SPECIALity

CHEMICALS
The Indian Speciality Chemical Industry set to reap in multiple
24TH
FEBRUARY
market share gains over next years both globally and domestically.
2020

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Indian Chemical Industry: A Brief Overview

India is the sixth-largest producer of chemicals in the world, and the Fertilizsers: These provide nutrients for plant growth. These also
chemicals & petrochemicals sector has one of the largest shares in can break down into organic/inorganic and natural/synthetic.
the country’s total GDP. The chemical industry in India is highly Further, these can be broadly divided into phosphate, potassium,
diversified and includes more than 80,000 commercial products. As nitrogenous.
per the report from FICCI, the total annual output stood at
US$163B in FY18, accounting for 3.4% of the global chemical Speciality Chemicals: These are derivatives of basic chemicals that
industry. India generated major chemicals and petrochemicals of are manufactured for specific end-use solutions. The characteristics
27,847MT during 2018-19, an increase of 4.15% over 2017-18. of these chemicals include high value, high R&D, and low volume.
Similarly, Alkali chemicals, with an approximately 69% share in the The details of these chemicals are elaborated in the next section.
total production, has the highest contribution in the chemical indus-
try. Further, the production of polymers accounts for around 61% of Agrochemicals: These chemicals are used for the protection of
the total production of basic major petrochemicals. crops against insects and pests covered under the category. These
include fungicides, herbicides, and insecticides, among others.
In India, the per capita consumption of chemical products is low These chemicals have an application in irrigation water, seeds, soils,
(one-tenth of the global average). The demand for chemical and crops.
products is expected to grow over the next decade, driven by
increased population, increase in disposable income, and a gradual
shift towards middle-class society. The petrochemical demand is
Speciality Chemicals
expected to grow at a CAGR of 7.5% from FY 2019-23, with
polymer demand growing at 8%. The agrochemicals market in India
is expected to reach $3.7B by FY22 and $4.7B by FY25 with a These chemicals are characterized by relatively high-value low-vol-
CAGR of 8%. India ranks fourteenth in terms of export and eighth ume chemicals and targeted at specific end-user performance-en-
in terms of import of chemicals (excluding pharmaceuticals hancing applications. These broadly cover polymer additives,
products) globally. Further, exports account for nearly one-fourth personal care ingredients, water treatment chemicals, construction
and imports represent over a quarter of the annual consumption of chemicals, paints and coatings, colorants, among others.
chemicals.

India Chemicals – Production, export, import

and consumption trend

Source: FICCI

Source: Ministry of Chemicals and Petrochemicals

The consensus gowth rate of chemical speciality segments

The chemical industry is divided into five major segments

Bulk Chemicals: These are groups of chemicals that are generated

on a large scale, which further break down into organic, inorganic
and alkali chemicals.

Petrochemicals and Polymers: These chemicals are derivative of

several chemical compounds such as hydrocarbons, which are
derived from crude oil or natural gas.

Source: FICCI

2
Speciality chemicals contribute to 22% of the chemical industry The capex plan of leading companies in the specialty chemicals
with a market size of US$ 35.9B as per the FICCI specialty chemi- industry
cals report. The demand for specialty chemicals is estimated to
grow at a CAGR of 12%-–14% CAGR from FY19-22. The incre- Companies Capex Plan Overview
mental demand is majorly driven by investments in end-user indus-
tries like personal care, food-beverage, textiles, and packaging. Aarti Industries The total planned capex for FY20 stands at Rs
benzene 10-12B, with Rs 5.1B already incurred in H1
intermediaries,
pharmaceuticals,
FY20. The capex planned for FY21 stands at
Speciality chemicals delivers solutions to customer applications, surfactants Rs 5–7B. The ongoing project includes acid
which are based on knowledge and generates higher returns as re-concentration plant, capex for long-term
compared to basic chemicals. contract at Dahej, API and pharma intermedi-
ate debottlenecking, and expansion at Vapi
and Tarapur, and a specialty chemical complex
along with chlorination plant at Jhagadia in
Gujarat.

Atul Currently, new projects under standalone

Aromatics, Bulk business that are in pipeline stand at Rs ~4.5B
Chemicals
& Intermediates,
which is expected to generate sales revenue of
Colours, about Rs 8.5B and are estimated to be
Crop protection, API, completed by H2FY21. Further, across subsid-
Polymers perfor-
iaries and JV, a total capex of Rs 3.7B is
mance
Competitive Advantage of Specialty Chemicals Sectors in India materials planned. Also, the caustic-chlorine project
worth ~Rs 5B has received the board's
China’s derailed chemical industry growth is positive for India approval.
Deepak Nitrite The company has given capex guidance of Rs
The domestic chemical industry is gradually slowing down on Standalone business 2.5B in the standalone business, which will be
accountas a result of China’s muted economic growth, of china segments and
phenylacetone
utilized in capacity expansion and debottle-
which remained the in a growth overhang. China’s GDP is estimat-
derivatives in necking projects. The recent acquisition of
ed to grow at 6-–6.5% as compared towith 8-–10% recorded Deepak Phenolics industrial land worth ~125 acres at Dahej,
during the period ofbetween 2009- and 201818. The key factors
Gujarat stands at Rs 990M. Further, capex in
that accounted for a downturn in the chemical industry are
Deepak Phenolics (DPL) of Rs1.5B includes
discussed as follows
phenol-acetone derivatives, energy saving
and efficiency improvements projects.
o
The challenging global scenario such as muted global growth
along with the U.S.-China trade war holds a prominent key in Navin Fluorine The company has made announcements of Rs
Fluorochemicals 4.5B over the coming 3-4 years at Dahej,
subdued production growth in China.
Gujarat, for its fluorochemical business.
o
China’s government has made the environmental protection Further, the new CRAMS unit at Dewas has
norms more stringent from January 2015. In 2017, as per the attracted Rs 1.15B investments, which initiat-
Crisil research report, an estimated 40% of the chemical manu- ed commercial production from January 2020.
facturing units were closed temporarily for safety inspections. SRF The company has planned capex of ~Rs 11B
Further, more than 80,000 manufacturing units were penalized Refrigerants, in FY20 and Rs 7–8B in FY21. The company
for breaching emission limits. Fluoro Specialties
has received board’s approval for capex of
and
Technical Textiles, US$50M for setting up a new 45ktpa BOPP
o
The Chinese government has made it compulsory to build packaging Films film line in Thailand and capex of Rs 4.24B to
effluent treatment plants and levied a green tax on the chemicals set up an integrated PTFE (polytetrafluoroeth-
industry to keep pollution at bay. This is likely to hit the margin on ylene) plant.
account of a scaled-up cost of production, driven by capital
expenses incurred towards building these plants and increased Sudarshan The company has planned to execute a capex
cost of compliance. Chemicals of Rs 3–3.25B in FY20, of which Rs 2.5B is
Pigments already incurred till FY19. Overall, the compa-
o
Companies have to reduce their overall capacity due to govern- ny has capex plan of Rs 10B over FY18-23
ment restrictions on emissions. As per the report from MC-chem- towards production of new high-performance
icals, there is a shortage in the production of Maleic anhydride pigments, backward integration of various
due to restrictions on emissions against the backdrop of only input chemicals and improved infrastructure.
50–60% utilization of the theoretical capacity. Alkyl Amines The company has given capex guidance Rs
Amine 0.8–0.9B in FY20 and Rs1–2B in FY21
The Chinese government has made it mandatory for all small- to Derivatives, Fine
o

Chemicals
towards amine derivatives and chemicals.
mid-size chemical companies to shift their operation to dedicated
special chemical parks, far away from habitat by the end of 2020. PI Industries The company has given capex guidance of Rs
Agrochemicals 4–4.5B for FY20 (already incurred in Rs 3.5B
Further, all the largest plants must relocate by 2025.
in 1HFY20) and Rs 3B for FY21.
Aggressive capex to drive next leg of growth Vinati Organics The company has budgeted Rs 1.1B towards
Butyl Phenol, ATBS expansion of ATBS capacity to 40 Kktpa from
The specialty chemical companies have started accelerating their 26 Kktpa. Further, Rs2.4B capex towards
capex plan, driven by strong growth visibility and emerging oppor- Butyl Phenol with capacity of 35ktpa,
tunities. The aggregate capex at specialty chemical space is completed in September 2019, and the
expected to reach Rs 61.7B over FY19-21E, which is likely to be commercial production is expected to start in
60% higher compared with Rs 37.7B over FY16-18. 4QFY20.

3
 Differentiated business model and strong entry barriers to act as
key tailwind for growth

The specialty chemical companies enjoy the strong entry barriers in

the form of vendor acquisition, lengthy and complex product
approval/registration process, customer loyalty, among others. The
strong entry barriers help specialty chemical companies to ensure
sustainable growth. Further, a distinguished and resilient business
model is a unique growth driver for specialty chemical companies.
Companies such as Galaxy Surfactants, Fine Organics, among
others, catering to user industries like FMCG, HPC, and food ingre-
dients because of their differentiated business model enjoy strong
Source: Crisil Research entry barriers and a higher level of product customization.

Availability of skilled labour on lower cost Supply chain disruption in China due to the outbreak of
coronavirus to augur well for Indian companies
India poses the competitive advantage of having skilled labor at a
lower cost. This leads to comparatively lower operating expenses The ongoing supply disruption in China started in the aftermath of
and other cost items compared with its global peers, including anti-pollution measures that the country took in the last four to five
China. In China, the labor cost has been consistently witnessing an years. Recently, the supply chain disruption further worsened due
uptrend. The average labor cost in China over 2005-2015, has to the outbreak of coronavirus (COVID-19) in China. The latest
clocked a CAGR of nearly 19–20% as compared with a CAGR of outbreak is far worse than earlier outbreaks as the death toll has
4–5% in India. In fact, over the last five years, this cost has more already surpassed the levels seen during the outbreak of SARS and
than doubled compared with India, making manufacturing some- MERS. As of February 20, 2,127 deaths have been reported of the
what cost-effective in India. 75,752 cases, with a fatality rate of around 2.7%.

Coming to its effect on the chemical industry, about 42 chemical

parks are located in the Hubei province, which is near the epicenter
of COVID-19. Also, Wuhan, a city in the Hubei province, is a key
transport link between the four cardinal parts of China.

Source: ILO and CRISIL

Availability of Raw Materials

Companies like IOC, BPCL, BPCL, and Reliance are leading resourc-
es of basic raw materials, which support the organic value chain.
On the other side, India has sufficient availability of inorganic basic
chemicals such as caustic soda, chlorine, and soda ash, among
others. Further, India has a geographical advantage because of its
proximity to the Middle East and southeast Asia where basic petro-
chemicals can be imported at a competitive cost. India’s specialty chemical companies that have a diverse and quality
product portfolio can get higher orders from Europe and the U.S.
Government’s policy push These companies can take advantage of capex incurred over the
last few years and operate at maximum utilization to cater to the
The government has initiated actions like mandating BIS-like surge in demand. Also, the cost of specialty chemicals can go higher
certification for imported chemicals to prevent dumping of cheap due to the supply shortage from China. This will lead to higher
and substandard chemicals into the country. margins for Indian firms.

The government has allowed 100% FDI under the automatic route
in the chemicals sector, excluding certain hazardous chemicals.

The Indian government has prepared a draft National Chemical

Policy with a vision of increasing the share of the chemical sector to
6% in GDP within 10 years, driven by several imperatives essential
for the growth of the sector. It has proposed various amendments
in the existing legislation such as it suggests the MSIHC Rules
should be merged with those of the Chemical Accidents (Emergen-
cy Planning, Preparedness, and Response) Rules to streamline the
legislation. This would result in more effective implementation and
safer handling of hazardous chemicals throughout the country.

4
Stocks of Interest
Deepak Nitrite CMP: 467.75 (AS ON February 24, 2020 EOD)

Deepak Nitrite is one of the country’s fastest-growing chemical This helped the company in maximizing realizations keeping utiliza-
intermediate companies. It is ranked among Fortune Next 500 and tion in the range of 50–60%. Further, DSDA (di-amino stilbene
recognized among the top 25 wealth creators by Fortune Maga- disulphate acid) prices are expected to remain the same in the
zine, India. future as per management. The significant performance in this
segment has generated free cash flows for the company, which is
It caters to the pharmaceutical, agrochemical, plastics, textiles, dyes essential for future growth.
and pigments paper, and home and personal care segments in India
and overseas. The company has five manufacturing plants. Good progress on plans to launch acetone downstream products
by FY20 end:
Double-digit growth in the Basic Chemicals (BC) segment amid a
challenging macro environment: The company’s plan of entering the downstream product of Isopro-
panol (IPA) is progressing well, and production is expected to
The BC segment’s revenue stood at INR 236 crores in Q2 FY20 as commence from the next financial year. IPA will be made from
against INR 202 crores in Q2 FY19, thereby registering 17% y/y acetone and lead to around 25–30% consumption of acetone. The
growth. In Q3 FY20 also, revenue in the segment grew 15% y/y. On company is expecting a total capex of INR 60–65 crores for the
the volume front, the higher realizations after the company lever- product. Margins for the product are expected to be around
aged its cost leadership position in serving the demand for its 20–24%.
products.

SOURCE: Company Presentation

Performance Products (PP) segment continued its outstanding

performance: SOURCE: Company Presentation

Looking ahead:
The PP segment delivered a superb in Q2 and Q3 FY20. Revenue
growth of 119% y/y and 77% y/y in Q2 and Q3 FY20, respectively. The company expects all three Strategic Business Units (SBU) to
This segment covers newer, high-performance products in optical keep increasing its growth momentum over the near term due to
brightening agents (OBA), which has gained customer satisfaction. product rationalizations, extensions, and planned capacity expan-
sions. As per management, while BC and PP segments will be able
In OBA, the company is focusing on doing business with quality to maintain their growth momentum, the Fine and Speciality Chem-
customers rather than improving capacity utilization, which will, in icals (FSC) segment is expected to improve performance led by
turn, increase customer retention. capacity augmentation and new product launches.

Deepak Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 16,107 26,752 42,882 44,011

Growth % y/y 19 66 60 3

EBITDA 2,019 4,181 10,124 8,846

Margin % 13 16 24 20

PAT 800 1,763 5,943 4,986

EPS in INR 6 13 44 37

Cash and Equivalents 699 230 - -

Total Debt 9,865 11,865 - -

Cash from Operations 11,395 (188) - -

Free Cash Flow (4,827) (2,743) 1,888 4,294

In INR Million BLOOMBERG ESTIMATES

5
 Booked 34% profit,
Feb 18, Rs 483

Added, Nov 05
Rs 359.8
Increase in institutional
sponsorship

Cup Base

Superior sales and

earnings profits

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

Currently, the stock is extended from its ideal buy range.

It has done very well in recent times, thus its RS rating is at 96.

Consistently, it has reported triple-digit growth in its earnings and double-digit growth in sales in the recent four quarters. Hence,
its EPS strength is at 98.

Funds invested in the company have increased 52% to 81.

The buyer demand for the stock is at A+, indicating higher demand for the stock.

Deepak Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 432 452 485 550 569 584

Revenue growth % y/y - - - - 32% 29%

EBITDA 68 66 113 184 213 213

EBITDA Margin % 15.9 14.6 23.3 33.6 37.4 36.5

PAT 28 31.6 59.2 107 178 141

PAT growth % y/y - - - - 536% 346%

EPS (In INR) 2.06 2.32 4.34 7.84 13.1 10.4

In INR Crore

6
Atul CMP: 4,988.80 (AS ON February 24, 2020 EOD)

Atul is one of the largest integrated chemical companies of India. A caustic-chlorine project of Rs 500 crore is also approved by Atul's
The company produces chemicals mainly for six different indus- board of directors. This will help the company supply chlorine for
tries: polymers, aeromatic, bulk chemical and intermediates, expansion in phosgene product line. The in-house raw material will
pharma and intermediates, crop protection, and colors. It has plants lead to improvement in margins.
in Valsad (Gujarat) and Thane (Maharashtra).
The ongoing capex at subsidiary company, Atul Bioscience, is
In the last five years, on average, the company spent Rs 193 crore expected to be completed by end of FY20. It has potential to add
per year in capex. The amount was invested for expansion, debot- ~Rs 150 crore to revenue in the next few quarters.
tlenecking, and sustenance projects. This could help the company
generate more revenue and with improved efficiency, margins
could improve. The improvement is already visible in the last 4-5
quarter results.

SOURCE: Company Presentation

The crop protection business of the company contributes more than

20% to the revenue. Above-average monsoon and government
initiatives to increase minimum support price will help the company
SOURCE: Company Presentation

Also, additional capex will be done over coming years. Projects improve its business in H2 FY20.
worth Rs 400 crore are underway to double the capacity of
p-cresol, its flagship product. In addition, the company is also In the last two years, due to environmental compliance issues in
expanding its colors segment. Management expects to add Rs 250 China, India's chemical industry has been one of the beneficiaries.
crore in revenue in the near term. Atul being the leading player will benefit from it.

Strong performance of subsidaries

SOURCE: Company Presentation

SOURCE: Company Presentation

Atul Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 32,402 40,378 42,792 48,821

Growth % y/y 14 25 6 14

EBITDA 5,051 7,668 9,321 10,412

Margin % 16 19 22 21

PAT 2,762 4,360 6,512 7,007

EPS in INR 93 147 220 236

Cash and Equivalents 531 2,633 - -

Total Debt 159 524 - -

Cash from Operations 3,570 - - -

Free Cash Flow 2,140 - 2,553 1,716

In INR Million BLOOMBERG ESTIMATES

7
 Currently at the gain of 23.5% in portfolio

Added
Rs 4,208

break out on above

average volume

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

After breaking out from the cup-with-handle base pattern in October, the stock has formed a cup base pattern. It broke out of cup
base in January and has given around 20% gain since then.

It has done well in recent times, outperforming the majority of stocks. RS rating is at 91.

It has consistently reported double-digit growth in its earnings in the recent three quarters. EPS strength is at 94.

The number of funds invested in the stock has improved 3% to 159 funds. However, shares held by them remained almost
constant.

Atul Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 1007 1019 1008 993 1013 978

Revenue growth % y/y - - - - 1% -4%

EBITDA 190 211 192 216 213 231

EBITDA Margin % 18.9 20.7 19.3 21.8 21.1 23.7

PAT 119 116 108 129 208 159

PAT growth % y/y - - - - 75% 37%

EPS (In INR) 69.9 77.1 8.6 54.1 75 36

In INR Crore

8
Sudarshan Chemicals CMP: 452.35 (AS ON February 24, 2020 EOD)

The company is the fourth-largest pigment manufacturing compa- Aggressive capex investment to boost growth
ny globally and the largest domestically with ~35% market share. It
generates nearly half of revenue from the international market. The The company has made aggressive capex investments of Rs
company has a diversified product portfolio, with its presence 800-1,000 crore in the last 10 years and is expected to keep up the
across organic, inorganic, and effect pigments. The company has investments in the future as well. Management has shown confi-
more than 400 products under brands like Sudaperm, Sudafast, dence in making a capex investment of Rs 325 crore by the end of
Sudacolor, Sumida, and Sumicos. FY20.

Leadership position in the pigments industry with a strong global Robust financial performance
presence
The company has maintained an EBITDA margin above 15% over
The company is the market leader and the largest pigment produc- the last four quarters, driven by a focus on cost optimization.
er in India, with a market share of ~35%. Despite strong competi- EBITDA margins advanced to 16% in H1FY20 from 14% in the
tion from global giants such as Lanxes, Clariant, etc., the company year-ago period. Further, gross margins in last few quarters are
is the fourth-largest pigment manufacturer in the world. It has a higher than 40% (41.6% in Q3 FY20). The net debt-equity ratio is
strong global presence and exports products to 85+ countries with kept at 0.6 in FY19 as well as H1 FY20, while the current ratio has
50+ sales members. witnessed a marginal increase to 1.5 in H1FY20 as compared to 1.4
in FY19.
Gross margin pigment business

SOURCE: Company Presentation

Commissioning of HPP plants to aid in top-line growth

The company recently launched a high-performance yellow

pigment, which has a market of about Rs 250 crore. The company SOURCE: Company Presentation

is the only second serious player globally to launch this product. Looking ahead
Further, management is planning to launch one more high-perfor-
mance organic pigment in Q4 FY20 and one large molecule in Q1 As per consensus, the global colour pigment is estimated to have a
FY21. market of about $10B, opening market opportunities of about $
8.6B (as per the company's annual report) for the company.
Furthermore, the global organic pigment market is expected to
clock about 3% CAGR over the next 5 years. The company, being
the market leader, is in a good position to leverage these opportuni-
ties and expand its market share for its portfolios.

Sudarshan Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 13,055 14,531 16,708 19,232

SOURCE: Company Presentation Growth % y/y 5 11 15 15

EBITDA 1,873 2,108 2,634 3,185

Margin % 14 15 16 17

PAT 783 1,397 1,494 1,610

EPS in INR 11 20 22 23

Cash and Equivalents 67 48 - -

Total Debt 4,309 3,670 - -

Cash from Operations 1,255 593 - -

Free Cash Flow 383 (422) (670) (429)

In INR Million BLOOMBERG ESTIMATES

9
 The stock can continue doing well. It can be
accumulated once it pulls back to its 21-or 50-DMA
on low volume and rebound strongly from there.

break out on above

average volume

Good growth in earnings

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock has broken out of its cup base on above average volume. Currently, it is slightly above its buy range.

In the recent two quarters, its earnings grew in double-digits. Hence, it has EPS strength of 96.

The stock has a pretty good support at its 50-DMA.

It has a good RS rating of 91 and the buyer demand of B+.

The number of funds invested in the company decreased 7% to 38 funds.

Sudarshan Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 370 333 388 383 382 380

Revenue growth % y/y - - - - 3% 14%

EBITDA 56 29 59 60 62 62

EBITDA Margin % 15.2 8.8 15.3 15.7 16.3 14.5

PAT 29.6 13.1 13.8 44.5 43.4 27.4

PAT growth % y/y - - - - 47% 109%

EPS (In INR) 4.2 1.9 2 6.4 6.3 4

In INR Crore

10
Pi Industries CMP: 1,543.05 (AS ON February 24, 2020 EOD)

PI Industries works on a unique business model across the Agchem This will increase the additional manufacturing capacity of the
value chain from R&D to distribution, providing innovative solutions company, and that, in turn, will help cater to the growing demand of
by partnering with the best. It has a pan-India distribution network global customers. It will also provide synergy benefits of adjacent
of 10,000+ channel partners. manufacturing sites while de-risking the supply chain of few
products. Further, the company can strengthen its market position
Recently developed positive momentum in the agriculture sector by leveraging the distribution channel and product portfolio of
to act as a tailwind: Isagro Asia.

The agriculture sector has been positive for the last couple of EBITDA
months, driven by better prospects of the rabi season and an
increase in firm crop output prices. Early indications of the standing
rabi crop augur well for the agriculture gross value added (GVA) in
2020-2021. The market price of rice and wheat has increased to Rs
3,000 and Rs 2,500, respectively, in November 2019 from Rs 2,700
and Rs 2,200 in the year-ago period. Furthermore, the storage of
water in the majority of water bodies lies at a comfortable level this
year. The overall storage position in the country is better than the
same period last year, according to the report from the Central
Water Commission (CWC).

Total Revenue (In crore INR)

SOURCE: Company Presentation

Stellar performance from exports business to keep growth

momentum intact:

The company posted a noteworthy 52% improvement in exports,

ascending to Rs 639 crore from Rs. 419 crore. Further, the company
witnessed a decent increase in inquiries from its innovative
partners. Also, the prevailing challenging conditions in China have
helped in boosting the inquiries. The company is also expecting
commercialization of two to three molecules on account of
enhanced requirements for commercializing new generation mole-
cules.
SOURCE: Company Presentation

Looking Ahead:
Company's new product offerings have been instrumental in
driving the growth trajectory: Management is expecting the company to keep the growth
momentum intact and deliver more than 20% growth this fiscal
Recently, the company has launched 'Awkira,' a new generation year, driven by very good exports and healthy order book positions.
herbicide to help find better solutions for Indian farmers to deal Further, management reiterated consistent and predictable growth
with resistant weeds. This is working well with certain resistant over the next two years.
weeds in the Northern part of the country.
Management is estimating 50bps-100bps improvement in the
New acquisition to aid in non-organic growth through the margin. Also, the current order book position of the company
addition of manufacturing capacities: stands at $1.4 billion and has entailed a capex of Rs. 347 crore in
FY20 to date. The company would be spending close to Rs. 450
The company has completed the acquisition of Isagro Asia, which crore for the full-year FY20.
deals in contract manufacturing, local distribution, and exports of
agrochemicals.
PI Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 22,771 28,409 28,409 43,962

Growth % y/y 1 25 25 27

EBITDA 4,940 5,886 5,886 9,535

Margin % 22 21 21 22

PAT 3,679 4,187 4,187 6,466

EPS in INR 27 30 30 47

Cash and Equivalents 2,850 1,973 1,973 -

Total Debt 463 99 99 -

Cash from Operations 3,407 4,052 4,052 -

Free Cash Flow 1,710 367 367 2,012

In INR Million BLOOMBERG ESTIMATES

11
 Added
Rs 1,545

}
Increase in institutional Ideal buy range
sponsorship 1,524 - 1,600

break out on above

average volume

Superior sales and

earnings profits

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock broke out of a flat base on above average volume on January 27. It has traded in its buy range since then.

It has a strong RS Rating of 89, with an upward trending RS line. EPS Strength of 84.

It has been reporting double-digit sales and earnings growth for six consecutive quarters.

The number of fund holdings has witnessed a meaningful growth of 2.8% in the recent quarter, indicating good institutional spon-
sorship.

PI Ind Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 723 707 804 754 907 849

Revenue growth % y/y - - - - 25% 20%

EBITDA 134 163 171 151 192 186

EBITDA Margin % 18.6 23.2 21.4 20.1 21.1 21.8

PAT 94 107 124 100 122 120

PAT growth % y/y - - - - 30% 12%

EPS (In INR) 6.8 7.8 9 7.3 8.9 8.7

In INR Crore

12
SRF CMP: 4,062.10 (AS ON February 24, 2020 EOD)

SRF is a chemical-based business entity with a diverse portfolio. It Largest refrigerant manufacturer in India
is mainly engaged in the manufacturing of industrial and specialty
intermediates. The company operates through the following SRF is among the few players globally with a fully backward
segments: Technical textile business (nylon tyre cord fabrics, integrated production process of refrigerant gases. The company
belting fabrics, coated, chemicals business, packaging film has a wide portfolio of gases and value-added products. It contin-
business, and others. ues to maintain a dominant position with the largest market share
in refrigerants market in India. It is also focusing on increasing the
No impact of coronavirus on import of raw materials penetration of FLORON brand of refrigerants in the overseas
markets.
Management does not see any challenges in sourcing key raw
materials like fluorspar due to the current coronavirus situation in Revenue in crore
China. The company can easily procure raw materials from South
Africa and Russia.

Higher growth potential in specialty chemicals

SRF has a good market presence in agri intermediates category.

Management maintained its growth guidance of more than 40%
growth in specialty chemicals for FY20. During Q3 FY20, the
company announced additional capex of Rs 65 crore to debottle-
neck HFC capacity at Dahej and Rs 238 crore to set up a series of
dedicated facilities to produce intermediates catering to the
agro-chemicals segment. SOURCE: Company Presentation

Revenue Share EBIT in crore

PFB
CB
TTB
OTHERS

SOURCE: Company Presentation

SOURCE: Company Presentation

Margins Improving despite margin pressure in refrigerator gases

business

EBITDA margins have improved to ~20% in 9M FY20 from ~18% in

9M FY19. This has helped the company grow bottom line despite
weak top-line growth. Consensus expects EBITDA margin to be
around 21% in Q4 FY20, mainly due to higher margins and growth
in specialty chemical business and superior product portfolio with
more than 70% revenue from value-added products in the packag-
SOURCE: Company Presentation ing film business.
SRF Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 55,890 76,926 78,491 88,699

Growth % y/y 16 38 (2) 18

EBITDA 9,145 13,586 15,280 18,601

Margin % 16 18 20 21

PAT 4,658 6,430 8,529 9,787

EPS in INR 81 112 150 170

Cash and Equivalents 2,184 2,993 - -

Total Debt 27,580 32,887 - -

Cash from Operations 5,528 6,760 - -

Free Cash Flow (7,472) (3,803) 3,086 4,498

In INR Million BLOOMBERG ESTIMATES

13
 break out on above
average volume

Good earnings

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock broke out of its flat base on above average volume in November and has run over 35% since then.

It has done relatively well compared with the market, hence, an RS rating of 94. The buyer demand is at A+.

Even though the company’s sales stayed more or less flat, its earnings grew in triple digits in the recent two quarters. EPS rating is
at 97.

There’s a 5% decline in the number of funds invested in the company to 207 funds.

SRF Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 1881 1907 2072 1828 1737 1807

Revenue growth % y/y - - - - -8% -5%

EBITDA 332 331 382 365 331 390

EBITDA Margin % 17.7 17.4 18.7 20 19 21.6

PAT 151 166 191 185 201 345

PAT growth % y/y - - - - 33% 108%

EPS (In INR) 26.3 28.8 33.2 32.2 34.9 60.1

In INR Crore

14
Vinati Organics CMP: 1,015.40 (AS ON February 24, 2020 EOD)

Vinati Organics Ltd. is engaged in the manufacturing of organic & Revenue (In lakhs)
inorganic chemical compounds and specialty organic intermediar-
ies such as isobutyl benzene (IBB) and ATBS among others.

The company operates through two manufacturing facilities in

Maharashtra. Plant 1 (established 1989, Raigad, Maharashtra)
produces IBB (the world's largest producer) and NBB. Plant 2
(established in 2002) produces ATBS (the world's largest producer)
and NaTBS, TBA, IB, HP, MTBE, and DAAM.

Key points:
SOURCE: Company Presentation

o
2-acrylamido 2-methylpropane sulfonic acid (ATBS): The EBITDA Margin(%)
company recorded strong growth in the ATBS segment in the
previous quarter (share in sales rose from 50% to 60% in Q2).
After the company's key competitor Lubrizol announced its exit
from the segment, Vinati Organics is set to absorb the entire
market share (15–20%) of its rival in the segment. As a result,
management revised the expansion plan of ATBS to add a capac-
ity of 14,000TPA instead of 4,000TPA by FY21

o
Due to a slowdown in the ATBS end-user market, management
reduced its volume growth guidance for FY21-22E to flat 8–10%
from 10%–15%. ATBS contributed 55% to the top-line in Q3. It SOURCE: Company Presentation

is operating at its full capacity of 26KTPA. The proposed brown- Industry Dynamics
field expansion of 14KTPA has been pushed forward to March
2020 due to slowing demand. o
ATBS copolymers are used in oil fields and are set for better
growth prospects with the revival in crude oil prices.
o
Isobutyl Benzene (IBB): The company's key IBB client (BASF) is
engaged in capacity expansion, which will result in higher o
The overall growth in specialty chemical consumption is about to
demand for IBB in the coming quarters. However, volume for IBB plateau, except for emerging markets. Hence, the key remains
took an impact of 40–50% because of the temporary shutdown innovation, sustainability, and competitiveness.
at BASF due to expansion plans.

International - Domestic Sales Ratio

SOURCE: Company Presentation

Overall Revenue mix

Vinati Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 7,287 11,076 11,153 13,810

Growth % y/y 16 52 1 24

EBITDA 1,994 4,039 4,349 5,066

Margin % 27 37 39 37

PAT 1,453 2,830 3,325 3,781

EPS in INR 14 28 33 38

Cash and Equivalents 1,369 1,002 - -

Total Debt 152 37 - -

SOURCE: Company Presentation

Cash from Operations 1,448 2,059 - -

Free Cash Flow 681 (2) 2,112 3,149

In INR Million BLOOMBERG ESTIMATES

15
 Resistance near pivot
Accumulation only if the stock
breaks out with a rising RS line

RS
Line
de
cli
Consolidating in a nin
g
Flat Base

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock is currently forming a flat base. It has resistance near its pivot (Rs 1,196).

RS rating is at 76 and the line has been declining.

Apart from the December quarter results, it had done well, thus has a good EPS strength of 88.

Number of funds invested in the stock has also gone up 5.6% to 114 funds.

Currently, its 50-DMA is below 200-DMA. For a growth stock, the short-term moving average should be above the long-term
moving average.

Vinati Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 248 303 296 290 245 238

Revenue growth % y/y - - - - -1% -21%

EBITDA 91 106 120 120 100 83

EBITDA Margin % 36.6 35.1 40.4 41.3 40.7 34.8

PAT 65 70 82 82 110 66

PAT growth % y/y - - - - 69% -6%

EPS (In INR) 6.3 6.9 8 8 10.7 6.5

In INR Crore

16
Aarti Industries CMP: 1,022.45 (AS ON February 24, 2020 EOD)

Aarti Industries is the world’s lowest cost producer of Besides, in December 2017, it signed another multi-year supply
benzene-based specialty chemicals. In addition to specialty chemi- contract worth Rs 10,000 crore with a global chemical conglomer-
cals, it manufactures chemicals for pharmaceutical, home and ate. The project enables the Company to enter a new chemistry
personal care products. Aarti Industries has a broad portfolio that range (first of its kind in India), and for which it will be setting up a
consists of more than 200 products. Moreover, it ranks among the large-scale manufacturing facility. The client will be paying $42
global top four players in 75% of its product portfolio. It provides million as an advance amount (will be adjusted against future
specialty chemicals and intermediates for pharmaceuticals, sales), thereby helping Aarti Industries to maintain higher ROCE for
agrochemicals, polymers, pigments, printing inks, dyes, fuel the project.
additives, aromatics, and surfactants to more than 600 domestic
clients and 400 overseas clients spread across 60 countries.

Coronavirus outbreak in China can benefit the company

According to management, the company does not have significant

imports from China in its specialty chemicals segment. The compa-
ny is receiving more inquiries from a few leading global players for
its products. Consequences of the coronavirus’s impact on Chinese
chemical manufacturers can benefit Aarti’s specialty chemical
business.

SOURCE: Company Presentation

Higher capex on track to improve top-line growth

The company has spent Rs 8.3B in 9MFY20 and expects a total

capex of Rs 12B in FY20. Capex is mainly directed towards two
projects in Dahej, specialty chemicals chlorination complex in
Jhagadia. Management expects both contract manufacturing
capacities to be commissioned by 4QFY20. Management has
identified 15-20 products in newer chemistries like photo-chlorina-
tion and oxidation, which will help in import substitution. The
management is expecting higher double-digit volume growth in
SOURCE: Company Presentation

Multi-year Deals in Speciality Chemical FY21.

In June 2017, the Company signed one multi-year deal with a Strong Traction in Pharmaceutical Business
global agriculture company to supply agrochemical intermediaries,
spread over a 10-year period. It expects to commence supplies According to management, Pharma margins improved on the back
from FY 2020, which would generate revenue of Rs 4,000 crore of an improved product mix and low costs of raw materials. It is
over the said period. The Company will be investing about Rs 400 expected that pharma margins will remain above 20% over the next
crore in the project. year.

AARTI Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 37,593 46,595 46,290 56,027

Growth % y/y 21 24 (1) 21

EBITDA 6,914 9,630 10,168 12,431

Margin % 18 21 22 22

PAT 3,285 4,905 5,610 6,944

SOURCE: Company Presentation EPS in INR 20 28 32 40

Cash and Equivalents 257 3,058 - -

Total Debt 20,830 24,011 - -

Cash from Operations 2,036 5,537 - -

Free Cash Flow (4,112) (2,399) (1,523) 1,599

In INR Million BLOOMBERG ESTIMATES

17
 Shares held by institutional
funds doubled

Declining sales

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock recently broke out of its flat base and is currently trading above its ideal buy range.

It has done relatively well versus the market, thus an RS rating of 90.

Apart from the December quarter results, it had done well, thus has a good EPS strength of 95.

Number of funds invested in the company has been flat at 166 funds. However, the number of shares held by these funds has
doubled.

Aarti Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 1299 1268 860 1086 1019 1176

Revenue growth % y/y -22% -7%

EBITDA 242 246 239 236 238 242

EBITDA Margin % 18.6 19.5 27.8 21.8 23.4 20.6

PAT 123 132 135 137 142 136

PAT growth % y/y 15% 3%

EPS (In INR) 7.56 8.16 6.58 7.89 8.18 7.85

In INR Crore

18
Navin Fluorine Intl. CMP: 1,211.95 (AS ON February 24, 2020 EOD)

The company is one of the largest integrated specialty fluorochemi- Stellar performance across verticals backed by strong pipeline
cal companies in India. It has over 50 years of expertise in handling and positive outlook keep growth momentum intact
fluorine, with a strong global clientele base, which includes global
innovators. In 2014, it had formed a JV with Piramal Enterprises to o
Its specialty chemical business witnessed a double-digit revenue
develop, manufacture, and sell specialty fluorochemicals with a growth of 33% to Rs 97 crore in Q3 FY20, from Rs 73 crore a
focus on healthcare applications. The company’s key business year ago. The strong performance was witnessed across domes-
verticals include refrigerant gases, inorganic fluorides, specialty tic as well as exports markets, backed by higher volume. Further,
chemicals, and CRAMS. growth momentum is expected to remain intact on account of a
robust project pipeline in Life Science & Crop Science and
In-house R&D, strong manufacturing and fluorination capabili- product portfolio expansion, along with deeper penetration into
ties remain key strengths existing users.

The company is a pioneer in the manufacture of refrigerant gases in o

The long-term outlook for its CRAMS business is positive on the
India with over 45 years of experience in handling fluorine. It also backdrop of new projects signed up for CGMP3, which are
has manufacturing units for its refrigerant and inorganic fluorides expected to start contributing in the coming quarters. Further, a
businesses. In Surat, the company has built a specialty chemicals strong pipeline from European majors is expected to aid top-line
manufacturing plant spread over 135 acres. It recently built a cGMP growth.
compliant pilot plant in Dewas for CRAMS, which is now fully
operational. o
In the legacy business of refrigerant gases, overall profitability
has scaled up due to better pricing power, lower cost, and strong
The company’s state-of-the-art R&D center (Navin Research demand from the non-emissive sector.
Innovation Centre) at Surat has also received DSIR approval. This
center supports product addition and process efficiency in all
business units. The acquisition of Manchester Organics has further
strengthened its R&D process.

Robust financial performance to drive profitability

In the last two financial years, the company has maintained ROCE
above 30%. For FY19, its consolidated adjusted ROCE was at
34.7% versus 36.2% reported in FY18. Further, the company has
an excellent track record of dividend payout over the last ten years.
The company has paid a special dividend of 600%/75%/150% on
FV of Rs 10/10/2 in FY12/FY17/FY18, respectively.

SOURCE: Company Presentation

Navin Key Stats FY 2018 FY 2019 FY 2020 (E) FY 2020 (E)

Revenue 9,072 9,877 10,816 12,672

Growth % y/y 23 9 10 17

SOURCE: Company Presentation EBITDA 2,205 2,190 2,663 3,220

Margin % 24 22 25 25

PAT 1,421 1,469 1,877 2,335

EPS in INR 29 30 38 47

Cash and Equivalents 2,441 2,210 - -

Total Debt 126 41 - -

Cash from Operations 1,731 907 - -

Free Cash Flow 1,243 231 40 460

In INR Million BLOOMBERG ESTIMATES

19
 The stock can continue doing well. It can be
accumulated once it pulls back to its 21-or 50-DMA
on low volume and rebound strongly from there.

Increase in institutional
sponsorship

Good earnings

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

It has not formed any base pattern on the daily chart. However, it formed an ascending base pattern on a weekly basis.

RS rating is at 96 due to its outperformance.

The number of funds in the stock has increased 23% to 114 funds.

The recent two quarters have been good for the company. EPS rating is at 93, and the buyer demand is at A+.

Navin Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 241 226 244 241 263 251

Revenue growth % y/y 9% 11%

EBITDA 50 52 52 60 67 65

EBITDA Margin % 20.8 23.2 21.4 25.1 25.5 25.9

PAT 34.2 38.7 35.9 39.4 46.3 45.2

PAT growth % y/y 35% 17%

EPS (In INR) 6.9 7.8 7.2 7.9 9.3 9.1

In INR Crore

20
Alkyl Amines Chemicals CMP: 1,656.45 (AS ON February 24, 2020 EOD)

Alkyl Amines supplies amines and amine-based chemicals, global- Aggressive capex plans
ly, to the agrochemical, pharmaceutical, rubber chemical & water
treatment industries, among others. The company is the sole manu- The company is aggressively looking for expansion and has a capex
facturer of ethylene-amines in India, with a significant stake in plan of Rs 100 crore in FY20 and Rs 150 crore in FY21. For the
Di-amines and Chemicals Ltd. current year, the company is targeting debottlenecking, and for the
next year, it will deploy more capital on the amines space. Moreover,
Pharma and agrochemical sector drives the growth the company is adding one-two derivative products that were
previously outsourced, but currently, the company is planning to
The company mainly caters to the pharma and agrochemical produce in-house.
sectors. These two contribute ~65% toward revenue. So, the
company's growth mainly depends on the growth of these two Strong Fundamentals
sectors.
The company’s gross revenue has been growing at a decent pace
The company is hopeful that the pharma market will remain over the last nine years, both domestically and internationally. It has
aggressive and has overcome its problems, which were there 2 clocked a CAGR of 18% in domestic and 17% internationally. The
years ago, and the agrochemical sector will repeat its last year's ROCE over the defined period has clocked 16%+ and RONW at
performance due to good monsoons. 13%+.

Volume in methylamines can grow with a CAGR of higher than Looking ahead:
20%
Overall, the company has given volume growth guidance of
In terms of producing methylamines, Alkyl Amines is one of the 10–15% in the future. As per management, the total market is
three major players in the market. The company is expecting expected to grow at 7–8% and the other competitors are reaching
volume in methylamines would at least grow with a CAGR of 20% their peak capacities. Thus, the company is well-positioned to lever-
for the next 2 years. age these opportunities to grow at 15% when the market is expect-
ed to grow at 7%.
Further, there is more headroom for expansion in methylamines as
the company has received an environmental clearance of 45,000 The company has maintained an 80% capacity utilization rate on an
TPA, while the current capacity is at 30,000 TPA. average basis. Management is confident in increasing its capacity
by 30–40% over the next 3 years.

Alkyl Key Stats FY 2017 FY 2018 FY 2019

Revenue 5,006 616 6,464

Growth % y/y 4 23 37

EBITDA 937 1,162 1,630

Margin % 18 19 19

PAT 515 650 850

EPS in INR 25 32 42

Cash and Equivalents 29 32 201

Total Debt 1,003 1,509 1,296

Cash from Operations 561 940 1,301

Free Cash Flow (98) (416) 607

In INR Million BLOOMBERG ESTIMATES

Alkyl amine Q2 FY19 Q3 FY19 Q4 FY19 Q1 FY20 Q2 FY20 Q3 FY20

Revenue 218 212 237 266 234 256

Revenue growth % y/y 7% 21%

EBITDA 49 38 38 59 57 72

EBITDA Margin % 22.6 18.1 16.2 22.2 24.6 28.2

PAT 26.4 22.1 17.5 35 53.8 77

PAT growth % y/y 104% 248%

EPS (In INR) 12.9 10.8 8.5 17.1 26.3 37.6

In INR Crore

21
 Booked 24% profit
Rs 1,184.15

Increase in institutional
sponsorship Added
Rs 952.50

break out on above

average volume

Superior sales and

earnings profits

21-DMA
50-DMA
100-DMA
200-DMA

O’Neil Methodology and Technical Viewpoint:

The stock broke out of its flat base on above average volume in October and has run over 80% since then.

It has done relatively well compared with the market, hence, an RS rating of 98.

It has reported triple-digit growth in its earnings in the recent three quarters. EPS rating is at 97.

Number of funds invested in the stock has increased 35% to 19 funds. Also, the number of shares held by them has increased
nearly 50%.

22
Research Team:
Mayuresh Joshi, mayuresh.joshi@williamoneilindia.com
Kongari Rajashekar, kongari.rajashekar@williamoneilindia.com
Rushit Sejpal, rushit.sejpal@williamoneilindia.com
Satya Narayan Panda, satya.panda@williamoneilindia.com

Disclaimer: William O Neil India Investment Adviser division, is one of the divisions of William O Neil India
Private Limited, which is a company incorporated under the Companies Act 1956. William O Neil India Invest-
ment Adviser division is a registered investment advisor with the Securities and Exchange Board of India and
through its online product, MarketSmith India intends to provide quality equity research material and information
to its customers. The investments discussed or recommended through MarketSmith India may not be suitable
for all investors and hence, you must rely on your own examination and judgement of the stock and company
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the relevant forward-looking statement. William O'Neil India Investment Adviser division or its employees /
directors or any of its affiliates are not responsible for any losses that may arise to any person who has made
investments based on the contents of this document. Past performance never guarantees future results.

Analyst Disclosures: 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.

Disclosure of Interest Statement Companies where there is interest

Analyst ownership of the stock No

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