vikas ecotech ltd. (vel) sector: specialty chemical · the indian poly vinyl chloride ......

(Wholly owned subsidiary of Bank of Baroda)

Exhibit 1: Financial summary (Rs mn)

Year end: March FY14 F Y15 FY16 FY17e FY18e FY19e

Net sales 2500 2110 3072 3901 6102 7888

Growth (%) -0.9 -15.6 45.6 27.0 56.4 29.3

Operating margin (%) 5.3 7.9 15.9 17.7 18.0 18.4

PAT 37 38 255 363 566 779

Adjusted PAT 36 38 254 363 566 779

EPS (Rs) 0.4 0.1 1.0 1.4 2.2 3.1

Growth (%) -1.5 4.7 570.2 42.9 56.2 37.5

P/E(x) 35.6 85.0 12.7 8.9 5.7 4.1

ROE (%) 9.1 8.9 46.3 43.5 44.6 41.0

ROCE (%) 10.6 9.4 24.5 24.7 27.0 26.2

Source: Company, BOBCAPSe

Vikas EcoTech Ltd. (VEL)

Road to a ‘GREENER’ tomorrow; initiate with BUY

VEL has an experience of over 15 years in the chemical industry and is an

emerging player in the global arena of the high end Specialty Polymer Compounds and Additives. VEL is the only Indian company that manufactures Organotins (Tin based heat stabilizer for PVC) which is lead free and non-toxic.

The company has evolved from trading company to a manufacturing organization. The increasing awareness about lead poisoning which has led the companies and countries preferring eco-friendly and non-toxic substitutes, will

boost the topline for a company like VEL. We believe that such factors coupled with the capacity expansion plans of VEL would further drive the stock upside.

Strengthening manufacturing business: With a focused strategy, VEL has

transformed from trading business to manufacturing business (trading contributed 64% in FY13 to 20% in FY16). In FY16, specialty compounds/specialty additives/ trading contributed 59%22%/20% of total revenue. Going forward, VEL has planned capacity

expansion in its Specialty compounds and Organotins segment. We expect, revenue contribution in specialty compounds/specialty additives/ trading at 48%/43%/10% respectively by FY18e. This change in contribution will also help in expanding EBITDA

margins which are expected to expand by ~207 bps over FY16-18e.

Only manufacturer of Organotins - An eco-friendly heat stabiliser: Organotins is a US FDA approved eco- friendly heat stabilizer; a substitute for health hazardous lead

based stabilizer. This stabilizer is mainly used as a heat stabilizer in PVC pipes. Various studies across globe has proven that lead based stabilizer are toxic, therefore, many developed countries like Europe and USA have banned them. By looking at the ill

effects on the human body, plastic/pvc processors are shifting to the eco-friendly Organotins. Indian stabilizer market is of ~60,000MTPA where at present Organotins markets stands for 6,000MTPA. This shows broader scope for Organotins market

growth in India. VEL is the only manufacturer of Organotins in India. Considering the growth prospects, VEL has planned capacity expansion from current 1,800 MTPA to 3,000MTPA in FY17 and additional 6,000 MTPA in FY18. We expect, Organotins

revenue to grow at a CAGR of 105% over FY18e.

Growth in Specialty compounds: Polymer and Polymer Rubber compounds are used in various industries like rubber (footwear industry) and plastic industry (pipe

industry), PVC, wire and cable industry. PVC / TPR-TPE/CPE compounds are expected to grow at 15-20% CAGR for next 5years. VEL manufactures large range of polymer and Polymer Rubber compounds. Polymer compounds require constant

upgradation in the products and manufacturing technology, which is possible for VEL with it’s in- house R&D facility. The company has a current capacity of 20,000MTPA and achieved capacity utilization of 74% in FY16. VEL has planned to increase the

capacity to 31,000MTPA by FY18e. We expect the compounds business to grow at a CAGR of 27% over FY16-18e.

Valuation: We believe that VEL is uniquely positioned in compound and additives

business with its integrated R&D. We further believe that, increasing demand for toxin free stabilizers, growth in PVC industry, opportunities in export markets and capacity expansion will create enormous opportunities for VEL’s revenue/ earning to grow at a

CAGR of 41%/49% over FY16-18e. Historically, VEL traded at an average one year forward PE multiple of 14x. At the CMP of Rs.12.7, the stock is trading at 8.9x FY17e and 5.7x FY18e earnings. We are initiating coverage on the stock with a BUY rating

and a target price of Rs.31 an upside of 145%.

Vaishali Parkar Kumar | [email protected] | +91 22 6138 9382

Source:-Bloomberg

Price Price Target

Rs. 12.7 Rs. 31

Bloomberg Code

VKEC IN

Share Holding (%)

Promoters 46.01

FII 0.0

DIIs 0.19

Stock Data

Nifty 8,743

Sensex 28,413

52 week high/low 25.4/10.85

Maket Cap (Rs. bn) 3.2

Face value 1

Price performance (%) 1M 3M 6M 1Y

Absolute -1.2 -6.6 -14.2 -9.3

Relative to Sensex -2.1 -12.9 -29.9 -19.8

Relative Performance

Up/Down (%)

145

Reuters Code

VKGL.NS

As on 30th June, 2016

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Nifty Vikas EcoTech Ltd.

Initiating coverage

BUY

Sector: Specialty Chemical

15th September, 2016

Vikas EcoTech Ltd. | 15 September 2016

| Equity research | 2


Industry Outlook

The Indian Poly Vinyl Chloride (PVC) industry

The PVC industry in India has historically been driven by agriculture till 2000. Thereafter, the main

driver for PVC consumption has been infrastructure (Ex: Pipes & Fittings) which now has a share

of to over 70% from 14% in 1975. Globally, Pipes & Fittings account for ~43% of the PVC

consumption. For the period between 2002 and 2015, the total demand for PVC in the country grew

at a CAGR of ~8.7%. During the same period domestic production capacity grew at a CAGR of

~4.6 % whereas imports grew at a CAGR of ~32.5%.

The PVC industry in India is valued at over Rs. 200bn. In spite of strong economic growth, India

still has a long way to go to realize its infrastructural needs – nearly US$ 650 billion will be required

for urban infrastructure in the next twenty years. Also, the construction sector contributes to 10%

of the GDP. This provides great opportunity for investment and hence for PVC products that are

used in these sectors.

Exhibit 2: PVC value chain

Source: Company, BOBCAPS

The global demand for PVC Market was valued at USD 57.06 billion in 2015 and is expected to

reach USD 78.90 billion in 2021, growing at a CAGR of 5.6% between 2016 and 2021The global

consumption of PVC in 2014 was estimated at 40 million tons. India has huge growth prospects as

the per capita consumption in India of 2kg is low compared to 11.8kg per capita in the US and 10.3

kg per capita in China. With the increasing GDP growth and implementation of new age material

the PVC future is bright in India.

Exhibit 3: Per capita consumption of Suspension PVC


Going forward, the Indian PVC demand is expected to be driven primarily by the Agriculture,

Infrastructure, Housing and other sectors like FMCG, pharmaceutical and retail segments. The

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

India Brazil Malaysia Thailand China USA

Qu

an

tity

(kg

pe

r p

ers

on

)The PVC industry in India is estimated to grow at 15% over next few years




estimated annual growth for PVC is expected to be at least 13% in the next five years, with demand

expected to cross 5 million tons in 2020.

PVC Stabilizer Industry:

Role of Stabilizers

Achieve an optimum balance of ecological and economical benefits

Enable custom properties in end products

Enable use in product engineering

Enhance the key properties of plastics

Ensure efficient processing without sacrificing physical properties

Provide higher performance in the intended function

Be thermodynamically constrained from free migration to the surface

Across the progressive nations of US, Europe and Asia use of lead-based stabilizers in PVC pipe

manufacturing has been voluntarily ceased or mandatorily banned by the end of 2015. The global

PVC pipe manufacturing industry has shown courage and acted responsibly in phasing out lead

based stabilizers and plasticisers in Europe, US and some nations like Australia and South Korea.

The harmful effects of lead have been medically proven. Hence, moving towards a lead-free world

is becoming an increasingly imperative need.

India currently does not have any industry volunteerism or government regulation to ban lead based

stabilizers in PVC pipes. This is especially critical in pipes used for carrying water for drinking,

irrigation or cooking. However, few Indian PVC pipe manufacturers have resolved to shift to toxin-

free stabilizers in their manufacturing.

Today, lead-based stabilizers are being phased out worldwide in a planned manner. In Europe, the

phase out is driven by the Comprehensive Chemicals Regulation (REACH). Globally, the PVC

stabilizer market is estimated to be worth USD 3.8 billion by 2020. With environment-friendly and

non-toxic stabilizer alternatives, it presents a huge opportunity to tap. The Asia-Pacific market is

the largest, registering 57.1% share in 2014. With the global manufacturing base moving to Asia

and a special focus on China and India, these markets are expected to register significant growth.

Organotins - A safe and eco-friendly alternative

Organotins stabilizers scientifically known as MTM (Methyl Tin Mercaptide) are tin (Sn) - based

stabilizers primarily used in rigid PVC applications for food and water contact. Stabilizers are added

to PVC compounds as critical ingredients to maintain the properties of the end product throughout

its life cycle.

Advantages of Organotins stabilizers

• Lead-free, non-toxic, safe and eco-friendly

• Sanctioned by most international legislations for potable water pipes and fittings

• Extensive global approvals for food contact applications with equal or improved strength

(efficacy)

• Approval in all European countries and USA for potable water pipes

PVC stabilizer market is estimated to be worth USD 3.8 billion by 2020

Organotins is a better substitute for lead based stabilizer




Industries switching to Organotins stabilizers

Organotins stabilizers are being increasingly adopted by industries such as medical devices,

agriculture & infrastructure pipes, medical components and the packaging industry. As most of the

end products have significant human contact, being lead-free is a key requirement that is driving

demand.

Indian manufacturers who are looking at exports or supplying to MNC clients have to adhere to

lead-free stabilizer norms of EU, America and other progressive nations. Thus, more and more

players especially in the organized and premium product offerings space are shifting to green and

environment-friendly stabilizers.

Organotins stabilizers are the only safe and eco-friendly heat stabilizers that can be used for

transparent and food-grade PVC applications. Organotins stabilizers are suitable for critical

applications. They are FDA-approved PVC additives and comply with the regulatory health

standards of the most advanced nations. While the Indian market size is 6 KTPA, the global market

is about 140 KTPA.

Opportunity in Indian PVC pipe manufacturing

Lead-based stabilizers in PVC pipes used for water, plumbing and sanitation are being banned or

voluntarily discontinued. Consumer awareness for greener and safer products is creating demand

for Organotins stabilizers in food-grade applications. With the National Green Tribunal giving a

notice to major PVC pipe manufacturers and the Government of India, eco-friendly stabilizers like

tin-based stabilizers will become the industry’s preferred choice.

Exhibit 4: PVC Stabilizer market


Rest of the world43%

Asia-Pacific market share (2014)

57%

Current stabilizer market in India ~60,000MTPA. Out of which Organotins market is ~6,000MTPA




Investment rationale

Vikas EcoTech Ltd. has an experience of over 15 years in the chemical industry and is an

emerging player in the global arena of high end specialty chemical players. VEL’s forte is in

the manufacturing of Specialty Polymer Compounds and Additives, and it is the only Indian

company that manufactures Methyl Tin Mercaptide (MTM) also known as Organotins (heat

stabilizer) which are lead free and non-toxic.

We believe, going forward, the company’s revenue/earnings will grow at a CAGR of

~41%/49% over FY16-18e, led by 1) rising demand for PVC piping through various

Government initiatives, 2) Focus on increasing exports to provide higher realizations, 3)

increasing demand in the overall specialty chemical segment and 4) capacity expansions in

Specialty Compounds and Organotins Stabilizers for supporting volume growth due to

various triggers

Focus on manufacturing to drive operational efficiency

VEL is mainly into manufacturing of specialty compounds (TPR, PVC, EVA, SOE, PET, TPE,

and recycled compounds) and specialty additives (Organotins - MTM, Plasticizer- ESBO and

Flame Retardants - ATH which mainly goes into PVC manufacturing) along with trading. Over

a period of time, with focused strategy, the company has increased its capacity in specialty

compounds /additives and worked towards reducing share of trading business. In FY13 the

share of specialty compounds/ specialty additives/ trading was 25%/11%/64%, respectively,

which has changed to 58% /22% /20% respectively in FY16.

We expect, with the expansion plans in specialty compounds and specialty additives the

company will focus on manufacturing products in these two segments. We expect, the revenue

contribution from specialty compounds/additives/trading would be 48% /43% /10% by FY18e

which will be margin lucrative.

VEL has improved EBITDA margin from 4.2% to 15.9% over FY13 to FY16 led by increasing

manufacturing activity and increasing share of specialty compounds and additives. Going

forward, we expect VEL to improve EBITDA margin by ~207bps to 18% led by 1) new capacity

addition in additives segment, 2) breakthrough and streamlined production in few products with

the help of R&D, 3) achieving very low wastage, 4) capability to produce through recycling, 5)

increasing exports opportunities

Exhibit 5: Changing revenue contribution trend to ensure better margins

Revenue contribution trend EBITDA Margin trend

Source: Company, BOBCAPs Source: Company, BOBCAPs

Growth prospects in specialty Additives (Organotins)

Organotins are lead free additive and a substitute for lead based additives which goes into the

manufacturing of PVC pipes. At present, the total additives market in India is ~60,000MTPA. This

includes Organotins and lead based stabilizers, out of which ~6,000MTPA is a market of

Organotins. With the increasing awareness one can expect, huge scope for Organotins in coming

years.

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Speciality Compounds Speciality Additives

Trading & Other

0%

5%

10%

15%

20%

-

300

600

900

1,200

1,500

1,800

FY14 FY15 FY16 FY17e FY18e FY19e

Rs. M

n

EBITDA EBITDA margin %

VEL is the only Indian company that manufactures Organotins which are lead free and non-toxic

Trading reduced from 64% in FY13 to 20% in FY16

~207bps expansion in EBITDA margins over FY16-18e

Huge scope for growth in Organotins as eco- friendly stabilizer




VEL is the only manufacturer of Organotins in India with an in house R&D facility. Out of

6,000MTPA Organotins market the company had ~10% market share in FY16 and sold ~600MTPA

of Organotins in India. The company sees huge growth opportunities in this segment as it has direct

competition only from Chinese and USA players (domestically no one has fully integrated

technology). Adding to this advantage is the clients’ shifting preference to VEL’s products from

Chinese products led by quality issues and USA products led by higher landing cost.

VEL has current capacity of 1,800MTPA and with the growing awareness for lead free stabilizers

as well as increasing demand, the company has planned to increase the capacity to 9,000MTPA

by FY18e. We expect, Organotins sales to grow at a CAGR 105% by FY18e led by 1) Increasing

awareness about lead poisoning and thus higher demand for lead / heavy metal free stabilizers, 2)

lower base and increasing new capacity 3) Governments’ eco-friendly initiatives in many countries

banning lead based stabilizers which may be implemented in India too in the near future.

Exhibit 6: Organotins stabilizer to grow at a CAGR of 105% over FY16-18e


Scope in Polymer Compounds

Polymer compounds are used in various industries like rubber (footwear industry) and plastic

industry (pipe industry), PVC, wire and cable industry. PVC compounds/ TPR-TPE/CPE market in

India is ~1,400KTPA/9KTPA/27KTPA, which is expected to grow at 15% CAGR for next 5years.

VEL manufactures large range of polymer compounds which go into different industries. This helps

the company to diversify its product concentration. Polymer compounds require continuous

developments in the products, which is possible for VEL with its’ in- house R&D. The company has

current capacity of 20,000MTPA and working at 74% capacity utilization. VEL has planned to

increase the capacity to 31,000MTPA by FY18e.

VEL has grown at a CAGR of 42% over FY13-FY16. We expect, with the increasing use of different

polymer compounds and increasing production capacity assisted with constant upgradation

through R&D, the company's polymer compound segment will be able to grow at 27%.

Exhibit 7: Specialty compounds to grow at a CAGR of 27% over FY16-18e

Source: Company, BOBCAPs

-50%

0%

50%

100%

150%

200%

100

900

1,700

2,500

3,300

4,100


Rs. M

n

Organotins - TIN Growth (%)

0%

20%

40%

60%

80%

100

900

1,700

2,500

3,300

4,100


Rs. M

n

Speciality Compounds Growth %

Capacity expansion of 9,000MTPA by FY18e to meet the future demand

In-house R&D a key catalyst in polymer compounds




Transforming waste into profits through recycling

Vikas EcoTech Ltd. has been able to transform itself to make recycling its specialty through in-

house R&D. Its forte through access to appropriate supply chain for ample & consistent supplies,

the specialized machinery and strong technical knowhow has opened up new opportunities in

recycling business. With this initiative, the Company not only contributes towards environmental

preservation, but also helps other organizations to dispose their waste in a responsible manner

and in the process VEL is able to improve its margins.

The margin improvement is a direct result of recycling as the recycled or non-prime materials

generally cost less than the virgin materials. If the Company is able to use for example 15% to 25%

recycled raw material (replacing virgin materials) in making of a compound, they can save on raw

material costs and thereby add to the overall margins of the company.

VEL uses industrial and consumer wasted RPVC (Rigid PVC) pipes, RPET (PET Reclaimed Bottles

or Films) and off grades (batches which lack on meeting specs of virgin materials on any one of

the key parameters) and reprocesses the same achieving the targeted specifications on the final

product.

The company foresees recycling to be a very attractive business as there is an increase in

awareness on plastic and rubber recycling. The new directives pouring in on mandatory recycling

by all the plastic/pvc processors would contribute more to the same. In such conditions, VEL

already has a grip on the usage of such materials and should be in a better position than its

competitors in many ways (commercial & technical).

Going forward, we believe, VEL’s focus on recycling of non-prime materials and converting them

to a compound that is as good as virgin raw materials due to its specialized machinery and strong

technical expertise. This will not only create goodwill for the company, but also improve its EBITDA

margins by 207 bps over FY16-FY18e (on conservative basis).

Capacity expansion; a boost to topline and exports

In the last two years Vikas EcoTech’s manufacturing volume has seen a growth rate of over 40%

YoY. Considering better volume growth, going forward, VEL has planned capacity expansions in

Organotins, specialty compounds and recycled compounds. The company has existing plants in

Rajasthan & J&K. VEL has capex plan of ~ 450mn till FY18e.

For expansion purpose, VEL has already acquired land in Dahej (Gujarat) and construction work

has started. The company expect to start trial production by January 2017 for Organotins and

specialty compounds in Dahej plant. Purpose of the Dahej plant is to predominantly cater the

markets in western and southern India. Apart from serving the domestic markets, this new plant

will also provide a significant boost to the Company’s exports through a better and faster access to

ports.

VEL expects to increase its Organotins capacity from current 1,800MTPA to 9,000MTPA by FY18e

and specialty compounds capacity from current 20,000MTPA to 31,000MTPA by FY18e. (Looking

at continually increasing demand for its products). We believe, increasing capacity will add to the

growth in revenue/earning. We expect, revenue/earnings to grow at a CAGR of 41%/49% over

FY16-18e.

Specialized machinery and strong technical knowhow has enabled VEL to convert non-prime raw materials to virgin material standards

Recycling to enhance margins on account of reduction in material cost

More than Rs. 450 mn capex planned till FY18e to give revenue visibility




Exhibit 8: Capacity Expansion Plan

MTPA FY16 FY17e FY18e

Organotins Stabilizers

Opening Capacity 1,200 1,800 3,000

Addition (North) 600 1,200 -

Closing Capacity (North) 1,800 3,000 3,000

Capacity Dahej - - 6,000

Total Capacity 1,800 3,000 9,000

Polymer Rubber Compounds


Addition (North) 9,200 6,000 -


Capacity Dahej - - 5,000

Total Capacity 20,000 26,000 31,000

Recycled Compounds


Addition (North) 4,600 - -


Capacity Dahej - - -

Total Capacity 10,000 10,000 10,000

Plasticizers


Addition (North) 600 - -




Flame Retardants


Addition (North) 600 - -





“Lead” it go

PVC is a volatile material and needs to be supported with a heat stabilizer which prevents it from

degradation when subjected to high temperatures while processing. Lead holds the longest history

as a stabilizer for PVC as 1) it is a cost effective form of stabilizer, 2) it has excellent stabilizing

effects, and 3) it is used for PVC products with long service life and is required to endure long

fabrication (heating) hours. Conversely, the use of lead can cause lead poisoning when in direct

human contact, the long term effects of which are tragic (adverse impact on multiple organs). In

India, this poison could be ubiquitous in modern day life and go unnoticed. It could even be coming

out of the tap water being carried by PVC pipes.

Dahej plant to focus on better serving domestic and export clientele

Lead poisoning have an adverse long term impact on the human body




Facts about Lead content in India

According to the investigations by the Quality Council of India, 33% of over 370 samples of water

from the top 26 cities in India have tested positive for harmful content of lead, while another 2% of

the samples failed to meet even the comparatively lenient Indian norms of 50 parts per billion (ppb).

Out of these, 31% of samples have failed to adhere to WHO standards of lead content of less than

10 ppb.

Nestle’s Maggie Downfall – A “Lead” Story

In the year 2015, tests were ordered on a dozen samples of Nestle’s Maggie Noodles, where

high levels of lead (17.2 parts per million) were found. This discovery of lead presence in such

high levels has brought lead poisoning to the limelight.

Considering the adversity of lead poisoning on health and environment, companies are shifting

towards substitute stabilizers. Also, various nations are trying to eliminate the use of lead based

stabilizers.

Organotins Stabilizers are tin based stabilizers primarily used in rigid PVC application for food

and water contact. It is lead-free, non-toxic and eco-friendly, which is sanctioned by most

international regulatory authorities (including USFDA & EFSA) for portable pipes & fittings.

Today, the lead based stabilizers are being phased out worldwide in a planned manner. On

account of increased awareness of lead poisoning and the emergence of eco-friendly & non-

toxic stabilizer alternatives, a company like Vikas EcoTech Ltd. can generate huge opportunities

globally. Thus, this makes us believe that VEL’s Organotins Stabilizer, being a perfect substitute

of lead, will play a major role in its revenue growth. Going ahead, we expect Organotins revenue

to grow at ~96% CAGR over FY16-18e.

Rising polymer compound and Organotins demand; a key contributor to revenue growth

The Indian piping industry (largely comprising of PVC) is on a growth path with increasing demand in water distribution, wastewater management and plumbing, largely due to increasing infrastructure development in tier-II and tier-III cities. In the agri space, the adaptation of modern practices (like drip irrigation systems) have been a key contributor to the rising demand for PVC. Also, there is a rapid shift seen in the preference of PVC over the conventional metal piping systems to.

Various Government initiatives have been announced which would create huge opportunities for the piping industry. A major impact on demand growth of pipes can be seen as a result of the following initiatives:

A 100 Smart Cities over 5 years

The Govt. of India intends to develop 100 smart cites in five years (FY16- FY20) in the purview of

increasing urbanization (urban areas are expected to house 40% of India’s population and

contribute 75% of India’s GDP by 2030), improving the quality of life and attracting people and

investments to the City. The total no. of smart cities have been distributed among the states and

UT (United Territories) ~Rs 1000bn of Government/ULB funds will be available for ‘Smart Cities’

development.

Such a huge investment in next five years will provide growth opportunities for many industries

including piping as one of the core infrastructure elements in a Smart City is adequate water supply,

sanitation and waste water management.

Pradhan Mantri Awas Yojana – “Housing for All (Urban) by 2022”

Under this scheme the Govt. of India in planning to construct 2 crore houses for the weaker sections

of the society. The Pradhan Mantri Awas Yojna (PMAY) is amongst the flagship programs of the

Government of India to tackle the problems of growing urbanization by providing ‘Pucca house’

with water connection, toilet facilities, 24x7 electricity supply and access.

Lead poisoning in the spotlight due to the recent Nestle Maggie Noodle controversy

VEL’s eco-friendly and non-toxic Organotins Stabilizer is a perfect substitute of lead stabilizers

Plastic pipes demand expected to increase on account of various Government infrastructure initiatives




We believe that this initiative of “Housing for all”, in order to curb the shortage of housing along with

the lack of water management systems, would create ample opportunity for the Indian piping

industry.

The Swachh Bharat Mission; a step towards clean and hygienic India

This initiative has two sub-missions, the Swachh Bharat Mission (Gramin) for rural areas and the

Swachh Bharat Mission (Urban) for cities. The mission aims to achieve “Swachh” India by 2019,

which in rural areas shall mean improving the levels of cleanliness through Solid and Liquid Waste

Management activities, making Gram Panchayats free of Open Defecation, safe handling of

drinking water. The overall project cost, for both rural and urban India, has been estimated at Rs

1.96 tn that will include construction of 12 crore toilets across the country.

We believe, Government of India’s thrust for creating a “Swachh Bharat” will generate huge

opportunities for the PVC piping industry.

Atal Mission for Rejuvenation and Urban Transformation

The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme was launched by

the Government of India on 25th June 2015, with the purpose of providing basic services to

household and build amenities in cities which will improve the quality of life for all, especially the

poor and the underprivileged.

Five hundred cities will be taken up under the AMRUT scheme to improve existing water supply

systems, develop underground sewerage system, septage management, construct storm water

drains, improve public transportation, etc. The total outlay for AMRUT is Rs. 500bn for five years

from FY16 to FY20.

It is our belief that the growth of plastic piping industry would in-turn propel sales for a company

like Vikas EcoTech Ltd., since, manufacturers of agriculture and infrastructure PVC pipes and

fittings are amongst VEL’s key customers. Above factors will lead to growth in the Company’s

revenue at a CAGR of ~41% over FY16-18e.

Global presence

VEL exports to more than 20 countries which contributed to ~48% of VEL’s overall revenue (Rs.

1.49 bn in FY16 vs ~Rs. 760mn in FY15). VEL is also targeting to tap USA markets and is in the

process of getting regulatory approvals. We expect that going forward exports markets would

contribute significantly to the revenue along with the growing domestic markets.




Key risk

Delay in capacity expansion: As the company has planned to invest for huge capacity expansion,

any delay in the regulatory/environmental approvals may affect the sales growth of the company

Delay in government flagship programmes: Government programmes like Smart Cities,

Pradhan Mantri Awas Yojana, Swachh Bharat and AMRUT would be a strong boost to the plastic

piping industry in India, going forward. However, any delay in execution of such projects could hurt

the demand in India.

Volatility in commodity prices: VEL mainly works in polymer (linked to crude prices) for its

compound business and in Tin for its Organotins business. Any volatility in these raw material may

hurt the EBITDA margins of the company for short term as the volatility in commodity prices get

passed on with a lag period

Currency Risk: VEL derives ~48% of the total revenue from exports. Also the company imports

~70-80% of raw material which is billed in USD. Therefore, VEL enjoys natural hedge on currency.

However, any sudden fluctuations in the currency, may impact the company’s margins temporarily.

Country Risk: VEL exports to ~20 countries. In FY16, exports revenue accounted to ~48% of the

total revenue. Any changes in the exports policy or economic/ geopolitical tension arising in any

country may impact the sales for VEL. However, the company is well diversified in terms of country

concentration.




Valuation:

Vikas EcoTech Ltd. is engaged in the business of manufacturing and distribution of eco-friendly

Specialty Polymer Compounds and Additives. It is the only Indian manufacturer of Methyl Tin

Mercaptide (Organotins Stabilizer), a lead free heat stabilizer used in the production of PVC. The

company manufactures high end products used in Agriculture/Infrastructure Components, Wires &

Cables, Auto Parts, Textiles, Electrical Goods, Medical Goods, Writing instruments, Organic &

Inorganic chemicals, Footwear, Packaging, among others.

VEL has emerged as a manufacturing company from trading company where its trading has

reduced from 64% in FY13 to ~20%in FY16. We reckon that growth in plastic piping industry

(majorly PVC) is on cards due to the potential Government initiatives (like 100 Smart Cities,

Pradhan Mantri Awas Yojana, etc.) which is a strong push towards infrastructure

development. Moreover, the increasing awareness about lead poisoning which has led the

companies and countries preferring eco-friendly and non-toxic substitutes, will boost the

topline for a company like VEL. We expect, revenue/earnings to grow at a CAGR of 41%/49%

over FY16-18e. We further believe, such factors coupled with the capacity expansion plans

of Vikas EcoTech Ltd. would further drive the stock upside.

Historically, the stock as traded at an average one year forward PE multiple of 14x. At the

CMP of Rs. 12.7, the stock is trading at 8.9x FY17e and 5.7x FY18e earnings. We are initiating

coverage on the stock with a BUY rating and assign 14x PE to FY18e EPS of Rs 2.2, arriving

at a target price of Rs. 31 with a potential upside of 145%.

Exhibit 9: Vikas EcoTech ltd. 1 year forward PE


0

20

40

60

80

Se

p-1

1

Jan

-12

May-1

2

Se

p-1

2

Jan

-13

Ma

y-1

3

Se

p-1

3

Jan

-14

Ma

y-1

4

Se

p-1

4

Jan

-15

Ma

y-1

5

Se

p-1

5

Jan

-16

Ma

y-1

6

Se

p-1

6

(x)

PE(x) Avg

5 yr mean = 14x

Current PE = 6x




Financial Summary

Top line to grow at ~41%CAGR over FY16-18e

VEL’s revenue grew at a CAGR of 17% over FY12-FY16. In these years, the company has forayed

into manufacturing from trading. VEL is currently focusing on Organotins and polymer compounds.

We expect that with the awareness in the society for non-toxic products and VEL’s expansion plans

would be able to grow at a CAGR of 41% over FY16-18e. Also, other factors like various

Government infrastructure push (Smart Cities, Housing for all, AMRUT, etc.) and better realization

due to focus on increasing exports would augur well for the company.

Exhibit 10: VEL likely to post ~41% revenue CAGR over FY16-18e


EBITDA margin to grow by ~207 bps over FY16-FY18e

EBITDA margins of the company have improved from 7.3% in FY12 to 15.9% in FY16 mainly due

to focus on manufacturing. VEL has taken various initiatives in these years to expand its EBITDA

margins like 1) Shutting down two plants viz., Sitarganj (Uttarakhand) and Bawana (Delhi) which

helped to consolidate its manufacturing activity at its main plant in Shahjahanpur (Rajasthan), 2)

Automation in existing plant, 3) Capacity expansion in FY16 which helped in expanding EBITDA

margins.

We expect, VEL’s EBITDA margins to expand by ~207 bps over FY16-FY18e to 18% mainly due

to 1) increasing demand for Organotins and supporting technical expertise of VEL for the same 2)

VEL being the only manufacturer of Organotins in India, 3) increasing use of non-prime raw

materials, which are cheaper than virgin materials, and recycling them, 4) focus on exports (higher

margin contribution). Also, going forward VEL has planned to keep its trading revenue at current

levels (with efficient raw material hedging policy) while focusing more on manufacturing.

Exhibit 11: EBITDA margin expansion by ~207 bps over FY16-18e


-20%

0%

20%

40%

60%

80%

-

2,000

4,000

6,000

8,000


Rs. M

n

Net sales Growth (%)

0%

5%

10%

15%

20%

-

300

600

900

1,200

1,500

1,800


Rs. M

n

EBITDA EBITDA margin %




Exhibit 12: PAT to grow at ~49% CAGR over FY16-18e


Optimal returns despite the multifold capacity expansion

With the increasing operational efficiency (revenue/earnings to grow at a CAGR of 41%/49% over

FY16-18e) VEL would able to finance its expansion mainly through internal accruals. This will help

the company to improve its return ratios in future. However, in short term perspective, we expect

ROE and ROCE to the tune of ~43.5%/44.6% and ~24.7%/27% over FY17/18e, respectively.

Exhibit 13: Marginal reduction in ROE & ROCE


Exhibit 14: High growth in EPS over FY16-18e


0%

2%

4%

6%

8%

10%

12%

0

200

400

600

800

1000


Rs. M

nPAT PAT margin%

0

10

20

30

40

50


%

ROE ROCE

0.0

0.5

1.0

1.5

2.0

2.5

3.0


Rs.




Exhibit 15: Income statement

Y/E Mar (Rsmn) FY14 FY15 FY16 FY17e FY18e FY19e

Net sales 2,500 2,110 3,072 3,901 6,102 7,888

growth (%) (0.9) (15.6) 45.6 27.0 56.4 29.3

COGS 2,199 1,760 2,372 2,935 4,542 5,808

Staff Cost 38 37 33 46 79 102

R&D Cost - - - - - -

SG&A Cost 130 146 177 229 382 526

EBITDA 133 166 490 691 1,099 1,451

growth (%) 27 25 194 41 59 32

Depreciation 22 34 34 45 79 108

EBIT 111 132 456 646 1,020 1,343

Other income 28 37 48 41 44 48

Interest paid 92 107 113 128 192 191

Extraordinary/Exceptional items

- - 2 - - -

PBT 48 62 391 559 873 1,200

Tax 11 24 137 196 306 421

Minority interest 1 - - - - -

PAT 37 38 255 363 566 779

Non-recurring items - - (2) - - -

Adjusted PAT 36 38 254 363 566 779

growth (%) (1.5) 4.7 570.2 42.9 56.2 37.5


Exhibit 16: Balance sheet

Y/E Mar (Rsmn) FY14 F Y15 FY16 FY17e FY18e FY19e

Cash & Bank balances 5 8 44 168 246 393

Other Current assets 1,304 1,251 1,950 1,951 2,958 3,774

Investments 0 0 0 0 0 0

Net fixed assets 229 210 279 644 875 857

Goodwill - - - - - -

Other non-current assets 3 3 4 2 2 2

Total assets 1,541 1,473 2,277 2,765 4,081 5,026

Current liabilities 447 378 703 732 1,003 1,220

Borrowings 669 662 912 1,029 1,542 1,539

Other non-current liabilities 3 0 - - - -

Total liabilities 1,120 1,040 1,615 1,761 2,545 2,759

Share capital 102 254 254 254 254 254

Reserves & surplus 319 179 408 749 1,281 2,014

Shareholders' funds 420 433 662 1,003 1,536 2,268

Total liabilities 1,541 1,473 2,277 2,765 4,081 5,026





Exhibit 17: Ratios

Y/E Mar FY14 F Y15 FY16 FY17e FY18e FY19e

Per share data (Rs)

EPS 0.4 0.1 1.0 1.4 2.2 3.1

CEPS 0.6 0.3 1.1 1.6 2.5 3.5

DPS 0.1 0.1 0.1 0.1 0.1 0.2

BV 4.1 1.7 2.6 3.9 6.0 8.9

Profitability ratios (%)

Gross margins 10.5 14.8 21.7 23.6 24.3 25.1

EBITDA margins 5.3 7.9 15.9 17.7 18.0 18.4

Net margins 1.4 1.8 8.3 9.3 9.3 9.9

Valuation ratios (x)

PE 35.6 85.0 12.7 8.9 5.7 4.1

P/BV 3.1 7.4 4.9 3.2 2.1 1.4

EV/EBITDA 14.7 23.2 8.3 5.9 4.1 3.0

EV/Sales 0.8 1.8 1.3 1.0 0.7 0.6

RoE 9.1 8.9 46.3 43.5 44.6 41.0

RoCE 10.6 9.4 24.5 24.7 27.0 26.2

RoIC 3.3 2.5 19.2 21.2 24.0 24.9


Exhibit 18: Cash flow statement

Y/E Mar (Rsmn) FY14 FY15 FY16 FY17e FY18e FY19e

Profit after tax 36 38 255 363 566 779

Depreciation 22 27 29 45 79 108

Chg in working capital (140) (17) (373) 28 (736) (600)

Deferred tax paid 0 (4) (2) - - -

Cash flow from operations

(82) 44 (90) 436 (91) 287

Capital expenditure (53) (8) (98) (410) (310) (90)

Change in investments (0) (0) (0) - - -

Cash flow from investments

(54) (8) (98) (410) (310) (90)

Free cash flow (135) 36 (188) 26 (401) 197

Issue of shares 1 153 - - - -

Net inc/dec in debt 130 (8) 250 117 513 (3)

Dividend (incl. tax) (6) (15) (15) (22) (34) (47)

Other financing activities 10 (163) (11) 2 (0) 0

Cash flow from financing 135 (34) 224 97 479 (49)

Inc/(Dec) in Cash & Bank bal.

(0) 3 36 124 78 147





Company Profile

Vikas EcoTech Ltd. was incorporated in 1984. It is engaged in the business of manufacturing and

distribution of Specialty Polymer Compounds and Additives since 1998. The company

manufactures high end products used in Agriculture/Infrastructure Components, Wires & Cables,

Auto Parts, Textiles, Electrical Goods, Medical Goods, Writing instruments, Organic & inorganic

chemicals, Footwear, Packaging, among others.

VEL is a company focused on manufacturing eco-friendly specialty chemicals and polymers. It is

the only Indian manufacturer of Methyl Tin Mercaptide (Organotins Stabilizer), a lead free heat

stabilizer used in the production of PVC.

Currently, the Company has two manufacturing sites, one at Shahjahanpur, Rajasthan and the

other at Samba, Jammu and Kashmir. Along with its manufacturing units, Vikas EcoTech Ltd. has

an in-house R&D Centre located in Delhi, comprising of dedicated chemical engineers and

technologists.

Apart from the above mentioned manufacturing sites, the Company has planned to setup a

manufacturing unit in Dahej, Gujarat to manufacture Organotins Stabilizer and specialty

compounds for domestic and export markets. A research and development centre will also be

housed in this facility. The construction of Phase I of this plant has commenced and full-fledged

production should commence from FY18.

Exhibit 19: Management details

Vikas Garg Promoter & Managing

Director

A commerce graduate with more than 18 years of

experience in the line of polymer compound and chemicals.

Lead the group’s diversification into polymer compounds

and chemicals.

Vivek Garg Promoter & Whole-time

Director

16 years of experience with an in-depth knowledge of the

business.

Supervises the operations of the company pertaining to the

Real Estate, Logistics, Administration and Purchase

Segments

Ashutosh Verma

CEO & Whole-time Director

Experience spanning over 34 years in field of Plastics Raw

Material and Polymer Compounds.

Responsible for Business Development and Technical

support to the customers of VEL.

Experience and expertise in the field of sales, marketing,

business development, technical

services, sourcing of raw material, machinery and R&D

Jagdish Capoor

Independent & Non-Executive Director

An industry stalwart, he has a vast experience of over 45

years.

A former Deputy Governor of the Reserve Bank of India

(RBI), he has served on the boards of several banks, i.e.

Bank of Baroda, State Bank of India, National Housing

Bank, NABARD, Exim Bank, and HDFC Bank (as

Chairman). He has also served on the board of the Bombay

Stock Exchange (BSE).


Manufactures eco-friendly specialty polymer compounds & additives and the only producer of Organotins in India

Manufacturing units at Rajasthan and Jammu & Kashmir, along with an upcoming Dahej plant




Exhibit 20: Serving a diverse range of industries

Products Used


Plasticizers

PVC Compounds

Plasticizers

Flame Retardants

TPR Compounds

Plasticizers

Flame Retardants

EVA & PVC Compounds

Products Used

Chlorinated Paraffin

DMTDC


Plasticizers

Chlorinated Polyethylene


Plasticizers

PVC Compounds

Products Used


Plasticizers

Recycled PET

Plasticizers

Flame Retardants

TPR Compounds

Plasticizers

TPR Compounds

PVC Compounds


Exhibit 21: Supplying to a Diverse Range of Industries & Customers

Industries Customerss

Footwear Liberty, Super Tannery Ltd., Action, Relaxo

End Users – Premium

Footwear Brands

Omega Polymicrons, Euro Shoes, Capstan Rubber, Royal

Polymers, Indcoat Footwear, DSM Soles, Suolificio Linea Italia,

Alvin Leather Craft, Unisal India, Apex Footwear Limited, F.B.

Footwear

Automotive Components

Horizon Global Ltd., OEM Supplier of Maruti Suzuki Ltd., Avlight

Automotive Ltd., OEM Supplier of Yamaha Motors, Pioneer

Tooling Services Pvt. Ltd., OEM Supplier of Maruti & Ford India

Ltd.

Electricals Polycab Wires & Cables, Shilpi, RR Kabel, KEI, Havells

Plastic Polymer (Pvc)

Apar Industries Ltd., Prakash, Prince Piping Systems, SRF,

Premier Polyfilm Ltd., Vectus, APL Apollo, Kriti Industries (India)

Ltd., Aeroflex, Supreme, Ilpea Paramount Ltd., Shriram Axiall

Hygiene & Healthcare Biotique, Disposafe, Medibank, Polymed, JHS Svendgaard

Laboratories Ltd., Escorts, SRS

Chemical Companies Navratan Specialty Chemicals LLP, HIM-CHEM Ltd.

Stationery Flair

Textiles Jinflex, SBM Yarn Dyeing, Jindal Specialty





Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). We have no investment opinion on the stock. “The BoB Capital Markets research team hereby certifies that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report."

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vikas ecotech ltd. (vel) sector: specialty chemical · the indian poly vinyl chloride ......

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