JM Chemical Sector Report 01 March 19

28 February 2019
SECTOR UPDATE
INDIA SPECIALTY CHEMICALS
Still anybody's race
JI.
IS�
.111
•
...•..
•
Does India still What if China Analysing some
have cost capacities important
advantage? comeback? chemical chains
28 February 2019
SECTOR UPDATE
TABLE OF CONTENTS

Mehul Thanawala
03 Introduction [email protected]
Tel: (91 22) 6630 3063
04 Key Charts
Ashish Mendhekar
[email protected]
MAIN THEMES Tel: (91 22) 6630 3073
05 Indian companies may have lost some Ankit Kabra

competitiveness to China… [email protected]
Tel: (91 22) 6224 1877
09 Margins and return ratios of Indian vs
Chinese companies
11 Analysing some chemical chains for

competitive advantage
COMPANIES
JM Financial Research is also
22 SRF (TP: INR 2250) available on: Bloomberg - JMFR
<GO>, Thomson Publisher &
29 PI Industries (TP: INR 800) Reuters S&P Capital IQ and FactSet
35 Aarti Industries (Not Rated) Please see Appendix I at the end of

this report for Important Disclosures
37 Deepak Fertilisers (Not Rated) and Disclaimers and Research
Analyst Certification.
39 GHCL (Not Rated)
You can also access our portal
41 IG Petrochemicals (Not Rated) www.jmflresearch.com
43 Philips Carbon Black (Not Rated)
45 Vinati Organics (Not Rated)
OTHER
REPORTS
INDIA SPECIALTY CHEMICALS INDIA STRATEGY INDIA POWER RURAL SAFARI VIII
SEPTEMBER 2017 2019 OUTLOOK
JM Financial Institutional Securities Limited Page 2

28 FEBRUARY 2019
CHEMICALS
CY19 – still optimistic for Indian

companies
th
In our previous report on the chemical sector dated 28 Sep 2017 (Indian Specialty Chemicals – Growth Catalysts), we had analysed
that India had gained a competitive edge in the chemicals sector due to the high manufacturing cost in the US and Europe and the
reduced gap with China amid the latter’s focus on environment and increasing employee cost for its companies. We now revisit the
thesis, particularly in view of recent media reports indicating China may have relaxed its focus on pollution in the current winter.
According to reports, the target reduction in count of PMI 2.5 was cut to 3% YoY (against an original target of 5%). In this report,
we also analyse which part of the chemical chain will be relatively less impacted if Chinese manufacturing comes back on stream,
Since it would not be possible to analyse all chemicals, we analyse one inorganic chemical (fluorine), one organic chemical (benzene),
oleochemicals and dyestuff sub-segments. Finally, we provide an update on some of the companies in the Indian investment space.
Competitive advantage of Indian companies Indian companies have better RoCEs but
In our previous report, we had reported that employee cost need to invest in R&D
for Chinese chemical companies had risen rapidly. However,
in FY18 we note that employee cost (as a percentage of sales) Over the last few years, on the back of increased costs for
for Indian companies has increased to c.8.7% while the Chinese companies, Indian companies EBIDTA margins have
employee cost for Chinese companies has increased relatively improved and are now similar to Chinese companies. Indian
slowly to c.4.5%. The gap between employee costs for Indian companies also have better RoEs and RoCEs indicating that they
and Chinese companies has increased from c.353 bps in FY17 have been judicious in use of capital. However, the Chinese
to 423 bps in FY18. Additionally, if China allows a certain companies are investing significantly higher in R&D (c.4.5% of
relaxation in environment norms, Chinese production could sales) while Indian companies have only marginally increased
increase. Therefore, in the next part of this report we also R&D expenses to c.0.9% of sales. Clearly, Indian companies
analyse some of the chemical chains and potential for China need to invest significantly more in R&D.
to impact margins of Indian companies.
Analysing four sub-sectors Company specific updates

In the next part of this report, we analyse 4 sub-sectors and are In the final part of this report, we analyse and provide an
led to believe that China has strategic advantage in 2 sub- update on some companies. We update our estimates for
sectors 1) fluorine and 2) dyestuff industry. Our analysis SRF and PI Industries.
indicates that Indian fluorine companies may face margin
pressures for 2HCY19. In the dyestuff industry, shutdown of We also provide operational updates and growth drivers
companies in China has benefitted Indian companies to improve for some other chemical companies and the key risks to
their revenues. these businesses. We do not have a view on some of
these companies, but we provide a brief outlook for some
In the benzene and oleochemicals chain, Chinese companies do interesting companies in the Indian investment space.
not have a strategic advantage and therefore, companies in
these sub-sectors will not be impacted if China relaxes
environment norms.

Chemicals 28 February 2019
Key Charts
Exhibit 1. Gap in emp. expense between Ind-China is increasing again Exhibit 2. China continues to beat India in Employee Productivity
10.0%
8.7%
Productivity (GDP/person employed)
9.0% 8.5%
8.1% CAGR 32848
35000
8.0% 7.5% 7.2%
7.1% 6.9% 30000
7.0%
25000 23175
6.0% CAGR
5.0% 5.5% 18529
5.0% 4.4% 4.6% 20000
3.8% 3.7% 14169
4.0% 3.6% 15000
3.0% 10000
2.0% 5000
1.0% 0
0.0% India China
FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
2013 2014 2015 2016 2017 2018
India China
Source: Industry, JM Financial, Bloomberg Source: The Conference Board Total Economy Database™ (Adjusted version), November 2018, JM
Financial; * converted to 2017 price level with updated 2011 PPPs, JM Financial
Exhibit 3. Rising fluorspar prices to compress margins in 1HCY19 Exhibit 4. India has advantage in benzene chain as it is a major
exporter of raw material
3000
2500
2000
1500
1000
500
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China Benzene Imports India Benzene Exports
Source: Tertiary Minerals plc., Industry Source: ITC calculations based on UN COMTRADE and ITC statistics, JM Financial
Exhibit 5. India’s R&D investments still lag significantly Exhibit 6. Indian companies have consistently shown better ROCE
5.0% 25.0%
4.5% 4.5%
4.3%
4.5% 4.1% 19.5%
4.0% 3.9% 19.7% 19.4%
4.0% 20.0% 19.1% 17.6%
17.0% 17.0% 16.6%
3.5%
14.7% 15.0%
14.5%
3.0% 15.0% 13.6%
12.8%
2.5%
10.0%
2.0% 10.0%
1.5%
0.8% 0.8% 0.8% 0.9% 0.9%
1.0% 0.8% 5.0%
0.5%
0.0% 0.0%
FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
India China India China
Source: Bloomberg, JM Financial Source: Bloomberg, JM Financial

Indian companies may have lost some competitiveness to China
Since our previous report (Indian Specialty Chemicals-Growth Catalysts), we have two years
of updated numbers from Indian and Chinese chemical companies. Based on these, we have
an update on the competitive scenario. We have focused on three major areas which can
impact Indian companies 1) Employee costs, 2) Effluent treatment / Environment costs and 3)
Research and Development (R&D) investments.
1. Employee costs
In our previous report, we had analysed how an increase in employee cost could
benefit Indian companies. We have referred to our updated numbers on Chinese
employee cost and have used broadly same sample we used in our previous report
(Exhibit 7 and Exhibit 8 below)
Exhibit 7. Increase in employee cost (YoY%) Exhibit 8. Employee Expense as a % of Revenue

50.0% 10.0%
43.2% 8.5% 8.7%
45.0% 9.0% 8.1%
40.0% 8.0% 7.5%
7.1% 6.9%
35.0% 7.0%
30.0% 26.5% 6.0%
5.0% 4.5%
25.0% 5.0% 4.4%
3.6% 3.8% 3.7%
20.0% 17.0% 17.4% 4.0%
13.8% 14.3% 15.1%
15.0% 3.0%
9.7%
10.0% 2.0%
4.8%
3.9%
5.0% 1.0%
0.0% 0.0%
FY 14 FY 15 FY 16 FY 17 FY 18 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial
Based on the above exhibits it is clear that:

1.1. Employee cost for Indian companies has increased at a slower pace than Chinese
companies (Exhibit 7) every year (excluding FY15 and FY18) in the last five years.
Between FY14 and FY18, the employee cost for Chinese companies registered a
CAGR of 22.3% while for Indian companies the CAGR was c.14.2%.
1.2. However, over the last two years, the increase in employee costs for Chinese
chemical companies has moderated and in FY18 employee expenses for Indian
companies grew at a rate faster than Chinese companies (Exhibit 7).
1.3. We note that while (as discussed in our previous report), Chinese unskilled labour
cost in $/hour is higher than Indian labour cost / hour, higher productivity / scale
means that employee cost as a percentage of revenue is a better matrix to
compare Indian and Chinese chemical companies. Employee costs as a percentage
of revenue (Exhibit 8) for Chinese companies increased from 3.6% in FY13 to
4.5% in FY18 while for Indian companies; it has increased from 7.1% in FY13 to
8.7% in FY18.
1.4. The difference in employee cost as a percentage of revenue between Chinese
companies and Indian companies had narrowed from 355 bps in FY13 to 307 bps
in FY14. However, it has to be noted that the gap between employee cost as a
percentage of revenue for Indian companies vis-à-vis Chinese companies has
increased from 307 bps in FY14 to 423 bps in FY18 i.e. Indian company costs
increased from 8.5% to 8.7% of sales while Chinese companies costs declined
from 5% to c.4.5%.
Interestingly, (refer Exhibit 9 below) sales growth at Chinese companies was very
strong (22.6%) against sales growth of Indian companies (14.4%).

Exhibit 9. Revenue Growth (YoY%)

25.0% 22.6%
19.3%
20.0%
13.8% 14.4%
15.0%
12.6%
10.0% 8.2%
5.6%
5.0%
0.6%
0.0%
-0.5%
-5.0%
-4.0%
-10.0%
FY14 FY15 FY16 FY17 FY18
India China
Source: Bloomberg, Company, JM Financial

1.5. In FY17, our sample set of Chinese companies reported a marginal growth in sales
revenue (c.0.6%) but in FY18, they reported a sharp (c.22.6%) growth. For our
sample of Indian companies, revenue growth was 5.6% and 14.4% in FY17 and
FY18 respectively (Exhibit 9). This sharp increase in revenue for Chinese companies
in FY18 contributed to the decrease in employee cost (as a percentage of revenue).
Exhibit 10. Productivity (GDP/person employed)* (in USD) Exhibit 11. Hourly labour cost (productivity-adjusted)* (in USD)
35000 32848 3.50 CAGR
CAGR 3.13
4.4%
30000 7.2% 3.00
2.52
25000 23175 2.50 CAGR
CAGR 3.7%
5.5% 18529 1.93
20000 2.00
1.61
14169
15000 1.50
10000 1.00
5000 0.50
0 0.00
2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
Source: The Conference Board Total Economy Database™ (Adjusted version), November 2018, JM Source: The Conference Board Total Economy Database™ (Adjusted version), November 2018, JM
Financial; * converted to 2017 price level with updated 2011 PPPs Financial; * converted to 2017 price level with updated 2011 PPPs
1.6. We had, in our previous report, pointed out that Chinese productivity was higher
than Indian productivity and this also needs to be addressed by India / Indian
companies. The updated employee productivity data shows that India’s productivity
per person employed registered a CAGR of 5.5% (Exhibit 10) while China’s
productivity registered a CAGR of 7.2% during the period between FY13-FY18.
We note that the lower CAGR for India was on lower base and therefore, the
productivity gap has continued to increase.
1.7. On the positive side for India, while structurally, productivity has been better in
China; labour cost in China is also higher than in India. Hence, one needs to adjust
labour cost for productivity (Exhibit 11) to get a correct picture. We note that
hourly labour cost (adjusted for productivity) has recorded a CAGR of 3.7%/4.4%
for India / China respectively during FY13-FY18. Thus, Indian labour cost continues
to be cheaper than China. We note that chemical industry is not very labour
intensive and therefore, we have also analysed employee cost as a percentage of
sales above. To conclude, in FY18, employee cost gap tilted marginally in favour of
China primarily due to higher sales growth. However, the structural trend of labour
cost growth is still favourable to India.

2. Effluent treatment / Environment costs :

Chinese companies have seen higher environment cost through investment in
effluent treatment facility (ETF) or sewage disposal. However, very few companies
reported the amount spent on the above. Of the companies we observed, Zhejiang
Longsheng Dyestuff Chemicals Co Ltd was the only company that reported their
environment protection cost at 3.86% of the revenue in CY17 (3.49% in CY16).
Thus, effluent treatment cost for Zhejiang Longs has continued to increase but is
still below effluent treatment costs incurred by AksharChem, an Indian Dyestuff
company which has spent c 5% annually from FY15-FY18.
It is also pertinent to note that our sample set of dyes and dyestuff industries
recorded a CAGR of 17.7% in effluent treatment costs between FY14-18 (Exhibit
12).
Exhibit 12. Expense towards effluent treatment cost – Indian Dyestuff companies
700 35%
600 29.2% 30%
500 CAGR 17.7% 25%
400 19.6% 20%

18.2%
300 15%
200 10%
100 5.2% 5%
299
358
376
445
575
3.6%
0 0%
2014 2015 2016 2017 2018
Effluent treatment Expense (INR mn) YoY growth %
Source: Company, Industry, JM Financial
Interestingly, in view of the recent opportunity in environmental issues in China,

Tsaker Chemical started a separate business unit, environmental technology
consultancy services, and reported earnings of RMB 724,000 (0.04% of total
revenue in CY17, nil in CY16). This has opened a new area of revenue generation
for large companies as part of the core business.
New laws in China – more stringent with higher penalties
On January 1 2019, China’s new Soil Pollution Prevention and Control Law came
into effect. Under this law, the non-compliant party can be penalised up to Yuan
2mn on the principle of “polluters pay”. Furthermore, the law also adopts the
protection-first approach whereby third party authentication will be required to
justify the pollution prevention methods adopted by the owner. This may make land
buying costly for the companies and puts extra operating expense for regular
inspection and maintenance of land in use.
Additionally, China has published a draft regulation on the Environment Risk

Assessment and Control of Chemical Substances (also being called the China
REACH, similar to EU REACH). It is expected that the major impact of this law, if
passed, will be on companies that manufacture, processes and trade in chemicals.
The law imposes civil, administrative and even criminal liabilities for violations. This
law will lead companies to spend more on legal and technical counselling as any
non-compliance can attract penalty up to Yuan 2mn and executives may face
administrative detention.
These regulations bring with them expenses towards monitoring and might put
costs for rectifications to technology for companies. Hence for medium-term
Chinese companies will continue to report an increase in environment compliance
expenses.

3. R&D investments
We believe that R&D is the key to long-term sustainable chemical business.
However, China has been investing significantly more than India as pointed out in
our previous report. This puts Indian companies in long-term disadvantage against
Chinese companies.
We update the data on R&D expense (Exhibit 13 and 14) from our previous report.
Exhibit 13. Increase in R&D Expenses (YoY%) Exhibit 14. R&D Expenses as a % of Sales revenue
70.0% 63.1% 5.0% 4.5% 4.5%
4.3%
4.5% 4.1% 4.0%
60.0% 3.9%
51.3% 4.0%
47.6%
50.0% 3.5%
40.0% 3.0%
30.6% 2.5%
30.0% 25.6%
2.0%
19.4%
20.0% 14.6% 16.9% 1.5%
0.8% 0.8% 0.8% 0.9% 0.9%
9.1% 1.0% 0.8%
7.1% 8.8%
10.0% 5.8% 0.5%
0.0% 0.0%
FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
Source: Bloomberg, Company, JM Financial. Source: Bloomberg, Company, JM Financial
Key findings:
3.1. During FY17 and FY18, Indian companies have stepped up their R&D investment.
However, we note that Indian companies are smaller (in terms of revenue) and are
also spending less as a percentage of revenue. Hence, the gap between the two in
absolute value of investment in R&D continues to increase. It needs to be seen if
Indian companies can increase R&D expense now that they earn sustainable and
decent profits.
3.2. R&D expense as a percentage of sales revenue (Exhibit 14) for Indian companies
has remained flat at c.0.8% till FY16 but increased marginally to c.0.9% since
FY17. We note a) our analysis is based on the reported P&L numbers and could be
impacted if some of the R&D expense is capitalised and b) UPL had significant R&D
spending in FY13 and FY17 resulting in volatility in R&D spending growth.
Based on the above three points, since our last report, Chinese companies seem to have
recovered some of the competitive edge (particularly in employee cost but need to monitor if
that is sustainable) while Indian companies have stepped up their R&D expense.
Given the sharp increase in employee costs for Indian companies, we now analyse if the
margins and return ratios of Indian companies vis-a-vis Chinese companies to check for any
deterioration.

Margins and return ratios of Indian vs Chinese companies

Chinese companies have typically reported better EBIDTA margins compared to
Indian companies but they now have stabilised at around 18% (Exhibit 15). We
therefore conclude that EBIDTA margins have been broadly stable since our last
report.
Exhibit 15. EBITDA Margins (%)

25.0%
19.5% 18.9%
20.0% 18.2% 17.7%
17.6% 17.7%
16.8%
15.6%
15.0%
15.0% 14.6%
13.3%
12.1%
10.0%
5.0%
0.0%
FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
India China
Source: Bloomberg, Company, JM Financial

EBIDTA margins of Indian companies have broadly mirrored the EBIDTA margins of
Chinese companies. We believe that the raw material cost for both Indian and
Chinese chemical companies have to be broadly similar since the raw materials are
likely to be primarily commodities. If the EBIDTA margin is similar and raw material
cost is similar, it implies that the operating costs for both the India and China are
similar. However, we have noted that Chinese companies have lower employee
cost and effluent treatment costs. Therefore, can it be argued that Chinese
companies have taken advantage of the lower employee cost and effluent
treatment costs to invest in R&D?
RoCE / RoE comparision
We have previously reported that despite lower EBIDTA margins, Indian companies
have generally been able to deliver higher RoE and RoCEs. During FY18, there was
a compression in the RoE / RoCE for Indian companies, likely because China sales
increased (as reported previously in our section on employee costs).
Exhibit 16. ROCE comparison (%) Exhibit 17. ROE comparison (%)
25.0% 20.0% 18.5% 18.8% 18.8%
17.3% 17.3%
19.5% 18.0% 16.5% 16.9%
19.7% 19.4%19.1% 15.8%
20.0% 17.6% 16.0% 14.0% 14.1%
17.0% 17.0% 16.6% 13.3%
15.0% 14.0% 12.4% 12.3%
14.7% 14.5%
15.0% 13.6% 12.0% 10.0%
12.8%
10.0%
10.0%
10.0% 8.0%
6.0%
5.0% 4.0%
2.0%
0.0% 0.0%
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial
Stricter environmental norms in CY19 (China REACH and land pollution norms) for
Chinese companies could increase expenses towards environment protection

(both capital expenditure and operating expenditure) and could provide Indian
companies an opportunity to increase R&D expense while maintaining margins.
Indian chemical companies benefit if the rupee depreciates

FY19 has seen the rupee fall to as low as INR/USD 74.39, a fall of 6.41% from the
average of INR/USD 69.91 (as on 21 Feb’19). Last year, the average INR/USD was
65. Given such volatility, it is imperative to track the impact of forex fluctuations
on EBITDA and PAT. For FY18, companies had reported PBT sensitivity (Exhibit 18).
We note that this was the exposure at the end of the reporting period and not
exposure during the year. However, assuming that the exposure remains the
same, it can help us analyse the impact of rupee depreciation and identify
companies which have highest sensitivity to forex.
Exhibit 18. Reported PBT sensitivity on 1 % depreciation (INR mn)

140.0
123.6
120.0
100.0
PBT (in mn)
80.0
60.0
40.0
20.0 13.4 13.9

1.6
0.0
Fine Organics Galaxy Surfactants Navin Fluorine SRF
Source: Company, JM Financial
Keeping the same rate as FY18, we estimated the EBIDTA impact and PAT impact
for FY19. Our estimates show a range of EBITDA impact from 0.12% to 2.55%
and PAT impact from 0.12% to 4.28% for 1% depreciation in INR over the
average INR/USD (Exhibit 19). A similar appreciation in INR will have an opposite
effect for a similar amount.
Exhibit 19. Currency sensitivity on EBITDA and PAT

2018 - Forex 2019 - Forex
(if INR depreciated by 1%) (if INR depreciates by 1%)
Company EBIDTA Impact PAT Impact EBIDTA Impact PAT Impact
Fine Organics 0.77% 0.80% 1.22% 1.38%
Galaxy Surfactants 0.48% 0.73% 0.90% 1.12%
Navin Fluorine 0.08% 0.06% 0.12% 0.12%
SRF 1.36% 2.13% 2.55% 4.28%

Since the companies under our coverage are mainly export-oriented, depreciation
of the rupee gives a positive impact at EBITDA and PAT level. Hence, if the rupee
continues to depreciate, companies under coverage will benefit from it.
After the update on the financials of Indian chemical sector, in the next part of the report, we
analyse which part of the chemical sector could be at risk if Chinese companies were to
increase the production. The Chemical sector is very large and it is not feasible to analyse all
the chemicals in a single report. Hence, in this report, we analyse only one organic (Benzene),
one inorganic (Fluorine) and oleochemicals to check if these chains will be impacted if China
increases production.
Analysing some chemical chains for competitive advantage

In general, raw materials for most chemical companies are commodity chemicals
and therefore would not provide a competitive edge (excluding the cost of
transportation). We analyse four chains (detailed below) to identify Chinese vs. India
strategic advantage. We have used HS code-based data for analysing the import-
export data in the following chains
1) Fluorine-based chemical chain (representative of inorganic chemicals)
2) Benzene-based chemical chain (representative for organic chemicals) and
3) Oleochemicals
4) Dye Intermediates
1. Fluorine-chemistry based companies - CY19 outlook: Raw material cost pressure may China is one of the top 4 global
ease after 2QCY19. exporters of Fluorspar and India has
All fluorochemicals are derived initially from the manufacture of hydrofluoric acid been majorly importing from China
(HF). HF is produced from fluorspar. Aluminium industry (which uses acid grade or in the past. But things are changing
high purity fluorspar) and steel industry (which uses metallurgical spar) are major with the diversification of sourcing
users of fluorspar apart from chemicals and fluoropolymers. from various Indian companies.
Exhibit 20 below provides a) world production of fluorspar, b) China’s production
of fluorspar and c) the share of China’s production in total world production of
fluorspar. Exhibit 21 below provides a) China’s exports of fluorspar (HS code:
292522) and b) % of Chinese fluorspar (HS code: 292522) production exported.
Exhibit 20. Fluorspar production (‘000 tons) Exhibit 21. China’s Flourspar exports (‘000 tons)
100% 700 20.0%
17.7%
2790
2560
2710
2820
2670
2370
2590
2270
2130
2200
90% 18.0%
600
80% 16.0%
65.0% 66.0% 64.1% 500
70% 62.5% 62.2% 63.3% 14.0%
59.5% 11.7% 9.2%
60% 53.8% 53.1% 54.9% 12.0%
400
50% 10.0%
300 6.4%
40% 6.8% 6.0% 8.0%
6.1%
5.3%
30% 200 3.9% 4.0% 6.0%
20% 4.0%
100
3250
2900
3300
4700
4400
4400
3800
4400
3800
3800
574
196
386
433
262
283
231
171
201
153
10% 2.0%
0% 0 0.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China Rest of World % of World production Export ('000 tonnes) Export as % production
Source: U.S. Geological Survey, JM Financial Source: ITC calculations based on UN COMTRADE and ITC statistics, U.S. Geological Survey, JM
Financial
Based on the above, it can be stated:

1.1. China dominates the world supply of fluorspar with more than 60% of the world
production.
1.2. Exports as a percentage of production has declined this can mean that China uses
most of the fluorspar domestically. Exports as % of fluorspar production have
declined from c. 17.7% in 2008 to c. 4.0% in 2017.
Exhibit 22 and Exhibit 23 (below) provide an overview of fluorspar industry in

India. India is an importer of fluorspar (HS code:252922) and imports c. 37% from
China (though India has diversified the imports over the last decade)

Exhibit 22. Total fluorspar imported by India (‘000 tons) Exhibit 23. Major exporters of fluorspar to India (by volume)
250 90%
78%
80%
194
200 70%
174
60%
141 139 138 144
150 50%
118 122
40% 37%
30% 29%
100 83
20%
55
50 10% 14%
0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 China Thailand South Africa
Source: ITC calculations based on UN COMTRADE and ITC statistics, JM Financial Source: ITC calculations based on UN COMTRADE and ITC statistics, JM Financial
1.3. Clearly, China has a natural advantage in fluorine chain given the domestic
availability of fluorspar. Therefore, Indian companies may be able to compete in
the higher value-added specialty chemicals and CRAMS business, but China is
likely to have a competitive edge in inorganic fluorides.
To substantiate the thesis that China has an edge in inorganic fluorides, we

reviewed the data on global aluminium fluoride (HS code: 282612) and
refrigeration gas (R-22, HS code: 290371) export. China is the largest exporter of
both fluoride of aluminium (Exhibit 24) and refrigeration gas (Exhibit 25).
Exhibit 24. Aluminum fluoride export data shows China’s might Exhibit 25. India increasing chlorodifluoromethane exports
60% 90%
80%
50% 54% 82%
51% 70%
50% 74% 73%
40% 60% 72% 72%
68%
42% 42%
50%
30%
40%
20% 26% 30%
16%
20% 13% 13%
8% 10%
10%
2% 1% 1% 1% 0% 0% 10% 0%
0% 0%
2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
Thus Chinese fluorine companies have a strategic advantage in organic fluorides

and refrigeration gas business and Indian companies may only have to compete
for higher value-added products like specialty chemicals, CRAMS, etc.
We now analyse the outlook for fluorspar and fluorine in 3 sections – short-term
(next few quarters), medium-term (from next few quarters to say five years) and
long-term (beyond five years)
1.3.1. Short-term – next few quarters:

Over the next few quarters (i.e. early CY19), the outlook for fluorspar
companies is likely to be facing higher Fluorspar prices. This is because China
has increased focus on environmental issues related to both the fluorine
industry and fluorspar mining. Recently, it announced a shutdown of
aluminium capacity by 30% from mid-Nov 2018 to mid-Mar 2019.
Additionally, construction of a sizable alumina smelter plant was cancelled.
Similarly, many steel companies had to shut down due to environment

inspection. These factors have resulted in a decrease in domestic demand for

fluorspar within China.
This should have resulted in lower fluorspar prices, but China has also cracked
down on fluorspar mining and this crackdown on mining is likely to continue
until 1QCY19. The crackdown has resulted in higher cost for Chinese fluorspar
producers and a shutdown of some fluorspar mines during winter.
Consequently, fluorspar prices have risen to the highest in the last two
decades (Exhibit 26).
Exhibit 26. Fluorspar prices at seven-year high
Source: Tertiary Minerals plc., Industry

The increase in fluorspar prices may likely take some time to be passed through to
consumers and therefore, fluorine companies are likely to face margin pressures in
1QCY19. Prices could stabilise from 2QCY19 if Chinese fluorspar production starts
ramping up post winter.
1.3.2. Medium-term –up to about five years:

However, if we look at beyond next few quarters, a fluorspar mine was
commissioned in Canada in CY18 (which will continue to ramp up production in
CY19) and South African fluorspar production (which is expected to start in CY19)
would also provide some relief in 2HCY19. Additionally, Chinese production cuts
will be reversed post winter ramping up production. Hence, we see lower price
pressures in 2HFY20.
Therefore, if we consider medium-term outlook for fluorspar, Chinese companies
will have a strategic advantage in the medium-term on the back of reserves.
1.3.3. Longer-term – beyond five years:

We note that while China is the largest producer of fluorspar globally (Exhibit 20),
it has just c.10 year reserve / production ratio (Refer our Navin Fluorine Initiating
coverage report page no. 26). We also note that Kenya, South Africa and Mexico
have significant fluorspar reserves that are almost similar in size to Chinese
reserves. Hence, later (say over 5/7 years), as other countries develop fluorspar
reserves; Chinese companies may not have a structural advantage.

2. Benzene chain: Crude price to drive raw material cost but China does not have a
strategic advantage
Next, we analyse benzene as a major organic chemical. We note that while this
analysis is for benzene, it could be extrapolated to other organic chemicals.
Benzene is derived from crude oil (during the refining process) and India has a
surplus refining capacity (vis-à-vis the domestic demand). Therefore, India is also
surplus in benzene. In fact, benzene (HS code: 290220) is one of the highest
exported organic chemicals from India with exports of >10 lakh tons in CY17. This
translates to c.20% of the total volume of organic chemicals exported from India.
On the other hand, for China, benzene is one of the highest imported products.
During CY17, China imported c.25 lakh tonnes of benzene (Exhibit 27) which is c.
4.6% of the total volume of organic chemicals imported. ICIS in its China Outlook
2019 report expects Benzene consumption to increase by 8.5% over CY18 and
reach 15.7m tonnes by CY19 based on growth in downstream capacity expansion
in styrene monomer, phenol, acetone and caprolactum sectors. ICIS also expects
output to increase by 7.4% YoY and reach to 13.2m tonnes by CY19. Further,
China’s benzene capacity is projected to expand by c.15% to reach 20.4m tonnes,
which can provide sufficient capacity to cater to growing domestic consumption
beyond 2019.
Exhibit 27. Benzene: India exports while China imports (mn tons) Exhibit 28. China’s import from India (USD mn)
3.00 800.0
673.0
700.0
2.50
2.50 600.0
2.00
500.0
1.50 400.0
1.04
300.0
1.00
200.0
0.50 63.1
100.0
23.7 25.4
0.00 0.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 P-Xylene Benzene
India Benzene Exports China Benzene Imports 2013 2014 2015 2016 2017
Source: ITC calculations based on UN COMTRADE and ITC statistics, JM Financial Source: Chemical Weekly, JM Financial
We also note that, one of the derivatives of benzene - para-xylene (HS Code:
290243), which is used to make PET, has seen a sharp increase in imports into
China from India (Exhibit 28). This could be due to an increase in the domestic
Chinese demand for PET and commissioning of Reliance’s PX plant in Jamnagar.
We will also discuss a little about cyclic hydrocarbons (HS Code: 2902) which are
primarily derived from benzene. India has been an exporter of cyclic hydrocarbons
(excluding benzene) for the last 5 years (Exhibit 29 and 30) while China has been
an importer for the past 5 years. This would substantiate our argument that Indian
organic (like Benzene) intermediate manufactures were globally competitive even
before the recent environmental issues in China.

Exhibit 29. Export of Cyclic hydrocarbons (‘000 tons) Exhibit 30. Import of Cyclic Hydrocarbons (‘000 tons)
1800 1701 25000
1600
19323
1400 1282 1266 20000
17298 17484
1200 15565
14542
983 15000
1000 836
800
10000
600
386
400 224 228 5000
202 2395 2197
145 1668 1680 1873
200
0 0
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
We can therefore conclude that China does not have a strategic advantage in
benzene and its derivatives. Thus, Indian companies in the benzene chain are likely
to be less impacted if Chinese production restarts.

3. Oleochemical industry – neutral to positive for India

The derivatives of palm oil, palm kernel oil, and rapeseed oil are important raw
materials for oleochemical companies in India (Fine Organics, Galaxy Surfactants).
Other oils used by oleochemical companies include mustard oil, castor oil,
soyabean oil, and other vegetable oils. We focus on palm oil and rapeseed oil (and
their derivatives) as these are the largest consumed oils for industrial use.
3.1. Palm oil and its derivatives.
India and China both import a major portion of palm oil from Malaysia and
Indonesia leaving neither country at a strategic advantage. Further, adding
shipping costs would make it unviable to ship raw palm oil or its derivatives to
China and subsequently ship back derivative-based chemicals into India. Hence,
China is not a big player in Indian domestic palm oil derivatives. We will focus on
lauryl alcohol to validate that China is not a big player in the Indian palm oil
derivative market.
3.1.1. Lauryl Alcohol
Lauryl alcohol is a derivative of palm kernel oil and mainly used as a
surfactant (cleansing agent). It is used in soaps, shampoos, shower gels,
cosmetics and some pharmaceuticals. It is an important raw material for
Galaxy Surfactants.
The price of lauryl alcohol has been volatile in the last three years (Exhibit
32). China and India both have a significant impact on prices on back of
growing demand of the end user surfactant industry.
Exhibit 31. Palm oil price (INR/kg) Exhibit 32. Lauryl alcohol price (FOB SE Asia) in USD per ton
70 3,000
2,800
65
2,600
60
2,400
55 2,200
2,000
50
1,800
45
1,600
40 1,400
1,200
35
1,000
Jan-2016
Mar-2016
May-2016
Jul-2016
Sep-2016
Nov-2016
Jan-2017
Mar-2017
May-2017
Jul-2017
Sep-2017
Nov-2017
Jan-2018
Mar-2018
May-2018
Jul-2018
Sep-2018
Nov-2018
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Source: Chemical Weekly, JM Financial Source: ICIS prices, Company, JM Financial
In line with our thesis that China does not have a strategic advantage in this
chain, Exhibits 33 and 34 (data for HS Code: 290517) reflect that China is a
net importer of fatty alcohols (including lauryl alcohol) while India is a net
exporter. In fact, India exports small quantities of fatty alcohols to China.
While China may find it difficult to supply lauryl alcohol to India, globally,
both countries can be competitive (depending on the freight from China /
India to the destination country). Thus, India could have an advantage
exporting to Africa and Middle East (AME) regions. Galaxy Surfactants
intends to focus on Africa, the Middle East and Turkey. (Galaxy has also
established a manufacturing base in Egypt).

Exhibit 33. Import of Fatty Alcohol (incl. Lauryl alcohol) (‘000 tons) Exhibit 34. Export of Fatty Alcohol (incl. Lauryl alcohol) (‘000 tons)
45.0 20.0 18.6 18.8
39.6
40.0 18.0 16.8
35.0 33.1 16.0 14.7

31.0 14.0
30.0
27.7 14.0
30.0
12.0
25.0
10.0
20.0
8.0
15.0
6.0
10.0 4.0 2.9
2.2
1.3 1.8 1.2
5.0 1.9 2.2 1.5 2.3 2.3 2.0
0.0 0.0
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Imported by India Imported by China Exported by India Exported by China
Interestingly, linear alkylbenzene sulfonic acid (LABSA) can be used to make

anionic surfactants (another type of surfactant) which are used in detergent
powders and bars. LABSA is a widely used product in India and India’s
import of linear alkylbenzene (LAB), an important raw material, has been
increasing (Exhibit 35). Therefore, while India exports Benzene (as noted
previously), India imports Benzene derivative LAB. India imports LAB mainly
from Middle East, Thailand, Egypt, and China. Therefore, China has a
strategic advantage for LABSA based surfactants.
Exhibit 35. India’s LAB import has been growing YoY

250
200
150
100
50
100
100
138
121
193
214
223
38
87
80
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
India import ('000 tons)
Source: ITC calculations based on UN COMTRADE and ITC statistics, JM Financial
However, in our coverage universe, only Galaxy Surfactants has some

dependence on LAB based products and that too not for Indian markets – it
uses LABSA in Egypt. Hence, even if Chinese manufacturing increases,
Galaxy Surfactants is unlikely to be impacted.

3.1.2. Lauric Acid

Lauric acid, a fatty acid, is also a derivative of palm oil and is used for various
purposes by Fine Organics. Exhibit 36 and 37 shows the dynamics of import
and exports of fatty acids (HS Code: 291570).
Exhibit 36. Import of Fatty acid – India vs China (‘000 tons) Exhibit 37. Export of Fatty acid – India vs China (‘000 tons)
40 37 90
35 80
35 80
70 66
30 59 60
59
24 60
25 21
50
20 17
16 15 40
13 14
15 11 30
18 20 19
10 14
20 13
5 10
0 0
2013 2014 2015 2017 2013 2014 2015 2017
Based on the above exhibits, we observe that India is a net exporter and
China, a net importer of fatty acids. Thus, even Indian lauric acid-based
companies are unlikely to be impacted if Chinese manufacturing comes
back.
3.2. Rapeseed oil and its derivatives

Fine Organics uses derivatives of rapeseed oil and several other vegetable oils.
There is usually a lack of clarity between rapeseed and canola since both plants
have bright yellow colored flowers. However, the key difference is that canola was
created through traditional cross-breeding (in the 1970s) to remove the pungent
odour (present in rapeseed oil) by removing glucosinolates and erucic acid. Canola
oil is used mainly for cooking while rapeseed is used primarily for animal feeds and
other industrial applications (very small quantity is used for cooking).
Exhibit 38. Rapeseed oil price (INR/kg) Exhibit 39. Rapeseed Oil imports – India vs China (tons)
95 2500
90 2,020
2000
85
80 1500
1,163
75 891
1000 783
698
70 582
449
500 268
65
18 5
60 0
Jan-2016
May-2016
Jan-2017
May-2017
Jan-2018
May-2018
Mar-2016
Nov-2016
Mar-2017
Nov-2017
Mar-2018
Nov-2018
Jul-2016
Sep-2016
Jul-2017
Sep-2017
Jul-2018
Sep-2018
2013 2014 2015 2016 2017
India China
Source: Chemical Weekly, JM Financial Source: Indexmundi (citing: United States Department of Agriculture), JM Financial
Rapeseed oil prices have been fluctuating and India’s imports (HS code:
15149990) have declined to practically zero (Exhibit 39).
Hence, we believe that even if Chinese manufacturing comes back, it is unlikely to
impact rapeseed oil-based companies like Fine Organics.

4. Dyes and dyes intermediates – integrated players can grow but China still a risk in dye
intermediates
Dye and dyes intermediates supply to end-user industries like textile, plastics,
paints etc. According to the Centre for Advance Trade Research, the global dye
and dyestuff market in 2017 was USD 5.7bn. Textile sector is a major end-user
with c.80% of the total production. The market which was earlier consolidated in
Europe has moved to China and India. Asia-Pacific has a c.40% of the global
share, while India accounts for 7% of the global production. Globally, organised
segment has a share of c.65% while in India, organised sector share is c.50%.
4.1. Dyes
Dyes can be further classified into various types like reactive, organic, disperse,
azo, etc. In this report, we analyse two types of dyes – organic and reactive dyes.
Organic dyes are sourced from natural things like plants and add richness to
natural materials like wool, cotton, and leather etc. On the other hand, reactive
dyes are a class of dyes that attach themselves to their substrates by chemical
reaction to form covalent bonds and are much less likely to be removed by
washing easily in comparison.
Exhibit 40. Exports of Organic Dyes Exhibit 41. Exports of Reactive Dyes
1,400 26.9% 30.0% 350 60.0%
24.7% 49.6%
23.9%
1,200 22.7% 25.0% 300 41.1%46.2% 45.4% 46.8% 50.0%
21.3% 21.5%
19.6% 32.2% 39.9%
1,000 18.6%19.1% 250
20.0% 30.3% 21.6%34.5% 40.0%
800 15.0% 200
14.3% 13.0%13.7%12.4% 15.0% 30.0%
12.0%
600 11.1%11.6%11.7% 10.5% 150 20.8%
19.1% 17.9% 18.1% 18.1% 17.3%
9.7%
10.0% 14.7% 15.9% 14.1% 12.7% 20.0%
400 100
5.0% 50 10.0%
1,000
1,183
1,004
200
224
218
212
203
245
277
265
238
253
286
840
814
950
871
996
903
953
0 0.0% 0 0.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
World Export Volume India Export share (%) China Export share (%) World Export volumes India Export share (%) China Export share (%)
Based on Exhibit 40 and 41, we can conclude:

4.1.1. India is a major exporter of organic dyes (HS Code: 320412) and reactive dyes
(HS code: 320416), exporting more than China in both these segments. This
was true even during the CY08-CY11 when China had not yet restricted
production.
4.1.2. After 2015, India is growing its export share while China’s export share
continues to decline. Therefore, India has benefitted after China restricted
production on environmental grounds.
Therefore, we believe that organic and reactive dye manufacturers may not
be affected much even if China relaxes environment norms to result into
increase in Chinese production.
4.2. Dye intermediates

Dye intermediates are products like H-acid and vinyl sulphone which are used to
make dyes. According to industry sources, India has vinyl sulphone (VS) / H-acid
production capacity of 67,400 MTPA / 43,700 MTPA while China has a vinyl
sulphone (VS) / H-acid production capacity of 107,000 MTPA / 89,000 MTPA
respectively. Exhibit 42 and 43 (below) provide data on import and export of vinyl
sulphone (HS Code: 29041040).

Exhibit 42. India is net exporter of VS; exports small % to China Exhibit 43. But India imports VS primarily from China
15.1%
18 16.0% 9.0 100.0% 99.8% 100.5%
14.2% 99.8%
99.7%
16 13.0% 10.8% 14.0% 8.0 100.0%
14 7.0 99.5%
12.0%
99.0%
12 6.0
9.4% 10.0% 98.5%
10 5.0
8.0% 97.1% 98.0%
8 4.0
6.0% 97.5%
6 3.0
97.0%
4.0% 2.0
4 96.5%
2 2.0% 1.0 96.0%
17 14 13 15 15 6.1 6.4 3.7 4.9 8.5
0 0.0% 0.0 95.5%
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Total exports ('000 tons) China's share % Total imports ('000 tons) China's share %
From the above charts

4.2.1. India is a net exporter of VS and exports c.10-15% of the total exports to
China. Most of the exports are to South Korea (c.40% of total exports).
Interestingly, our data shows that exports to South Korea increased by c.
150% between CY13 to CY17.
4.2.2. However, almost the entire imports of VS into India come from China.
To conclude, China has large capacities in VS (c. double that of India’s capacity) and
more importantly, industry participants informed that China’s capacity is
concentrated while India’s capacities are more fragmented. Thus, China has an
advantage in VS not only in terms of scale but also because India imports most of its
VS requirements from China.
Similarly, for H-acid (HS Code: 29222160) the numbers give an interesting story
(Exhibit 44 and 45).
Exhibit 44. H-acid exports and share of exports to China from India Exhibit 45. H-acid imports of India
13.2%
6.0 14.0% 9.0 102.0%
12.3% 100.0%
99.7% 99.4%
8.0 99.2%
5.0 12.0% 100.0%
7.0
10.0% 98.0%
4.0 6.0
8.0% 5.0 92.6% 96.0%
3.0
6.0% 4.0 94.0%
2.0 3.0
4.0% 92.0%
2.0
1.0 0.0% 2.0% 90.0%
0.0% 0.9% 1.0
2.4 2.5 3.9 5.1 3.8 8.2 6.5 5.3 4.4 4.4
0.0 0.0% 0.0 88.0%
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Total exports ('000 tons) China's share % Total imports ('000 tons) China's share %
Based on the above we can conclude:

4.2.3. India has broadly increased its H Acid export volume (except for CY17) and
share and has significantly increased exports to China. However, this was
primarily during the period of CY16/17 when environmental reasons had
impacted Chinese production.
4.2.4. The total imports (Exhibit 45) have declined from c.8,200 tonnes to c.4,400
tonnes. This could be on the back of new capacity additions as Indian
companies took advantage of Chinese curtailment to increase capacities.
4.2.5. Even after the decline in India’s overall imports of H-acid, India still imports
most of its H-acid from China.
Again, China has almost double the capacity of India and Chinese capacities are
fairly concentrated while Indian capacities are fragmented. Clearly, Indian H-acid
manufacturers can be at risk if Chinese capacities come back on stream.
Based on the above analysis, we provide a quick overview of the impact on some of the
companies under our coverage.
Exhibit 46. The industrial situation if China comes back…

Company Chemistry followed Effect on China coming back Impact Remark
Technical expertise and independent product profile. Capacity to

Fine Organics Oleochemistry Zero
be doubled soon.
Weak overlap on final products and expertise in the value-chain

Galaxy Surfactants Oleochemistry Zero
with planned capacity expansion
China's stronghold in raw material (Fluorspar) is compensated by

Navin Fluorine Fluorine Medium Navin's expertise in the Fluorine chemistry (CRAMs) with planned
capacity expansion but margin pressure will remain till 1HCY19.
China's stronghold in raw material (Fluorspar). SRF has c. 50% of

SRF Fluorine Low
revenues coming from non-fluorine businesses.
Source: JM Financial, Industry
After identifying industries that could face a challenge if Chinese capacities come
back either after environmental norms are relaxed or environmentally cleaner
capacities are introduced, we need to look at the employee strength of India
compared to China to have a better outlook for the Indian chemical sector.

28 February 2019 India | Chemicals | Company Update
SRF Ltd | BUY

Capacity expansion to lead the growth
SRF is a multi-business entity engaged in the manufacturing of industrial and specialty Mehul Thanawala
[email protected] | Tel: (91 22) 66303063
intermediates. Equipped with state-of-the-art R&D facilities, SRF has filed 155 patents for
Ashish Mendhekar
R&D and technology so far, of which 23 have been granted. SRF has 4 major businesses – [email protected] | Tel: (91 22) 66303073
Chemicals, Packaging films, technical textiles, and others which contributed c.28%, 29%, Ankit Kabra
36%, and 7% resp. in 9MFY19. SRF has 12 manufacturing plants in India, with 2 in Thailand [email protected] | (91 22) 62241877
and 1 in South Africa and export to more than 75 countries. Segmentally, Chemicals business
(CB) has seen some margin pressure on account of increasing prices of fluorspar (as
mentioned previously), a key raw material. Subsequently, SRF management said that CB in
3QFY19 was impacted due to higher depreciation and fixed costs on account of new
facilities. Packaging Films business (PFB) is usually cyclical and is impacted by volatility in raw Recommendation and Price Target
material (polyethylene terephthalate, a derivative of crude oil) prices. Technical textile Current Reco. BUY
business (TTB) is growing with portfolio improvement with higher sales of value-added Previous Reco. BUY
Current Price Target (12M) 2,250
products. SRF reported 3QFY19 revenue of INR 19.6bn (+3% QoQ/ +41% YoY / +2% JMFe)
Upside/(Downside) -0.1%
and EBITDA of INR 3.3bn (-1% QoQ/ +43% YoY) missing JMFe by 6% on higher other Previous Price Target 2,000
expense while PAT was reported at INR 1.7bn (+10% QoQ/ +26% YoY). SRF also announced Change 12.5%
Capex of INR 2.2bn for 2 capacity expansion projects over 3 year period. We are positive
about revival in specialty chemicals business and strategy to grow through capacity Key Data – SRF IN
Current Market Price INR2,253
expansion. We maintain BUY with TP of INR 2250 (previous TP of INR 2000).
Market cap (bn) INR129.5/US$1.8
 Capacity expansion plans and quarterly result takeaways: (i) RoCE for CB/PFB/TTB was Free Float 39%
calculated at 5%/11%/20%. The low return in CB business is due to lagging recovery in Shares in issue (mn) 57.4
Diluted share (mn) 57.4
agrochemicals and pharma industry. (ii) CB revenue was at INR 5.9bn (+8% QoQ/ +46%
3-mon avg daily val (mn) INR929.1/US$13.0
YoY/ -2%JMFe). A new CB plant was recently commissioned which is expected to start 52-week range 2,447/1,530
contributing from 4QFY19. Also, SRF announced plan to invest INR 1.4bn for CB capacity Sensex/Nifty 35,905/10,807
expansion at Dahej. (iii) PFB revenue was at INR 7bn (+1% QoQ/ 63% YoY/ -3% JMFe) INR/US$ 71.2
and the strong YoY growth may be due to contribution from new capacities and focus on
Price Performance
value-added products. (iv) TTB revenue was 5.5bn (+1% QoQ/ +21% YoY/ -7% JMFe) as % 1M 6M 12M
the segment operated at optimal capacity utilisation. SRF plans to invest INR 800mn for Absolute 8.5 14.2 18.4
capacity addition in spinning and textile capacity in Manali and Gwalior over next 3 years. Relative* 8.9 23.1 13.2
(v) Others business had revenue of INR 1.3bn (-4% QoQ/ +13% YoY). * To the BSE Sensex
 Growth drivers: (i) SRF is expected to grow EBIDTA at c.25% over the medium term. (ii) In
TTB, specialty films consitute c.70% to the revenue with a margin that is 15% higher
than commodity films (iii) SRF announced plans to double the refrigerantion gas capacity
from c.25,000 TPA to c. 50,000 TPA at an investment of INR 3.8bn. (iv) Hungary and
Thailand capacities for packaging films are expected to be commissioned in Mar ‘20 and
Sep ‘20 respectively.
 Maintain BUY with TP of 2250: We maintain BUY, valuing SRF based on SOTP at
EV/EBITDA of (i) Technical Textile at 6x, (ii) specialty chemicals at 12x (iii) packaging films
to 7x (iv) Refrigerant gases (134a) at 10x, and (v) Others at 6x , to arrive at TP of 2250.
Key risks to our estimates include delayed ramp-up in chemicals segment.
Financial Summary (INR mn)

Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 47,394 55,108 74,956 85,263 96,464
Sales Growth (%) 4.8 16.3 36.0 13.8 13.1
EBITDA 9,694 9,062 13,397 15,726 17,522
EBITDA Margin (%) 20.1 16.2 17.6 18.2 17.9 JM Financial Research is also available on:
Adjusted Net Profit 5,150 4,617 6,079 7,994 9,543 Bloomberg - JMFR <GO>,
Diluted EPS (INR) 89.7 80.4 105.9 139.2 166.2 Thomson Publisher & Reuters
Diluted EPS Growth (%) 19.8 -10.3 31.7 31.5 19.4 S&P Capital IQ and FactSet
ROIC (%) 10.7 8.0 11.1 12.9 14.4
ROE (%) 17.3 13.7 15.9 18.1 18.4
P/E (x) 25.1 28.0 21.3 16.2 13.6 Please see Appendix I at the end of this
P/B (x) 4.1 3.7 3.2 2.8 2.4 report for Important Disclosures and
EV/EBITDA (x) 15.4 17.4 11.7 9.6 8.2 Disclaimers and Research Analyst
Dividend Yield (%) 0.5 0.5 0.6 0.7 0.9
Source: Company data, JM Financial. Note: Valuations as of 27/Feb/2019
Certification.
JM Financial Institutional Securities Limited

SRF Ltd 28 February 2019
3QFY19 result
Exhibit 47. Operational and financial highlights
3QFY19 E3QFY19 Variance 2QFY19 QoQ 3QFY18 YoY
Actual Estimate Actual Actual
Segmental Performance
Technical Textile Business Revenues INRmn 5,478 5,876 -7% 5,436 1% 4,522 21%
Technical Textile Business EBIT INRmn 817 801 2% 880 -7% 763 7%
Technical Textile Business EBIT Margins % 15% 14% 129bps 16% -128bps 17% -194bps
Chemicals & Polymer Business Revenues INRmn 5,860 6,002 -2% 5,420 8% 4,018 46%
Chemicals & Polymer Business EBIT INRmn 766 1,200 -36% 630 22% 733 5%
Chemicals & Polymer Business EBIT Margins 13% 20% -691bps 12% 146bps 18% -516bps
Packaging Films Business Revenues INRmn 7,026 7,229 -3% 6,959 1% 4,302 63%
Packaging Films Business EBIT INRmn 881 1,077 -18% 1,204 -27% 629 40%
Packaging Films Business EBIT Margins % 13% 15% -237bps 17% -476bps 15% -209bps
Others INRmn 1,292 1,353 -4% 1,140 13%
Others EBIT INRmn 121 123 -2% 121 0%
Others EBIT% % 9% 9% 24bps 11% -126bps
Financial:
Total Income INRmn 19,640 19,346 2% 19,154 3% 13,971 41%
Gross Margin 42.6% 43.1% 42.1% 47.4%
Raw Material Consumed INRmn 11,880 10,802 10% 10,860 9% 7,518 58%
Purchase of Goods in Trade INRmn 120 208 124 -3% 96 25%
(Increase)/ Decrease in Stock INRmn -732 0 108 -780% -263 179%
Power & Fuel INRmn 1,585 1,705 -7% 1,618 -2% 1,265 25%
Employee benefits expenses INRmn 1,305 1,354 -4% 1,259 4% 1,199 9%
Miscellaneous Expenses INRmn 2,173 1,741 25% 1,859 17% 1,840 18%
Operating Expenses INRmn 16,330 15,811 3% 15,827 11,655
EBIDTA INRmn 3,310 3,535 -6% 3,327 -1% 2,316 43%
EBITDA margin % 16.9% 18.3% 17.4% 16.6%
Depreciation INRmn 932 878 6% 880 770
EBIT INRmn 2,378 2,657 -11% 2,447 -3% 1,546 54%
Other non business Income INRmn 154 87 77% -34 -561% 420 NA
Interest Expense INRmn 544 510 7% 500 239
PBT INRmn 1,988 2,235 -11% 1,914 4% 1,727 15%
Taxes INRmn 508 492 3% 485 415
Tax as % of PBT % 16.7% 22.0% -534bps 25.4% 18bps 24.0% 152bps
PAT INRmn 1,657 1,743 -5% 1,512 10% 1,312 26%
PAT margin % 8.4% 9.0% 7.9% 9.4%
EPS `/share 28.83 30.36 -5% 26.31 10% 22.85 26%


Exhibit 48. TTB revenues and EBIT Exhibit 49. TTB RoCE’s
Technical Textile Revenues Technical Textile EBIT 25.0%

20.3%
6,000 18% 20.0% 17.8%
17% 16% 16%
5,000 14% 14% 14% 15%
14% 13.1%
15.0% 12.3% 12.0% 11.1%
4,000 12% 12% 12% 11.1%
11% 9.4% 10.1%
10%
3,000 10.0%
8%
2,000 6%
5.0%
4,530
4,879
5,073
4,759
4,522
4,622
5,014
5,436
5,478
4%
1,000
2%
- 0% 0.0%
Source: Company, JM Financial Source: Company, JM Financial
Exhibit 50. CB revenues and EBIT Exhibit 51. CB RoCE’s
Chemicals Business Revenues Chemicals Business EBIT

10.0% 8.7%
7,000 20% 9.0%
18% 18% 18% 8.0%
6,000 17% 18% 17% 16% 16% 7.0%
5,000 14% 6.0% 5.1% 5.2%
13% 13% 4.7% 4.7%
4,000 12% 12% 5.0% 4.0% 3.6% 3.9%
10%
3,000 4.0% 2.7%
8%
3.0%
2,000 6%
2.0%
3,604
4,791
3,567
4,011
4,018
5,066
4,774
5,420
5,860
4%
1,000 1.0%
2%
- 0% 0.0%
Exhibit 52. PFB revenues and EBIT Exhibit 53. PFB RoCE’s
Packaging Business Revenue Packaging Business EBIT 14.0% 12.2%

11.2% 10.7%
8,000 20% 12.0%
7,000 17% 18%
16% 10.0%
6,000 16% 15%
15% 14% 14% 8.0%
5,000 12% 13%
12% 6.1% 5.8% 5.7% 5.3% 6.2%
4,000 10% 11% 10% 6.0% 4.3%
3,000 8%
6% 4.0%
2,000
3,207
3,598
4,148
4,107
4,302
5,267
6,318
6,959
7,026
4% 2.0%
1,000 2%
- 0% 0.0%

Exhibit 54. Valuation of SRF

Particular Multiple EV
Technical Textile Business 3,198 6.0 19,188
Specialty Chemicals 7,568 12.0 90,821
Packaging Films Business 2,345 7.0 16,413
HFC-134a 4,906 10.0 49,061
Others -2,840 6.0 -17,038
Total Business EBITDA 15,177 1,58,444
Less
Gross Debt 31,418
Cash & Cash Equivalents 2,184
Equity Value 1,29,210
Share o/s 57
SRF price (Rs /share) 2,250


Company Background
SRF is a multi-business entity with manufacturing tyre cord fabrics to developing advanced
fluorine based intermediates (specialty chemicals). It also manufactures packaging films and,
fabrics and engineering plastics. It is a multiproduct, multi-locational (including 2
manufacturing plants outside India in South Africa and Thailand) entity with exports to
around 75 countries.
Investment thesis:
 De-risked business profile: With 4 major business segments, SRF has kept the
growth high even if one or two businesses remain stagnant for a quarter or two.
Expanding geographies make it viable for SRF to supply to customers in case of
macroeconomic hindrances in some part of the globe.
 Specialty chemicals business continues to be growing story: SRF is large domestic
player in fluoro-specialty chemicals and these products have found widespread
applications in agrochemicals and pharmaceutical industry. SRF continues to expand
capacities to cater to the growing demand from customers.
 Growing packaging films business: SRF is sole suppliers to many global companies.
SRF is focusing on increasing R&D and capabilities to add value-added products in
the portfolio.
Key risks:
 Currency Volatility: SRF has 2 plants outside India and export to c.75 countries.
Therefore, adverse currency movements can have a significant impact on company’s
profitability.
 Fluorspar price fluctuations: Major fluctuations in fluorspar prices globally will have a
corresponding impact on the margins and profitability of the Company.
 Slowdown in agrochemicals industry: The demand for the specialty chemicals
business is mainly driven by agro industry while pharmaceutical is the other
contributor.

Financial Tables (Consolidated)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 47,394 55,108 74,956 85,263 96,464 Shareholders’ Fund 31,827 35,645 40,847 47,686 55,851
Sales Growth 4.8% 16.3% 36.0% 13.8% 13.1% Share Capital 584 584 584 584 584
Other Operating Income 824 782 1,142 1,256 1,382 Reserves & Surplus 31,242 35,061 40,262 47,102 55,266
Total Revenue 48,218 55,890 76,097 86,519 97,846 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 23,892 30,157 39,478 42,489 42,797 Minority Interest 0 0 0 0 0
Personnel Cost 4,338 4,740 5,072 5,427 5,807 Total Loans 23,962 31,418 30,418 25,418 18,418
Other Expenses 10,294 11,931 18,150 22,877 31,720 Def. Tax Liab. / Assets (-) 2,840 2,914 2,914 2,914 2,914
EBITDA 9,694 9,062 13,397 15,726 17,522 Total - Equity & Liab. 58,629 69,978 74,179 76,018 77,183
EBITDA Margin 20.1% 16.2% 17.6% 18.2% 17.9% Net Fixed Assets 46,635 56,804 57,577 57,961 57,563
EBITDA Growth -0.4% -6.5% 47.8% 17.4% 11.4% Gross Fixed Assets 48,410 58,248 66,248 70,360 73,878
Depn. & Amort. 2,834 3,158 3,511 3,729 3,916 Intangible Assets 49 41 41 41 41
EBIT 6,860 5,904 9,886 11,997 13,607 Less: Depn. & Amort. 5,218 8,200 11,711 15,440 19,356
Other Income 730 1,151 350 442 407 Capital WIP 3,393 6,715 3,000 3,000 3,000
Finance Cost 1,018 1,239 2,129 1,779 1,289 Investments 1,959 1,218 1,218 1,218 1,218
PBT before Excep. & Forex 6,572 5,817 8,106 10,659 12,724 Current Assets 21,090 25,608 32,797 35,740 39,363
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 8,381 9,582 12,732 14,483 16,386
PBT 6,572 5,817 8,106 10,659 12,724 Sundry Debtors 6,569 6,807 10,268 11,680 13,214
Taxes 1,422 1,200 2,026 2,665 3,181 Cash & Bank Balances 961 967 1,545 1,324 1,510
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 143 151 151 151 151
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 5,036 8,101 8,101 8,101 8,101
Reported Net Profit 5,150 4,617 6,079 7,994 9,543 Current Liab. & Prov. 11,055 13,653 17,414 18,900 20,961
Adjusted Net Profit 5,150 4,617 6,079 7,994 9,543 Current Liabilities 8,389 10,785 14,546 16,032 18,093
Net Margin 10.7% 8.3% 8.0% 9.2% 9.8% Provisions & Others 2,666 2,868 2,868 2,868 2,868
Diluted Share Cap. (mn) 57.4 57.4 57.4 57.4 57.4 Net Current Assets 10,035 11,955 15,383 16,840 18,402
Diluted EPS (INR) 89.7 80.4 105.9 139.2 166.2 Total – Assets 58,628 69,977 74,179 76,018 77,183
Diluted EPS Growth 19.8% -10.3% 31.7% 31.5% 19.4% Source: Company, JM Financial
Total Dividend + Tax 829 829 878 1,155 1,378
Dividend Per Share (INR) 11.8 11.8 12.5 16.4 19.6
Cash Flow Statement (INR mn)

Dupont Analysis
Profit before Tax 6,572 5,817 8,106 10,659 12,724
Net Margin 10.7% 8.3% 8.0% 9.2% 9.8%
Depn. & Amort. 2,671 2,982 3,511 3,729 3,916
Asset Turnover (x) 0.8 0.9 1.0 1.1 1.3
Net Interest Exp. / Inc. (-) -730 -1,151 -350 -442 -407
Leverage Factor (x) 2.0 1.9 1.9 1.7 1.5
Inc (-) / Dec in WCap. -1,609 -1,914 -2,851 -1,677 -1,376
Others 0 0 0 0 0 RoE 17.3% 13.7% 15.9% 18.1% 18.4%
Taxes Paid -1,422 -1,200 -2,026 -2,665 -3,181

Operating Cash Flow 5,481 4,534 6,390 9,605 11,676 Key Ratios
Capex -5,730 -9,838 -8,000 -4,112 -3,518 Y/E March FY17A FY18A FY19E FY20E FY21E
Free Cash Flow -248 -5,304 -1,610 5,492 8,158 BV/Share (INR) 544.6 609.9 698.9 816.0 955.7
Inc (-) / Dec in Investments -1,276 -3,322 3,715 0 0 ROIC 10.7% 8.0% 11.1% 12.9% 14.4%
Others 7 823 0 0 0 ROE 17.3% 13.7% 15.9% 18.1% 18.4%
Investing Cash Flow -6,999 -12,337 -4,285 -4,112 -3,518 Net Debt/Equity (x) 0.7 0.8 0.7 0.5 0.3
Inc / Dec (-) in Capital -124 31 0 0 0 P/E (x) 25.1 28.0 21.3 16.2 13.6
Dividend + Tax thereon -829 -829 -878 -1,155 -1,378 P/B (x) 4.1 3.7 3.2 2.8 2.4
Inc / Dec (-) in Loans -1,190 7,456 -1,000 -5,000 -7,000 EV/EBITDA (x) 15.4 17.4 11.7 9.6 8.2
Others 730 1,151 350 442 407 EV/Sales (x) 3.1 2.8 2.1 1.7 1.5
Financing Cash Flow -1,413 7,809 -1,529 -5,713 -7,972 Debtor days 50 44 49 49 49
Inc / Dec (-) in Cash -2,931 6 577 -221 186 Inventory days 63 63 61 61 61
Opening Cash Balance 3,892 961 967 1,545 1,324 Creditor days 77 81 83 81 81
Closing Cash Balance 961 967 1,544 1,324 1,510 Source: Company, JM Financial

History of Earnings Estimate and Target Price Recommendation History

Date Recommendation Target Price % Chg.
4-Apr-16 Buy 1,450
13-May-16 Buy 1,380 -4.8
10-Aug-16 Buy 1,600 15.9
15-Nov-16 Buy 1,760 10.0
14-Feb-17 Buy 1,680 -4.5
24-May-17 Buy 1,680 0.0
10-Aug-17 Buy 1,670 -0.6
8-Feb-18 Buy 1,885 12.9
4-Nov-18 Buy 2,000 6.1

PI Industries | HOLD
Focus on R&D and exports providing growth momentum
PI Industries (PI) is an agri-based chemistry solution provider. It currently operates 3 Mehul Thanawala
formulation facilities as well as 8 multi-product plants at 3 manufacturing locations. It has
Ankit Kabra
successfully leveraged its capabilities across the agri-sciences value chain by providing [email protected] | (91 22) 62241877
integrated and innovative solutions to its customers through strategic partnerships. It has Ashish Mendhekar
strong research and development team, state-of-the-art manufacturing services, a strong
brand building team, robust distribution presence in India. We expect the agrochemicals
industry to grow at 8%-9% domestically over the medium term, as stated in our previous
report. PI operates in more than 30 countries across 6 continents and in FY18 had earned c.
63% of its total revenue from outside India market. PI reported 3QFY19 revenue at INR Recommendation and Price Target
Current Reco. HOLD
7.08bn (+32% YoY / -2% QoQ) beating JMFe by 14%. EBITDA was reported at INR 1.49bn
Previous Reco. HOLD
(+42% YoY / +10% QoQ) beating JMFe by 20%. PAT was reported at INR 1.07bn (+33% Current Price Target (12M) 800
Upside/(Downside) -12.3%
YoY / +14% QoQ) beating JMFe by 15%. While the export seems to push the revenues but
Previous Price Target 775
we wait for sustainability in CSM business. We maintain HOLD with TP of INR 800. Change 3.2%
 Strong volume growth in exports drives Revenue growth: (i) Revenue growth was driven Key Data – PI IN
by ~40% YoY growth in exports. In the conference call, management was confident that Current Market Price INR912
exports should continue to grow at c.20%. During the conference call, management has Market cap (bn) INR125.9/US$1.8
also indicated a double-digit growth for domestic revenue based on branded portfolio Free Float 42%
Shares in issue (mn) 137.3
and new launches. (ii) EBITDA margin for the quarter was reported at 21% (+152bps YoY
/ +239bps QoQ) against JMFe of 20%. (iii) Tax rate for the quarter was at 22.8% as 3-mon avg daily val (mn) INR88.4/US$1.2
against JMFe of 18%. (iii) Net Debt to Equity ratio for the company stands close to zero. 52-week range 933/676
Sensex/Nifty 35,905/10,807
 Other Key takeaways from conference call: (i) PI has indicated a capex of INR 3 to 3.5bn INR/US$ 71.2
each for FY20 and FY21, which is proposed to be funded through internal accruals. (ii)
The company has recently commissioned a new multi-product plant in Jambusar and the Price Performance
% 1M 6M 12M
other multi-product plant is expected to get commissioned in the next quarter. (iii)
Absolute 7.2 18.5 3.0
Separately, the company has also initiated construction of 2 new multi-product plants Relative* 7.5 27.7 -1.5
which are expected to be commissioned by 1Q’FY20. (iv) Management has stated that * To the BSE Sensex
the current order book for CSM is at close to USD 1.3bn. (v) Management also
maintained guidance for EBITDA Margin at c.21% and indicated that the current Gross
Margins are sustainable. (vi) We expect the exposure of raw materials procurement have
been diversified with new emerging sources like India and other Asian countries.
 Maintain HOLD with TP of INR 800: We believe that while the last two quarters have
been good for the exports / CSM segment after a series of quarterly misses. Company is
hopeful of strong order book performance while we remain cautious and would wait for
some clarity on sustainability of the CSM / export business. We value the stock at PE of
19x on EPS of FY21 to arrive at TP of INR 800. Key risks to the earnings: 1) Fluctuating
raw material prices. 2) Delay in revival of global innovator agro-chemical companies.

Net Sales 22,765 22,771 27,705 32,559 38,274
Sales Growth (%) 8.6 0.0 21.7 17.5 17.6
EBITDA 5,505 4,921 5,738 6,937 8,197
Diluted EPS Growth (%) 47.6 -21.2 14.9 22.5 18.6 S&P Capital IQ and FactSet
ROIC (%) 31.5 19.7 20.8 22.3 22.7
ROE (%) 32.0 19.8 19.3 20.1 20.2
Dividend Yield (%) 0.2 0.4 0.5 0.6 0.7
Certification.

PI Industries 28 February 2019
3QFY19 result
Exhibit 55. Financial highlights
(Rs mn) Q3FY19 AS Q3FY19 E % vs JMFe Q2FY19 AS %QoQ Q3FY18 AS %YoY
Net revenue from operations 7,075 6,184 14% 7,230 -2% 5,377 32%
Expenses
COGS 3,775 3,216 17% 4,125 -8% 2,821 34%
Employee Benefit expenses 637 680 -6% 683 -7% 513 24%
Other Expenses 1,177 1,051 12% 1,076 9% 996 18%
Total Expenses 5,589 4,947 13% 5,884 -5% 4,330 29%
EBIDTA 1,486 1,237 20% 1,346 10% 1,048 42%
As a % of sales 21.0% 20% 100bps 19% 239bps 19% 152bps
Other Income 152 118 28% 124 23% 161 -6%
234 215 9% 228 3% 211 11%

Depreciation and Amortization Expenses
EBIT 1,404 1,141 23% 1,242 13% 997 41%
Finance Costs 15 6 100% 14 7% 14 6%
PBT 1,389 1,135 22% 1,228 13% 983 41%
Tax expense 316 204 55% 284 11% 177 79%
Tax rate % 22.8% 18% 475bps 23% -38bps 18% 479bps
PAT 1,073 930 15% 944 14% 806 33%
OCI 348 - NA -202 NA 106 NA
PAT after OCI 1,421 930 53% 742 92% 912 56%
EPS 7.77 6.75 15% 6.85 13% 5.86 33%


Exhibit 56. Revenue growth Exhibit 57. EBITDA growth

Revenue (INR mn) QoQ growth EBIDTA (INR mn) QoQ growth
8000 30% 1800 60%

25% 25% 1600 53% 50%
7000 49%
19% 20% 1400 40%
6000 16%
15% 15%
5000 10% 13% 1200 29% 30%
10% 24%
1000 20%
4000 5%
14%
5003
0% 800 10% 10%
1048
3000 5%
1034
-3% -2%
-4% -4% 600 0%
5719
-5%
1279
2000 -7% -6%
-10% 400 -10%
-12%
5237
6048
6834
6273
5848
5611
5377
6251
6056
7230
7075
-13% -15% -14%
1031
1084
1656
1537
1304
1222
1347
1181
1346
1486
1000 -15%
-16% 200 -19% -20%
-23%
0 -20%
0 -30%

Exhibit 58. PAT growth Exhibit 59. EBITDA and PAT margins
PAT (INR mn) QoQ growth EBIDTA margin PAT margin
1600 50% 30.0%

44% 24.2% 24.5%
1400 40% 22.4% 22.3%
36% 25.0% 21.8% 21.5% 21.0%
32% 20.7%
1200 31% 30% 19.7% 19.5% 19.5%
17.9% 18.6%
24% 20.0%
1000 20% 21.5%
16% 14%
800 10% 15.0% 18.6% 18.8%
17.7% 17.1% 16.9%
15.9% 15.0% 15.2%
600 0% 0% 14.3%
940
10.0% 13.5% 13.5%

13.1%
806
400 -7% -10%

1014
5.0%
1269
1352
1001
1054
1073
200 -20% -20%

708
960
803
817
944
-20% -23%
-26%
0 -30% 0.0%
Exhibit 60. Valuation of PI

FY21 EPS 42.10
Mutliple 19
TP 800

Investment thesis
 Land productivity has to increase to offset stagnant land availability: World
population is expected to reach 8.5bn by 2030 from 7.6bn in 2018, an increase of
about 12%, while the cultivable land will either decrease (due to urban expansion)
or remain same. New chemistries are the only aid to the surging demand for food.
 Technical expertise: SRF has always given preference to R&D through it’s Udaipur
facility that focuses on process improvement, cost optimisation, and effluent
management etc. Further the distribution team is a technical marketing team that
understands the chemistry.
 Strong long term relationship: 60 years of brand building and strong relationship
with the channel partners helps PI to enjoy loyalty of both customers as well as
distributors since decades.
Key risks
 Agriculture is seasonal and cyclic in nature: The industry is subject to the vagaries of
nature with un-favourable weather/climate conditions, poor rainfall, seasonal
fluctuations that can adversely affect the company.
 Threat from global innovators: If any global innovator, from whom in-licensing is
done, enters the Indian market, opportunity will be lost.
 Alternatives to current technology: Agri input activities could be adversely affected
by introduction of alternative pest management and crop protection measures such
as bio technology products, pest resistant seeds or genetically modified crops.

Financial Tables (Standalone)

Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Other Operating Income 0 0 0 0 0 Reserves & Surplus 15,951 18,984 22,259 26,272 31,031
Personnel Cost 2,204 2,400 2,712 3,254 3,840 Total Loans 830 463 320 0 0
Other Expenses 3,425 3,760 4,433 5,112 5,952 Def. Tax Liab. / Assets (-) -179 -252 -350 -469 -610
EBITDA Growth 28.2% -10.6% 16.6% 20.9% 18.2% Gross Fixed Assets 10,584 11,920 14,420 17,445 20,695
Depn. & Amort. 727 826 909 1,099 1,316 Intangible Assets 264 279 310 346 381
Other Income 0 0 0 0 0 Capital WIP 583 691 1,191 1,416 1,416
Finance Cost 72 59 63 26 0 Investments 1,414 2,240 2,778 2,848 2,949
Taxes 491 971 1,168 1,383 1,640 Cash & Bank Balances 638 574 1,588 2,018 3,529
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 539 384 1,112 1,306 1,536
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 1,304 2,057 918 1,078 1,268
Diluted EPS Growth 47.6% -21.2% 14.9% 22.5% 18.6% Source: Company, JM Financial
Total Dividend + Tax 248 662 725 889 1,054

Dupont Analysis
Net Margin 19.4% 15.3% 14.4% 15.1% 15.2%
Depn. & Amort. 707 804 909 1,099 1,316
Asset Turnover (x) 1.5 1.2 1.3 1.3 1.3
Net Interest Exp. / Inc. (-) -286 -541 -339 -447 -573
Inc (-) / Dec in WCap. -1,205 -1,177 640 -887 -1,037
Others 0 0 0 0 0 RoE 32.0% 19.8% 19.3% 20.1% 20.2%
Taxes Paid -1,045 -1,043 -1,266 -1,502 -1,782

Capex -1,478 -1,459 -3,031 -3,286 -3,286 Y/E March FY17A FY18A FY19E FY20E FY21E
Free Cash Flow 1,400 620 1,679 790 1,520 BV/Share (INR) 117.2 138.9 162.2 191.3 225.7
Inc (-) / Dec in Investments -824 -771 -766 0 0 ROIC 31.5% 19.7% 20.8% 22.3% 22.7%
Others 358 600 402 472 573 ROE 32.0% 19.8% 19.3% 20.1% 20.2%
Investing Cash Flow -1,944 -1,630 -3,395 -2,813 -2,713 Net Debt/Equity (x) 0.0 0.0 -0.1 -0.1 -0.1
Inc / Dec (-) in Capital 0 0 0 0 0 P/E (x) 28.5 36.2 31.5 25.7 21.7
Dividend + Tax thereon -248 -662 -725 -889 -1,054 P/B (x) 7.8 6.6 5.6 4.8 4.0
Inc / Dec (-) in Loans -487 -425 -206 -346 0 EV/EBITDA (x) 22.6 25.2 21.5 17.7 14.7
Others 0 0 0 0 0 EV/Sales (x) 5.5 5.5 4.4 3.8 3.2
Financing Cash Flow -735 -1,087 -932 -1,234 -1,054 Debtor days 68 84 65 65 65
Inc / Dec (-) in Cash 199 -638 384 28 1,039 Inventory days 69 72 71 70 70
Opening Cash Balance 438 1,212 1,204 1,990 2,490 Creditor days 61 76 72 72 72
Closing Cash Balance 638 574 1,588 2,018 3,529 Source: Company, JM Financial

History of Earnings Estimate and Target Price Recommendation History

Date Recommendation Target Price % Chg.
17-Feb-17 Hold 830
18-May-17 Hold 810 -2.4
16-Aug-17 Hold 750 -7.4
27-Oct-17 Hold 775 3.3
6-Feb-18 Hold 760 -1.9
17-May-18 Hold 775 2.0
9-Aug-18 Hold 775 0.0
30-Oct-18 Hold 765 -1.3

Aarti Industries | Not Rated

Global contracts and R&D to keep the margins high
Aarti Industries (Aarti) is a leading manufacturer of Specialty and Pharmaceuticals chemicals Mehul Thanawala
with expertise in benzene-based products. It is one of the most unique global entities that is
Ashish Mendhekar
both forward and backward-integrated in its range of chemicals and across various value [email protected] | Tel: (91 22) 66303073
chains. Around 45% of the revenue comes through exports. The company has more than Ankit Kabra
200 products and 17 manufacturing units in India. Aarti serves 700 domestic and 300 export [email protected] | (91 22) 62241877
customers spread across 60 countries. Company’s global market share in various products
range is between 25%-40%. Aarti is present in the value-chain that makes it easy for them
to pass on any raw material price increase. Aarti is REACH-complaint (Euro standards), giving
surety over quality and process. Management is well aware of the need for innovation and
plans to invest INR 750mn for their fourth R&D and scale-up facility for product development.
We do not have a rating on the stock.
nd
 Expansive presence across various chemistries: Globally, Aarti is 2 largest in
nd rd th
ammonolysis, 2 largest in hydrogenation, 3 largest player in chlorination, 4 largest in
nitration, and only player in India for fluoro compounding. The company boasts a product
portfolio comprising of 75% of the specialty chemical products taking top 4 positions in
their respective categories.
 De-risked portfolio driving continuous growth: Aarti serves customers from various Key Data – ARTO IN
industries like Agrochemicals, Pharmaceuticals, FMCG, Dyes, Pigments, Cattle Feed, Current Market Price INR1390
Flavours and Fragrances, Food Ingredients, Oil & Gas, Optical Brighteners, Polymers and Market cap (bn) INR113.0/$1.6
Free Float 45.6%
Additives, Printing Inks, Rubber Chemicals etc. Agrochemical has c. 25-30% share of
specialty chemical sales, Polymer, Pigments and Dyes contribute c. 15-20% each to the Diluted share (mn) 81.3
sales. Top 10 customers make 27% of the bottom-line. 3-mon avg daily val (mn) INR129.9/US$1.8
52-week range 1808/1041
 Next chain of growth drivers already on the way: Aarti is going beyond benzene Sensex/Nifty 35,867/10,793
chemistry and started operations of Nitrotoluene facility at Jhagadia which reached INR/US$ 70.7
utilisation of 40% by the end of FY18. Peak utilisation is expected to reach by FY22 and
Price Performance
estimated revenue visibility is of c. INR 3.5bn-4bn per annum. Aarti plans to introduce
% 1M 6M 12M
toluene and ethylene-based chemicals for end-use applications of agrochemicals, Absolute -14.5 1.1 18.5
engineering polymers, pigments, and additives. The company has 12 new API’s under Relative* -13.4 8.3 13.6
development and has witnessed 60% exports from US and EU with 4 commercial * To the BSE Sensex
products in US and other awaiting approval. Further, Aarti has invested in Contract
Research and Manufacturing Services (CRAMS) for clients with focused R&D team for it.
 Revenue assurance with long-term contracts: Aarti reported revenue/ EBITDA/ PAT of INR
37bn/ 6.6bn/ 3.2bn in FY18. It has entered into a 10-year contract valued at INR 40bn
with a global agriculture company to provide high-value intermediates for manufacturing
herbicides. Aarti got into a 20-year contract worth INR 100bn to supply high-value
specialty chemical intermediates. Aarti has received basic technology for the plant and is
investing c. USD 35-40mn for the project, Aarti has received an advance of USD 42mn for
the same. Key risks to business: 1) Downside in developed markets.

Y/E March FY14A FY15A FY16A FY17A FY18A
Net Sales 26,328 28,706 29,336 30,502 36,993
Sales Growth (%) 25.6 9.0 2.2 4.0 21.3
EBITDA 3,955 4,565 5,302 6,084 6,567
Diluted EPS Growth (%) 1.1 24.0 45.6 23.3 4.2 S&P Capital IQ and FactSet
ROIC (%) 14.6 16.1 16.1 16.4 14.1
ROE (%) 20.4 21.2 24.6 25.5 22.4
Dividend Yield (%) 0.3 0.4 0.6 0.0 0.1
Certification.

Aarti Industries 28 February 2019

Y/E March FY14A FY15A FY16A FY17A FY18A Y/E March FY14A FY15A FY16A FY17A FY18A
Other Operating Income 0 0 0 0 0 Reserves & Surplus 7,344 9,159 10,520 12,690 14,745
Personnel Cost 757 897 1,104 1,402 1,768 Total Loans 9,409 10,662 12,170 14,179 18,843
Other Expenses 4,760 5,291 5,377 6,015 7,168 Def. Tax Liab. / Assets (-) 845 1,025 1,195 1,420 1,594
EBITDA Growth 11.0% 15.4% 16.2% 14.8% 7.9% Gross Fixed Assets 13,939 16,007 19,269 24,362 28,491
Depn. & Amort. 874 786 927 1,148 1,358 Intangible Assets 362 362 362 382 382
Other Income 104 20 96 25 21 Capital WIP 1,126 1,880 3,068 2,668 4,312
Finance Cost 1,175 1,375 1,159 1,174 1,307 Investments 322 969 560 617 559
Taxes 523 580 788 721 759 Cash & Bank Balances 124 263 242 216 239
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 5,158 1,688 1,379 1,425 1,948
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 295 1,256 1,448 1,878 2,415
Diluted EPS Growth 1.1% 24.0% 45.6% 23.3% 4.2% Source: Company, JM Financial
Total Dividend + Tax 466 585 840 0 99

Dupont Analysis
Net Margin 5.6% 6.4% 8.6% 10.1% 8.6%
Depn. & Amort. 866 640 926 1,145 1,351
Asset Turnover (x) 1.4 1.4 1.3 1.2 1.2
Net Interest Exp. / Inc. (-) 1,071 1,355 1,063 1,149 1,286
Inc (-) / Dec in WCap. -452 883 534 -167 -1,831
Others 0 0 0 0 0 RoE 20.4% 21.2% 24.6% 25.5% 22.4%
Taxes Paid -523 -580 -788 -721 -759

Capex -2,662 -2,822 -4,450 -4,714 -5,772 Y/E March FY14A FY15A FY16A FY17A FY18A
Free Cash Flow 309 1,900 596 480 -1,801 BV/Share (INR) 87.9 108.4 131.3 159.5 186.4
Inc (-) / Dec in Investments -137 -647 409 -57 58 ROIC 14.6% 16.1% 16.1% 16.4% 14.1%
Others 0 -984 -284 -405 -498 ROE 20.4% 21.2% 24.6% 25.5% 22.4%
Investing Cash Flow -2,799 -4,452 -4,324 -5,176 -6,212 Net Debt/Equity (x) 1.2 1.1 1.1 1.1 1.2
Inc / Dec (-) in Capital 0 0 -26 -6 -4 P/E (x) 82.7 66.7 45.8 37.2 35.7
Dividend + Tax thereon -466 -585 -840 0 -99 P/B (x) 15.8 12.8 10.6 8.7 7.4
Inc / Dec (-) in Loans 1,391 1,254 1,508 2,009 4,663 EV/EBITDA (x) 30.8 26.9 23.5 20.8 20.0
Others -1,071 -798 -1,386 -2,046 -2,297 EV/Sales (x) 4.6 4.3 4.2 4.1 3.5
Financing Cash Flow -146 -130 -744 -43 2,263 Debtor days 65 59 65 66 63
Inc / Dec (-) in Cash 26 140 -22 -25 23 Inventory days 84 69 59 65 68
Opening Cash Balance 97 124 263 242 216 Creditor days 60 38 45 44 42
Closing Cash Balance 124 263 242 216 239 Source: Company, JM Financial

Deepak Fertilisers | Not Rated

Everything in place - demand, R&D, and capacity expansion
Deepak fertilisers (DFPCL) is among leading producers of fertilisers and industrial chemicals in Mehul Thanawala
India. Industrial chemicals business is the major segment that contributed 51.31% to total
Ashish Mendhekar
revenue in FY18. While crop nutrition business contributed 29.81%, the technical [email protected] | Tel: (91 22) 66303073
ammonium nitrate contributed 18.48% to the total revenue in FY18. DFPCL has 5 plants that Ankit Kabra
are in close proximity to sourcing channels, ports and gas pipeline to procure raw materials [email protected] | (91 22) 62241877
and save logistics cost. DFPCL has grown its trading business to have key partnerships in
South East Asia, Middle East Europe and China, providing another source of income. DFPCL
expects to keep the leadership position through its plan to grow via the route of capacity
expansion of current plants, investing in R&D for increasing customisation of products,
improving portfolio mix towards high-margin products and some investments into real estate.
We do not have a rating on the stock.
 Domestic penetration: DFPCL has strategically placed plants in close proximity to its
largest customers in the Indian geography. In crop nutrition business, DFPCL has
expanded its market share in Maharashtra to c. 19% with improved market presences in
Telangana, Andhra Pradesh, Tamil Nadu, Madhya Pradesh, Chhattisgarh and North India.
It recently operationalised new Bensulf plant with effective capacity of 32,000 MTPA at
Panipat, Haryana. In mining chemicals, DFPCL added new geographies in Raipur, Tata
Nagar and NCR. Key Data – DFPC IN
Current Market Price INR127
 Growth drivers: DFPCL has initiated on a research establishment – ARTIC that is aimed
Market cap (bn) INR11.2/$0.2
towards customised product delivery, product innovation, nutrient management, and Free Float 47.9%
post-harvest shelf life etc. On products side, Global market insights estimates global Shares in issue (mn) 88.20494
market for ammonium nitrate to grow at CAGR of 3% during 2016-2024 on back of Diluted share (mn) 88.20494
increase in demand for fertilisers and explosives. DFPCL can benefit from the growth in 3-mon avg daily val (mn) INR57.5/US$0.8
52-week range 397/104
Indian market as farmers are focusing towards increasing land yield and increase in Sensex/Nifty 35,867/10,793
coalfield mining is resulting into increase in demand for commercial explosives. Further, INR/US$ 70.7
demand is expected to rise from cement industry with GOI’s “Pradhan mantra Awas
Yogna” (housing for all). In mining, DFPCL bagged a USD 60mn mining services contract Price Performance
% 1M 6M 12M
in Australia for duration of 3 years.
Absolute 8.1 -49.9 -62.8
 Expansion plans: DFPCL has successfully completed the mechanical completion of Nitric Relative* 9.2 -42.7 -67.7
* To the BSE Sensex
Acid plant and the production trials are in progress. The plant is estimated to produce
1,48,500 MTPA of dilute nitric acid and 92,400 MTPA of concentrated nitric acid.
Additionally, more capacity expansion projects are planned for ammonia (5,00,000
MTPA) , isopropyl alcohol (1,00,000 MTPA), technical ammonium nitrate (3,76,000
MTPA), and NPK fertiliser (2,00,000 MTPA).
 Financials: DFPCL reported revenue/ EBITDA / PAT of INR 60bn/ 5.5bn/ 1.6bn in FY18.
DFPCL has all the growth drivers in place- R&D, capacity expansion, and demand. Key
risks to the business are: 1) Monsoon depended fertilisers business. 2) Pharma business
vulnerable to the USA’s policy changes. 3) Raw material price fluctuations.

Net sales 39,146 38,124 43,092 41,501 59,949
Sales growth (%) -2.6 13.0 -3.7 44.5
EBITDA 5,167 2,959 3,565 4,734 5,452
EBITDA (%) 13% 8% 8% 11% 9%
JM Financial Research is also available on:
Adjusted net profit 2,519 594 1,163 1,543 1,627 Bloomberg - JMFR <GO>,
EPS (Rs) 27.3 7.7 13.2 17.5 18.4 Thomson Publisher & Reuters
EPS growth (%) -71.7 71.0 32.7 5.4 S&P Capital IQ and FactSet
ROE (%) 17.3 4.0 6.0 7.7 7.9
PE (x) 3.8 16.1 10.8 14.3 15.3
Price/Book value (x) 0.6 0.7 0.6 1.1 1.2 Please see Appendix I at the end of this
EV/EBITDA (x) 2.8 6.4 8.0 7.6 10.0 report for Important Disclosures and
Source: Company data, JM Financial. Note: Valuations as of 28/Feb/2019 Disclaimers and Research Analyst
Certification.

Deepak Fertilisers 28 February 2019

Net sales (Net of excise) 39,146 38,124 43,092 41,501 59,949 Share capital 882 882 882 882 882
Growth (%) -3% 13% -4% 44% Reserves and surplus 13,650 13,839 18,563 19,280 19,580
Raw material (or COGS) 28,180 29,849 33,432 29,432 45,549 Networth 14,532 14,721 19,445 20,162 20,462
Personnel cost 1,689 1,536 1,830 2,102 2,458 Total loans 8,237 11,237 18,956 16,692 34,647
Other expenses (or SG&A) 4,110 3,781 4,265 5,234 6,489 Minority interest 1 55 77 79 403
EBITDA 5,167 2,959 3,565 4,734 5,452 Sources of funds 22,770 26,013 38,478 36,933 55,512
EBITDA (%) 13% 8% 8% 11% 9% Fixed assets 23,717 24,443 14,507 22,886 25,687
Growth (%) -43% 20% 33% 15% Less: Depn. and amort. 9,443 10,604 1,066 2,374 3,850
Other non-op. income 469 289 724 159 241 Net block 14,274 13,840 13,441 20,511 21,837
Depreciation and amort. 1,143 1,244 1,218 1,350 1,632 Capital WIP 953 1,518 3,962 3,853 6,538
EBIT 4,024 1,714 2,347 3,384 3,820 Investments 2,104 2,533 557 1,592 3,929
Less: Finance Costs 1,010 1,111 1,300 1,215 1,732 Def tax assets/- liability 0 0 2,680 1,585 785
Pre tax profit 3,483 892 1,755 2,304 2,305 Current assets
Taxes 964 312 599 758 664 Inventories 3,462 4,094 6,059 5,045 7,685
Exceptional items 114 -86 0 0 0 Sundry debtors 7,891 9,535 15,195 13,113 19,654
Less: Minority interest 0 -14 -6 3 14 Cash & bank balances 957 604 2,257 980 1,003
Reported net profit 2,405 680 1,163 1,543 1,627 Other current assets 578 836 3,007 3,747 8,439
Adjusted net profit 2,519 594 1,163 1,543 1,627 Loans & advances 1,175 1,442 27 55 45
Margin (%) 6% 2% 3% 4% 3% Current liabilities & prov.
Diluted share cap. (mn) 88 88 88 88 88 Current liabilities 7,567 7,566 8,258 13,061 13,823
Diluted EPS (`) 27.27 7.71 13.18 17.50 18.44 Provisions and others 1,056 823 449 488 580
Growth (%) -72% 71% 33% 5% Net current assets 5,440 8,122 17,838 9,393 22,424
Source: Company, JM Financial Others (net)
Application of funds 22,770 26,013 38,478 36,933 55,512
Cash Flow Statement (INR mn) Source: Company, JM Financial
Reported net profit 2,405 680 1,163 1,543 1,627
Depreciation and amort. 1,143 1,161 -9,538 1,309 1,476
-Inc/dec in working cap. -753 -3,465 -8,716 7,230 -14,545
Others 1,353 822 570 1,059 1,504
Cash from operations (a) 4,148 -802 -16,521 11,141 -9,938
Key Ratios
-Inc/dec in investments 541 0 -51 0 0
Capex -1,317 -1,292 7,493 -8,270 -5,487
BV/Share (`) 164.8 166.9 220.5 228.6 232.0
Others 79 289 724 159 241
ROE (%) 17.3 4.0 6.0 7.7 7.9
Cash flow from inv. (b) -697 -1,003 8,166 -8,111 -5,247
Net Debt/equity ratio (x) 0.4 0.6 0.8 0.7 1.5
Inc/-dec in capital 0 0 0 0 0
Valuation ratios (x)
Dividend+Tax thereon -670 -425 -956 -529 -529
PER 3.8 16.1 10.8 14.3 15.3
Inc/-dec in loans -1,924 3,000 7,719 -2,263 17,955
PBV 0.6 0.7 0.6 1.1 1.2
Others -963 -1,123 3,245 -1,513 -2,219
EV/EBITDA 2.8 6.4 8.0 7.6 10.0
Financial cash flow ( c ) -3,557 1,452 10,008 -4,306 15,207
EV/Sales 0.4 0.5 0.7 0.9 0.9
Inc/-dec in cash (a+b+c) -106 -353 1,653 -1,277 23
Turnover ratios (no.)
Opening cash balance 1,062 957 604 2,257 980
Debtor days 74 91 129 115 120
Closing cash balance 957 604 2,257 980 1,003
Inventory days 32 39 51 44 47
Creditor days 98 93 90 162 111

GHCL | Not Rated

Promising growth through improving chemicals business
GHCL is an integrated manufacturer of chemicals (Soda Ash and Baking soda), textiles (final Mehul Thanawala
products like sheets and duvets) and consumer products. In chemicals, GHCL has Soda ash
Ashish Mendhekar
production capacity of 975 kMTPA (accounting for 25% of domestic demand) and plans to [email protected] | Tel: (91 22) 66303073
have a phase-wise expansion to cater to increasing demand. The business is backward Ankit Kabra
integrated with lignite mines at Khadsaliya to supply raw material for Soda ash which has [email protected] | (91 22) 62241877
helped it to have 30% EBITDA margin for the last 3 years in the business. For Sodium
Bicarbonate, GHCL has production capacity of 60 kMPTA used as raw material across various
industries like bakery, pharmaceuticals, cleaning agents etc. GHCL has fully integrated textile
operations, starting from spinning till finished products exported to developed markets.
Expansion plans and new brand building would drive the growth. We do not have a rating
on the stock.
 Phase-wise expansion plans in Chemicals business: For Soda ash business the production
capacity utilisation is c. 95% and hence GHCL is investing to address the growing
demand of Soda ash. GHCL expects the completion of brownfield expansion of 1.25 lakh
MTPA by March 2019 with estimated investment of c. INR 3bn. While the next phase of
Key Data – GHCL IN
capex will come through a planned brownfield expansion of 1.0 lakh MTPA at cost of INR Current Market Price INR222
3bn to be completed over next 2 years. GHCL further is in planning stage to add 5 lakh Market cap (bn) INR21.8/$0.3
MTPA soda ash facility to be completed in 4-5 years. Free Float 61.4%
 New brands in consumer products and textile businesses: Through its Consumer Products Diluted share (mn) 98.02829
Division, GHCL is expanding its brand reach with i-FLO, under which products like salt, 3-mon avg daily val (mn) INR29.1/US$0.4
honey, and spices are sold, with salt manufacturing facility at Tamil Nadu. This gives 52-week range 301/189
company an added advantage of brand recognition and make a mark in FMCG sector. INR/US$ 70.7
Further, GHCL has recently come up with REKOOP brand to sell bed sheets, duvet covers,
and comforters in US market. This is made using recycled PET bottles to become most Price Performance
eco-friendly polyester fiber. % 1M 6M 12M
Absolute -11.2 -13.4 -23.3
 Growth drivers: Soda ash demand is primarily driven by demand from glass industry Relative* -10.2 -6.2 -28.2
(TechSci Research estimates it to grow at CAGR of 13% during 2016-2025) on back of * To the BSE Sensex
increased construction activities and manufacturing of smartphones, LCDs, laptops etc.

Furthermore, soda ash is an important raw material for chemical fertilisers, dyes, coloring
agents, recycling aluminum and zinc and hence growing demand from metallurgy and
chemicals industry. GHCL is the one of the largest domestic producers and should benefit
from this growing demand. GHCL has doubled its Bi-carbonate capacity to 60,000 MTPA
in Jan’ 2018 which will cater to the growing demand from bakery market. IMARC Group
report estimates the Indian bakery market to grow at CAGR of 10% during 2018-2023.
 Financials: GHCL reported revenue/ EBITDA/ PAT of INR 29.4bn/ 6.1bn/ 3.6bn in FY18.
The company is growing its penetration by brand building and expansion in its businesses.
Key risks to the business are: 1) Price correction owning to new capacities across the
globe; 2) Increase in natural soda ash production a threat to synthetic soda ash.

Net sales 22,477 23,736 25,307 27,838 29,432
Sales growth (%) 5.6 6.6 10.0 5.7
EBITDA 4,334 5,283 6,159 6,808 6,061
EBITDA (%) 19% 22% 24% 24% 21%
Adjusted net profit 1,395 2,093 2,578 3,831 3,564 Bloomberg - JMFR <GO>,
EPS growth (%) 67.6 41.7 48.3 -4.3 S&P Capital IQ and FactSet
ROE (%) 23.8 27.2 24.9 28.5 22.1
PE (x) 2.8 3.1 4.2 6.7 6.9
Certification.

GHCL 28 February 2019

Net sales (Net of excise) 22,477 23,736 25,307 27,838 29,432 Share capital 1,000 1,000 1,000 995 974
Growth (%) 6% 7% 10% 6% Reserves and surplus 4,873 6,701 9,359 12,471 15,134
Other operational income 50 113 104 400 379 Networth 5,873 7,702 10,359 13,465 16,108
Raw material (or COGS) 8,730 9,214 9,464 11,387 12,756 Total loans 14,859 13,235 13,650 14,633 13,220
Personnel cost 1,220 1,263 1,336 1,585 1,767 Minority interest 0 0 0 0 0
Other expenses (or SG&A) 8,192 7,977 8,348 8,058 8,848 Sources of funds 20,731 20,937 24,010 28,098 29,328
EBITDA 4,334 5,283 6,159 6,808 6,061 Fixed assets 29,180 30,625 21,286 25,473 27,332
EBITDA (%) 19% 22% 24% 24% 21% Less: Depn. and amort. 10,487 11,286 794 1,377 2,315
Growth (%) 22% 17% 11% -11% Net block 18,694 19,339 20,492 24,096 25,017
Depreciation and amort. 817 849 817 857 1,101 Capital WIP 125 70 369 260 735
EBIT 3,517 4,434 5,342 5,951 4,960 Investments 75 15 146 88 103
Less: Finance Costs 1,832 1,704 1,649 1,368 1,266 Def tax assets/- liability -1,620 -1,727 -1,932 -2,360 -1,950
Pre tax profit(before Current assets
1,735 2,842 3,797 4,983 4,074
extraordinary items)
Inventories 5,439 4,874 5,033 5,843 6,367
Taxes -340 -749 -1,219 -1,152 -511
Sundry debtors 3,812 2,444 1,828 2,762 2,287
Extraordinary items -310 -274 0 -30 0
Cash & bank balances 417 339 426 361 268
Minority interest 0 0 0 0 0
Other current assets
Reported net profit 1,085 1,819 2,578 3,801 3,564
Loans & advances 1,336 1,298 662 1,303 1,083
Adjusted net profit 1,395 2,093 2,578 3,831 3,564
Current liabilities & prov.
Margin (%) 5% 8% 10% 14% 12%
Current liabilities 7,328 5,353 3,385 4,349 4,790
Diluted share cap. (mn) 100.02 100.02 100.02 99.47 97.42
Provisions and others 461 497 161 229 214
Diluted EPS (`) 10.85 18.19 25.77 38.21 36.58
Net current assets 3,215 3,104 4,403 5,691 5,001
Growth (%) 68% 42% 48% -4%
Source: Company, JM Financial Others (net) 243 136 531 323 421
Application of funds 20,731 20,937 24,010 28,098 29,328
Reported net profit 1,085 1,819 2,578 3,801 3,564
Depreciation and amort. 817 800 -10,493 583 938
-Inc/dec in working cap. 394 240 -1,372 -724 86
Others 2,225 1,592 1,545 968 886
Cash from operations (a) 4,522 4,451 -7,741 4,628 5,473 Key Ratios
-Inc/dec in investments -6 60 -131 58 -15 Y/E March FY14A FY15A FY16A FY17A FY18A
Capex -844 -1,390 9,041 -4,079 -2,334 BV/Share (`) 58.7 77.0 103.6 135.3 165.2
Others -317 121 104 400 379 ROE (%) 23.8 27.2 24.9 28.5 22.1
Cash flow from inv. (b) -1,167 -1,210 9,014 -3,621 -1,969 Net Debt/equity ratio (x) 2.4 1.7 1.3 1.1 0.8
Inc/-dec in capital 0 0 0 -5 -21 Valuation ratios (x)
Dividend+Tax thereon -233 -265 -421 -602 -412 PER 2.8 3.1 4.2 6.7 6.9
Inc/-dec in loans -1,139 -1,623 415 983 -1,413 PBV 0.5 0.7 1.1 1.9 1.5
Others -1,856 -1,431 -1,179 -1,447 -1,752 EV/EBITDA 4.0 3.5 3.9 5.8 6.2
Financial cash flow ( c ) -3,228 -3,319 -1,185 -1,072 -3,597 EV/Sales 0.8 0.8 0.9 1.4 1.3
Inc/-dec in cash (a+b+c) 126 -78 87 -65 -93 Turnover ratios (no.)
Opening cash balance 291 417 339 426 361 Debtor days 62 38 26 36 28
Closing cash balance 417 339 426 361 268 Inventory days 88 75 73 77 79
Source: Company, JM Financial Creditor days 306 212 131 139 137

IG Petrochemicals Ltd | Not Rated
Growing domestic penetration through capacity expansion
IG Petrochemicals Ltd (IGPL) is the largest Phthalic Anhydride manufacturer in India, capturing Mehul Thanawala
c.50% of domestic market share and one of the lowest cost producers globally. Phthalic
Ashish Mendhekar
Anhydride is used in plasticizers, alkyd resins, unsaturated resins, and copper phthalocyanine. [email protected] | Tel: (91 22) 66303073
IGPL acquired Mysore Petro Chemicals Ltd. in 2017 to enter into Maleic Anhydride business. Ankit Kabra
Maleic Anhydride is used across industries like coatings manufacturing, pharmaceuticals, [email protected] | (91 22) 62241877
agrochemicals, lubricates, and surfactants. IGPL exports to 15 countries and exports
constitute c.15% of the total revenue. IGPL has annual contract for its sales to domestic
customers that provide sales visibility. IGPL has planned a capacity expansion by 31% in
FY19 with further capex to capacity expansion in for downstream products. The strategy to
grow through forward integration and the expansion of current facility will cater to
increasing demand from end-users. We do not have a rating on the stock.
 Growth drivers: IndianPetroChem estimates the global consumption of phthalic anhydride
to grow at CAGR of 2.8% till 2021. On end-user front, India is below the world average
per capita consumption in polyesters, plastics, paints etc. TechSci research estimates
Indian paints & coating industry to grow at CAGR of 11.4% during 2018-2023. Key Data – IGPL IN
Furthermore, MarketsandMarkets estimates global plasticizers market to grow at CAGR
Market cap (bn) INR7.6/$0.1
of 5.7% during 2017-2022, which will drive growth in the consumption of phthalic Free Float 45.6%
anhydride. Allied market research values Indian PVC pipes market to grow at CAGR of Shares in issue (mn) 30.79485
10.2% during 2016-2023 on back of increased focus of GOI on rural water management Diluted share (mn) 30.79485
and upsurge in construction industry to support growth of phthalic anhydride. 3-mon avg daily val (mn) INR10.6/US$0.1
 Raw material is largely sourced domestically: India is one of the largest exporters of Sensex/Nifty 35,867/10,793
INR/US$ 70.7
Ortho-xylene, an important raw material for phthalic anhydride, hence IGPL is placed well
with the availability of raw material. Additionally, export of phthalic anhydride is more Price Performance
than import of raw material, giving company natural hedge to price fluctuations. % 1M 6M 12M
Absolute -17.6 -49.5 -64.5
 Capacity expansion: IGPL has planned to have brownfield expansion of 53,000 on-stream Relative* -16.5 -42.3 -69.4
during FY19 at an investment of INR 3.2bn. For the same IGPL has taken ECB of INR * To the BSE Sensex
1.25bn. Additionally, capex of c. INR 1.0bn will be put for specialty plasticizers as part of
downstream expansion.
 Integrating the business: Raw material for Maleic Anhydride comes from phthalic
anhydride, supporting smooth functioning of the forward integrated plant. Steam
generated from the production process is captively used to power and reduces the power
and fuel cost. IGPL has its plant in close proximity to the majority of downstream
industries (Chemical belt of India) reducing cost of the final product for the customers.
 Financials: IGPL has reported Revenue/ EBITDA/ PAT of INR 11.4bn/ INR 2.7bn/ INR 1.5bn.
The growth drivers are in place and the capacity expansion will ensure capitalisation of
benefits of demand growth. Key risks to the business: 1) Crude price fluctuation have
direct impact on the raw material prices. 2) Removal of anti-dumping duty on phthalic
anhydride.

Net sales 12,043 11,866 9,528 10,375 11,442
Sales growth (%) -1.5 -19.7 8.9 10.3
EBITDA 605 803 1,132 1,682 2,673
EBITDA (%) 5% 7% 12% 16% 23%
Adjusted net profit 210 300 602 1,017 1,460 Bloomberg - JMFR <GO>,
EPS growth (%) 184.2 576.5 68.9 43.6 S&P Capital IQ and FactSet
ROE (%) 8.2 12.6 20.2 26.0 27.7
PE (x) 22.9 18.6 5.3 11.4 13.5
Certification.

IG Petrochemicals Ltd 28 February 2019

Growth (%) -1% -20% 9% 10% Reserves and surplus 2,265 2,080 2,675 3,608 4,970
Raw material (or COGS) 10,484 10,012 7,341 7,512 7,275 Total loans 1,848 1,305 925 624 619
Personnel cost 251 285 298 391 558 Sources of funds 4,420 3,693 3,907 4,540 5,897
Other expenses (or SG&A) 703 767 758 790 936 Fixed assets 7,622 6,950 7,235 7,410 8,446
EBITDA 605 803 1,132 1,682 2,673 Less: Depn. and amort. 3,859 3,682 3,964 4,171 4,411
EBITDA (%) 5% 7% 12% 16% 23% Net block 3,763 3,268 3,271 3,239 4,035
Growth (%) 33% 41% 49% 59% Capital WIP 6 8 44 112 886
Depreciation and amort. 180 164 175 211 257 Investments 1 1 1 168 596
EBIT 425 639 956 1,471 2,416 Def tax assets/- liability 0 0 0 -20 -371
Less: Finance Costs 304 382 227 182 149 Current assets
Pre-tax profit before Inventories 1,415 866 835 966 944
218 324 765 1,320 2,304
exceptional
Sundry debtors 1,743 1,452 1,088 1,498 1,388
Taxes -8 -24 -164 -303 -843
Cash & bank balances 285 182 167 299 217
Extraordinary items -179 -211 0 0 0
Other current assets 430 265 356 296 525
Reported net profit 31 89 602 1,017 1,460
Loans & advances 0 0 4 4 6
Adjusted net profit 210 300 602 1,017 1,460
Current liabilities & prov.
Margin (%) 0% 1% 6% 10% 13%
Current liabilities 3,201 2,282 1,840 1,994 2,292
Diluted share cap. (mn) 31 31 31 31 31
Diluted EPS (`) 1.02 2.89 19.54 33.01 47.42
Net current assets 650 416 591 1,041 751
Growth (%) 184% 577% 69% 44%
Source: Company, JM Financial Application of funds 4,420 3,693 3,907 4,540 5,897

Reported net profit 31 89 602 1,017 1,460
Depreciation and amort. 180 -177 282 207 240
-Inc/dec in working cap. -193 131 -190 -379 133
Others 262 315 191 151 113 Key Ratios
Cash from operations (a) 281 358 884 995 1,945 Y/E March FY14A FY15A FY16A FY17A FY18A
-Inc/dec in investments 0 0 0 -87 0 BV/Share (`) 83.5 77.5 96.8 127.1 171.4
Capex -404 671 -321 -243 -1,811 ROE (%) 8.2 12.6 20.2 26.0 27.7
Others 48 67 36 32 37 Net Debt/equity ratio (x) 0.6 0.5 0.3 0.0 0.0
Cash flow from inv. (b) -356 737 -285 -298 -1,774 Valuation ratios (x)
Inc/-dec in capital 0 0 0 0 0 PER 22.9 18.6 5.3 11.4 13.5
Dividend+Tax thereon 0 -37 -74 -74 -111 PBV 0.3 0.7 1.1 3.0 3.7
Inc/-dec in loans 222 -543 -380 -301 -5 EV/EBITDA 3.8 3.5 3.5 7.0 7.3
Others -207 -618 -160 -191 -136 EV/Sales 0.2 0.2 0.4 1.1 1.7
Financial cash flow ( c ) 15 -1,198 -614 -565 -253 Turnover ratios (no.)
Inc/-dec in cash (a+b+c) -61 -103 -15 131 -81 Debtor days 53 45 42 53 44
Opening cash balance 346 285 182 167 299 Inventory days 43 27 32 34 30
Closing cash balance 285 182 167 299 217 Creditor days 111 83 91 97 115

Phillips Carbon Black Ltd. | Not Rated

Growing on new applications and customer demands
Philips Carbon Black Ltd (PCBL) is a largest carbon black producers and exporter in India with Mehul Thanawala
presence in 37 countries across 5 continents. PCBL has 4 manufacturing plants close to the
Ashish Mendhekar
eastern and western coasts that provide easy accessibility to ports for exports. Carbon black [email protected] | Tel: (91 22) 66303073
finds application as rubber black and specialty black. PCBL has 56 grades of carbon black that Ankit Kabra
are used in various forms across industries like tyres, pigmentation, UV stabilisation, and [email protected] | (91 22) 62241877
conductive agent. PCBL has combined capacity of 76 MW of co-generation unit at the 4
plants that help them to reduce power and fuel cost while the excess is sold to third party.
PCBL is consistently investing in capacity expansion and R&D to strengthen operating
capability to global standards. PCBL is investing in production capacity to increase by 46% by
the end of 2021 on current capacity of 515,000 MTPA. These are the growth drivers to cater
to the increasing customer demands. We do not have a rating on the stock.
 Cost effective operations: PCBL has manufacturing plants at strategic locations that are in
proximity to customers and result into lower logistic cost and easy access to raw
Key Data – PHCB IN
materials. PCBL produces power from tail gas and has seen consistent growth in power
generation. The plants have easy accessibility to the power grid to sell the excess power Market cap (bn) INR26.8/$0.4
from captive production, PCBL sold c. 60% of the power generate to third party in FY18, Free Float 43.1%
contributing 3.25% to the total revenue. Shares in issue (mn) 172.3379
 Growth drivers: Specialty carbon black contributed with 7% of the total volumes but 3-mon avg daily val (mn) INR195.0/US$2.8
12% by value. PCBL has completed production line of c.22,000 for specialty carbon black
in Sep 2018 as EBITDA margins are 3.5x the commodity grade carbon black. PCBL has INR/US$ 70.7
invested into R&D that resulted into 24 specialty carbon black grades. These are used in
polyester textile, engineering plastics, wire, news ink, and paints/coatings. R&D is focused Price Performance
% 1M 6M 12M
towards value added products in applications like automotive, consumer electronics and
Absolute -11.2 -35.7 -35.2
home appliances market. Relative* -10.1 -28.5 -40.1
* To the BSE Sensex
 Expanding production capacity to capitalise on expected growth in demand: PCBL
operated at utilisation of 95.1% of the effective capacity for carbon black. Thus, PCBL has
planned for brownfield expansion at Palej for specialty carbon black with capacity of
32,000 MTPA while Mundra site with have capacity expansion of 56,000 MTPA for
carbon black. Additionally, a new greenfield expansion for carbon black is planned with
capacity of 150,000 MTPA in South India. TechSci research estimates Indian carbon
black market to grow at CAGR of c. 8.6% during 2017-2026 on back of increasing tyre
manufacturing and antidumping duty on imports on GOI.
 Financials: PCBL reported revenue/ EBITDA/ PAT of INR 25bn/ 3.8bn/ 2.3bn in FY18. PCBL
has seen growing EBITDA/ton from INR 6451 /ton in FY16 to INR 10550 /ton FY18. The
company is improving margins from operations as well as value added product mix. Key
risks to the business are: 1) Margin correction as the major revenue comes from
commodity grade product. 2) Removal of anti-dumping duty by GOI.

Net sales 22,775 24,702 18,941 19,270 25,470
Sales growth (%) 8.5 -23.3 1.7 32.2
EBITDA 253 1,510 1,652 2,581 3,768
EBITDA (%) 1% 6% 9% 13% 15%
Adjusted net profit -857 107 146 687 2,264 Bloomberg - JMFR <GO>,
EPS (Rs) -5.0 0.6 0.9 4.0 13.3 Thomson Publisher & Reuters
EPS growth (%) -111.9 53.5 331.5 234.3 S&P Capital IQ and FactSet
ROE (%) -17.1 2.1 1.4 6.1 16.4
PE (x) NA 40.6 19.3 16.0 15.9
Certification.

Phillips Carbon Black Ltd. 28 February 2019

Growth (%) 8% -23% 2% 32% Reserves and surplus 4,668 4,727 10,104 10,962 13,432
Raw material (or COGS) 18,305 19,404 13,446 12,365 16,593 Total loans 10,866 12,197 10,217 7,582 7,173
Personnel cost 633 704 728 820 974 Minority interest 70 69 67 58 66
Other expenses (or SG&A) 3,584 3,084 3,116 3,503 4,135 Sources of funds 15,950 17,338 20,732 18,947 21,016
EBITDA 253 1,510 1,652 2,581 3,768 Fixed assets 13,061 13,257 14,780 15,103 15,796
EBITDA (%) 1% 6% 9% 13% 15% Less: Depn. and amort. 4,172 4,742 621 1,227 1,803
Growth (%) 498% 9% 56% 46% Net block 8,889 8,515 14,159 13,876 13,992
Depreciation and amort. 546 584 622 606 605 Capital WIP 735 796 797 796 668
EBIT -293 927 1,030 1,975 3,163 Investments 382 856 2,281 2,908 3,158
Less: Finance Costs 803 948 721 515 414 Def tax assets/- liability -299 -278 -1,474 -2,047 -2,273
Pre tax profit -870 121 474 1,647 3,036 Current assets
Taxes -12 17 315 960 740 Inventories 4,287 2,968 2,442 2,435 3,099
Extraordinary items -9 -1 14 6 24 Sundry debtors 5,170 5,214 4,382 4,657 5,220
Minority interest -3 -3 0 -6 8 Cash & bank balances 109 129 519 245 1,726
Reported net profit -869 104 159 687 2,296 Other current assets 841 770 479 522 618
Adjusted net profit -857 107 146 687 2,264 Loans & advances 866 867 844 362 233
Margin (%) NM 0% 1% 4% 9% Current liabilities & prov.
Diluted share cap. (mn) 172.35 172.35 172.35 172.35 172.35 Current liabilities 4,969 2,333 3,608 4,633 4,533
Diluted EPS (`) -5.04 0.60 0.92 3.99 13.32 Provisions and others 62 166 89 173 893
Growth (%) -112% 54% 331% 234% Net current assets 6,242 7,449 4,969 3,415 5,470
Source: Company, JM Financial Application of funds 15,950 17,338 20,732 18,948 21,015
Reported net profit -869 104 159 687 2,296
Depreciation and amort. 546 571 -4,121 606 576
-Inc/dec in working cap. -1,748 -1,208 4,061 1,896 -349
Others 577 806 556 328 126
Key Ratios
Cash from operations (a) -1,494 273 655 3,517 2,649
-Inc/dec in investments -5 -474 -1,426 -627 -249
BV/Share (`) 29.1 29.4 60.6 65.6 79.9
Capex -409 -257 -1,524 -322 -565
ROE (%) -17.1 2.1 1.4 6.1 16.4
Others 54 142 165 186 288
Net Debt/equity ratio (x) 2.1 2.2 0.7 0.4 0.2
Cash flow from inv. (b) -360 -590 -2,784 -762 -526
PER NA 40.6 19.3 16.0 15.9
PBV 0.4 0.8 0.3 1.0 2.6
Inc/-dec in loans 1,956 1,331 -1,980 -2,635 -409
EV/EBITDA 48.3 10.2 6.4 6.0 10.3
Others -718 -960 4,541 -40 39
EV/Sales 0.5 0.6 0.6 0.8 1.5
Financial cash flow ( c ) 1,220 337 2,520 -3,028 -642
Inc/-dec in cash (a+b+c) -634 20 390 -273 1,481
Debtor days 83 77 84 88 75
Opening cash balance 742 109 129 519 245
Closing cash balance 109 129 519 245 1,726

Vinati Organics | Not Rated

No stopping growth in ATBS and IBB
Vinati Organics (VOL) was established in 1989 focusing on manufacturing of specialty Mehul Thanawala
chemicals and organic intermediates. The company enjoys global leadership in IBB (65%
Ashish Mendhekar
market share) and ATBS (55% market share) simultaneously being domestic leader in IB [email protected] | Tel: (91 22) 66303073
(70% market share) and HP-MTBE. VOL has exported to 31 countries in Americas, Europe, Ankit Kabra
Australia and Asia. VOL has been increasing their product basket to leverage their expertise [email protected] | (91 22) 62241877
and benefit from cost efficiencies associated with product and process integration. This has
enabled them to attract customers in pharmaceutical, oil drilling, personal care, and
agrochemicals etc. VOL has grown EBITDA at 5-year CAGR of 14% till FY18. VOL is investing
INR 2.4bn to earn sales revenue of c. INR 3.5-4bn and may continue to grow at 25% CAGR
for next three years. With multiple products under development, VOL will continue to write
new growth stories. We do not have a rating on the stock.
 New applications in ATBS: ATBS accounted for more than 50% of total revenue in FY18.
VOL is leader in IB, an important raw material for ATBS and thus provides smooth raw
material supply for ATBS facility. VOL has proprietary technology for ATBS and recent
price negotiations provide a healthier margin for the product. ATBS is used to make
Key Data – VO IN
polymers which provide hydrolytic and thermal stability to the products. Furthermore, Current Market Price INR1444
ATBS is finding new applications across industries like oil exploration and mining, thus Market cap (bn) INR74.2/$1.0
VOL has been able to add new customers for ATBS. VOL is expanding the ATBS capacity Free Float 26.0%
from 26,000 TPA to 40,000 TPA at expense of INR 750-800mn that will be completed by Shares in issue (mn) 51.39103
April 2019.
3-mon avg daily val (mn) INR37.0/US$0.5
 Capacity expansion in IBB: IBB is basic raw material for pharmaceutical and perfumery 52-week range 1728/765
industries. It is also a key raw material for Ibuprofen synthesis (VOL has consistently given INR/US$ 70.7
IBB at purity of 99.8%, above the international standard of 99.5%). Grandview research
estimates the global migraine drugs market to grow at CAGR of 18% till 2025. VOL Price Performance
expanded its capacity from 16,000 MTPA to 25,000 MTPA to cater to this increasing % 1M 6M 12M
Absolute -8.5 2.2 69.5
demand of Ibuprofen worldwide and the current capacity utilisation is c.50% giving
Relative* -7.4 9.4 64.6
scope to provide for next 4 years if demand grows at c.18-19%. * To the BSE Sensex
 Widening the product portfolio: The new product portfolio consisting of para tertiary
butyl phenol and ortho tert butyl phenol to be used in perfumery industry and 2,4-di tert
butyl phenol and 2,6-di tert-butyl phenol to be used for making antioxidants is expected
to finish by April 2019.
 Financials: Vinati Organics reported revenue/EBITDA/PAT of INR 7.4bn/2.1bn/1.4bn in

FY18. The company is focused towards bringing new products through R&D and benefit
from forward and backward integration of product portfolio. Key risks to the business
are: 1) Exchange risk fluctuation (c.71% of the revenue came from Outside India). 2)
Slowdown in end-user industry like oil exploration, pharmaceutical etc. 3) Margin
correction (high EBITDA margin of c. 36% in 9MFY19) due to economic downturn.

Net sales 6,873 7,590 6,309 6,408 7,434
Sales growth (%) 10.4 -16.9 1.6 16.0
EBITDA 1,529 1,918 2,068 2,170 2,109
EBITDA (%) 22.0 24.8 32.8 33.9 28.4
Adjusted net profit 862 1,158 1,316 1,403 1,439 Bloomberg - JMFR <GO>,
EPS growth (%) 28.6 13.6 6.6 2.7 S&P Capital IQ and FactSet
ROE (%) 27.8 26.7 24.2 20.6 18.1
PE (x) 15.6 22.9 15.2 27.7 32.2
Certification.

Vinati Organics 28 February 2019

Growth (%) 10.4 -16.9 1.6 16.0 Reserves and surplus 3,002 4,237 5,340 6,697 7,864
Raw material (or COGS) 4,188 4,565 2,963 3,005 3,776 Total loans 1,616 653 159 23 152
Personnel cost 274 319 359 419 490 Minority interest
Other expenses (or SG&A) 970 915 920 814 1,059 Sources of funds 4,716 4,993 5,602 6,823 8,119
EBITDA 1,529 1,918 2,068 2,170 2,109 Intangible assets 57 65 54 45 35
EBITDA (%) 22.0 24.8 32.8 33.9 28.4 Fixed assets 3,634 4,028 3,701 4,836 4,966
Growth (%) 13.1 31.9 3.3 -16.2 Less: Depn. and amort. 650 821 0 205 433
Other non-op. income 92 91 62 125 170 Net block 3,042 3,273 3,756 4,676 4,568
Depreciation and amort. 153 177 185 216 234 Capital WIP 101 200 248 74 349
EBIT 1,376 1,741 1,883 1,953 1,876 Investments 27 27 34 618 1,317
Less: Finance Costs -181 -98 -79 -19 -12 Def tax assets/- liability -331 -390 -494 -695 -809
Pre tax profit 1,286 1,735 1,866 2,060 2,034 Current assets 2,327 2,484 2,656 2,682 3,335
Taxes 424 577 550 657 595 Inventories 466 545 433 651 822
Reported net profit 862 1,158 1,316 1,403 1,439 Sundry debtors 1,151 1,291 1,148 1,405 1,771
Adjusted net profit 862 1,158 1,316 1,403 1,439 Cash & bank balances 427 271 735 47 52
Margin (%) 12.4 15.0 20.9 21.9 19.4 Other current assets 4 26 312 536 650
Diluted share cap. (mn) 49.37 51.59 51.59 51.59 51.51 Loans & advances 278 351 27 42 39
Diluted EPS (`) 17.45 22.44 25.50 27.19 27.93 Current liabilities & prov. 473 609 734 693 872
Source: Company, JM Financial Current liabilities 267 353 629 484 814
Cash Flow Statement (INR mn) Net current assets 1,853 1,876 1,921 1,990 2,463
Y/E March FY14A FY15A FY16A FY17A FY18A Others (net) 24 8 137 161 230
Reported net profit 862 1,158 1,316 1,403 1,439 Application of funds 4,716 4,993 5,602 6,823 8,119
Depreciation and amort. 153 182 -850 216 238 Source: Company, JM Financial
-Inc/dec in working cap. 159 -103 393 -578 -424
Others -92 -91 -62 -125 -170
Cash from operations (a) 1,081 1,145 797 915 1,083
-Inc/dec in investments 100 0 -6 -585 -699
Capex -293 -412 367 -1,136 -131
Others 40 -99 -48 174 -275
Key Ratios
Cash flow from inv. (b) -153 -511 313 -1,546 -1,105
BV/Share (`) 62.8 84.1 105.5 131.8 154.6
ROE (%) 27.8 26.7 24.2 20.6 18.1
Inc/-dec in loans -757 -963 -494 -136 129
Net Debt/equity ratio (x) 0.4 0.1 -0.1 -0.1 -0.2
Others 92 386 97 390 209
Financial cash flow ( c ) -838 -790 -646 -57 27
PER 15.6 22.9 15.2 27.7 32.2
Inc/-dec in cash (a+b+c) 89 -156 464 -688 5
PBV 4.3 6.1 3.7 5.7 5.8
Opening cash balance 338 427 271 735 47
EV/EBITDA 9.6 14.0 9.4 17.6 21.4
Closing cash balance 427 271 735 47 52
EV/Sales 2.1 3.5 3.1 6.0 6.1
Debtor days 61 62 66 80 87

APPENDIX I
JM Financial Inst itut ional Secur ities Lim ited

(formerly known as JM Financial Securities Limited)
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: [email protected] | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]
Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
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.
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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
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28 February 2019

Still anybody's race

INDIA SPECIALTY CHEMICALS

05 Indian companies may have lost some Ankit Kabra

11 Analysing some chemical chains for

35 Aarti Industries (Not Rated) Please see Appendix I at the end of

43 Philips Carbon Black (Not Rated)

45 Vinati Organics (Not Rated)

JM Financial Institutional Securities Limited Page 2

CY19 – still optimistic for Indian

Analysing four sub-sectors Company specific updates

JM Financial Institutional Securities Limited Page 3

China Benzene Imports India Benzene Exports

India China India China

Source: Bloomberg, JM Financial Source: Bloomberg, JM Financial

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Indian companies may have lost some competitiveness to China

Exhibit 7. Increase in employee cost (YoY%) Exhibit 8. Employee Expense as a % of Revenue

India China India China

Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial

Based on the above exhibits it is clear that:

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Exhibit 9. Revenue Growth (YoY%)

Source: Bloomberg, Company, JM Financial

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2. Effluent treatment / Environment costs :

600 29.2% 30%

500 CAGR 17.7% 25%

400 19.6% 20%

Effluent treatment Expense (INR mn) YoY growth %

Source: Company, Industry, JM Financial

Interestingly, in view of the recent opportunity in environmental issues in China,

Additionally, China has published a draft regulation on the Environment Risk

JM Financial Institutional Securities Limited Page 7

India China India China

Source: Bloomberg, Company, JM Financial. Source: Bloomberg, Company, JM Financial

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Margins and return ratios of Indian vs Chinese companies

Exhibit 15. EBITDA Margins (%)

Source: Bloomberg, Company, JM Financial

India China India China

Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial

JM Financial Institutional Securities Limited Page 9

Indian chemical companies benefit if the rupee depreciates

Exhibit 18. Reported PBT sensitivity on 1 % depreciation (INR mn)

20.0 13.4 13.9

Source: Company, JM Financial

Exhibit 19. Currency sensitivity on EBITDA and PAT

Company EBIDTA Impact PAT Impact EBIDTA Impact PAT Impact

Fine Organics 0.77% 0.80% 1.22% 1.38%

Galaxy Surfactants 0.48% 0.73% 0.90% 1.12%

Navin Fluorine 0.08% 0.06% 0.12% 0.12%

SRF 1.36% 2.13% 2.55% 4.28%

Analysing some chemical chains for competitive advantage

1) Fluorine-based chemical chain (representative of inorganic chemicals)

2) Benzene-based chemical chain (representative for organic chemicals) and

Based on the above, it can be stated:

Exhibit 22 and Exhibit 23 (below) provide an overview of fluorspar industry in

JM Financial Institutional Securities Limited Page 11

To substantiate the thesis that China has an edge in inorganic fluorides, we