target price: 1,600 high growth – well integrated – isomer...

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. Anand Rathi Research India Equities

India I Equities

Key f inancia ls (YE Mar) FY17 FY18 FY19e FY20e FY21e

Sales (` m) 31,635 38,061 47,616 57,259 66,346

Net profit (` m) 3,158 3,330 4,163 5,046 6,084

EPS (`) 38.5 41.0 51.2 62.1 74.8

PE (x) 34.3 32.2 25.8 21.3 17.6

EV / EBITDA (x) 18.8 18.3 14.7 12.5 10.8

PBV (x) 7.9 6.8 5.4 4.4 3.5

RoE (%) 23.2 21.1 21.0 20.5 19.9

RoCE (%) 14.6 12.8 13.7 14.0 14.2

Dividend yield (%) 0.1 0.1 0.1 0.1 0.2

Net debt / equity (x) 1.1 1.2 1.1 1.0 0.8

Source: Company, Anand Rathi Research

Nav BhardwajResearch Analyst

Bhawana Israni Research Associate

Chemical

Initiating Coverage `

Rating: Buy Target Price: `1,600 Share Price: `1,320

Relative price performance

Source: Bloomberg

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Key data ARTO IN / ARTO.BO

52-week high / low `1,445 / 821

Sensex / Nifty 38723 / 11692

3-m average volume $0.7m

Market cap `107 / $1514.5m

Shares outstanding 81m

Shareholding pattern (%) Jun'18 Mar'18 Dec'17

Promoters 53.1 51.1 53.6

- of which, Pledged - - -

Free float 46.9 48.9 46.4

- Foreign institutions 3.8 3.6 3.9

- Domestic institutions 14.3 14.2 13.2

- Public 28.8 31.1 29.3

29 August 2018

Aarti Industries

High growth – well integrated – isomer management

We initiate coverage on Aarti Industries with a Buy recommendation and a price target of `1,600.

Highly-integrated isomer management capabilities. Its process-chemistry competence with scale-up engineering competence put Aarti Inds. as one of the global leaders in benzene-based chemistry. Its highly integrated manufacturing facilities along the entire value chain of processing capabilities, makes Aarti competent at isomer management, a key factor acting as an entry barrier.

Predictable high growth for the next three years. Continual capex has enabled Aarti to grow continuously. The scale-up in its business and the new toluene setup offers assurance of an over 20% CAGR in the next three years.

Product lines are complementary to customers’ products. Aarti’s product lines complement those of its customers. It aligns its product development and initiatives with the forward growth path of its clientele. Its capital expenditure commitments are in sync with customers’ expansion objectives.

Management focus on profitable business sections. Management is working toward hiving off its non-performing segment – home care. This shows the management focus, on performing segments and maintaining profitability.

Valuation. We arrive at a valuation of `1,600 a share. At this price the stock is valued at a PE of 31x FY19e and 21x FY21e. On an EV/EBITDA multiple comparison, it is valued at 17x FY19e and 13x FY21e. Risks: Re-starting of Chinese chemical companies at below par rates, delay in implementation of capex, product off-take risk for the goods sold in the Indian spot market, overall slowdown in end-consumer industries.

29 August 2018 Aarti Industries – High growth – well integrated – isomer management

Anand Rathi Research 2

Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY17 FY18 FY19e FY20e FY21e

Net revenues 31,635 38,061 47,616 57,259 66,346 Growth (%) 5.2 20.3 25.1 20.3 15.9

Direct costs 17,433 21,815 27,379 32,924 38,149

SG&A 7,667 9,254 11,428 13,742 15,923 EBITDA 6,535 6,991 8,809 10,593 12,274 EBITDA margins (%) 20.7 18.4 18.5 18.5 18.5 Depreciation 1,225 1,462 1,639 2,097 2,444 Other income 20 78 95 115 133 Interest expenses 1,173 1,317 1,845 2,041 2,041 PBT 4,156 4,290 5,421 6,570 7,922 Effective tax rate (%) 21.2 19.3 20.0 20.0 20.0 + Associates / (minorities) 118 132 173 210 254 Net income 3,158 3,330 4,163 5,046 6,084 Adjusted income 3,158 3,330 4,163 5,046 6,084 WANS 82 81 81 81 81 FDEPS (`/ sh) 38.5 41.0 51.2 62.1 74.8 FDEPS growth 22.9 6.5 25.0 21.2 20.6 Gross margins (%) 44.9 42.7 42.5 42.5 42.5

Fig 3 – Cash-flow statement (` m) Year-end: Mar FY17 FY18 FY19e FY20e FY21e

PBT after OI and Interest 5,310 5,529 7,170 8,496 9,830

+ Non-cash items 1,225 1,462 1,639 2,097 2,444

Oper. prof. before WC 6,535 6,991 8,809 10,593 12,274

- Incr. / (decr.) in WC 1,250 2,861 2,001 3,887 3,398

Others incl. taxes 597 609 1,084 1,314 1,584

Operating cash-flow 4,688 3,521 5,724 5,392 7,292

- Capex (tang. + intang.) 5,301 6,138 6,000 6,000 5,000

Free cash-flow -613 -2,617 -276 -608 2,292

Acquisitions

- Div. (incl. buyback & taxes) 99 98 150 182 220

+ Equity raised -6 -4 - - -

+ Debt raised 2,725 5,065 2,350 2,450 -

- Fin investments 57 3 - - -

- Misc. (CFI + CFF) (OI & Int.) 1,955 2,307 1,749 1,926 1,908

Net cash-flow -5 36 174 -266 164 Source: Company, Anand Rathi Research

Fig 5 – Price movement

Source: Bloomberg

Fig 2 – Balance sheet (` m) Year-end: Mar FY17 FY18 FY19e FY20e FY21e

Share capital 411 407 407 407 407 Net worth 13,625 15,784 19,797 24,661 30,525 Total debt 15,643 20,708 23,058 25,508 25,508 Minority interest 639 770 944 1,154 1,407 DTL / (assets) 1,554 1,774 1,774 1,774 1,774 Capital employed 31,461 39,036 45,572 53,096 59,214 Net tangible assets 16,949 19,962 22,575 27,555 32,045 Net intangible assets 17 13 13 13 13 Goodwill 4 4 4 4 4 CWIP (tang. & intang.) 2,695 4,362 6,110 5,034 3,100 Investments (strategic) 470 472 472 472 472 Investments (financial) - - - - -Current assets (ex cash) 14,571 18,140 21,570 26,454 30,652 Cash 285 321 495 229 394 Current liabilities 3,530 4,239 5,667 6,665 7,465 Working capital 11,041 13,902 15,902 19,789 23,187 Capital deployed 31,461 39,036 45,572 53,096 59,214 Contingent liabilities 1,386

Fig 4 – Ratio analysis Year-end: Mar FY17 FY18 FY19e FY20e FY21e

P/E (x) 34.3 32.2 25.8 21.3 17.6 EV / EBITDA (x) 18.8 18.3 14.7 12.5 10.8 EV / sales (x) 3.9 3.4 2.7 2.3 2.0 P/B (x) 7.9 6.8 5.4 4.4 3.5 RoE (%) 23.2 21.1 21.0 20.5 19.9 RoCE (%) - after tax 14.6 12.8 13.7 14.0 14.2 Gross margin 14.7 12.9 13.9 14.1 14.3 DPS (` / sh) 1.0 1.0 1.5 1.9 2.2 Dividend yield (%) 0.1 0.1 0.1 0.1 0.2 Dividend payout (%) - incl. DDT 2.6 2.4 3.0 3.0 3.0 Net debt / equity (x) 1.1 1.2 1.1 1.0 0.8 Receivables (days) 60 56 58 58 58 Inventory (days) 118 123 126 126 126 Payables (days) 62 59 59 59 59 CFO : PAT % 148.5 105.7 137.5 106.9 119.8 Source: Company, Anand Rathi Research

Fig 6 – Revenue contribution-(Speciality chemical segment)

Source: Company

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Polymer & additives

Agrochemicals & intermediates

Dyes, pigments, paints & printing inks

Pharma intermediates

Fuel additives, Rubber chemicals, etc.



Leading manufacturer of benzene derivatives Incorporated in 1984, over the years Aarti Industries has established itself as one of the largest producers of benzene-based derivatives in India, with a global footprint. It has diverse long-term clientele across the globe for specialty chemicals and intermediates for pharmaceuticals, agro-chemicals, polymers, pigments, printing inks, dyes, fuel additives, aromatics, surfactants, etc.

It ranks first to fifth in many of its product categories such as:

Chlorination (among the top three globally)

Nitration (among the top four globally)

Ammonolysis (among the top two globally)

Hydrogenation (among the top two globally)

Halex chemistry (the only manufacturer in India)

Being forward- and backward-integrated across various value-chains enables the company to manage the various isomers obtained as by-products in various reactions and hence offer a basket of products to customers. The company is the only Indian manufacturer developing benzene-based fluoro-compounds.

Each of these isomers finds use in diverse end-user industries. This serves as an effective entry barrier to competition to set up shop for individual isomers. Aarti is better placed than its competitors in providing a higher product customisation and enhanced customer confidence.

It has more than 200 products and serves more than 1,000 customers in domestic and international markets. Over 45% of its revenue arises from exports. Its products are used in over 60 countries, largely developed markets such as the USA, Europe and Japan, as well as in emerging markets, including India. It has 17 manufacturing plants and two US FDA certified units.

The business is divided into three divisions

Specialty chemicals (bringing ~80% to revenue)

Pharmaceuticals (~15%) and

Home- and personal-care chemicals (~5%).

Specialty chemicals – well established in benzene and

toluene-based isomer management



Fig 7 – Company profile

Source: Anand Rathi Research

Specialty chemicals The specialty chemicals division brings the largest portion to the company’s revenue (81%) and EBIT (~90%). This division has a well-diversified revenue mix, with sales to multiple end-user industries: polymers & additives, agro-chemicals & intermediates, dyes, pigments, paints & printing inks, pharma intermediates, fuel additives, rubber chemicals, resins, fertilisers and nutrients.

Fig 8 – End-users industries

Category Sub-category Contribution to the division % Major clients

Polymers & additives

Aircraft Automobiles Cruise-liners Electrostatic precipitators Bullet-proof jackets Electronic gadgets

15-20

BASF Solvay Teijin Ticona Everlight Chemipro Toray

Agro-chemicals & intermediates

Pesticides Insecticides Fungicides Herbicides Fertilisers Nutrients

20-25

BASF Gharda Chemicals DOW FMC Syngenta UPL Bayer Coromandel

Dyes, pigments, paints & printing inks

15-20

BASF Eastman Sudarshan Chemicals Huntsman Clariant Sun Chemicals

Pharma intermediates 15-20

Sun Pharma Sanofi Cipla Dr. Reddy's Zydus Cadila Pfizer

Fuel additives, rubber chemicals, etc.

20-25


• Non-ionic Surfactants • Concentrates for

Shampoo, hand wash & dish wash

• Active Pharmaceuticals Ingredients (APIs)

• Intermediates for Innovators & Generic Companies

• Polymer & Additives • Agrochemicals &

Intermediates • Dyes, Pigments,

Paints & Printing Inks • Pharma

Intermediates • Fuel additives,

Rubber Chemicals, Resins, etc.

• Fertilizer & Nutrients

Aarti Industries

Speciality Chemicals (~80%)

Pharmaceuticals (~15%)

Home and Presonal care(~5%)

Segments (Revenue %)

End-user industries



Benzene-based value chain

Starting from benzene as a raw material, the company manufactures monochlorobenzene, dichlorobenzene (three isomers) and trichlorobenzene (two isomers) in the first stage of chlorination. Each of these isomers undergoes further nitration (reaction with nitric acid, HNO3) to form seven compounds. Benzene may be directly reacted with nitric acid to form nitrobenzene, which in turn is used to manufacture dinitrobbenzene. These compounds may be subjected to further steps such as ammonolysis (reaction with ammonia to form amines), hydrogenation (treatment with hydrogen), Halex exchange (Halogen - fluorine (F), chlorine (Cl), bromine (Br), iodine (I) and astatine (At) exchange), etc. to form isomers, which are used in various industries.

Uses of monochlorobenzene(MCB)

Manufacture of phenol, aniline, DDT, specialty chemicals, diphenyloxide, process solvents for methylene diisocyanate

Pigment intermediates

Solvents for paints

Agrochemical intermediates, pesticides

Adhesives, silicones, polishes, waxes

Pharmaceutical products

De-grading solvents

Heat-transfer fluids in solar energy and functional fluids in external combustion.

Fourth-largest global manufacturer of nitrochlorobenzene (NCB)

In 1986, the company started its first plant (for nitrochlorobenzene) at its Sarigam unit of 1,200 tpa. Over three decades, it has become the largest producer of benzene derivatives in India and one of the leading global manufacturers with a 25-40% global market-share across various products. Further, it is a global leader in processes such as:

Fig 9 – Benzene derivatives value chain


Benzene

Benzene

DCB

TCB

Benzene

ODCB

123TCB

124TCB

PDCB

MDCB

PNCB

ONCB

34 DCNB

23 DCNB

25 DCNB

24 DCNB

245TCNB

PNA

ONA OCA

OCPNA

PCONA

34 DCA

23 DCA

25 DCA

24 DCA

245 TCA

MPD

PPD

OPD

NB DNB

35 DCA 24 DNCB 33 DCBH

RED B

23 DCP

25 DCP

PFNB

OFNB

OFA

24 DFNB 13 DFB 24 DFA

PFA

MCB

A B C D E F

A–Chlorination B-Nitration C-Ammonolysis D-Hydrogenation E-Others F-Halex Chemistry



Chlorination

Nitration

Hydrogenation

Ammonolysis.

It is a market leader in PNCB/ONCB and derivatives.

To better serve the market and strengthening its operations, the company increased its NCB capacity from 57,000 tpa in FY15 to 75,000 in FY16. At present, the plant operates at 92% capacity and the company is planning some progressive bottlenecking to increase capacity in the next two years.

What is nitrochlorobenzene

Nitrochlorobenzene is an organic compound a precursor of and an intermediate in producing a variety of chemicals and other products. It is a common precursor in the production of industrially useful compounds, including common antioxidants found in rubber. Besides, it is an important intermediate in preparing dyes, pharmaceuticals and pesticides.

Process

Commercially, nitrochlorobenzene (NCB) is manufactured by nitration of benzene using a mix of nitric and sulphuric acids. Ortho (ONCB), meta (MNCB), and para (PNCB) isomers of nitrochlorobenzene have different properties from each other. Production of these three compounds is in the ratio of 65:34:1.

Products

Major products and their properties:

Fig 10 – Nitrochlorobenzene Chain NCB isomer Colour Form Uses

O-nitrochlorobenzene Light yellow Monoclinic needles Azo dye intermediates Agriculture chemicals Corrosion inhibitors

M-nitrochlorobenzene Pale yellow Solid Manufacture of aniline dyes such as a

fast orange base & aniline-based drugs

P-nitrochlorobenzene Pale yellow Flakes and molten form

Production of intermediates for sulphur dyes and photo chemicals

Pharmaceuticals Rubber chemicals Insecticides

2,4-dinitrochlorobenzene Yellow Crystals

Dyes & dye-stuff intermediates for detection and determination of Nicotinic acid Nicotinamide Pyridine compounds


The growth in end-user industries such as pesticides, pharmaceuticals and fertilisers is expected to be the major driving factor in the growth of the nitrochlorobenzene market.

Asia Pacific is the fastest growing market for nitrochlorobenzene. China is the largest market accounting for most of the global market. The rapid development of China's pharmaceutical, dye, pesticide and rubber chemical industries has increased demand and consumption. Besides, North America and Europe are other major markets.



Fig 11 – Some of the key manufacturers of nitrochlorobenzene USA Japan Germany Others

Dow Chemicals Mitsubishi Chemicals BASF LG Chem (South Korea)

E. I. du Pont de Nemours & Co. Toray Industries Evonik Industries Akzo Nobel (Netherlands)

Monsanto Mitsui Chemicals

Eastman Chemicals Sumitomo Chemicals


Fig 12 – Capacity utilization - nitrochlorobenzene


Capacity additions for nitrotoluene derivatives

To diversify into a toluene chain of products, the company has initiated a 30,000 tpa greenfield plant at Jhagadia for nitrotoluene in Q3 FY18. The reason to establish the unit was to leverage established existing customer relationships to cross-sell toluene derivatives for downstream use in products already serviced. Users are

Optical brighteners

Agrochemicals

Pigments and

Pharmaceuticals.

In FY18, plant utilization was 40% and the company expects to reach over 80% in the coming two years. It believes this capacity expansion should generate ~`3.5bn-4bn annual revenue at optimum utilisation.

Fig 13 – Capacity utilization – nitrotoluene


84%

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The only company in India to manufacture ethylene derivatives

To increase its agrochemicals business and better serve global clients, in FY17 the company set up an 8,000-10,000 tpa multi-purpose ethylation plant at Dahej. This is the first plant in India with Swiss technology. The manufactured products are used in herbicides and agrochemicals. The company expects full utilisation in the next four years. The product derived from the nitrotoluene value chain, MEA, is used as raw material for ethylene derivatives. This helps to lower its raw material cost.

Fig 15 – Growth in the agrochemicals industry to drive ethylation demand


Phenylenediamine (PDA) - capacity expanded

Aarti is the only Indian company in India to manufactures phenylene diamines (PDA). To strengthen its position in a growing market and cater to demand of high0growth industries (engineering polymers, additives), in FY16 it expanded its PDA capacity at Jhagadia from 250 tpm to 450 tpm and to 1,000 tpm in FY17. It expects to generate `2bn revenue at the optimal utilisation at a ~20-22% margin. The increased capacity would strengthen its operations in high-end polymers and additives.

Specialty polymers are expected to see significant growth owing to increasing applications in electronics and construction, chiefly in Asia

30%

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Fig 14 – Toluene value chain


Nitration

Chlorination

Hydrogenation

Others

Toluene

Meta Nitro Toluene (MNT)

Para Nitro Toluene (PNT)

Ortho nitro Toluene (ONT)

6C2NT 4C2NT OCPNT

OT 6C2ATPTOCPTMT

NEOT MEA

24DCT 26DPT48ACIDMNPTDMPT

2B AcidDEMT MENT

Dyes & Pigments Agrochemicals Optical Brightener Explosives Key end-users

29 August 2018

Anand Rathi Reseearch

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Fig 16 – PhenyProducts

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O-phenylenediami

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Source: Anand Rathi

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Multiyear projects

In FY18, company secured two large contracts, for ten and twenty years respectively from two global customers. Both will start from FY20 and ensure future earnings.

`40bn – a 10-year deal with a global agriculture company

In Jun’17, the company entered into a ten-year agreement with a global agriculture company to supply a high-value agrochemical intermediary used in herbicides. Planned capex is ~`4bn ($62m); the company expects ~`2bn-2.5bn to be invested in FY19, the rest in FY20. It expected to start supplying from FY20. Margins expected in this would be above the company’s 18% average margin.

`100bn – a 20-year deal with a global chemicals conglomerate

With this project, the company is set to enter a new chemistry range, the first of its kind in India. The end product is one of the major growth products for the customer. For this, it will invest $35m-40m to set up a dedicated large-scale manufacturing plant for this specialty chemical intermediate based on the basic technology package received from the customer. For this project, the customer will be paying Aarti in instalments $42m as advance against future sales. Supplies are expected to commence from FY20. This advance helps to higher RoCE for the project on account of the lower capital employed.



Raw materials The basic raw materials used by Aarti are

Benzene

Concentrated nitric acid (C.N.A.)

Aniline

Ammonia

Hydrochloric acid

Alpha olifine (AO)

Sulphur

Phthalic anhydride

Fig 20 – Raw material break-up


The company’s major raw materials (by volume) are benzene and toluene. Prices of benzene and toluene are up y/y ~30% and ~40% respectively. However, these price movements impact only its revenue. EBITDA and all other line items in the P&L are not impacted by the movement in raw material prices as the company operates on a raw material pass-through model.

This also shows that assessment of growth in revenue is not a correct parameter to assess the company’s growth.

Benzene30%

Concentrated Nitric Acid (CNA)

8%

Aniline7%

Alpha Olifine (AO)5%

Sulphur4%

Pthalic Anhydride3%

Others43%Raw material prices are passed on

to customers and no major impact is seen on margins

Fig 21 – Benzene

Source: Chemical Weekly , Anand Rathi Research

Fig 22 – Toluene

Source: Chemical weekly , Anand Rathi Research

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Pricing mechanism helps maintain EBITDA margin

The company follows the raw-material cost+delta per kg/ton model and passes on the variation in raw material prices to customers. The delta comprises other raw material and energy costs, overheads.

Generally, variation in prices of benzene and crude oil affect the top line. However, as the business model incorporates the passing on of key raw material costs, the company’s absolute EBITDA is not affected. On the other hand, the EBITDA margin improves on lower benzene prices. For some value-added end-products (polymers, pharmaceuticals and agrochemicals) demand is inelastic to benzene prices as the cost in total production is insignificant.



Capacity expansion to fuel growth Capex to ensure supply-side growth

In the past six years (FY13-18), Aarti has invested ~`25.6bn as capital expenditure and expects to invest ~`17bn in the next three years to improve and enhance its product capacities. Major capex will be for the chlorotoluene capacity, new R&D and innovation plant in Mumbai and for the multi-year projects.

The company plans capex of ~`12bn in two phases of `6bn each in FY19 and FY20, for

A specialty chemicals complex at Jhagadia

Acid re-concentration plants

API and pharma intermediate de-bottlenecking

Expansions at Vapi and at Tarapur

R&D and innovation plant

Capex for the `40bn multi-year deal and

Various other specialty chemical-based project initiatives.

Fig 24 – Plant capacities and utilisation Particulars Capacity (tonnes) 2018 capacity utilisation (%)

Nitrochlorobenzene 75,000 92

Nitrotoluene plant 30,000 40

Ethylation unit at Dahej SEZ 10,000 30

PDA 12,000 50

Sulphuric acid 200,000

Calcium chloride granulation unit 60,000

Chlorination capacities 175,000

Solar power (six turbines) 697 KW NA

Co-generation power plant 6 MW NA

Source: Company

Capex for safety, health and emissions (SHE)

Of the capex, the company has invested a considerable amount in safety, health and emission curtailment and treatment of effluents and hazardous waste. It has six zero liquid discharge (ZLD) units and works on the principle of reduce-reuse-recover. In the past five years, it has invested over `2bn on safety, health and emission capex.

End-user growth to ensure demand-side growth

Aarti’s products are used across the spectrum of manufacturing companies. The following charts give an overview of the major growth drivers and end-users of its products.

Fig 23 – Capex Year (` m)

FY13 3,274

FY14 2,899

FY15 2,982

FY16 4,976

FY17 5,301

FY 18 6,138

Source: Company



The company serves consumers of specialty chemicals and intermediates for pharmaceuticals, agro-chemicals, polymers, pigments, printing inks, dyes, fuel additives, aromatics, surfactants and various other specialty chemicals across the globe.

Growth in the agrochemical industry

After the US, Japan and China, India is the fourth-largest global producer of agrochemicals, valued at $4.4bn in FY15 and expected to touch $6.3bn by FY20, a 7.5% CAGR.

The agrochemicals market is split equally between domestic (50%) and exports (50%). They are expected to clock growth of 6.5% and 9% p.a. respectively till FY20.

Herbicide use is seasonal. Rice and wheat crops are the major application areas for herbicides. Rising labour costs and shortages are key growth drivers for herbicides. In India herbicide consumption was $0.4bn in FY15 and expected to clock a 15% CAGR to $0.8bn by FY20. The global herbicide market was $23.9bn in 2016 and expected to be $34.1bn by 2022, a 6.1% CAGR.

The ballooning need for food in the world should drive demand for agrochemicals.

Aarti’s global clients (BASF, UPL, Monsanto, Dow Chemicals) have been investing heavily in their agrochemicals businesses. This would boost the Aarti’s revenue growth in future as herbicide intermediates form an integral part of its portfolio. Of its revenue, ~25% comes from agrochemicals.

Growth in the pharmaceutical industry

The Indian pharmaceutical sector accounts for about 2.4% of the global pharmaceutical industry (by value) and 10% by volume. Meanwhile, India enjoys 20% of global exports of generics. The generics market amounted to $26.1bn in 2016, up from $21bn the year prior. In FY16, India exported pharmaceutical products worth $16.9bn, and is estimated to export products worth $40bn by 2020.

The sector ranked fifth in terms of attracting FDI, 5% of FDI to India from Apr’00 to Sep’16. From Apr’00 to Sep’16 cumulative FDI inflows to the pharmaceutical sector were $14.5bn. The Indian pharmaceutical market is a tremendous opportunity and is expected to expand to $55bn by 2020 ($40bn from exports).

Fig 25 – Growth drivers


Fig 26 – End-users of company’s products




Other growth factors Integration, the basis of cost leadership

Proactive investments in backward integration and in cost-reducing capital expenditure have led to the company maintaining cost leadership. Further, its expertise in isomer management enables

Downstream integration of end products

Conversion of by-products into commercially viable ones

Enhanced value for customers by integrating with the manufacturing chain of clients

Augmenting margins and reducing waste footprint.

Reduction in power costs

In FY17, the company has started three co-generation - renewable energy capacities each at Jhagadia, Kutch and Vapi.

These capacities will transform waste-heat energy generated from the manufacturing process into energy. The company expects `3-4 saving per unit in energy costs. The total estimated capacity is ~6 MW. This will help the plants maintain cost leadership and increase margins in coming years.

The company had also operationalised six solar power-generation units with capacity of 697 KW to further supplement power needs from alternative energy sources.

Focus on R&D and innovations

At present, the company has three R&D centres:

Two focus on R&D initiatives for pharmaceutical APIs;

The third is for specialty chemicals.

The company plans to set up a world-class R&D centre, and scale it up, equipped with state-of-the-art equipment and analytical tools at ~`750m capex. This new centre will double R&D capabilities and focus on developing newer and niche value-added products and process chemistries. This will help improve product quality and process yields of existing products by forward integrating for downstream products.

Fig 27 – R&D as percent of sales


0.48%

0.53%

0.47%

0.53%

0.68%

0.40%

0.45%

0.50%

0.55%

0.60%

0.65%

0.70%

0

50

100

150

200

250

FY13

FY14

FY15

FY16

FY17

(%)(` m)

R&D R&D as % Sales

29 August 2018

Anand Rathi Rese

Fig 28 – Expor

Source: Company

China16%

Japan10%

Rest of the Wo21%

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America28%

Europe25%

The new plaapplications rubber chem

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Fig 29 – MajorPolymers & addi

Source: Company

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Pharma business on a growth path

Aarti’s pharmaceuticals division brings ~15% to revenue. In the past six years, revenue from this division registered a 24% CAGR to ~`5.6bn in FY18 (15% of revenue) from ~`1.9bn in FY13 (9% of revenue). The division’s EBIT margin was 12-14%. The active pharmaceutical ingredients manufacturing plant is US FDA- and EU GMP-accredited with dedicated production blocks for steroids and oncological APIs.

Further, the company has some dedicated, world-class manufacturing plants for xanthine derivatives with mammoth capacity (3,600m tpa) for its flagship product, caffeine.

Fig 30 – Xanthine derivatives manufactured and their use Xanthine derivatives Use

Caffeine anhydrous Beverages, neutraceuticals, pharmaceuticals

Caffeine anhydrous (granules) Beverages, neutraceuticals, pharmaceuticals

Theophylline Bronchodilator

Aminophylline Treating active symptoms and blockage of airways due to asthma or other lung diseases such as emphysema or bronchitis

Acephylline piperazine A stimulant, it acts as an adenosine-receptor antagonist

Choline theophylline Non-selective phosphor-diesterase inhibitor (xanthine); treatment of reversible airways obstruction

Doxofylline Treatment of asthma

Theobromine Non-selective phosphor-diesterase inhibitor (xanthine); treatment of reversible airways obstruction

DMAU Plastic industry and intermediate for caffeine


The APIs manufactured are used in these pharmaceutical groups.

Anti-hypertensives

Anti-asthamatics

Anti-cancer

CNS agent

Skin care

De-congestant

Anti-thalassaemics

Analgesics

Ophthalmologics

In FY18, company had

48 commercial APIs with 33 EDMFs,

28 US-DMFs and

16 CEPs, with

12 APIs being developed.

Of its exports, 60% go to the US and EU. The company has USA, Japan and EU approval for steroids and anti-cancer products.

Its major clients are Pfizer, Sandoz, Sanofi, Sun Pharma, Syngenta, Teijin, Teva, Ticona, Toray and Zydus.

We expect that the growth momentum will continue in coming years following the sharper focus on exports, particularly to regulated markets, coupled with greater utilisation of capacities.



Hiving off the home- and personal-care division The low-margin home- and personal-care division brings ~5% to revenues with over 4% of capital employed. These have one manufacturing unit each, at Pithampur (Madhya Pradesh) and Silvassa. It caters to FMCG companies and is used in shampoos, anti-dandruff shampoos, disinfectants, hand & body washes, dish washes, detergent bars & powders, soaps, tooth-powders, pastes, etc. Currently, it is not RoE-accretive.

As the business does not expand the bottom line, the company decided to split it off and merged with the newly formed Aarti Surfactants, planned to be listed on the exchange by the end of FY19. The company has been making concerted efforts to gain larger scale and drive sustained improvement in this business. Plans are afoot to optimise production capabilities to suitably alter/revise the product mix, explore new markets, and debottleneck some operations to expand capacities for high-margin export-oriented products. These measures would help increase exports and expand margins.

The company has been accorded 49 patents till now and has applied for ~37 more. These should give a fillip to its earnings potential when the patents are finally awarded.



Competitors in India

SEYA industries Seya Industries manufactures products in the same value chain as Aarti. However, Seya largely serves domestic markets and has manufacturing capacity of 68,000 tons. It chiefly manufactures three products

3,3 DCB – 7,600 tons (the world’s largest capacity)

PNA – 4,000 tons (fourth largest in the world, second largest in India) to be doubled by Q4 to become the largest in India

2,4 DNCB - 6000 tons.

The printing ink industry is the largest customer for Seya, bringing 50-60% to its revenue.

These products constitute ~85% of its revenue and ~90% of EBITDA. Seya Industries is also undertaking a `6bn expansion to double its production capacity by FY20. It has similar capex cycles, capacity utilisation, scale-up procedures and timelines as Aarti, thus establishing an industry capex-cycle benchmark.

Panoli Intermediates (India) Pvt. Ltd. Panoli is a part of the Goyal Group of Industries, which manufactures and exports dye intermediates, chlorinated aromatic compounds and nitrochloro aromatic compounds. It has an annual turnover of more than $130m. The company has a manufacturing plant for

Chlorination products

Monochlorobenzene

Para-dichlorobenzene

Ortho-dichlorobenzene

Trichlorobenzene

Nitration products

Ortho-nitrochlorobenzene

Para-nitrochlorobenzene

2:4 Dinitrochlorobenzene

2:5 Dichloronitrobenzene

Para-nitroaniline

Nitrobenzene

3:4 Dichloronitrobenzene

Hydrogenation products

Ortho-toludine

Para-toludine

Meta-toludine

3:4 Dichloroaniline



Sulphuric acid group products

Sulphuric acid

Chlorosulphonic acid

Oleum 23%

Oleum 65%

Dimethlysulphate

Hydrochloric acid

Calcuim chloride

Besides these companies in India, competition for Aarti comes mainly from China, which in turn is currently closing/upgrading its plants due to environmental concerns.



Financials

Growth in gross block, a lead indicator of growth Displaying the characteristics of a true manufacturing company, growth in gross block is a lead indicator of growth in revenue for Aarti, with a lag of around two years, the time required to achieve optimum utilisation.

Fig 31 – Revenue growth vs. gross-block growth


From FY11 to FY18 Aarti’s gross block clocked a 22% CAGR, resulting in a 15% CAGR in net sales, and 18% in EBITDA.

The annual report states that the company operates on a cost-plus model and revenue has elements of movements in prices of raw materials. Hence, the best parameter to evaluate growth is EBITDA. With the gross block expected to grow 17% in the next three years, we reckon EBITDA would grow 21%. Management says that it expects the company to grow 25% in FY19, and ahead, sees earnings growing 20%.

We believe that, with Aarti’s long-standing relationship with clients, focus on R&D and product innovation, and of becoming an “extension of customers’ production facilities” further surprises can be expected.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

e

FY20

e

FY21

e

(%)(` m)

Net Sales Gross Block Gross Block Growth (RHS) Sales Growth (RHS)

Fig 32 – EBITDA growth vs. gross-block growth


Fig 33 – EBITDA and EBITDA margins


5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

2,000

4,000

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FY11

FY12

FY13

FY14

FY15

FY16

FY17

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FY19

e

FY20

e

FY21

e

(%)(` m)

Operating Profit Gross Block Growth (RHS) Operatin Profit Growth (RHS)

15% 15%

17%

15%

16%

19%

21%

18% 19% 19% 19%

14%

15%

16%

17%

18%

19%

20%

21%

2,000

4,000

6,000

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10,000

12,000

14,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

e

FY20

e

FY21

e

(%)(` m)

Operating Profit OPM (RHS)



Fig 34 – EBITDA margins and EBITDA-to-gross block


One can’t help but notice that the home care segment which brings ~5% to sales has not been contributing anything to EBIT. It is but natural that the company hives off the division, for which it is awaiting approval from the relevant government departments.

With the current capacity additions focused on specialty chemicals, we believe the contribution of the pharmaceuticals division to revenue (15% - FY18), will be greater ahead.

Depreciation as percent of gross block has been a consistent ~5% throughout the last decade. The company enjoys a good credit rating, which has resulted in the effective cost of debt at below 8%. External currency borrowings for working capital for exports at 3-4% help keep cost of debt low. Aarti has in the past maintained a D/E of 1, and is comfortable in maintaining a similar ratio ahead. It is prudent in the leverage it uses. We foresee that debt should increase from FY18’s `20.7bn to `23.0bn in FY19 in order to fund capex. Interest coverage is estimated to hold stay above 3.5 times.

15% 15%

17%15% 16%

19%21%

18% 19% 19% 19%

28%29% 29%

27% 28% 28%

25%23%

25% 25% 25%

10%

15%

20%

25%

30%

35%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

e

FY20

e

FY21

e

(%)

EBITDA / Sales EBITDA/Gross block

Fig 35 – Segment-wise revenue split


Fig 36 – EBIT split


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY13

FY14

FY15

FY16

FY17

FY18

(% of revenue contribution)

Speciality Chemicals Pharmaceuticals Home & Personal Care Chemicals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY13

FY14

FY15

FY16

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FY18

(%)

Speciality Chemicals Pharmaceuticals Home & Personal Care Chemicals



Fig 37 – Debt and Interest coverage


Receivable days in the past have matched payable days. The major investment in working capital has been due to investment in inventory.

Fig 38 – Days – Receivables – Payables – Inventory – WC cycle


The cash-conversion cycle is 120 days. This has not been volatile, and shows that the company comfortably rotates its cash thrice a year. In our assumptions we have maintained the same cash-conversion cycle (FY18’s 120 days) as opposed to a minimum of FY16’s 101 days and an average of 118 days.

Capex, FCF and OCF

It is noteworthy that capex in the past has been close to (though more than) operating cash generated. The further debt helps it tide over the deficit and enables the company to be cash positive, after a dividend payout ~25% till FY16 and 3% from FY17. We assume that a payout trend similar to that in FY18 will continue.

2.32.1

2.6

3.5

4.0

4.4

3.6 3.5

2.0

2.5

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FY11

FY12

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(%)(` m)

Total Borrowing Interest Coverage

40

60

80

100

120

140

160

FY13

FY14

FY15

FY16

FY17

FY18

FY19

e

FY20

e

FY21

e

(Days)

Debtors Inventory Creditors Working Capital Cash conversion cycle



Fig 39 – Cash flow from operations – Borrowings – Capex


RoE and RoCE

Aarti Industries has consistently maintained an RoE in the 20-22% band. The return-on-capital-employed has steadily been in the 13-14.6% band.

Fig 40 – RoE and RoCE (calculated on EBIT)


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

e

FY20

e

FY21

e

(` m)

Net Cash from Operating Activities Increase in Borrowings Net addition to Fixed Assets

17.818.7

19.2

22.623.2

21.1 21.020.5

19.9

13.613.0

13.514.2 14.6

12.813.7 14.0 14.2

10

12

14

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18

20

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24

FY13

FY14

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FY16

FY17

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FY19

e

FY20

e

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e

(%)

ROE ROCE



Valuations As there are not many companies manufacturing similar products, we value it using the discounted cashflow method and arrive at its fair value.

The weighted-average cost-of-capital (WACC) has been arrived at on the following assumptions:

Fig 41 – DCF assumptions Equity (FY18) ` m 15,784

Cost of equity % 15.00

Debt (FY18) ` m 20,708

Cost of debt % 8.0

Weighted-average cost-of-capital WAAC % 11.0

Current price ` 1,320

Terminal growth rate % 4.50

Increase in depreciation % 5

Working capital changes % 4


Fig 42 – DCF calculation (` m) Financial Year -->> FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e

EBIT 7,265 8,610 9,963 10,411 10,880 11,369 11,881 12,416 12,974 13,558

EBIT (1- t) 5,812 6,888 7,970 8,329 8,704 9,095 9,505 9,932 10,379 10,847

Depreciation 1,639 2,097 2,444 2,566 2,694 2,829 2,970 3,119 3,275 3,439

Working capital changes (2,001) (3,887) (3,398) (3,543) (3,695) (3,853) (4,017) (4,189) (4,369) (4,556)

CAPEX (6,000) (6,000) (5,000) (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) (1,500)

FCFF (550) (901) 2,017 5,852 6,204 6,572 6,958 7,362 7,786 8,230

Present value of FCFF (495) (731) 1,473 3,851 3,677 3,508 3,345 3,188 3,037 2,891


Fig 43 – DCF results (` m) PV 24,035

Terminal value 126,425

DEBT (20,708)

Cash 321

Total value 130,074

No. of shares 81

Target price (market value) (`) 1,600


We arrive at a valuation of `1,600 a share. At this price the stock is valued at a PE multiple of 31x FY19e and 21x FY21e. On an EV/EBITDA multiple comparison, it is valued at 17x FY19e and 13x FY21e.



Risks

Delay in capex implementation

Shutdown of manufacturing plants of key clients

Revival of Chinese chemical manufacturing at the same cheap rates as FY14

Global slowdown, leading to a slowdown in key consumer sectors such as agro-chemicals, pharmaceuticals, and dyes & pigments

Fig 44 – PE Band


Fig 45 – EV/EBITDA Band


10x

15x

20x

25x

0

200

400

600

800

1,000

1,200

1,400

1,600

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

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15

Nov

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-16

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4x

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15,000

35,000

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75,000

95,000

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1,35,000

1,55,000

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Nov

-14

Feb-

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May

-15

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15

Nov

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May

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16

Nov

-16

Feb-

17

May

-17

Aug-

17

Nov

-17

Feb-

18

May

-18

Aug-

18

(`m)



Company Background & Management

Technically qualified management Promoted by first-generation technocrats, five of six promoter directors are engineers. Three of four founder promoters are chemical engineers from ICT (formerly known as University Department of Chemical Technology (UDCT)

In Aug’13, founder-chairman Chandrakant Gogri retired, and now advises in the capacity of chairman emeritus.

Fig 46 – Management Name Designation Description Chandrakant V. Gogri

Chairman Emeritus

Founder. Chemical engineer from UDCT. Expertise in projects, operations, process development and local & international marketing in the chemicals industry. As Chairman Emeritus provides guidance and expertise to the Board

Rajendra V. Gogri

Chairman & MD Associated with company since formation. Master’s in chemical engineering from the USA and rank holder from UDCT, Mumbai. expertise in handling financial and commercial matters

Rashesh C. Gogri

Vice-Chairman & MD

Production engineering degree from Mumbai University. Played the key role in the growth of various strategic business units in chemicals, pharma and personal-care

Shantilal T. Shah

Vice Chairman Non-executive vice-chairman since Apr’90. Experience in marketing, finance and administrative functions in the industry

Ramdas M. Gandhi

Independent director

Master’s in Law, Mumbai University. Corporate lawyer with experience in commercial law, corporate law and more

Laxmichand K. Jain


B.E, (Chem.) USA. Environmental expert with over 45 years’ experience in the industry

K.V.S. Shyam Sunder


B.Com., ACA. Fellow of The Institute of Chartered Accountant of India;seasoned banker with over 31 years’ rich banking experience. Expertise in corporate & retail banking, risk management, credit rating, reviewing & monitoring systems and loan policies

Bhavesh R. Vora


B. Com., ACA. Practicing CA, with more than 24 years’ experience in stock brokers’ audits, compliance, derivatives, futures & options, accounting standards and internal management audit

Padmashri Prof. Ganapati D. Yadav


Vice-chancellor of The Institute of Chemical Technology (ICT). Numerous honours and distinctions for his contributions to “green”chemistry and engineering, catalysis science and engineering, chemical-reaction engineering, nano-technology and energy engineering. Has authored over 300 original research papers in 51 cross-disciplinary international peer-reviewed journals

Priti P. Savla Independent director

CA & qualified certificate holder in Entrepreneurs' Development Program from Indian School of Business, Hyderabad. Has more than 10 years of experience.

Parimal H. Desai

Whole-time director

Chemical Engineer, UDCT, Mumbai. More than 34 years of experience in development and project implementation

Manoj M. Chheda

Whole-time director

Commerce graduate, Mumbai University. More than 25 years of experience in purchase and marketing of chemicals.

Hetal Gogri Gala

Whole-time director

B.E-Electronic (Mumbai university) and has done MEP from IIM Ahmedabad. Expertise in Purchase & Supply Chain Management & manages various strategic business units.

Renil R. Gogri Whole-time director

B.Tech (Mech), IIT, Mumbai. Handles the portfolios of systems developments/improvements in operations, adoption of IT advancements into operations and project execution and other production related activities of the company.


Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide (12 months) Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of Anand Rathi Financial Services Ltd. ARSSBL is a corporate trading and clearing member of Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd. (NSEIL), Multi Stock Exchange of India Ltd (MCX-SX) and also depository participant with National Securities Depository Ltd (NSDL) and Central Depository Services Ltd. ARSSBL is engaged in the business of Stock Broking, Depository Participant and Mutual Fund distributor.

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

General Disclaimer: This Research Report (hereinafter called “Report”) is meant solely for use by the recipient and is not for circulation. This Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through ARSSBL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security (ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by ARSSBL to be reliable. ARSSBL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of ARSSBL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. The price and value of the investments referred to in this Report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. ARSSBL does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding taxation aspects of any potential investment.

Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views expressed in this Report. Research Report may differ between ARSSBL’s RAs and/ or ARSSBL’s associate companies on account of differences in research methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold ARSSBL, its employees and associates responsible for any losses, damages of any type whatsoever.

ARSSBL and its associates or employees may; (a) from time to time, have long or short positions in, and buy or sell the investments in/ security of company (ies) mentioned herein or (b) be engaged in any other transaction involving such investments/ securities of company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) these and other activities of ARSSBL and its associates or employees may not be construed as potential conflict of interest with respect to any recommendation and related information and opinions. Without limiting any of the foregoing, in no event shall ARSSBL and its associates or employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind.

Details of Associates of ARSSBL and Brief History of Disciplinary action by regulatory authorities & its associates are available on our website i.e. www.rathionline.com

Disclaimers in respect of jurisdiction: This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject ARSSBL to any registration or licensing requirement within such jurisdiction(s). No action has been or will be taken by ARSSBL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. ARSSBL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to ARSSBL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India.

Statements on ownership and material conflicts of interest, compensation - ARSSBL and Associates

Answers to the Best of the knowledge and belief of ARSSBL/ its Associates/ Research Analyst who is preparing this report

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report?

No

ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company No

ARSSBL/its Associates/ Research Analyst/ his Relative have any other material conflict of interest at the time of publication of the research report? No

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation from the subject company in the past twelve months No

ARSSBL/its Associates/ Research Analyst/ his Relative have managed or co-managed public offering of securities for the subject company in the past twelve months

No

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months

No

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months

No

ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation or other benefits from the subject company or third party in connection with the research report

No

ARSSBL/its Associates/ Research Analyst/ his Relative have served as an officer, director or employee of the subject company. No

Other Disclosures pertaining to distribution of research in the United States of America

This research report is a product of ARSSBL, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by ARSSBL only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a MajorInstitutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business withMajor Institutional Investors, ARSSBL has entered into an agreement with a U.S. registered broker-dealer, Cabrera Capital Markets. ("Cabrera"). Transactions in securities discussed in this research report should be effected through Cabrera or another U.S. registered broker dealer.

1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.

2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.

3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect to receive compensation for investment banking services from the issuer of these securities within the next three months.

4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.

5. As of the publication of this report, ARSSBL does not make a market in the subject securities.

6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.

© 2018. This report is strictly confidential and is being furnished to you solely for your information. All material presented in this report, unless specifically indicated otherwise, is under copyright to ARSSBL. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of ARSSBL. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of ARSSBL or its affiliates, unless specifically mentioned otherwise.

Additional information on recommended securities/instruments is available on request.

ARSSBL registered address: 4th Floor, Silver Metropolis, Jaicoach Compound, Opposite Bimbisar Nagar, Goregaon (East), Mumbai - 400 063. Tel No: +91 22 4001 3700 | Fax No: +91 22 4001 3770 | CIN: U67120MH1991PLC064106.

target price: 1,600 high growth – well integrated – isomer...

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