,970
26.2
3,738
26.8
2,435
24.4
45.1
13.3
14.1
31.2
4.2
20.7
0.0
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Thomson Publisher & Reuters,
S&P Capital IQ, FactSet and Visible Alpha
Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers
and
Research
Analyst
Certification.
31 May 2021
Anupam Rasayan
Contract-driven business provides long-term growth visibility
and entry barriers

Time to optimally utilise newly-added capacities: In end-Mar’20, ARIL completed a major
leg of capex of ~INR 9.5bn (including ~INR 2.1bn for backward integration). This was
undertaken over FY16-20 to commission two new facilities, one each at Jhagdia (Unit-5)
and Sachin (Unit-6). We expect utilisations of these newly-commissioned facilities to
increase gradually and reach 90% by FY23E. Moreover, a few of the newer products that
ARIL intends to manufacture at these facilities are likely to be of high value. This would
boost average realisations to INR 640/kg in FY23E from INR 380/kg in FY20. As a result,
we expect ARIL’s revenue to register a 32% CAGR over FY21-23E to reach INR 14.0bn by
FY23E.
Exhibit 1. ARIL’s capacity and utilisations on an upward trajectory
25,000
23,396
23,438
23,438
86%
100%
700
640
85%
557
75%
20,000
93%
23,438
Exhibit 2. ARIL’s average realisations growing steadily
70%
75%
525
484
447
60%
14,882
379
15,000
12,178
50%
350
324
10,000
25%
175
5,000
0
FY18
FY19
FY20
Installed Capacity (MT)
Utilisation (RHS) (%)
FY21E
Source: Company, JM Financial
0%
FY22E FY23E
Actual Production (MT)
0
FY18
FY19
FY21E
FY22E
FY23E
Average realisation on production (INR/kg)
Source: Company, JM Financial

One more contract in the bag: ARIL has recently received an order of INR 11bn from a
leading life sciences MNC and has signed a letter of intent (LOI) for it. Under this
agreement, it is slated to manufacture and supply 3 products for the next 5 years. Of this,
2 would start contributing to the top line from 2HFY23, in our view. This, along with its
existing contracts, gives us comfort on the company’s long-term growth potential.

Strong and long-term relationships with a diversified customer base across geographies
with significant entry barriers: The CSM industry has significant entry barriers, including
customer validation and approvals, expectation from customers for process innovation
and cost reduction, high quality standards and stringent specifications. Customer
relationships have been led primarily by the company’s ability to develop innovative
processes, meet stringent quality and technical specifications and manufacture products
in a cost-effective, safe and environment-friendly manner. ARIL’s customers are typically
engaged in various industries such as agrochemicals, personal care, pharmaceuticals,
specialty pigments and dyes, and polymers and additives. They are spread across various
geographies and this has helped the company mitigate risks arising from customer,
industry and geographic concentration. ARIL has well-established relationships with
various MNCs such as Syngenta Asia Pacific Pte. Ltd., Sumitomo Chemical Company
Limited, and UPL Limited, across Europe, Japan, United States and India. At end-Sep’20,
ARIL manufactured products for over 45 domestic and international customers, including
15 multi-national companies. Exports constituted 59.7%, 60.0%, 68.1% and 57.7% of
revenues in FY18, FY19, FY20 and 1HFY21, respectively.
JM Financial Institutional Securities Limited
FY20
Page 105
31 May 2021
Anupam Rasayan

Return ratios to improve significantly: Over FY16-20, ARIL’s return ratios were depressed
by its aggressive expansion plans. As a result, a) Its gross debt mounted to INR 8.2bn at
end-FY20 (from INR 2.5bn at end-FY16) and b) its net working capital (NWC) jumped to
205 days of sales in FY20 (from 102 days in FY16). It should be noted that NWC usually
jumps up for most chemical companies when they introduce a new set of products on
incremental capacity as their customers only tend to release payments after approvals/lab
tests. However, in ARIL’s case, capacity almost doubled from FY18 to FY20. Hence, there
was a higher impact on its NWC vs. peers as most other chemical companies engage in
phase-wise expansions. Going forward, we take comfort from our belief that ARIL’s
FY23E ROE and ROCE (pre-tax) are likely to reach 14% and 18%. This would be driven by
i) debt reduction of INR 5.6bn from recent IPO proceeds, which would lower the interest
payment burden; ii) a significant reduction in NWC to 130 days in FY23E; and iii)
improvement in EBITDA margins on positive operating leverage and commissioning of the
solar plant.
Exhibit 3. ARIL’s ROE likely to improve to 14.1% by FY23E
Exhibit 4. ARIL’s ROCE (pre-tax) likely to reach 17.9% by FY23E
20.0
16.0
13.5
11.4
12.0
17.9
14.1
14.7
15.0
10.2
9.6
9.5
9.6
10.0
8.0
8.3
8.0
6.9
5.0
4.0
0.0
0.0
FY18
FY19
FY20
FY21E
FY22E
FY18
FY23E
FY19
FY20
FY21E
FY22E
FY23E
ROCE (pre-tax) (%)
RoE (%)
Source: Company, JM Financial
Source: Company, JM Financial
Exhibit 5. ARIL’s gross debt profile to reduce with IPO proceeds
Exhibit 6. ARIL’s working capital days likely to normalise
10,000
250
213
205
200
176
7,500
150
5,000
165
135
130
130
102
100
2,500
50
0
0
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
FY16
FY17
JM Financial Institutional Securities Limited
FY19
FY20 FY21E FY22E FY23E
Working capital (days)
Gross Debt (INR mn)
Source: Company, JM Financial
FY18
Source: Company, JM Financial
Page 106
31 May 2021
Anupam Rasayan
Financials

Expect revenue/EBITDA CAGR of 32%/41%: We believe ARIL’s revenue is likely to reach
~INR 14.0bn in FY23E (32% CAGR over FY21-23E) on account of a) higher capacity
utilisations of recently-commissioned units and b) a gradual increase in average
realisations on the back of the manufacture of high-value products. We further expect
ARIL’s EBITDA margins to improve to 26.8% in FY23E (vs. 25.5% in FY20) driven by i)
positive operating leverage; ii) optimum utilisation of its plants; and iii) installation of a
solar power plant of 12.5MW, which would reduce power and fuel costs significantly. As
a result, EBITDA is likely to reach INR 3.7bn in FY23E (41% CAGR over FY21-23E).

Substantial decline in Interest expense to drive 86% PAT CAGR over FY21-23E: ARIL’s
interest expenses had jumped to INR 453mn in FY20 on a sharp increase in borrowings to
INR 8.2bn at end-FY20. With debt repayments to the tune of INR 5.6bn from the recent
IPO proceeds, we expect ARIL’s interest expenses to drop to INR 89mn in FY23E. Hence,
in our view, ARIL’s PAT is likely to demonstrate a staggering 86% CAGR over FY21-23E
and reach INR 2.4bn in FY23E.
Exhibit 7. ARIL likely to register 32% revenue CAGR over FY21-23E
Exhibit 8. Exports are likely to remain at 60% of overall revenue
15,000
60%
100%
11,250
45%
7,500
30%
3,750
15%
0
40%
40%
60%
60%
FY18
FY19
32%
35%
68%
65%
FY20
FY21E
40%
40%
60%
60%
FY22E
FY23E
75%
50%
25%
0%
FY18
FY19
FY20
FY21E
Revenue from operations (INR mn)
FY22E
0%
FY23E
YoY growth (RHS) (%)
Export Sales
Source: Company, JM Financial
Domestic Sales
Source: Company , JM Financial
Exhibit 9. EBITDA margins are likely to inch up to 26.8% by FY23E
Exhibit 10. PAT is likely to reach INR 2.4bn by FY23E
4,500
30%
3,000
140%
3,375
25%
2,250
105%
2,250
20%
1,500
70%
1,125
15%
750
35%
10%
0
0
FY18
FY19
EBITDA (INR mn)
FY20
FY21E
FY22E
FY23E
EBITDA margins (RHS) (%)
Source: JM Financial, Company
JM Financial Institutional Securities Limited
0%
FY18
FY19
PAT (INR mn)
FY20
FY21E
FY22E
FY23E
YoY growth (RHS) (%)
Source: JM Financial, Company
Page 107
31 May 2021
Anupam Rasayan
Company Background
ARIL is among India’s leading companies engaged in the custom synthesis and manufacturing
of life science-related specialty chemicals and other specialty chemicals, which involve multistep synthesis and complex technologies. ARIL’s products are sold to multi-national
corporations (MNCs) for use as additives, ingredients or intermediates that impart particular
characteristics to the customers’ end-use products. ARIL’s key focus in custom synthesis and
manufacturing operations is developing in-house innovative processes to manufacture
products requiring complex chemistries and achieving cost optimisation. The company has
two distinct business verticals:
1) Life science-related specialty chemicals
ARIL manufactures a variety of life science-related specialty chemicals comprising products
related to agrochemicals, personal care and pharmaceuticals (accounted for 95.4%/92.5% of
revenue from operations in FY20/1HFY21). It manufactures agro intermediates and agro
active ingredients for the agrochemicals industry; these are used in the manufacture of
pesticides, insecticides, fungicides, herbicides and nutrients, among others. For the personal
care industry, it provides anti-bacterial and ultra violet protection intermediates and
ingredients, among others. In the pharmaceuticals segment, it focuses on developing
intermediates and ‘key starting materials’ for active pharmaceutical ingredients (APIs), and
may also be used in material sciences and surface chemistry. Going forward, life science
related-specialty chemicals are likely to contribute ~89% to overall revenue by FY23.
2) Other Specialty Chemicals
ARIL’s other specialty chemicals are used in diverse end-user segments, comprising specialty
pigments, specialty dyes, polymer additives and paint additives.
Exhibit 11. Business mix over the years
100%
7%
7%
Exhibit 12. Geographical revenue break-up
5%
6%
100%
13%
11%
32%
75%
50%
40%
40%
60%
60%
FY18
FY19
35%
40%
40%
60%
60%
FY22E
FY23E
75%
93%
93%
95%
94%
50%
87%
89%
68%
25%
65%
25%
0%
0%
FY18
FY19
FY20
FY21E
Life science specialty chemicals
Source: Company, JM Financial
JM Financial Institutional Securities Limited
FY22E
FY23E
Other specialty chemicals
Export Sales
FY20
FY21E
Domestic Sales
Source: Company, JM Financial
Page 108
Anupam Rasayan
31 May 2021
Process Technology - Continuous Processes
ARIL currently uses continuous processes such as diazotisation, hydrolysis, nitration,
chlorination and distillation. Continuous process technology has distinct advantages over the
traditional batch process in reducing the batch cycle time of a chemical production process
and making the process safer and environment-friendly as well as energy and cost efficient.
In addition, continuous process technology is fully integrated and involves a higher level of
automation, maximises quality control and reduces the amount of inventory and storage.
Continuous processes can be undertaken under: i) Flow reactors, i.e. flow chemistry, and ii)
Photo reactors, i.e. photo chemistry.
i) Flow Chemistry: Flow chemistry technology helps improve chemical processes in order to
satisfy the growing demand for chemical sustainability. In addition, performing flow
chemistry can significantly reduce environmental impacts in the laboratory and production
scales. There exists a significant opportunity for flow chemistry technology in specialty
chemicals, specifically pharmaceuticals, as it reduces the cost and lead time significantly. The
reactions under flow chemistry are carried out at gram-per-kilogram levels with flow of 10300 kilograms per hour, and are undertaken in micro and tube reactors.
ii) Photo Chemistry: Photo chemistry technology is a relatively new technology for the
specialty chemicals manufacturing industry and ARIL is currently in the process of developing
a few products for customers using it. Photochemical reactions are induced through the
electronically agitated state. Consequently, the chemical reactivity of the agitated molecules is
considerably different from that of ground state molecules. Photochemical reactions are
currently becoming an important tool in the search of new active compounds for applications
in, among others, specialty chemical and pharmaceutical industries. Photo chemistry
technology offers various benefits in the context of sustainability, including a) shorter and
simplified multi-step synthesis of complex molecules and typically, a high molecular
complexity is generated in one step from simple precursors; b) immense potential for
automation; c) increased accessibility of a portfolio of novel compound families; and d) in
many reactions, the photon acts as a ‘traceless reagent’, and no chemical catalysts or
activating groups are required.
Conventional photo chemical systems require large reactors, while in photo chemistry
technology, reactions can be seen with micro reactors. The narrow channel of a typical micro
reactor provides opportunities to ensure a uniform irradiation of the entire reaction mixture,
resulting in shorter, more selective reactions, high energy and quantum efficiencies, efficient
scale-up and a reduction in the formation of by-products.
JM Financial Institutional Securities Limited
Page 109
Anupam Rasayan
31 May 2021
Custom Synthesis and Manufacturing
The custom synthesis and manufacturing industry has significant entry barriers, including
customer validation and approvals, expectation from customers for process innovation and
cost reduction, high quality standards and stringent specifications. In particular, typical end
customers are required to register the manufacturer with the regulatory bodies as a supplier
of intermediate products or active ingredients. As a result, any change in the manufacturer of
the intermediate product or active ingredient may require customers to spend significant time
and resources, resulting in customer acquisition becoming a long process. From the product
testing stage, to the batch procurement phase, to the eventual customer approval stage –
acquiring a new end customer typically takes approximately 12 to 24 months depending on
product complexity.
Further, customers in general avoid sharing product-related information with numerous
manufacturers to restrict the spread of confidential information. As a result, customers
typically select manufacturers after carefully reviewing them and tend to develop long-term
relationships with them as well as limit the number of such manufacturers. In addition, the
level of technical skill and expertise that is essential for developing in-house innovative
processes, undertaking complex chemistries and handling some of the raw materials and
intermediates, requires a significant amount of training that can only be achieved over a
period of time. This creates additional entry barriers for new entrants.
ARIL’s custom synthesis and manufacturing agreements are typically long-term in nature
where the validity of the contract is 2-5 years, with certain agreements being automatically
renewed for one year at a time. ARIL depends on a limited number of customers for a
significant portion of its revenues; sales to top 10 customers represented 86.7% and 88.6%
of revenues in FY20 and 1HFY21, respectively.
Additionally, ARIL’s agreements typically require its customers to place purchase orders that
include the quantity and price while certain agreements include the purchase prices in USD
per kilogram and minimum purchase quantities for the products during the tenure of the
agreement. Further, certain agreements require the customers to provide a non-binding
forecast indicating the quantities of the product they intend to purchase for a particular
period.
Exhibit 13. End-to-end process for custom synthesis and manufacturing operations
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 110
Anupam Rasayan
31 May 2021
Board of Directors and Key Managerial Personnel
Board of Directors

Dr. Kiran C Patel is the Chairman of Board and is a Non-Executive Director. He holds a
degree in bachelor of medicine and bachelor of surgery from Gujarat University and holds
diploma certificates in the speciality of internal medicine and the subspecialty of
cardiovascular disease from the American Board of Internal Medicine. He completed his
fellowship in affiliation with the Columbia University of New York in 1982 and served as a
cardiovascular fellow at the Overlook Hospital from 1980 to 1982.

Ms. Mona A Desai is the Vice Chairman of Board and a Whole-time Director of ARIL. She
has been on Board since the incorporation of the Company in 2003. She holds a
bachelor’s degree in home science. Ms. Desai was the chairperson of the Board of
Company from April 23, 2013 until 21 August, 2020. She is also a director on the board
of RIRCPL. She has over 18 years of experience in the field of chemicals industry.

Mr. Anand S Desai is the Managing Director of ARIL. He has been associated with ARIL
since 1992 and was one of the first Directors of Company. He has passed the final
semester examination of the bachelor’s degree in science from Vinoba Bhave University.
He is the zonal chairman of Confederation of Indian Industry (CII), southern Gujarat
region for year 2020 – 2021 and a member of CII’s national committee on chemicals and
petrochemicals for year 2020-21. He has over 28 years of experience in the field of
chemicals industry.

Mr. Milan Thakkar is a Non-Executive Director of ARIL. He holds a second year junior
college certificate in science from R.D. & S.H. National College and S.W.A. Science
College, Maharashtra. He has been associated with ARIL since 2018 as an additional NonExecutive Director and was regularised pursuant to approval of the Shareholders by
resolution dated September 30, 2019. He is also a director on the boards of Arochem
Industries Pvt Ltd and Nanavati Developers Pvt Ltd and was previously on the board of
Exochem Ltd and Exichem (HK) Limited.

Mr. Hetul Krishnakant Mehta is an Independent Director of ARIL. He holds a diploma
degree in chemical engineering from Bharati Vidyapeeth, Jawaharlal Nehru Institute of
Technology, Dhankawadi, Pune and is a founding director of Praveen Laboratories Pvt Ltd
and Advanced Diabetes Centre Pvt Ltd. He has published a patent application in relation
to process for preparation of clopidogrel polymorphous form 1 using seed crystals.

Dr. Namrata Dharmendra Jariwala is an Independent Director of ARIL. She holds a doctor
of philosophy degree in civil engineering and holds a master’s degree in engineering
(civil). She is currently an assistant professor at Sardar Vallabhbhai National Institute of
Technology, Surat. She has published certain research papers in various journals.

Mr. Vijay Kumar Batra is an Independent Director of ARIL. He has completed an executive
development program from Wharton School and holds a bachelor’s degree in chemical
engineering from IIT, Delhi. He has been a member of the board of directors of the Flow
Chemistry Society India chapter and is a member of Institute of Chemical Engineers. He
was the managing director of Regent Drugs Ltd and was previously associated with
Albany Molecular Research, Hyderabad Research Centre Private Limited as the managing
director. He has also served as the president and the director of J.K. Drugs and
Pharmaceuticals Ltd.

Mr. Vinesh Prabhakar Sadekar is an Independent Director of ARIL. He holds a bachelor’s
degree in chemical engineering from University of Bombay. He was a member of the
executive committee and the chairman of human resources committee of Organisation of
Pharmaceuticals Producers of India. He was elected as an honorary fellow of the Indian
Institute of Chemical Engineers. He was previously associated with Navin Fluorine
International Ltd and Cheminova India Ltd as a managing director.
JM Financial Institutional Securities Limited
Page 111
31 May 2021
Anupam Rasayan
Key Management Personnel

Mr. Afzal Malkani is company’s CFO. He holds a bachelor’s degree in commerce and is a
qualified chartered accountant. He joined ARIL on October 28, 2005 and was appointed
as CFO with effect from Dec 1, 2014.

Dr. Nileshkumar Naik is the technical head of ARIL. He holds a doctor of philosophy
degree in chemistry, master’s degree in science (organic chemistry) and a bachelor’s
degree in science (special). He has been associated with company since its incorporation.

Dr. Anuj Thakar is the R&D (process development) head and Unit II head of ARIL. He holds
a doctor of philosophy degree in chemistry, a master’s degree in science (organic
chemistry) and a bachelor’s degree in science (special). He joined ARIL on Feb 4, 2005.

Mr. Ravi Desai is the sales head of Company. He holds a master’s degree in computer
applications and a bachelor’s degree in science (special). He joined ARIL on December 22,
2012 and was previously associated with Standard Chartered Bank as an investment
advisor.
Exhibit 14. ARIL’s Management Organisation Chart
Source: Company, JM Financial
Exhibit 15. List of ARIL’s key competitors
Crop Protection Chemicals
PI Industries
Deccan Chemicals
Coromandel International
Anupam Rasayan
Navin Fluorine International
Aarti Industries
Hikal Limited
APIs
Imaging Chemicals
Other specialty chemicals
Divi’s Laboratories
Vivimed Labs
Sami labs
Dishman Pharma
Fujifilm India
Sajjan India
Nicholas Piramal
Hubergroup India
Syschem India
Shasun Chemicals
Navin Fluorine International
Infinity spec chem
Jubilant Organosys
Anubhav corp.
Cipla Ltd
Aamirav ingredients
Aarti Industries
Chemcon spec chem
Anupam Rasayan
Vivimed Labs
Dr. Reddy’s Ltd
Aurobindo Pharma
Laurus Lab (Synthesis division)
Source: ARIL DRHP
JM Financial Institutional Securities Limited
Page 112
31 May 2021
Anupam Rasayan
Raw materials
ARIL uses phenol and benzene derivatives - such as para chloro phenol and meta dichloro
benzene, bromine, various chloro and fluoro intermediates, solvents and chloro-alkalies - to
manufacture its products. Historically, the company has sourced raw materials from several
vendors in India, China and Japan. However, its dependence on imports from China has
reduced; imported raw materials from China as a percentage of total raw materials purchases
decreased from 17.1% in FY19 to 12.2% in FY20.
The company usually does not sign long-term supply contracts with any of its raw material
suppliers. The purchase price of its raw materials generally follows market prices. The
company typically keeps 5-6 months of inventory including raw materials, work-in-progress
and finished good at its facilities to mitigate the risk of raw material price movements. These
inventory levels are planned based on contractual quantities and expected orders, which are
confirmed due to its long-standing relationships with customers.
Manufacturing facilities
ARIL operates 6 manufacturing facilities in Gujarat, India, with 4 of these located in Sachin
and two located in Jhagadia. Each facility has the ability to manufacture a wide range of
products, which can be inter-changed to address customer requirements. Further, given that
operations are primarily export-oriented, its Sachin facilities’ proximity to Adani Hazira Port
helps reduce freight and logistic costs. Its power requirements are met through the local state
power grid through interstate open access, while water is procured from Gujarat Industrial
Development Corporation. We expect ARIL to utilise its enhanced capacities optimally so its
overall utilisation would reach ~93% by FY23E given robust support by its contracts.
Exhibit 16. Installed capacity and utilisation of ARIL's facilities
Facility
Sachin Unit-1
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Sachin Unit-2
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Sachin Unit-3
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Jhagadia Unit-4
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Jhagadia Unit-5
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Sachin Unit-6
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
Total
Installed Capacity (MT)
Actual Production (MT)
Capacity Utilisation (%)
FY18
FY19
FY20
FY21E
FY22E
FY23E
2,778
2,168
78.0%
3,362
1,784
77.2%
4,542
3,691
81.3%
4,542
3,634
80.0%
4,542
4,088
90.0%
4,542
4,315
95.0%
2,220
2,134
96.1%
2,520
1,795
71.3%
2,520
1,986
78.8%
2,520
2,016
80.0%
2,520
2,268
90.0%
2,520
2,394
95.0%
4,760
4,216
88.6%
5,950
4,587
77.1%
6,088
4,971
81.7%
6,130
4,904
80.0%
6,130
5,517
90.0%
6,130
5,824
95.0%
2,420
2,009
83.0%
3,050
2,240
73.5%
3,520
2,766
78.6%
3,520
2,816
80.0%
3,520
2,992
85.0%
3,520
3,238
92.0%
5,520
441
8.0%
5,520
2,208
40.0%
5,520
4,030
73.0%
5,520
4,968
90.0%
1,206
88
7.3%
1,206
905
75.0%
1,206
989
82.0%
1,206
1,085
90.0%
23,396
13,944
59.6%
23,438
16,482
70.3%
23,438
19,883
84.8%
23,438
21,824
93.1%
12,178
10,527
86.5%
14,882
11,217
75.4%
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 113
Anupam Rasayan
31 May 2021
Key strengths

Experienced promoters and management team: ARIL is led by experienced Promoters,
some of whom have significant experience in the chemical industry. Mr. Anand S Desai
and Ms. Mona A Desai have an experience of approximately 28 years and 18 years,
respectively, in the chemicals industry. Further, Dr. Kiran C Patel, one of ARIL’s Promoters
and Chairman, is a businessperson experienced in the healthcare sector, and ARIL’s Key
Managerial Personnel have significant experience in the chemical industry. For instance,
Dr. Nileshkumar Naik has been associated with the company since its incorporation, while
Dr. Anuj Thakkar and Mr. Ravi Desai have been associated with the company since 2005
and 2012 respectively.

Focus on process innovation through value engineering, complex chemistries: ARIL, over
the years, has successfully diversified itself in terms of process capability and expanded its
expertise into multi-step synthesis capabilities and complex chemistries, such as,
etherification, diazotisation and hydrolysis, acylation, hydrogenation, fluorination,
alkylation, nitration, amination, esterification, chlorination and bromination. It has scaledup for several new molecules in the area of life sciences related specialty chemicals and
other specialty chemicals, and as a result, expanded its commercialised product portfolio
from 25 products in FY 2018 to 34 products in FY20 and 36 products in 1HFY21.

…and consistent R&D: ARIL’s focus on upgrading processes has enabled them to
manufacture products in an energy and cost-efficient manner by utilising continuous
processes for which the company has developed innovative methods in-house. Further,
the company intends to focus on early stage process innovation and development to
capitalise on the complete lifecycle of products. ARIL uses continuous and flow chemistry
technology which makes the process safer and environment friendly as well as energy and
cost efficient. ARIL is currently in the process of developing a few products for customers
by undertaking photo chemistry technology and intends to advance this technology to
take it to a commercial scale.
JM Financial Institutional Securities Limited
Page 114
Anupam Rasayan
31 May 2021
Key risks

Risk to long-term CSM agreement with various MNCs: ARIL’s CSM agreements are longterm in nature where the validity of the contract is 2-5 years, with certain agreements
being automatically renewed for one year at a time. The company’s business and financial
condition and results of operations depend on its relationships with MNCs. Any adverse
developments or inability to engage in or maintain such relationships could have an
adverse effect on the company’s business, results of operations and financial condition.

Raw material pricing and sourcing risk: ARIL does not have long-term agreements with
raw materials suppliers with pricing and production volumes being negotiated for each
purchase order. Hence, any increase in the cost and/or shortfall in the availability or
quality of such raw materials could have an adverse effect on business and results of
operations.

Foreign exchange fluctuation risk: Exports constituted 59.7%, 60.0%, 68.0% and 57.7%
of revenues in FY18, FY19, FY20 and 1HFY21, respectively. Similarly, expenses in foreign
currency accounted for 20.0%, 17.8%, 17.4% and 25.6% respectively, of total expenses
in FY18, FY19, FY20 and 1HFY21. Hence, fluctuation in the value of the INR against
foreign currencies, to the extent that it is not hedged, could have an adverse impact on
ARIL’s profitability.

Concentration risk: ARIL depends on a limited number of customers for a significant
portion of its revenues. Revenues generated from sales to top 10 customers represented
86.7% and 88.5% of revenue from operations in FY20 and 1HFY21, respectively. Further,
a significant portion of revenues are from operations from a limited number of markets:
Europe, Japan and India accounted for 36%, 5.8%, and 32%, respectively, in FY20.

High dependency on R&D and introduction of innovative products: ARIL’s life sciencesrelated specialty chemicals business is dependent on R&D and introduction of innovative
products. Inability to identify and understand evolving industry trends, technological
advancements, customer preferences and develop new products to meet customers’
demands may adversely affect the company’s business. Further, newly developed
products may replace existing ones and R&D efforts may not yield new products,
processes and solutions to allow the company to remain competitive.

Rising use of alternative pest management and crop protection measures: Increasing use
of alternative pest management and crop protection measures such as bio technology
products, pest resistant seeds or genetically modified crops may reduce demand for the
company’s products and adversely affect its business and result of operations.

Seasonal nature of agrochemicals related business: ARIL’s agrochemicals related business
is subject to climatic conditions and is cyclical in nature. Seasonal variations and
unfavourable weather patterns may have an adverse effect on business. Further, change
in Government policies towards agriculture sector or a reduction in subsidies provided to
farmers could adversely affect agrochemicals business.

All manufacturing facilities on leasehold land: ARIL’s all manufacturing facilities are
operated on industrial land allotted by industrial development corporations on a leasehold
basis. There is no assurance that these lease agreements will be renewed upon
termination or that company will be able to obtain other premises on lease on same or
similar commercial terms. Further, failure to comply with the conditions of use of such
land could result in an adverse impact on business
JM Financial Institutional Securities Limited
Page 115
31 May 2021
Anupam Rasayan
Financial Tables (Consolidated)
Income Statement
(INR mn)
Balance Sheet
(INR mn)
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Sales
5,015
5,289
7,978
11,067
13,970
Shareholders’ Fund
5,071
5,937
8,841
16,115
18,307
Sales Growth
46.9%
5.5%
50.8%
38.7%
26.2%
Share Capital
0
0
0
0
0
Total Revenue
5,015
5,289
7,978
11,067
13,970
Cost of Goods Sold/Op. Exp
2,571
2,105
3,749
5,202
6,566
Personnel Cost
186
210
241
337
371
Other Expenses
1,327
1,625
2,112
2,746
3,295
Def. Tax Liab. / Assets (-)
137
192
218
218
218
931
1,349
1,875
2,782
3,738
Total - Equity & Liab.
11,905
14,309
16,836
18,550
20,741
EBITDA Margin
18.6%
25.5%
23.5%
25.1%
26.8%
Net Fixed Assets
8,715
10,783
11,086
11,553
14,475
EBITDA Growth
26.6%
44.8%
39.0%
48.4%
34.3%
Gross Fixed Assets
7,669
10,437
11,446
12,247
13,247
Depn. & Amort.
225
287
497
533
578
Intangible Assets
151
151
151
151
151
EBIT
706
1,062
1,377
2,249
3,159
Less: Depn. & Amort.
1,011
1,207
1,704
2,238
2,816
Other Income
195
105
132
212
210
Capital WIP
1,906
1,402
1,193
1,393
3,893
Finance Cost
244
453
559
200
89
Investments
56
72
68
68
68
PBT before Excep. & Forex
657
714
951
2,261
3,280
Current Assets
4,454
5,786
8,803
10,702
10,687
Inventories
1,954
2,970
3,934
4,548
5,741
Sundry Debtors
1,206
1,295
1,749
2,274
2,679
Cash & Bank Balances
18
200
1,767
2,526
914
Other Operating Income
EBITDA
Excep. & Forex Inc./Loss(-)
500
500
862
1,149
1,149
4,571
5,437
7,979
14,966
17,157
Preference Share Capital
0
0
0
0
0
Minority Interest
0
0
0
0
0
6,697
8,180
7,777
2,216
2,216
Reserves & Surplus
Total Loans
0
0
0
0
0
PBT
657
714
951
2,261
3,280
Taxes
155
184
245
583
846
Extraordinary Inc./Loss(-)
0
0
0
0
0
Loans & Advances
214
252
265
265
265
Assoc. Profit/Min. Int.(-)
-10
0
0
0
0
Other Current Assets
1,062
1,068
1,088
1,088
1,088
Reported Net Profit
492
530
706
1,678
2,435
Current Liab. & Prov.
1,320
2,332
3,120
3,773
4,489
Adjusted Net Profit
492
530
706
1,678
2,435
Current Liabilities
738
1,631
2,420
3,072
3,788
Net Margin
9.8%
10.0%
8.8%
15.2%
17.4%
Provisions & Others
582
700
701
701
701
Diluted Share Cap. (mn)
74.6
76.3
86.2
99.9
99.9
Net Current Assets
3,134
3,454
5,682
6,929
6,199
Total – Assets
11,905
14,309
16,837
18,550
20,741
Diluted EPS (INR)
6.6
6.9
8.2
16.8
24.4
Diluted EPS Growth
0.2%
5.1%
18.0%
105.2%
45.1%
Total Dividend + Tax
0
0
0
2
2
0.0
0.0
0.0
0.0
0.0
FY19A
FY20A
FY21E
FY22E
FY23E
Profit before Tax
657
714
951
2,261
3,280
Depn. & Amort.
225
287
497
533
578
Net Interest Exp. / Inc. (-)
244
453
559
200
89
Dividend Per Share (INR)
Source: Company, JM Financial
Source: Company, JM Financial
Cash Flow Statement
Y/E March
Inc (-) / Dec in WCap.
(INR mn)
-581
-482
-635
-487
-882
Others
-31
70
0
0
0
Taxes Paid
-125
-92
-245
-583
-846
Dupont Analysis
Y/E March
FY19A
FY20A
FY21E
FY22E
FY23E
Net Margin
9.8%
10.0%
8.8%
15.2%
17.4%
Asset Turnover (x)
0.5
0.4
0.5
0.6
0.7
Leverage Factor (x)
2.2
2.4
2.2
1.4
1.2
10.2%
9.6%
9.5%
13.5%
14.1%
FY23E
RoE
389
949
1,127
1,924
2,220
Key Ratios
Capex
-2,483
-1,804
-800
-1,000
-3,500
Y/E March
FY19A
FY20A
FY21E
FY22E
Free Cash Flow
-2,094
-854
326
924
-1,280
BV/Share (INR)
68.0
77.8
102.6
161.3
183.2
12
0
4
0
0
ROIC
5.3%
6.2%
7.1%
10.9%
13.3%
ROE
10.2%
9.6%
9.5%
13.5%
14.1%
1.3
1.3
0.7
0.0
0.1
109.7
93.0
45.3
31.2
Operating Cash Flow
Inc (-) / Dec in Investments
Others
Investing Cash Flow
Inc / Dec (-) in Capital
Dividend + Tax thereon
Inc / Dec (-) in Loans
-32
22
0
0
0
-2,502
-1,782
-796
-1,000
-3,500
0
35
2,198
5,764
0
P/E (x)
115.4
Net Debt/Equity (x)
0
0
0
0
0
P/B (x)
11.2
9.8
7.4
4.7
4.2
2,301
1,170
-403
-5,561
0
EV/EBITDA (x)
88.8
62.3
43.8
27.2
20.7
5.5
Others
-244
-191
-559
-368
-332
EV/Sales (x)
16.5
15.9
10.3
6.9
Financing Cash Flow
2,057
1,014
1,237
-165
-332
Debtor days
88
89
80
75
70
Inc / Dec (-) in Cash
-56
182
1,567
759
-1,612
Inventory days
142
205
180
150
150
Opening Cash Balance
74
18
200
1,767
2,526
Creditor days
66
121
124
120
123
Closing Cash Balance
18
200
1,767
2,526
914
Source: Company, JM Financial
Source: Company, JM Financial
JM Financial Institutional Securities Limited
Page 116
31 May 2021
Anupam Rasayan
APPENDIX I
JM Financial Inst itut ional Secur ities Lim ited
Corporate Identity Number: U67100MH2017PLC296081
Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610
Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: sunny.shah@jmfl.com
Definition of ratings
Rating
Meaning
Buy
Total expected returns of more than 10% for large-cap stocks* and REITs and more than 15% for all other stocks, over the next twelve
months. Total expected return includes dividend yields.
Hold
Price expected to move in the range of 10% downside to 10% upside from the current market price for large-cap* stocks and REITs and
in the range of 10% downside to 15% upside from the current market price for all other stocks, over the next twelve months.
Sell
Price expected to move downwards by more than 10% from the current market price over the next twelve months.
* Large-cap stocks refer to securities with market capitalisation in excess of INR200bn. REIT refers to Real Estate Investment Trusts.
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.
Important Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.
JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the
investor.
JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell
the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,
or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in,
it may have potential conflict of interest at the time of publication of this report on the subject company(ies).
Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.
The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations,
2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered
under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this
report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or
developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may
not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This
report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.
JM Financial Institutional Securities Limited
Page 117
Anupam Rasayan
31 May 2021
The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of
any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to
make modifications and alterations to this statement as they may deem fit from time to time.
This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or
other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional
Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be
eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of
and to observe such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala (ruchir.jhunjhunwala@jmfl.com) on +65 6422 1888 in
respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial
Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the
United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of
1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").
This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for
purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule
15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are
not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM
Financial Institutional Securities or to JM Financial Securities.
This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The
research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered
broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing
requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading
securities held by a research analyst account.
JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities,
JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial
Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.
Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the
Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii)
are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside
the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial
Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be
communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or
relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will
be engaged in only with relevant persons.
Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the
securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as
a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an
exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable
securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or
sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or
similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities
described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your
representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as
such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the
information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the
needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized
agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the
information contained herein.
JM Financial Institutional Securities Limited
Page 118