thematic specialty chemicals april 22, 2020 a never before

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

A never before world Indian chemicals players will benefit from expanding specialty chemicals market globally led by growing new applications alongside manufacturing shifts from China due to reliability and transparency woes and EU due to ageing workforce, innovation focus, and M&As. Specialized engineering/chemistry talent availability in India would drive replication of IT/Pharma (unlike Textiles!) in chemicals. Managements investing in (i) building product capabilities like chemistry platforms, process engineering; (ii) manufacturing infrastructure like compliances on QSHE and accreditations; and (iii) superior client engagement while entering multiple application areas will help recreate Infy/TCS/Sun/Divis in the next decade. PI and SRF outscore peers on management capability, capital allocation and ability to handle scale. Aarti and NFIL are promising as they upgrade on organizational capabilities.

Macros support Indian chemical players Specialty Chemicals is a big USD750bn industry growing at 5%. Large part is getting commoditized (profitability pressure) while new parts are being added (innovation pressure), driving rise of outsourcing of manufacturing in the last decade and would continue. Loss of China (25% share) as reliable partner and continued shifts from EU/Japan (17%/7% share) mean share of India (3%) will rise meaningfully. Availability of talent in chemistry and engineering will act to India’s advantage (similar to IT/Pharma) offsetting lower competitiveness on scale/utilities/infra. COVID-19 is a new catalyst with many countries asking their companies to move supply chains out of China.

Indian companies would need to move into multiple application areas Upgrading QSHE compliances, investments in process/engineering capabilities and building well-incentivized management teams will be crucial to build this business. Companies would need to be truly independent on supply chain (backward integrate/diversify RM sources). They would also need to enter new growth areas beyond agri/pharma and build own proprietary technologies which may require R&D bolt-ons for acquiring clients and product offerings. Capital allocation record would be key given capex will remain high. PI, SRF, Aarti, NFIL are our favourites on this count.

Similarities in growth, macros, RoCE and multiples with Pharma Chemical companies in India are broadly similar in revenue size as pharma (DRL, Cipla, Lupin, Sun, Aurobindo) in 2002. All of them registered growth of 15-27%, reaching revenues of US$1-2bn over the next decade as exports ramped up and traded at 20-25x 1-year fwd P/E of. All adopted slightly different business models but macros (strong demand for generics in US/Europe) benefited the top players. It is only now that many are being separated. COVID-19 will accelerate the macro theme and benefit the companies which can capture the opportunities. Multiples to remain steady due to earnings visibility and healthy RoCE PI/SRF (Chemicals) and Aarti will cross US$1bn revenues over FY23/FY24. Thereon they need to build more growth engines. PI has articulated growth path beyond agrochem CSM into pharma and other fine chemicals. Aarti has set up specialized R&D for more downstream benzene and other customised products. SRF is looking at fluoropolymers and also becoming a more end-to-end AI player vs just providing intermediates. Navin Fluorine already has growth engines in pharma and agro and adding few more beyond them. These would deliver RoCE of 15-20%, reinvest most cash in growth and deliver 16%/18% revenue/PAT CAGR over next decade. High visibility on growth, steady RoCE and good governance would keep multiples steady at 20-30x 1-year fwd P/E.

THEMATIC SPECIALTY CHEMICALS April 22, 2020

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POSITIVE

Key Recommendations

PI Industries BUY

Target Price: Rs1,700 Upside 21%

Navin Fluorine BUY

Target Price: Rs1,800 Upside: 27%

SRF BUY


Aarti Industries BUY


Sudarshan BUY

Target Price: Rs500 Upside: 19%

Vinati Organics BUY


PI, SRF and NFIL are our top picks

Sales CAGR FY22 PE FY20 RoCE

(FY20-23) on TP post tax

PI Inds 22% 30.6 18%

SRF 19% 17.3 15%

Aarti 21% 20.3 11%

Sudarshan 12% 18.3 15%

NFIL 28% 31.3 12%

Vinati 24% 21.2 26%

Source: Ambit Capital Research

Research Analysts

Ritesh Gupta, CFA [email protected]

+91 22 6623 3242

Prasenjit Bhuiya

[email protected]

+91 22 6623 3132

[email protected] 2020-12-07 Monday 13:19:55

https://www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-shift-production-out-of-china

https://www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-shift-production-out-of-china

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April 22, 2020 Ambit Capital Pvt. Ltd.

Global market: Changing Landscape Global chemicals market is growing at 5% CAGR (vs. 3% GDP growth in 2019) with increasing capacity shifts from US and Europe to China and India. Developed world’s chemicals manufacturers (primarily Europeans) have been a) undertaking M&As to consolidate on higher margin specialty products and b) undergoing portfolio rejigs to shift from generics and high-EHS exposure segments. Increased pace of M&As has led to stretched balance sheets and lower investments in manufacturing as product cycles are getting shorter. Mounting pressure on EHS, rising complexities in synthesis of molecules and competition from generic players will aid in outsourcing of manufacturing to Indian players. A few Indian players with product/process development and manufacturing capabilities along with EHS and respect for IP protection will be the likely beneficiaries.

Emerging global trends We identify the key trends emerging in the global chemicals sector and how these impact India, particularly the outsourcing pattern. Globally, chemical companies are undergoing a) consolidation (for example: top three agrochemicals have 60%+ share in 2019 vs. six players in 2015), b) portfolio restructuring (divesting commoditizing portfolio and buying specialities), and c) de-risking supply chain from China. India is emerging as a key beneficiary of these patterns. We also later highlight which companies are in a position to benefit from these tailwinds.

Globally, the chemicals sector has been consolidating Exhibit 1:

Year Acquirer Target Deal value (USD bn)

2016 Bayer AG Monsanto 65.7

2016 China National Chemical Corp Syngenta 45.5

2018 International Flavors & Fragrances Frutarom Industries 6.7

2017 Solvay Cytec Industries Inc 6.1

2016 Lonza Group Capsugel Sarl 5.5

2015 DuPont de Nemours Inc Dow Silicones Corp 4.8

2018 UPL Arysta 4.2

2016 Evonik Industries Performance Materials division, Air Products

3.8

2016 BASF Chemetall GmbH 3.2

2019 Nippon Paint Holdings Co Ltd Dulux Group 2.9

2016 China National Chemical Corp Adama Agricultural Solutions 1.4

Source: Bloomberg, Ambit Capital Research

Globally, portfolio rejigs drive balance sheet pressure

Besides the global consolidation, companies have also been undergoing portfolio restructurings and rebalances. These portfolio rejigs are done with the aim to a) focus on core operations while divesting commodity portfolio or not-so-green chemistry portfolios, b) increase profitability by getting into specialty products, and c) increase flexible of asset deployment.

In the last few years, many global MNCs divested their non-core portfolios. Akzo Nobel divested its Specialty Chemicals business and Lonza carved out its Specialty Ingredients segment (LSI) etc. Companies are also entering new verticals to chase growth; for e.g., Lanxess entered a new vertical called Consumer Protection Chemicals.

After a series of M&As, global chemical companies are under pressure to generate returns to shareholders by improving margins and growth rates

To keep manufacturing asset base light, Syngenta and Bayer divested their plants to Indian company Deccan Finechemicals a few years back

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This effectively brings global chemical players with stretched balance sheets and new war heads of integrating M&As but also helps them look at rationalizing their manufacturing costs dispassionately. Unlike the past, the relative life cycle of products is shortening, reducing the amount of time available to innovators to capitalize on manufacturing skills. This is also leading to rise of specialized manufacturing services players which have done well in the recent past such as Lonza, Saltigo, PI, Divi’s, Deccan Finechemicals, etc.

A few examples of global chemicals players that have undergone portfolio restructuring Exhibit 2:

Particulars Year Segment restructured Remarks

Clariant 2020 Masterbatch business Clariant has agreed to sell its masterbatch business to PolyOne for USD1.6bn in order to concentrate on its personal and home care businesses.

Merger of Dow and Dupont and split into three companies

2019 Separate entity for Agrochemicals, Specialty Products and Materials Science

Dow and Dupont first merged together and then divided themselves into three segments: Corteva (focusing on agrochemicals), DuPont (Specialty Products), Dow (Materials science).

Lonza Group 2019 Specialty Ingredients business carved out

Lonza Group in 2019 had announced that it will carve out its Specialty Ingredients segment (LSI). LSI has Microbial-control solutions and specialty chemical services. Lonza had earlier divested its water care business.

Evonik 2019 Methacrylates business Evonik signed an agreement to sell its Methacrylates business to Advent International (a private equity firm) for EUR3bn in 2019 in order to focus on specialty chemicals.

BASF 2019 Pigment business BASF agreed to sell its global pigment business to DIC in 2019 for a consideration of EUR1.15bn as it looks to move away from the pigment business.

Huntsman 2019 Surfactant business Huntsman is selling its chemical intermediates businesses (includes surfactants and derivatives of ethylene oxide and propylene oxide [PO]) to Indorama Ventures.

Akzo Nobel 2018 Specialty chemicals business Akzo Nobel sold its specialty chemical business (Nouryon) to The Caryle Group for an enterprise value of USD12.5bn to focus on its paints and coatings business.

Solvay 2015 Cytec Solvay completed acquisition of Cytec in 2015 for USD6bn. Cytec Industries is a specialty chemicals company serving aerospace, agriculture, automotive, defence sectors.

Source: Company, Ambit Capital Research

BASF’s presentation indicates the churn in product portfolios of global MNCs. This means that manufacturing Exhibit 3:focus gets limited as a lot more management bandwidth is spent on turning around the acquisition, product portfolio management and need for much more agility


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Shift in capacities from EU/Japan to India/China a secular trend

As Western players face increasing pressure from rival producers and local players try to capture a larger share of the global market, global specialty chemical companies are trying to find new ways to compete. Manufacturing is the first thing these global majors look to outsource to remain competitive. Given rising costs related to labour, initial setup expenses, and stricter environmental compliance, manufacturing capacities in global countries are being shut down. Most of these capacities are being transferred to manufacturing captives or third-party manufacturers in India/China. Most of the specialty chemical segments except for Pharmaceuticals have been laggards in outsourcing their manufacturing needs vs. base chemical players. This trend is catching up with the changing mindset of these global innovators.

Europe’s market share in global chemical sales Exhibit 4:has dropped significantly; China was the biggest beneficiary in the last decade…

Source: CEFIC, Ambit Capital Research

…driven by significant ramp-up in capital Exhibit 5:spending in chemicals by China while Europe and Japan’s shares have reduced

Source: CEFIC, Ambit Capital Research

As the shift of manufacturing capacities takes place from Europe/China to other geographies, we believe different segments will be preferred in different market. We broadly classify the chemical sector into three categories - Petrochemicals, Specialty chemicals and Base chemicals. India would be a beneficiary of global specialty chemicals play off a low base given its talent base, low manufacturing costs and respect to IP protection laws.

India won’t gain traction in Petrochemicals or base chemicals but would be Exhibit 6:a beneficiary in specialty chemicals

Country expected to benefit from shifts out of Europe and China

Petrochemicals The Middle East likely to gain share given considerable investments towards forward integration from Oil majors

Specialty chemicals

Europe is incrementally outsourcing to India. China will also emerge as an innovator itself but would lose its share as a supplier.

Base chemicals China would remain competitive due to better RM availability, scale and efficiency of the industry; some areas where Indian players are already there may benefit as Chinese industry cost structures themselves have gone up.


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Global Specialty market is expected to grow at a Exhibit 7:CAGR of 5% in 2017-21

Source: Aarti Industries, Ambit Capital Research. Note: This estimate is before disruptions related to coronavirus and can see some revisions.

Indian specialty chemicals sector is expected to Exhibit 8:grow at 13% CAGR over FY18-23

Source: Aarti Industries, Ambit Capital Research. Note: This estimate is before disruptions related to coronavirus and can see some revisions.

De-risking the supply chain from China Some key outsourcing trends by global MNCs based on what global companies are highlighting and our interactions with experts:

Major MNCs are trying to de-risk their supply chains by diversifying their RM procurement away from China (amongst the developing countries). During the past decade, China aggressively added chemical capacities and became the largest exporter (amongst the developing countries) to MNCs. However, various experts we talked to believe that as risks associated with Chinese exports are increasing (domestic slowdown, IP threat, currency volatilities, consistent disruptions and tightening controls), MNCs are increasingly preferring India over China for their raw material supplies. There is also an increase trend of specific governments (ex. Japan and US) asking their companies to pull out from China. For details of the takeaways from an industry expert who has worked with Bayer and Syngenta, click here.

US Trade War and COVID-19 are accelerating shift away from China

COVID-19 has renewed talks of Japanese firms reducing their reliance on China as a manufacturing base. The Japan government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia. Japanese focus on relationships rather than cost competitiveness. Ten years back they had no presence in India but through acquisitions or organically they have built a reasonable presence in India.

Sourcing strategies of most of the global agrochemical MNCs vary but Indians are incrementally becoming strategic partners.

Focus is on both strategic as well as tactical sourcing. The strategy which prevails in tactical sourcing is cost competitiveness. These players float the product development need in the entire market and then pick up one that provides top quality at the most competitive cost. On other hand, some players start working with outsourcing partners right since the molecule discovery (such as with PI). The partner helps right from setting up the first commercial scale process to putting up large scale manufacturing for the molecule. This predominantly happens in case of newly invented molecules.

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FY18-23 expected CAGR of specialty chemicals region wise

Global companies would de-risk their procurement from China and India stands to gain from this shift.

India is at an advantageous position as it already has regulations in place which cover all concerns raised by the Chinese government in its fight against pollution. India has been well ahead when it comes to regulations and is looking at becoming world class. Certain norms of India are even stricter than in the US and Europe.

Japanese and US companies incrementally prefer Indian suppliers. But, China has lower fixed costs for assets, electricity and water than India but has higher labour costs and higher risk of theft of intellectual property.

https://ambitresearch.co/user/download-report/Ambit-Chemicals_POSITIVE_Prefer_defensiveness_of_agriculture_segment-03-04-2020_09-09-06.pdf

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Divested segments create opportunity for Indian players like Sudarshan and UPL Indian players would benefit from reducing focus of European innovators from lower-margin or high-EHS-sensitivity products. Indian players have a large opportunity to gain share from business which are turning lower margin for European business due to lower manufacturing (operating as well as capex) costs and manpower costs. These are resulting in lower sales and marketing, technical support, product servicing costs. Over the years, amongst Indian companies, UPL benefited from increased genericisaition of market and took advantage of products where MNCs exited due to EHS-related issues (such as Mancozeb). Sudarshan too has been benefiting from growing disinterest of Clariant (looking to divest pigment portfolio) and BASF (already divested pigments portfolio) into this market. The company has ramped up its R&D capabilities and built a sales and marketing network across US and Europe.

Sudarshan Chemicals has better EBITDA margins Exhibit 9:than Clariant India

Source: Company, Ace Equity, Ambit Capital Research

UPL has similar margins compared to FMC Exhibit 10:despite having a completely generic portfolio (until FY17)

Source: Company, Ambit Capital Research. Note: UPL has completely generic product portfolio while FMC has been focusing more on new molecules. FMC acquired Dupont’s portfolio including Rynaxypyr in FY18.

BASF presentation highlights optimization of capex across business segments and consistent need to improve Exhibit 11:the product portfolio through M&As. More M&A focus ideally should drive lower manufacturing capex to facilitate balance sheet flexibility. Note the plans to do low capex in agricultural solutions.

Source: BASF presentation, Ambit Capital

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Sudarshan Chemicals Clariant India

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UPL FMC


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Agrochemical market presents an interesting case study

The global agrochemical market is USD56bn post sharp correction over CY14-CY17 and resuming growth in CY18. ~40% of this is accounted for by raw materials, implying a RM procurement market size of US$22bn. Of this, 50% is manufactured in-house by key agrochemical players themselves and the rest is outsourced. Half of total outsourcing is contract manufacturing (USD5bn) and the rest is building blocks (USD5bn). Out of this total USD5bn outsourcing market, China accounts for USD2-2.5bn, East Europe ~2-2.5bn, and India USD600-700mn per annum. The largest companies (Lianhe Tech) in China would have a size of USD600-700mn. Among global innovators, Syngenta and Bayer are the biggest outsourcers to China. In Europe, outsourcing is done to companies like Saltigo, Lonza and Solvay.

Extent of outsourcing for raw material varies across MNCs Exhibit 12:

Source: Primary Data Expert, Ambit Capital Research

Rising complexities support entry barriers for more skilled CSM players

Globally molecules are turning more complex again, leading to more complex manufacturing capabilities and hence the need for more specialized manufacturers too has been increasing.

Process technology is becoming critical as molecular structures have become heavier and much more complex. Most of the old products are now being replaced with more complex chemistries.

Call on technology capabilities for partners have gone up from 1-3 reactions to 6-10 reactions also due to reduced reliance on multiple suppliers. Hence, the required chemistry capabilities for manufacturing partners have gone up meaningfully.

Going forward, major component of cost will be for complex technologies and not raw material unlike today. Indian companies can gain from this opportunity by being service/technology providers.

Outsourcing partnerships will focus on increasing RoI per product (internal cost efficiency). Outsourcing partners with deep technical expertise stand to benefit.

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Imidaclorpid (innovated by Bayer) – one of the Exhibit 13:old insecticides but still one of the largest generics


Its replacement Rynaxypyr (from Corteva and Exhibit 14:now FMC) is very complex


Bayer’s Tetraniliprole (competing to Rynaxypyr) is even more complex and Exhibit 15:heavy on fluorination


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China chemicals industry changing rapidly The rising global chemicals supplier, China has been hit by three major issues – tighter environmental regulations, trade war with US and virus-related disruption. While the trade wars (given the recent renegotiations between US and China) and virus-related disruptions are transient, these do expose vulnerabilities of a heavy China-dependent supply chain. To top these concerns, blasts such as in Jiangsu have further raised concerns around sustainability of such manufacturing supply chains. That said, we believe that the shift would be gradual and a lot dependent on Indian companies’ own capabilities to capitalize on these opportunities.

Tighter environment regulations in China

China’s chemical industry has been one of the key contributors to its GDP growth. According to China’s state council information, Chinese chemical industry contributed 13.8% of the national GDP in 2018. Share of China’s contribution to global chemicals by value have increased to 40% in 2018 from 24% in 2010. This increase is driven by large investments and R&D. This was further aided by government subsidies and relaxed environment regulations. However, 2016 proved to be a turning point as environment concerns became the important concern for the Chinese government.

The strict implementation of environmental norms in 2016-17 resulted into shortages and steep price rise for many chemicals. Trade tension with USA and slowdown in economy led to partial relaxations of restrictions resulting in improved availability and moderation of prices. However, the blast in March 2019 in Jiangsu triggered severe restrictions including permanent closure of some chemical parks which led to major short term price increase and shortages. In another development Chinese government declared some areas of Yangtze River as protective zone in order to protect the river. No factories are allowed within the one kilometre of the river impacting the chemical industries established in those areas.

Series of disruptions in China has led to unpredictability among global MNCs Exhibit 16:

Events Date Remarks

Beijing Olympics 2008 China had shut (fully or partially) many of its polluting manufacturing units (chemical plants, power stations and foundries) for over a month to improve the environment quality before the Beijing Olympics.

Government measures

2013 Chinese government had passed '10 Measures for Environmental Protection' and set targets to reduce the emissions from heavily polluting industries by 30% by end of 2017.

G20 summit Jun, 2016 China ordered at least 255 Shanghai-based industrial facilities, including part of a major oil refinery operated by Sinopec Corp, to shut for 14 days to reduce pollution ahead of the G20 summit.

13th five year plan

July, 2017 The 13th five-year plan covering the period of 2016-20 resulted in heightened focus of Chinese government on environment. The plan also highlighted shifting of chemical production to chemical parks and also reducing the number of parks.

Winter shutdown 2017 and 2018 China had closed many of its manufacturing units for two months to cut emissions in order to prevent smog and promote blue sky.

Trade war 2018-2019 The series of tariffs imposed by US on China led to many MNCs look for alternative to China in order to diversify their supply chains away from China.

Jiangshu Blast Mar-19 A major explosion at a chemical plant in Chenjiangang Chemical Industry Park resulted in death of more than 78 people. Chinese government closed the entire region which led to sharp increase in product prices.

Coronavirus 2020 After two consecutive years of winter shutdown, Chinese government didn't go ahead with winter shutdown in 2019. But coronavirus led to prolonged shutdown after Chinese New Year, disrupting supply chains and logistics.


The key regulatory changes in China were:

Shifting of chemical production to dedicated chemical parks covering 90% of the plants from current 50%.

Restriction on existing number of chemical parks and strict rules for particular substances.

Restriction of plants near the Yangtze river with no factories can be established within 1km of the river.

Introduction of environmental tax; reduction in capital outflow to the chemicals sector.

In addition to above regulations, there were further provincial-level measures depending on the industry concentration and pollution level of the provinces. In order

The 13th five year plan for 2016-20 has environment as one of the key themes with strict implementation guidelines

http://www.reuters.com/article/us-china-industry-pollution-idUSKCN0Z3145

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to implement the regulations, the Chinese government conducted nationwide rounds of inspections.

What is our view of what’s happening in China? Exhibit 17:

Phase 1: Growth at any cost Focus on growth at any cost Free capital flowing into the sector, lot of

interest subvention from banks Export incentives Easy regulatory permissions to set up;

growth and employment generation focused

Phase 2 Pollution control measures being

implemented Incremental emphasis on fuel getting

replaced from coal to LNG Stronger compliances Focus on quality of growth vs. quantity of

growth

Phase 3: Focus on hi-tech chemicals Focused on building high-tech capabilities Moving away from being factory for the world to self-

sustenance and move towards being innovation leaders Build larger corporation with balance sheet strength Acquires business for technology – ex: ChemChina’s

acquisition of Syngenta Banks charging higher interest rates

Provincial-level measures significantly increased in some of the key chemicals zones in China Exhibit 18:

Key Zones Key chemicals Measures taken

Hebei Specialty Chemicals Agro intermediates

Implemented new emission limits on water pollutants in July 2018 which are expected to reduce chemical oxygen demand by ~33% and ammonia nitrogen emissions by ~58% from the chemical firms in the province.

Jiangsu

Dyes intermediates Resins Herbicides Agro intermediates

Jiangsu province came under intense scrutiny following the blast and number of listed chemical companies like Nanjing Chemical Fibre, Lianhe Chemical Technology and Jiangsu Yabang Dyestuff were found to be violating environment regulation (Reuters, 7 May, 2018).

Jiangsu province government plans to close 30 industrial parks comprising chemical plants and thousands of individual plants. This can possibly result in survival of only ~2,000 plants by 2021 out of ~7,000 plants (Global Times, 11 April, 2020).

Jiangsu province aims to boost use of cleaner fuel like natural gas and phasing out more than 2GW of coal-based power plants (Reuters, 18 Oct, 2018).

Shandong Specialty Chemicals Dyes intermediates

Shandong province has a goal of reducing the number of chemical parks in the province to 100. Shandong has low share of chemical companies located in chemical parks (37%) and high share of GDP

depending on chemical industry.

Zhejiang Specialty Chemicals Zhejiang province is seeing tighter regulations and closure of chemical plants which are not in compliance

with the environmental regulations. Zhejiang has prohibited opening of new chemical parks in the province.


Over the longer term, we see the following structural changes in the industry:

Rising costs of doing business in China: The earlier business model in China was based on low cost vs. other countries. With increase in environment regulations, cost of compliance with these regulations has jumped. For example, shift to cleaner sources of energy like natural gas from coal will increase energy costs. Moreover, labour costs are already high compared to India.

China’s coal consumption has been on a Exhibit 19:downtrend while gas consumption is increasing

Source: CEIC, Ambit Capital Research

Labour costs are significantly higher in China vs. Exhibit 20:India

Source: Cefic, Trading economics, Ambit Capital Research

Preference of global players to de-risk from China: The sudden spike in intermediates due to closure of chemical plants forced many global players to geographically diversify away from China. This was accelerated by the trade tension between China and the US.

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Tightening of financial availability: China’s main bank supervisor decreed in 2014 that it would control investment in oversupplied industries, including part of chemical industry. This led banks in 2015 to tighten rules governing eligibility to loans in oversupplied sectors. Banks have shifted over the past two years to demand more collateral, terminate loans prematurely, and refuse to renew loans, putting chemical companies at a further disadvantage in borrowing. Chemicals companies also get charged an above-average market interest rate.

Change in environment policies: The environmental policy aims to move chemical production from its current configuration, in which many tens of thousands of chemical plants are scattered across urban industrial and residential areas. New regulations are having limited impact on big upstream petrochemical and chemical intermediates and polymer plants, most of which are built with appropriate emissions controls and waste treatment facilities. The sever impact has been on thousands of smaller plants that make specialty chemicals, from coatings and dyestuffs and pesticides to food ingredients and surfactants. These are typically privately owned operations often lacking appropriate waste management capabilities and located in urban areas. The move to shut down out of- compliance plants have affected large numbers of these small operations, but the impact on overall chemical output has been less severe.

Chinese regulations are getting tighter and incremental supply will be at an elevated cost base. Chinese supply may take 5-8 years to resume with more innovation and cleaner process but their cost advantage is clearly over. They will not be able to dump products that they could do earlier. The number of producers will come down and hyper-competition will end.

Implementation of a national chemical inventory, substance volume bands and tracking are now similar to EU REACH. First round inspection from July 2016 to Dec 2017 covered 31 provinces, 29,000 cases and detention of 1830 people. Fines worth CNY 1.43bn were levied on all non-compliant firms. Second round of inspection run over 2018-20. Going forward, Chinese government plans to organize inspection with focus for specific industries.

Anti-China feeling post COVID-19: An expert we spoke with believes anti-China feelings due to the global virus spread and ensuing economic damage are increasing. The urgency to reduce dependence on China will reinforce India as a valuable partner. Most of his customers, the expert revealed, have been appreciative of the measures taken by India in restricting the impact of the virus so far. The expert believes it will likely create opportunities not only for agrochemicals but also for pharmaceuticals and specialty chemical players in India. For e.g., API shortage is opening up opportunities like backward integration for Indian players that are dependent on China.

China’s cost structures are unlikely to go back to where they were

The potential of a resumption of Chinese supply fuelled by a slowdown in China’s economic growth is a key concern raised by multiple investors for our China to India capacity shift argument. Industry participants believe this is unlikely given these factors:

Centrally driven regulations: Regulations have become increasingly stringent in China with most environmental directives being implemented by the central government and not the provinces like earlier. Chinese President, Mr Xi Jinping, has made it clear that environmental protection is of paramount importance and even precedes economic growth.

Entrepreneurs are backing off in absence of free capital: Secondly, most owner-driven enterprises in China are reluctant to re-invest profits earned in the last 20 years in environmental compliance, especially when their second generation is not keen on running the business. Growing constraints over cheap capital and focus on compliance is diminishing attractiveness of expansion.

India a growing force; China’s cost advantage eroding

The Indian specialty chemicals space has largely been driven by value advantages offered by specific players with a) superior processes, b) RM advantage led high backward-integration, and c) better impurity profile. Opportunities in volume- and scale-based products have largely bypassed domestic companies. A key trend that favours India is gradual erosion in China’s cost advantage, due to: (1) increase in capital costs driven by adherence to stricter effluent treatment norms, (2) increasing labor cost, and (3) reduction of government subsidies.


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China is moving towards more innovation than volumes

Recent supply disruptions in China have raised concerns among all the innovators who sourced from there.

They are now being forced to consider other alternative suppliers and also diversify their regional exposure by keeping 2-3 suppliers from every region. Most companies were over dependent on China prior to this. Considering this scenario, India is emerging as a potential alternative due to cheap labour, availability of good talent and increased reliability.

Secondly, manufacturing as a whole will experience a shift from China to India over the next decade as China turns into a developed economy and focusses more on innovation.

Both rising cost structures are further adding to the woes of already lower margins

A 2016 McKinsey research suggests that margins in specialty chemicals in China are structurally lower than other parts of the world: the average EBITDA margins of specialty chemical companies operating in China—both local players and international companies—is about four percentage points lower than the global industry average,

Overcapacity and intense competition underpinned by fragmentation of industry players are common factors seen in many products and market segments in China’s specialty chemical sector.

China’s margins are lower than rest of the world companies even in Exhibit 21:specialty chemical segments

Note: Link to the report, Source: Mckinsey, Ambit Capital Research

https://www.mckinsey.com/%7E/media/McKinsey/Industries/Chemicals/Our%20Insights/A%20game%20plan%20for%20international%20specialty%20chemical%20companies%20in%20China/A-game-plan-for-international-specialty-chemical-companies.ashx

Chemicals


Chinese peers of PI like Lianhe Chemical has Exhibit 22:faced plant closures and also margin pressures

Source: Bloomberg, Ace Equity, Company

Asset turnover of Indian players PI and Deccan Exhibit 23:are better than Chinese peers like Lianhe

Source: Bloomberg, Ace Equity, Company

But we refrain from painting a broad brush We continue to believe China has substantial advantages due to its massive infrastructure, resilient and efficient work force and raw material advantages in multiple cases. We believe it would continue to remain a base chemicals hub, however in certain specialty chemicals where RM integration isn’t so strong, some Indian companies may benefit due to their higher focus on EHS, ability/significant efforts over last few years to backward integrate, and provide strong comfort on IP protection.

What are the advantages that India has?

Complex chemistries: India is strong when it comes to complex chemistry (multi step synthesis) which is required in the manufacturing of Knowledge Chemicals – Pharma and Agro & Biotech. Some Indian vendors have done quite well in delivering very complex molecules as well, which has impressed global clients like BASF. India has a good quality of chemists and engineers with reasonable analytical abilities.

Specialised unit operations: India is specialised in specific unit operations/synthesis, e.g. Fluorination. India is strong in complex chemistry (multi-step synthesis) given decent presence of building blocks. One area, for example, is fluorine chemistry (used in agro/pharma) which is getting incrementally used in all agro/pharma products. Most of the new age Agro/Pharma molecules involve fluorine chemistry given resistance management etc. India has been one of the most open countries to globalisation and hence IP protection and transparency metrics have been better.

Good QSHE compliances: India (good companies) give preference to safety and adhere to environmental norms

Risk mitigation: Many MNCs like BASF don’t put all eggs in one basket (China). To mitigate risk, they give sourcing share to Indian companies as well.

Cost is also a determining factor in sourcing from India, other than China. India is still cheaper compared to EU/US companies or sometimes better than China. (Aarti export Chloro chemicals to China, though it’s a volume game)

The stricter norms imposed by Chinese Government also made some sourcing companies to look to India for chemicals.

India advantage: Not just cost but also ability to do complex molecules

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Chemicals


Summary of opportunities for Indian chemical players Exhibit 24:


Need for alternative to ChinaImprovement in feedstock

availability

Rising Costs/Compliances in Europe/US (e.g: SRF, NFIL, PI)

Import substitution (e.g: Deepak Nitrite, Aarti & Vinati)

Multiple opportunities for Indian specialty chemical players

Chemicals


Growth narrative for the sector is secular and more than a China story Indian chemical companies (PI, SRF, Aarti, NFIL) have grown handsomely at 13-27% CAGR over FY15-20E, consistently generating 15%+ RoCEs while at the same time reinvestment continues to be on an upward trajectory. We believe China has been one of the many catalysts and future growth for the sector is not solely dependent on China. Going ahead, we believe companies can continue to grow at similar level as a) they foray into new segments, b) feedstock availability improves in India, and c) outsourcing by global players continues to rise. Players with right mix of infrastructure for manufacturing, client handling and R&D capabilities will be the key beneficiaries. We prefer exporters like PI, SRF, Aarti and NFIL over domestic-focused players (Dhanuka, Insecticides) or consumer ingredient players (Galaxy, SH Kelkar) given their process capabilities, resulting in limited competition and ability to grow in new avenues (like NFIL’s new segment in HPP).

Chemical companies have grown revenues at 14% CAGR over FY10-19 along with improving returns on capital Exhibit 25:

Note:1) We have taken PI Industries, SRF, Aarti Industries, Atul, Vinati, Sudarshan, Navin Fluorine, Deepak Nitrite, Neogen and NOCIL for the calculation. 2) During FY11-13, NFIL and SRF received carbon credits which boosted margins. Source: Company, Ambit Capital Research

At the same time, total capital employed by the Exhibit 26:sector in FY19 was 4 times vs. FY10

Source: Company, Ace Equity, Ambit Capital Research. Note: We have taken Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak, Nocil, Vinati and Neogen chemicals for calculation.

Exports as % of total revenues has increased to Exhibit 27:51% in FY19 vs. 35% in FY10

Source: Company, Bloomberg, Ambit Capital Research. Note: We have taken Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak and Nocil for calculation.

Attractive growth and RoCE sustained even pre-China Many investors argue the sustainability of recent earnings track record of these companies and think of them as a short-term plays. We would like to highlight that most of these companies were growing quite well even before measures in China related to pollution controls started to play out.

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Chemicals


Aarti has grown at 15% CAGR over last 10 Exhibit 28:years despite Chinese competitors and being in commodity segments


Atul has grown at a CAGR of 13% over the last Exhibit 29:ten years


We expect growth to remain robust going forward too

We expect the top 5 players to compound their earnings at 15-25% over next decade driven by: a) improved cost competitiveness vs. Chinese players, b) continued ramp-up in capabilities of Indian suppliers, and c) increased innovation and cost pressures driving increased propensity of outsourcing by global majors. Chemicals has more than 70 listed companies; some of them have started to pick up or reach a critical size which should give more comfort to investors on their longevity.

Indian companies are having multiple growth factors Exhibit 30:

Drivers Companies benefiting from the same

European MNCs exiting certain chemical segments due to cost pressure

Globally, chemical companies are exiting pigments, wood chemicals, and rubber chemicals due to cost pressures. Companies like Sudarshan would benefit.

European MNCs exiting certain chemical segments due to EHS pressure

Dyes, certain old agrochemicals like Mancozeb/Triazoles. Companies like Bodal, UPL, Astec benefited.

Growing outsourcing by global players With increased hassles on cost and ability to invest in heavy capex, many chemical companies manufacturing outsourcing is picking up. Companies like PI, SRF, and Aarti are benefiting.

Indian player gaining share in chemicals sourcing from China

With growing issues in China, many companies have started to outsource more to India while reducing their sourcing from China.

Indian companies into specialized chemistries (The knowledge advantage)

Companies like SRF and Navin Fluorine are benefiting from their strong capabilities on fluorination.

Indian companies growing due to import substitution Indian buyers also prefer Indian suppliers. Likes of Vinati Organics are incrementally targeting these opportunities.

Indian companies taking Chinese head-on Companies like SRF are taking Chinese manufacturers head on, on products like refrigerants despite RM advantage enjoyed by Chinese players. Companies like UPL too have better competitiveness on products like organophosphates due to their historical strengths on product.


Companies like BASF are investing in putting out base chemical products in India which should improve RM capabilities

BASF buys $250mn worth of products from India and it expects that number to grow.

BASF is doing a feasibility study for a $2bn investment in Mundra for acrylics value chain in partnership with Adani group. Butyl acrylate is an imported product, which has huge demand from the paints industry. It is a 150kt market, out of which 50kt is imported

Crude MDI (used to make polyurethane) prices have been quite volatile and have significantly impacted the Dahej plant’s profitability. Crude MDI is imported and typically has a 90-day holding period, which causes inventory losses.

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Chemicals


Strengths and weaknesses of Indian chemical companies - Businesses with good mix of credible promoters Exhibit 31:(growth hungry and good capital allocators) taking care of macro decisions and quality professionals taking care of micro execution will do well; strong second generation in promoter-driven firms necessary to build futuristic business while bringing in fresh ideas Strength Weakness

PI Ind Ability to build relationship with global clients, impeccable track record on execution and IP protection

Attrition at senior level management

Atul Wide range of chemistry capabilities Perceived lack of aggression

Aarti Good player with capabilities in Benzene chemistry Lack of cutting edge technology

Sudarshan Ramp-up in capabilities for specialty pigments Execution has been patchy over recent years

Vinati Good history on capital allocation and focus on green chemistries High product concentration

Navin Fluorine Expertise in fluorination Ability to gain scale still need to be watched out for

Camlin Fine sciences Good growth through backward and forward integration High WC cycle; mid of capex cycle

SRF Strong chemistry capabilities in fluorination driving high margins Asset efficiency has been weak

Galaxy Surfactants Relationships with FMCG majors Weaker bargaining power against clients; limited ability to gain incremental share in SLS/SLES (key two products)

Rallis Good parentage and credible professional management Limited aggression in execution Tata Chemicals Significant and steady cash generation in Soda Ash business Weaker capital allocation

Alkyl Amines Leadership in amines, good promoter and credible second generation Base business is a relative commodity though they are going more downstream

UPL Good execution over the years; ability to turn around M&As High leverage on balance sheet Source: Ambit Capital Research

Capex by chemicals players have more than doubled in 2019 vs. 2015 Exhibit 32:

Note: We have taken Aarti, PI, SRF, Atul, Sudarshan, NFIL, Deepak, Nocil, Vinati for calculation. Source: Company, Ambit Capital Research

We highlight some of the big capital expenditure plans by chemicals companies Exhibit 33:

Company Year Remarks

PI Industries 2020 PI has approved QIP of Rs20bn and intends to use this in three areas: a) organic business growth through further expansion, b) scale-up of newer and niche technologies, and c) diversifying into adjacent verticals through CDMO, CSM in pharmaceuticals and other specialty chemicals, nutraceuticals and imaging chemicals.

Sudarshan Chemicals 2020 Sudarshan has also increased its capex intensity and plans do a capex of Rs5,000mn over FY20-21E with major part for the revenue generation (~70%) and rest for backward integration which will drive margin improvement.

SRF 2020 SRF has guided for a capex of Rs8,500mn for FY21 as it plans to set up an MPP plant for agrochemicals for Rs2,380mn over the next 8-12 months. SRF also plans to invest Rs650mn for HFC's Phase 1.

Navin Fluorine 2019 NFIL announced a capex program of Rs4.5bn to be spent over a period of two three years.

Aarti Industries 2019-20 Aarti has already spent Rs8.3bn in 9MFY20 and expects to spend a total amount of Rs10bn in FY20. Capex is directed towards two projects in Dahej (LT contracts, both commissioning by 4QFY20), specialty chemicals chlorination complex in Jhagadia and new R&D center. Aarti had in 2019 raised Rs7.5bn through QIP for capex and expansion purposes.

Adani Group and BASF 2019 Adani has signed an MoU in late 2019 with Adnoc, BASF and Borealis for setting up a USD4bn chemical complex at Mundra in Gujarat by 2024. Earlier Adani had signed agreement with BASF to establish a JV with an investment of about USD2bn.

Reliance and ADNOC 2019 Reliance in 2019 announced its agreement with ADNOC to sign an agreement to explore the development of an ethylene dichloride (EDC) plant in Abu Dhabi. This can provide low cost ethylene feedstock to produce EDC (input for PVC)


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Many players have invested aggressively and continue to invest to tap the opportunity

Chemicals


SRF’s specialty chemicals continues to scale up Exhibit 34:(revenues up 18% CAGR, FY14-19) as it deploys capital


Similarly, PI has grown its CSM segment Exhibit 35:revenues at a CAGR of 17% over FY14-19


Many Indian companies will foray into new areas to chase growth We believe companies like PI, SRF, Aarti and Navin have been targeting to get into multiple new products and application areas. This would improve the target market size and hence longevity of the growth these businesses have.

Capabilities required for successful contract Exhibit 36:manufacturer remain the same


Contract manufactures will likely go beyond agr Exhibit 37:size in segments like electronic materials etc.


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Chemicals


Companies ticking all three boxes will be able to move from one area to multiple areas quickly Exhibit 38:

Key capability areas Capabilities

R&D/product development Ability to consistently find new products Develop command on new chemistries Incrementally optimise existing processes to improve margins

Manufacturing

Fast scale-up of new plants and then running them efficiently Compliance to local and global regulations on EHS Safety adherence and avoid plant disruption due to maintenance/regulatory issues Consistently improving plant utilisation and asset turns to improve RoCE

Client engagement

To protect customer IP Ensure reliability of supply even in supply chain disruptions Maintain transparency over cost structures and compliance Reduce lead times from query to delivery Build offices and marketing teams across the world


Efforts taken by these companies to get into new areas; battery chemicals is another major area being focused Exhibit 39:on by most of these players

Company Areas

PI Industries

PI has significantly ramped up its R&D capabilities, and has proven ability to run manufacturing assets smoothly and efficiently alongside having innovator partnerships with more than 18 clients.

PI is now looking to foray into new sectors such as pharmaceuticals, and neutraceuticals, beyond their existing strengths in agrochemicals.

SRF

SRF is building its strengths across key verticals, such as refrigerants, packaging films, fluoro specialty chemicals and now fluoro polymers too.

In all these categories they have built a global presence (Ex: in packaging they are in India, Europe, South Africa, Thailand) and continuously upgrading product portfolios (ex: entry into fourth generation refrigerants.

Aarti

Aarti entered Toluene value chain two years ago and aims to replicate entire benzene derivatives block in Toluene

From a catalogue-based company, they are focusing on entry into contract manufacturing too with innovators. They have now partnered with Bayer-Monsanto, BASF and SABIC for contract manufacturing. They have started a design centre (in Vadodara) and R&D centre (in Navi Mumbai) to focus on developing new competencies.

Navin Fluorine

The company entered CRAMS pharma business with the acquisition of Manchester Organics. NFIL has also entered High Performance Product (HPP) segment signing a contract worth Rs29bn spanning over seven years (~40%

of FY20 revenues will be added every year). NFIL will supply the product for the MNC with both the product and the technology being heavily patented.


PI/SRF are trying to transition from agrochemicals to pharma: Agrochemicals are more about cost and Pharma is about compliances

While chemical entities can be surprisingly similar across pharma and agrochemicals (see exhibits below), agrochemical players are far more obsessed on costs (given the high volume usage) though regulatory strictness such as USFDA isn’t there for agrochemicals. We believe some of the Indian chemical players like PI and SRF have plants which are equally good in terms of compliance.

NFIL forayed into a new vertical through Rs29bn contract over 7 years

NFIL is opening a completely new vertical in High Performance Product (HPP). NFIL in Feb 2020 won a new contract worth Rs29bn with an MNC spanning over 7 years. The product and technology is heavily patented and production is expected to start towards end of FY22E. This will add, on an annual basis, ~40% of FY20 revenues each year. This contract win shows the future potential size of the business and NFIL’s growing capabilities and client management skills. For more details, please see our detailed initiation on NFIL here.

https://ambitresearch.co/user/download-report/Ambit-Navin_Fluorine_BUY_A_Specialist_in_a_hurry-07-04-2020_09-11-42.pdf

Chemicals


Many agrochemicals are similar to pharma Exhibit 40:drugs

Pesticide (Class) Can Treat Disease Like

Endothall (Herbicide) Malaria

Glyphosate (Herbicide) Malaria

Acetyl CoA inhibitors (Herbicide)

Heart Disease, Cancer and anti-inflammatory

Epothilone (Fungicide) Hypertension

Imdazolinones (Herbicides) Hypertenstion

Suflonylureases (Herbicide) Cancer

Triazolopyrimidines (Fundgicide)

Cancer

Source: Galchimia, Ambit Capital Research

Molecule structures too are similar for pharma Exhibit 41:drugs

Source: Galchimia. NTBC is the drug Nitisone.

Case studies highlighting some of the Indian chemical companies’ technological advancements

SRF –Turning into a formidable refrigerants story Navin Fluorine – Emergence onto Pharma CRAMS

SRF has significantly expanded its product portfolio. It is preparing itself for blends in refrigerants which would continue to do well even when the base products would get phased out. Apart from having technology for some new-age refrigerants/blends (R1234yf, R32, R125, R410a), SRF is also building scale in more commodity products (R134a). Exploring other usages for refrigerants getting phased out over the next few years for other purposes (such as metered dosage inhalation for R134a and backward integration of R22 as a feedstock for specialty chemicals) is also a key strategy for sustainable expansion in the category.

Navin Fluorine entered into the CRAMS segment in 2011. It started with a pilot plant with reactor capacity of 100 to 500 litres to serve innovator drug companies for new molecules which are getting launched and the maximum production was up to ton level. As NFIL’s customer projects started moving towards commercial production, it expanded to a multi-ton plant with total reactor capacity of 32KL varying from 500L to 3,000L.

The refrigerant gas market in India is one-tenth that of the US and should continue to grow at a healthy double-digit rate. SRF doesn’t have any organised competition in the refrigerant market in India except for R22, which is being phased out. Raw material availability risks are being addressed with SRF looking to procure Fluorospar from South Africa, Vietnam and Mexico. Today SRF’s costs are comparable to Chinese players across all key refrigerants. They have presence across all key products in refrigerants.

NFIL set up another CRAMS unit in its Dewas facility from Dec’2019 which will help it to take large scale projects where molecules are in commercialization stage. NFIL uses its fluorination expertise to collaborate with global innovators. Recently then won a Rs27bn contract with a European major in non-agro/pharma applications.

SRF will set up an R1234yf plant in 2024 or so as the application patent by Dupont/Honeywell would get over by then. Commercial demand for the product too would have picked up by then. SRF is also developing capabilities for other next generation refrigerants such as HFOs.

NFIL acquired 51% stake in Manchester Organics Limited, UK (MOL) in 2011. MOL plays an important role as many of the CRAMS projects originate from MOL. It helps in new customer acquisitions especially for customers who would be reluctant to come to India for their newer molecules. In 2016, NFIL also acquired the remaining 49% stake in MOL.


https://www.galchimia.com/es/pharma-vs-agro/

https://www.galchimia.com/es/pharma-vs-agro/

Chemicals


Prefer chemical exporters over domestic suppliers/consumer ingredient players We believe global suppliers have a better opportunity to grow vs. domestic suppliers. The market growth has been slower at 8-10% across consumer chemical suppliers, domestic agrochemicals players, etc. Most consumer chemical players like SH Kelkar, Galaxy Surfactants, Advanced Enzymes, BASF India, and Clariant Chemicals have grown slower than export peers. Domestic agrochemical peers such as Rallis, Dhanuka, Insecticides India and Bayer Crop Science India too have struggled.

PI, NFIL, SRF and Vinati scores over other players like domestic suppliers/consumer ingredients Exhibit 42:

Export business Size Key Geographies Peers

Comp intensity

Pricing Power

Reinvest opport

PI Ind Agrochemicals; contract manufacturer for global innovators

Rs25bn by FY20; grown at a CAGR of 19% over FY15-20

North America, Japan and Europe

Deccan Fine, Saltiago, Lianhe

SRF Intermediates/contract manufacturing for agrochemicals, pharma, refrigerants

Chemicals business is Rs29bn; grown at a CAGR of 18% over FY15-20

Europe, US NFIL, Aarti

Aarti Intermediates for agrochemicals, pharma, dyes, pigments, etc.

Exports contributed Rs20bn in FY19 (42% of revenues); grown at 8% CAGR FY15-19

America, US, China, Japan

SRF, NFIL,PI, Atul

Vinati Key products: ATBS (oil field mines, water treatment, etc.), IBB (intermediate for ibuprofen), IB (antioxidants, fragrances)

Exports business is ~Rs7bn; 70% of FY19 revenues

Exports ~70% of revenues

Atul, Lubrizol,

NFIL

Contract manufacturing of key intermediates for Pharma innovators; intermediates for agrochemicals and pharma players

Specialty Chem is Rs3bn growing at 14% CAGR; CRAMS is Rs1.8bn

US, Europe PI, SRF

Atul Intermediates for agrochemicals, pharma, dyes, pigments, etc.

Exports is Rs21bn; growing at 12% CAGR over FY15-19

US, Europe, Brazil, Middle-East

Aarti, Vinati, Fairchem

Sudarshan Exports organic/inorganic/effect pigments, Exports is Rs6.8bn; growing at 22% CAGR over FY14-19

Europe and North America

Clariant, DIC, Asahi

Galaxy Surfactants for HPC (consumer ingredients) ~50% of the India business is exported AMET, US

SH Kelkar Flavours (major) and Fragrances (consumer ingredients)

Exports is small and mainly via inorganic expansion

ASEAN, MENA Givaudan, Symrise, IFF

Rallis

Agrochemicals; key export products are Metribuzin, Pendimethylene, Acephates. Contract manufacturing for some intermediates.

Exports is 33% of the business and growing at 7% CAGR over FY15-10

Asia, America, and Africa

Dhanuka, Insecticides

Dhanuka Agrochemicals; exports is small portion Exports is small portion

Rallis, Insecticides India

Insecticides India

Agrochemicals; exports is small portion Exports is ~5% of total revenues

Rallis, Dhanuka

Source: Company, Ambit Capital Research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Exporters like PI, SRF, Aarti have grown faster Exhibit 43:at a CAGR of 15-22% during FY14-19


Consumer chemicals like SH Kelkar and Exhibit 44:Fairchem have grown slower at a CAGR of 0-10%

Source: Ace Equity, Ambit Capital Research

On margins, in general MNCs have struggled in India primarily due to higher amount of profits being booked with the parent entity. Domestic agrochemical players too have struggled with their margins while exporters have reported better margins. Consumer chemical companies have reported range-bound margins.

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Chemicals


Exporters like PI, SRF and Aarti’s margins have Exhibit 45:improved over the years…


…while margins of consumer chemicals have Exhibit 46:remained range-bound


Evolution of chemical exporters - PI and SRF perfected their models fast given early focus on exports while NFIL Exhibit 47:is also following them; Aarti and Atul are catching up equipped with their diverse chemistry/client capabilities

Aarti PI SRF NFIL Vinati Atul Sudarshan

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Scale build-up, entry into new chemistry areas

Focus on QSHE and R&D; commercial success is limited

Start of Specialty chemicals R&D

Ventured into Specialty chemicals business in 2000, earlier was into commodity products

Struggle with ATBS; success in IBB

Turnaround of company; improved asset discipline

Made technological advancement, through tie-up with DIC, Japan

2005-2010

Expansion of client base, ramp-up of capacities, growing product complexity

Growing client base; expansion into new chemistry areas

Gradual attainment of process and engineering capabilities; early client wins

Set-up new R&D facility, more capital deployed in specialty business

Focus on backward integration and forward integration

Improvement in margins; global tie-ups

Focusing on process efficiencies and exports

2010-2015

Growing focus on QSHE; cross-sector client wins

Rapid growth phase; Investments in Jambusar infrastructure

Infrastructure build-out in Dahej; rapid scale-up

Entered CRAMS in 2011, building relationships with innovators

Success with ATBS; cross-sector client wins

Focus on QSHE; reduction in effluent discharge

Increasing share of exports and capacity ramp-up

2015 onwards

Growing focus on R&D; aggressive growth capex in building infrastructure

Agrochemical slowdown but focus on margin expansion; growing focus on expansion beyond pharma

Diversification into Pharma; Aggressive growth capex in building infrastructure

Aggressive capex, capability building and gaining scale through big contracts/forays into new verticals

Aggressive growth capex on new products, such as IB derivatives, PAP

Aggressive growth capex in building infrastructure

Increasing share of high value-added products like HPPs


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Chemicals


Benchmarking key exporters – We expect growth to be fairly good across all key players like Exhibit 48:PI/SRF/Aarti/Atul/Vinati/Sudarshan/NFIL

Promoters Product capabilities/ R&D

Nature of competition

Client engagement

Switching barriers

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PI

Promoters are involved in day-to-day operations backed by a strong team of professionals

Strong capabilities on process engineering and in general delivering AIs

Domestic peers such as SRF, Deccan to some extent Navin, Laxmi Organics; European peers such as DSM, Saltigo, Lianhe (Chinese)

High High

Product/Client concentration risks; agri cycle

SRF

Professionals run day-to-day operations; promoters take capital allocation decision; high culture of grooming people

Strong capabilities on process engineering on fluorination

Domestic peers such as Navin Fluorine and European peers such as Dupont, Honeywell

High Medium Product/Client concentration risks; agri cycle

Aarti Technocrat promoters run the businesses

Benzene derivatives; going more downstream

Wide set of local and global peers

Medium; large part of business is contingent on being lowest cost supplier

Low RM volatility, pricing competition

Atul

Professionals run day-to-day operations; promoters take capital allocation decision

Wide set of product portfolio across 10 sub-segments

Wide set of local and global peers

Medium; large part of business is contingent on being lowest cost supplier

Low RM volatility, pricing competition

Vinati

Promoters run the businesses backed by a team of professionals

Process-led innovation; doesn’t specialize in any specific process but good at identifying good processes

Limited molecules and limited competition

High; but customer will switch if a low cost alternative comes

High due to limited suppliers

Alternative products which offer same efficacy

Sudarshan

Technocrat promoters run the business backed by a team of professionals

Earlier was a low-cost supplier; significantly improved R&D capabilities on specialty pigments

Clariant and BASF are large; competition is limited but has been formidable; now competition is facing cost challenges

High for HPPs; low for commodities

High for HPPs

Pigments are critical part of identity; difficult to switch; economic cycles do impact auto demand but packaging demand remains steady

Navin Fluorine

Professionals run day-to-day operations; promoters take capital allocation decision

Strong capabilities on process engineering on fluorination

Domestic peers such as Navin Fluorine and European peers

High with pharma clients

High with Pharma Pricing competition, product failures at client end


Big will become bigger: PI, SRF and NFIL are our top picks

Similar to IT services sector (top 5 accounts for 48% of IT services industry) which had multiple entrants but only a few which became large ones, we expect the same to happen in Indian chemicals industry. Many of the companies would fail to scale up on one of the parameters below and would falter. In Indian chemicals space too companies which remain in a status quo on upgrading product capabilities, have no tolerance on QSHE, don’t cut corners on engineering capabilities and are developing proprietary technology platforms, shall continue to become bigger.

Market share of top IT companies in 2005 Exhibit 49:


Market share of top IT companies in 2019 Exhibit 50:


TCS, 13%

Infosys, 8%

Wipro, 8%

HCL Tech, 4%

Cognizant, 3%

Others, 63%

TCS, 15%

Infosys, 9%

Wipro, 6%

HCL Tech, 6%

Cognizant, 12%

Others, 52%

Chemicals


Focus on creating right building blocks to capture growth While growth avenues will continue to come up, only players with focus on R&D/capability development and QSHE will likely be able to capitalize on these opportunities in the long run. Globally, companies are focusing on sustainable supply chains and procurement policy, which makes companies with better QSHE standards have significant advantage. Companies cognizant of this fact have started meaningful investments in R&D (~20% CAGR in past five years) and infrastructure related to QSHE. In fact, expenses related to QSHE account for ~25% of plant expenses for some of the Indian players. These parameters will become crucial in separating the winners from the rest in the specialty chemicals. Companies which are (i) R&D-driven leading to innovative products have more stringent emission norms (like Zero Liquid Discharge, low carbon footprint) and (ii) essentially more resource-efficient will likely create more value for shareholders.

Most of the big specialty chemical players in India started as SMEs and then gradually developed capabilities (products and R&D) and intangible aspects (board and processes). It will be difficult to generalize the average time taken across the sector to move from one stage to another. Companies like PI and SRF were initially less focused on factors like R&D/QSHE whereas Vinati’s focus from the beginning has been on R&D and process efficiencies.

Evolution of a successful chemicals company in India Exhibit 51:


Beefing up of talent key to chemical companies’ ecosystem

As Indian chemical companies grew bigger, they realized the importance of building a professional team to manage key functions and started to hire experienced professionals from larger companies/MNCs. The specialty chemicals sector as a whole has seen jump in the employee expenses. Employee expenses have grown at a CAGR of 14% in the past five years and contributed 6.7% of total revenues in FY19 vs. 6.1% in F14. This is at a time when the revenue of the sector has grown at a CAGR of 12% in the last five years

Talents from top institutes like IITs/IIMs are hired. For example, PI Industries and Aarti Industries started the journey of professionalizing the management and hired many IIT/IIM graduates who later on went on to become the backbone of second tier management. Companies are also now focusing on training and developing employees skill sets.

Most of the chemical companies started as a SME. manufacturer of 1 or 2 small chemicals

Gradually evolved into multi product entities in 3-10 years of evolution

Invested in R&D capabilities: gradual expansion of chemistry capabilities Usually 2-4% of sales; Employee cost CAGR of 12-20% 10-50 people R&D quite common; PI and SRF have 100-200 people R&D

Investments in building global standard QSHE

Accreditation by Ecovadis or Responsible care

Clean track record on safety; certificates from regular client audits

Product portfolio R&D QSHE Inducting talent

Hired experiencedprofessionals from larger companies/MNCs

Management team function of old loyalists and seasoned resources from other companies

Credible Board

Mix of credible people from finance, sales, R&D, ex senior management ofcustomers

Moving beyond friends and family board

Chemicals


Employee costs of specialty chemicals industry Exhibit 52:have grown at a CAGR of 14%

Note: Companies included are PI Ind, SRF, Aarti, Atul, Vinati, Sudarshan, Navin, Deepak, Neogen, Nocil and Fine Organics. Source: Company Ambit Capital Research

Employee costs as % of sales have been rising Exhibit 53:even when sales grew at a CAGR of 9%

Note: Companies included are PI Ind, SRF, Aarti, Atul, Vinati, Sudarshan, Navin, Deepak, Neogen, Nocil and Fine Organics. Source: Company Ambit Capital Research

Significant ramp-up in R&D/capabilities

Earlier, specialty chemicals sector in India benefitted from the cost arbitrage opportunities it provided vs. its global peers. China grabbed major pie of the chemical sector where scale and size of the manufacturing is crucial. Many of these companies having realized the importance of R&D, have ramped up their R&D capabilities. Indian companies like PI Industries, SRF and Navin Fluorine have been able to gain share where process knowledge is more important than scale. R&D spend of Indian companies usually varies between 2-4% of sales and a team of 10-50 people is quite common in the good companies. PI Industries, for example has a pool of ~350 scientists. Aarti is setting up 50,000sq ft. R&D and innovation complex which will house 150 scientists and engineers in addition to its existing facilities.

R&D initiatives are gaining traction Exhibit 54:

Companies R&D expenses in past 5 years

R&D capabilities and initiatives

PI Industries Rs3,310mn

PI has a pool of 350 scientists, process chemists and analytical chemists, including 80 Doctorates Dedicated R&D centre in Udaipur having recognised by department of Science and Technology -

Government of India with all modern equipment and facilities with utilities to support wide range of chemical reactions

Analytical labs at process development centre

SRF Rs4,637mn

SRF has R&D facilities at Bhiwadi and Chennai in the field of Fluorochemicals and Specialty Chemicals with 170+ patents filed to date and 400+ people in R&D

SRF has developed more than 100 molecules and has engineering lab for complex molecules development and scale-up

Aarti Industries Rs1,397mn

Established three R&D centers with two focused on R&D initiatives for Pharmaceutical APIs and the other for Chemicals

Aarti is in the process of establishing another 50,000 sq. ft. R&D and innovation complex which will house 150 scientists and engineers

The new complex will comprise of an R&D centre, a scale up facility, an innovation center, and dedicated labs for process safety, effluent treatment and flow chemistry

This new complex will double Aarti's R&D capabilities and will help in developing new and niche value-added products

Navin Fluorine Rs830mn Established Navin Research Innovation Center (NRIC) comprising analytical labs in Surat; State of art

R&D approved by DSIR led by qualified and experienced chemistry teams of PhDs and Post Doctorals

Sudarshan Chemicals Rs810mn

Sudarshan has R&D centre near Pune with over 50 chemists and technicians supported by additional 50 chemists in the R&D and quality control labs in Roha & Mahad


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R&D expenses have increased at 20% CAGR Exhibit 55:between FY14-19

Source: Ambit Capital Research. Note: PI Ind, SRF, Aarti, Atul, Sudarshan, Navin, Deepak, Neogen, Nocil and Fine organics are included for the calculation.

Research and Innovation spending share by Exhibit 56:EU, Japan, US have decreased while India’s has increased

Source: Cefic, Ambit Capital Research

Besides ramping up R&D capabilities, companies are also looking for acquisitions and JVs with technology companies. This is helping not only in enhancing capabilities but also getting more attention from global customers. Navin Fluorine’s acquisition of Manchester Organics enhanced its capabilities to handle more complex chemistries related to fluorine and widen its specialty chemicals portfolio. Global players also look for credible partners in order to have infrastructure for the launch of innovative molecules in India. In 2016, PI Industries formed JV with Japanese agrochemicals company Mitsui Chemicals and intends to leverage its understanding and reach of Indian agriculture. We believe this will be the way forward for specialty chemicals companies as they look for generating bigger and more meaningful opportunities. We expect these partnerships to increase as more players build capabilities.

Indian chemicals players are also partnering with global players Exhibit 57:

Company Year Remarks

NFIL 2020 Navin has entered into a ~Rs2,900mn contract with a global company to manufacture and supply a High Performance Product (HPP) for a period of seven years. Both the technology and the product are heavily patented and the final technology is transferred to NFIL by its partner.

Bharat Rasayan 2020 Bharat Rasayan entered into a Joint Venture agreement with Nissan Chemical Corporation (NCC) for agrochemicals. This will help NCC to expand its manufacturing base in India.

Aarti and SABIC 2018 Aarti and SABIC had signed a supply contract worth Rs100bn for a period of 20 years for supply of high value specialty chemicals intermediate.

Atul Chemicals 2017 Atul has a partnership with Akzo Nobel to access its hydrogenation technology for monochloroacetic acid (MCA) production in India. MCA is a vital ingredient in agrochemicals, adhesives and pharmaceuticals.

NFIL and Honeywell JV 2016

NFIL had entered into an agreement with Honeywell for small scale manufacturing of the new generation refrigerant gas HFO 1234 yf used in vehicle air conditioning systems globally. However, management recently announced that they have discontinued this project on ground of scalability opportunities. NFIL is discussing three new opportunities with Honeywell on the same assets where the possibility of commercialisation is high.

PI with Kumiai Chemicals and Mitsui Chemicals

2017/ 2016

PI and Kumiai have partnered to manufacture bispyribac sodium, one of the flagship products of Kumiai. PI also has a JV with Mitsui chemicals. It also had partnered with Sony to set up research centre for carrying out research in synthetic organic chemicals for application in electronics industry. This however could not deliver the required results.


Building credible corporate governance

One of the pushbacks which Indian chemicals companies used to get is the lack of an independent board of directors. The quality of the board is gradually changing as is evident from the improvement in board composition of some of the companies like PI Industries, Vinati and Aarti. For example PI at an early stage started to focus on quality of board; Raj Raul (ex-Bayer), Venkat Sohoni (ex-Tata Rallis, Novartis) and Bimal Raizada (ex-Ranbaxy) were some directors during FY10-11.

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JVs and technology transfer will be the way forward for many of the companies

Companies are evolving into professionally managed from family run businesses


Chemicals


Independent members with technical background are inducted in the board Exhibit 58:

Companay Name Background

PI Industries Dr. T. S. Balganesh

PhD in Medical Microbiology from University of Calcutta and completed his post-doctoral research at Brookhaven National Lab, USA and Max Planck Institute, Germany.

Awarded an honorary doctoral degree from the University of Uppsala, Sweden Possesses more than three decades of experience in antibacterial drug discovery

Currently, he holds the position of President and a Director on the board of GangaGen Biotechnologies Pvt. Ltd., Bangalore

Aarti Industries Ganapati D Yadav Vice Chancellor of Institute of Chemical Technology (ICT). With numerous honours and distinctions he has authored over 300 original research papers in 51

cross-disciplinary international peer-reviewed journals

Aarti Industries Dr. Vinay G Nayak

Pharmaceutical professional with technical background and has worked with organisations such as Cipla, Lupin, Watson, Marksans, Alembic & Emcure pharmaceuticals for the past 32 years.

Specialised in the areas of Manufacturing, Quality, R&D, compliance and Regulatory Affairs both for API and formulation manufacturing.

Vinati Organics Dr. M Lakshmi Kantam

Professor of Green Chemistry and sustainability Engineering Department of Chemical Engineering Institute of Chemical Technology. Has 32 years of experience in the research, design and development of catalysts for innovative green and economical processes for chemical industry

Served as Director at CSIR-IICT, Hyderabad

Navin Fluorine Mr. S.S. Lalbhai Holds M.S degree in chemistry from USA and also M.S degree in Economic planning & policy from the

Boston University of US An industrialist having varied experience of over 29 years in chemicals and general management.

Deepak Nitrite Mr. S.K. Anand Has a rich experience of 46 years in the field of Project Management, Corporate Planning, Quality Management, etc. in Petrochemicals, refining and other allied industries

Deepak Nitrite Dr. Richard H. Rupp

Has held various top-level positions in leading multinational companies He is well-acquainted with the USA, European, Asian and Indian subcontinent markets Holds a Ph.D in Chemistry from the University of Karlsruhe, Germany, and has completed a

programme for Executive Development from IMD at Lausanne, Switzerland

Neogen Chemicals Prof. Ranjan Malik

He has a bachelor’s degree with a gold medal from the University of Kanpur; he also has a masters’ in chemical engineering from the IIT, Kanpur, and a doctor in philosophy from the University of Wisconsin-Madison, USA

He is currently an Emeritus Fellow at the IIT, Bombay


Preference for Big 4 as auditors is increasing Exhibit 59:

Company name Auditors Company name Auditors

PI Industries Price Waterhouse Chartered Accountants LLP Sudarshan Chemicals B S R & Associates, LLP*,

SRF B S R & Co. LLP* Atul SPANJ & Associates

Vinati Organics M. M. NISSIM & CO Deepak Nitrite Deloitte Haskins & Sells, LLP

Aarti Industries Kirtane & Pandit LLP, Neogen Chemicals M/s. JMT & Associates,

Navin Fluorine Price Waterhouse Chartered Accountants LLP Fine Organics M/S B Y & Associates

*Note: KPMG carries out its auditing work in India through BSR & Co LLP; Source: Company, Ambit Capital Research

No shortcuts on environment and safety

One of the biggest risks for the chemicals industry is from violations of safety standards. Violation of safety norms can lead to not only financial damage but also reputational damage. It can lead to multiple repercussions from both the customers and investors. As discussed earlier, Jiangsu blast incident in China has been an eye opener for chemical companies worldwide and forced them to take Environment and Safety in a very serious manner. Globally, companies are looking to procure intermediates from players that have better environments and safety standards in place in order to make their supply chains more sustainable. Most of the global innovator companies have strong audit processes for vendor selection.

Incidents like the blast in PI’s Jambusar plant and closure of SRF’s plant in Dahej by the government due to non-compliance highlight the importance of improving EHS standards and complying with global standards. Many companies, as a result, are proactively taking initiatives to do business in a more sustainable approach. Terms like Zero liquid discharge (ZLD), emission intensity, and carbon footprint are getting featured in company objectives. PI has one of its objectives to undertake research on new synthesis routes which are less polluting. Aarti Industries has achieved ZLD for eight of its units and aims to achieve ZLD in all its units.

Globally companies are adopting sustainable procurement policy

PI is undertaking research on new synthesis routes which are less pollution intensive.

Chemicals


EHS initiatives of chemical companies continue to ramp up Exhibit 60:Companies EHS initiatives

PI Industries

Scored 80 out of 100 in the ECOVADIS Survey in the "Safety, Labour & Human Rights" worldwide Rated as ‘Gold category Supplier Top 7 supplier companies globally from a group of 171 registered suppliers in the Pesticides & Other Agrochemical sector Aims to achieve Zero Liquid Discharge (ZLD) for its units

Aarti Industries Achieved Zero Liquid Discharge (ZLD) for 8 out of 11 divisions with 2 divisions achieving ZLD status in FY19 Installation of STOPs and RO plants for treatment of rejected water Two facilities, USFDA approved

SRF

Reduced direct GHG emissions by 21.5% and absolute electricity consumption by 4% Increasing share of renewable energy with 528KWh of electricity through solar was produced in FY17 Around 54% of the Fluorspar used in FY16 and 70% in FY17 was obtained by recycling ETP sludge More than 50% of waste water was recycled in Dahej unit during FY16 and FY17

Vinati Organics Rated GOLD by EcoVadis towards sustainability performance and was in the top 2% of suppliers assesses by EcoVadis in all categories

Sudarshan Chemicals Reduction of COD at source through continuous improvement like distillation and solvent recovery Initiatives like expansion of ETP, installation of Anaerobic Hybrid Reactor (AHR) etc. taken to reduce greenhouse gases REACH registration of 43 colorants


PI And Vinati are the top players while others are also moving fast in Exhibit 61:terms of investments in capabilities/QSHE

Investments in

R&D/capabilities Focus on

QSHE Quality of

board Inducting

talent Overall

PI Ind

SRF

NFIL

Vinati

Aarti

Sudarshan

Source: Ambit Capital Research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak.

Chemicals


Valuations rich but will sustain Indian specialty chemicals space would continue to witness a strong earnings trajectory (potentially faster than 24% EBITDA CAGR witnessed over FY10-FY19) alongside healthy RoCEs as proven in the past of ~18% which should sustain existing multiples. We note next 5 years could be very interesting for few Indian players as consistent disruption in China have reached an inflection point towards moving large amount of supplies to India. All these companies would be able to reinvest their cash flows at good RoCEs which should keep their multiples healthy. Most of these companies have topline size of < US$300mn which makes them right candidates to scale more than 3-4x of their current size. We also note that the top leaders have also been looking to enter new segments beyond agri and pharma which also pulls the market opportunity ceiling for them and would elongate the sustenance of this high growth phase. While sector valuations have turned punchy at ~25x 2yr fwd EPS (vs. 10-15x 5 years back), but are in-line with valuations that pharma peers enjoyed in the past in their growth phase.

Valuations would sustain due to steady growth rates Chemical sector has seen a meaningful valuation re-rating over last 6 years as investors realized the earnings compounding potential of the sector. While multiple re-rating may be difficult, earnings momentum would continue to remain strong led by new contract wins in existing areas and entry into new application areas by Indian suppliers. Their growth would entirely be a function of their ability to a) upgrade their capabilities – on process engineering as well as manufacturing infrastructure b) offer strong compliances as well as reduce their RM exposure to China c) building their capability to manage the growth. We continue to believe macro opportunity continues to remain quite strong and any company’s growth longevity is going to be entirely a function of internal factors than external factors.

Chemicals sector P/E multiples have rerated over the years Exhibit 62:

Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind, SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite in our calculations.

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Many of the companies started transitioning from volume based products to high value products. Companies moslty run by promoter family gradually focused on R&D , QSHE and professionalising management

Multiples started getting re rated as the companies attained scale and share of value added products increased. Companies grew their sales at a CAGR of ~12% during FY13-16.

Multiples further re rate d as Chinese chemical industry went under disruptions due to pollution curbs and major accident in Jiangshu plant. Sales have grown at 16% CAGR over FY16-19.

Valuations corrected marginally from 2018 as earnings started to normalise from a relatively soft 2016-18 base for agrochemical exporters. Multiples are likely to settle between 20-25x on trailing basis similar to pharma players

Chemicals


…as sector earnings trajectory has remained Exhibit 63:upwards

Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind, SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite in our calculation.

..along with increase in CFO and capex while Exhibit 64:net debt to equity has come down

Source: Bloomberg, Ambit Capital Research. Note: We have included PI Ind, SRF, Vinati, Sudarshan, Navin Fluorine Aarti, Atul, Nocil and Deepak Nitrite in our calculation.

Lot of similarities with IT and Pharma emergence We note that while the opportunity is large, only a few promoters would be able to capitalize on it. Very similar to the IT sector in India, we expect these companies to evolve over the next few years in terms of capabilities and revenue diversification. China-related issues are akin to Y2K issues which opened doors for Indian IT companies. Over the years, these chemical companies will build capabilities in multiple areas similar to their IT peers. Requirement of quality talent/chemists is an important criterion.

While most of the pharma companies focus on end-markets, most of the chemicals companies are B2B suppliers and hence can be termed more as chemicals manufacturing services (similar to IT services) than pharma.

Chemicals companies are closer to IT and Pharma evolution Exhibit 65:

Chemicals comparison to IT and Pharma

R&D/product capabilities

Chemical companies consistently need to build product capabilities and invest in getting perfection on new technology platforms while expanding suite of tools.

Pharma APIs are more a challenge on compliance where chemicals on agro side have challenges on keeping the costs low given the high amount of volumes that are consumed

People capabilities Quality talent pool of chemists/engineers is required. This is similar to IT and Pharma both.

Compliances Compliances in Pharma are stronger. Pharma is always under stricter regulatory restrictions; Chemicals while

regulatory pressures are relatively lower on plant hygiene, customer audit do warrant similar levels of plant levels. Compliances on emissions are equally important for both Pharma and Chemicals.

IP sensitivity IP sensitivity is very high in IT. Indian pharma does more of generics and hence IP sensitivity isn’t that high barring the CRAMS model. For some companies like PI, IP sensitivity is quite high.

Ability to build and manage large organisation

Like any of the large organisations, ability to manage multi-cultural clients, currency exposures do become quite important.

Ability to grow organisational capabilities in sync with revenue growth of the companies too become important.

Timeliness and accuracy of delivery is a very important part of the business similar to IT/Pharma and hence having an ability to manage organisations become critical.


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Chemicals


Many pharma companies in 2005, similar to Exhibit 66:chemical companies in size, have consistently reported high revenue growth


Net earnings of the companies also grew at a Exhibit 67:healthy pace


We have always liked specialty chemicals as a space to be in given healthy growth prospects, RoCE and cash generation. While multiples have turned expensive at ~20x FY21 EPS, a strong EPS CAGR of ~20% can wash down these multiples very quickly. We note that while the opportunity is large for Indian specialty chemicals players, capable beneficiaries are relatively limited in light of lack of vision by most of the promoters. The attributes, as discussed earlier, are aggressively investing in R&D to build new process capabilities, investment in capacities ahead of time, zero tolerance on QSHE non-compliances, focus on quality and building global relationships. We think PI, SRF and Aarti potentially can benefit meaningfully from new investments coming into India. Vinati is on a ‘once in a decade’ product introduction cycle which can meaningfully change its scale over the next few years. We think earnings for these companies are not a function of price movements (due to capacity shutdowns in China) but steady expansion in volume to growing preference for these players given their capabilities in product and QSHE compliance. We reiterate our BUY on PI, SRF, Aarti, NFIL and Vinati Organics. Sudarshan and UPL are global plays across pigments and agrochemicals space.

PI, the most expensive stock in our coverage, has been trading at similar level to Divis (which also has FDA Exhibit 68:risks); NFIL has also closed the gap recently as it ramped up its CRAMS and got new HPP contract

Source: Bloomberg, Ambit Capital research

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Divis: Sales have grown at healthy rates and Exhibit 69:moderated when it faced FDA issues in 2017


Divis: Net income has also followed a similar Exhibit 70:trajectory


PI sales growth has picked up after a blip in Exhibit 71:FY18


PI’s reinvestment rate has also increased while Exhibit 72:the company remains debt free


NFIL is also ramping up its sales Exhibit 73:

Source: Ambit Capital Research. Note: NFIL had received carbon credits(~R4sbn) during FY10-13 which resulted in higher sales.

NFIL’s reinvestment rate is also picking up Exhibit 74:while company remains net cash positive


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Chemicals


Divis R&D expenses has grown at a CAGR of 8% Exhibit 75:over FY15-19


PI and NFIL have been increasing their R&D Exhibit 76:expenses and are higher (% of sales) than Divis

Source: Company, Ambit Capital Research. Note: For PI, we have taken CSM revenues for calculating R&D expenses as % of revenues.

Pharma sector P/E - Multiples didn’t see any meaningful de-rating between FY10-15 when growth visibility Exhibit 77:remained strong

Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin, Cadilla, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit Capital Research

Pharma sector revenue grew at a fast pace Exhibit 78:before it started to moderate since FY15

Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin, Cadila, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit Capital Research

Similar was the trend for pharma sector Exhibit 79:earnings as well

Note: We have taken Sun Pharma, Divis, Dr. Reddy, Cipla, Torrent, Lupin, Cadila, Aurobindo and IPCA for the calculation. Source: Bloomberg, Ambit Capital Research

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Chemicals


Relative valuations Valuations within the chemical sector also have gradually polarized with markets strongly differentiating between export players with better growth visibility and domestic players. Growth cyclicality of domestic agrochemical players (like Dhanuka, Rallis) drives multiples to nearly 50% discount to export players (PI Industries, SRF, Navin Fluorine). Multiples of Aarti and Atul are at a marginal discount due to chances of realisations coming off for some of their products and relative commodity-like nature of their portfolios. However, we note Aarti and Atul also are upgrading themselves now.

Contract manufacturers are likely to remain the most expensive given growth and longevity

This segment has worked quite well for Indian players which focused on early global partnerships rather than competing in the same space as global peers. Process innovation and chemistry capabilities seem to have been the forte of Indian chemicals players. Indian players that have combined this with trust and low-cost manufacturing capabilities have done quite well. The likes of PI, SRF and Aarti all started small and then eventually scaled up as their capabilities developed.

Contract manufacturers like PI has generally traded higher vs. Aarti and Vinati Exhibit 80:

Source: Bloomberg, Ambit Capita Research

Competitive benchmarking- Contract manufacturing players are best placed in Indian chemicals space Exhibit 81:

NFIL PI Industries Divis Laboratories

Application area

NFIL caters to both Pharmaceuticals and Agrochemicals.

PI is majorly into Agrochemicals and is trying to enter the Pharmaceuticals segment.

Divis caters to Custom Synthesis of APIs and Intermediates for global pharmaceutical innovator companies.

Scale NFIL started CRAMS in 2011 and is still in nascent stage with a revenue of Rs1,780mn in FY19.

PI is one of the few players for the end-to-end Active Ingredients (AI) projects for global agrochemical players. Its revenue from CSM in FY19 was Rs18,800mn.

Divis is a big player in pharma custom synthesis and six out of the top ten big pharma companies are associated with Divis.

Capabilities

NFIL is building its capabilities in CRAMS with more R&D and infrastructure development. Its focus remains fluorine and is likely to be benefited as use of fluorine keeps on increasing in pharmaceuticals. It also has the advantage of being backward integrated for some of the RMs used for CRAMS.

PI has proved its capabilities in agrochemicals, however, it hasn't been very successful in entering pharma intermediates.

Divis has some attractive chemistry skills which make it differentiated vs. other peers.

Future growth

NFIL is presently doing grams to tonnes. The future growth will depend on the commercialisation of its molecules and its ability to manufacture in multi-tons.

PI is expected to continue to grow its CSM segment driven by commercialisation of new molecules.

Shift in capacities and USFDA-related challenges for vertically-integrated players would create opportunities for Divis.

Knowledge Architecture

R&D is still at a nascent stage when compared to Divi’s which has taken up much more complex products and end-to-end API.

Does end-to-end manufacturing for agrochemicals API but limited presence in pharma.

Does complex chemistries and is into pharma APIs.


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Chemicals


Benchmarking contract manufacturing peers on CRAMS/fine chemicals business - All a play on chemistry skills, Exhibit 82:manufacturing asset hygiene and client relationships (trust, transparency and deeper engagement)

Product capability Manufacturing capability Client engagement Overall

PI Industries

Good chemistry capabilities; more of a generalist than a specialist; now moving towards proprietary capabilities

Manufacturing assets are good. Barring one recent incident on safety, clean track record on QSHE

Works with global agrochem innovators; no presence into generics; most of it is agri clients

Has been an agro CRAMS player, trying to get into pharma. Differentiated model of no conflict with generics players and largely patented molecules

SRF Limited

Specialised fluorination capabilities, now expanding into more chemistry platform; more on the aromatic fluorination

Good 100-acre complex at Dahej – integrated facility for all fluorine-based products

Works with global agrochem innovators and a few pharma ones; limited final products with agri clients, large fluorinated intermediates

Novelty lies in fluorination; recently transitioned to full AI products too; manufacturing assets are integrated and state-of-the-art; developed cGMP facilities too

NFIL CRAMS/Specialty/ Performance

Specialized fluorination capabilities; more focused on specialised intermediate for CRAMS

cGMP approved plants differentiate Navin from peers; manufacturing location spread across three places

Works with global innovators in pharma, including Roche, Novartis, Hetero

Novelty lies in fluorination. Largely been into pre-commercial stage fluorinated products supply; one molecule got commercialised recently

Divis

More of generalist on Pharma APIs; also into select generic API where they have advantages on chemistry

Relatively better track record on USFDA compliance

Works with pharma innovators and generics

Novelty lies in chemistry platforms; significant command over novel chemistries like Chiral reactions; into both CRAMS and very old generics


Low cost manufacturers and distributors

UPL (in agrochemicals) and Sudarshan (in pigments) are key examples of those capitalizing on opportunities where phase of extreme innovation in new products gradually subsided. They entered with better cost capabilities and ability to serve the markets better. We would like to note that costs are not just for manufacturing but also for sales and marketing where Indian companies have had lower cost structures. Typically, in this segment, Indian companies start with 400-500bps better margins which help them to invest in offering better prices and compete despite having under-scale sales and marketing operations. In many generics spaces, Indian companies score due to better ability to service and provide customisations even in lower margin products due to lower cost structures.

Commodity chemical plays haven’t worked well

In the thick of China constraints, product realisations witnessed a sharp increase which benefited some of the Indian players. While old prices are not likely to come back, many companies witnessed a sharp increase in realization which may rationalize as supply side challenges normalize. This is specifically true for companies where product prices tend to be governed by demand-supply equations. Companies like NOCIL continue trade at lower multiples due to such concerns despite being strong players in their space. Multiples for Aarti and Atul are at a discount to contract manufacturers like PI and Navin Fluorine due to similar reasons.

Incumbents in high innovation space or FMCG suppliers haven’t worked

Most of the relatively underperforming chemical companies in India have been stuck in extremely high innovation categories where they didn’t have capabilities to compete with the R&D might of global majors.

Fragrances is an interesting space from that perspective, where SH Kelkar struggled to compete with Givaudan, Firmenich, IFF and gradually lost market share in more profitable customers to them in Indian markets.

Within Enzymes too, Advanced Enzymes too has struggled vs. the likes of Novozymes.

Camlin’s foray into anti-oxidant blends has met with limited success as well.

Domestic agri-inputs too hasn’t worked as a story

Domestic agrochemical players’ (Rallis, Dhanuka, Insecticides India) growth has remained under pressure over the last few years with weaker cash flows alongside pressure on margins. While growth rates seem to have revived in FY20, we don’t see a growth case of more than 15% for most of the industry players even in an upcycle. While these stocks can be traded in and out, we don’t see a reason to be structurally bullish on these names (barring likes of Bayer Cropscience given strong product support from the parent) given weaker product differentiation and consequent weaker pricing power. That said FY21 is looking promising here given better Rabi output, good water levels and likely dole-outs by government.

Chemicals


IBAS Framework –PI and SRF scores highest on all the four metrics Exhibit 83:

Atul Aarti Vinati SRF PI

Innovation

Quite a long history and wide presence across different chemical segments but process innovation has been limited; the company has generally stuck to its existing product lines

Limited at an absolute scale. Good in terms of engineering efficiencies and addition of downstream products

Very strong on process innovation – greener and cheaper. This is quite unique given that they don’t quite specialise in a specific chemistry area. Very good at backward and forward integration and consequently doing cost innovation

Very strong capabilities in fluorination; expanding across other chemistries as well. Strong culture of innovation comes in from its old businesses as well

PI’s strength lies in speed to bring the product to market. Not quite an innovator but an efficient executor

Brand

Credible brand with multiple customers across different segments. However, depth of relationships is still somewhat middling on the vendor to partner scale for clients

Relatively weaker compared to SRF/PI but caters to a much wider client base vs SRF/PI. Improvements on QSHE and growing capabilities on product front would drive sharp improvement hereon in our view

Very strong brand in limited set of products it does. Ranks in top 5 percentile in vendor rankings such as Ecovadis

Very strong brand among clients. As an employer too recognised as a good brand to work with in the industry

Very strong brand and well recognised through customer awards. As an employer too recognised as a good brand to work with in the industry

Architecture

Wide set-up with different CEOs managing different businesses, but possibly not decentralised in a true sense. Ethical and compassionate culture but not aggressive enough to capitalise fully on growing opportunities

Promoter family is a technocrat and offers ample techno-management capabilities within the family. Aarti has focused on improving professional talent and is improving. Not so great at an absolute level but clearly going in the right direction

Very strong culture and sense of purpose amongst people. Clear vision of the promoter drives steady but quality execution. Good capital allocation. Seemingly lacks ambition to grow beyond the existing track

Focused on professional management right since the beginning. Promoter involvement limited in day-to-day operations Asset discipline is a weakness. Strong 1st and 2nd line of managers is the strength of SRF.

Well-managed company; sharp execution capabilities; strong capital allocation. Always had a strong board and has effectively utilised it to build capabilities

Strategic Asset

Widest matrix of chemistry capabilities and client base. It also has a big infrastructure in Valsad. The question is how aggressively Atul is able to use it.

Well-engineered Benzene-derivative manufacturing facilities. Technocrat promoters and a capable second-generation looking forward to steer the business into second orbit

Strong relationships with clients; partnerships with global R&D institutes

High quality human capital; very strong R&D team and years of operational excellent experience through technical textiles and packaging films business; world class manufacturing infrastructure at Dahej

High quality human capital; Good relationship with Japanese clients

Overall

Wide set of product capabilities but somewhat less aggressive.

Has been a good executor in a semi-commodity business and has gradually built on value-added products. It has got a good reputation in a wide set of clients. Improvement in architecture will gradually create a stronger brand and increase intimacy with clients.

Slow and steady execution. Possibly the best company in this space gradually looking to gain scale

Strong at R&D and infrastructure. Asset discipline is weak from an investor point of view

PI has perfected the business model. Has got everything – chemistry capabilities, engineering skills, strong capital allocation, wide talent base, ambitious promoter, strong set of guiding principles. Widening client base beyond agri will drive long-term scalability


NFIL scores high in product capabilities and global orientation while its position in capital efficiency and Exhibit 84:scalability is improving

Capital

Efficiency Margins

Product/Process Capabilities

Global orientation

Cash conversion

Scalability Total Score

PI Industries

SRF Ltd

Navin Fluorine International Ltd

Vinati Organics Ltd

Aarti Industries Ltd

Atul Ltd

Sudarshan Chemicals

Source: Company, Ambit Capital Research; Note: - Highest; - Relatively more; - Average; - Lowest


Chemicals


NFIL is just behind PI and SRF in our coverage universe due to growth Exhibit 85:visibility and improving RoCE

Source: Ambit Capital Research; Note: Bubble size indicates the current market cap and dotted bubbles indicate positioning based on FY19 RoCE, revenue CAGR (FY20-23E) and current Market Cap.

What are built into our target prices? Exhibit 86:

CMP FY22 PE TP FY22 PE (CAGR FY20-23) (CAGR FY24-30) Discount Terminal FY20 FY20 RoCE

(Rs) on CMP (Rs) on TP Sales EBITDA Sales EBITDA rate growth D/E Post tax

PI IND 1,450 26.1 1,700 30.6 22% 27% 15% 16% 13% 5% 0.0 17.8%

SRF 3,403 14.7 4,000 17.3 19% 19% 8% 10% 13% 3% 0.5 14.8%

Aarti 933 18.9 1,000 20.3 21% 24% 11% 12% 13% 5% 0.5 11.4%

Sudarshan 423 15.4 500 18.3 12% 19% 13% 15% 15% 5% 0.5 14.6%

NFIL 1,454 25.3 1,800 31.3 28% 37% 20% 20% 15% 5% 0.0 12.3%

Vinati 870 18.4 1,000 21.2 24% 22% 14% 14% 13% 5% -0.1 26.0%

Source: Ambit Capital Research. SRF/Aarti’s capex investment plans drive our growth estimates beyond FY24. So LT growth numbers will increase as more capex plans get rolled out.

We upgrade TP for PI Ind, SRF and Aarti by slightly tweaking our long Exhibit 87:term growth estimates

New Old Sales CAGR FY24-30 EBITDA CAGR FY24-30

TP Rs TP Rs New Old New Old

PI IND 1,700 1,600 14.9% 14.7% 16.1% 15.8%

SRF 4,000 3,700 7.9% 7.4% 9.6% 9.1%

Aarti 1,000 900 11.3% 11.1% 12.5% 12.1%

Source:Ambit Capital Research

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Chemicals


Consensus estimate movements: PI/SRF/NFIL/Vinati better at delivering on earnings expectations FY17/FY18 earnings downgrades for PI/SRF were due to slowdown in global agrochemicals markets along with ongoing M&As which delayed new contracts.

PI Ind’s consensus EBIT estimates Exhibit 88:


SRF’s consensus EBIT estimates Exhibit 89:


NFIL’s consensus EBIT estimates Exhibit 90:


Aarti’s consensus EBIT estimates Exhibit 91:


Vinati’s consensus EBIT estimates Exhibit 92:


Sudarshan’s consensus EBIT estimates Exhibit 93:


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Chemicals


PI and NFIL are well-positioned from perspective of COVID-19 disruption and the long term Exhibit 94:

Name Ambit CMP TP Up Mcap Free Median CAGR (FY20-22E) PE (x) EV/EBITDA (x) RoE (%) Share Price (%)

rating (`) 12m

(USD) Float DTV 3m Sales EBITDA EPS FY21 FY22 FY21 FY22 FY21 FY22 1M 3M 1Y

Agrochemicals and agro inputs

UPL BUY 346 675 95% 3,431 64% 24.6 11% 20% 45% 10.2 6.5 7.7 5.9 13 18 15% -39% -45%

Coromandel Intl NR 520 NA NA 1,978 36% 1.9 7% 8% 10% 15.0 13.2 10.1 9.2 22% 22% -6% -13% 21%

Bayer CropScience NR 3,920 NA NA 2,287 26% 0.9 11% 17% 18% 29.5 25.2 23.0 20.1 22% 22% 12% -4% -7%

BASF India NR 1,060 NA NA 596 23% 0.6 5% 15% 278% 40.8 27.5 16.0 16.0 6% 8% -6% 5% -24%

Rallis India SELL 197 185 -6% 497 40% 1.2 11% 15% 17% 18.3 15.8 11.3 9.8 14% 15% 5% -15% 26%

Bharat Rasayan NR 6,125 NA NA 338 21% 0.3 NA NA NA 14.0 NA 9.7 NA 25% NA 7% -3% 42%

Kaveri seeds NR 363 NA NA 285 48% 0.6 11% 12% 11% 8.8 7.9 6.3 5.6 22% 21% 6% -24% -22%

Dhanuka NR 420 NA NA 259 25% 0.2 10% 15% 14% 13.5 11.8 10.1 8.9 19% 19% 30% -7% 9%

Gujarat State Fertiliser NR 42 NA NA 219 32% 0.4 4% 59% 120% 5.8 4.6 5.2 4.4 4% 5% 14% -51% -59%

Insecticides India NR 395 NA NA 106 20% 0.1 9% 14% 16% 5.9 5.3 4.9 4.4 17% 16% 38% -31% -39%

Specialty Chemicals

PI Industries BUY 1,400 1,700 21% 2,511 44% 3.8 23% 28% 27% 33.0 25.2 22.0 16.8 0 0 17% -3% 39%

SRF BUY 3,307 4000 21% 2,468 39% 14.8 28% 25% 16% 20.4 14.3 12.0 9.1 18% 22% 3% -8% 36%

Aarti Ind BUY 916 1000 9% 2,073 56% 3.5 20% 25% 25% 27.0 18.7 16.1 12.0 16% 20% 19% 6% 17%

Atul NR 4,466 NA NA 1,720 49% 2.2 13% 12% 10% 19.0 16.7 12.6 11.1 18% 18% 7% 3% 28%

Vinati Organics BUY 866 1,000 15% 1,156 26% 1.1 29% 26% 22% 25.5 18.4 19.4 13.7 13% 18% 10% -18% 0%

Navin Fluorine BUY 1,419 1800 27% 911 29% 2.8 22% 29% 31% 31.0 24.7 20.9 15.9 17% 18% 20% 32% 104%

Fine Organics NR 2,050 NA NA 816 24% 0.5 17% 18% 20% 31.2 25.8 21.7 18.4 29% 27% 12% -8% 57%

Sudarshan BUY 406 500 23% 365 36% 1.2 11% 18% 6% 19.2 14.8 10.6 8.9 20% 22% 10% -15% 23%

Galaxy Surfactants SELL 1,318 1050 -20% 607 16% 0.4 7% 11% 14% 21.0 18.0 13.0 11.5 19% 19% 12% -11% 31%

Commodity Chemicals

Solar Ind NR 851 NA NA 1,000 25% 0.3 17% 15% 17% 25.2 20.2 15.0 12.9 0 0 -12% -27% -21%

Tata Chemicals SELL 249 210 -16% 825 62% 6.7 9% 12% 7% 7.1 5.3 4.6 3.7 6% 8% 9% -24% -4%

Deepak Nitrite NR 450 NA NA 796 69% 4.8 5% -3% -4% 12.3 11.2 8.1 7.5 27% 24% 19% 15% 72%

NOCIL NR 81 NA NA 174 48% 1.7 17% 19% 12% 9.5 7.6 5.9 4.8 11% 12% 26% -33% -42%

GHCL NR 108 NA NA 133 70% 0.6 4% 5% 7% 2.5 2.3 2.4 2.3 17% 16% 20% -48% -56%

Oriental Carbon & Black NR 619 NA NA 80 59% 0.1 10% 12% 3% 8.0 7.7 5.5 4.8 15% 14% 4% -41% -45%

Source: Bloomberg, Ambit Capital research. Note: NR= Not Rated; NA= Not Applicable; Covered stocks are based on Ambit estimates; Not-rated stocks have

Bloomberg estimates, priced as of21st April, 2020

Chemicals


Summary recommendations PI, SRF, and Navin Fluorine are our top picks in the space.

Companies worth considering in Indian Chemicals space Exhibit 95:

Play on Product capability Asset capability Client engagement Management/Succession Planning

UPL Ltd. Global dominance on global agrochemicals

Medium; focusing on a balance of cost and product

Proven track record in relatively stable geography like India while competition struggles with supply chain issues from China

Company is into business to farmers; Arysta (UPL’s recent acquisition) will help ramp up client engagement

Mr. Jai Shroff has taken aggressive M&A bets to build global distribution and still has many good years to lead the organisation

PI Industries Global chemicals contract manufacturer for innovators

Focused on developing proprietary technologies and getting into molecule development

Company already has flawless manufacturing infrastructure in India; now looking to further diversify manufacturing locations

Very high – well respected by clients for IP protection

Mr. Mayank Singhal is known to be a tough taskmaster and had a single-minded focus on building IP-led business with global innovators

SRF Limited Multiple industry play akin to Dupont

Targeting even innovative spaces in refrigerants; focused on internal R&D and product development across

Infrastructure quality in Dahej is extremely good

Well regarded by clients for quality (two-time Deming prize winner) and consequently has only A-lister clients across segments

Mr. Ashish Bharat Ram has focused on focusing on value-added products with high quality and more profitable grades with multiple businesses being run by professionals

Aarti Industries Multiple industry play akin to Lanxess

Focused on gaining share of Europe and China; capabilities are medium on chemistry and high on cost

Fragmented manufacturing infrastructure across India. Investments in EHS have stepped up meaningfully

Company has been supplier to multiple MNC clients for commodities across key segments. The engagement has lot more width though depth is catching up

Mr. Rajendra Gogri has focused on transitioning the business from a commodity-like business to more specialty business by improving QSHE, building R&D and design, professionalising the management.

Atul Ltd. Multiple industry play akin to Lanxess

Focused on gaining share of Europe and China; capabilities are medium on chemistry and high on cost

Has an entire city on its own; EHS track record has been strong

Company has been supplier to multiple MNC clients for commodities across key segments. The engagement has lot more width though depth is catching up

Succession planning is the only key risk to otherwise a great business. Promoters have done well in building business without taking too many risks.

Navin Fluorine

Global chemicals contract manufacturer for chemical innovators

Strong chemistry capabilities

Good capabilities; EHS track record is good; manufacturing is divided as per various segments

Company’s uniqueness lies in relationships with pharma innovators

Well incentivised professionals run the business. Though key man risks prevail when professionals transition

Sudarshan Chemicals

Global market-share play on pigments

Medium; focusing on a balance of cost and product

Well respected on EHS; Pigments though is generally more polluting space

Good standing in India though in advanced stages to build client relationships with global majors in autos and consumer goods

Promoters have focused on building the business in a slow but steady manner. Mr. Rajesh Rathi is the identified successor and will run the business for next few years.


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Catalysts and risks for the sector Catalysts New emerging areas: Some Indian companies have or are trying to foray into new chemical verticals which are completely different from their existing ones. These ventures have the potential to significantly alter the size of the business. For e.g., NFIL entered a completely new segment – High Performance Product (HPP) – which is expected to add ~40% of FY20 revenues in FY23. PI has been trying to enter new areas other than agrochemicals and has been working on some proprietary technologies as well. Aarti is getting into downstream products for Benzene derivatives to get into more complex applications.

Desire to diversify supply chains away from China: The coronavirus disruption has led to rising anti-China feelings and need to have supply chains independent of China. High-quality Indian chemicals companies will likely benefit in specialty chemicals as MNCs will prefer India as a outsourcing partner for certain specialty products/intermediates over China. We note that such shifts won’t happen in basic and petrochemicals given weaker feedstock advantages for Indian players.

Currency depreciation: INR depreciation may benefit Indian exporters like PI and NFIL (indirectly as currency is usually a pass-through) in improving competitiveness. SRF (more so for non-specialty chemicals exports), Vinati, Aarti and Atul benefit directly from rupee depreciation.

Feedstock availability will boost competitiveness: Lack of feedstock availability has been one of the biggest challenges for Indian chemical players. According to McKinsey, Indian chemicals companies/sector can benefit from the increase in the focus on petrochemicals in India by several global oil and gas majors as they are looking for downstream opportunities.

Risks Rise of protectionism: Coronavirus has globally led to both supply chain disruptions and demand softening. These can lead to rise in protectionism both in order to have less supply chain disruptions risk and to promote investments closer to home. In such a scenario, growth might be adversely impacted.

Demand slowdown: Worldwide lockdowns and closure of industries have led to significant demand weakening. If this persists for long, there will be impact from end-users. Although many of the chemicals are used in defensive category, prolonged demand slowdown will dent chemical companies’ growth and future expansion plans.

Supply side challenges: Extension of lockdowns or increase in severity of COVID-19 spread in India may lead to further delays in capacity ramp-up. As of now most of the companies have been ramping up their capacities as lockdowns ease for manufacturing units. Companies will have to put more efforts on supporting their Indian suppliers.


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PI Industries On a trajectory of its own What does the company do?

PI works with global agrochemical innovators on manufacturing of their patented molecules. It helps find the right manufacturing process and improve them over a period of time to further cut costs. This business accounts for ~70% of revenues. They also distribute agrochemicals in-licensed from global agrochemical MNCs in India taking care of registration, formulation, marketing and distribution. This business accounts for 30% of the revenues.

How to we expect them to evolve over next 10 years

We expect PI to evolve into a chemicals manufacturing giant with expanding presence into both wider set of chemistries as well as application areas. Business model will also expand from dedicated contract manufacturing (entire IP is dedicated to clients) to own IP creation through proprietary technologies. They are likely to strengthen their partnership-based approach with innovators and have expanded into research process too with innovators in addition to manufacturing and registrations (likely to be an engagement driver than revenue driver though). They would foray into areas like pharmaceuticals, neutraceuticals, etc. through acquisitions and/or on organic efforts basis. While the base CSM business will grow at ~16% CAGR over the next decade, proprietary technologies and foray into new application areas can drive 400-500bps top up to this earnings CAGR and would drive potential upside to our LT growth estimates.

What differentiates PI with other chemical companies Exhibit 96:

Advantage Description

Non-compete business model and respect for IP

Non-compete business model with global innovators; in-licensing model for domestic business than launching generics. Currently in-licensed molecules account for more than 65% of domestic business and are likely to go up gradually. In the long history of ~20 years of being in the CSM business, PI hasn’t had any instance of potential IP violations.

Strong track record in execution capabilities

Experience of commercialising more than 30 molecules over last 20 years including some really complex ones (over 15 steps).

Solid pipeline of more than 20 molecules which are in various stages of commercialisation. 3Cs: Cost, compliance and capacities (global standard) are well taken care of.

Good experience in chemistry and process engineering

In-house capabilities and immense experience in process research, plant engineering, efficient manufacturing and product registration.

Command over multiple complex chemistries makes suitable for complex intermediates. Impeccable standards on the environmental safety and emission standards of global innovators.

Long-term relationships with clients

Strong relationships with the innovators (18+ innovators), including a mix of Japanese, European and US clients. Customer trust on timely deliveries, quality control and ability to manage various volatilities. Well rated with sustainability ratings such as Ecovadis (Gold) and Responsible Care.

Cost advantage

With substantial scale-up on process capabilities, PI clearly has much more cost advantage vs other domestic players. Most of the company’s plants are multi-product facilities which lead to improved utilisation of its plants. A large set of PI’s competition is based in developed countries wherein PI and other Indian players have a clear cost

advantage. Source: Company, Ambit Capital

PI’s investments into capability building could make it the fastest growing Exhibit 97:chemicals player in next decade


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Upgrade our TP to Rs 1,700(vs. Rs1,600 earlier)

We roll forward our estimates to FY21 and slightly tweak to increase our long term growth estimates given our belief that PI will continue to dominate the custom manufacturing in agrochemicals and the possibility of entering in new segments. As a result our TP increases to Rs1,700 from Rs1,600 earlier. Our FY21-23E estimates remain unchanged.

What do we think about the management and their capital allocation?

PI has been extremely conservative on capital allocation always utilizing the manufacturing capacities with-in 12-18 months of commissioning delivering 20%+ post tax RoCEs consistently. Their on-ground execution has been great as also visible into building some great brands such as Nominee Gold, Osheen and now Akira. Ethically too they have the cleanest business model which is completely non-compete with innovators. This is also visible in the fact that 95% of their CSM business (70% of overall revenues) is patented molecules and 60% of their domestic business is innovator licensed.

Management has also kept a high quality board right since inception comprising industry veterans with expertise across various technical and business functions. In addition, senior management team is made up of all qualified professionals barring one member from the promoter family. They have also rewarded employees with ESOPs and industry-best compensation. The only challenge so far has been a higher turnover amongst top leadership team which management is now trying to address.

What is the impact of COVID-19?

Given PI draws 100% of revenues from agrochemicals, we believe they are relatively more defensive. PI has already been able to ramp up their plants to 50-60% utilization and hence less likely to be impacted by supply-side disruptions as well. 15-20 days of sales loss can be made up over the year in FY21 as order book continues to remain healthy.

PI’s market and capability evolution have gone hand in hand Exhibit 98:

Source: Company, Ambit Capital

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Summary Financials - PI Industries Profit and loss statement

Rs. Mn FY18 FY19 FY20E FY21E FY22E

Revenue 22,771 28,409 33,267 40,749 50,398

Total expenses 17,837 22,645 26,322 32,045 39,011

EBITDA 4,934 5,764 6,945 8,704 11,387

EBITDA Margin % 21.7% 20.3% 20.9% 21.4% 22.6%

% Growth -11% 17% 20% 25% 31%

Depreciation 830 930 1,281 1,513 1,708

EBIT 4,105 4,834 5,664 7,191 9,679

Interest Expenditure 53 50 112 520 798

Other income 602 595 655 1,119 1,321

PBT 4,654 5,379 6,206 7,790 10,202

Provision for taxation 979 1,277 1,489 1,948 2,551

Adjusted PAT 3,676 4,101 4,717 5,843 7,652

% Growth -20% 12% 15% 24% 31%

Reported PAT 3,676 4,102 4,717 5,843 7,652

EPS (Rs) 26.7 29.7 34.2 42.4 55.5


Balance Sheet


Share capital 138 138 138 138 138

Reserves and surplus 18,984 22,710 26,005 30,636 37,076

Total Networth 19,122 22,848 26,143 30,774 37,214

Loans 463 99 5,099 4,876 4,653

Deferred tax liability (net) (252) (127) (127) (127) (127)

Sources of funds 19,333 22,820 31,115 35,523 41,740

Net block 9,957 11,839 17,508 18,995 20,286

Capital work-in-progress 899 1,828 1,828 1,828 1,828

Investments 1,607 2,540 2,540 2,540 2,540

Total Current Assets 13,515 15,214 18,944 23,844 31,341

Current Liabilities 6,029 7,996 8,303 10,282 12,854

Provisions 340 415 1,212 1,212 1,212

Current liabilities and provisions 6,369 8,411 9,514 11,493 14,066

Net current assets 7,145 6,803 9,429 12,350 17,275

Application of funds 19,333 22,820 31,115 35,523 41,740


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Cash flow statement


PBT 4,655 5,379 6,206 7,790 10,202

Depreciation 830 930 1,281 1,513 1,708

Interest paid (net) 53 50 112 520 798

CFO before change in WC 5,200 6,595 6,945 8,704 11,387

Change in working capital (1,043) (1,542) (1,286) (900) (1,079)

Direct taxes paid (963) (1,177) (1,489) (1,948) (2,551)

CFO 3,194 3,876 4,550 5,856 7,757

Net capex (1,696) (3,675) (6,950) (3,000) (3,000)

Net investments (375) 379 - - -

Interest received 266 193 655 1,119 1,321

CFI (1,805) (3,198) (6,296) (1,881) (1,679)

Proceeds from borrowings (364) (399) 5,000 (223) (223)

Change in share capital - 75 (210) - (0)

Interest & finance charges (53) (59) (112) (520) (798)

Dividends paid (662) (832) (1,212) (1,212) (1,212)

CFF (1,060) (1,215) 3,466 (1,954) (2,233)

FCF 1,161 624 2,339 4,360 8,206


Key ratios

FY18 FY19 FY20E FY21E FY22E

Revenue growth 0.0 24.8 17.1 22.5 23.7

EBITDA growth (10.8) 16.8 20.5 25.3 30.8

PAT growth (20.0) 11.6 14.9 23.9 31.0

EBITDA margin 21.7 20.3 20.9 21.4 22.6

EBIT margin 18.0 17.0 17.0 17.6 19.2

Net margin 16.1 14.4 14.2 14.3 15.2

RoCE 20.4 19.6 17.8 18.7 21.4

RoIC 23.8 24.4 23.3 24.8 30.0

RoE 20.7 19.5 19.2 20.5 22.5

P/E (x) 58.4 52.4 45.5 36.8 28.1

P/B(x) 11.2 9.4 8.2 7.0 5.8

EV/EBITDA(x) 43.4 37.2 30.8 24.6 18.8

EV/EBIT(x) 52.2 44.3 37.8 29.8 22.1

PBT margin 20.4% 18.9% 18.6% 19.1% 20.2%


Valuation ratios

FY18E FY19E FY20E FY21E FY22E

PBT margin (%) 20.4 18.9 18.6 19.1 20.2

Net profit margin 16.1 14.4 14.2 14.3 15.2

Dividend pay-out ratio (%) 15.0 16.8 30.0 17.7 13.5

Net debt/Equity(x) -0.0 -0.1 -0.2 -0.1 -0.1

RoCE (post-tax) (%) 20.4 19.6 17.8 18.7 21.4

RoIC (%) 23.8 24.4 23.3 24.8 30.0

Working Capital Turnover 6.6 7.3 8.2 9.2 10.2

Gross Block Turnover 2.0 2.1 1.8 1.7 1.9


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SRF Limited India’s mini Dupont Thoughts on growth for next decade

We expect SRF to evolve itself into a wider chemicals play expanding into refrigerants, specialty chemicals (agri as well as pharma), solvents and fluoropolymers (likely to get commissioned in FY22). Their capabilities and backward integration in fluorination are their biggest strength. All of their operations are well integrated at one facility in Dahej which gives them the scale advantage. We expect SRF’s specialty chemicals revenue to grow at 25% CAGR over the decade led by forays into pharma intermediates and other spaces, diversifying away from agrochemicals which form 90% of their revenues in this business.

Refrigerants business would benefit from growing distribution capabilities across the globe – Middle East, Thailand, South Africa, US etc. A wider product portfolio comprising R134a, R32, R125, R410a and R1234yf (waiting for the patent expiry) and low cost manufacturing in Dahej would make SRF a global player through their brand ‘Floron’. Solvents are another opportunity where SRF can play the import substitution opportunity. Many of these solvent products are byproducts of existing processes and provide scale to the overall business. Refrigerants would also be a play on China substitution in US and other developed markets. China has over 50% market share in old generation refrigerants like R134a which SRF can substitute. We note SRF is equally competitive with Chinese now on pricing.

Fluoropolymers are another opportunity that SRF is pursuing which has large market potential. SRF’s R&D capabilities can help it target specialty grades of the polymer which can support overall growth. The growing chemicals revenues (given rising scale across all the four businesses) from Dahej complex would also support overall margin expansion. We note Dupont has built a high-end specialty fluoropolymers business spanning across multiple industry segments.

While Technical Textiles would gradually lose relevance in the overall profitability pie (15% of FY20 EBIT), SRF is likely to continuously invest in the packaging films business (~30% of overall EBIT in FY23). With diversified presence across Thailand, South Africa, Hungary and India (Indore), SRF can be a strategic supplier to various MNCs (like Nestle, Unilever, Pepsico, etc.) globally. It has also been focusing on being in the more value-added solution (rather than just supplying BOPET/BOPP commodity grades).

Upgrade our TP to Rs 4,000(vs. Rs3,700 earlier)

We slightly tweak to increase our long term growth estimates primarily driven by SRF’s chemicals business given increasing applications of fluorine and fluorinated polymers and SRF’s capability to capitalise on these opportunities. As a result our TP increases to Rs4,000 from Rs3,6700 earlier. Our FY21-23E estimates remain unchanged.

What do we think about management?

We believe de-centralisation of business management is the biggest strength of SRF. SRF promoters have focused on capital allocation while leaving the day to day business management to professional CEOs (good academic pedigrees, SRF veterans with over 1.5-2 decades spent in the same business) who run each line of business separately. While promoters focus on macro opportunities, capital allocation and overall hygiene of the business, management teams continue to focus on micro pieces such as driving cost efficiencies in the business, building superior client engagements and continuous evolvement of product mix. Across the businesses, SRF has been able to cater to the best of the clients offering best of grades possible in the category. Their quality assurances and reliability of supply work in their favour. This explains their superior operation cash generation (1 day WC cycle, OCF 2.5x of PI with similar market cap) despite being in multiple commodity B2B businesses.

Even in commodity portfolios, SRF differentiates itself on product grades, quality assurance, relationships with top-tier clients and management depth to manage these businesses. SRF’s commodity businesses are strong cash generators providing them further growth capital


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We continue to see SRF being present in a mix of commodity and specialty businesses. Aggressive capital investments (most of operating cash flows get reinvested into the businesses) are a drag on RoCE but also help the company grow well (6x PAT growth over FY14-FY20). The company’s balance sheet remains comfortable (0.5x Net Debt to Equity) and RoE is healthy at ~20%. We envision SRF to be India’s Dupont given presence across different business lines.


We expect Technical Textiles (exposure to autos) and refrigerants (exposure to autos and domestic room ACs) to be impacted due to loss of 1Q sales. Refrigerants would revive gradually as two thirds of demand is replacement. Specialty chemicals would face challenges due to supply constraints and may suffer a loss of a month of sales.

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Summary Financials - SRF Profit and loss statement

(Rs mn) FY18 FY19 FY20 FY21 FY22

Revenue 55,890 76,938 74,021 93,590 114,802

YoY growth 16% 38% -4% 26% 23%

Total expenses 46,828 63,375 59,620 76,546 92,365

EBITDA 9,062 13,564 14,401 17,044 22,438

yoy growth -7% 50% 6% 18% 32%

Net depreciation / amortisation 3,158 3,669 4,019 4,563 5,051

EBIT 5,904 9,895 10,381 12,481 17,386

Net interest and financial charges 1,239 2,016 1,955 1,662 1,483

Other income 1,151 401 855 807 729

PBT 5,817 8,280 9,282 11,626 16,632

Provision for taxation 1,200 1,853 186 2,325 3,326

Adjusted PAT 4,617 6,427 9,096 9,301 13,306

yoy growth -10% 39% 42% 2% 43%

EPS (Rs) 80.4 112 158 162 232


Balance Sheet

Rs mn FY18 FY19 FY20 FY21 FY22

Share capital 584 585 585 585 585


Total Networth 35,645 41,293 49,934 58,027 69,604

Loans 27,580 33,073 27,073 24,073 21,573

Deferred tax liability (net) 2,914 3,420 3,420 3,420 3,420

Sources of funds 66,139 77,785 80,427 85,519 94,596

Net block 51,216 56,094 58,983 64,073 66,495

Capital work-in-progress 5,588 7,536 7,536 7,536 7,536

Investments 1 1 1 1 1

Long term loans and advances 308 341 341 341 341



Provisions 380 441 381 381 381



Net Long Term Assets - 3,185 3,185 3,185 3,185



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Cashflow statement

Rs mn FY18 FY19 FY20 FY21 FY22

PBT 5,817 8,269 9,282 11,626 16,632

Depreciation 3,158 3,669 4,019 4,563 5,051

Interest paid (net) 1,239 2,016 1,955 1,662 1,483


Change in working capital (1,693) (3,165) 1,142 (1,969) (2,004)

Direct taxes paid (1,176) (1,502) (186) (2,325) (3,326)

CFO 6,995 8,956 15,357 12,750 17,107

Net capex (12,829) (10,526) (6,909) (9,653) (7,473)

Net investments 840 332 - - -

Interest received 48 45 855 807 729

CFI (11,953) (10,142) (6,053) (8,846) (6,744)

Proceeds from borrowings 7,079 (3,000) (3,000) (3,000) (3,000)

Change in share capital - (9,145) 0 0 0

Interest & finance charges paid (1,299) (2,241) (1,955) (1,662) (1,483)

Dividends paid (689) (694) (455) (1,208) (1,729)

CFF 4,951 2,458 (8,409) (5,871) (5,712)

FCF (5,833) (1,570) 8,448 3,097 9,634


SRF: Key ratios


EBITDA margin (%) - ex. OI 16.2% 17.6% 19.5% 18.2% 19.5%

EBIT margin (%) - ex. OI 10.6% 12.9% 14.0% 13.3% 15.1%

PBT margin (%) 10.4% 10.8% 12.5% 12.4% 14.5%

Net profit margin 8.3% 8.4% 12.3% 9.9% 11.6%

Dividend payout ratio 14.9% 5.0% 5.0% 13.0% 13.0%

Net debt to Equity (x) 0.7 0.7 0.5 0.4 0.2

Working capital turnover NM 132.8 71.4 428.0 422.3

Gross block turnover 1.0 1.2 1.0 1.2 1.3

Pre-tax CFO/EBITDA 0.6 0.5 1.1 0.6 0.6

Capex/post-tax CFO 1.8 1.2 0.4 0.8 0.4

Pre-tax RoCE 12.2% 15.5% 14.8% 16.3% 20.8%

RoE 13.7% 16.7% 19.9% 17.2% 20.9%


Valuation ratios


EPS (Rs) 80.4 111.9 158.4 162.0 231.7

BVPS (Rs) 621 719 870 1,011 1,212

DPS (Rs) 4.8 6.8 18.0 25.7 88.7

P/E (x) 41.0 29.5 20.8 20.4 14.2

P/BV (x) 5.3 4.6 3.8 3.3 2.7

EV/EBITDA (x) 23.7 15.8 14.9 12.6 9.6

EV/EBIT (x) 36.4 21.7 20.7 17.2 12.3

Price/Sales (x) 3.4 2.5 2.6 2.0 1.6


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Aarti Industries What does Aarti do?

Aarti Industries is a leading player in Benzene-based derivatives, enjoying global market share of about 25-40% amongst various products. Aarti is promoted by first-generation technocrats who are chemical engineers from a reputed university (UDCT Mumbai). Wide client relationships (for every possible application of its product), backward/forward integrated processes, and expertise on profitable downstream products create strong entry barriers. Aarti has been able to grow its EBITDA/PAT at 19%/25% CAGR over the last decade while maintaining dividend payout of ~25%.See our initiation here.

Thoughts on growth over the next decade

While base product growth in Benzene derivatives would come down to high single digits (vs. ~15% witnessed in the last decade), incremental growth would come from a) going more downstream for Benzene derivatives; b) deepening of capabilities in Toluene derivatives – hydrogenation, chlorination block addition etc.; c) contract manufacturing revenues ramp-up – Monsanto/SABIC/BASF, etc.; and d) benefits in pharma given new API launches and import substitution from China. Significant augmentation on QSHE (20% of last 5 years’ capex spent on QSHE) and human talent (new design centre in Vadodara and R&D centre in Mumbai) add to the ability to expand into newer chemistries and contract manufacturing revenues. Unlike PI/SRF, Aarti is already well diversified in its chemicals business which provides it with existing client relationships beyond agri/pharma.

Employee costs have increased at a CAGR of Exhibit 99:25% over FY10-19


R&D expenses have increased at a CAGR of Exhibit 100:25% over FY10-19


Upgrade our TP to Rs 1,000(vs. Rs900 earlier)

We slightly tweak to increase our long term growth estimates to reflect Aarti’s increasing capabilities in both Specialty Chemicals and Pharmaceuticals segment. As a result our TP increases to Rs975 from Rs900 earlier. We also reflect the low crude prices in our estimates which will lower the inventory costs and hence reducing the working capital for Aarti. Our FY21-23E estimates remain unchanged.


Aarti’s promoters are technocrats with engineering graduates from top tier institutes like UDCT and IITs. Management has made two key changes over the last decade: a) strengthened compliances on QSHE by investing over Rs2.5bn and b) professionalized management teams. Aarti has been the most aggressive in hiring senior talent across functions (hired PI’s CTO Prashant Potnis as CTO, Design Head Bhaskaran R from SRF, Manoj Sharma as Head of HR from Aditya Birla and Vedanta). There is a commendable desire to change the culture where otherwise top management team largely comprised 5 members from the Gogri family, 2 from other

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Aarti’s is undertaking aggressive capacity expansion in both existing chemicals (Nitrobenzene, Chlorobenzene, and PDA) and their downstream products while entering into new areas such as Toluene derivatives (Nitration, Chlorinaton, Ethylation).

https://ambitresearch.co/user/download-report/report-1507279049937.pdf

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promoter families and 3-4 old employees. Fragmented manufacturing presence Gujarat/Maharashtra instead of having integrated operations at one place is a challenge though, which Aarti would have to address. We believe the promoters have shown strong intent to build a world class organization whose execution is in progress and so far quite credible. We expect RoCE (currently 15%) to upgrade by 300-400bps over next decade as it builds a more profitable downstream chain under Benzene derivatives alongside other custom products.

Adding more top talent: Aarti added 20-30% new employees in FY19 for Exhibit 101:the top 3 brackets (Senior Leader, Leader, Manager)

Source: Company, Ambit Capital


COVID-19 is likely to impact Aarti’s P&L given 50% exposure is to non agri/pharma segments. Lower crude prices may provide some cushion to earnings and lower the WC investments given Benzene forms ~75% of RM. Sharp rupee depreciation is another benefit of the same.


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Summary Financials – Aarti Industries Profit and loss statement

Profit and loss FY18 FY19 FY20E FY21E FY22E

Revenue 36,993 47,055 44,371 52,577 64,155

yoy growth 17% 27% -6% 18% 22%

Total expenses 30,426 37,404 34,986 41,645 49,505

EBITDA 6,567 9,651 9,384 10,932 14,650

yoy growth 0% 47% -3% 16% 34%

Net depreciation / amortisation 1,358 1,627 1,661 1,982 2,262

EBIT 5,210 8,024 7,913 9,159 12,597

Net interest and financial charges 1,307 1,825 1,074 1,566 1,644

Other income 21 21 190 209 209

PBT 3,924 6,220 6,839 7,593 10,953

Provision for taxation 759 1,085 1,368 1,670 2,410

Adjusted PAT 3,165 5,135 5,471 5,922 8,543

yoy growth 6% 46% 9% 8% 44%

EPS (Rs) 21.3 31.0 31.4 34.0 49.0


Balance Sheet

Rs mn FY18 FY19 FY20E FY21E FY22E

Share capital 407 433 433 433 433


Total Networth 15,784 27,621 33,523 39,149 47,265

Loans 19,208 21,356 22,373 23,489 23,633

Deferred tax liability (net) 1,774 2,003 2,003 2,003 2,003

Sources of funds 36,920 51,134 58,053 64,795 73,054

Net block 19,979 22,832 31,730 36,748 41,486

Capital work-in-progress 4,362 7,990 7,990 7,990 7,990

Investments 472 647 647 647 647



Provisions 310 439 439 439 439





Chemicals


Cash flow statement

Cash flows (Rs mn) FY18 FY19 FY20E FY21E FY21E

PBT 4,290 6,220 6,839 7,593 11,013


Change in working capital (2,633) (1,186) 919 (1,298) (4,178)

Direct taxes paid (988) (1,178) (1,368) (1,670) (2,423)

CFO 3,349 7,287 8,935 7,963 8,049

Net capex (6,141) (8,000) (9,000) (7,000) (7,000)

Net investments 34 0 0 0 0

Interest received - - - - -

CFI (6,104) (7,979) (8,810) (6,791) (6,791)

Proceeds from borrowings 5,192 2,149 1,017 255 (550)

Change in share capital (985) 7,500 - - -

Interest & finance charges paid (1,317) (1,825) (1,074) (1,566) (1,584)

Dividends paid (100) (252) (821) (1,184) (2,148)

CFF 2,791 7,571 (878) (2,495) (4,282)

FCF (2,792) (713) (65) 963 1,049


Key ratios



EBIT margin (%) - ex. OI 14.1% 17.1% 17.8% 17.4% 19.6%

PBT margin (%) 10.6% 13.2% 15.4% 14.4% 17.2%


Dividend payout ratio 2% 5% 15% 20% 25%

Net debt to Equity (x) 1.2 0.5 0.5 0.4 0.4

Working capital turnover 5.1 3.6 2.7 3.7 4.4



Capex/post-tax CFO 1.8 1.1 1.0 0.9 0.9

Pre-tax RoCE 19.6% 20.9% 15.6% 16.1% 20.8%

RoE 23.5% 23.2% 18.1% 16.8% 21.0%


Valuation parameters


EPS (Rs) 21.3 31.0 31.4 34.0 49.3

BVPS (Rs) 97.1 169.9 189.3 216.5 253.4

DPS (Rs) 0.5 1.6 4.7 6.8 12.3

P/E (x) 43.0 29.5 29.1 26.9 18.6

P/BV (x) 9.4 5.4 4.8 4.2 3.6

EV/EBITDA (x) 26.6 4.7 5.0 4.2 3.5

EV/EBIT (x) 33.5 18.1 18.6 16.0 11.9

Price/Sales (x) 4.0 3.2 3.6 3.0 2.5


Chemicals


Navin Fluorine NFIL – A play on fluorination

NFIL, with >5 decades of expertise in fluorine, gradually rose in the fluorination value chain building presence across refrigerants and inorganic fluorides (1967), specialty chemicals (2000) and CRAMS (2011). Brisk business pick-up in FY14-19 (22% PAT CAGR) was led by CRAMS success. It boasts of MNC clients like Novartis, Roche, Honeywell, Bayer and others. NFIL is in a sweet spot given its capabilities, growing fluorine opportunities across categories and limited competition. Newly won HPP contract of Rs29bn, spanning 7 years (40% of FY20 revenues), indicates future size of the business. See our initiation here.

Where do we think the company will go over next decade?

We expect NFIL to become a US$1bn revenue player by FY30 vs. US$150 currently largely driven by success in pharma CRAMS, specialty chemicals, entry into new generation refrigerant gases and entry into new areas of fluorination.

Focus on trinity of products, platforms and partnerships: The business will grow on three axes: Products – refrigerants could be a potential opportunity (HFCs, applications as industrial gases), expanding products in specialty chemicals; Platforms – chemistry and engineering capabilities are key for building CRAMS and new age business; Partnerships – contract manufacturing opportunities with innovators.

Looking abroad to enhance R&D capabilities: NIFL will augment R&D teams not only in India but also abroad. Management is cognizant of incremental competition for quality R&D talent in the country and hence wants to build an R&D centre outside India as well to get higher quality talent.

Adding growth verticals: NFIL is exploring opportunities beyond existing verticals to leverage fluorination capabilities. They have recently entered polycarbonates with an MNC which would be their fifth vertical. They can also look at specialty grades within fluoropolymers. NFIL is also looking to get into product intermediates which are into fluorination and around fluorination.

Building management bandwidth: As NFIL is aggressively chasing new projects across agri, pharma and other new domains, it is also looking to add talent across key verticals. Our checks suggest senior level hiring from other chemical companies including SRF, PI, etc. across design, R&D, engineering, sales functions etc. To attract talent NFIL has been offering ESOPs right from the manager level.

Focused on being a leading material sciences company: NFIL will transition from a chemicals company to a material sciences company. Amongst the three categories, bulk, fine and performance chemicals, they may tilt more on the performance chemicals side.


NFIL has been undergoing a transition. The third generation of Mafatlal family, Vishad Mafatlal, took over the reins of the company from May 2016. It has also undergone changes in the top management (new MD and CFO). Mr. Radhesh Welling joined NFIL in December 2018 as Managing Director after spending four years in Laxmi Organics. NFIL has a strong and capable second line of management with vast industry experience heading different verticals. We believe that the company under the leadership of Radhesh is focused on attracting credible talent at the professional and senior level to run the business. We expect meaningful increase in aggression (capability building and hiring right people) and continued investments in building R&D and manufacturing infrastructure. NFIL is likely to remain a professionally driven firm with capital allocation decisions to remain with promoters. To that extent, CEO departure could be a key risk for the company.

NFIL’s management team has given a vision on transitioning from fine chemicals company to performance Chemicals Company. To augment the same they are looking to build management bandwidth as well as augment R&D capabilities.

https://ambitresearch.co/user/download-report/Ambit-Navin_Fluorine_BUY_A_Specialist_in_a_hurry-07-04-2020_09-11-42.pdf

Chemicals


NFIL has significantly increased both Exhibit 102:employee benefit expenses and cost per employee


NFIL‘s employee expense as a percentage of Exhibit 103:sales is one of the highest in the industry


NFIL has been increasing its R&D expenses Exhibit 104:


NFIL’s R&D expenses as a percentage of sales Exhibit 105:is next to PI Industries



NFIL’s inorganic fluorides business (~20%/15% of revenues/EBITDA) will be mostly impacted as it is exposed to the domestic steel and glass industry. Refrigerants business will have marginal impact as NFIL supplies R22 which has undergone two phases of supply cuts, resulting in low supply. Specialty chemicals and CRAMS will remain resilient as they cater to end-segments like pharma and agrochemicals.

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Summary Financials – NFIL Profit and loss statement


Total operational revenue 9,127 9,959 10,587 12,454 15,870

Gross Profit 5,104 5,194 5,801 6,887 8,776

Employee expenses 1,105 1,155 1,275 1,445 1,724

Power and fuel expenses 524 567 602 704 897

Other expenses 1,286 1,283 1,403 1,538 1,941

EBITDA 2,188 2,190 2,521 3,200 4,215

EBITDA margins 24.0% 22.0% 23.8% 25.7% 26.6%

Depreciation 398 275 339 405 533

EBIT 1,790 1,914 2,182 2,795 3,682

Interest (12) (8) (5) (39) (104)

Net recurring income 327 169 359 284 242

PBT (Before non-recurring income) 2,105 2,075 2,536 3,040 3,820

Non recurring income 560 169 (76) - -

Taxes 840 770 812 778 978

PAT reported 1,825 1,474 1,648 2,262 2,842

PAT (adjusted) 1,265 1,306 1,724 2,262 2,842

EPS adjusted (in Rs) 37 30 33 46 58


Balance sheet


Share capital 99 99 99 99 99


Total Networth 9,835 10,724 11,878 13,461 15,451

Loans 42 - - - -

Deferred tax liability (net) 308 348 348 348 348

Sources of funds 10,185 11,073 12,226 13,809 15,799

Net block 2,818 2,850 3,377 4,142 5,233

Capital work-in-progress 201 393 1,093 2,143 2,543

Investments 1,892 2,058 2,058 2,058 2,058

Cash and bank balances 374 370 331 457 445

Sundry debtors 1,556 1,727 1,764 2,076 2,645

Inventories 1,138 1,119 1,259 1,465 1,867

Loans and advances 118 48 48 48 48


Other long term assets 1,994 2,163 2,159 2,154 2,148

Net Long Term Assets 1,737 1,932 1,928 1,923 1,917




Chemicals


Cash flow statement


PBT 2,665 2,244 2,460 3,040 3,820

Depreciation 398 275 339 405 533

Interest paid (net) (30) (4) (354) (245) (138)


Change in working capital (157) (615) 72 (347) (516)

Direct taxes paid (497) (719) (812) (778) (978)

CFO 1,694 902 1,705 2,075 2,720

Net capex (487) (616) (1,562) (2,215) (2,018)

Net investments (1,363) (243) (1,203) (1,931) (1,776)

CFI (390) (683) (541) (18) (957)

Proceeds from borrowings (59) (85) (41) 700 -

Change in share capital 31 21 - - -

Interest & finance charges (12) (8) (5) (39) (104)

Dividends paid (350) (611) (494) (678) (853)

CFF (390) (683) (541) (18) (957)


Key ratios



EBIT margin (%) - ex. OI 19.6% 19.2% 20.6% 22.4% 23.2%

PBT margin (%) 23.1% 20.8% 24.0% 24.4% 24.1%


Dividend payout ratio 19.5% 41.9% 30.0% 30.0% 30.0%

Net debt to Equity (x) (0.0) (0.0) (0.0) 0.0 0.0

Working capital turnover 5.2 4.7 5.1 5.2 5.4



Capex/post-tax CFO 29% 68% 92% 107% 74%

Pre-tax RoCE 18.4% 17.6% 18.4% 21.1% 24.5%

RoE 20.1% 14.3% 14.6% 17.9% 19.7%


Valuation parameters

Valuation parameters FY18 FY19 FY20E FY21E FY22E

EPS (Rs) 37.0 29.8 33.3 45.8 57.5

BVPS (Rs) 199.7 217.0 240.4 272.4 312.7

DPS (Rs) 7.2 12.5 10.0 13.7 17.3

P/E (x) 36.5 45.3 40.5 29.5 23.5

P/BV (x) 6.8 6.2 5.6 5.0 4.3

EV/EBITDA (x) 28.9 28.9 25.1 19.8 15.0

EV/EBIT (x) 35.4 33.1 29.0 22.7 17.2

Price/Sales (x) 7.3 6.7 6.3 5.4 4.2


Chemicals


Broader thoughts on COVID-19 disruption We expect moderate COVID-19 impact on our chemicals coverage universe. A large part of the coverage caters to global agriculture (largest piece for Indian listed chemicals stocks), pharma and FMCG. Demand challenges are likely lower for these sectors than automotive, consumer durables, energy, electronics, etc. Supply-side challenges (plant shutdowns for Indian players) are the key challenge. Ongoing supply chain shifts from China should continue to benefit Indian players as lockdowns end and possibly would intensity due to COVID-19 impact. This would aid earnings growth while underlying end market growth remains challenging. We had recently cut earnings by 15%/7% for FY21/FY22 given delay in capex, logistical challenges and impact of weaker end-market growth globally. See detailed note here.

Exhibit 1: Revenue exposure to geographies and end-markets of companies in our coverage

Geography/Exposure Segments Remarks

PI Industries

India: 34% Asia (ex-India) 14% North America: 39% Europe: 10%

Agrochemicals: 100%

PI is likely to be less impacted due to the defensive nature of Agrochemicals. Ramp-up of new molecules, such as Pyroxasulfone (launch in Brazil and India recently) and

Tetraniliprole (replacement for Imidaclorpid) would support overall revenue growth. Three new plants coming up (vs. 8-9 plants now): one in 4QFY20, one in 1Q/2Q and one in

4QFY21. Integration of Isagro’s capacities which would further boost overall manufacturing assets. Demand has remained very strong, driving momentum in capex.

SRF

India: 55% South Africa: 4% Germany: 4% USA: 5% Thailand: 3% Switzerland: 3% Belgium: 3% Others: 23%

Refrigerants: 13% Specialty Chemicals: 21% Technical textiles: 19% Packaging films: 37%

Refrigerants segment’s end-customers are air conditioners and refrigerators, chillers and automobiles. This segment will be impacted due to slowdown in automobiles though market-share gains from China in R134a/R125 will support volume growth.

Specialty chemicals’ end-customers are agrochemicals (major), pharmaceuticals and industrial chemicals. This segment is going to be less impacted.

Technical textiles cater to auto and industrial applications (like conveyor belts in industries like coal and cement, machines etc.) and will get badly hit.

Packaging films are used in FMCG/packaged goods, which should see more usage due to hygiene concerns.

Vinati

India: 27% Outside India: 73%

IBB: 17% ATBS: 54% IB: 9%

IBB is used as core intermediate for ibuprofen and perfumes. ATBS has multiple uses – oilfield mines (~25%), water treatment (~40%), emulsions for paints and

paper coatings. IB is used in antioxidants, fragrances and perfumes, insecticides and pesticides. Butylated Phenols are used in agri and pharma.

Aarti Industries


Pharmaceuticals: 17% Specialty Chemicals: 83%

Agrochemicals is 25-30% of total Polymer additives is 15-20% of total Pharmaceuticals is 25-30% of total Dyes, pigments and printing inks is 15-20% of total

Sudarshan Chemicals


Pigment Key end-user industries are paints and coatings used in auto, home painting, plastics, ceramics, etc. This is likely to be sharply impacted.

UPL

LatAm: 42% Europe: 13% Rest of the World: 19% North America: 13% India: 13%

Agrochemicals

UPL might get impacted in the near term due to disruptions in labour force and raw materials in some geography; however, the base too is extremely soft due to sharp declines in US/Europe in 2019; USDA expects US acreage to improve this year.

Latam soybean exports to benefit from revival of China demand (impact of African swine flu in the base).

Fall in emerging market currencies would impact the profitability.

Tata Chemicals

India: 36% Asia (ex India): 10% Europe: 15% Africa: 3% America: 35%

Soda Ash: 57% Sodium bicarbonate: 6% Salt: 12% Agrochemicals: 25%

Key end-users of soda ash are glass and detergent industry. Around 60% of soda ash revenue comes from America. Glass is used in home building as well as FMCG (beverages). Home building demand will be affected while detergent and beverages industries are resilient.

Galaxy Surfactants


Performance surfactants: 63% Specialty products: 37%

FMCG usage, in toothpaste and shampoos, is likely to be resilient. Specialty products may face some challenges. Rise in palm prices may impact profitability.

Rallis India

India: 67% Asia: 19% America: 11%

Agrochemicals and seeds Demand is resilient given presence in domestic agri-inputs.

Navin Fluorine


Refrigerants:29% Inorganic fluorides:21% Specialty Chemicals:31% CRAMS:19%

Inorganic fluorides will see impact of domestic industry slowdown due to corona-related disruptions. Refrigerants will be less impacted due to supply restriction of R22.

Specialty chemicals and CRAMS will have minimal impact due to exposure to Agrochemicals and Pharmaceuticals and contract nature of the business.


https://ambitresearch.co/user/download-report/Ambit-Chemicals_POSITIVE_Moderate_impact_of_COVID19-08-04-2020_08-47-34.pdf

Chemicals


Appendix Revenue grew 14% CAGR over last decade though that doesn’t capture the increased share of value-added Exhibit 106:

products which has driven sharper EBITDA growth Rs mn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10 yr CAGR 5 yr CAGR

Alkyl Amines Chemicals 1,582 1,969 2,150 2,359 2,880 3,659 4,461 4,764 4,836 5,006 6,162 8,464 16% 14%

Aarti Industries 8,989 14,613 13,012 14,257 16,323 20,576 25,984 28,614 29,562 31,146 37,593 46,595 12% 12%

Atul Ltd 10,281 12,023 11,920 15,319 17,767 20,429 24,578 26,564 25,946 28,339 32,402 40,378 13% 10%

Camlin Fine Science 813 1,041 1,403 1,717 3,352 3,736 5,087 5,583 4,893 5,284 7,101 8,781 24% 12%

Dhnuka Agritech 3,809 4,455 4,898 5,275 5,807 7,369 7,838 8,271 8,528 9,524 9,753 10% 6%

Deepak Nitrite 4,681 5,724 5,324 6,661 7,847 10,108 12,638 13,168 13,642 13,536 16,107 26,752 17% 16%

Fine Organics 6,146 6,596 7,893 8,563 10,603 Meghmani Organics 5,937 7,914 8,163 10,451 10,622 10,585 11,783 12,942 14,530 14,229 18,033 20,880 10% 12%

Navin Fluorine 2,881 4,156 4,292 4,297 7,219 5,482 4,843 5,900 6,778 7,396 9,072 9,877 9% 15%

NOCIL 3,599 4,654 4,360 4,480 4,768 4,854 5,936 7,160 7,078 8,074 9,768 10,304 8% 12%

National Peroxide 1,094 1,350 1,219 1,816 1,547 2,129 2,359 1,957 2,334 2,322 3,054 4,013 12% 11%

Plastiblends India Ltd 1,572 1,673 2,103 2,769 3,411 4,090 4,658 4,944 5,182 5,453 5,678 6,269 14% 6%

Phillips Carbon Black Ltd 10,760 12,326 16,957 21,868 22,807 22,761 24,702 18,941 19,270 25,579 35,286 13% 9%

PI Industries 4,174 4,633 5,425 7,177 8,770 11,484 15,869 19,370 20,963 22,768 22,771 28,409 20% 12%

Rallis India 6,746 8,367 8,787 10,862 12,749 14,582 17,466 18,218 15,147 16,635 17,909 19,840 9% 3%

Sudarshan Chemicals 3,944 4,578 5,870 7,175 7,945 8,679 11,145 12,117 13,973 12,494 13,056 14,531 12% 5%

SRF Ltd 16,835 20,230 24,987 33,914 39,809 37,689 39,927 44,924 45,927 48,218 55,890 76,927 14% 14%

Ultramarine Pigment 599 833 910 1,178 1,360 1,402 1,502 1,716 2,192 2,554 2,774 3,069 14% 15%

Vinati Organics 1,463 1,905 2,321 3,169 4,421 5,417 6,873 7,590 5,782 6,258 7,287 11,076 19% 10%

Total 75,191 110,230 119,026 149,456 177,933 193,516 225,237 254,216 252,574 265,403 308,325 391,804 14% 12%


As the share of value-added products has increased faster, driving EBITDA growth at 16% CAGR over last Exhibit 107:decade

Rs mn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10 yr CAGR 5 yr CAGR

Alkyl Amines Chemicals 254 319 352 313 457 585 849 874 956 937 1,162 1,631 18% 14%

Aarti Industries 1,258 2,489 2,062 1,981 2,493 3,612 4,015 4,657 5,663 6,515 6,914 9,630 14% 19%

Atul Ltd 706 1,485 1,441 1,960 2,265 2,594 3,722 4,085 4,607 5,186 5,050 7,668 18% 16%

Camlin Fine Science 167 176 126 155 311 470 616 847 918 282 126 687 15% 2%

Dhnuka Agritech 479 581 778 795 865 1,276 1,370 1,462 1,699 1,661 1,460 12% 3%

Deepak Nitrite 381 828 496 562 610 693 1,177 1,340 1,611 1,355 1,964 4,139 17% 29%

Fine Organics 1,139 1,458 1,455 1,640 2,302 Meghmani Organics 637 1,355 1,243 1,464 1,692 1,931 1,684 2,054 2,913 2,978 4,537 5,552 15% 27%

Navin Fluorine 384 1,006 1,460 1,125 2,581 914 666 732 1,173 1,588 2,150 2,184 8% 27%

NOCIL 99 652 571 521 349 210 624 1,138 1,396 1,592 2,654 2,927 16% 36%

National Peroxide 274 416 331 919 480 674 639 226 359 700 1,450 2,263 18% 29%

Plastiblends India Ltd 187 175 195 291 322 314 475 508 593 639 549 603 13% 5%

Phillips Carbon Black Ltd (54) 1,795 2,237 2,337 1,087 709 1,555 1,652 2,391 3,951 6,141 54%

PI Industries 354 650 886 1,152 1,479 1,809 2,890 3,727 4,312 5,533 4,935 5,764 24% 15%

Rallis India 591 1,109 1,449 1,915 2,030 2,106 2,613 2,771 2,290 2,636 2,645 2,409 8% -2%

Sudarshan Chemicals 288 505 832 855 849 786 1,322 1,263 1,742 1,841 1,873 2,108 15% 10%

SRF Ltd 3,707 4,363 6,967 9,465 9,667 6,567 4,913 7,175 9,625 9,694 9,081 13,567 12% 23%

Ultramarine Pigment 200 187 193 237 245 218 261 294 376 498 602 702 14% 22%

Vinati Organics 261 339 580 697 968 1,154 1,529 1,864 1,998 2,170 1,993 4,036 28% 21%

Total 9,748 16,478 21,560 26,629 29,929 26,589 29,981 37,617 45,106 49,688 54,933 75,774 16% 20%


Chemicals


Players have been investing aggressively to tap the opportunity: Annual run-rate of capex has become close Exhibit 108:to 3x over FY15 to FY19 Rs mn FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Alkyl Amines Chemicals 178 229 108 189 147 240 263 410 353 660 1,356 695

Aarti Industries 566 711 629 691 1,331 2,348 2,909 3,031 4,665 5,302 6,148 7,936

Atul Ltd 622 675 189 506 1,306 4 1,153 1,848 3,720 2,167 1,430 2,084

BASF India 301 408 285 925 1,798 3,876 6,009 2,071 919 850 671 841

Camlin Fine Science 40 46 110 129 144 212 363 282 671 308 193 694

Dhnuka Agritech 42 169 54 52 298 308 256 316 199 65 61

DCM Shriram 3,796 4,008 952 928 669 775 951 1,044 3,506 4,451 3,797 8,509

Deepak Nitrite 52 236 137 228 1,397 1,862 969 1,061 867 2,962 6,223 2,555

Fine Organics 655 277 149 403 818

Meghmani Organics 698 3,214 1,418 1,034 1,088 1,086 927 600 946 710 2,456 3,780

Navin Fluorine 217 141 193 480 620 172 186 623 179 1,764 487 616

NOCIL 167 232 67 292 933 921 280 90 142 600 3,449 5,704

National Peroxide 60 44 46 210 342 42 564 360 13 68 110 781

Plastiblends India Ltd 146 98 55 33 72 78 41 198 810 264 186 93

Phillips Carbon Black Ltd 1,092 2,435 943 1,568 940 1,402 411 343 389 407 944 2,327

PI Industries 285 329 362 971 1,178 1,510 645 1,692 3,215 1,419 1,697 3,685

Rallis India 269 656 1,030 1,314 570 465 591 605 607 585 483 338

Sudarshan Chemicals 236 203 285 822 875 1,207 309 567 851 1,356 873 1,016

SRF Ltd 1,740 4,237 3,622 2,190 5,713 7,042 7,995 5,118 5,876 6,740 13,002 10,564

Ultramarine Pigment 43 130 24 139 103 36 52 28 169 101 197 189

Vinati Organics 171 397 347 357 609 1,558 294 568 766 1,141 766 2,061

Total 10,678 18,469 10,970 13,059 19,888 25,133 25,220 21,449 29,256 32,203 44,935 55,345


Chemicals


Institutional Ownership has been increasing

FII and DII shareholding in PI Industries has Exhibit 109:increased over the years


SRF’s FII shareholding has increased while Exhibit 110:DII has remained at similar levels


FII and DII shareholding in Aarti Industries Exhibit 111:has increased over the years


For Atul, FII and DII have increased their Exhibit 112:holdings


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Chemicals


Institutional Equities Team Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building / Aviation (022) 66233241 [email protected]

Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 [email protected]

Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 [email protected]

Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 [email protected]

Ashwin Mehta, CFA Technology (022) 6623 3295 [email protected]

Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 [email protected]

Darshan Mehta E&C / Infrastructure / Aviation (022) 66233174 [email protected]

Deep Shah Media / Telecom / Oil & Gas (022) 66233064 [email protected]

Dhruv Jain Mid-Caps (022) 66233177 [email protected]

Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 [email protected]

Karan Kokane Automobiles / Auto Ancillaries (022) 66233028 [email protected]

Kushagra Bhattar Healthcare (022) 66233062 [email protected]

Nikhil Mathur, CFA Healthcare (022) 66233220 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 [email protected]

Prasenjit Bhuiya Agri & Chemicals (022) 66233132 [email protected]

Prateek Maheshwari Cement (022) 66233234 [email protected]

Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 [email protected]

Satyadeep Jain, CFA Metals & Mining (022) 66233246 [email protected]

Shreya Khandelwal Banking / Financial Services (022) 6623 3292 [email protected]

Sumit Shekhar Economy / Strategy (022) 66233229 [email protected]

Udit Kariwala, CFA Banking / Financial Services (022) 66233197 [email protected]

Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 [email protected]

Vinit Powle Strategy / Forensic Accounting (022) 66233149 [email protected]

Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 [email protected]

Bhavin Shah India (022) 66233186 [email protected]

Dharmen Shah India / Asia (022) 66233289 [email protected]

Abhishek Raichura UK & Europe (022) 66233287 [email protected]

Pranav Verma Asia (022) 66233214 [email protected]

USA / Canada

Hitakshi Mehra Americas +1(646) 793 6751 [email protected]

Achint Bhagat, CFA Americas +1(646) 793 6752 [email protected]

Singapore

Srinivas Radhakrishnan Singapore +65 6536 0481 [email protected]

Sundeep Parate Singapore +65 6536 1918 [email protected]

Production

Sajid Merchant Production (022) 66233247 [email protected]

Sharoz G Hussain Production (022) 66233183 [email protected]

Jestin George Editor (022) 66233272 [email protected]

Richard Mugutmal Editor (022) 66233273 [email protected]

Nikhil Pillai Database (022) 66233265 [email protected]

Babyson John Database (022) 66233209 [email protected]

Chemicals


PI Industries Ltd (PI IN, BUY)


Navin Fluorine International Ltd (NFIL IN, BUY)


SRF Limited (SRF IN, BUY)


Vinati Organics Ltd (VO IN, BUY)


Aarti Industries Ltd (ARTO IN, BUY)


Sudarshan Chemical Industries (SCHI IN, BUY)


400600800

1,0001,2001,4001,6001,800

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

PI Industries Ltd

0200400600800

1,0001,2001,4001,6001,800

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

Navin Fluorine International Ltd

0500

1,0001,5002,0002,5003,0003,5004,0004,500

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

SRF Ltd

0200400600800

1,0001,2001,400

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

Vinati Organics Ltd

0

200

400

600

800

1,000

1,200

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

Aarti Industries Ltd

0100200300400500600700

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

Mar

-20

Sudarshan Chemical Industries

Chemicals


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like change in stance/estimates) to make the recommendation consistent with the rating legend.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. AMBIT Capital Private Ltd. research is disseminated and available primarily electronically, and, in some cases, in printed form.

Additional information on recommended securities is available on request.

Disclaimer

1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager, Merchant Banker, Research Analyst and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.

2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital and its affiliates/ group entities may or may not subscribe to any and/ or all the views expressed herein and the statements made herein by the research analyst may differ from or be contrary to views held by other parties within AMBIT group.

3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report.

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Conflict of Interests

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Ownership & Material Conflicts of Interest:

i. Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have or have had positions, may “beneficially own” as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of the equity securities or may conduct or may have conducted market-making activities or otherwise act or have acted as principal in transactions in any of these securities or instruments referred to herein.

ii. Ambit America Inc. or its affiliates or the principals or employees of Ambit Group may have managed or co-managed a public offering of securities or received compensation for investment banking services or expects to receive or intends to seek compensation for investment banking or consulting services or serve or have served as a director or a supervisory board member of a company referred to in this research report.

iii. As of the date of this research report Ambit America Inc. does not make a market in the security reflected in this research report.

Additional Disclaimer for Canadian Persons

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11. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.

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(ii) About AMBIT America Inc.:

17. Ambit America Inc. is not registered in Canada

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Additional Disclaimer for Singapore Persons

22. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.

23. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”).” Accordingly, if a Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.

Chemicals


Additional Disclaimer for UK Persons

24. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be reproduced, redistributed or copied in whole or in part for any purpose.

25. This report is a marketing communication and has been prepared by Ambit Capital Private Ltd. of Mumbai, India (“Ambit”). Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. Ambit is an appointed representative of Aldgate Advisors Limited which is authorized and regulated by the Financial Conduct Authority whose registered office is at 16 Charles II Street, London, SW1Y 4NW.

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31. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.

32. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and its affiliates may from time to time render advisory and other services, solicit business to companies referred to in this Report and may receive compensation for the same. Ambit has a restrictive policy relating to personal dealing. Ambit has controls in place to manage the risks related to such. An outline of the general approach taken in relation to conflicts of interest is available upon request.

33. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

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Additional Disclaimer for U.S. Persons

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40. In the United States, this research report is available solely for distribution to major U.S. institutional investors, as defined in Rule 15a – 6 under the Securities Exchange Act of 1934. This research report is distributed in the United States by Ambit America Inc., a U.S. registered broker and dealer and a member of FINRA. Ambit America Inc., a US registered broker-dealer, accepts responsibility for this research report and its dissemination in the United States.

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Disclosures

43. The analyst (s) has/have not served as an officer, director or employee of the subject company.

44. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.

45. All market data included in this report are dated as at the previous stock market closing day from the date of this report.

46. Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from Bayer Cropscience Ltd., and Vinati Organics Ltd. in the past 12 months.

Analyst Certification

The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form. © Copyright 2020 AMBIT Capital Private Limited. All rights reserved.

thematic specialty chemicals april 22, 2020 a never before

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