hdfc report

INSTITUTIONAL RESEARCH

HDFC sec Investor Forum

The Chemical Age – Key takeaways

Participating Companies

Aarti Industries

Aksharchem (India)

Apcotex Industries

Bodal Chemicals

IG Petrochemicals

Omkar Speciality Chemicals

Tata Chemicals

18 SEP 2014

Satish Mishra [email protected] +91-22-6171-7334

Shrenik Mehta [email protected] +91-22-6171-7336

2

Aarti Industries (AI) is engaged in the manufacture of dyes, pigments, pharmaceuticals, agrochemicals, rubber chemicals and their intermediates. AI specialises in benzene chemistry and is perceived as a quality and cost-efficient manufacturer. Its customer list includes global giants such as BASF, Huntsman, Clariant and Dow Chemicals.

Full benefits of capex still to accrue : Capex of ~Rs 7bn (on Gross block of Rs 7.38bn in FY11) in the previous 3 years will help reap benefits in the foreseeable future. Additional capex of Rs 3bn in the next 2 years, with a guidance of 3-4x asset turns, will lead to healthy Revenue/PAT growth.

Steady & profitable growth : A diversified product portfolio supported by backward and

forward integration has translated into stable EBITDA margins 14-17% over FY11-14. Improvement in EBIT margins by 700bps to 12% bodes well for the pharma division. Benzene prices have moved up by 60% over last 2 years to Rs 84/kg in FY14, but price pass throughs have protected margins. This tells us that most product segments (that Aarti is present in) offer robust pricing power.

Outlook and view : Management has guided for 15-18% revenue CAGR for speciality chemicals and 18-20% for the pharma segment over FY15-17E. D/E as at FY14 is 1.1x and this will peak out by FY15. Foray into ethylene chemistry post FY17 can be a key trigger. With steady cash flow, ROEs of ~20%, operating leverage from newer capacity, de-leveraging post FY16, we feel AI can

replicate its steady growth rate over FY15-17E.

18 SEP 2014

Aarti Industries

INDUSTRY Chemicals

CMP (as on 17 Sep 14) Rs 290

Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg ARTO IN

No. of Shares (mn) 89

MCap (Rs bn)/(US$ mn) 26/421

6m avg traded value (Rs mn) 33

STOCK PERFORMANCE (%)

52 Week high / low Rs 308/66

3M 6M 12M

Absolute (%) 52.5 133.8 316.5

Relative (%) 48.2 111.7 282.1

SHAREHOLDING PATTERN (%)

Promoters 60.87

FIs & Local MFs 8.78

FIIs 0.18

Public & Others 30.17

Source : BSE FINANCIAL SUMMARY (Rs mn) FY10 FY11 FY12 FY13 FY14 1QFY15

Revenues 13,012 14,530 16,733 20,962 26,325 7,250

EBITDA 2,058 2,021 2,529 3,650 4,125 1,131

EBITDA Margin 15.82% 13.91% 15.11% 17.41% 15.67% 15.60%

PAT 685 815 1,033 1,344 1,624 414

EPS (Rs) 7.7 9.2 11.7 15.2 18.3 4.7

P/E (x) 37.3 31.3 24.7 19.0 15.7

EV/EBITDA (x) 14.5 15.0 12.3 9.1 8.4

RoE (%) 16.5 16.9 18.7 19.9 19.9

ND/ E (x) 0.92 0.93 0.97 1.04 1.06

Ramp-up to continue

Source : Company, HDFC sec Inst Research

Satish Mishra [email protected] +91-22-6171-7334 Shrenik Mehta [email protected] +91-22-6171-7336

3

AksharChem (ACI) is engaged in the production

of dyes and intermediates. ACI excels as one of

the leading manufacturers and exporters

of Vinyl Sulphone (VS). VS is used as raw

material for reactive dyes, which are used in

making colour pigments, paints, rubber, textiles

and plastics.

Market leader in VS : The current VS capacity is 7,800 TPA with utilisation at 75%. About 85% of VS produced by ACI is exported and it has a 50% market share in India’s exports. VS business is very volatile with EBITDA margins varying from 10% to 25%. VS is used to make reactive dyes which are largely linked to textiles. ACI’s management feels that EBITDA margins of 23%+ is sustainable going ahead.

Green biz to moderate volatility : Pigment green (PG) biz of Asahi Songwon Colors (a related co) will be demerged and transferred to ACI. Five shares of ACI will be issued to Asahi’s shareholders for every 26 shares they hold in Asahi. Yearly revenue from green pigment biz is Rs 800mn. Current capacity of pigment green is 1,440 TPA . Plans to double capacity in PG biz is in the offing by 4QFY15. Current EBITDA margins for PG are at 22%. Management is guiding for a slight improvement hereon. Pigment green biz has stable margins and does not face any threat from Chinese manufacturers.

Well placed to ride recovery across sectors : Market leadership in VS, transfer of pigment green biz (stable margin biz) and investments in ETP gives us confidence about the sustainability of the biz.

18 SEP 2014

Aksharchem (India)

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg ADCH IN


MCap (Rs bn)/(US$ mn) 1.2/20.3




3M 6M 12M

Absolute (%) 80.8 101.0 425.6

Relative (%) 76.4 78.9 391.1


Promoters 73.68


FIIs -


Source : BSE

Well placed to ride a recovery



FINANCIAL SUMMARY (Rs mn) FY10 FY11 FY12 FY13 FY14 1QFY15

Revenues 816 846 519 958 1,449 386

EBITDA 44 86 (17) 62 328 69

EBITDA Margin 5.40% 10.20% -3.34% 6.43% 22.67% 17.77%

PAT 15 64 (39) 38 200 41

EPS (Rs) 3.1 12.9 -7.9 7.7 40.5 8.3

P/E (x) 81.3 19.4 - 32.6 6.2

EV/EBITDA (x) 31.4 15.2 -78.9 22.2 4.0

RoE (%) 18.7 56.4 -27.8 24.9 78.5

ND/ E (x) 1.83 0.54 0.97 0.79 0.25

4

Apcotex Industries (API) is one of the leading producers of Performance Emulsion Polymers in India. API produces two main products : Synthetic Latex and Synthetic rubber. Synthetic latex is used in paper, carpet, construction, tyre, paint and textiles. Synthetic rubber is primarily used in footwear. Apcotex was established in the year 1980 as a division of Asian Paints (India) Ltd., the largest paint manufacturer in India. Apcotex was spun-off as a separate company in 1991.

Steady growth : API has delivered a strong CAGR 21/16% Revenue/EBITDA over FY10-14 with margins at ~8.5-9.5%. RM risks are present due to dependence on styrene (100% imported) and butadiene (only two manufacturers in India) but volatility has decreased recently.

Jump in utilisations : Tough economic

environment led to sub-par capacity utilisation in

FY14 (latex ~60% and rubber ~50%). But post

1QFY15, utilisation of ~80% on account of

improving demand is sustainable according to

management.

Outlook : API clocked a double digit EBITDA

margin in 1QFY15 and the focus is now on

sustaining these levels. Current capacity for

synthetic latex is 55,000 TPA which will be scaled

to 65,000 TPA by FY16 with a capex of ~Rs 60mn.

API will be repaying ~Rs 50mn/yr over the next

couple of years to pare down long term debt.

Although Rubber division has shown some

recovery, API will not invest for expanding

rubber capacity. API feels it can achieve a

revenue CAGR of 40% over FY14-16.

18 SEP 2014

Apcotex Industries

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg APCO IN






3M 6M 12M

Absolute (%) 91.0 201.1 204.1

Relative (%) 86.7 179.0 169.6


Promoters 57.60


FIIs -


Source : BSE

Urban growth play




Revenues 1,431 2,031 2,550 2,734 2,978 1,030

EBITDA 141 203 228 235 276 114

EBITDA Margin 9.82% 9.98% 8.92% 8.60% 9.26% 11.12%

PAT 83 107 115 128 131 58

EPS (Rs) 8.0 10.3 11.1 12.3 12.7 5.6

P/E (x) 41.2 31.9 29.9 26.8 26.1

EV/EBITDA (x) 25.3 17.6 16.1 15.7 13.7

RoE (%) 14.7 18.0 17.1 17.1 16.1

ND/ E (x) 0.23 0.29 0.34 0.35 0.39

5

Bodal Chemicals (BCL) is a leading manufacturer of dyes, dye intermediates and basic chemicals, including H-acid. BCL produces three major types of dyes: direct, acid and reactive dyes (more than 175 products) having applications in the textile, leather and paper industries.

Painful past, miraculous recovery : BCL undertook a major debt funded (Rs 2.5bn) expansion in FY07 to forward and backward integrate its dye intermediate business. Dumping by China during this period led to squeeze in margins and high interest led to losses. In FY14, margins shot up to 20% on the back of strong H-acid prices as Chinese plants shut down.

Integrated model: Current capacity for Basic Chemicals/Intermediates/Dyestuff is at 190/30/17 kTPA with utilisations at 90/70/65%

respectively. With commissioning of ETP (capex of Rs 300mn) the utilisation levels can increase to 90% for both intermediates and dyestuffs from the second half of FY15.

Outlook : BCL has no plans to expand capacity as of now, with its primary target being debt reduction. As at Mar-14, net D/E is 3.8x. BCL has a debt repayment obligation of ~Rs 150mn every 2 years. But with strong internal cash generation (OCF of Rs 522mn in FY14 vs Rs 142mn in FY13), BCL will probably run ahead of schedule in repaying debt.

Co has guided for 10-15% revenue growth over FY15-17E with EBITDA margins ranging between 16-18%. PAT (adj for one time depreciation) for FY14 was Rs 778mn, with a guidance of Rs 1.15bn in FY15E. BCL has no plans to dilute equity to reduce D/E but will rely on strong internal generation.

18 SEP 2014

Bodal Chemicals

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg BODL IN






3M 6M 12M

Absolute (%) 37.8 259.3 382.3

Relative (%) 33.5 237.2 347.8


Promoters 72.32


FIIs 0.13


Source : BSE


Turnaround turk



Revenues 4,675 5,727 6,137 5,275 9,595 3,853

EBITDA 527 617 49 237 1,925 939

EBITDA Margin 11.28% 10.78% 0.80% 4.49% 20.06% 24.37%

PAT 135 166 (298) (232) 302 520

EPS (Rs) 1.2 1.5 -2.7 -2.1 2.8 4.8

P/E (x) 42.9 34.8 - - 19.2

EV/EBITDA (x) 15.9 13.5 185.2 38.7 4.7

RoE (%) 23.4 24.4 -43.6 -42.8 43.1

ND/ E (x) 4.51 3.23 5.63 6.72 3.78

6

IGP is one of the largest and lowest cost producers of Phthalic Anhydride (PAN) in the world. PAN is an industrial chemical and has wide usage across cables, pipes, packaging, plasticisers, paints, building materials etc.

Cost savings on synergies : IGP added 50,000 TPA capacity of PAN in FY14 to take the overall capacity to 166,000 TPA. Addition of the third plant led to cost savings for IGP. Steam generated from PA-3 has led to decrease in furnace oil consumption. This initiative will lead to Rs 80-90mn/yr of cost saving. Benzoic acid produced from waste water can generate additional income. IGP can produce 1,200 TPA of benzoic acid which will boost topline by Rs 120-130mn/yr as per the management.

Raw Material scenario : Orthoxylene (OX) is the key RM required for manufacturing PAN. IGP currently sources 70% of its RM requirements

from Reliance Industries and the balance is imported. With setting up of a new OX manufacturing facility of 2 lac TPA in Singapore, prices of OX should stabilize/correct as per the management. Also reduction in import duty from 5% to 2.5% augurs well for the company.

Outlook : EBITDA/kg for IGP had corrected from Rs 5.4 in FY10 to Rs 3.6 in FY12 due to higher manufacturing (plant level) costs. Operational efficiency on commissioning of PA-3 has led to an improvement in this metric to Rs 6.1/kg in 1QFY14 which is sustainable according to the management. With gross margins hovering in the Rs 10-12/kg range and OX prices remaining soft, we believe IG could be headed for EBITDA in the Rs 900-1000mn per annum. With healthy cash accretion, we think the co is well placed to set in motion the next phase of growth : a downstream foray into plasticisers and perhaps one more brownfield PA expansion.

18 SEP 2014

IG Petrochemicals

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg IGPL IN






3M 6M 12M

Absolute (%) 51.2 244.8 310.6

Relative (%) 46.8 222.7 276.1


Promoters 72.10


FIIs 0.01


Source : BSE

Transition




Revenues 5,419 6,313 8,861 9,703 12,043 3,434

EBITDA 611 449 461 620 702 278

EBITDA Margin 11.27% 7.11% 5.21% 6.39% 5.83% 8.09%

PAT 273 132 133 31 31 108

EPS (Rs) 8.8 4.3 4.3 1.0 1.0 3.5

P/E (x) 7.9 16.3 16.2 69.9 68.7

EV/EBITDA (x) 4.3 5.5 5.1 5.5 5.3

RoE (%) 7.7 13.1 13.0 11.5 12.5

ND/ E (x) 0.20 0.12 0.08 0.48 0.61

7

Omkar Speciality Chemicals (OSC) produces Speciality Chemicals and Pharma Intermediates. OSC’s products are used in Pharmaceuticals, Chemicals, Glass, Cosmetics, Ceramic Pigments and Cattle & Poultry Feeds.

Iodine derivative biz : Management guided that iodine derivatives (50% of revenues) will grow at 25% CAGR over FY15-17E. EBITDA margin of 12% in iodine biz seems sustainable. Resumption of crude iodine supplies from Japan (post earthquake) has led to price retracement to $35/kg currently (had risen from $35/kg in FY09 to $70/kg in FY11). Domestic receivables is an issue for the iodine biz with debtor days of ~150 which has led to stretched working capital. OSC is

doubling the iodine + intermediate capacity to 9,000 TPA for Rs 600mn (debt + internal accruals).

Veterinary API : OSC has increased its Veterinary API facility from 100 TPA to 600 TPA with a capex of Rs 200mn. OSC expects asset turns of 6x on the expanded capacity. Veterinary API biz has an EBITDA margin of 30% which is sustainable going ahead and can grow at 30% CAGR over FY15-17E.

Outlook : OSC has planned for an equity dilution to pare working capital debt. Due to high volatility in INR/USD, the company has started using INR loans instead of FCNR loans which has resulted in doubling of interest cost. This was the primary reason behind the fall in FY14 profits.

18 SEP 2014

Omkar Speciality Chemicals

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg OSCL IN






3M 6M 12M

Absolute (%) 18.4 7.4 98.7

Relative (%) 14.1 (14.7) 64.2


Promoters 66.08


FIIs 3.70


Source : BSE

Well Placed



FINANCIAL SUMMARY (Rs mn) FY11 FY12 FY13 FY14 1QFY15

Revenues 1,068 1,669 2,117 2,403 364

EBITDA 220 364 442 462 53

EBITDA Margin 20.59% 21.79% 20.89% 19.22% 14.69%

PAT 102 160 206 136 30

EPS (Rs) 5.2 8.2 10.5 6.9 1.6

P/E (x) 28.1 17.9 13.9 21.1

EV/EBITDA (x) 13.0 9.6 9.2 9.9

RoE (%) 11.0 16.2 17.7 10.3

ND/ E (x) 0.00 0.59 0.95 1.26

8

Tata Chemicals Ltd (TCL) is a key player in fertilisers (both urea and complex), iodised salt and soda ash (world’s 2nd largest producer with manufacturing facilities in Asia, Africa, EU & USA).

US operations : US soda ash remains a high profit business and TCL plans to expand capacity from 2.5 mtpa to 2.75mtpa.

UK, Kenya operations : With a view to ensure long term viability of the business, the company had restructured its UK operations in the early part of FY14. Management has guided for a sustainable EBITDA of $15m from the Kenyan operations and £25m from the UK operations once a steam turbine is installed to begin sale of surplus power. Installation of the turbine is

expected in 3QFY15. The Kenyan operations will retrench ~200 people as a part of restructuring.

Growth Drivers : TCL plans to focus on consumer products and wellness nutrition business like ready to cook/eat food, spices, pulses. 5 yr target from this segment is to increase revenues from Rs 10bn to Rs 35bn (includes Rs 18bn from salts) according to the management. With the restructuring efforts coming to an end, the management is now focused on repayment of debt. The management has guided for a gradual debt repayment schedule over the next 5 years across all its operations. Stemming of losses in the UK and Africa businesses accompanied by a gradual reduction in interest expense are to drive earnings growth in the years to come.

18 SEP 2014

Tata Chemicals

INDUSTRY Chemicals


Nifty 7,976

Sensex 26,631

KEY STOCK DATA

Bloomberg TTCH IN


MCap (Rs bn)/(US$ mn) 100/1,643




3M 6M 12M

Absolute (%) 16.5 41.4 61.6

Relative (%) 12.1 19.3 27.1


Promoters 31.06


FIIs 21.93


Source : BSE

Focus on de-leveraging




Revenues 95,436 110,606 138,150 147,110 158,954 38,466

EBITDA 18,101 19,597 24,715 25,807 19,519 5,307

EBITDA Margin 18.97% 17.72% 17.89% 17.54% 12.28% 13.80%

PAT 6,059 6,535 8,376 4,004 (10,320) 1,755

EPS (Rs) 23.8 25.7 32.9 15.7 -40.5 6.9

P/E (x) 16.4 15.2 11.9 24.8

EV/EBITDA (x) 7.6 7.0 5.8 5.8 8.5

RoE (%) 12.8 12.9 14.2 6.3 (17.2)

ND/ E (x) 0.76 0.64 0.63 0.74 1.06

9

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