12th December 2019

Initiating Coverage | Sector: Chemicals

Retail Research I BUY

Atul Industries Limited
Current Price RS. 4006 Big getting Bigger
Target Price RS. 5000 Hailed as the first private sector company of independent India that was
Upside % 24.7 inaugurated by first Prime Minister of country, Atul, a Lalbhai Group company, is a
diversified chemical company which serves to a base of 6,000 customers across 27
CMP as on 11th December 2019
various industries in 92 countries. It is an integrated manufacturer of 900 products
& 450 formulations from basic chemicals with 13 subsidiary companies & 2 Joint
STOCK DATA venture entities who operate from Brazil, China, UAE, UK & USA. In last 7 decades
Industry Segment Chemicals of operations, Company has exhibited a strong operational and financial
performance as it built a niche market for its comprehensive product portfolio
BSE Code 500027
(pioneers for many of the products in India), strong clientele, backward
NSE Code ATUL integration, focused management. Atul classifies its products under 2 main
Bloomberg Code ATLP IN Equity categories i.e. a) Life Science Chemicals and b) Performance & Other Chemicals
52 Week High / Low (Rs.) 4379.9/3200.0
which are further sub-divided under 7 segments. With a rich history, market
leadership in multiple product offerings and well-established global presence,
Face Value (Rs.) 10.0
company is set to continue its growth despite headwinds. Initiate with a BUY with a
M.Cap 11,881.6 24.7% upside.
Introduction of newer, value added & high margin products yielding benefits:
SHAREHOLDING PATTERN (%) Atul, who possesses a strong legacy in production of commodity chemicals, has
Particulars Dec18 Mar19 Jun-19 Sep19 over the years steadily added newer, high margin products to its product portfolio
Promotors 44.7 44.7 44.7 44.7
which have resulted in fastening the pace of profitability. Newer products and
customer offers increased cross selling opportunities. Many products of Atul hold
Other Insti. 6.2 6.6 6.9 7.2
strong positions globally due to its low-cost manufacturing advantage and long
FIIs 28.5 28.1 28.3 28.3 experience. Hence company is in continuous process of adding value to its
Public & Others 20.6 20.6 20.1 19.7 products. Company has successfully improved EBITDA margin over the years as it
Total 100.0 100.0 100.0 100.0 has strongly grown from 11.2% to 19% between FY11 & FY19.
Chemical industry – huge scope: The chemical industry is in a state of both
RETURNS STATISTICS (%) optimism and uncertainty. The world economy has entered a difficult phase
Particulars 1M 3M 6M 12M characterized by strong downside risks and fragility. For chemical companies, the
ATUL Ind. -2.6 6.9 -2.3 22.3
prospect of going forward revolves around finding a mid-way in demand and
BSE500 -0.7 7.3 -0.1 8.9
supply. While emerging nations has managed to buck the trend, despite a
slowdown in China, a muted American economy and debt-constrained Europe will
tend to weigh down industry demand. The Indian chemical sector is on the verge
STOCK PERFORMANCE (2-year) of rapid growth in the coming years due to increasing population, employment
opportunities in the country and growth in end-user industries. As Atul is a
producer of both base as well as specialty chemicals, the robust growth of end-
user industries is expected to be favorable in coming years.
Shift towards Asian region getting strengthened: Europe & NAFTA countries had
acquired around 32% & 28% of global chemical market share respectively in 1997
whereas Asian countries contributed around 17%. By the year 2007, the Asian
contribution increased to 30% which further strengthened to 41% by the year
2018. China and India became the major chemical hubs in world and presently
China continues to dominate the world ranking. It is noticeable that the chemical
sector over the year has shifted from developed countries to emerging economies.

Rajesh Gupta (AVP - Research)

[email protected]
+91 22 4366 3524

Nilesh Patil (Associate Analyst)

[email protected]
+91 22 4366 3525
ATUL Industries Limited Initiating Coverage| Sector: Chemicals

FINANCIAL SUMMARY
Particulars (Rs crore) FY18 FY19 FY20E FY21E FY22E

Net Sales (Rs Cr) 3,295.8 4,037.8 4,391.2 4,784.7 5,285.7

Growth (%) 16.3 22.5 8.8 9.0 10.5
EBITDA (Rs Cr) 505.2 766.8 768.7 875.4 983.7
Growth (%) (0.8) 51.8 0.3 13.9 12.4
Net Profit (Rs Cr) 276.5 432.2 502.8 576.5 650.3
Growth (%) (14.4) 56.3 16.3 14.7 12.8
EPS (Rs) 93.2 145.5 169.2 194.0 218.9
Growth (%) (14.4) 56.3 16.3 14.7 12.8
DPS (Rs) 12.0 15.0 15.0 15.0 15.0
BVPS (Rs) 756.0 910.7 1,064.9 1,244.0 1,462.9
PE (x) 43.0 27.5 23.7 20.6 18.3
P/BV (x) 5.3 4.4 3.8 3.2 2.7
ROCE (%) 18.7 25.5 21.3 21.1 20.4
Source: Company, SSL Research

Chinese crackdown turning beneficial: China is in the midst of a great transition.

No longer willing to be slotted in the class of big polluters, it has undertaken one of
the most comprehensive sustainability action plans in history, and the chemical
industry will be fundamental to turning this vision into reality. China’s effluent-
discharge standards have been reduced to 100 COD (250 in India). The cost
implication has forced many Chinese chemical firms to be non-functional. Indian
chemicals companies are benefitting from the adverse situation faced by China.
Capital investment – a way to enter new league of growth: Company is
implementing nine projects with an investment of ~Rs412 cr along with an
additional investment of Rs57 cr in its subsidiary and joint venture entities – most
of these investments are funded through internal accruals. Company is focusing on
debottlenecking of its plants along with expansion which are further likely to
propel the growth of the company.
On a standalone basis, company is expected to generate additional sales of ~Rs850
cr from nine new projects under implementation (at full capacity).
Outlook and Valuation: We believe Atul is set to enter next stage of growth once
its current capex plans of debottlenecking and expansion of plants gets completed.
Company is likely to fetch additional revenues of around Rs850 cr following the
completion of these plants in FY20. Atul commands multiple products under its
portfolio which are market leaders on global scenario that are likely to further
strengthen their positioning due to low-cost manufacturing once the demand in
developed countries revive. Atul’s strategic investments (subsidiary companies)
are steadily improving their performance.
We forecast 14.4% revenue CAGR over FY19 – FY22E. Further we expect Atul to
maintain its debt-free status along with generating strong return ratios (ROCE
22.1% over FY19-22e). We assign a valuation of 30.8x to FY20E earning and Initiate
BUY with an upside of 24.7% for a target price of Rs5000 (rounded off).

Key Risks
1. Foreign exchange fluctuations
2. Vulnerable to amendment in environmental norms
3. Delay in capacity utilization & de-bottlenecking
4. Subdued demand in chemical sector
5. Underperformance by end-user industries

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Investment Rationale:
A. Introduction of newer, value added & high margin products
yielding benefits
Atul, who possesses a strong legacy in production of commodity chemicals, has
over the years steadily added newer, high margin products to its product portfolio
which have resulted in fastening the pace of profitability. Newer products and
customer offers increased cross selling opportunities. Many products of Atul hold
strong positions globally due to its low-cost manufacturing advantage and long
experience. Hence company is in continuous process of adding value to its
products.
Company has successfully improved EBITDA margin over the years as it has
strongly grown from 11.2% to 19% between FY11 & FY19. The consistent rise in
EBITDA margin is a resultant of company’s decision to shift towards higher margin
products in a focused manner along with ability to pass on the rising input cost to
its customers thereby off-setting the losses due to the same. Company’s capital
expenditure in recent years towards high margin products indicates its focus to
improve the sales arising from value added and high margin products.
Company has lined up a huge capex in FY20 & FY21 which is likely to assist in
yielding higher sales via value added & high margin products thereby maintaining
the EBITDA margin at higher end.

Exhibit 1: EBITDA Margin trajectory

Source: Company, SSL Research

It is noticeable in the above chart that EBITDA margin has surged over the years
while growth in number of products has remained almost flat. One can illustrate
that the company’s high margin and value added products have assisted in yielding
higher margin. Atul has multiple market leading products who are likely to
strengthen their position with constant growth in coming years ultimately assisting
Atul in maintaining EBITDA margin at current levels.

B. Chemical industry – huge scope

The chemical industry creates an immense variety of products which impinge on
virtually every aspect of commoner’s life. Chemicals are one of the key input
materials that are used across a wide range of industrial and consumer sector. The
world chemical industry at USD4.6 tn grew at a CAGR 3.9% whereas Indian
chemical industry has robustly grown to 142 bn at the end of FY19 with a CAGR of
12.3% in last 8 years. Global specialty chemicals at USD824 bn at the end of FY19
grew at a CAGR of 5.3% in last 2 years. It is expected to reach to USD971 by end of

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

FY22. India is the third largest producer of chemicals in Asia and sixth largest in the
world.

Exhibit 2: Size of Indian chemical industry (Bn USD)

Source: Company, SSL Research

The Indian chemical sector is on the verge of rapid growth in the coming years due
to increasing population and employment opportunities in the country. The
market size of the domestic agrochemical sector is expected to reach USD8.1 bn by
FY25. This acceleration in market size will be backed by the Atul availability of
cheap labour and low processing cost opportunities to set up manufacturing for its
export market. The Indian specialty chemical sector is expected to increase by
about 10% annually to almost double the market size by FY25, driven by growth in
end user industries. As Atul is producer of both base as well as specialty chemicals,
the robust growth of these industries is expected to be favourable in coming years.
Most of the segments in which Atul offers its products have huge potential in
coming years. Although several of its products are in a commanding position in
their respective segment; their contribution to overall pie is still insignificant
signaling a huge scope for acquiring a major portion in years ahead.
Company serves its products to around 27 industries which suggest that company
is directly or indirectly connected to lives of everyone in some or the other way.
The performance of end-user industries such as automobiles, agriculture, textiles,
real estate and construction, consumer durables, packaged foods, paints, plastic,
cosmetics, paper, etc. will drive industry’s demand.
Government initiatives such as Make in India, Skill India, Digital India, Swatch
Bharat Abhiyan etc. will accelerate growth of Chemical Industry.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 3: Porter’s five-force analysis - chemical industry

Competitive Rivalry: Threat of new Entrants:

 Highly prone to intense  High capital investment
rivalry and R&D costs are key
 Severe competition from barriers
international players since  Patent protocols and
100% FDI allowed stringent government
 Pricing issues as international norms are other
players dump chemicals at significant barriers
lower price

Bargaining Power of Suppliers: Bargaining Power of Customers:

 Dependency of small companies  Multiple alternative options
on large plants or petrochemical of supply
units for raw materials
 Long term contracts with
 Inputs for a chemical plant cannot
customers limits the scope
be easily substituted
 Niche chemical companies
have some pricing power
Substitute products:
 Inclination towards specific
chemical requirements by buyers
which cannot be easily substituted

C. Shift towards Asian region getting strengthened

European and NAFTA countries dominated the manufacturing of chemicals until

the beginning of new millennium. Asian countries, especially China & India,
thereafter have emerged as the market leaders by massively acquiring a major
share of the global chemical market. Europe & NAFTA countries had acquired
around 32% & 28% of global chemical market share respectively in 1997 whereas
Asian countries contributed around 17%. By the year 2007, the Asian contribution
increased to 30% which further strengthened to 41% by the year 2018. The
contribution of Europe & NAFTA countries meanwhile dropped to 27% & 18%
respectively. Japan which had contribution of around 12% in 1997 saw maximum
deterioration with market share getting almost half by 2018.
China and India became the major chemical hubs in world and presently China
continues to dominate the world ranking. China sales levels are higher than the
next nine countries combined – as much as the NAFTA and EU markets put
together. It is also noticeable that the chemical sector over the year has shifted
from developed countries to emerging economies.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 4: World chemical sector contribution – Region-wise

Source: Company, SSL Research Source: Company, SSL Research

D. Chinese crackdown turning beneficial:

China’s rapidly surging chemical industry continues to enjoy the top podium
position in the world in terms of revenue since 2011, and its growth rate continues
to outpace by far other major chemical-producing regions. Chemical growth in
China over the past two decades has been driven by rapid investment, intense
competition and fragmentation across large numbers of segments. This has
particularly been the case where production technology has been widely Atul
available and where access to raw materials and financing has been easy to obtain.
This combination has led to extensive overcapacity in many sectors.
But this enormous size should not be seen as a sign of stability. On the contrary,
China’s chemical industry is in the midst of a profound, rapid transition. No longer
willing to be slotted in the class of big polluters, it has undertaken one of the most
comprehensive sustainability action plans in history, and the chemical industry will
be fundamental to turning this vision into reality. China’s effluent-discharge
standards have been reduced to 100 COD (250 in India). The cost implication has
forced many Chinese chemical firms to be non-functional. Shandong province has
announced the goal of halving the number of chemical parks in the province to
less than 100 and the number of chemical producers in Jiangsu is expected to
decrease to 2,000 & 1000 by 2020 & 2022 respectively with no new plant or
expansion to be permitted for investment less than Rs1,000 cr.
Increasing economic turbulence since mid-2018, related to China’s economic
slowdown and US–China trade relations, adds new uncertainties to the short-term
outlook. The chemical market’s growth rate is expected to slow as the country’s
overall economy matures.
Indian chemicals companies are benefitting from the adverse situation faced by
China on account of stricter policy norms causing in shutting down of companies,
US trade and anti-dumping duties on Chinese imports.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 5: China - GPD growth v/s Chemical industry growth

Source: IMF, Asian Development Bank, SSL Research

E. Capital investment – a way to enter new league of growth

Company is implementing nine projects with an investment of ~Rs412 cr along

with an additional investment of Rs57 cr in its subsidiary and joint venture entities
– most of these investments are funded through internal accruals.
On a standalone basis, company is expected to generate additional sales of ~Rs846
cr from nine new projects under implementation (at full capacity). Two of these
projects are related to environment protection – in next 15 months, two out of
four sites of company are expected to become zero liquid discharge (ZLD).
Ankleshwar site is already ZLD since 2012.
Exhibit 6: Status of Capex plans

No. of plants
Segment
Debottlenecking Completed Undertaken
Crop protection - 1 3
Pharmaceuticals 2 - 2
Aromatics - II 1 - 2
Bulk Chemicals - 2
Colors - 5 -
Source: Company, SSL Research

Company expects on-going projects to be completed in FY20.

Due to stricter norms many of the Chinese chemical companies are now investing
in India along with shifting of their base. Atul, sensing the competition in future
has already started to implement its capex plans.
Atul management has been conservative & cautious on cash expenditure in past.
Management has successfully implemented a major capex in FY16 (~Rs365 cr)
which fetched desired results in the following years as revenues grew at CAGR of
19.8% between FY17-FY19. In the current round of capital expenditure (~Rs476 cr)
company is focusing on debottlenecking of its plants along with expansion which
are further likely to propel the growth for the company. We are of the opinion that
multiple products of company are at their inflexion point and with increased
capacity utilization due to current capex plans, these products are likely to be well-
accepted on global markets.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Company Overview
Atul, a Lalbhai Group company, is a diversified chemical company which serves to
a base of 6,000 customers across 27 various industries in 92 countries. It is an
integrated manufacturer of 900 products & 450 formulations from basic chemicals
with 13 subsidiary companies & 2 Joint venture entities who operate from Brazil,
China, UAE, UK & USA. In the last 7 decades of operations, Company has exhibited
strong operational and financial performance as it built a niche market for its
comprehensive product portfolio (pioneers for many of the products in India),
strong clientele, backward integration, focused management. Company classifies
its products under 2 main categories i.e. a) Life Science Chemicals and b)
Performance & Other Chemicals which are further sub-divided under 7 segments.

Exhibit 7: Atul in snapshot

Source: Company, SSL Research

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 ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 8: Classification of business segments

Source: Company, SSL Research

Exhibit 9: Management Overview

Name Designation Brief Profile

Atul Ltd. was founded on 05 Sept 1947 by Mr. Kasturbhai Lalbhai to create wealth in rural India,
generate employment on large scale and make India self-reliant. Mr. Lalbhai was known for
Kausturbhai Lalbhai Founder
excellence, perseverance and trusteeship. Company abides to these values while expanding and
diversifying its footprints. Company is endeavoring to achieve this remit in full measures.
Mr S S Lalbhai is Managing Director since June 1984 and the Chairman of the Board of the Company
S S Labhai Chairman since August 2007. Mr Lalbhai is a highly educated individual and deputed on boards of Pfizer Ltd &
Navin Flourine Ltd. as Non-independent director.

Mr S A Lalbhai is a Director of the Company since January 2000 and the Managing Director of the
S A Lalbhai Managing Director Company since December 2000. Mr Lalbhai holds a graduate degree in Commerce from Gujarat
University.
Mr Gopi Kannan has 34 years of experience in various capacities and is currently the Chief Financial
Officer. He is a Member of the Stakeholders Relationship Committee and Risk Management
T R Gopi Kannan CFO
Committee of the Board. Mr Gopi Kannan is a fellow member of Institute of Chartered Accountants of
India, the Institute of Cost and Management Accountants of India etc.
Source: Company, SSL Research

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Business profile
Atul classifies its products under 2 main categories i.e. a) Life Science Chemicals
and b) Performance & Other Chemicals which are further sub-divided under 7
segments.
Exhibit 10: Categorical classification with end-user industries

No. of products/
Category Sub-segment Product groups Industry
Customers

Fungicides, Herbicides & Crop protection chemicals, Technical: 20

Crop Protection
Insecticides agriculture, lawn & garden industries Formulation: 40
Life Science Chemicals
Pharmaceuticals &
API & API intermediates Pharmaceuticals 80/160
Aromatics - I

Intermediates & API Additives, Fragrance, Personal care &

Aromatics – II 38/367
intermediates Pharmaceutical industries

Bulk Chemicals, Adhesion

Bulk Chemicals Cosmetics, Chemical, Dyestuff & Tyre 24/197
promoters, Intermediates
Performance & Other
Chemicals
Colors Textile Dyes & Pigments Textile, Paint & Coatings, Paper 552/298

Curing agents, Epoxy resins, Aerospace, Adhesives, Automobiles,

Polymers 101/615
Reactive diluents Composites

Life Science Chemicals:

Life Science Chemicals segment contributes around 34% of Atul’s total revenue for
FY19. Life Science Chemicals segment consists of 3 sub-segments, namely, Crop
Protection, Pharmaceuticals and Intermediates and Aromatics - I.
This division has robustly grown at CAGR of 17.3% for last 4 years on account of
strong growth witnessed in crop protection business.

Exhibit 11: Classification of segments under Life Science Chemicals

Source: Company, SSL Research

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Crop Protection:
The products falling under these product groups are used by customers belonging
to Agriculture & Crop protection chemicals industries. The product groups
comprise about 20 products and 40 formulations. 2,4-D, Indoxacarb, Isoprothilane,
Propoxur & Sulfonyl urea herbicides are some of the key products.
Crop Protection is one of the leading revenue generators and constitutes 19.5% of
total sales and 59% of revenue from Life science segment. Atul has reported a
healthy revenue growth of 21.8% for last 5 years in this sub-segment on account of
satisfactory monsoon seasons along with an increase in Minimum Support Prices
(MSPs) by the Government that raised farm incomes. Some key products of this
segment like 2,4-D and Indoxacarb has acquired global market share of 16% & 7%
respectively which has resulted high growth in crop protection segment.
Growth drivers: The Company has successfully completed work on one project
and has undertaken 3 more projects for implementation which will drive the
further growth in this segment.
Population growth and rising income will drive growth in consumption of major
food grains which ultimately result in rising consumption of fertilizers, pesticides &
nutrients.
With consistent and reasonable monsoons, increasing awareness among the
farmers towards crop protection, growing market share of 2,4-D & Idoxacarb,
positive growth outlook of agro chemical industry, we expect the company’s crop
protection business to report healthy growth. Initiatives to develop new products
with entering new geographies and capacity addition are likely to fetch strong
growth in their revenues from crop protection. As per the company management
Atul has an unrealized sales potential of Rs59 cr and a project under
implementation for herbicides (estimated sales of Rs129 cr).

Crop protection products:

Source: Company

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Pharmaceuticals & Aromatics-I:

The products falling under these product groups are used by customers belonging
to Pharmaceutical industry for various therapeutic categories, such as anti-
depressant, anti-diabetic, anti-infective, anti-retroviral and cardiovascular. The
product groups comprise about 72 products. Carbonates, chloroformates,
isocyanates and organic ureas are some of the key classes of products.
The Pharmaceuticals and Aromatic-I constitute 13.5% of company’s total revenue
and 41% of the Life Science chemicals segment. In last 4 years company reported a
moderate revenue growth of 12%.
Atul Bioscience Ltd (ABL)
Atul Bioscience Ltd (ABL) is a 100% subsidiary of Atul Ltd which is focused on
manufacturing of advanced API Intermediates. ABL reported a revenue & PBT
growth of 21% & 21% for last 4 years primarily because of volume.
Company has completed debottlenecking of 2 projects and has currently
undertaken 2 more projects for implementation.

Exhibit 12: Performance of subsidiary – Atul Bioscience Ltd. (in cr)

Source: Company, SSL Research

Growth drivers: Global pharma market expanding to USD1.5 tn by 2021, led by

Pharmerging markets & Generics are taking an increased market share globally.
Growing and ageing population with increasing access of pharmaceuticals of poor
and middle class families due to their rising disposable income is likely to be
favorable for the company.
Company is likely to capitalize the growth in the industry through its subsidiary by
i) increasing its manufacturing facilities which includes expansion of current plants
ii) introduction of new plants and iii) forming long term strategic alliances with
other companies
Key risk: Increasing cost controls in key pharma markets & tightening of
government policies, decreasing return on investments in generics pharma market
due to price erosion.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Performance & Other Chemicals:

Performance and Other Chemicals segment consists of 4 sub-segments, namely,
Aromatics - II, Bulk Chemicals and Intermediates, Colors and Polymers. This
segment contributes around 66% of Atul’s total revenue for FY19.
It has shown a moderate CAGR growth of 8.6% for last 4 years compared to strong
growth witnessed in crop protection business led by growth in Aromatics II
vertical.

Exhibit 13: Classification of segments under Performance & Other chemicals

Source: Company, SSL Research

Aromatics-II:
The products falling under these product groups are mainly used by customers
belonging to Fragrance and Personal Care industries. The product groups comprise
about 20 products. Para Cresol, para Anisic Aldehyde, para Anisyl Alcohol and para
Cresidine are some of the key products. Company is the market leader in these
products.
The Aromatics-II division grew by 8% CAGR over FY15-FY19. Para Cresol is one of
the key products for the company. Earlier UK & USA were the major
manufacturers of the product which has now been majorly shifted to India and
China. The size of the world Fragrance industry & world Personal Care industry is
estimated at USD13 bn & USD415 bn and is growing at about 4% which might be
beneficial for the company.
Growth drivers: The Company has completed 1 project and undertaken 2 more
projects for implementation.
The main user industries, namely, Fragrance and Personal Care, are growing well
due to an improved standard of living.

Bulk Chemicals & Intermediates:

The products falling under these product groups are used mainly for internal
consumption and by customers belonging to Cosmetic, Dyestuff, Pharmaceutical
and Tyre industries. The product groups comprise about 21 products. Resorcinol,
Formaldehyde Resins, 1-3- Cyclohexanedione, Anisole, Sulphur Trioxide and
Caustic soda are some of the key products.
Company is a market leader in many of the bulk chemicals it produces. It is the
only manufacturer of resorcinol whereas it is the only integrated manufacturer of
resorcinol and resorcinol formaldehyde resin in the country.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

This has robustly grown at CAGR of 25.6% for last 4 years on account of strong
growth witnessed in industries to which the company caters its products.
Resorcinol & RF resins are relevant products for the automotive industry. Although
auto industry is witnessing a slowdown domestically as well as globally; the
demand in sector is likely to recover and the long term outlook remains positive.
The size of the world Tyre industry is estimated at USD229 bn and is growing at
about 3.7%. The size of the world Chlor-alkali industry is estimated at USD45 bn
and is growing at about 3.2%. The tyre industry is expected to grow further
because of increasing population with improved standard living which is favorable
for auto industry. The captive consumption of bulk chemicals is expected to grow
as the company expands manufacturing facilities of its various products.

Colors:
The product groups comprise about 587 products. The products are used by
customers belonging to textile, paint and coating & paper industries. Pigment Red
168, Sulphur Black 1 & VAT green 1 are some of the key products. The company
completed five projects. Rudolf Atul Chemicals Ltd. (RACL), a joint venture formed
in 2011-12, provides a complete range of textiles chemicals in Indian market.
The main user industries namely Textiles, Paper, Paint & Coatings will continue to
grow because of growing population & increase in discretionary spending.
The size of the world Dyestuff industry & High performance pigments are
estimated at USD6.1 bn and USD5.2 bn with growth rate of about 3.5% & 4.0%
respectively. China is the largest manufacturer of dyes followed by India. There has
been a shift of Dyes & pigment manufacturing from developed countries to China
& India and the market share is increasing year by year which is likely to be
beneficial for Atul in acquiring market share. The main user industries namely
Textiles, paper, paint & coating will continue to grow strong because of growing
population and increase in discretionary spending.
Colors division has moderately grown at CAGR of 8.3% for last 3 years.

Rudolf Atul Chemicals

Rudolf Atul Chemicals Ltd (RACL) is a joint venture company of Rudolf GmbH and
Atul Ltd since 2011 and is engaged in manufacturing and marketing of textile
chemicals in India. The Company is effectively leveraging the strengths of Rudolf (a
German company) and Atul (an Indian company) in serving its customers.
Company has reported a steady growth in topline since last 3 years.

Exhibit 14: Performance of JV – Rudolf Atul Chemicals Ltd. (in cr)

Source: Company, SSL Research

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Growth drivers:
• Continuous bleaching and yarn lubricant segments
• Specialty silicones for terry towel finishing
• High performance PFC free durable water repellents
• Resin finishing and digital printing

Polymers:
The products falling under these product groups are used by customers belonging
to Aerospace, Automobile, Composites, Construction, Defence, Electrical and
Electronics, Footwear, Paint and Coatings, Paper, Sport and Leisure and Wind
Energy industries. The product groups comprise about 96 synthetic products and
300 formulations. B11, P62 and P101 are some of the key products. Synthetic and
formulated products are versatile and have significant applications in Aerospace,
Automobile, FRP Composites, Wind Energy, Electrical and Electronics, Paint and
Coatings, Construction, Defence, Sport and Leisure and Paper industries.
The user industries, Construction, Defence, Electrical and Electronics, Paint and
Coatings are growing well particularly in India.
Paint & Coatings industry is likely to scale up to Rs78000 cr by FY21 from existing
Rs65000 cr in FY19. Construction material and adhesives industries are also likely
to scale higher which might be favorable for polymers segment of the company.

JV with Akzo Nobel

AkzoNobel, a Dutch Specialty chemicals company and Atul have formally entered
into a joint venture partnership for the production of monochloroacetic acid
(MCA) in India. The companies have established a new plant at Atul’s facility in
Gujarat in FY19, with each partner holding a 50% stake in the joint venture, to be
registered as “ANAVEN”. The partnership is likely to enhance Atul’s status as a key
global supplier of the herbicide 2,4-D, which uses MCA as a key raw material. The
partnership uses chlorine and hydrogen manufactured by Atul to produce MCA,
taking advantage of both Atul’s existing infrastructure and the leading eco-friendly
hydrogenation technology of AkzoNobel. From an initial annual capacity of 32,000
tons per year at start-up, the plant has been designed for future expansion to
60,000 tons per year. The facility is likely to produce enough MCA to meet Atul’s
growing demand for MCA and supply the expanding Indian market.
Polymers products:

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Source: Company

Floras:
Floras business commenced in the year 2008. The business offers tissue-culture
raised date palms, banana plants and a range of products derived from the date
fruit.

Growth drivers:
World food and agribusiness industry is estimated to be USD5 tn with India’s
contribution being USD160 bn. As the population of world is growing rapidly it is
estimated that by 2050, planet Earth will need to double the food supply, caloric
demand will increase by 70%.
Agriculture businesses constitute around 25% of the nation’s GDP and might
become area of focus in future due to severe demand for agri-products around the
globe.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Initiating coverage with a BUY Rating

Expect Revenue CAGR of 14.4% over FY19-FY22e
We expect Atul to deliver revenue growth at a CAGR of 14.4% over FY19-FY22e as
company focuses on strengthening the position of its market leading products,
improving global presence, debottlenecking and expansion of its plants etc. We
believe crop protection, pharmaceuticals, aromatics and polymer business will
continue to be amongst highest revenue generators for company. Demand in
developed countries is likely to revive post trade deal agreements which is likely to
be beneficial for Atul.

EBITDA Margin to continue improving due to focus on high margin

and value added products
Atul has over the years steadily shifted itself from a commodity oriented player to
diversified chemical player by adding newer, high margin products to its product
portfolio which have resulted in fastening the pace of profitability. Company has
successfully improved EBITDA margin from 11.2% to 19% between FY11 & FY19 as
many of its products hold strong position in global market due to low-cost
manufacturing and long experience. We believe Atul will continue its high EBITDA
margin profile.

Strong cash flow status - a key for large capex

Company has maintained healthy free cash flows in the past and has used them to
achieve debt free status. Company has executed massive capex in FY16 mainly
funded by internal accurals. Atul has planned even bigger capex in the next few
years for debottlenecking and expansion of its existing plants (majority in FY20)
that is likely to take some toll on balance sheet. But we are confident that
company possesses enough cash flows to smoothly take Atul through its capex
program along with fetching desired results from capex plans.

Healthy Return Ratios

Atul has one of the best return ratios as compared to its domestic peers. Atul has
maintained a healthy ROCE of >20% for last 6 years except FY18. We expect Atul
would continue to deliver ROCE in excess of 20% driven by strong revenues and
profitability trends. On similar lines, Atul has maintained average ROE of 19.7%
over last 6 years. Going forward we estimate Atul will maintain ROE growth
trajectory driven by strong PAT margin.

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 15 - Sustained Revenue growth Exhibit 16 - Improved EBITDA margin due to high margin products

Source: Company, SSL Research Source: Company, SSL Research

Exhibit 17 – Growth in PAT driven by EBITDA growth Exhibit 18 - Sustained ROE & ROCE

Source: Company, SSL Research Source: Company, SSL Research

Exhibit 19 – Growth in EPS despite capex Exhibit 20 – Strong cash flow structure

Source: Company, SSL Research Source: Company, SSL Research

Peer Comparison
Sales Growth (%) P/E (x) EV/EBITDA (x) ROE (%) ROCE (%)
Company
FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY18 FY19 FY18 FY19

PI Industries 24.8 22.2 24.2 50.0 40.5 31.7 24.4 27.6 21.7 20.7 19.5 20.0 19.4
Atul Industries 22.5 8.8 9.0 27.5 23.7 20.6 15.2 15.1 13.0 13.1 17.5 18.7 25.5
Bayer Cropscience -0.9 22.2 14.8 50.6 37.8 29.0 39.6 29.2 22.6 15.7 13.0 16.1 13.3
UPL Ltd. 25.7 60.2 9.5 22.6 16.5 12.2 20.5 10.5 8.9 24.5 12.2 16.8 7.1
Source: Bloomberg, SSL Research.

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 ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Exhibit 21 – 1 Yr rolling Forward PE band Exhibit 22 – 1 Yr rolling forward PE with deviation

Source: Company, SSL Research Source: Company, SSL Research

Exhibit 23 – 1 year rolling forward P/B bands Exhibit 24 – 1-Yr rolling forward P/B with deviation

Source: Company, SSL Research Source: Company, SSL Research

Exhibit 25 - Assumptions
Revenue
We assume revenues would grow at 14.4% CAGR over FY19-22E led by growth.
We assume Atul will sustain EBITDA margin at current levels.
We assume Atul ’s capex plans will take Atul successfully through, similar to its historically implemented plans, and will yield additional revenues.

Source: SSL Research

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Investment Risks
Foreign Exchange fluctuation
Atul generates almost half of the revenues through exports. Any sharp fluctuations
in foreign exchange may impact the sales realization. Around 70% of company’s
raw materials are imported which suggests that company may incur higher raw
material costs if the currency fluctuates adversely.
Vulnerable to amendment in environmental norms
Atul identifies & accesses potential environmental risks for its existing and new
products. After the developed countries, presently, China is undergoing a
paradigm shift where chemical companies are getting shutdown due to the stricter
environmental norms. Although Atul has constant focus towards protecting
environment yet any such change in policy norms in India might affect the
performance of the company.
Delay in capacity utilization & de-bottlenecking
The company has planned de-bottlenecking and expansions plants of Rs 476 cr, of
which Rs 87 cr would be spent on environmental friendly practices such as zero-
liquid discharge and adhering safety norms. Any delay in achieving the desired
outcome from this initiative might affect the performance of the company.
Subdued demand in chemical sector
Global chemical industry is undergoing an extended up cycle. Yet the sector has
seen many other headwinds which have diluted the overall demand. While
emerging nations manage to buck the trend, despite a slowdown in China, a
muted American economy and debt-constrained Europe will tend to weigh down
industry demand. A continued recession in the developed world may take its toll
on East Asian economies ultimately resulting in subdued demand in chemical
sector.
Underperformance by end-user industries
The chemical industry creates an immense variety of products which impinge on
virtually every aspect of commoner’s life. Chemicals are one of the key input
materials that are used across a wide range of industrial and consumer sector. Atul
serves its products to around 27 industries which suggest that company is directly
or indirectly connected performance of these industries.

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 ATUL Industries Limited Initiating Coverage| Sector: Chemicals

Financial Statements (consol.)

Income Statement Figures in Cr. Balance Sheet: Figures in Cr.
Equities & Liabilities FY18 FY19 FY20e FY21e FY22e
Particulars FY18 FY19 FY20e FY21e FY22e
Share capital 29.7 29.7 29.7 29.7 29.7
Net Sales 3,295.8 4,037.8 4,391.2 4,784.7 5,285.7 Reserves and surplus 2,214.2 2,676.0 3,134.2 3,666.2 4,316.5
Other Income 25.9 34.9 44.1 53.7 57.3 Net Worth 2,243.9 2,705.7 3,163.9 3,695.9 4,346.2
Total Income 3,321.7 4,072.7 4,435.3 4,838.3 5,343.0 Non-controlling interests 20.0 23.8 28.5 33.3 39.1
Non-current liabilities
Total Expenditure 2,790.6 3,271.0 3,622.4 3,909.3 4,302.1
Long Term Borowings - 43.1 21.6 10.8 5.4
Raw Material Consumed 1,803.5 2,106.1 2,311.3 2,504.8 2,766.3 Deferred tax liabilities (net) 129.6 139.5 168.4 178.7 190.2
Other Operating Cost 987.1 1,165.0 1,311.1 1,404.4 1,535.7 Long Term Provision 51.4 54.6 57.3 59.9 64.7
Sub- Total 180.9 237.2 247.3 249.4 260.3
EBDITA ( Excl OI) 505.2 766.8 768.7 875.4 983.7
Current liabilities
EBDITA ( Incl. OI) 531.1 801.6 812.9 929.0 1,040.9 Short-term borrowings 15.9 9.3 7.0 6.3 5.7
Interest 12.7 7.4 6.7 6.0 5.4 Trade payables 459.0 379.6 438.3 447.0 468.9
Other current liabilities 74.8 157.7 72.6 77.8 83.4
PBDT 518.4 794.2 806.2 923.0 1,035.5
Short-term provisions 10.9 29.9 27.6 29.4 30.5
Depreciation 110.4 118.9 134.3 152.6 166.5 Sub- Total 568.7 577.2 546.8 561.7 589.4
PBT 412.2 680.3 671.9 770.4 869.0 Total Liabilities 3,013.6 3,544.0 3,986.5 4,540.2 5,235.0
Assets
Tax 131.0 244.3 169.1 193.9 218.7
Non-current assets FY18 FY19 FY20e FY21e FY22e
Net Profit 276.5 432.2 502.8 576.5 650.3 Tangible assets 1,000.3 1,049.2 1,231.4 1,368.5 1,492.1
Intangible assets 23.8 51.9 53.9 56.9 59.9
Capital Work in Progress 96.2 172.3 127.0 113.6 127.3
Key Financial ratios Sub-total 1,135.0 1,289.7 1,430.1 1,558.1 1,700.0
Non-current investments 464.1 543.2 599.7 703.5 777.6
Particulars FY18 FY19 FY20e FY21e FY22e LT loans and advances 1.7 1.8 6.7 7.2 7.0
(A) Growth Other Non Current Assets 49.7 38.1 50.1 51.2 51.3
Net Sales 16.3 22.5 8.8 9.0 10.5 Total Non Current Assets 1,658.1 1,881.7 2,087.6 2,321.9 2,539.3
EBITDA (0.8) 51.8 0.3 13.9 12.4 Current assets
Current Investment 5.7 208.8 250.6 451.0 721.6
PBT (7.6) 65.0 (1.2) 14.7 12.8
Inventories 411.4 511.8 557.9 584.6 624.1
PAT (14.4) 56.3 16.3 14.7 12.8
Trade receivables 723.4 698.5 792.5 879.4 992.0
Cash Profit (7.5) 42.5 15.6 14.4 12.0
Cash and bank balances 49.4 54.6 58.0 60.5 105.5
(B) Measures of Performance ST loans and advances 106.7 120.0 141.6 154.3 154.1
Operating Profit Margin (%) 15.3 19.0 17.5 18.3 18.6 Other Current Assets 38.0 47.4 75.2 64.0 72.3
Gross Profit Margin (%) 15.7 19.7 18.4 19.3 19.6 Total Current Assets 1,355.5 1,662.3 1,898.9 2,218.2 2,695.7
Total Tax Rate (%) 31.8 35.9 25.2 25.2 25.2 Net Current Assets 802.7 1,094.4 1,359.1 1,662.9 2,111.9
Net Profit Margin (%) 8.4 10.7 11.4 12.0 12.3 Total Assets 3,013.6 3,544.0 3,986.5 4,540.2 5,235.0
(C) Measures of Fin. Status
Debt / Equity (x) 0.0 0.0 0.0 0.0 0.0 1,0
Net Debt / Equity (x) (0.0) (0.1) (0.1) (0.1) (0.2)
Cash Flow Statement Figures in Cr
Debtors Period (days) 68.8 64.3 62.0 63.8 64.6 Particulars FY18 FY19 FY20e FY21e FY22e
Creditors Period (days) 52.1 46.8 41.2 41.3 38.9
PBT 412.2 680.3 671.9 680.3 869.0
Inventory Period (days) 84.1 80.0 84.5 83.2 79.7 Depreciation 110.4 118.9 134.3 118.9 166.5
Cash Coversion Cycle (Days) 100.8 97.5 105.2 105.7 105.5 Interest (Net) 12.7 7.4 6.7 7.4 5.4
(D) Measures of Investment Other Income -25.9 -34.9 -44.1 -34.9 -57.3
EPS (Rs) 93.2 145.5 169.2 194.0 218.9 Change in WC -94.7 -83.3 -219.6 -286.4 -133.4
Book Value (Rs) 756.0 910.7 1,064.9 1,244.0 1,462.9 Direct Taxes Paid (net of refunds) -131.0 -244.3 -169.1 -244.3 -218.7
Earning Yield (%) 2.3 3.6 4.2 4.8 5.5 Net operating Cash Flow 283.7 444.2 380.1 241.0 631.6
ROA (%) 9.6 13.2 13.4 13.5 13.3 (Inc.) / Decrease in Fixed Assets -147.6 -252.0 -130.4 -252.0 -131.9
Free Cash Flow 136.2 192.1 249.7 -11.0 499.7
Return on Net Worth (%) 13.1 17.5 17.1 16.8 16.2
(Increased ) / Decreased in
Return on Cap. Employed (%) 18.7 25.5 21.3 21.1 20.4 -40.9 -282.2 -98.3 -282.2 -344.7
Investments
Interest Coverage (x) 33.4 92.8 101.7 129.4 161.9 Other income 25.9 34.9 44.1 34.9 57.3
(E) Measures of Valuation Cash flow from investing activities -162.6 -499.3 -184.5 -499.3 -419.4
P/E (x) 43.0 27.5 23.7 20.6 18.3 Issue of Share capital / Reduction
0.0 0.0 0.0 0.0 0.0
M. Cap to Sales (x) 3.6 2.9 2.7 2.5 2.3 in R&S
Change in Debt -151.8 38.8 -26.1 38.8 -6.0
EV/Sales (x) 3.6 2.9 2.6 2.4 2.1
Interest Paid -12.7 -7.4 -6.7 -7.4 -5.4
EV/EBDITA (x) 23.5 15.2 15.1 13.0 11.3
Cash flow from financing activites -203.1 -17.2 -81.4 -17.2 -60.0
Source: SSL Research Other Adjustment (Net) 103.1 77.7 -110.8 286.6 -107.2
Other Adjustment (restated) 0.0 0.0 0.0 0.0 0.0
Net Change in cash 21.1 5.3 3.4 11.1 45.0
Opening Balance 28.3 49.4 54.6 49.4 60.5
Closing Balance 49.4 54.6 58.0 60.5 105.5

Source: SSL Research

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

SBICAP Securities Limited

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Name Qualification Designation
Rajesh Gupta PGDBM (Finance), MA (Bus. Eco) AVP - Research
Nilesh Patil BSc (IT). PGDBM Associate Analyst

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ATUL Industries Limited Initiating Coverage| Sector: Chemicals

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