Indian Specialty Chemicals Growth Catalysts

28th Sep 2017
INDIAN
SPECIALTY
CHEMICALS
GROWTH
CATALYSTS
USA
Indian Specialty Chemicals 28 September 2017
Table of Contents
Contents Page No.
Indian Specialty Chemicals
Specialty Chemicals Distilling the common into the special 4
Unveiling the key catalysts behind specialty chemicals 5
Where does Indias specialty chemicals industry stand? 6
Confluence of identified drivers suggests high growth potential 8
Specialty chemicals An aggregate of distinct segments 20
Agrochemicals 23
Navin Fluorine (Buy, TP INR 700) 29
PI Industries (Hold, TP INR 750) 32
SRF (Buy, TP INR 1670) 35
UPL (Buy, TP INR 950) 38
Colourants 41
Aarti Industries (Not Rated) 51
Aksharchem India (Not Rated) 53
Asahi Songwon (Not Rated) 55
Atul Limited (Not Rated) 57
Clariant Chemicals (Not Rated) 59
Meghmani Organics Ltd. (Not Rated) 61
Sudarshan Chemicals (Not Rated) 63
Surfactants 65
Sunshield Chemicals (Not Rated) 74
Ultramarine & Pigments (Not Rated) 76
Water Treatment Chemicals 79

Ion Exchange (Not Rated) 86
Appendix
Specialty chemicals A special segment within chemicals 88
Specialty chemicals Transitions, worth looking at 89
Oleochemicals Driving consumers toward GREENER products 96
JM Financial Institutional Securities Limited Page 2

28 September 2017 India | Specialty Chemicals | Sector Report
Indian Specialty Chemicals

Growth Catalysts
Over the years, growth drivers in the chemicals industry (including specialty chemicals) have
shifted and evolved. The US was the original home to innovation and production of Mehul Thanawala
chemicals and specialty chemicals. The industry then gradually transitioned to Europe, mehul.thanawala@jmfl.com | Tel: (91 22) 66303063
followed by developing countries such as China. In this report, we focus on specialty Alok Ranjan
alok.ranjan@jmfl.com | (+91 22) 6630 3073
chemicals and analyse these transitions and identify their drivers, ultimately aiming to
understand whether India can be the next global growth leader. We believe the drivers for Pramod Krishna
pramod.krishna@jmfl.com | Tel: (91 22) 61781074
specialty chemicals are: (1) domestic availability of raw material at competitive prices, (2)
strong demand growth in consumer industries and a domestic industry that supports
premiumisation of products, (3) competitive manufacturing costs, (4) investment in R&D and
(5) an ecosystem that supports the industry and innovation. Our analysis indicates that India
has all these drivers required to Make in India and become the top destination for specialty
chemicals. Additionally, in this report, we analyse four specialty chemicals sub-segments and
identify why they make an attractive investment proposition. We believe agrochemicals,
colourants, surfactants and water treatment chemicals are the most attractive segments as
they are characterised by high growth potential, high product differentiation and low-to-
medium penetration levels. Having analysed this industry in detail, we believe companies with
high focus on R&D, with a diversified product profile and increasing share of revenue from
high-value products will be the most attractive in the long term.
The specialty chemicals industry needs certain drivers to grow: Some of the drivers we
have highlighted may be generic and applicable to any industry, but drivers such as
investment in R&D are more relevant to specialty chemicals. In this report, we empirically
validate these drivers based on how the US, Europe and later China used these growth
drivers to become leaders in the specialty chemicals industry.
India has all the drivers to focus on specialty chemicals: India has a strong base of
technically skilled manpower (over 2.5 million students graduated in 2016 Science,
Technology, Engineering and Maths - STEM). Just as STEM graduates were the base for
growth in Indias IT and Pharma sectors, they can also help boost the specialty chemicals
th
industry. India also has a well-developed chemicals industry, which is the 6 largest
producer of chemicals globally. This not only provides raw materials at competitive prices,
but also the expertise needed to store and handle chemicals. Finally, the Indian
government has also focussed on the specialty chemicals industry under its Make in
India programme.
Indias global competitiveness improving: Globally, at various points in time, various
regions have emerged as industry leaders. China has led the chemicals industry over the
past two decades, but over the past five years, its labour costs increased from c.2% of
sales to c.5%, while Indian companies labour costs have been stable at 6-7%. This has
improved Indias competitiveness. We analyse these and other factors in the report to
substantiate that Indian companies are now competitive.
The specialty chemicals industry has several segments: Specialty chemicals are used to add
value to an end product, and therefore, the industry operates on a B2B premise.
Accordingly, specialty chemicals can be classified based on their use into agrochemicals,
construction chemicals, paints & coatings, personal care, polymer additives, textile
chemicals and water treatment chemicals. They can also be classified based on application
into segments such as colourants, flavours & fragrances and surfactants. We analyse
these sub-segments in this report and identify those that are attractive from an
investment perspective. Some of these segments (such as textile chemicals) do not have
many listed players and some (like flavours & fragrances and paints & coatings) are more JM Financial Research is also available on:
FMCG plays than chemicals. We exclude these and analyse the growth drivers and Bloomberg - JMFR <GO>,
potential for the remaining segments. Thomson Publisher & Reuters
S&P Capital IQ and FactSet
Major companies: Finally, in this report, we provide a brief overview of some of the
companies operating in the specialty chemicals industry. These are Navin Fluorine
Please see Appendix I at the end of this
International Limited (Buy rating; Sep18 TP: INR 700), PI Industries Limited (Hold rating; report for Important Disclosures and
Sep18 TP: INR 750), SRF Limited (Buy rating; Sep18 TP: INR 1670), UPL (Buy rating; Disclaimers and Research Analyst
Sep18 TP: INR 950), and others. Certification.
JM Financial Institutional Securities Limited

1. Specialty Chemicals Distilling the common into the

special
The chemicals industry can be classified based on various parameters such as value addition
Basic chemicals are high-volume
(basic/specialty), end-use (water treatment/construction/agrochemicals), process
and low-value chemicals. Specialty
(batch/continuous), etc. If we focus on value addition, the chemicals industry can be
chemicals are low-volume and
classified into two broad segments - basic and specialty.
high-value chemicals
Basic chemicals are generally high-volume and low-value products that are sold to other
industries for further processing. Typically, basic chemicals are more likely to be manufactured
in continuous process plants and there is no major product differentiation among several
manufacturers. Sales of basic chemicals are primarily driven by price.
On the other hand, specialty chemicals are low-volume and high-value products sold on the
basis of their quality or utility, rather than composition. Thus, they may be used primarily as
additives or to provide a specific attribute to the end product. Specialty chemicals are more
likely to be prepared and processed in batches. The focus is on value addition to the end-
product and the properties or technical specifications of the chemical.
Specialty chemicals are an important group, but classifying a particular chemical as basic or
specialty has been somewhat contentious. Often, terms such as specialty chemicals, fine
chemicals, and performance chemicals are used interchangeably and can cause confusion.
Therefore, Kline and Company prepared a simple matrix to explain the classification.
Exhibit 1. Specialty chemicals - differentiation matrix
Fine chemicals Specialty chemicals

Price ($/Kg)
Specialty chemicals cost more per

kg and have a high differentiation
index
Commodities Pseudo-commodities
Source: Kline and Company, Inc., JM Financial

Differentiation Index
Another useful way to look at chemicals is based on the value chain (Exhibit 2).
Exhibit 2. Chemical industry value chain

Parameters Basic chemicals Differentiated commodities Specialty chemicals
Chemistry Production of molecule Development of molecule Modification of molecule Specialty chemicals are
Focus Economy of scale Operations Customer/market characterised by low capital
Structure Centralised Somewhat decentralised Decentralised
intensity and high product
Process & product Product & application
technology
Technology Process technology
technology know-how
Capital Intensity High Moderate Low
Source: Kline & Company, Inc., JM Financial
Appendix 1 analyses the basic and specialty chemical companies in more details.
In this report, we focus on specialty chemicals. Since specialty chemicals are mainly used to
add value to the finished product, they are primarily sold on a B2B basis. Specialty chemicals
can be further divided into various sub-segments on the basis of end-use and application. In
this report, we have classified specialty chemicals into ten sub-segments. These sub-segments
are 1) Agrochemicals, 2) Colourants, 3) Construction chemicals, 4) Flavours & Fragrances, 5)
Paints & Coatings, 6) Personal care, 7) Polymer additives, 8) Surfactants, 9) Textile chemicals
and 10) Water treatment chemicals. Of these, we have discussed the important sub-segments
with most growth potential in detail in later sections of this report.

2. Unveiling the key catalysts behind specialty chemicals

2.1 An overview of the global specialty chemicals industry
Globally, the chemical industry recorded sales of c.USD 4.3trn in FY15, of which specialty
chemicals (including agrochemicals) recorded sales of c.USD 829bn (or c.20% of the global
chemical industry sales). Industry estimates indicate that the chemical industry could record a Specialty chemicals form nearly
CAGR of c.5.4% to reach c.USD 5.6trn by end-FY20, while specialty chemicals could grow at 20% of the total chemical industry
a slightly faster rate, recording c.5.8% CAGR to reach USD 1.1trn by end-FY20 (Exhibit 3
below).
Exhibit 3. Global basic and specialty chemicals market size (USD bn)
6000
5000 1100
4000 829
Global specialty chemicals are
3000 expected to increase at a CAGR of
4496 5.8% per annum
2000
3471
1000
0
FY15 FY20
Basic Specialty
Source: TSMG-FICCI, Global Market Insights, JM Financial
2.2 Drivers for the specialty chemicals industry

We note that specialty chemicals are low-volume products. If a country does not have a
strong basic chemical industry and focuses only on specialty chemicals, then the raw
materials would have to be imported. Importing and storing low volumes could make the
specialty chemicals uncompetitive unless they are highly specialised/patented. Therefore, a
strong chemical industry is one of the key drivers for specialty chemicals.
We also note that specialty chemicals are primarily a B2B business aims at adding value to an
end-product. Therefore, just as importing small quantities of raw material could make the
specialty chemical unviable, exporting small quantities could also make specialty chemical
unviable. Again, since specialty chemicals add value to end-products, a domestic economy
that supports up-trading would help support and grow the domestic specialty chemicals
industry.
Competitive employee costs would be another driver for any industry and specialty chemicals
is no exception.
We have also previously stated that specialty chemicals require high product differentiation
(Exhibit 1). Therefore, cost-effective innovation and investment in R&D is another driver.
Finally, investment in innovation would need government policies not only to protect
innovation but also support cost-effective manufacturing, including effluent treatment.
Therefore, growth drivers for the specialty chemicals industry can be listed as 1) Domestic Innovation, raw material
availability of raw material at competitive prices, 2) Strong demand growth in the consumer availability, demand growth and
industry and a domestic industry that supports premiumisation of products, 3) Competitive low-cost production are key drivers
cost of manufacturing, 4) Investment in R&D and 5) An ecosystem to support industry and
innovation.
In Appendix 2, we empirically validate these drivers based on the experience of other
countries.
In the next section, we review the current state of the Indian chemicals industry.

3. Where does Indias specialty chemicals industry stand?

In FY15, Indian chemical industrys revenue was c.USD 147bn, implying a less-than-4% share
of the global chemical industry (c. USD 4.3trn). This is despite strong CAGR of c.13% during
FY10-FY15. The Indian specialty chemicals industry at c.USD 28bn (Exhibit 4) accounted for
The Indian specialty chemicals
c.3.4% of the global specialty chemicals industry and c.20% of the Indian chemical industry
industry is worth USD 28bn
in FY15. The Indian specialty chemicals industry reported annual growth of 14% during
FY10-FY15 implying that growth in specialty chemicals was slightly stronger than growth in
the overall chemicals industry.
Exhibit 4. Indian basic and specialty chemicals market size (USD bn)
250
200 52
150
28
100
174
15
119
50
65
0
FY10 FY15 FY20
Basic Specialty
Source: TSMG-FICCI, JM Financial
Indian specialty chemicals grew by

According to TSMG-FICCI, specialty chemicals industry could grow c.13% per annum during CAGR of 14% over FY10-FY15
FY15-FY20 (on the back of increasing consumption and high growth in end-use industries), and slated to grow 13% over
leading to a market size of c.USD 52bn by 2020. FY15-FY20
Exhibit 5. Indian specialty chemicals segment - Forecast (USD bn)

60 56
15%
13% 52
11%
50 47
40
28 Indian specialty chemicals grew 2x

30
global specialty chemicals
20
10
0
FY15 FY20 - Base FY20 - Most likely FY20 - Optimistic
Source: TSMG & FICCI, Company, JM Financial
If Indias specialty chemicals industry grows at 13% as estimated above, against the global
growth rate of c.6%, Indias share in the specialty chemicals global market could increase to
c.5% by end-FY20 from c.3.4% in FY15.
Exhibit 6. Specialty chemicals market size - India vs. Global

120%
100%
80%
Indian specialty chemicals will
account for 5% of global specialty
60%
chemicals by end-FY20
97% 95%
40%
20%
3% 5%
0%
FY15 FY20
India ROW
Source: JM Financial
In the next section, we try to understand if India has the drivers identified previously to
become a global leader in specialty chemicals.

4. Confluence of identified drivers suggests high growth

potential
We have previously identified drivers of specialty chemicals as:

Domestic availability of raw materials at competitive prices,
Strong demand growth in the consumer industry and higher disposable income
encouraging premiumisation of products,
Competitive cost of manufacturing,
Investment in R&D, and
An ecosystem to support the industry and innovation
4.1 Domestic availability of raw materials at competitive prices

One of the first large private sector chemical companies in India (Atul Limited) was
th th
established exactly a month after independence on 15Sep47. This makes the Indian India 6 largest producer and 6
chemicals industry over 7 decades old and one that has only grown with the presence of largest consumer of chemical sales in
large and small companies. world
th
Today, India is the 6 largest producer of chemicals worldwide (Exhibit 7).
Exhibit 7. Worldwide chemical production data CY15 (in USD bn) - India at 6th position
1800 1690
1600
1400
1200
1000
800
622
600
400
163 177
200 138
89 93
0
France India South Korea Japan Germany USA China
Source: Make in India, JM Financial
This large industry base provides cost-effective expertise for handling, production, storage
and transportation of various types of chemicals. This can easily be leveraged for specialty
chemicals.
Strong demographic potential and
It is interesting to note from the above that all countries ahead of India (except China) are increasing penetration will support
developed countries with populations lower than Indias. Therefore, there is significant market growth
potential upside to the Indian chemicals industry if demand grows, as we analyse in the next
sub-section.

4.2 Strong domestic demand growth in the consumer industry and a move
towards premiumisation
India also is the 6th largest market (Exhibit 8) for chemicals. Despite this, we believe there is
still significant potential for growth in chemicals industry based on 1) rapid growth in the
Indian economy and 2) increased penetration of specialty chemicals on the back of up-
trading.
th
Exhibit 8. Global sales of chemical in CY15 (EUR bn) India at 6 position
1600
1409
1400
1200
1000
800
600 519
400
200 148 136 115

77 74 72 60 52
0
China USA Germany Japan Korea, India France Taiwan Brazil Italy
Republic
Source: CEFIC, JM Financial
I. Rapid growth in the Indian economy: During the past 6 years (FY10-FY16), the Indian
economy grew c.6.85%, but industry research indicates that the growth rate over the next 5
years will be moderately higher, with India likely to become one of the fastest growing (if not
the fastest growing) major economies in the world. Since chemicals are used across various
industries, demand for chemicals is directly linked to economic growth. If economic growth in
the next 5 years is stronger than the previous 5, demand growth for chemicals in the next 5
years will also be higher than the last 5 years. This is corroborated by studies by government
trusts such as IBEF that said major industries consuming specialty chemicals will grow at a
higher rate during FY15-FY20 compared with the growth rate during FY10-FY15 (Exhibit 9
below).
Exhibit 9. End-use industries market growth rate

20%
17.42%
18%
15.60% 16% 16%
16% 15%
14%
13% High growth in packaged food,
14%
11.20% personal care and household care
12%
10% will drive demand for flavours and
10% 8.70% 9%
fragrances, personal care
8% 7%
5.50% 5.65% ingredients and surfactants
6% 4.90%
4% 2.95%
2%
0%
Textile Real estate Packaged personal care Household Automobiles Consumer Construction
industry food care durables
FY10-15 FY15-20
Source: IBEF, IJIRD, Industry, Company, JM Financial

II.Surpassing China in terms of growth in the specialty chemicals industry: Although Indias
specialty chemicals industrys growth rate was only marginally better than Chinas over FY10-
FY15, over the next 5 years (FY15-FY20), India (CAGR 13%) is slated to grow c.2x China
(CAGR 7%). The slowdown in Chinas specialty chemicals industry is mainly attributed to its
transition phase. It has recorded a slowdown in economic growth and a shift to the
production of personal goods/services vs. industrial goods. Exhibit 10 illustrates the slowing
growth of key end-use industries. Additionally, the Chinese chemicals industry has over-
capacity in commodity chemicals with heavy reliance on imported specialty chemicals. There
has been an increased emphasis on environment protection, which has affected production,
leading to increased exports from India. In the next section, we discuss in detail the
attractiveness of Indias specialty chemicals industry.
Exhibit 10. End-use industries growth in China growth slowed down

16% 14%
14% 12.30%
12% 11%
10.20% 9.80%10% 10%
9% 9.50% 9% 9%
10% 8.30% 8.40%
8% 7%
6% 5.80%
6% 5.30% 5% 5% 5%
Slowing key end-use industries in
4%
China
2%
0%
Textiles
Semiconductors
Rubber products
Plastic products
Motor Vehicles
Personal care
Health & Social Services
Paper & Pulp

Construction
Food & Beverages
2010-15 2015-20
Source: IHS Markit, JM Financial
Exhibit 11. Chinas specialty chemical market (USD bn)

200 189.5
7%
180 13%
160
143.7
140
120
100
80 Chinas specialty chemicals market

60
54.2 is slowing down
40
20
0
2008 2016 2020
Source: IHS, McKinsey Analysis, Industry, JM Financial

Exhibit 12. Indian specialty chemicals Industry - Forecast (USD bn)

60 56
15%
13% 52
11%
50 47
40
30 28
Indias specialty chemicals industry
20
to grow 2x Chinas
10
0
FY15 FY20 - Base FY20 - Most likely FY20 - Optimistic
Source: TSMG & FICCI, Company, JM Financial
III.Increased penetration of specialty chemicals on the back of up-trading: Over and above
faster end-use industry growth, low penetration (ratio of domestic per capita consumption in The construction industry will drive
USD to global per capita consumption in USD) of specialty chemicals in India will support demand for construction
growth. For example, the polymer additives sub-segment is likely to grow 10% over FY15- chemicals, polymer additives and
FY20, on account of growth in end-use industries and lower per capita consumption (Indian paints and coating
per capita consumption is less than 10% vs. global per capita consumption - Exhibit 13).
Exhibit 13. Penetration ratio of Indian specialty chemicals

0.80
0.70
Domestic penetration to global penetration
Colourants
0.60
Surfactants
0.50
0.40 Construction chemicals, polymer

additives, water treatment and
0.30 Agrochemcials Personal care flavour & fragrances have the
0.20 Textile chemicals lowest penetration ratio (<0.15)
Paints & Coatings
0.10
Construction Water treatment
0.00 chemicals F&F
Polymer additives
-0.10
5% 7% 9% 11% 13% 15% 17%
Domestic growth rate
Source: Industry, Company, JM Financial
Among specialty chemicals sub-segments, water treatment, polymer additives, flavours &
fragrances and construction chemicals have a lower penetration ratio (<0.15). Our analysis
indicates that polymer additives consumption in China/EU/USA is 2.4x/13x/18x that of
3
Indias. In construction chemicals, India spends around USD 1.5/m on concrete admixtures Per capita consumption of polymer
3 3
vs. USD 3/m and USD 4.5/m in China and the US, respectively. With increased focus on additives/construction chemicals in
th rd
improving the quality of construction, per capita consumption of specialty chemicals in India India is 1/18 / 1/3 of US
could grow faster than the industry rate.
Thus, a rapidly expanding end-use industry, coupled with low penetration, would help
specialty chemicals grow faster than the end-use industry.

4.3 Competitive cost of manufacturing

Competitive cost of manufacturing for a country would depend on two factors: 1) availability
of technically skilled manpower and 2) competitive labour costs.
I.India has a strong pool of technically skilled manpower: The specialty chemicals industry
requires skilled manpower and India had one of the highest numbers of graduates in Science,
Technology, Engineering and Mathematics (STEM) in 2016 (Exhibit 14).
Exhibit 14. Countries with most STEM graduates (In mn)
Japan 0.2
nd
India ranked 2 in terms of STEM
Indonesia 0.2
graduates in 2016; the Indian
Iran 0.3 chemicals industry will benefit from
a strong base of engineering
Russia 0.6 graduates
USA 0.6
India 2.6
China 4.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Source: Forbes Statista, JM Financial
India is also among the top 10 globally in number of scientific publications (Exhibit 15).
Exhibit 15. Research excellence

6 000 25.0
4 958
5 000
20.0
19.2 19.4
18.6
4 000 16.4 16.6 16.5
16.1 15.7 15.4 15.1 14.6 15.4 15.5 15.0
14.1
13.2 13.3
3 000 12.2 12.3
2 434 12.0
10.0 10.0
2 000 8.8 8.3
16.7
3491 244 6.8 6.7 6.9 7.1
1 192 6.1
895 5.0
1 000 730 699 595 4.1
585 520 478
396 386 368 288 266 258 257
225 158 155 150 142 135 131 128 122 116
0 0.0
Number of publications (thousands) Percentage of publications among 10% most cited
Source: Data from OECD, JM Financial
However, while India has been ranked among the top 10 in the number of scientific papers
India is among the top 10
published, it rates fairly low (about 6%) in terms of citations among the worlds 10% most
countries in terms of the number
cited articles. This is in line with the perception that there is a need to improve the quality of
of publications
education in the country.
Consequently, we note that while there is a strong base for the Indian chemicals industry to
grow on, there is a need to focus on innovation if India wants to become a global leader in
specialty chemicals. At this point, it would be worth noting that Indias IT and Pharma
industries have both benefitted from a strong base provided by the large number of STEM
students in the country. Therefore, the Indian specialty chemicals industry can also benefit
from this large pool.

II. Labour costs are among the lowest: While having a technically qualified pool is
imperative, competitive labour costs are as important. Again, India and China have the lowest
labour costs among major countries producing specialty chemicals (Exhibit 16).
Exhibit 16. Average hourly labour cost in 6 major countries*

60
50
40
Dollar per hour
India and China have the lowest

30 labour costs per hour among
major chemical producers
20
10
0
India China South Korea Japan United States Germany
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: The conference board, BLS-US, National Bureau of Statistics of China, Labour bureau India, OECD, Company, JM Financial
*Countries ranked by chemical sales as of FY15 *India For year 2013 to 15, labour cost per hour derived from index provided by labour
bureau, **China For year 2014 & 15, labour cost is derived from cost given in CNY by National bureau of Statistics in China
Since India and China have the lowest labour cost, it would be relevant to focus only on
these two countries (Exhibit 17). From the Exhibit, it is clear that Chinese labour costs have
been rising at a much faster rate than Indias (Exhibit 17).
Exhibit 17. Hourly labour cost comparison India and China

6
4.93
5
4
Dollar per hour
3 China saw accelerated labour cost

growth rate vs. a modest increase
2 1.7
in India
0.95 0.95
1
0
India China
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: The conference board, BLS-US, National Bureau of Statistics of China, Labour bureau India, OECD, Company, JM Financial
In order to analyse the manufacturing competitiveness of India and China, we have also
accounted for the difference in productivity between the two countries. Exhibit 18 (below)
provides the productivity data for India and China taking into account GDP per person
employed. We note that GDP per person employed measures productivity of all sectors
(including manufacturing) and therefore may only be representative.
We also note that if we adjust for the higher productivity in China, Indian labour costs are still
competitive (Exhibit 19 below).

Exhibit 18. Productivity (GDP/person employed) India Vs. China Exhibit 19. Hourly labour cost (productivity adjusted) India Vs. China
30000 3.5 3.24
25000 23846 3
2.5
20000
Dollar per hour

15652 2
1.7
15000
11268 1.5
8990
10000 0.95
1 0.76
5000 0.5
0 0
India China India China
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: World Bank, JM Financial, constant 2011 PPP $ Source: The conference board , World Bank, JM Financial
It is interesting to note from the above graph that Chinese labour costs have increased c.5x
over a period of 10 years. In our view, despite this sharp increase in labour costs, Chinese
chemical companies remained competitive owing to rapid sales growth.
In order to further understand this aspect, we analysed in detail the labour costs in 22 Indian,
30 Chinese and 27 European specialty chemicals companies (Exhibits 20, 21, 22 and 23
below).
Exhibit 20. Increase in employee costs (YoY%) for companies Exhibit 21. Increase in employee cost (CAGR %, FY11-FY16)
60% 35%
50% 52%
29%
50% 30%
40% 35% 25%

20%
30% 25% 20%
20% 22%
16% 16% 15%
20% 14% 14%
11% 10% 10% 8%
10%
10% 6%
5%
0%
FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 0%
-10% -3% India China Europe
India China Europe CAGR(%)
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial
Exhibit 22. Increase in the number of employees (FY11-FY16) Exhibit 23. Employee cost as a % of sales
8% 16% 15%
14% 15%
7% 14% 14% 14%
7% 14%
6% 12%
5% 10%
4%
4% 8% 7% 7%
7% 7%
3% 6% 6%
3% 6% 5%
4%
3% 4% 4%
2% 4% 2%
1% 2%
0% 0%
India China Europe FY11 FY12 FY13 FY14 FY15 FY16
CAGR(%) China India Europe
Source: Bloomberg, Company, JM Financial Source: Bloomberg, Company, JM Financial

The key findings are:

Employee costs for Indian companies increased at slower pace when compared
with Chinese companies (Exhibit 20). The CAGR for employee expenses in India is better placed among major
Chinese companies was c.29% against 20% for Indian companies (Exhibit 21). chemical companies in terms of %
This is also partly since Chinese companies were growing rapidly and needed increase in employee costs
more employees (Exhibit 22).
Employee costs as a % of sales (Exhibit 23) increased from only 2% in FY11 to
5% of sales in FY16 for Chinese companies. For Indian companies, it was flat at
c.6-7%. Therefore, the gap between Chinese companies and Indian companies
has reduced from c.4% in FY11 to c.2% in FY16.
It is also pertinent to note that hourly labour costs have increased rapidly
(discussed previously). Therefore, if Indian specialty chemicals companies can
expand rapidly (or if Chinese labour costs continue to increase), Indian
companies can become more competitive.
4.4 Investment in R&D

While those mentioned above are broadly positive aspects that can support the Indian
specialty chemicals industry, we believe Indian companies will have to increase investment in
R&D. This could include investment in R&D to cater to Indias distinct needs, such as products
for small cars, additives for the construction sector (quick-setting concrete) and personal care
materials suited to the countrys hot and humid weather. Currently for Indian companies, the
investment in R&D/sales ratio is just 1.3% while for global companies, the ratio is 3%-4%
(Exhibit 24). Indian companies investment in R&D is the lowest among major regions -
USA/Europe/China/India.
Exhibit 24. R&D expense as a % of sales (FY11-FY16)

4.5%
4.0% 4.0%
4.0%
3.5%
3.0%
3.0%
2.5%
2.0%
1.5% 1.3%
1.0%
0.5%
0.0%
India China Europe USA
Source: Bloomberg, Company, JM Financial

Gradually, Indian companies are
On the positive side, our detailed analysis of companies indicates a c.17% CAGR in R&D increasing R&D spends as they
expenses by Indian specialty chemicals companies compared with 11%/7% by USA/Europe focus on CRAMS and new product
during FY11-FY16. We believe that Indian specialty chemicals companies have realised the development
need for increased investment in R&D (Exhibit 25).

Exhibit 25. Increase in R&D expense India vs. developed countries FY11-FY16
18% 17%
16%
14%
12% 11%
10%
8% 7%
6%
4%
2%
0%
India US EUR
Source: Bloomberg, JM Financial
4.5 An ecosystem to support the industry and innovation

Any manufacturing industry needs an environment that is conducive to conduct business and
governments shoulder the primary responsibility to do so. Specifically in the context of the
chemical industry, this includes:
Providing the necessary support (including education, legislation and infrastructure) for
growth
This includes rules and infrastructure for effluent treatment since the chemicals industry
can pollute air/water
Protecting and incentivising innovation since the specialty chemicals industry depends on
R&D
We now analyse these 3 aspects:

I. Provide the right environment for growth
The Government of India has identified chemicals as one of the focus sectors under its Make
in India initiative. However, even prior to identifying chemicals under Make in India, Central Reverse SEZs, PCPIRs, Make in
and state governments had taken various measures to attract investment in the industry. India will drive the domestic
The government established chemical hubs (Petroleum, Chemicals and Petrochemicals specialty chemicals industry
Investment Regions PCPIR) to provide the required ecosystem (raw material/market for
intermediate producers, transportation, utilities, etc.) and a common effluent treatment plant
(CETP) to ensure environment compliance. A CETP supports the industry and provides a
balance between the needs of the industry and the safety of the local population. PCPIRs are
being developed in Andhra Pradesh, Gujarat, Odisha and Tamil Nadu. PCPIRs already received
investments worth USD 24.68bn until end-FY15, but the government believes they can Exhibit a. PCPIR scheme clusters
attract investments up to c.USD 117.42bn.
Plastic parks scheme: Along similar lines, Indias government plans to set up plastic parks and
provide grant funding up to 50% of the project cost with a ceiling of USD 5.97mn per
project. Nearly 10 parks have been approved by the central government.
State governments are also trying to support the chemical industry. Gujarat and Maharashtra
already have a large chemical industry base, while the Telangana government is planning to
set up exclusive clusters for the manufacture of plastics.
These government efforts have already yielded results. There has been a significant increase
in foreign direct investment (FDI) in the Indian chemical industry. During FY13-FY17, FDI
equity flows recorded a CAGR of 56%.
Source: Company, JM Financial

Exhibit 26. FDI equity inflows in the Indian chemical sector (In USD mn,FY13-FY17)
12000
10000 9664
9397
CAGR - 56%
8000
6000 56% increase in FDI due to overall

4738 4658 supportive ecosystem
4000
2000 1596
0
FY13 FY14 FY15 FY16 FY17
Source: DIPP, JM Financial
II. Impact of environment compliance costs effluent treatment

In the winter of 2015, Beijing was cloaked in smog with visibility of less than 200 meters. In
January 2015, Chinas Ministry of Environmental Protection cracked down on factories found
to be in violation of its emission standards. Several chemical plants especially unorganised
and small units in the region faced shutdowns, leading to uncertainty in production and a
delay in exports. Consequently, Indian specialty chemicals companies benefitted, with some
even exporting to China while Chinese exports declined (Exhibit 27).
Exhibit 27. Impact of Chinas EPA crackdown reduced chemical exports index
114
112
112
110
108 Reduced chemical exports index in

China owing to shutdowns and
106
Index
reduced production
104 103
102
102
100
98
96
2013 2014 2015
Source: Bloomberg, JM Financial
We have assessed the environment compliance cost by analysing the annual reports of 30
Chinese specialty chemicals companies. We observed that only few of these companies were
explicitly stating the effluent treatment cost, while others provided only environment
protection fee (c.0.18% of sales) and sewage charges (c.1% of sales). Some key observations
are that none of the Chinese companies stated the effluent treatment costs prior to FY13.
This possibly highlights the lack of focus on environment/safety amongst Chinese specialty
chemicals companies. There were several punitive actions by environment agencies e.g.
Zhejiang Longs, a Chinese specialty chemicals company, had to pay an environment damage
fee of c.CNY 24mn in CY15 and also necessitated an investment of c.CNY 624mn in capital
expenditure towards environment protection facility.

This resulted into an increase in effluent treatment costs for Chinese companies (those that
started reporting effluent treatment costs explicitly) to 4-6% of their net sales in FY15-FY16.
In comparison, Indian chemicals companies were broadly adhering to environmental norms
by using either separate effluent treatment plants (ETPs) or common effluent treatment
plants (widely used in Gujarat). The opex of ETPs would depend on the sub-sector; polluting
sub-sectors such as colourants and textile chemicals would incur the highest costs. According
to Dyestuff Manufacturers Association (DMAI), on an average, Indian companies were
spending 5%-6% of the revenue and incurring capex of 8%-10% of the chemical plant,
resulting in lower relative competitiveness. Exhibit 28 below compares effluent treatment
costs for dyestuff companies in India and China.
Exhibit 28. ETP opex cost as a % of sales incurred by Chinese vs Indian companies*
5.2%
5.1%
5.00% 5.00%
5.0%
4.8%
4.6%
4.4%
4.4%
4.2%
4.0%
FY15 FY16
China India
Source: Company, JM Financial *companies Tsaker Chemical, Zhejiang Longs, Zhejiang Runtu Co, Lianhe chemical technology, Lier
chemical, Jiangsu Chango
It is interesting to note that over FY11-FY14, the EBITDA margins of Chinese chemical
companies grew from 16% to 21%, but fell c.5% over FY14-FY16 (Exhibit 29 below). We
have previously analysed that during FY14-FY16, employee costs of Chinese companies
increased only c.1%. Therefore, some of this compression in EBIDTA margin is likely due to Chinese chemicals companies are
increased investment in effluent treatment plants and compliance with EPA norms. Indian investing in ETPs incurring capex
companies were the biggest beneficiary of this as their EBITDA margins improved 5% during and 4%-6% opex
the same period. Lower EBIDTA margins also impacted Chinese companies ROCE and ROE as
both return ratios declined c.7% each (Exhibit 30).
Exhibit 29. Effect of environmental impact on companies EBITDA % - China vs. India
25%
21%
20% 19%
20% 19%
17% 16%
16% 16%
15%
15% 14% 14% Indian companies gained EBITDA
12%
margins at the cost of Chinese
10% companies
5%
0%
FY11 FY12 FY13 FY14 FY15 FY16
India China

Exhibit 30. Effect of environmental impact on Chinese companies ROCE and ROE
25
22
21
20 19
20
17 17 17
16
15 14
13 13 12
10 Both ROCE and ROEs of Chinese

companies declined due to
5 increased capex and opex in
effluent treatment costs
0
FY11 FY12 FY13 FY14 FY15 FY16
ROCE ROE
Indias cost of production for specialty chemicals is now lower (EBIDTA margins for FY16 and
FY17 are higher) than Chinas (FY16: Exhibit 29).
III. Regulations on protecting and incentivising innovation

The specialty chemicals industry depends on innovation and investors would be reluctant to
invest if IPR is not protected. Also, there should be legal remedies in case of any breaches.
India, as a member of the WTO, recognises patents and the Indian legal system is considered
reasonably fair. This encourages chemical companies to engage in contract research and
manufacturing services (CRAMS) or contract synthesis and manufacturing (CSM). Such tie-
ups depend primarily on the comfort of IPR protection. In India, chemical/agrochemical
companies such as Navin Fluorine and PI Industries have used this strategy.
It is worth noting that India and Chinas IPR rankings are not substantially different (Exhibit
31). However, both countries have taken measures to improve their rankings, but Indias
seems to have improved at a faster pace and reduced the gap.
Exhibit 31. IPR ranking India vs. China/US

70
60 61
59
60 56 55 54
52 52
48
50 46
40 India has improved its ranking from

60 in CY13 to 54 in CY17
30
20 17 17
15 15 14
10
0
2013 2014 2015 2016 2017
India China US
Source: IPR, JM Financial
This would potentially help Indian companies explore global opportunities and branch out
beyond domestic markets, as discussed previously.
We now dive deeper into the specialty chemicals segment to first understand the various sub-
segments of specialty chemicals and then analyse each sub-segment.
5. Specialty chemicals An aggregate of distinct segments

Specialty chemicals can be classified either by end use or application; in this report, we
consider both. Segments classified on the basis of end use are agrochemicals, construction
chemicals, paints & coatings, personal care, polymer additives, textile chemicals and water
treatment chemicals. Application-driven segments include colourants, flavours & fragrances,
and surfactants. These industries cumulatively constitute c.80% of the specialty chemicals
sector. The remaining 20% includes other segments such as paper chemicals, printing inks,
industrial & institutional cleaners and rubber chemicals.
The following table lists the major specialty chemicals segments, their domestic and global
market sizes, growth rates as well as other key characteristics.
Exhibit 32. Specialty segments overview

n
Segments Indian specialty % share of Indian specialty Indian specialty Global specialty Global specialty Product Adopt Key end Impact of
n
chemicals Indian chemicals chemicals chemicals chemicals different level markets consumer
industry specialty industry industry market size growth rate standards
market size chemicals growth rate expected (FY15 USD bn) (FY15-FY20)
(FY15, USD mn) industry (FY15-FY20) market size
(%,FY15) (FY20, USD mn)
Agrochemicals 4350 15.5% 8% 6392 57 3.2% Agri sector Medium
Textiles,
Colourant 5400 19.3% 11% 9100 45.2 5% Leather, High
Paper
Construction Infrastructure,
610 2.2% 15% 1075 27.16 5.6% Medium
Chemicals Real estate
Food
Flavours &
700 2.5% 14% 6354 23.6* 5.1%* processing, High
Fragrances
Personal care
Paints and Construction,

5300 19% 10% 8536 110 3% High
Coatings Automotive
Personal
care 700 2.5% 14% 1348 13 4.3% FMCG High
ingredients
Pipes, White
Polymer
477 1.7% 10.7% 793 50.6 5% goods Medium
Additives
automotive
Laundry care,
Surfactants 3000 10.7% 13% 5527 29.2 5.4% Medium
Dishwashing
Apparel,
Textile
1250 4.5% 12% 2203 21.8 3.4% Technical Medium
Chemicals
textiles
Industrial &
Water
458 1.6% 14% 882 24.5 4.5% Municipal High
Treatment
water
Source: UPL.TSMG and FICCI, Global Market Insights, Allied market research, MarketsandMarkets, Globe news wire, IAL consultants, Company, JM Financial *Based on CY
The Indian specialty chemicals market is smaller than global peers in most of the sub-
segments. However, in some sub-segments (such as agrochemicals, colourants, paints &
coatings) India accounts of 5%-10% of the respective global market sizes. India is also one of Agrochemicals, Colorants, Paints &
the largest exporting countries for agrochemicals and colourants, and has significantly Coatings and Surfactants have
boosted its market share over the years. grown to a sizeable market size
Exhibit 33 illustrates the expected growth rate comparison of the domestic vs. global specialty
chemicals segments.

Exhibit 33. Specialty chemical segments growth rate - India vs. Global
16%
14% 14% 14%
14% 13%
12% 12%
12% 11% 11%
10%
10%
8%
8%
6% 5%
6% 5% 5% 5%
4% 5%
4% 3% 3%
3%
2%
0%
Agrochemicals Colourant Construction Flavours & Paints & Personal Care Polymer Surfactants Textile Cemicals Water Treatment
Chemicals Fragrances Coatings Additives
India Global
Source: Global Market Insights, Industry, JM Financial, Company
Exhibit 34. Specialty segments growth rate An Analysis

Estimated Exp. growth Expected
Growth rate Drivers - growth Drivers -
Segments Key Drivers - growth growth rate rate over FY15-FY20 Growth rate
(FY10-15) rate (FY10-15) Multiple (x)
(FY15-20) (driver multiple) (FY15-20)
GDP 6.8% 1.32x 7.3% 10%
Agrochemicals 9% Exports demand 12% 0.75x 9% 7% 8%
Food demand 8% 1.13x 9% 10%
GDP 6.8% 1.47x 7.3% 11%
Textile industry 7% 1.43x 8.7% 12%
Colourant 10% 11%
Paints and coatings 12.9% 0.78x 12% 9%
Global colorants 4.2% 2.38x 5% 12%
Construction GDP 6.8% 2.06x 7.3% 15%
14% 12%
Chemicals Real estate 10% 1.4x 11.2% 15.7%
GDP 6.8% 1.5x 7.3% 11%
Packaged food 15.6% 0.65x 16% 10%
Beauty & personal
Flavours & Fragrances 10.2% 13% 0.78x 16% 13% 14%
Care sector
Toiletries &
14% 0.73x 17.42% 13%
Household care
GDP 6.8% 1.37x 7.3% 10%
Paints & Coatings 9.3% Automobile industry 5.5% 1.69x 4.9% 8% 10%
Real estate 10% 0.93x 11.2% 10%
GDP 6.8% 1.74x 7.3% 13%
Personal Care
11.8% Beauty & personal 14%
ingredients 13% 0.91x 16% 15%
Care sector
GDP 6.8% 1.47x 7.3% 11%
Consumer durables 9% 1.11x 15% 17%
Polymer Additives 10% 11%
Automobile industry 5.5% 1.8x 4.9% 9%
Real Estate 10% 1x 11.2% 11%
GDP 6.8% 1.62x 7.3% 12%
Beauty & personal
13% 0.85x 16% 14%
Surfactants 11% Care sector 13%
Toiletries &
14% 0.79x 17.42% 14%
Household care
GDP 6.8% 1.4x 7.3% 10.2%
Textile Chemicals 9.5% 11.55%
Textile industry 7% 1.43x 8.7% 12%
GDP 6.8% 1.76x 7.3% 13%
Urbanisation 2.37% 5.06x 2.32% 12%
Water Treatment 12% 14%
Water & waste water
14.7% 0.82x 10% 8.2%
Capex by industry
Source: World bank, Bloomberg, FICCI-TSMG, Company, IBEF, IPA, PR News wire, CMIE, Ken research, JM Financial
Exhibit 34 indicates the major drivers that would boost growth rates in the specialty
chemicals segment. Apart from the key drivers mentioned above, other notable factors
Flavours & Fragrances, Personal
common to most of the segments are increasing urbanisation, increasing per capita income,
care, Surfactants and Construction
growing middle class population (NCAER projected 267 million mid-income population in
chemicals are the most attractive
2016 vs. 50 million in 2005), lower penetration ratio, increasing consumerism and
segments
premiumisation. However, there are other specific factors driving these segments. For
instance, agrochemicals growth rate will also be affected by volatile weather (including the El
Nino phenomenon and prolonged weak rainfall) as well as low agri-commodity prices.
The following exhibit 35 provides a summary of major players in each specialty chemicals
segment, with relevant financial parameters.
Exhibit 35. Summary of specialty chemicals players (FY11-FY16)

Segment Company Key Products EBITDA % Profit % ROCE %
Rallis Crop protection chemicals 16% 9% 32% 21%
United Phosphorous Limited Agro chemicals 19% 8% 26% 18%

Crop protection, Environmental
Agrochemicals Bayer Crop science 11% 8% 19% 20%
science
Crop protection, Agri-
PI Industries 18% 11% 26% 32%
intermediates
Dhanuka Crop protection chemicals 13% 9% 20% 19%
Aksharchem India Dyes and Pigments 10% 6% 26% 39%
Bodal Chemicals Dyes 12% 3% 5% 19%
Meghmani Organics Pigments & Agrochemicals 17% 3% 8% 6.5%
Colourant (Includes dyes Asahi Songwon Pigments 14% 8% 25% 20%

and pigments) Aarti Industries Dyes and Pigments 16% 7% 25% 20%
Sudarshan chemicals Pigments 11% 4% 16% 18%
Atul industries VAT, Acid and Direct Dyes 14% 8% 22% 19%
Clariant Chemicals India Colorants 10% 5%* 11%* 15%*

Admixtures, Joint sealants, Surface
Fosroc India NA NA NA NA
treatments
Construction chemicals SIKA India Waterproofing, Tiling, Sealing NA NA NA NA
Admixtures, Joint Sealants,
BASF Construction NA NA NA NA
Flooring and Waterproofing
Personal wash, personal care,
Flavours and fragrances Sachee Aromatics NA NA NA NA
fabric care, incense sticks
Electrodeposition coatings, primer
Paints and coatings BASF Coatings India Ltd. NA NA NA NA
surfacer
Alpha lipolic acid, Cococin, Ellagic
Sami labs NA NA NA NA
Personal care Acid
Vivimed Labs Oral, skin and Hair Care 17% 8% 17% 19%
Polymer additives Plastiblends Polymer additives masterbatches 10% 6% 18% 19%
Ultramarine & pigments Ltd. Surfactants and Pigments 18% 11% 22% 19%
Sunshield Chemicals Ltd. Surfactants and Anti-oxidants 7% 0% 13% 4%

Surfactants
Aarti home & personal care Surfactants NA NA NA NA
Surfactants, Modifiers, Pearlising
Galaxy Surfactants 11% NA NA NA
agents, active ingredients
Textile chemicals Fineotex Textile chemicals 15% 10% 29% 16%
Chembond Engineering and chemicals 10% 13% 30% 38%

Water treatment
Ion Exchange Engineering and chemicals 4% 1% 16% 7%
Source: Bloomberg, Company annual reports, JM Financial *Clariant chemicals- one off data removed
Segments such as construction chemicals, flavours & fragrances, personal care, polymer
additives and textile chemicals do not have many listed B2B companies and therefore, we are
not covering these sub-segments. Additionally, paints and flavours & fragrances sub-
segments are primarily driven by consumer preferences and are not covered in this report We
now analyse the remaining sub-segments (agrochemicals, colourants, surfactants and water
treatment) covering the global and domestic demand drivers, key domestic and global
players, competitive scenario and long-term outlook for the remaining sub-sectors .

28 September 2017 India | Agrochemicals | Sector Report
Agrochemicals
Growing need for innovation
The agrochemicals sub-sector can be attractive to investors given Indias large rural economy Mehul Thanawala
mehul.thanawala@jmfl.com | Tel: (91 22) 66303063
and the need to improve yields. The global crop protection market is currently valued at
Pramod Krishna
c.USD 57bn, of which revenue of c.USD 43bn came from proprietary off-patent and generic pramod.krishna@jmfl.com | Tel: (91 22) 61781074
products. Indias agrochemical companies saw a 10% CAGR over FY13-FY17E, to record Alok Ranjan
revenue of INR 296bn (USD 4.42bn) in FY17E. Almost 50% of this came from exports, while alok.ranjan@jmfl.com | (+91 22) 6630 3073
the remaining was from India. We believe that Indian agrochemical companies can continue
to grow 8%-9% domestically over the next few years based on factors such as an increase in
rural spending, a consistent monsoon and improving farmer sentiment. Likewise, in exports,
Indian companies can continue to grow c.10% due to lower research and manufacturing
costs, a rise in technically skilled manpower and products going off-patent. Therefore, while
agrochemicals may not be the fastest growth sub-segment in specialty chemicals, a relatively
large domestic manufacturing and market base provides it technically skilled manpower and
an opportunity to grow.
Exports to witness CAGR of c.8%-9%: The global market for agrochemical products was
valued at c.USD 63bn in CY14 (+13% since CY12). However, after CY14, the market
began contracting due to a global slowdown caused by low commodity prices, significant
currency headwinds, high channel inventories and a shift towards generics. Therefore, at
end-CY16, the market stood at USD 57bn. In coming years, we believe Indian companies
catering to the export market are well placed since the rising development costs for new
molecules are benefitting low-cost research destinations; there is also a significant
opportunity in manufacturing products that are going off-patent. Companies such as PI
and SRF are already focusing on these opportunities.
And Indian market could support at 8%-9% CAGR: In India, the primary source of water
is rainfall, with only c.46% of cultivated land being irrigated. Hence, the monsoon plays a
very important role in agrochemical sales. Over the past few years, monsoon in India has
been below normal, resulting in inventory backlog in the channel. While this inventory
backlog could take some time to clear, we believe the outlook is broadly positive based
on a) a likely normal monsoon in FY18, which could help clear inventory, b) increased
government spending on rural India aimed at doubling farmers income over a 5-year
period, c) improving farmer awareness on pesticide use and d) higher labour costs leading
to increased use of herbicides to remove weeds. We elaborate on these factors in the
following pages.
Key companies: To mitigate monsoon-related uncertainty specific to India-focussed

companies, we prefer companies that are based in India but have a global presence. UPL
remains our top pick in the segment on the back of the companys integrated business
model and well-diversified presence across the globe. Another company to focus on is PI
Industries, with an order book of USD 1bn in the contract synthesis and manufacturing
(CSM) business as well as a strong brand presence in India. We note that PI has corrected
recently and therefore offers a good entry point. Other companies which could benefit
are (i) Rallis, with its strong brand recall among farmers (TATA) and recent entry into the
CSM segment and (ii) Dhanuka for its asset-light business model, which has allowed it to
earn higher margins and ROEs than peers, as well as its strong brand positioning.
JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
Key risks for the segment: a) Potential government intervention as seen in the pharma
Thomson Publisher & Reuters
and cotton seeds business, b) persistently low commodity prices causing a further
slowdown in the industry, c) inadequate rainfall and seasonal variations, d) low farmer
awareness and e) currency headwinds. Please see Appendix I at the end of this
report for Important Disclosures and
Disclaimers and Research Analyst
Certification.

Agrochemicals 28 September 2017
Market size and estimated growth

Exhibit 36. Total agrochemicals market catered to by Indian players (FY17) (INR bn)
Source: GAVL DRHP, JM Financial
Exhibit 37. Domestic industry to record 8%-9% CAGR (INR bn) Exhibit 38. Export industry growth forecasts (INR bn)
Source: GAVL DRHP, JM Financial Source: GAVL DRHP, JM Financial
Global agrochemicals in need of innovation
- Rising costs of developing new molecules resulting in fewer product launches: Every
crop protection product that reaches the market currently costs USD 286mn and
takes 11 years (vs. 8 years in 1995) (Phillip Mcdougall) of research and development
to ensure its safety and efficacy. Development costs have increased c.55% over the
past decade. Additionally, the number molecules needed to be synthesised to
launch one agrochemical product in the market has increased 3x over the past
couple of decades.
Exhibit 39. Discovery and development costs of a new crop protection product
Source: Phillip Mcdougall, JM Financial

Exhibit 40. Number of AIs launched over the years

18
16
14
12
10
0
1951-1955
1956-1960
1961-1965
1966-1970
1971-1975
1976-1980
1981-1985
1986-1990
1991-1995
1996-2000
2001-2005
2006-2010
2011
Source: Data - Agronova, JM Financial
- Increased herbicide/fungicide resistance: In recent years, pesticide resistance has

increased with more weeds (c.479 unique cases) becoming resistant to herbicides.
Key fungicides such as triazoles, strobilurins and SDHIs are also facing resistance.
Rising weed resistance means gradual loss of pesticide efficacy and even the end of
its life cycle; this increased the need for the development of alternatives.
Exhibit 41. Number of weeds with herbicide resistance to the respective modes of action
Source: UPL
Exhibit 42. Some common weeds that have developed resistance

Pig weed Conzya Phalaris minor
- Creating huge opportunities for Indian contract research companies: One of the key
alternatives adopted by global innovators to reduce the research cost is to outsource
part of the R&D to countries like India that have low-cost high-quality manpower.
Indian companies such as SRF, PI, Navin Fluorine and Aarti are already catering to
this niche demand.
Also, branded generic sales by Indian companies to continue doing well: The rising
potential in the proprietary off-patent and generic categories augurs well for revenue
growth. In CY16, the global sales mix of patented, proprietary off-patent and generic
pesticides were 25%, 30% and 45%, respectively. This implies that of the total sales
value of USD 57bn in CY16, c.USD 43bn was driven by proprietary off-patent and generic
pesticides. Also, another USD 3bn worth of patents are slated to expire by 2020. This
provides non-research-oriented pesticide enterprises in countries such as India and China
with a large amount of opportunities and market potential.
Long term outlook of the domestic business also remains strong due to:
a) Increased government focus towards rural India: Indias Prime Minister has targeted
to double farmer incomes by 2022 and sharply 24% increased (to INR 1.8trn) allocation
to the rural, agriculture and allied sector in the FY18 budget. The Government of India
has targeted increased spends on (a) Irrigation - capex spending up 25% in FY17 and
21% in FY18E and an increase in the fund for irrigation from INR 200bn to INR 400bn,
(b) Housing - PMAY targets to build over 5 million rural houses in FY18, almost 2x the run
rate of 2-3 million annually and has increased the construction amount provided from INR
70,000 to INR 120,000 for the beneficiary household, (c) Crop insurance The
government plans to expand crop coverage from 30% of gross cropped area in FY17
(25% in FY16) to 40% in FY18 and 50% in FY19. These will also help improve farm
incomes.
b)coupled with increasing farmer awareness on use of pesticides: In our interactions

with dealers and farmers, we noted that farmers are increasingly becoming aware about
the importance of using quality pesticides to improve yields. This is possibly due to
increased farmer engagement programmes undertaken by organised players or through
word of mouth. A study conducted by the National Centre for Biotechnology Information
says that the growth of weeds reduces yields by 35%-71%; as per FICCI, 25-50% of crop
losses in India are due to insect attacks. Proper use of agrochemicals can help reduce
losses due to weeds and pest attacks and help farmers improve yield. This would be
particularly important in crops where margins are low (fruits/vegetables). Hence, this
trend of increased farmer awareness would benefit Indian agrochemical companies.
c) and rising share of fungicides and herbicides: India has a tropical climate resulting in
higher pest incidences. Therefore, insecticides form the largest segment of crop
protection, market followed by fungicides and herbicides. However, the share of
insecticides saw a marginal decline from 58%/55% in FY13/FY14 to 54% in FY17. While
insecticides are expected to continue to dominate the overall mix, the share of herbicides
and fungicides could increase owing to rising labour costs, a shift in agriculture from cash
crops to fruits and vegetables and government support for fruit and vegetable exports.
Exhibit 43. Share of fungicides and herbicides on the rise
Source: Industry, JM Financial

Expect 8-10% domestic revenue growth for FY18:
Though CY16 monsoon turned out to be normal after two years of poor rains, there
were a number of headwinds that impacted agrochemical companies in FY17 such as (i)
high channel inventories, (ii) scattered and uneven rainfall, (iii) low pest infestation and (iv)
demonetization.
nd
While monsoon in CY17 has turned out to be deficient (-5.3% as of 22 September),
healthy rains towards the end of the season in South India (c.50% of sales for key
companies) bodes well for the rabi season. We note 1HFY17 may be flat to marginally
positive, with 2Q making up for the negative revenue growth of 1Q (caused by GST
destocking). Overall, we expect high single digit YoY revenue growth for key domestic
agrochemical companies for FY18.
Exhibit 44. Correlation between rainfall and agrochemical companies top-line growth
Source: Companies, JM Financial
Exhibit 45. Summary of key states

State Market size Organized share
AP and Telangana INR 25-30bn 60%
Maharashtra INR 15-16bn 50%
Punjab INR 14-15bn 60%
Gujarat INR 9-10bn on the rise
UP low low
Some other challenges persist, which if addressed could act as drivers: (i)
Overdependence on rainfall: In India, rainfall is the primary source of water and only
c.46% of land under cultivation is irrigated. Therefore, the fate of Indian agriculture is
subject to the vagaries of the monsoon and so is the fate of agrochemical companies
top-line growth, (ii) low farmer awareness on the right dosage of pesticide usage and
quality of pesticides and low purchasing power and (iii) low agricultural yields due to poor
soil quality, poor irrigation, etc. have discouraged farmers from using quality agri-inputs.

Exhibit 46. Per hectare agrochemical usage is lowest in India (kg/ha) Exhibit 47. India has one of the lowest agricultural yields (tonnes/ha)
Source: Company, JM Financial Source: Company, JM Financial
Integrated players to benefit from new CIBRC regulations

th
The Central Insecticides Board and Registration committee (CIBRC) in its 375 Meeting dated
th
19 May 2017, implemented a new set of guidelines encouraging indigenous manufacturing
and in-line with the governments Make in India campaign. The new guidelines along with
the possible implications are discussed in Exhibit 13. We believe the given set of guidelines
are likely to give a big boost to domestic manufacturing and act as a beneficiary for players
present across the value chain.
Exhibit 48. New guidelines and its implications

New guideline Implication
No new application of Registration under the category TI vs TIM (Technical import vs The regulation will negatively impact generic companies depending
Technical indigenous manufacturing) shall entertained except for Technical import from heavily on imports for their technical sourcing. While some key
new source. Registration under TI vs FIM is also proposed to be withdrawn, however in listed players importing technicals do so primarily under the in-
view of the fact that the matter is pending in the Hon'ble HC of Gujarat, withdrawal of licensed model, companies without/with limited technical
the same will be in concurrence of DAC &FW manufacturing facilities will have to undergo changes in their
sourcing strategies (by either contracting with indigenous suppliers
or by starting technical manufacturing on their own) and hence are
likely to witness pressure in the near term
Import of formulated pesticides where the formulation is already registered for indigenous Companies importing formulations into India will be negatively
manufacturing, shall be restricted to 75% of the average of three years of import from the impacted. However, most key listed players either formulate in-
date of application. In case the Certificate of Registration of molecule of any registrant is house or import formulations under the in-licensed model. Hence
less than three years old, import of pesticides shall be restricted to 75% on the basis of the impact of the same on key players is expected to limited to a
data provided by the registrant for such period. smaller percentage of the portfolio.
No Certificate of Registration shall be issued to any company for import, if the applicant Not material
possesses the Certificate of Registration of that product under indigenous manufacturing
category. In case where registrant has registration certificate of indigenous manufacturing
and import category the certificate of registration of import category shall be
withdrawn.
Source: CIBRC, JM Financial

28 September 2017 India | Chemicals | Company Update
Navin Fluorine | BUY

Expertise across the fluorine chain
Globally, fluorine has become a leading choice to carry active ingredients in pharma and Mehul Thanawala
agrochemical applications, leading to rising interest in fluorine research. Navin Fluorine (I) Ltd
Pramod Krishna
(NFIL) is one of Indias largest manufacturers of fluorochemicals with over five decades of pramod.krishna@jmfl.com | Tel: (91 22) 61781074
experience in the fluorine chain and a portfolio of over 60 fluorine-based products. NFIL is Alok Ranjan
also the only Indian fluorochemical company to provide end-to-end services, from early-stage alok.ranjan@jmfl.com | Tel: (91 22) 6630
research to building Indias first high-pressure, cGMP-compliant production facility. This gives
NFIL a unique advantage to partner global companies. NFIL has consistently focused on
moving up the value chain. We have a BUY rating on NFIL with a TP of INR 700. We estimate
FY17-19 earnings CAGR of 20% and value NFIL at 20x (1XPEG and DCF) FY19E EPS.
NFIL operates in a resuscitating industry: Globally, the use of fluorine was frowned upon Recommendation and Price Target
Current Reco. BUY
due to the ban on certain refrigeration gases (it was actually on chlorine and carbon in
Previous Reco. BUY
the gas and not on fluorine). However, currently, 3 of 10 blockbuster drugs contain Current Price Target (12M) 700
fluorine and therefore, the use of fluorine in pharma and agrochemical has gained a lot Upside/(Downside) 6.0%
of interest. A recent report by Solvay states that 40%-50% of new molecules being Previous Price Target 700
Change 0.0%
researched (for use in agrochemicals/pharma) contain some form of fluorine, since
fluorine is 1) inert and 2) much more lipophilic (fat soluble) than hydrogen. Therefore, if Key Data NFIL IN
one replaces hydrogen with fluorine as an inert carrier, fluorine can enter membranes Current Market Price INR 660
much more easily, improving bio-availability of the active ingredient carried by fluorine. Market cap (bn) INR32.6/US$0.5
Free Float 55%
A unique industry position: NFIL, one of the 4 listed fluorine-based companies in India, is Shares in issue (mn) 48.9
uniquely positioned to benefit from rising interest in the segment. It acquired Manchester Diluted share (mn) 48.9
3-mon avg daily val (mn) INR89.7/US$1.4
organics (which was engaged in theoretical research and gram-scale production) and is 52-week range 799/430
making an investment of c.INR 0.6bn in Indias first high-pressure fluorine-based plant in Sensex/Nifty 31,160/9,736
Dahej for multi-ton batch size. Thus, backward and forward integration would help NFIL INR/US$ 65.7
offer a unique advantage of offering end-to-end solutions.
Price Performance
Focus on high-value businesses such as CRAMS and specialty chemicals: NFIL has % 1M 6M 12M
focussed on high-margin segments such as CRAMS and specialty chemicals, directing Absolute -0.3 11.4 41.7
most of its capex there. This led to the low-margin inorganic fluoride segment Relative* 1.1 4.6 28.3
* To the BSE Sensex
contributing only c.17% to its FY17 revenue, while the high-margin specialty
fluorochemicals and CRAMS segments contributed c.33% and 20%, respectively. We
estimate this trend to continue, with CRAMS revenues currently recording a CAGR of
42% and remaining the fastest growing segment for NFIL, followed by specialty
chemicals, with a growth rate of 13%. NFIL has also signed a JV with Piramal for the
manufacture of fluorine-based molecules; this is likely to further add revenues of c.INR
1bn annually.
BUY and TP of INR 700: We forecast FY17-20 revenue/EBITDA/earnings CAGR of
18%/19%/20% and factor in a 40bps improvement in margins by FY19. We value NFIL at
20x FY19E EPS. Key risks to our call are a continued slowdown in agrochemicals and a
rise in fluorspar prices (please refer to our initiating coverage note Navin Fluorine |
Fluorinating across the value chain for more details).
Financial Summary (INR mn)

Y/E March FY16A FY17A FY18E FY19E FY20E
Net Sales 6,797 7,477 8,802 10,479 12,268
Sales Growth (%) 14.9 10.0 17.7 19.1 17.1
EBITDA 1,173 1,578 1,850 2,266 2,692
EBITDA Margin (%) 17.3 21.1 21.0 21.6 21.9 JM Financial Research is also available on:
Adjusted Net Profit 835 1,178 1,288 1,716 2,009 Bloomberg - JMFR <GO>,
Diluted EPS (INR) 17.1 24.1 26.3 35.1 41.1 Thomson Publisher & Reuters
Diluted EPS Growth (%) 52.9 40.9 9.3 33.2 17.1
ROIC (%) 13.8 17.1 17.5 22.0 24.2
ROE (%) 13.5 16.7 15.8 18.5 18.8
P/E (x) 37.6 26.7 24.4 18.3 15.7 Please see Appendix I at the end of this
P/B (x) 4.9 4.1 3.7 3.2 2.8 report for Important Disclosures and
EV/EBITDA (x) 26.8 19.6 16.4 13.3 11.1 Disclaimers and Research Analyst
Dividend Yield (%) 0.7 1.1 1.0 1.3 1.6
Source: Company data, JM Financial. Note: Valuations as of 27/Sep/2017
Certification.

Navin Fluorine 28 September 2017
Financial Tables (Consolidated)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY16A FY17A FY18E FY19E FY20E Y/E March FY16A FY17A FY18E FY19E FY20E
Net Sales 6,797 7,477 8,802 10,479 12,268 Shareholders Fund 6,453 7,645 8,617 9,911 11,426
Sales Growth 14.9% 10.0% 17.7% 19.1% 17.1% Share Capital 98 98 98 98 98
Other Operating Income 0 0 0 0 0 Reserves & Surplus 6,356 7,547 8,519 9,813 11,328
Total Revenue 6,797 7,477 8,802 10,479 12,268 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 3,111 3,029 3,612 4,271 4,965 Minority Interest 0 0 0 0 1
Personnel Cost 806 921 1,058 1,250 1,455 Total Loans 816 703 603 503 403
Other Expenses 1,706 1,949 2,282 2,693 3,157 Def. Tax Liab. / Assets (-) 370 434 420 420 420
EBITDA 1,173 1,578 1,850 2,266 2,692 Total - Equity & Liab. 7,640 8,783 9,640 10,834 12,250
EBITDA Margin 17.3% 21.1% 21.0% 21.6% 21.9% Net Fixed Assets 3,073 4,598 3,444 3,739 4,003
EBITDA Growth 62.5% 34.5% 17.2% 22.5% 18.8% Gross Fixed Assets 4,614 6,202 5,322 5,922 6,522
Depn. & Amort. 225 299 288 319 349 Intangible Assets 7 3 3 3 3
EBIT 949 1,279 1,562 1,948 2,342 Less: Depn. & Amort. 1,752 1,917 2,191 2,497 2,833
Other Income 245 306 332 374 412 Capital WIP 204 311 311 311 311
Finance Cost 38 18 11 10 8 Investments 1,699 1,883 2,383 2,883 3,383
PBT before Excep. & Forex 1,156 1,567 1,883 2,312 2,747 Current Assets 4,770 4,594 5,469 6,017 6,875
Excep. & Forex Inc./Loss(-) 0 273 0 0 0 Inventories 755 1,127 1,314 1,558 1,787
PBT 1,156 1,840 1,883 2,312 2,747 Sundry Debtors 1,499 1,358 1,611 1,858 2,106
Taxes 321 456 629 680 806 Cash & Bank Balances 287 481 916 973 1,355
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 1,309 706 706 706 706
Assoc. Profit/Min. Int.(-) 0 0 -34 -83 -69 Other Current Assets 920 921 921 921 921
Reported Net Profit 835 1,384 1,288 1,716 2,009 Current Liab. & Prov. 1,903 2,292 1,656 1,805 2,010
Adjusted Net Profit 835 1,178 1,288 1,716 2,009 Current Liabilities 1,181 1,145 1,313 1,461 1,667
Net Margin 12.3% 15.8% 14.6% 16.4% 16.4% Provisions & Others 721 1,147 344 344 344
Diluted Share Cap. (mn) 48.9 48.9 48.9 48.9 48.9 Net Current Assets 2,868 2,302 3,813 4,212 4,865
Diluted EPS (INR) 17.1 24.1 26.3 35.1 41.1 Total Assets 7,640 8,783 9,640 10,834 12,250
Diluted EPS Growth 52.9% 40.9% 9.3% 33.2% 17.1% Source: Company, JM Financial
Total Dividend + Tax 205 340 317 422 494
Dividend Per Share (INR) 4.2 7.0 6.5 8.6 10.1
Cash Flow Statement (INR mn) Dupont Analysis

Profit before Tax 1,156 1,840 1,883 2,312 2,747 Net Margin 12.3% 15.8% 14.6% 16.4% 16.4%
Depn. & Amort. 201 165 274 305 336 Asset Turnover (x) 0.9 0.9 0.9 1.0 1.0
Net Interest Exp. / Inc. (-) -245 -306 -332 -374 -412
Leverage Factor (x) 1.2 1.2 1.2 1.1 1.1
Inc (-) / Dec in WCap. -51 825 -1,090 -342 -271
RoE 13.5% 16.7% 15.8% 18.5% 18.8%
Others 0 0 0 0 0
Taxes Paid -321 -456 -629 -680 -806 Key Ratios
Operating Cash Flow 740 2,068 106 1,221 1,593
Capex -341 -1,694 880 -600 -600 BV/Share (INR) 132.0 156.2 176.1 202.5 233.5
Free Cash Flow 399 374 986 621 993 ROIC 13.8% 17.1% 17.5% 22.0% 24.2%
Inc (-) / Dec in Investments 14 -184 -500 -500 -500 ROE 13.5% 16.7% 15.8% 18.5% 18.8%
Others -468 0 0 0 0 Net Debt/Equity (x) 0.0 -0.1 -0.1 -0.1 -0.2
Investing Cash Flow -795 -1,878 380 -1,100 -1,100 P/E (x) 37.6 26.7 24.4 18.3 15.7
Inc / Dec (-) in Capital 0 0 0 0 0 P/B (x) 4.9 4.1 3.7 3.2 2.8
Dividend + Tax thereon 29 -34 15 -48 -82 EV/EBITDA (x) 26.8 19.6 16.4 13.3 11.1
Inc / Dec (-) in Loans 204 -113 -100 -100 -100 EV/Sales (x) 4.6 4.1 3.5 2.9 2.4
Others -171 148 34 83 70 Debtor days 81 66 67 65 63
Financing Cash Flow 61 1 -51 -64 -112 Inventory days 41 55 55 54 53
Inc / Dec (-) in Cash 6 191 435 57 381 Creditor days 62 58 59 56 56
Opening Cash Balance 281 287 481 916 973 Source: Company, JM Financial
Closing Cash Balance 287 477 916 973 1,355


Navin Fluorine 28 September 2017
History of Earnings Estimate and Target Price Recommendation History

% FY19E EPS % Target %
Date FY18E EPS (INR)
Chg. (INR) Chg. Price Chg. Navin Fluorine
4-May-17 28.3 35.0 700
800 B B
27-Jul-17 26.3 -6.9 35.1 0.3 700 0.0
700
600
500
400
300
200
100
0
Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17
Target Price Navin Fluorine

PI Industries | HOLD
Robust business model but near-term headwinds persist
After strong growth until mid-FY17 with CAGR of 43% over FY12-16, PI Industries CSM Mehul Thanawala
business started slowing down due to the weak global agrochemical environment. This led to
Pramod Krishna
order deferrals by some key customers. In the domestic segment, weak monsoons in FY16 pramod.krishna@jmfl.com | Tel: (91 22) 61781074
and FY17 as well as price erosion for one of its key products hurt revenues. Going forward, Alok Ranjan
our long-term view of the stock remains positive backed by (i) the companys strong order Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
book of USD 1bn in the CSM business with execution visibility of 3-4 years and (ii) a strong
product portfolio in the domestic business with new product launches lined up, including the
recent tie-up with BASF. However, there is near-term weakness due to the following: (i) while
management has guided for a revival in CSM from 2HFY18, strong positive commentary is
yet to come from key global innovators and (ii) the monsoon is missing expectations in India, Recommendation and Price Target
with significant deficits key states and an overall uneven distribution of rainfall. Therefore, we Current Reco. HOLD
maintain a HOLD rating on the stock with a TP of INR 750. We highlight that indications of Previous Reco. HOLD
Current Price Target (12M) 750
revival in either of its segments would be key monitorables and positive triggers for the stock. Upside/(Downside) 0.0%
CSM order book to help sustain growth momentum: Growth in the CSM segment Previous Price Target 750
Change 0.0%
entirely depends on the companys relationships with global innovators and respect for
IPR. PI has developed relationships over the years, and so, we expect PI to record a growth Key Data PI IN
rate of 18-20% from FY19-21 (assuming there will be a revival in this segment) and its Current Market Price INR750
market share in global agrochemical CRAMS to increase from 4% currently to 6-8% by Market cap (bn) INR103.2/$1.6
FY25. The CSM business has a fragmented market and over the years, several new players Free Float 41.7%
have entered this segment. Hence, we believe very few companies in CSM will reach Shares in issue (mn) 137.59
Diluted share (mn) 137.59
double-digit market share. PI has also announced that it is evaluating its entry in the 3-mon avg daily val (mn) INR167.7/US$2.6
pharma CSM segment; however, given the limited visibility, we do not include any 52-week range 964/674
potential revenue from the pharma CSM segment in our model. We note that a Sensex/Nifty 31,160/9,736
INR/US$ 65.7
successful pharma CSM entry could provide a potential upside.
New product launches to determine growth outlook for domestic business: With Price Performance
% 1M 6M 12M
increasing competition for the herbicide Nominee Gold, PIs future growth will be
Absolute 3.0 -12.3 -9.9
determined by new launches. PI already has a strong portfolio of in-licenced molecules, Relative* 4.3 -18.9 -20.3
wherein it collaborates with global agrochemical companies for the manufacture and * To the BSE Sensex
distribution of proprietary products in PIs brand name. PI has further strengthened this
with a tie-up with BASF for the launch of 4 new 9(3) molecules in India, of which 3 were
launched in 1Q18. CIBRC recently announced new guidelines, under which if a molecule
has already been registered for indigenous manufacturing in formulation, its import will
be subject to specific quantity permissions (SQPs). Bispyribac Sodium is the chemical name
for PIs blockbuster product Nominee Gold and PI used to import the formulation and
could have been subject to SQP. However, it has now tied up with Kumiai Chemicals for
the manufacture of Nominee Gold India, thus mitigating the risk.
HOLD with TP of INR 750: We forecast sales/EBITDA/PAT CAGR of 16%/16%/15% for

FY18-20 and value PI at 19x Sep18E EPS to arrive at a TP of INR 750. We have a HOLD
rating on the stock.

Net Sales 20,963 22,764 24,906 29,083 33,619
Sales Growth (%) 8.3 8.6 9.4 16.8 15.6
EBITDA 4,294 5,505 5,985 7,000 8,037
Adjusted Net Profit 3,097 4,573 4,450 5,041 5,849 Bloomberg - JMFR <GO>,
Diluted EPS Growth (%) 34.2 48.0 -2.7 13.3 16.0
ROIC (%) 26.3 31.7 27.1 28.6 30.5
ROE (%) 30.4 33.1 24.9 23.4 22.6
Dividend Yield (%) 0.4 0.5 0.7 0.9 0.8
Certification.

PI Industries 28 September 2017
Financial Tables (Standalone)

Other Operating Income 0 0 0 0 0 Reserves & Surplus 11,410 15,951 19,489 23,368 28,160
Personnel Cost 1,914 2,204 2,524 3,023 3,583 Total Loans 1,244 830 0 0 0
Other Expenses 3,172 3,425 3,797 4,375 5,058 Def. Tax Liab. / Assets (-) 375 -179 -179 -179 -179
EBITDA Growth 16.0% 28.2% 8.7% 17.0% 14.8% Gross Fixed Assets 9,192 10,584 12,084 13,584 15,084
Depn. & Amort. 537 727 768 870 972 Intangible Assets 174 264 264 264 264
EBIT 3,756 4,778 5,217 6,130 7,066 Less: Depn. & Amort. 523 1,230 1,998 2,868 3,840
Other Income 349 358 364 416 630 Capital WIP 587 584 583 583 583
Finance Cost 96 72 19 0 0 Investments 11 840 1,839 3,839 6,839
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 3,948 4,320 4,813 5,620 6,496
Taxes 912 491 1,112 1,506 1,847 Cash & Bank Balances 443 1,212 1,841 2,594 3,367
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 328 591 618 722 834
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 1,212 1,251 1,251 1,251 1,251
Reported Net Profit 3,097 4,573 4,450 5,041 5,849 Current Liab. & Prov. 6,183 5,912 6,418 7,439 8,562
Adjusted Net Profit 3,097 4,573 4,450 5,041 5,849 Current Liabilities 3,664 2,881 3,961 4,623 5,356
Net Margin 14.8% 20.1% 17.9% 17.3% 17.4% Provisions & Others 2,520 3,032 2,457 2,816 3,206
Diluted EPS Growth 34.2% 48.0% -2.7% 13.3% 16.0% Source: Company, JM Financial
Total Dividend + Tax 511 663 912 1,161 1,057

Depn. & Amort. -1,154 707 768 870 972 Asset Turnover (x) 1.8 1.5 1.3 1.3 1.3
Net Interest Exp. / Inc. (-) -253 -286 -345 -416 -630
Inc (-) / Dec in WCap. 168 -1,205 -347 -497 -490
RoE 30.4% 33.1% 24.9% 23.4% 22.6%
Others 0 0 0 0 0
Taxes Paid -903 -1,045 -1,112 -1,506 -1,847 Key Ratios
Operating Cash Flow 1,867 3,236 4,526 4,998 5,701
Capex -1,647 -1,478 -1,500 -1,500 -1,500 BV/Share (INR) 84.5 116.9 142.6 170.7 205.5
Free Cash Flow 220 1,758 3,026 3,498 4,201 ROIC 26.3% 31.7% 27.1% 28.6% 30.5%
Inc (-) / Dec in Investments 10 -824 -1,000 -2,000 -3,000 ROE 30.4% 33.1% 24.9% 23.4% 22.6%
Others 484 989 364 416 630 Net Debt/Equity (x) 0.1 0.0 -0.1 -0.1 -0.1
Investing Cash Flow -1,153 -1,313 -2,136 -3,084 -3,870 P/E (x) 33.5 22.6 23.2 20.5 17.7
Dividend + Tax thereon -511 -663 -912 -1,161 -1,057 EV/EBITDA (x) 24.3 18.8 17.0 14.4 12.5
Inc / Dec (-) in Loans 1 -487 -848 0 0 EV/Sales (x) 5.0 4.5 4.1 3.5 3.0
Others 0 0 0 0 0 Debtor days 69 68 67 65 63
Financing Cash Flow -510 -1,150 -1,761 -1,161 -1,057 Inventory days 69 69 71 71 71
Inc / Dec (-) in Cash 203 773 629 753 774 Creditor days 80 61 76 76 76
Opening Cash Balance 239 439 1,212 1,841 2,594 Source: Company, JM Financial
Closing Cash Balance 443 1,212 1,841 2,594 3,367


PI Industries 28 September 2017

FY18E FY19E Target
Date % Chg. % Chg. % Chg.
EPS (INR) EPS (INR) Price PI Industries
11-Jan-16 31.4 725 1000
900 H H H
16-Feb-16 30.4 -3.2 700 -3.4 HH H
800 H H
25-May-16 31.6 3.9 700 0.0 700
28-Jul-16 32.8 3.8 700 0.0 600
500
27-Oct-16 32.9 0.3 40.3 810 15.7
400
16-Feb-17 33.4 1.5 39.5 -2.0 830 2.5 300
17-May-17 38.6 15.6 43.4 9.9 810 -2.4 200
15-Aug-17 32.3 -16.3 36.6 -15.7 750 -7.4 100
0
Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17
Target Price PI Industries

SRF Ltd | BUY

Ready to leverage its specialisation in Chemistry
SRF, a multi-business entity, has evolved from manufacturing tyre cord fabrics to developing Mehul Thanawala
advanced fluorine-based intermediates and refrigerant gases (HFC-134a). This business shift,
Pramod Krishna
coupled with increased capital allocation to fluoro-specialties, has led to renewed revenue pramod.krishna@jmfl.com | Tel: (91 22) 61781074
potential. Over the past few quarters, the weak global agrochemicals scenario led to lower- Alok Ranjan
than-estimated growth in the specialty chemicals segment. However, recent management Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
guidance indicates a revival in the segment by end-FY18 on the back of reduced global
inventory levels and new molecule developments. We therefore believe that the substantial
capex incurred by SRF in its specialty chemicals segment would now start yielding results. This
will also lead to margin expansions, aided by operating leverage and higher revenue
contribution of the high-margin specialty chemicals business. In the interim, we expect SRFs Recommendation and Price Target
R-134a (in which it is the market leader) and technical textile businesses (key player in NTCF) Current Reco. BUY
to provide growth support. We have a BUY rating on the stock with a TP of INR 1670. Previous Reco. BUY
Current Price Target (12M) 1,670
New capex to drive growth: The Company has increasingly focused on expanding its Upside/(Downside) 9.7%
specialty chemicals segment and for FY18, of the INR 10bn capex announced, c.70% has Previous Price Target 1,670
Change 0.0%
been allocated towards specialty chemicals. Of this, SRF expects to spend INR 700mn on
its CGMP pharma plant, INR 1.8bn on a multi-purpose plant for the manufacture of Key Data SRF IN
agrochemicals AI for a specific customer and INR 850mn for the production of a molecule Current Market Price INR1522
(P-33) for the agrochemical industry in FY18. This focus on the specialty chemicals Market cap (bn) INR87.4/$1.3
segment, despite a challenging environment, will pay off when the environment Free Float 32.4%
improves. It also indicates managements strong confidence of a revival in the segment. Shares in issue (mn) 57.42
SRF has announced a capex of c.INR 2.5bn to set up a 35,000MT BOPP film 3-mon avg daily val (mn) INR272.3/US$4.1
manufacturing plant in Indore. The plant is likely to be commissioned in 4QFY18 and 52-week range 1970/1351
generate 1.0x-1.3x asset turnover at full capacity utilisation. Sensex/Nifty 31,160/9,736
INR/US$ 65.7
Ref-gas to continue providing support; TTB remains a cash cow: SRF is the only domestic
manufacturer of 1,1,1,2-tetrafluoroethane (HFC-134a), a refrigerant gas with significantly
Price Performance
lower ozone depletion potential vs. other similar gases and no immediate commercially % 1M 6M 12M
viable substitute visible. SRF increased its production capacity of HFC-134a from 5,000MT Absolute 4.9 -5.0 -13.8
to 12,500MT. Current demand for HFC-134a in India is c.8000MT, but export potential is Relative* 6.3 -11.6 -24.2
* To the BSE Sensex
significantly high. In 2015, SRF acquired the brand DYMEL and the process to make
pharma-grade HFC-134a, which offers higher realisations at USD8/kg compared with
USD5/kg for industrial grade. Therefore, not only will the refrigeration gas volume
increase, but the realisation will also improve. SRF is also engaged in the manufacture of
technical textiles (TTB), which primarily comprises tyre cord, belting, coated and laminated
fabrics. The TTB segment has been generating FCF of INR2.0-2.5bn annually and will help
invest into growing the businesses.
BUY with TP of INR 1670: We forecast revenue/EBITDA/PAT CAGR of 13%/15%/19% for
FY17-20 and value the specialty chemicals business at 10x, refrigerant gases at 8x and the
remaining business at 6x EV/EBITDA to arrive at a TP of INR 1670. Key risks to our call are
(i) a continued slowdown in agrochemicals and (ii) INR appreciation (management has
indicated that a 1 INR appreciation against the USD would negatively impact SRF by
c.INR150-200mn).
Net Sales 45,234 47,394 51,439 58,688 67,737
Sales Growth (%) 0.7 4.8 8.5 14.1 15.4
EBITDA 9,728 9,694 9,810 12,656 14,790
Diluted EPS Growth (%) 42.0 19.8 -7.7 44.2 26.7
ROIC (%) 11.6 11.7 10.6 15.2 18.7
ROE (%) 17.0 17.3 14.0 17.7 19.1
Dividend Yield (%) 0.6 0.7 0.6 0.9 1.2
Certification.

SRF Ltd 28 September 2017

Other Operating Income 693 824 870 957 1,053 Reserves & Surplus 27,045 31,242 35,309 41,176 48,607
Personnel Cost 3,863 4,338 4,707 5,130 5,592 Total Loans 21,297 19,774 17,774 12,774 8,774
Other Expenses 9,551 10,294 11,561 11,790 14,268 Def. Tax Liab. / Assets (-) 2,523 2,840 2,840 2,840 2,840
EBITDA Growth 35.6% -0.4% 1.2% 29.0% 16.9% Gross Fixed Assets 70,083 75,977 79,977 82,977 86,977
Depn. & Amort. 2,750 2,834 2,879 3,319 3,479 Intangible Assets 49 49 49 49 49
EBIT 6,979 6,860 6,931 9,337 11,311 Less: Depn. & Amort. 29,950 32,784 35,663 38,982 42,461
Other Income 175 730 560 761 1,148 Capital WIP 2,117 3,393 4,000 1,000 1,000
Finance Cost 1,305 1,018 889 575 395 Investments 1,649 1,959 1,959 1,959 7,959
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 6,711 8,381 6,342 7,236 8,351
Taxes 1,551 1,422 1,849 2,667 3,378 Cash & Bank Balances 3,892 961 5,907 9,775 5,918
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 115 143 143 143 143
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 4,428 4,937 4,937 4,937 4,937
Reported Net Profit 4,299 5,150 4,753 6,857 8,686 Current Liab. & Prov. 12,789 15,143 17,060 18,470 19,859
Diluted EPS Growth 42.0% 19.8% -7.7% 44.2% 26.7% Source: Company, JM Financial
Total Dividend + Tax 678 744 687 990 1,255

Depn. & Amort. 2,750 2,834 2,879 3,319 3,479 Asset Turnover (x) 0.9 0.9 0.9 1.0 1.1
Net Interest Exp. / Inc. (-) -175 -730 -560 -761 -1,148
Inc (-) / Dec in WCap. 4,809 -1,277 4,606 -318 -768
RoE 17.0% 17.3% 14.0% 17.7% 19.1%
Others 0 0 0 0 0
Taxes Paid -1,551 -1,422 -1,849 -2,667 -3,378 Key Ratios
Free Cash Flow 6,957 84 7,679 6,097 6,249 ROIC 11.6% 11.7% 10.6% 15.2% 18.7%
Inc (-) / Dec in Investments -1,076 -1,276 -607 3,000 0 ROE 17.0% 17.3% 14.0% 17.7% 19.1%
Others -553 7 0 0 -3,000 Net Debt/Equity (x) 0.6 0.5 0.3 0.0 0.0
Investing Cash Flow -6,354 -7,162 -4,607 0 -7,000 P/E (x) 20.5 17.1 18.5 12.8 10.1
Inc / Dec (-) in Capital 1,045 -209 0 0 0 P/B (x) 3.2 2.8 2.5 2.1 1.8
Dividend + Tax thereon -678 -744 -687 -990 -1,255 EV/EBITDA (x) 10.6 10.8 9.9 7.0 5.8
Inc / Dec (-) in Loans -3,052 -1,523 -2,000 -5,000 -4,000 EV/Sales (x) 2.2 2.2 1.9 1.5 1.2
Others 175 730 560 761 1,148 Debtor days 41 50 41 41 41
Financing Cash Flow -2,509 -1,746 -2,127 -5,229 -4,106 Inventory days 53 63 44 44 44
Inc / Dec (-) in Cash 2,819 -2,931 4,946 3,868 -857 Creditor days 72 77 86 89 87
Opening Cash Balance 1,073 3,892 961 5,907 9,775 Source: Company, JM Financial
Closing Cash Balance 3,892 961 5,907 9,775 8,918


SRF Ltd 28 September 2017

FY18E FY19E Target
EPS (INR) EPS (INR) Price SRF Limited
4-Apr-16 101.5 1,450 2500
13-May-16 94.4 -7.0 1,380 -4.8
2000 B B B B
9-Aug-16 138.6 46.8 1,600 15.9 B
B B
13-Nov-16 104.8 -24.4 139.7 1,760 10.0 1500
13-Feb-17 96.5 -7.9 139.6 -0.1 1,680 -4.5
1000
23-May-17 91.3 -5.4 135.5 -2.9 1,680 0.0
9-Aug-17 82.8 -9.3 119.4 -11.9 1,670 -0.6 500
0
Target Price SRF Limited

UPL Ltd | BUY

A true Indian MNC
UPL has seen significant revenue growth over the past few years, making it outperform its Mehul Thanawala
global peers, owing to 1) its balanced presence across geographies, product segments and
Pramod Krishna
crops; 2) its robust presence in high-growth countries such as Brazil and India (totalling 40% pramod.krishna@jmfl.com | Tel: (91 22) 61781074
of revenues); 3) its presence across the value chain (R&D, registrations, manufacturing and Alok Ranjan
marketing) with minimal dependence on outsourcing and 4) leveraging its global marketing Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
potential by launching the right products at the right time in a falling commodity price
scenario. With global agrochemical players continuing to guide for near-term weakness, we
expect UPL to continue outperforming the market. We highlight that UPL is in for a number
of tailwinds in the coming quarter due to reversal of GST destocking, higher cotton acreages,
a normal monsoon in India, improvement in agri-commodity prices in Brazil, higher sugar Recommendation and Price Target
beet acreages in Europe, higher cotton acreages in North America and increased acceptance Current Reco. BUY
of Glufosinate globally. We value UPL at 16x P/E and have a BUY rating on the stock, with a Previous Reco. BUY
Current Price Target (12M) 950
TP of INR 950. Upside/(Downside) 23.4%
Key growth triggers and strengths: (i) UPL has the approval and registration to Previous Price Target 950
Change 0.0%
indigenously manufacture 2 new products in the market (both combination products)
named Mancozeb and Azoxystrobin; this could be a driver for revenue growth. (ii) The Key Data UPLL IN
company entered the biologicals segment in India, Africa, RO Asia and plans to introduce Current Market Price INR770
this in LATAM in FY18. For this, UPL will partner existing smaller players that manufacture Market cap (bn) INR391.2/$6.0
products with strong sales potential. Biologicals is the fastest-growing segment within Free Float 70.7%
agrochemicals and is expected to reach USD 10bn in market size by 2020 (from USD 4bn Shares in issue (mn) 508.04
currently). (iii) Herbicides became the largest segment for UPL (32% of revenues) in FY17. 3-mon avg daily val (mn) INR968.1/US$14.7
With growing weed resistance globally (weeds have developed resistance to 23 of 26 52-week range 903/584
known herbicide sites of action), the need for quality herbicides is increasing. UPL has a Sensex/Nifty 31,160/9,736
INR/US$ 65.7
strong herbicide portfolio with products such as Lifeline and Interline in the US (weeds
have become resistant to Paraquat and these UPL products are a substitute for Paraquat)
Price Performance
and Shagun in India (targeting Phalaris minor in wheat). % 1M 6M 12M
Absolute -7.6 6.1 12.6
Recent management commentary: (i) Management gave guidance of 12-15% revenue Relative* -6.2 -0.5 2.2
growth, 50-75bps improvement in margins, 20-22% tax rate, 90-110 days working * To the BSE Sensex
capital and INR10bn of capex for the full-year FY18. Revenue growth is likely to be driven
by increased sugar beet acreages in Europe, the replacement of Paraquat with
Glufosinate globally and an increase in cotton acreage in India and USA. (ii) Management
expects commodity prices to remain depressed in FY18, thereby continuing to benefit
generics companies. (iii) Global industry consolidation could result in merged companies
focusing on consolidation/restructuring over the next 2-3 years, which could benefit
companies such as UPL and allow it to capture further market share.
Revise TP to INR 950; maintain BUY: We value UPL at 16x FY19E EPS (peer average) and
forecast FY17-19 revenue/earnings CAGR of 16%/22%. We roll forward to Sep18 to
arrive at a TP of INR 950. Key risks to our call are (i) currency fluctuations, especially a fall
in the BRL, (ii) a rise in crude prices/technical prices and (iii) climatic vagaries.

Net Sales 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291
Sales Growth (%) 16.2 16.1 14.9 16.2 17.2
EBITDA 23,950 29,852 37,290 44,430 53,356
Diluted EPS Growth (%) -23.3 71.3 17.2 26.9 25.7
ROIC (%) 17.6 21.1 23.3 24.4 26.5
ROE (%) 17.9 27.3 25.8 26.3 26.2
Dividend Yield (%) 0.6 0.5 0.8 0.8 0.8
Certification.

UPL Ltd 28 September 2017

Net Sales 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291 Shareholders Fund 58,881 73,158 90,599 1,13,410 1,43,094
Sales Growth 16.2% 16.1% 14.9% 16.2% 17.2% Share Capital 857 1,014 1,014 1,014 1,014
Other Operating Income 0 0 0 0 0 Reserves & Surplus 58,024 72,144 89,585 1,12,396 1,42,080
Total Revenue 1,40,482 1,63,118 1,87,389 2,17,794 2,55,291 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 67,805 78,162 89,197 1,03,670 1,21,519 Minority Interest 438 330 1,129 2,141 3,414
Personnel Cost 14,335 16,269 17,802 20,690 24,253 Total Loans 48,230 61,398 56,400 53,900 56,400
Other Expenses 34,392 38,835 43,100 49,004 56,164 Def. Tax Liab. / Assets (-) -5,093 -6,701 -6,701 -6,701 -6,701
EBITDA 23,950 29,852 37,290 44,430 53,356 Total - Equity & Liab. 1,02,456 1,28,186 1,41,427 1,62,751 1,96,208
EBITDA Growth 1.6% 24.6% 24.9% 19.1% 20.1% Gross Fixed Assets 60,723 69,504 77,807 89,788 1,01,304
Depn. & Amort. 6,756 6,716 6,074 7,092 7,808 Intangible Assets 7,636 7,517 7,517 7,517 7,517
EBIT 17,194 23,136 31,216 37,338 45,548 Less: Depn. & Amort. 26,272 32,987 34,844 37,427 40,343
Other Income 3,157 4,436 2,712 3,386 3,814 Capital WIP 3,125 6,333 6,333 6,333 6,333
Finance Cost 7,041 7,351 7,309 6,844 6,844 Investments 1,603 2,050 2,050 2,050 2,050
PBT before Excep. & Forex 13,311 20,222 26,620 33,881 42,518 Current Assets 1,17,954 1,44,685 1,60,657 1,85,313 2,26,004
Excep. & Forex Inc./Loss(-) -1,291 -808 0 0 0 Inventories 37,866 41,559 51,339 59,670 69,943
Taxes 1,648 1,888 4,525 5,897 7,400 Cash & Bank Balances 11,892 28,940 27,525 33,438 51,014
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 4,558 3,444 3,444 3,444 3,444
Assoc. Profit/Min. Int.(-) 974 253 989 1,203 1,463 Other Current Assets 12,637 14,175 14,175 14,175 14,175
Reported Net Profit 9,398 17,273 21,106 26,781 33,655 Current Liab. & Prov. 62,312 68,916 78,092 90,823 1,06,657
Diluted Share Cap. (mn) 509.4 509.2 509.2 509.2 509.2 Net Current Assets 55,642 75,769 82,564 94,489 1,19,348
Diluted EPS (INR) 20.6 35.4 41.4 52.6 66.1 Total Assets 1,02,456 1,28,186 1,41,427 1,62,751 1,96,208
Diluted EPS Growth -23.3% 71.3% 17.2% 26.9% 25.7% Source: Company, JM Financial
Total Dividend + Tax 2,140 2,170 3,665 3,970 3,970

Depn. & Amort. 6,756 6,716 1,857 2,582 2,916 Asset Turnover (x) 1.3 1.3 1.3 1.3 1.3
Net Interest Exp. / Inc. (-) 7,041 7,351 7,309 6,844 6,844
Inc (-) / Dec in WCap. -5,342 -4,687 -8,211 -6,012 -7,282
RoE 17.9% 27.3% 25.8% 26.3% 26.2%
Others -1,371 -2,648 -1,690 -2,364 -2,792
Taxes Paid -4,092 -1,888 -4,525 -5,897 -7,400 Key Ratios
Free Cash Flow 6,765 13,195 13,056 17,053 23,288 ROIC 17.6% 21.1% 23.3% 24.4% 26.5%
Inc (-) / Dec in Investments 332 -447 0 0 0 ROE 17.9% 27.3% 25.8% 26.3% 26.2%
Others -7,405 1,480 1,500 2,174 2,602 Net Debt/Equity (x) 0.6 0.4 0.3 0.2 0.0
Investing Cash Flow -16,610 -10,838 -6,803 -9,807 -8,914 P/E (x) 38.0 22.2 18.9 14.9 11.9
Dividend + Tax thereon -2,134 -3,153 -3,665 -3,970 -3,970 EV/EBITDA (x) 18.2 14.5 11.5 9.5 7.6
Inc / Dec (-) in Loans 9,568 13,168 -4,998 -2,500 2,500 EV/Sales (x) 3.1 2.6 2.3 1.9 1.6
Others -5,333 -7,351 -7,309 -6,844 -6,844 Debtor days 133 127 125 125 125
Financing Cash Flow 2,101 2,821 -15,972 -13,314 -8,314 Inventory days 98 93 100 100 100
Inc / Dec (-) in Cash 1,794 17,049 -1,416 5,913 17,577 Creditor days 124 134 136 137 138
Opening Cash Balance 10,098 11,892 28,940 27,525 33,438 Source: Company, JM Financial
Closing Cash Balance 11,892 28,940 27,525 33,438 51,014


UPL Ltd 28 September 2017

FY18E FY19E Target
EPS (INR) EPS (INR) Price UPL Ltd. B
27-Nov-16 44.9 53.6 750 1000 B
26-Jan-17 44.1 -1.8 53.5 -0.2 750 0.0
900
B B
800
2-May-17 45.8 3.9 53.7 0.4 925 23.3
700
31-Jul-17 41.4 -9.6 52.6 -2.0 950 2.7 600
500
400
300
200
100
0
Target Price UPL Ltd.

28 September 2017 India | Colourants | Sector Report
Colourants
Selective focus to add colour to business
The colourants industry has seen a notable transition globally with the manufacturing base Mehul Thanawala
shifting from developed countries to Asia. Among Asian economies, India and Chinas mehul.thanawala@jmfl.com | Tel: (91 22) 66303063
colourants industries have been major beneficies of this transition, becoming preferred Alok Ranjan
Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
suppliers to the global market. The transition was driven by the favourable factors such as
low labour, energy and regulation costs in these countries. In the last decade, we also saw a Pramod Krishna
gradual transition from basic to specialty colourants chemicals on account of better margins
and differentiation index of specialty colourants. The colourants industry is one of most
polluting specialty chemicals industries, and thus, with reduced environmental arbitrage
between India and China, and skilled employee costs favouring India in the long term, we
believe the Indian specialty colourants industry looks stronger in the medium-to-long term. In
this section, we present a detailed analysis on the Indian dyes and pigments industry and
identify the high-value product groups (high-performance pigments and effect pigments)
driving industry growth and enhancing overall margins.
Growth in end-use industries boosting Indian colourants: Dyes and pigments are
predominantly used in paints, coatings and textiles. The paints, coatings and textiles
industries are expanding, with oders from rapidly-growing end-use industries such as
automobiles, construction and fashion. We believe the govt.s increased focus on housing
will drive organic and inorganic pigments as these pigments (used in paints & coatings)
are intrinsically linked to the growth of construction industry. End-use industries will
benefit from strong economic growth and rising per capita income as well as increased
discretionary spending.
Exports another key driver: Indias colourants industry is highly fragmented, with several
small companies in the commodities segment resulting in low profit margins. This has led
to increased focus on high-performance pigments for value-added applications, largely
catering to international markets. The industry has been a net exporter of dyes and
pigments with exports constituting c.80% of domestic consumption. Despite the positive
trade balance, the import value (INR/kg) for nearly 14 of 17 product groups is higher than
the export. Thus, with increased penetration of new technology and focus on R&D, we
believe there is enough room for Indian companies to foray into high-value colourants.
Reduced environmental arbitrage between India and China: The colourants industry is the
most polluting among speciality chemicals. Environmental crackdowns in China led to the
shutdown of 375 polluting facilities in 2014, across manufacturing segments including
dyes and textiles. Increasing regulatory compliance in China has forced small players out
of the market. With excess capacity (67% utilisation) and compliance with international
quality and environmental standards, we believe the Indian dyes and pigments industry
will benefit in the short and long term. Import substitution between India and China will
drive short-term benefits and increased sourcing diversification by importers will drive
long-term benefits.
Focus on high-margin HPPs & effect pigments to boost margins: HPPs and effect
pigments lead to better performance, high margins and low environment impact. Indian
pigment companies are moving from commodity pigments such as azo, blue and green
pigments to HPPs and effect pigments, which is leading to improved margins. Sudarshan
Chemicals is the only Indian company to operate in both these high-value pigments.
Increased R&D focus: Indian specialty chemicals companies are focussing on providing
colour solutions rather than merely supplying colourants. This is leading to an increased
focus towards providing integrated solutions to customers. Since structural factors favour JM Financial Research is also available on:
India, we believe there will soon be newer technologies in the Indian market along with
increased R&D investments by domestic firms. S&P Capital IQ and FactSet
Key concerns: The key concerns faced by players in the colourants segment are 1)
increasing commoditisation, which is eroding margins, 2) poor availability of feedstock Please see Appendix I at the end of this
such as naphthalene and toluene, 3) Low spending on R&D to alleviate environmental
concerns and 4) high compliance costs related to the REACH registration. Certification.

Colourants 28 September 2017
1. Colourants
1.1Introduction
It is difficult to say when colour itself was first developed, since even pre-historic caves have
colour paintings; however, those were natural colours. The first synthetic colour was
developed in 1856, when Perkins developed the first synthetic dye. This led to the birth of
the European dyestuff industry, with these dyes being used as textile substrates.
Colours add aesthetics to a variety of products (textiles, leather, paper, food, paints,
cosmetics, data storage, medical diagnostics, etc.) and make them look attractive, increasing
their perceived value. While dyes and pigments per-se are basic chemicals, there are niches
such as environment-friendly colourants and high-performance pigments, which give certain
characteristics or performance enhancements and can be classified as specialty chemicals. In
this report, we provide broad coverage of the colourants industry with special focus on
specialty chemicals. Paints companies such Asian Paints are outside the purview of this report
and the focus is only on dyes and pigments that are used to make masterbatches.
1.2Types of Colourants
Colourants are broadly classified into dyes and pigments.
Exhibit 49. Classification of colourants
Source: FICCI-TSMG, JM Financial
Dyes: Dyes are aromatic organic compounds made primarily from Benzene, Toluene,
Textiles, a major end-use industry,
Naphthalene, Anthracene and Cyanuric chloride. Dyes are soluble substances that pass
constitutes c.75% of the demand
colour to the substrate. Their end-use industries include textiles, leather, paper, plastics,
for dyes
printing inks and edibles.
Exhibit 50. Dyes - Classification and its Application

Group Application
Azo Printing inks
Exhibit a. Pigment application by segment
Acid direct dyes Leather and woolen products
Disperse dyes Synthetic fibers, Polyester
Ingrain dyes Cotton
Solvent dyes Colour organic solvents, hydrocarbon fuels, waxes, lubricants, plastics
Reactive dyes Cellulosic fiber and fabric
Sulphur dyes Cotton, cellulosic fiber
VAT dyes Cotton, cellulosic and blended fiber

Almost 75% of the dyes are used in the textile industry while c.20% are used in industries
such as paper, adhesives, art supplies, food and beverages, ceramics, construction, cosmetics,
glass and paints. Thus, the dye industry is primarily dependent on the textile industry. Dyes
can be further classified based on various criteria but the one used by the International Trade
Commission (ITA) is the most followed. According to ITA, there are nearly 12 types of dyes.
Among them, some are considered toxic/harmful and have been banned. Exhibit 50 Exhibit b.Pigments and its categories
illustrates the major types of dyes and its applications. Types Categories
Pigments: Pigments are insoluble substances usually in powdered or granular form that
Organic Quinacridone, Phthalocyanine, and
improve the appearance or impart colour to the substrate by reflecting only certain light Azo
rays due to selective wavelength absorption. Pigments are used to impart colour, hide the
substrate, efface the existing colour and enhance the strength of the paint film. Pigments Inorganic Chromium oxide, Carbon black,
Cadmium pigments, Iron oxide &
are mainly used in industries such as paints & coatings (c.43%), plastics (c.27%) and
Titanium pigments
others such as inks, automobiles, emulsion paints and distempers (30%). Specialty Thermochromic, Fluorescent, Metallic
& Light interference pigments
Exhibit 51. Classification of pigments
Source: Company, Industry, JM Financial
Exhibit c. Organic pigments consumption by

industry
5%
15%
20% 60%
Printing Inks Coatings Plastics Others

Source: IHS, JM Financial
Pigments can be broadly classified into organic and inorganic.

Organic Pigments (based on hydro-carbons): Organic pigments display brighter colours,
Exhibit d. Volume split of inorganic colour
higher colour strength, little toxicity and high resistance to weather and heat. Azo, pigments
phthalocyanines (blue and green) and high-performance pigments (HPPs) are common
organic pigments.. In terms of the global market share, azo/phthalocyanines/HPP & others
accounts for 55%/20%/25% respectively.
Inorganic Pigments: Inorganic pigments are resistant to sunlight and chemical exposure
and are more durable than organic pigments. Despite the durability, inorganic pigments
are cheaper than organic pigments due to higher toxicity, duller colour and low tinting
strength. For instance, export values of organic/inorganic pigments are c. INR
700/Kg/c.INR 100/Kg. (source: MoC&F).
Specialty pigments / High-Performance Pigments (HPPs): Specialty pigments/HPPs are

characterised by effectiveness (technical performance), economy (benefits to the
customer), ecology (environmental and toxicological safety) and higher margin (benefits
to the companies). HPPs are used in automotive and engineering plastics segments. HPPs
Source: IHS, JM Financial
can be further segmented as organic and inorganic/metallic HPPs. As of 2015, organic
HPPs, which are more environment-friendly, had a higher market share that is expected to
grow rapidly over the next five years. Companies focussing on HPPs will be preferred.
Different HPP types & categories are listed below. High performance pigments and
effect pigments Better
-Organic HPPs: Benzimidazolones, Quinacridones, Perylenes, Diketopyrrolopyrrole (DPP), realisations and lower competition
Isoindolinone and Isoindoline
-Inorganic HPPs: Bismuth Canadate, Cadmium Sulfide, Mixed Metal Oxides and Bismuth
Ferrite.

2. Global colourants market - overview

The global colourants market transitioned from developed countries to Asia: Until the early
90s, USA, Europe and Japan used to contribute c.70% to global colourants production, but
this has significantly fallen to below 50%, owing to factors such as increasing technology
transfer, increased skilled labour costs, energy costs, effluent treatment costs, regulatory costs
and growth in end-product demand.
Global colourants market expected to grow at a moderate pace: The global market for
colourants (comprising dyes, pigments and intermediates) was estimated at USD 45.2bn in
FY15 and is expected to grow at a moderate pace of c.5% CAGR over FY15-FY20 to reach Global growth rate will remain
USD 57.7bn. Growth has picked up marginally from an average CAGR of c.4.2% during moderate at c.5% CAGR over
FY10-FY15. Of the USD 45.2bn, the pigment industrys market size was c.USD 23bn. Growth FY15-20
in colourants will be led by the increasing use of specialty colourants, especially food
colourants and hair colourants, and by the increasing demand for environment-friendly
colourants. (source: markets&markets, PR Newswire, Meghmani annual reports).
Exhibit 52. Global colourants market (in USD bn)
Source: FICCI-TSMG, Markets & Markets, JM Financial
Driven by increased purchasing power in developing markets and high-growing end-use

segments such as food and hair colourants: On the back of strong growth in China and India,
including infrastructure (and construction) growth, there is strong derived demand growth
for pigments. Similarly, textiles being a labour intensive business moved to Asian countries
and led to strong demand growth for dyes. Growth is also driven by rapidly expanding
segments such as food (8.4% CAGR over FY10-15) and hair colour (9% CAGR over FY10-
15). Food and hair colour segments have seen rapid growth on account of increasing
acceptance of processed food as well as changing fashion trends. There is a high link
between colour and taste and most processed food loses its colour due to processing; thus
colourants are facing increasing demand. Within this, the use of natural colourants is
increasing. Some natural food colourants are carotenoids (used in dairy products margarine
and cheese), chlorophyll, anthocyanin (used for grapes, blueberries, and cranberries) and
turmeric (added to mustard).
High-performance colourants and niche products to drive future: Globally, textiles and
construction industries will remain the major end-use industries for colourants, but demand
for high-performance/environment-friendly colourants could grow faster. HPPs include both
organic high-performance pigments and inorganic effect pigments. The global HPP demand
was estimated at 162.8 kilo tons in 2015 with a market size of USD 4.56bn (Source: Globally, Food and hair colour will
Sudarshan chemicals). The market is expected to post 3.81% CAGR in value terms and record high growth rate of 9%
volume CAGR of 5.2% over FY15-FY21. Certain segments such as food colours and hair and 21% over FY17-FY21
colour could record CAGR of c.9% and 21% over FY17-FY21. Apart from that, the use of
colourants in electronics (in LCDs, LEDs, solar cells and laser dyes) could also be an interesting
niche. Therefore, companies that focus on high-performance/environment-friendly products
could grow at a faster rate.
3. Indian colourants market - overview

Soon after the development of synthetic dyes in 1856, the Indian textile industry started
using them. However, organic dyes were imported until the 1940s. India slowly emerged as
the supplier of dyestuffs and intermediates, particularly in reactive, acid, direct and VAT dyes
as well as some key intermediates.
Indian colourants industry is growing at a double-digit pace: The value of the Indian
colourants industry was estimated at c.USD 5.4bn in FY15 (Source: FICCI-TSMG). The industry
recorded a CAGR of 10% over FY10-FY15 and is expected to continue to grow at 10-11%
over FY15-FY20. The colourants industry is expected to record c.1.6x GDP growth led by high
expected growth in end-use industries (1.86x GDP growth rate), low per-capita consumption
th
(1/8 of Europe) and increasing production of high-value pigments such as HPPs and effect
pigments. Growth is also likely to be led by exports, with nearly three product groups (azo
dyes, pigment emulsion and reactive dyes) contributing c.72% of the exports by value
(source: MoC&F). The installed capacity and production of colourants, as of CY16, was 452kT
and 304kT, respectively (Exhibit 54). Exports contributed nearly 80% to total domestic
consumption and c.15% to the global market, which reflects the growth potential of the
overall industry.
Exhibit 53. Indian colourants Industry market size (USD bn)
Indian colourants industry

expected to grow at 11% i.e. c.1.6
10% x India GDP growth rate over
FY15-FY20E
Exhibit 54. Indian dyes and pigments - Capacity and production (In 000MT)
Impact of consolidation Only

67% of the capacity utilised
Source: Ministry of chemicals and Fertilisers, JM Financial

Low per capita consumption & high growth in end-use industries key strengths: The per
capita consumption of dyes in India/Europe/Japan is 50/400/300 grams, highlighting a
domestic opportunity. Textiles is the largest consumer of dyestuffs and Asia is the fastest-
growing textile market, with a CAGR of c.4% over FY10-15, followed by North America,
Latin America and Western Europe. Therefore, it is not surprising that Asia leads dyestuff
production both in terms of volume and value with a 42% share in global production;
US/Europe contribute c.24% and 22%, respectively. Apart from textiles, printing inks, paints
and plastics are the other segments driving growth in dyes/dye intermediates.
On the pigments side, growth will be mainly driven by rising demand for paints and coatings
from the construction industry, which is expected to grow at c.6% over FY15-20. Other
segments driving demand for pigments are plastics, inks and cosmetics, which are expected
to post low-double-digit growth in the domestic market and high-single-digit growth globally
over FY15-20.
Exhibit 55. Dyes - Per capita consumption (In grams)
India has the lowest per capita

dyes consumption among major
chemical producing countries
Exhibit 56. Growth rate of end-user industry (CAGR %, CY16-CY20E)
High expected growth rate of end-

use industry a key reason for
high expected growth rate of
colourants

Exhibit 57. Indian dyes and pigments Exports and Imports (000 'MT)
Source: Ministry of chemicals, JM Financial
Will lead to import substitution: During CY13-CY16, we imports rose by a meagre 1% YoY
due to import substitution through a reduction in exports from a CAGR of 9% YoY (CY09-
CY16) to 5% YoY (CY13-CY16). The major reason is environmental crackdowns in China
that led to a shutdown of several domestic dye and pigment companies. This drove increased Indian colourants industry saw
domestic sales by Indian companies, leading to a modest reduction in exports. The import substitution due to reduced
implementation of stricter environmental laws in China could provide Indian manufacturers Chinese exports
an opportunity to increase exports and gain global market share. Additionally, the export and
import data (Source: Ministry of Chemicals & Fertilisers) of 17 dye and pigment product
groups highlights that in the past 3 years, the growth rate of only two exported products is
lower in comparison with 12 imported product groups, highlighting the reduction in imports.
Increased focus on high-margin HPPs and effect pigments to drive margins: Since 80% of
dyestuffs are commodities, duplication is easy and leads to reduced margins. However, in
recent years, we have seen increasing attempts by major global manufacturers to move Companies with presence in HPPs
towards the manufacture of specialised VAT dyes, HPPs, etc., which functions as specialty and effect pigments will be the
products. Gradually, companies are focussing on the higher end of other dyes (eg. reactive most attractive
dyes segment). The overall trend leans towards innovation, production range, quality and
environment-friendly products.

4. Industry players and competitive analysis

The Indian colourants industry is highly fragmented and characterised by the co-existence of
a small number of players in the organised sector (c.50 units) and a large number of small
manufacturers (c.1000 units) in the unorganised sector. However, environmental concerns
leading to the ban on certain dyes and pigments by developed countries, the set-up of
effluent treatment plants and decreasing profitability have resulted in increasing
consolidation among major industry players. However, this has led to low capacity utilisation
at 67% owing to the exit of smaller players.
Major domestic dyes and pigment companies are Atul Limited, Aarti Industries, Bodal
chemicals, Kiri dyes, Clariant India, Sudarshan Chemicals, Meghmani Organics Ltd, Clariant
India, Golchha pigments and Heubach India. Major global players are BASF SE (Germany),
Clariant AG (Switzerland), Huntsman corporation (US), Lanxess AG (Germany) and Solvay SA
(Belgium).
The following table provides a snapshot of the major domestic and global colourants
companies in India.
Exhibit 58. Snapshot of colourants companies (FY11-FY16)

Revenue (FY16, Avg. Revenue
Company Country Avg. EBITDA,% Avg. ROCE% Avg. ROE%
in mn INR) Growth (CAGR %)
Aarti Industries India 27796 14% 16% 25% 20%
Atul Limited India 25946 11% 14%% 22% 19%
Aksharchem India India 1877 17% 10% 26% 39%
Bodal Chemicals India 9099 10% 12% 5% 19%
Clariant India India 981 3.4% 9% 17.3% 13.5%
Meghmani Organics India 13559 5% 17% 8.4% 6.5%
Sudarshan Chemical India 13973 14% 11% 16% 18%
Asahi Songwon India 2239 4% 14% 17.6% 15.7%
Lily Group China 13627 12% 18% 18% 24%
Zhejiang Longs China 124211 16% 25% 17% 17%
Zhejiang Runtu China 43673 15% 28% 15% 14%
BASF SE Germany 796972 -2% 15% 18% 18.5%
Lanxess AG Germany 70275 0.12% 11% 9% 10%
Clariant AG Switzerland 398873 6% 12% 13% 7%
Solvay SA Belgium 161893 12% 16% 7% 5%
Huntsman corporation US 648824 4% 10% 9.5% 15%

Among Indian companies engaged in the manufactur of dyes (Exhibit 58), Aksharchem is the
leader in terms of superior financials compared to its competitiors. Aksharchem is the largest Aksharchem is a true colourant
exporter of Vinyl Sulphone in India with c.45% share in exports of this product. However, it is company with presence in both
also the largest player globally for CPC green pigments, with a global market share of c.10%. dyes (60%) and pigments (40%)
Within the pigments segment, we have tried to identify the companies present in the high-
margin organic pigment segment vs. inorganic. Companies with a product-mix tilted towards
high-margin organic pigments such as high-performance pigments and effect pigments will
see better margins. There is an excess capacity for the manufacture of pigments worldwide,
resulting in lower margins, and thus companies that manufacture and trade in high-margin
organic pigments such as high-performance pigments and inorganic effect pigments will be
highly attractive. HPPs and effect pigments are specialty pigments that can be used in
automobiles and cosmetics.

Exhibit 59. High-value pigments - Indian companies

High value pigments Company % Revenue
Organic pigments ( including HPP & effect pigments) Sudarshan chemicals 70%
Organic pigments Meghmani Organics 34%
Organic Pigments Asahi Songwon 100%
Organic Pigments Clariant India 90%

Source: Company, Industry, Bloomberg, JM Financial
Exhibit 60. Presence of Indian companies across the pigment chain

Pigment Group Pigment type Companies
Inorganic Pigments
Titanium Dioxide
Black & White Sudarshan Chemicals is the only
Carbon Black
Indian company making both
Iron Oxide Sudarshan Chemicals high-performance pigments and
Colour Chrome Oxide effect pigments
Chroma Pigments
High performance inorganic
Effect Pigments Sudarshan Chemicals
pigments
Organic Pigments
Azos Sudarshan Chemicals,

Low-Medium Value Sudarshan Chemicals, Meghmani
Pthalos Organics, Asahi Songwon, Clariant,
Aksharchem
High-value High Performance Pigments Sudarshan Chemicals
Exhibit 59 and 60 highlight the dominance of Sudarshan Chemicals in the pigments value
chain. It is the only company that operates across various categories of organic pigments.
Sudarshan Chemicals is the only Indian company to manufacture and sell effect pigments,
which are specialty pigments used in cosmetics. Sudarshan Chemicals garnered c.90% of its
revenue from pigments in FY17. Other notable companies are Meghmani Organics, Asahi
Songwon and Clariant India.
Exhibit 61. Competitive dynamics of Indian colourants companies
Aarti Industries delivered the best

revenue growth and EBITDA
margin over FY11-FY16
Exhibit 61 highlights the companies with high average revenue growth and EBITDA margins
(%), namely Aarti, Atul, Sudarshan Chemicals and Aksharchem.

Exhibit 62. Valuation metrics for colourants companies based on consensus

Company Country EPS P/E EV/EBITDA
FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E
Aarti Industries India 30.8 38.5 42.6 54.9 16.7x 19.9x 19.9x 15.4x 9.8x 11.8x 12.1x 9.9x
Atul Limited India 92.5 109 123 153.9 16.6x 21.9x 18x 14.4x 10.4x 12.8x 11.8x 9.2x
Aksharchem India* India 22.8 71 67 77.3 7.2x 10.2x 11.4x 9.9x 4.6x 6.6x 7.8x 6.6x
Bodal Chemicals India 7.9 11.8 12.2 14.8 9.3x 13.6x 14.8x 12.2x 6x 8.4x 8.2x 6.9x
Clariant India India 23.4 10.6 NA NA 25.8x 57x NA NA 14.8x 18.6x NA NA
Meghmani Organics India 3.24 3.45 4.9 5.8 7.0x 10.8x 16.4x 13.8x 4.04x 4.8x 7.4x 6.4x
Sudarshan Chemical India 10.1 14.9 16.7 22.4 9.4x 23.3x 22.5x 16.8x 6.3x 13.8x 12.3x 9.7x
Asahi Songwon* India 17.1 20.4 23.8 28.7 7.65x 13.6x 14.1x 11.7x 5.5x 8.0x 8.4x 7.1x
Lily Group China 0.76 NA NA NA 43x NA NA NA 29.8x NA NA NA
Zhejiang Longs China 0.62 0.69 0.78 0.88 14.8x 15.6x 13.83x 12.3x 12.8x 13.8x 12.2x 11.4x
Zhejiang Runtu China 0.86 1.11 1.27 1.43 18.5x 18x 15.74x 14x 11.4x 11.4x 10.4x 9.8x
BASF SE Germany 4.42 5.83 5.9 6.32 20x 14.4x 14.2x 13.3x 9x 7.8x 7.5x 7x
Lanxess AG Germany 2.1 3.84 4.42 5.2 29.7x 16.4x 14.23x 12.1x 7.6x 7.4x 7.2x 7.1x
Clariant AG Switzerland 0.78 1.24 1.4 1.5 22.5x 18.5x 16.5x 15.2x 10.6x 9.6x 8.9x 8.3x
Solvay SA Belgium 6 8.3 4.4 5.2 18.3x 14.8x 14x 13x 8.6x 7.6x 7.6x 7x
Huntsman corporation US 1.6 2.24 2.1 1.97 14.1x 12x 12.8x 13.6x 7.9x 8x 7.5x 6.1x
Source: Company, JM Financial, * - Standalond data for these companies
The valuation chart of Indian colourant companies, along with their global peers, indicates
that barring Aarti and Atul, others are still trading at a discount. Aksharchem, Bodal and
Meghmani have the lowest valuation multiples.
Exhibit 63. Expected EPS growth (FY17-FY19E) Vs. ROE (FY19E)
Sudarshan is expected to deliver

the highest ROE with best EPS
growth
5. Outlook
With tremendous manufacturing capacity and sustained demand for high-performance
products, the colourants segment is an attractive proposition for investors. Moreover, with
reduced regulatory arbitrage, Indian companies will be favoured over their global peers. The
key challenge for the industry will be to continuously innovate as product duplication is easy.
Thus, companies focusing on new product development or improving product mix by
through HPPs and effect pigments will be successful in the long run.

Aarti Industries | Not Rated

A perfect example of platform leveraging
Aarti Industries (Aarti) is a leading benzene-based integrated specialty chemicals Mehul Thanawala
manufacturer with over 200 products, several clients globally and c.50% of revenue coming
Alok Ranjan
from exports. It is a highly diversified chemicals player with 3 business segments: specialty Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
chemicals (c.82% of FY17 revenue), pharmaceuticals (c.14% of FY17 revenue) and home & Pramod Krishna
personal care (c.6% of FY17 revenue). The key end-use industries for its products are pramod.krishna@jmfl.com | Tel: (91 22) 61781074
polymers additives (composite materials), dyes & pigments, pharma intermediates and agro
chemicals, with revenue contribution of 15%-25%. Aartis business model is based on raw
material prices plus margins, but it has consistently improved its margins with improving
isomer balancing and product mix. It has also continuously increased the capacity of high-
value-add processes, resulting in an improved product mix, and thus, better financial results.
Management has guided for moderate volume and earnings growth of 10% in FY18.
Unique positioning in Indias chemicals space: Aarti has a unique advantage vs. peers as
its specialty chemicals segment is completely based on benzene and its derivatives. As a
result of its expertise in the benzene value chain, it ranks among top3/top4/top2/top2
globally in chlorination/nitration/ammonolysis/hydrogenation and is the only player in
India with Halex chemistry, leading to a 25%-40% market share across products.
High focus on specialty chemicals and improving product mix enhancing margins: The Key Data ARTO IN
Current Market Price INR875
company is focussed on improving its product mix by enhancing the capacity of high-
Market cap (bn) INR71.9/$1.1
value-add processes with a mix of debottlenecking and greenfield capex. Its gross block
Free Float 43.7%
expanded 3x over FY12-17, resulting in increased capacities of high-value-add processes Shares in issue (mn) 82.12
such as hydrogenation (700 TPM in FY10 to 3000 TPM in FY17), PDA (250 TPM in FY15 Diluted share (mn) 82.12
to 1000 TPM in FY17), nitrochlorobenzene (60,000 TPA to 75,000 TPM), chlorination 3-mon avg daily val (mn) INR46.6/US$0.7
52-week range 1040/582
(65,000 TPA to 110,000 TPA). The resulting effect of this capex resulted in improved Sensex/Nifty 31,160/9,736
EBITDA/PAT margin (15%/5% in FY12 to 20%/10% in FY17). INR/US$ 65.7
Ethylation unit and Toluene value chain to drive revenue growth high focus on Price Performance
agrochemicals: Aarti commenced commercial production of ethylation, which is used in % 1M 6M 12M
herbicides and other agrochemicals. The company plans to diversify into the toluene Absolute 4.0 13.4 43.5
product chain (nitro toluene and derivatives) through a greenfield facility at Jhagadia. Relative* 5.4 6.8 33.1
* To the BSE Sensex
Aarti will leverage its existing customer relationships to cross-sell toluene derivatives for
their downstream use in the products serviced by the company (optical brighteners,
agrochemicals, pigments and pharmaceuticals). Management has guided for a similar
product margin as its benzene chain of products.
Multi-year contract with global agrochemicals company will improve margins: Aarti will
supply a high-value agrochemical intermediary from FY20 to a global agrochemicals
company. The project is expected to generate revenues of c.INR 40bn equally spread out
over the contract term of 10 years. Aarti will invest c.INR 4bn in this project, driving both
revenue growth and improved EBITDA margin as this project will have a higher EBITDA
margin of c.40% compared with its current EBITDA margin of c.20%.

Y/E March FY13A FY14A FY15A FY16A FY17A
Net sales 20,963 26,325 29,080 30,066 31,617
Sales growth (%) 25.3 25.6 10.5 3.4 5.2
EBITDA 3,612 4,015 4,657 5,723 6,518 JM Financial Research is also available on:
EBITDA (%) 17.2 15.3 16.0 19.0 20.6
Adjusted net profit 1,344 1,624 2,032 2,569 3,158
EPS (Rs) 15.2 18.3 23.2 30.8 38.5 Thomson Publisher & Reuters
EPS growth (%) 12.8 20.9 26.7 32.7 24.7 S&P Capital IQ and FactSet
ROIC (%) 14.9 14.9 16.0 15.6 16.0
ROE (%) 20.0 20.0 21.5 23.9 25.3
PE (x) 57.7 47.7 37.7 28.4 22.8
Price/Book value (x) 102.5 89.0 76.3 64.1 52.7 report for Important Disclosures and
Source: Company data, JM Financial. Note: Valuations as of 27/Sep/2017 Certification.

Aarti Industries 28 September 2017

Y/E March FY13A FY14A FY15A FY16A FY17A Y/E March FY13A FY14A FY15A FY16A FY17A
Net sales (Net of excise) 20,963 26,325 29,080 30,066 31,617 Share capital 443 443 443 417 411
Growth (%) 25.3 25.6 10.5 3.4 5.2 Other capital 0 0 0 0 0
Other operational income Reserves and surplus 7,120 8,265 9,721 10,956 13,214
Raw material (or COGS) 11,219 15,033 18,321 17,678 17,433 Networth 7,563 8,708 10,164 11,373 13,625
Personnel cost 654 788 937 1,207 1,523 Total loans 8,045 9,421 10,674 12,332 14,357
Other expenses (or SG&A) 5,478 6,489 5,165 5,458 6,144 Minority interest 43 43 59 521 639
EBITDA 3,612 4,015 4,657 5,723 6,518 Sources of funds 15,651 18,171 20,897 24,226 28,621
EBITDA (%) 17.2 15.3 16.0 19.0 20.6 Intangible assets 1 1 0 4 21
Growth (%) 44.9 11.1 16.0 22.9 13.9 Fixed assets 11,997 14,400 16,480 20,426 26,138
Other non-op. income 38 110 55 59 37 Less: Depn. and amort. 5,262 6,138 6,812 7,971 9,189
Depreciation and amort. 828 885 820 985 1,225 Net block 6,737 8,262 9,669 12,460 16,970
EBIT 2,821 3,239 3,892 4,797 5,329 Capital WIP 687 1,174 1,930 3,130 2,695
Less: Finance Costs -954 -1,178 -1,380 -1,170 -1,173 Investments 954 1,172 1,392 413 470
Pre tax profit 1,868 2,061 2,513 3,627 4,156 Def tax assets/- liability -709 -847 -1,027 -1,271 -1,554
Taxes 538 540 610 946 881 Current assets 13,382 16,092 16,387 13,663 14,856
Add: Exceptional items 0 0 35 0 0 Inventories 4,622 6,061 5,517 4,952 5,714
Add: Extraordinary items 0 0 0 0 0 Sundry debtors 4,290 4,432 4,390 5,234 5,247
Less: Minority Interest -10 -5 -17 -112 -118 Cash & bank balances 124 149 337 290 285
Assoc. Profit/Min. Int.(-) 24 109 139 0 0 Other current assets 255 296 323 185 239
Reported net profit 1,344 1,624 2,059 2,569 3,158 Loans & advances 4,092 5,155 5,820 3,002 3,371
Adjusted net profit 1,344 1,624 2,032 2,569 3,158 Current liabilities & prov. 3,193 5,005 4,395 4,167 4,811
Margin (%) 6.4 6.2 7.0 8.5 10.0 Current liabilities 2,271 3,690 2,488 3,052 2,997
Diluted share cap. (mn) 443.00 443.00 443.00 416.60 410.60 Provisions and others 922 1,315 1,907 1,115 1,814
Diluted EPS (`) 15.17 18.33 22.94 30.83 38.45 Net current assets 10,189 11,087 11,992 9,496 10,044
Growth (%) 12.8 20.8 25.1 34.4 24.7 Others (net) -2,207 -2,679 -3,060 -2 -5
Total Dividend + Tax 8,470 10,703 3,588 1,237 1,171 Application of funds 15,651 18,171 20,897 24,226 28,621
Cash Flow Statement (INR mn)

Reported net profit 1,344 1,624 2,059 2,569 3,158
Depreciation and amort. 1,276 876 673 1,159 1,218 Key Ratios
-Inc/dec in working cap. -1,090 -163 -615 285 -830 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 10 0 16 462 118 BV/Share (`) 8.5 9.8 11.5 13.6 16.6
Cash from operations (a) 1,540 2,338 2,133 4,475 3,664 ROIC (%) 14.9 14.9 16.0 15.6 16.0
-Inc/dec in investments -19 -218 -220 979 -57 ROE (%) 20.0 20.0 21.5 23.9 25.3
Capex -3,721 -2,890 -2,835 -5,150 -5,294 Net Debt/equity ratio (x) 0.9 0.9 0.9 1.0 1.0
Others -877 -711 -101 2,165 276 Valuation ratios (x)
Cash flow from inv. (b) -4,616 -3,819 -3,156 -2,006 -5,075 PER 57.7 47.7 37.7 28.4 22.8
Inc/-dec in capital 8,787 10,224 2,986 -123 265 PBV 102.5 89.0 76.3 64.1 52.7
Dividend+Tax thereon -8,470 -10,703 -3,588 -1,237 -1,171 EV/EBITDA 23.4 21.3 18.6 14.8 13.1
Inc/-dec in loans 2,165 1,376 1,253 1,658 2,026 EV/Sales 4.0 3.3 3.0 2.8 2.7
Others 612 609 561 -2,815 287 Turnover ratios (no.)
Financial cash flow ( c ) 3,094 1,505 1,212 -2,517 1,406 Debtor days 75 61 55 64 61
Inc/-dec in cash (a+b+c) 19 24 189 -47 -5 Inventory days 80 84 69 60 66
Opening cash balance 106 124 149 337 290 Creditor days 74 90 50 63 63
Closing cash balance 124 148 337 290 285 Source: Company, JM Financial

Company Name 28 September 2017
Aksharchem Ltd | Not Rated

Colourful and expanding
Aksharchem (India) Ltd (Aksharchem) is one of Indias key players in the colourants industry. Mehul Thanawala
It operates across 20 countries and has been one of the prime beneficiaries of the slowdown
Alok Ranjan
in Chinas chemical industry. Aksharchem primarily manufactures two products: Vinyl Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
Suphone, a dye intermediate used to make dyes for the textile industry (c.60% of revenues) Pramod Krishna
and CPC Green, a pigment used to make green colour used in the paint and automobile pramod.krishna@jmfl.com | Tel: (91 22) 61781074
industries (c.40% of revenues). In Dec16, Aksharchem announced a capex plan of INR
1.75bn to expand its current CPC Green facilities and add H-Acid and specialty chemicals.
Management expects these projects to be commissioned in 12-18 months from the date of
announcement. We do not have a rating on stock.
Vinyl Sulphone (60% of revenues): Aksharchem is one of Indias largest manufacturers of

Vinyl Sulphone with a capacity of 650 TPM, which forms c.6.5% of the global capacity.
The slowdown in Chinas chemical industry over the past 1-1.5 years has helped
Aksharchem significantly expand its margins (from 10-12% in FY15 to c.30% in FY17).
Given that Chinese companies are facing increasing wage and effluent treatment costs,
management estimates sustainable margins of 15-20% for Vinyl Sulphone. Based on our
discussions with the companys management we know that the company plans to
increase capacity utilisation (from the current level of 73%).
CPC Green (c.40% of revenues): In FY15, Aksharchem acquired the CPC Green business
Key Data ADCH IN
of Asahi Songwan; CPC Green is a product that generates steady margins of 15-20% Current Market Price INR732
annually and does not face competition from China. Aksharchem recently expanded its Market cap (bn) INR6.0/$0.1
capacity from 120TPM to 160TPM and, as per management, has 8% of the global market Free Float 32.5%
share. The company intends to expand this capacity to 200TPM through a brownfield Shares in issue (mn) 8.20
project and add another 150TPM at a new greenfield site at Dahej. 3-mon avg daily val (mn) INR16.0/US$0.2
Expansion plans going forward: Aksharchem recently announced capex of INR 1.75bn
Sensex/Nifty 31,160/9,736
for: (i) the expansion of its CPC Green facility from 160TPM to 200TPM in Phase I and to INR/US$ 65.7
350TPM in Phase II as well as backward integration into CPC Blue Capex of INR 850mn;
(ii) the manufacture of H Acid a dye intermediary for INR 250mn and (iii) the Price Performance
manufacture of value-added precipitated silica (as part of specialty chemicals) for INR % 1M 6M 12M
Absolute 3.6 -0.2 57.0
650mn. Management expects a timeline of 12-18 months from the date of Relative* 5.0 -6.7 46.6
announcement (Dec16) to execute these projects. * To the BSE Sensex
Financials: Aksharchem reported revenue/EBITDA/ PAT of INR 2,504mn/INR 795mn/INR

519mn, respectively, for FY17 thereby implying a CAGR of 14%/71%/85% during FY15-
FY17. We do not have a rating on the stock.

Net Sales 902 1,390 1,921 1,784 2,504
Sales Growth 85.7 54.1 38.2 -7.1 40.3
EBITDA 61 327 273 322 795
JM Financial Research is also available on:
EBITDA Margin 6.4 22.6 13.7 17.2 30.6
38 212 152 166 519
Adjusted Net Profit
Diluted EPS Growth -197.7 427.8 -45.9 3.9 211.9 S&P Capital IQ and FactSet
ROIC 19.5 60.1 25.3 17.9 39.3
ROE 25.0 83.0 28.8 21.3 47.4 Please see Appendix I at the end of this
P/E (x) NA 19.2 35.6 34.3 11.0 report for Important Disclosures and
P/B (x) 22.8 11.3 8.0 6.7 4.3 Disclaimers and Research Analyst
EV/EBITDA (x) 65.5 11.8 21.1 17.9 7.0
Certification.

Aksharchem Ltd 28 September 2017

Profit & Loss (` mn) Balance Sheet (` mn)
Net sales (Net of excise) 902 1,390 1,921 1,784 2,504 Share capital 50 50 73 73 73
Growth (%) 85.7 54.1 38.2 -7.1 40.3 Other capital
Other operational income 56 59 77 93 93 Reserves and surplus 120 291 641 777 1,265
Raw material (or COGS) 706 812 1,258 1,093 1,254 Networth 170 341 715 850 1,338
Personnel cost 17 39 58 63 75 Total loans 140 92 240 311 289
Other expenses (or SG&A) 174 270 410 399 472 Minority interest
EBITDA 61 327 273 322 795 Sources of funds 309 432 954 1,161 1,627
EBITDA (%) 6.4 22.6 13.7 17.2 30.6 Intangible assets 0 0
Growth (%) Fixed assets 265 325 793 851 952
Other non-op. income 1 1 22 13 58 Less: Depn. and amort. 110 119 245 287 334
Depreciation and amort. 12 12 39 42 47 Net block 155 206 548 564 619
EBIT 50 317 256 293 806 Capital WIP 0 4 18 40 89
Add: Net interest income -16 -11 -33 -34 -30 Investments 1 77 183 225 432
Pre tax profit 34 306 224 259 776 Def tax assets/- liability 0 -23 -67 -83 -110
Taxes -4 89 75 93 257 Current assets 275 406 699 706 976
Add: Extraordinary items 0 -16 12 0 0 Inventories 37 109 182 160 182
Less: Minority interest Sundry debtors 82 134 210 228 301
Reported net profit 38 201 160 166 519 Cash & bank balances 5 7 9 8 36
Adjusted net profit 38 212 152 166 519 Other current assets 0 0 0 0 2
Margin (%) 4.0 14.6 7.6 8.9 20.0 Loans & advances 151 156 299 310 454
Diluted share cap. (mn) 4.95 4.95 7.31 7.31 7.31 Current liabilities & prov. 129 246 444 307 378
Diluted EPS 7.68 40.52 21.91 22.76 71.00 Current liabilities 125 232 396 306 377
Provisions and others 4 14 47 2 1
Growth (%)
(2.0) 4.3 (0.5) 0.0 2.1 Net current assets 146 161 255 399 598
Total Dividend + Tax 29 31 31 31 47 Others (net) 7 8 16 15 0
Source: Company, JM Financial Application of funds 309 432 954 1,161 1,627
Cash flow statement (` mn) Key Ratios

Reported net profit 38 201 160 166 519 BV/Share (`) 34.2 68.9 97.7 116.3 183.0
Depreciation and amort. 11 10 126 42 47 ROCE (%) 19.5 60.1 25.3 17.9 39.3
-Inc/dec in working cap. 124 -18 16 -87 -24 ROE (%) 25.0 83.0 28.8 21.3 47.4
Others 0 0 0 0 0 Net Debt/equity ratio (x) 0.8 0.0 0.1 0.1 -0.1
Cash from operations (a) 173 193 302 121 542 Valuation ratios (x)
-Inc/dec in investments 0 -76 -107 -42 -207 PER NA 19.2 35.6 34.3 11.0
Capex -2 -64 -483 -80 -150 PBV 22.8 11.3 8.0 6.7 4.3
Others -165 5 -109 -57 -146 EV/EBITDA 65.5 11.8 21.1 17.9 7.0
Cash flow from inv. (b) -168 -136 -698 -179 -503 EV/Sales 4.4 2.8 3.0 3.2 2.2
Inc/-dec in capital 26 2 244 0 16 Turnover ratios (no.)
Dividend+Tax thereon -29 -31 -31 -31 -47 Debtor days 33 35 40 47 44
Inc/-dec in loans -1 -48 148 71 -22 Inventory days 15 29 34 33 27
Others -3 23 36 17 42 Creditor days 65 104 115 102 110
Financial cash flow ( c ) -7 -55 398 57 -11 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) -1 2 2 0 28
Opening cash balance 5 5 7 9 8
Closing cash balance 4 7 9 8 36

Asahi Songwon | Not Rated

The blue colour specialist
Asahi Songwon (Asahi) is a key player in the pigments industry and one of the largest Mehul Thanawala
producers of CPC Blue crude (60% of revenues) and its derivatives in India with a combined
Alok Ranjan
capacity of 11,400TPA. Over the years, Asahi has increased focussed on the development of
high-performance pigments through forward integration and enhancing productivity to
Pramod Krishna
become more competitive and earn higher margins. Asahis pigment portfolio consists of 4
derivatives of CPC Blue Crude: Beta Blue 15.3 and 15.4, and Alpha Blue 15.0 and 15.1. The
company has recently developed four new products (Phthalocyanine Blue 15.0 and 15.1,
Orange 64 and Yellow 12) which it expects to commercialise in FY18. We do not have a
rating on the stock.
CPC Blue Crude (60% of revenues): The global pigments market is valued c.USD 26bn
and is forecast to record a CAGR of 3.8% until 2023 (Research and Markets). Within the
organic pigments space, India has emerged as a global hub for Phthalo pigments (green
and blue). Pthalocyanine pigments are mainly used in the printing inks industry (around
40%) while the rest finds application across paints, plastics, textiles and paper industries.
Asahi, with c.5% of the worlds organic pigment production, has evolved as one of the
leading manufacturers of blue pigments in India. Asahi earns nearly 72% of its revenue
from exports. In FY17, the company commenced debottlenecking of its CPC Blue Key Data ASAH IN
capacity, which led to an increase in capacities by 13% and additional revenue generation Current Market Price INR305
of INR 330mn for FY17. The company aims to increase capacity utilisation going forward. Market cap (bn) INR3.7/$0.1
Free Float 26.4%
Shares in issue (mn) 12.27
Forward integration to blue pigments: Asahis production process is vertically integrated,
wherein CPC Blue Crude is the primary raw material for the production of blue pigments.
The companys product portfolio primarily consists of 2 variants of Beta Blue (15.3 and 52-week range 366/191
15.4) primarily used in the printing ink industry, and in FY16, the company added Alpha Sensex/Nifty 31,160/9,736
Blue to its portfolio. In FY17, the company developed 2 new variants of Beta Blue - 15.0 INR/US$ 65.7
for water based applications (inks, paint and textiles) and 15.1 for plastic applications. In
addition to pthalocyanines, the company recently forayed into the Azo pigment space
Price Performance
(wherein China is the global leader) with the development of Orange 64 and Yellow 12.
% 1M 6M 12M
Financials: Asahi reported revenue/EBITDA/PAT of INR 2.5bn/INR 463mn/INR 250mn in Absolute -2.9 15.7 33.2
FY17 and has recorded a CAGR of 4%/14%/20% over FY15-FY17. The companys focus Relative* -1.6 9.1 22.8
* To the BSE Sensex
towards increasing the share of value-added products (pigments), cost efficiencies and
higher utilisations has resulted in strong margin expansion from 13% in FY14 to 18% in
FY17. Key risk to its growth: (i) a slowdown in end-user industries such as plastics,
housing and FMCG, (ii) crude price fluctuations partly mitigated by vertical integration
and (iii) exchange rate fluctuations (72% of revenues generated from exports).
Exhibit 1: Financial Summary (INR mn)

Y/E March FY13 FY14 FY15 FY16 FY17
Net sales 2,322 3,020 2,395 2,239 2,571
Sales growth (%) -0.7 30.1 -20.7 -6.5 14.8
EBITDA 249 387 359 390 463
EBITDA (%) 10.7 12.8 15.0 17.4 18.0
Adjusted net profit 103 146 173 210 250 JM Financial Research is also available on:
EPS (INR) 8.4 11.9 14.4 17.1 20.4 Bloomberg - JMFR <GO>,
EPS growth (%) -54.0 40.9 21.3 18.6 19.2 Thomson Publisher & Reuters
ROCE (%) 8.3 9.9 11.5 14.4 14.8 S&P Capital IQ and FactSet
ROE (%) 8.6 11.2 14.7 15.4 16.0
PE (x) 35.8 25.4 20.9 17.7 14.8 Please see Appendix I at the end of this
Certification.

Asahi Songwon 28 September 2017

Profit & Loss (INR mn) Balance Sheet (INR mn)
Y/E March FY13 FY14 FY15 FY16 FY17 Y/E March FY13 FY14 FY15 FY16 FY17
Growth (%) -0.7 30.1 -20.7 -6.5 14.8 Other capital
EBITDA 249 387 359 390 463 Sources of funds 1,815 2,006 1,607 1,787 1,905
Growth (%) -42.8 55.5 -7.3 8.6 18.9 Fixed assets 1,299 1,563 1,253 1,303 1,382
Depreciation and amort. 53 67 61 67 71 Net block 1,028 1,227 945 932 939
EBIT 200 326 307 359 403 Capital WIP 174 70 8 58 102
Less: Finance Costs -49 -63 -48 -45 -28 Investments 143 159 179 257 257
Pre tax profit 151 263 260 314 375 Def tax assets/- liability -128 -190 -162 -174 -177
Taxes 48 95 87 104 125 Current assets 1,050 1,325 991 954 1,145
Add: Extraordinary items 0 -23 0 0 0 Inventories 238 320 288 194 281
Diluted EPS (Rs) 8.44 11.89 14.42 17.10 20.39 Current liabilities 261 398 215 188 297
Growth (%) -54.0 40.9 21.3 18.6 19.2 Provisions and others 187 189 139 51 63
Total Dividend + Tax 33 52 50 29 44 Net current assets 602 738 637 714 785
Source: Company, JM Financial Others (net) 3 2 0 0 0
Application of funds 1,823 2,006 1,607 1,787 1,905
Cash flow statement (INR mn) Key Ratios

Depreciation and amort. 52 65 -30 64 71 ROIC (%) 8.3 9.9 11.5 14.4 14.8
-Inc/dec in working cap. 48 -137 52 -103 -92 ROE (%) 8.6 11.2 14.7 15.4 16.0
Others 0 0 0 0 0 Net Debt/equity ratio (x) 0.4 0.4 0.2 0.1 0.0
-Inc/dec in investments -50 -17 -19 -79 1 PER 35.8 25.4 20.9 17.7 14.8
Capex -302 -160 374 -100 -123 PBV 3.1 2.9 3.1 2.7 2.4
Others -70 5 53 25 21 EV/EBITDA 16.7 10.9 10.7 9.9 8.1
Cash flow from inv. (b) -422 -171 408 -154 -101 EV/Sales 1.8 1.4 1.6 1.7 1.5
Inc/-dec in loans 206 96 -280 -1 -87 Inventory days 37 39 44 32 40
Others 22 65 -268 12 3 Creditor days 115 112 94 72 95
Financial cash flow ( c ) 195 109 -599 -18 -129 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) -23 12 4 -1 0

Atul Limited | Not Rated
Well-diversified inching closer to global players
Atul limited (Atul) is a well-diversified chemical company with products falling under two Mehul Thanawala
broad segments: life science chemicals (30% of FY17 revenue) and performance & other
Alok Ranjan
chemicals (70% of FY17 revenue). These two broad segments cater to several end-use Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
industries such as agriculture, textiles, construction, tyres, fragrances and pharmaceuticals. Pramod Krishna
The major sub-segments (c.85% of FY17 revenue) driving Atuls growth are aromatics (FY17 pramod.krishna@jmfl.com | Tel: (91 22) 61781074
value/volume growth: 16%/23%), colours (FY17 value/volume growth: 3%/7%), crop
protection (FY17 value/volume growth: 8%/23%) and polymers (FY17 value/volume growth:
7%/18%). The aromatics segment is one of Atuls strongest segments on account of its
market leadership in its 3 flagship products. Polymers is another major sub-segment driven by
high growth in end-use industries. In this report, we will focus on the two major sub-
segments aromatics and polymers which contributed c.29%/26% to FY17 revenue.
Key Data ATLP IN
Highly-diversified business model: Atul is a highly-diversified chemical company with Current Market Price INR2239
about 900 products and 450 formulations, 6000 customers across 68 countries and 27 Market cap (bn) INR66.4/$1.0
end-use industries. The life science chemicals segment (c.30% of FY17 revenue) consists Free Float 57.0%
of 3 sub-segments (aromatics-I, crop protection, APIs/API Intermediates and floras) and
caters to the pharmaceutical and agriculture industries. Performance and other chemicals 3-mon avg daily val (mn) INR58.4/US$0.9
(c.69% of FY17 revenue) consists of four sub-segments, (aromatics-II, bulk intermediates, 52-week range 2588/1880
colours and polymers) and caters to end-use industries such as fragrance and personal Sensex/Nifty 31,160/9,736
INR/US$ 65.7
care, cosmetic, dyes and tyres (growing 6% annually). Management plans to augment
growth by (i) deepening its presence in Africa and South America and (ii) introducing new Price Performance
products and formulations. % 1M 6M 12M
Absolute 10.5 -1.7 -3.0
Product market leadership a key driver for the aromatics segment: The aromatics segment Relative* 11.9 -8.2 -13.4
mainly caters to fragrance and personal care industries. The aromatics segments * To the BSE Sensex
sustained growth has taken place on the back of market leadership of its three flagship
products, p-cresol, p-AA & p-AA1 that have 42%/75%/90% domestic market share, and
the opportunity to participate in the global fragrance and personal care market valued at
c.USD 34bn with a 4% growth rate. Management is focussing on (i) increasing
manufacturing efficiencies, (ii) establishing capacity for fragrance intermediates and (iii)
introducing new products through its Kilo lab.
High growth in end-use industries and brand focus will drive the polymers business: The
polymers sub-segment (96 products and 300 formulations) accounted for 26% of FY17
revenue and expanded (7%/18% in value/volume) on account of c.6% growth in the
domestic epoxy market, which was driven by (i) 20% growth in paints & coatings (40%
of epoxy applications) and (ii) high growth in other end-use industries - 12% in civil &
construction, 8% in adhesives). Additionally, growth will be supported by (i) emerging
segments such as defence, wind and recreation, (ii) conversion of commodity capacity to
specialty, (iii) expansion plans of specialty resins and intermediates for sulphones and (iv)
brand (Lapox) leveraging.

Net sales 20,429 24,578 26,564 25,946 28,339
Sales growth (%) 14.0 20.3 8.1 -2.3 9.2
EBITDA 2,491 3,637 4,013 4,592 5,095
EBITDA (%) 12.2 14.8 15.1 17.7 18.0 JM Financial Research is also available on:
Adjusted net profit 1,161 2,192 2,407 2,742 3,230 Bloomberg - JMFR <GO>,
ROIC (%) 13.6 21.1 20.9 18.8 17.3
ROE (%) 16.5 25.7 24.2 20.7 18.0
Certification.

Atul Limited 28 September 2017

Growth (%) 14.0 20.3 8.1 -2.3 9.2 Other capital 0 0 0 0 0
Personnel cost 1,346 1,497 1,633 1,909 2,001 Total loans 3,259 3,124 2,346 2,797 1,450
Other non-op. income 166 363 103 389 572 Less: Depn. and amort. 6,711 7,112 7,680 658 1,608
Depreciation and amort. 514 583 603 661 954 Net block 5,069 5,703 5,137 7,496 10,236
EBIT 2,144 3,417 3,513 4,320 4,712 Capital WIP 652 591 1,121 1,804 590
Less: Finance Costs -334 -334 -257 -275 -252 Investments 667 628 661 3,819 4,314
Pre tax profit 1,810 3,083 3,256 4,045 4,461 Def tax assets/- liability -273 -371 -461 -658 -1,014
Taxes 583 881 994 1,302 1,227 Current assets 8,812 10,610 11,238 11,409 12,034
Less: Minority Interest -1 3 2 -1 -4 Cash & bank balances 149 211 366 220 283
Assoc. Profit/Min. Int.(-) -82 -13 143 0 0 Other current assets 175 374 256 1,045 798
Reported net profit 1,198 2,192 2,407 2,742 3,230 Loans & advances 1,307 1,313 2,039 1,452 1,463
Adjusted net profit 1,161 2,192 2,407 2,742 3,230 Current liabilities & prov. 4,455 4,797 4,623 4,498 4,430
Diluted share cap. (mn) 296.80 296.80 296.80 296.80 296.80 Provisions and others 1,539 1,546 1,901 1,347 1,055
Growth (%) 1,120.8 88.8 9.8 13.9 17.8 Others (net) 388 305 -279 -402 -468
Total Dividend + Tax 8,516 11,044 3,972 1,593 1,518 Application of funds 10,860 12,669 12,792 18,970 21,262

Reported net profit 1,198 2,192 2,407 2,742 3,230
Depreciation and amort. 493 401 568 -7,022 950 Key Ratios
-Inc/dec in working cap. -34 -1,196 -394 314 -575 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 14 1 -2 -32 128 BV/Share (`) 25.4 32.0 35.0 54.4 66.2
Cash from operations (a) 1,672 1,398 2,578 -3,998 3,733 ROIC (%) 13.6 21.1 20.9 18.8 17.3
-Inc/dec in investments 82 39 -32 -3,159 -494 ROE (%) 16.5 25.7 24.2 20.7 18.0
Capex -1,116 -974 -531 3,979 -2,476 Net Debt/equity ratio (x) 0.3 0.2 0.1 -0.1 -0.2
Others 73 -197 -253 -756 -56 Valuation ratios (x)
Cash flow from inv. (b) -960 -1,133 -816 64 -3,026 PER 57.3 30.3 27.6 24.2 20.6
Inc/-dec in capital 8,320 10,796 2,469 4,609 1,799 PBV 88.1 70.1 64.0 41.2 33.8
Dividend+Tax thereon -8,516 -11,044 -3,972 -1,593 -1,518 EV/EBITDA 27.7 18.9 16.9 14.2 12.4
Inc/-dec in loans -199 -136 -778 452 -1,348 EV/Sales 3.4 2.8 2.6 2.5 2.2
Others -355 180 675 320 422 Turnover ratios (no.)
Financial cash flow ( c ) -749 -203 -1,606 3,788 -644 Debtor days 63 65 61 62 67
Inc/-dec in cash (a+b+c) -38 62 156 -146 63 Inventory days 65 64 57 60 55

Clariant Chemicals | Not Rated
Diversified specialty player with a strong global foothold
Clariant Chemicals (India) Ltd (CCL) is a part of the Swiss-based Clariant Group, which is Mehul Thanawala
globally one of the largest specialty chemicals companies (second largest pigments company)
Alok Ranjan
with sales of USD 6bn in CY16. CCL primarily operates in two segments: (i) Plastics and Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
coatings (93% of revenues) which include pigments, additives and masterbatches and (ii) Pramod Krishna
specialty chemicals (7%) which include dyes, synthetic resins and coatings. Over the past few pramod.krishna@jmfl.com | Tel: (91 22) 61781074
years, CCL has strategically reorganised its portfolio through divestment of low-margin
businesses such as (i) textiles, paper and emulsion (TPE), (ii) leather services and (iii) industrial
and consumer specialties (ICS), and instead focused on expanding inorganically (through the
acquisition of M/s Plastichemixs masterbatch business and Lanxess Indias carbon black
business) and organically. We do not have a rating on the stock.
Plastics and coatings segment - P&C (93% of revenues): Under this segment, CCL
primarily operates in pigments (58% of P&C), masterbatches (40% of P&C) and additives.
It is one of the worlds leading providers of organic pigments that are used in paints,
Key Data CLRC IN
plastics, fibres, detergents and cosmetics. The key innovative variants of pigments that
Clariant manufactures are (i) dissolver dispersible pigments for paints, (ii) halogen-free Market cap (bn) INR13.2/$0.2
pigments for plastics, (iii) guaranteed limits of halogen in pigments for the electronic Free Float 15.8%
industry and (iv) pigments with higher brightness and contrast for LCD and W-OLED Shares in issue (mn) 23.08
displays. The companys masterbatch portfolio is a concentrated mixture of pigments Diluted share (mn) 23.08
and/or additives dispersed in a polymer medium. In FY15, the company acquired M/s 52-week range 840/560
Plastichemix Industries masterbach business which helped it improve its customer base Sensex/Nifty 31,160/9,736
and product portfolio in the segment. CCL has 4 manufacturing facilities in India for the INR/US$ 65.7
manufacture of masterbatches and has tie-ups with players in the fibre, consumer
Price Performance
durables, packaging and healthcare industries. CCL is also a leading provider of non-
% 1M 6M 12M
halogenated flame retardants, waxes and polymer additives. Absolute -2.1 -15.4 -24.3
Relative* -0.7 -22.0 -34.7
Specialty chemicals segment (7% of revenues): This segment includes performance * To the BSE Sensex
chemicals for personal care and industrial applications, oil and mining services and
products that are used in textile, paper, emulsion and leather industries. CCL has entered
supply agreements with Archroma India Pvt Ltd and Stahl India Pvt Ltd to manufacture
and supply products for textile and leather industries. In FY16, the company sold its low-
margin Industrial and Consumer Specialties business (ICS) to Clariant India Ltd, and
subsequently entered a job work agreement to process and supply job-work products.
Financials: CCL reported sales/EBITDA/PAT of INR 981mn/INR 67mn/INR 24mn in FY17.

Given that the company has undergone structural changes in the past 4-5 years, the
figures are not comparable with historical numbers. Key risks to its performance are a
slowdown in end-user industries, crude price/exchange fluctuations and regulatory risks.

Net sales 10,963 12,479 10,460 11,400 9,810
Sales growth (%) 12.0 13.8 -16.2 9.0 -13.9
EBITDA 1,370 1,209 245 643 671
EBITDA (%) 12.5 9.7 2.3 5.6 6.8
Adjusted net profit 921 545 -2,403 409 245 JM Financial Research is also available on:
EPS (Rs) 38.0 62.6 353.8 23.4 10.6 Bloomberg - JMFR <GO>,
EPS growth (%) -66.7 64.6 465.7 NA -54.7
ROIC (%) 19.7 10.7 -65.8 8.0 3.9 S&P Capital IQ and FactSet
ROE (%) 20.2 29.0 67.6 6.1 3.6
PE (x) 15.1 9.2 1.6 24.6 54.2
Price/Book value (x) 3.1 2.7 1.1 1.5 2.0
EV/EBITDA (x) 9.4 10.3 20.3 14.0 17.6
Certification.
Clariant Chemicals 28 September 2017

Growth (%) 12.0 13.8 -16.2 9.0 -13.9 Other capital
Personnel cost 906 1,012 979 1,062 906 Total loans 0 0 95 0 0
Other expenses (or SG&A) 2,159 2,549 2,031 2,281 2,077 Minority interest
EBITDA 1,370 1,209 245 643 671 Sources of funds 5,015 5,744 14,055 6,694 6,730
Growth (%) -9.5 -11.8 -79.7 162.1 4.3 Fixed assets 3,952 3,670 4,763 3,646 3,790
Other non-op. income 191 179 137 367 91 Less: Depn. and amort. 2,209 2,010 1,845 511 855
EBIT 1,345 1,153 50 510 367 Capital WIP 92 255 132 50 99
Less: Finance Costs -14 -18 -11 -7 -5 Investments 2,347 2,674 330 740 1,125
Pre tax profit 1,331 1,135 38 503 363 Def tax assets/- liability -54 -72 -104 -210 -180
Taxes 410 590 2,441 94 118 Current assets 4,033 4,527 14,612 4,575 4,673
Add: Extraordinary items 92 1,123 11,836 0 0 Inventories 1,623 1,456 1,634 1,421 1,556
Less: Minority interest Sundry debtors 1,483 1,692 1,606 1,766 1,730
Reported net profit 1,013 1,668 9,433 409 245 Cash & bank balances 143 226 10,115 289 318
Adjusted net profit 921 545 -2,403 409 245 Other current assets 34 76 41 101 63
Margin (%) 8.4 4.4 -23.0 3.6 2.5 Loans & advances 750 1,076 1,217 998 1,006
Diluted share cap. (mn) 26.66 26.66 26.66 17.47 23.06 Current liabilities & prov. 3,145 3,300 4,265 2,114 2,423
Diluted EPS (Rs) 38.00 62.55 353.82 23.42 10.61 Current liabilities 1,846 1,624 1,456 1,463 1,683
Growth (%) -66.7 64.6 465.7 -93.4 -54.7 Provisions and others 1,300 1,676 2,809 651 741
Total Dividend + Tax 640 1,248 4,479 210 692 Net current assets 888 1,227 10,347 2,461 2,249
Application of funds 5,015 5,744 14,055 6,694 6,730

Reported net profit 1,013 1,668 9,433 409 245 BV/Share (`) 188.1 215.4 523.6 383.2 291.8
Depreciation and amort. 118 -199 -166 -1,333 343 ROIC (%) 19.7 10.7 -65.8 8.0 3.9
-Inc/dec in working cap. -547 113 875 -2,100 211 ROE (%) 20.2 29.0 67.6 6.1 3.6
Others 0 0 0 0 0 Net Debt/equity ratio (x) -0.5 -0.5 -0.7 -0.2 -0.2
Cash from operations (a) 584 1,582 10,142 -3,024 799 Valuation ratios (x)
-Inc/dec in investments 319 -328 2,344 -410 -385 PER 15.1 9.2 1.6 24.6 54.2
Capex -117 118 -1,402 1,119 -178 PBV 3.1 2.7 1.1 1.5 2.0
Others -84 -369 -106 159 30 EV/EBITDA 9.4 10.3 20.3 14.0 17.6
Cash flow from inv. (b) 118 -578 836 869 -533 EV/Sales 1.2 1.0 0.5 0.8 1.2
Inc/-dec in capital 0 0 0 -36 0 Turnover ratios (no.)
Dividend+Tax thereon -640 -1,248 -4,479 -210 -692 Debtor days 49 49 56 57 64
Inc/-dec in loans 0 0 95 -95 0 Inventory days 54 43 57 46 58
Others -204 327 3,294 -7,366 454 Creditor days 176 156 216 104 144
Financial cash flow ( c ) -844 -921 -1,090 -7,706 -238 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) -142 83 9,888 -9,861 28
Opening cash balance 285 143 226 10,115 289
Closing cash balance 143 226 10,114 253 317

Meghmani Organics Ltd. | Not Rated

Sailing across the CPC value chain
Meghmani Organics Limited (MOL) operates in three major segments: pigments (8% global Mehul Thanawala
th
market share in Pthalocyanine), agrochemicals and basic chemicals (4 largest caustic chlorine
Alok Ranjan
player in India). MOL has vertically integrated facilities manufacturing CPC blue (upstream Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
product, also sold to other manufacturers) and final products (pigment blue and green). It Pramod Krishna
has a strong presence in exports with c.69%/61% of pigments/agrochemicals (227 exports pramod.krishna@jmfl.com | Tel: (91 22) 61781074
registrations in FY17 vs. 183 in FY16 in agrochemicals) revenue in FY17 coming from exports
to c.75 countries. MOL expects its pigment business to do well on the back of its improving
product mix and ramped-up Beta Blue plant. The domestic market will be driven by better Key Data MEGH IN
monsoons, which will drive the agrochemicals segment. Overall, MOL expects to deliver
better financial performance on the back of capacity expansion in high-margin businesses
Free Float 31.0%
coupled with improving capacity utilisation, a strong product base, improved demand Shares in issue (mn) 254.31
conditions and widening distribution channels. Diluted share (mn) 254.31
Vertically integrated in pigment segment (c.34% of FY17 revenue): MOL is a global scale 52-week range 89/34
producer of Phthalocyanines pigments, with capacity of 31,000 MTPA (c.8% of global Sensex/Nifty 31,160/9,736
capacity). MOLs product (pigment blue/green) is an organic pigment with better INR/US$ 65.7
performance and lower toxicity compared with inorganic pigments. Pigment
Price Performance
blue/pigment green (derived from CPC blue) have important properties: crystallising
% 1M 6M 12M
(brilliance and brightness) and non-crystallising non-flocculating (spread evenly)/non- Absolute 7.6 109.4 70.8
crystallising (maintain colour) and non-crystallising non-flocculating (spread evenly). These Relative* 8.9 102.8 60.4
are the three main properties required from a pigment and thus MOL can cater to a wide * To the BSE Sensex
range of applications. MOL has signed some long-term contracts recently. This coupled
with growth in end-use industries could improve utilisation, with management guiding
for better capacity utilisation (80% in FY18 vs. 65% in FY17). Additionally, the company
has c.70 overseas distributors leading to direct presence in export markets (US, Europe,
Indonesia and Dubai), which allows it to work closely with end-use customers.
Focus on agrochemicals segments (c.34% of FY17 revenue): In agrochemicals, MOL

makes products such as pesticide intermediates, technical grade pesticides and pesticides
formulations. MOL is trying to focus on relatively higher-margin contract manufacturing
(CRAMS) by entering into agreements with new customers. With 29 indigenously
developed technicals, the recent ban on the import of technicals will augur well for MOL.
Revenue growth to be driven by ongoing INR 5.4bn capex: MOL has undertaken capex of
INR 5.4bn, which will be completed over 2-3 years. Of the INR 5.4bn, c.INR 4bn will be
used to 1) set up a hydrogen peroxide project (25,000 TPA capacity), 2) expand its caustic
soda plant (increase by 50% to 240,000 TPA) and 3) increase its captive power plant
capacity from 60 MW to 90 MW. According to MOL, the first two projects are expected
to add INR 3bn by FY21. The remaining INR 1.4bn will be used in its CMS
(chloromethane) project, which is expected to add INR 1.2bn of revenue by FY19. The
end-products of these projects are used in pharma and agrochemicals industries.

Net sales 10,585 11,783 12,942 13,322 14,229
Sales growth (%) -0.4 11.3 9.8 2.9 6.8
EBITDA 1,852 1,959 2,031 2,608 2,888
Adjusted net profit 176 231 441 825 877 Bloomberg - JMFR <GO>,
ROIC (%) 4.4 6.1 9.4 11.5 10.5
ROE (%) 3.6 4.5 8.3 12.6 11.1
PE (x) NA 85.8 44.9 24.0 21.9 Please see Appendix I at the end of this
Certification.

Meghmani Organics Ltd. 28 September 2017

Growth (%) -0.4 11.3 9.8 2.9 6.8 Other capital 0 0 0 1,263 1,547
Personnel cost 488 575 725 579 648 Total loans 6,376 6,232 5,102 4,846 3,713
EBIT 1,234 1,218 1,348 2,095 2,105 Capital WIP 1,647 1,262 229 920 191
Pre tax profit 591 541 602 1,464 1,596 Def tax assets/- liability -202 -370 -471 -267 -285
Add: Exceptional items 0 0 -2 0 -38 Inventories 1,811 2,496 2,158 3,126 2,417
Add: Extraordinary items -9 -5 4 0 0 Sundry debtors 3,393 3,523 3,167 3,269 3,309
Less: Minority Interest -111 -127 -21 -288 -285 Cash & bank balances 99 373 156 110 102
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other current assets 182 216 176 691 1,245
Reported net profit 172 228 443 825 877 Loans & advances 1,528 1,586 1,290 315 349
Adjusted net profit 176 231 441 825 905 Current liabilities & prov. 2,698 3,497 3,341 3,200 3,013
Growth (%) -94.8 31.1 90.9 87.0 9.7 Others (net) -46 -149 144 96 58
Total Dividend + Tax 8,232 10,345 3,118 642 686 Application of funds 12,193 12,337 11,561 12,421 12,445

Reported net profit 172 228 443 825 877
Depreciation and amort. 3,880 1,696 1,135 4,501 5,256 Key Ratios
-Inc/dec in working cap. 189 -541 391 -724 524 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 229 127 20 -944 0 BV/Share (`) 2.0 2.0 2.2 3.0 3.4
Cash from operations (a) 4,471 1,510 1,990 3,658 6,657 ROIC (%) 4.4 6.1 9.4 11.5 10.5
-Inc/dec in investments -50 240 -233 233 -285 ROE (%) 3.6 4.5 8.3 12.6 11.1
Capex -4,347 -1,969 -1,024 -4,732 -4,955 Net Debt/equity ratio (x) 1.2 1.1 0.9 0.6 0.4
Others 107 432 483 -28 -629 Valuation ratios (x)
Cash flow from inv. (b) -4,290 -1,297 -775 -4,526 -5,869 PER NA 85.8 44.9 24.0 21.9
Inc/-dec in capital 8,320 10,278 3,009 1,876 966 PBV 39.5 38.3 36.0 26.2 22.7
Dividend+Tax thereon -8,232 -10,345 -3,118 -642 -686 EV/EBITDA 14.0 13.1 12.1 9.4 8.0
Inc/-dec in loans -594 -143 -1,130 -257 -1,132 EV/Sales 2.4 2.2 1.9 1.8 1.6
Others -16 271 -192 -156 56 Turnover ratios (no.)
Financial cash flow ( c ) -522 61 -1,432 822 -797 Debtor days 117 109 89 90 85
Inc/-dec in cash (a+b+c) -341 274 -217 -46 -8 Inventory days 62 77 61 86 62

Sudarshan Chemicals | Not Rated

Gearing up to become true global pigment leader
th
Sudarshan Chemicals Ltd. (Sudarshan) is globally the 5 largest pigment producer with a 5- Mehul Thanawala
6% market share. In India, Sudarshan is the market leader with a c.35% market share.
Alok Ranjan
Sudarshan has strong presence in pigments (which accounts for c.90% of revenue) and is the Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
only pigment company to manufacture all types of organic (azo, pthalos and other high- Pramod Krishna
performance pigments), inorganic and specialty (effect pigments and cosmetics) pigments. pramod.krishna@jmfl.com | Tel: (91 22) 61781074
Over the past 11 years, Sudarshan has increased the revenue contribution from organic
pigments (60% in FY05 to 75% in FY17), which are high-performance, high-margin and less
th
toxic. By 2020, Sudarshan aims to become the 4 largest player in the global pigment market
with sales of c.USD 220-240mn on the back of high export focus (45% revenue in FY16,
12% CAGR in exports market), improving product mix using HPPs and effect pigments and
high focus on R&D providing a pipeline of new products.
th
5 largest global pigment producer and domestic market leader: During the past 7 years,
th th
Sudarshan has improved its global rank in pigment producers from 20 to 5 and has also
become the domestic market leader (35% market share). It evolved from a local player in
the 1990s to a global player as a result of its 4-phase strategy. In Phase-III (2008-20), it is
th
targeting to become 4 largest global pigment producer. This transformation took place
on back of globalisation efforts (39% exports share in FY11 vs. 45% in FY16), continuous
investments in pigments resulting in the introduction of new products and a gradual shift
from classical azo pigments to HPP and effect pigments. To boost its exports market
share, it operates across Europe, North America, and China with sales teams and stocking
points to enable faster service. Thus, in Phase IV (after 2020), it aims to become the Key Data SCHI IN
global market leader in pigments. Current Market Price INR365
Free Float 29.4%
Focus on high-realisation HPPs and effect pigments: The Companys R&D team (located in
Sutarwadi, Pune) has nearly 50 scientists who have developed over 100 new products (in Diluted share (mn) 69.23
the past 7 years). These mainly include high-performance pigments, effect pigments and 3-mon avg daily val (mn) INR56.1/US$0.9
specialised azo pigments catering to automobile, engineering plastics, paints and 52-week range 459/261
cosmetics segments. This has led to Sudarshan becoming the only pearlescent effect INR/US$ 65.7
pigment producer in India (used in cosmetics). Management has focussed on high-value
products and improved exports share, which has supported improvement in its EBITDA Price Performance
margin (from c.8% in FY13 to c.13% in FY17), EPS (from c.INR 3 in FY13 to c.INR 15 in % 1M 6M 12M
Absolute -1.6 5.5 -5.0
FY17) and ROCE (from c.8% in FY13 to c.19% in FY17).
Relative* -0.2 -1.1 -15.4
Implementation of REACH Phase III will result in consolidation: REACH Phase III will be * To the BSE Sensex
implemented by June 2018, which will regulate all chemicals imported into the EU in
quantities of over 1 ton per annum (TPA). This will result in an increase in compliance
costs and may prevent smaller companies from supplying to the EU.
Key risks: A significant portion of Sudarshans revenue comes from exports. Therefore, a
strengthening INR is a key risk to its performance.

Net sales 8,729 11,186 12,182 14,093 15,226
Sales growth (%) 9.1 28.2 8.9 15.7 8.0
EBITDA 778 1,291 1,286 1,674 1,990
Adjusted net profit 220 351 544 699 1,034 Bloomberg - JMFR <GO>,
EPS growth (%) -34.4 59.2 -22.5 28.5 47.9 S&P Capital IQ and FactSet
ROIC (%) 9.6 10.0 13.4 14.4 18.0
ROE (%) 8.8 13.3 20.4 24.2 29.2
EV/EBITDA (x) NA 62.5 62.8 48.3 40.4 Disclaimers and Research Analyst
Certification.

Sudarshan Chemicals 28 September 2017

Growth (%) 9.1 28.2 8.9 15.7 8.0 Other capital 0 0 0 0 0
Personnel cost 740 797 940 1,034 1,111 Total loans 3,813 3,689 3,834 3,926 3,425
EBITDA 778 1,291 1,286 1,674 1,990 Sources of funds 6,355 6,399 6,460 7,065 7,371
Growth (%) -8.0 66.0 -0.4 30.1 18.9 Fixed assets 5,465 5,698 6,065 6,758 8,060
EBIT 587 961 1,104 1,333 1,668 Capital WIP 227 67 80 154 80
Pre tax profit 260 555 716 990 1,362 Def tax assets/- liability -252 -348 -364 -365 -469
Less: Minority Interest 0 0 0 0 0 Cash & bank balances 444 153 234 250 153
Reported net profit 220 351 544 699 1,034 Loans & advances 312 528 699 789 836
Adjusted net profit 220 351 544 699 1,034 Current liabilities & prov. 2,116 2,456 3,143 3,302 4,128
Growth (%) -34.4 59.2 -84.5 28.5 47.9 Others (net) -78 -80 -152 -163 -139

Reported net profit 220 351 544 699 1,034
Depreciation and amort. 230 156 432 405 368 Key Ratios
-Inc/dec in working cap. -513 -695 240 -109 251 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 0 0 0 0 0 BV/Share (`) 2.0 2.2 2.1 2.5 3.2
Cash from operations (a) -63 -189 1,215 995 1,653 ROIC (%) 9.6 10.0 13.4 14.4 18.0
-Inc/dec in investments 0 0 0 0 0 ROE (%) 8.8 13.3 20.4 24.2 29.2
Capex -1,192 -80 -500 -729 -1,207 Net Debt/equity ratio (x) 1.3 1.3 1.4 1.2 0.8
Others -32 187 -239 -169 105 Valuation ratios (x)
Cash flow from inv. (b) -1,225 107 -739 -898 -1,102 PER 19.0 12.3 15.8 12.3 8.3
Inc/-dec in capital 7,859 10,184 2,523 396 391 PBV 295.3 284.8 293.9 245.9 195.6
Dividend+Tax thereon -7,973 -10,367 -3,150 -581 -619 EV/EBITDA NA 62.5 62.8 48.3 40.4
Inc/-dec in loans 1,430 -124 145 92 -501 EV/Sales 9.0 7.2 6.6 5.7 5.3
Others 43 98 87 12 80 Turnover ratios (no.)
Financial cash flow ( c ) 1,359 -208 -396 -81 -648 Debtor days 88 84 95 91 85
Inc/-dec in cash (a+b+c) 72 -291 80 16 -97 Inventory days 95 84 75 66 64

28 September 2017 India | Surfactants | Sector Report
Surfactants
Increasing focus on GREEN solutions
Surfactants are application-driven segment and widely used in home and personal care Mehul Thanawala
products. According to Assocham, the size of Indias beauty, cosmetics and grooming market mehul.thanawala@jmfl.com | Tel: (91 22) 66303063
will touch USD 20bn by FY25 from USD 6.5bn in FY15. On the back of such high growth, the Alok Ranjan
Indian specialty surfactants market is expected to grow 13% over FY15-FY20. This will be
Pramod Krishna
driven mainly by the increased consumption of high-end home and personal care products, pramod.krishna@jmfl.com | Tel: (91 22) 61781074
which will be further driven by (1) rising standards of living and changing consumer
preferences, (2) increasing adoption of surfactants in a wide range of personal care products,
(3) increasing adoption of new-age surfactants and bio-surfactants and (4) other drivers
discussed in detail in this section. Upon analysing the competitive landscape of domestic and
global players, we observe that the domestic market is largely fragmented, leading to low
EBITDA margins. We therefore expect it to see some consolidation in the near-to-medium
term. We believe that the Indian surfactants market will post low-teen growth in the near-to-
medium term. However, long-term growth will be driven largely by increased adoption of
sustainable ingredients such as bio-surfactants.
Growing personal and household care market and increasing adoption in other end-use
industries: According to Euromonitor, household cleaning and personal care products
value of sales grew 8.3% in CY15 to reach INR 1trn, due to increasing consumerism. The
market size of rapidly-growing segments such as mens grooming products expanded
from USD 660mn in FY10 to USD 1,179mn in FY15, and is expected to grow 17% by
FY20 (source: Techsci Research). On the back of the high growth in the personal and
household care segments, the personal care surfactants market grew mid-to-high teens
during FY13-FY17; this growth is expected to sustain and drive the specialty surfactants
market. Surfactants-based face washes, hair creams and gels are increasingly gaining
traction due to the ease of using the product, the ease of customising it and its cleansing
ability. Additionally, surfactants are used in other end-use industries such as
agrochemicals, textiles, water treatment and oil-field chemicals.
Increasing use of premium products: Premium products not only use high-price
surfactants but also a higher percentage of surfactants (36.5%) compared with economy
products (23.5%) (source: Stepan Company). The rising standard of living due to
globalisation and the increase in per capita income (c.9.7% over FY16-FY17) is driving
growth in the premium home and personal care segment. The mens grooming segment
(which falls under personal care) is expected to grow c.17% YoY and continue such
growth momentum over FY17-FY21. Additionally, increased willingness to pay for the
best brands and quality is driving growth in the surfactants market.
New age surfactants are replacing traditional ones: Methyl Ether Sulfonate (MES) is a
natural (oleochemical) replacement for Linear Alkyl Benzene Sulfonate (LABS). On the
back of excellent characteristics such as high purity, activeness, low volatile organic
compound (VOC), gentleness on skin, low percentage of di-salt, suitability in both
liquid/powder detergents, MES is becoming more popular than LABS. According to TSMG
global report, MES market size will be c.1.2 MMT, which will be nearly one-third of LABS
(c.3 MMT in FY14) market size in FY20.
Growing demand for bio-surfactants and fluoro-surfactants: Stringent environmental
regulations (REACH) and demand for sustainable solutions are driving the demand for less
toxic bio-surfactants and short-chain fluoro-surfactants globally. Demand for fluoro-
surfactants is driven by its better performance in various application areas such as paints,
coatings and specialty detergents. However, the Indian market is still at a nascent stage
for products using natural surfactants. JM Financial Research is also available on:
Key challenges: Although the Indian specialty surfactants market is currently growing Thomson Publisher & Reuters
13%, it faces challenges on account of (1) margin pressures due to increased raw S&P Capital IQ and FactSet
material (coconut and palm oil, alpha olefin, petroleum) prices, (2) margin pressure as
brand owners do not pass on any margin reduction by big retailers to manufacturers and Please see Appendix I at the end of this
(3) environmental concerns related to synthetic surfactants. report for Important Disclosures and
Certification.
Surfactants 28 September 2017
1. Surfactants
Surfactant chemicals help break up stains and separate dirt from the surface being cleansed Exhibit a. Surfactants
be it cloth, hair or skin and keep the dirt in a water solution to prevent it from being
redeposited onto the surface it was removed from. In this report, we cover surfactant
chemicals used in industries such as home care, personal care, health care, crop care,
industrial and institutional cleaning. Surfactants are either derived from oleochemicals
(natural vegetable oil) or petrochemicals (synthetic) raw material. Within the oleochemicals
space, palm and coconut oil are the major sources. Exhibit 64 shows the difference between
synthetic and bio-surfactants.
Exhibit 64. Comparison between synthetic and bio-surfactants

Synthetic Bio-surfactants
Easy Availability Low Toxicity
Advantages Low Price Eco friendly
Broadened applications Goof Performance
Environmental concerns Technical constraints
Disadvantages Low performance Unskilled workforce
Volatile petroleum price Cost competitiveness

Surfactants are broadly classified as anionic, cationic, non-ionic and amphoteric. The structure
of the surfactants determines its functionality. Owing to their ionic properties, the four
different types of surfactants have different applications, as discussed below:
Anionic surfactants: Have a negatively charged hydrophilic group. They are widely used in
shampoos as well as laundry and dishwashing detergents. Exhibit b. Surfactants type by substrate
Cationic surfactants: This is the smallest surfactants category in terms of volume and
value and is used mainly in rinsing products and hair conditioners.
Non-ionic surfactants: Mainly used for grease removal as they do not carry an electrical
charge, making them resistant to deactivation in water with high mineral content.
Amphoteric surfactants: The charge depends on the pH balance of water and is well-
suited for personal care and household cleaning products. It has excellent dermatological
properties and is frequently used in shampoos, skin cleansers and other cosmetics.
Exhibit 65. Surfactants types and uses

Surfactants types Product types Property Use
Anionic Sulfate, Sulfonate, Phosphate Negative charge Shampoos
Quaternary Ammonium Source: JM Financial
Cationic Positive charge Rinses and Hair conditioners
compounds
Alkylphenol Ethoxylate,
Non-ionic No charge Grease removers
Sorbitan Ester
Charge depends on pH Shampoos, skin cleansers,
Amphoteric Phosphatidylcholine
of water cosmetics
Source: Klinegroup, JM Financial
Specialty surfactants: Specialty surfactants are used as co-surfactants with commodity

surfactants, as essential ingredients in a range of industrial and domestic products, and as
key process aids in several sectors. Specialty surfactants are Methyl ester sulfonates, Alkyl New age surfactants are finding
polyglycosides and Sulfosuccinates. applications in Agrochemicals, food
processing and oil industries
Specialty surfactants are used in the agriculture sector on a major scale, mainly as
additives primarily in pesticides (eg. Glycine Technical Grade). Food processing and oil
industries are other key markets for specialty surfactants, owing to the chemicals multi-
functional properties. Apart from specialty surfactants, bio-surfactants are being
increasingly used and are thus expected to lead growth in the surfactants market.

2. Global surfactants market overview

The global surfactants market is valued at c.USD 29.2bn, with a growth rate of 5.4% over
FY15-FY20E. Globally, synthetic surfactants account for a major share of the surfactants
market, owing to their extensive use in various industrial and commercial products. On the
basis of product types, anionic surfactants had the largest market share in CY16, accounting Anionic surfactants accounts 45%
for c.45% of the market (source: Mordor Intelligence). However, the demand for bio-based of the surfactants market share
surfactants is growing, owing to increased consumer inclination towards products made from
natural feedstocks. On the basis of end-use segments, the largest application segment is
detergents.
Exhibit 66. Global surfactants market size (In USD bn)
Source: Transparency Market Research, JM Financial
Asia-Pacific leading surfactants demand: Accounting for 37% of global consumption, the
Asia-Pacific region is the largest surfactants consumer, followed by North America (22%) and
Europe (25%) owing to the presence of a large consumer base, growing economies and Asia-Pacific is a key market.
changing consumer preferences towards beauty products. The Asia Pacific market is expected Account for 37% of global
to post a CAGR of 6.1%, compared with sub-3% growth in developed countries over FY15- consumption and expected to post
FY20. This is reflected in the increased investments in Asia by MNCs. For instance, Solvay 6.1% CAGR over FY15-FY20
(Belgium) is expanding its business in India and Singapore, Kao (Japan) now has surfactant
and detergent plants in Indonesia and Clariant (Switzerland) has established a new facility in
Indonesia.
Exhibit 67. Surfactants consumption by region Asia Pacific leading Exhibit 68. Surfactants business growth rate by volume (%)
Source: IHS Markit, Industry, JM Financial Source: IHS Markit, GCIS, JM Financial

There is increasing use of bio-surfactants owing to concerns on petrochemical-based

materials. The bio-surfactants market size was c.USD 1.7bn in FY15, accounting for c.6% of
the global surfactants market size (source: Global Market Insights).
Rising use of bio-surfactants will augment growth: High biodegradability and low toxicity,
apart from strict govt. regulations, is driving the bio-surfactants market. Among bio-
surfactant products, MES market size was c.USD 580mn in FY15. It is used in laundry
detergents due to its biodegradability and tolerance for rigidity. APG bio-surfactants are
expected to grow 4% over FY15-FY20 and are used in household-based detergents due to
their dampness and superior foaming properties. Other bio-surfactants such as rhamnolipids,
sophorolipids, and monoglycerides are also increasingly gaining market share. Some of green
specialty surfactants available in the market include alkylpolyglucosides, glutamates and
pentosides; however, they are more expensive than competing materials.
Other specialty surfactants (fluoro-surfactants) becoming popular: The global fluoro-
surfactants market was valued at c.USD 383mn in CY15 and is expected to reach c.USD
668mn by CY21 at a CAGR of 9.8% (source: Markets and Markets). Growth will be driven by
its superior performance vs. other surfactants in various application areas such as paints, Fluoro-surfactants offer better
coatings and specialty detergents. Moreover, stringent environmental regulations are wettability than normal surfactants
increasing demand for less toxic, short chain fluoro-surfactants. Paints and coatings segment
is the largest fluoro-surfactants application segment, since fluoro-surfactants have strong
wetting and levelling properties. On the basis of product, the anionic segment is projected to
record the highest CAGR during FY15-FY21. Among fluoro-surfactants product types, anionic
surfactants have excellent wettability and permeability, besides better levelling. As a result, it
is the preferred choice for paints and coatings.

3. Indian surfactants industry overview

The domestic surfactants market size was c.USD 3bn in FY15, constituting c.11% of the
Indian specialty chemicals market. It posted a CAGR of c.11% over FY10-FY15 and is
expected to register high growth of 13% over FY15-FY20, to reach c.USD 5.53bn on the
back of high growth in personal and household care products sales.
Exhibit 69. Indian surfactants industry size
Increasing use of personal and household care products a key driver: According to
ASSOCHAM, the beauty, cosmetics and grooming market will touch USD 20bn by FY25E Increasing usage of cosmetics will
from USD 6.5 bn in FY15, on the back of factors such as the middle class rising disposable drive growth of high value
income, the emergence of an aspirational class, a young population and increasing womens surfactants
participation in the workforce. The consumption of cosmetics among teenagers is also rising
(c.68% of young adults feel that using grooming products boosts their confidence).
Surfactants demand is additionally being driven by the increased use of high-value personal
care products, since premium products use not only higher-priced surfactants but also a
higher percentage of them.
Exhibit 70. Indian surfactants based on end use
Personal care is expected to grow

by 16% over FY15-FY20, driving
surfactants growth
Source: Company, Industry, JM Financial
The toiletries and household care market in India is expected to record a CAGR of 16-18%
over FY15-FY20. Dish washing and floor cleaning liquids are the fastest growing segments in
this category.

Exhibit 71. Percentage of ingredients by functionality in economy and premium shampoo

Ingredients/Functionality Economy Premium
Carrier - -
Surfactant 23.5% 36.5%
Viscosity Adjuster 10% -
Additives - -
pH Adjuster - -
Preservatives 0.1% -
Source: Stepan Company, JM Financial
Growing demand for new age surfactants, bio-surfactants and fluoro-surfactants: High
biodegradability and low toxicity apart from strict govt. regulations are driving the bio-
surfactants market. Stringent environmental regulations (REACH) and demand for sustainable
solutions are driving the use of less toxic bio-surfactants and short-chain fluoro-surfactants.
The demand for fluoro-surfactants is driven by its better performance in various application
areas such as paints, coatings and specialty detergents.


The Indian surfactants industry is highly fragmented with only a few organised players. Apart
from Sunshield Chemicals, which was acquired by Solvay in 2012 and Ultramarine &
Pigments Ltd., there are no other major listed players. We have considered eight companies
across geographies for a comparative analysis. These are Sunshield Chemicals, Aarti Home
and Personal Care (part of Aarti Industries), Galaxy Surfactants, Stepan Company, Croda
International PLC, Kao Corp, Symrise AG, and Guangzhou Tinci Materials. The following table
provides a snapshot of these eight surfactants companies.
Exhibit 72. Snapshot of surfactants companies (FY11-FY16)

Revenue Avg. Revenue
Avg. Avg. Avg.
Company Country (FY16, Growth Summary of Business
EBITDA,% ROCE % ROE%
In mn INR) (CAGR %)
Manufacture and sales of surfactants and
Sunshield Chemicals Ltd. India 1,502 14% 7% 9% -1%
anti-oxidants in domestic and international markets
Portfolio consists of surfactants (58.45%),
Ultramarine & Pigments Ltd. India 2,192 13% 18% 22.4% 19.2%
pigments (28%) and ITES (12.28%).
Portfolio includes surfactants, modifiers, pearlising
Galaxy Surfactants India 18,014 4% 11% NA NA
agents, UV filters and active ingredients
Segment of Aarti Industries. Manufactures surfactants
Aarti home & personal care India 1,504 10% 5% NA NA
catering to home & personal care & industrial applicn
Manufactures surfactants, polymers, specialty
Stepan Company US 118,663 7% 10% 11% 15%
products. 67% revenue from surfactants
Operates in three segments: consumer care,
Croda International PLC UK 113,327 8% 27% 32% 44%
performance technologies and industrial chemicals
Four fields of business beauty care, human health
KAO Corp Japan 902,873 7% 16% 17% 13%
care, fabric & home care and chemicals
Manufacture personal care functional ingredients
Guangzhou Tinci Materials China 5,308 23% 19% 15% 15%
including surfactants. Also ventured into batteries
Exhibit 73. Valuation metrics for water treatment companies based on consensus
EPS P/E EV/EBITDA
Company Country
Sunshield Chemicals Ltd. India -1 -7 NA NA NA NA NA NA NA 34x NA NA
Ultramarine & Pigments Ltd. India 9 11 NA NA 12x 17x NA NA 8x 10x NA NA
Stepan Company US 3.78 4.58 5.17 NA 21.3x 17.6x 15.6x NA 9.54x NA NA NA
Croda International PLC UK 1 2 2 2 22x 21x 20x 19x 14x 14x 13x 12x
KAO Corp Japan 253 280 301 323 21.8x 24x 22x 25x 11x 12x 11x 10x
Guangzhou Tinci Materials China 1.23 1.43 1.9 2.4 34.3x 37.8x 28.6x 22.7x 27.4x 29.2x 22.8x 18.7x
We have conducted a detailed competitive landscape analysis by analysing two sets of

Ultramarine & pigments is
companies over FY11-FY16. The first set contains only domestic companies while the second
attractive, on the basis of valuation
covers both domestic and foreign companies.
ratio among its global peers
Exhibit 74. Competitive landscape of surfactants India (FY11-FY16)
Source: Bloomberg, Company, JM Financial Aarti home and personal care* is a segment of Aarti Industries. Galaxy surfactants* is a private
company

Exhibit 74 classifies the selected domestic specialty surfactant chemicals into four segments
namely: performance segment (high growth %, high EBITDA %), growth segment (high
growth %, low EBITDA %), laggard segment (low growth %, low EBITDA %) and mature
segment (low growth % and high EBITDA %). The size of the bubbles indicates the
companies FY16 revenues.
Among the three companies analysed, Ultramarine & pigments falls in the performance
segment as it has displayed high revenue CAGR of 14% and average EBITDA margin of 18%
over FY11-FY16. Galaxy Surfactants recorded a high average EBITDA margin of 11% owing
to strong operating performance, but lagged in terms of growth.
A comparative analysis of surfactants companies globally (including in india) indicates that
foreign companies are fairly diversified and operate on a higher scale vs. their Indian
counterparts and have thus delivered high EBITDA margins. Among all the companies,
Guangzhou Tinci Materials, Ultramarine & Pigments, Croda International and Kao Corp have
delivered superior performance over the past five years.
Exhibit 75. Competitive landscape of surfactants Global (FY11-FY16)
We believe that scale plays an important role in this segment and thus Indian surfactants
need large investments for capacity expansion. Further, in the near-to-medium term, MNCs
will be looking to enter the Indian market either through JVs or acquisitions.

5. Key challenges and outlook

Key challenges facing the segment are (1) commoditisation and (2) environmental concerns.
The commoditisation of specialty surfactants is one of the biggest concerns across the
specialty chemicals industry. This is leading to reduced margins and lower shelf life of
specialty surfactants. However, manufacturers are tweaking their business models by
switching from merely supplying one type of surfactant to supplying different types, each
customised for specific needs. This is achievable as different home and personal care brands
focus on different functionalities. For example, within the hair care segment, different
shampoos treat different concerns such as dandruff, breakage, dry scalp, etc.
Environmental concerns and increasing demand for green products by consumers will lead to
demand for ingredients either derived from vegetable oils or made using greener
manufacturing processes. This trend is more pronounced in developed markets but is
gradually picking up pace in developing markets. Thus, companies with products made from
natural ingredients will be the ones to look out for. However, one has to remain cautious as
natural refers to sustainable or renewable sources. However, it can lead to depletion and thus
ingredients can harm the local ecosystem and may not be considered green. Hence,
manufacturers of surfactants who use sustainable and/or renewable ingredients will be long-
term winners, in our view.

Sunshield Chemicals | Not Rated

Focus on improving operational efficiency
Sunshield Chemicals Limited (SCL) manufactures specialty chemicals such as surfactants and Mehul Thanawala
anti-oxidants sold in domestic and international markets. SCLs principal products are: (1) mehul.thanawala@jmfl.com | Tel: (91 22) 66303063
specialty surfactants, predominantly Ethylene Oxide (EO)-based products (2) specialty anti- Alok Ranjan
oxidants for lubricants, polymers, rubber, tyres, latex and other segments and (3) other non-
EO technologies and customised blends. SCL was acquired by Solvay (Europe) in Dec12 and Pramod Krishna
this has helped SCL leverage Solvays global distribution and technical expertise. SCL expects
improved performance on back of an increase in sales volume (growing 20%+) and
manufacturing efficiency (upgradation of the Rasal plant).
Acquisition by Solvay in Dec12: The Indian surfactants market was valued at c.USD 3bn
in FY15 and gew low-double digits to mid-teens over FY10-FY15. This attracted several
global players such as BASF, CRODA, and Solvay to India. After acquiring Rhodia Specialty
Chemicals in 2010, Solvay consolidated its position in the Indian specialty surfactants
market by acquiring a controlling stake in SCL in 2012. This has given SCL improved
technical skills and a global distribution channel to export its products.
Specialty chemicals finding application in multiple end-use industries: SCL manufactures a

wide range of specially formulated and customised products such as wire insulation Key Data SNCH IN
enamels, colours, textiles, polymers, home care products, soaps and detergents. The Current Market Price INR252
major end-use industries are (1) agrochemicals SCL provides solutions based on
Free Float 31.0%
specialty surfactants that help increase the efficacy of pesticides; (2) coatings SCL offers Shares in issue (mn) 7.35
surfactants that reduce the interface between liquid resin solutions and solid particles Diluted share (mn) 7.35
such as pigments and extenders; and (3) home and personal care - SCL provides multi- 3-mon avg daily val (mn) INR0.8/US$0.0
functional surfactants used in skincare products, detergents, etc.
INR/US$ 65.7
Financial performance is a turnaround near? SCL delivered revenue growth of
26%/10% in FY16/FY17 led by strong domestic sales growth (c.26%/23% in FY16/FY17) Price Performance
on the back of volume growth (+28%). In the past, SCL has incurred losses on account of % 1M 6M 12M
Absolute -7.9 -7.3 -32.3
an increase in operating costs for plant upgrades and manufacturing excellence projects. Relative* -6.5 -13.8 -42.7
Management expects these costs (capex of c.USD 6.2 mn) undertaken in FY16 to lead to * To the BSE Sensex
benefits such as increased efficiency and productivity in future.
Dependence on a single or few suppliers is a key risk: SCL depends on ethylene oxide
(EO), one of the key components of ethylene oxide condensates (EOC). EO is sourced only
from one supplier currently Reliance Industries Limited. However, EO produced by RILs
petrochemical complex is also used for captive consumption by RIL to manufacture
monoethylene glycol (MEG) for polyester fibres. This can lead to procurement risks for
SCL. EO is not easy to import through sea/air due to its low boiling point and explosive
nature. To mitigate this risk, SCL sources EO from multiple sites of RIL and has recently
increased its storage facility by 40% to counter procurement risks.

Net sales 1,053 1,337 1,190 1,502 1,652
Sales growth (%) 11.7 26.9 -11.0 26.2 10.0
EBITDA 84 109 22 98 84
Adjusted net profit 9 -4 -32 -8 -54 Bloomberg - JMFR <GO>,
EPS (Rs) 1.2 -0.6 -4.3 -1.1 -7.4 Thomson Publisher & Reuters
EPS growth (%) -14.9 NA NA NA NA S&P Capital IQ and FactSet
ROIC (%) 9.5 -1.1 -0.4 1.7 2.0
ROE (%) 4.1 -1.9 -16.5 -4.9 -38.6
PE (x) NA NA NA NA NA Please see Appendix I at the end of this
EV/EBITDA (x) 24.8 21.9 NA 28.9 31.9 Disclaimers and Research Analyst
Certification.

Sunshield Chemicals 28 September 2017

Growth (%) 11.7 26.9 -11.0 26.2 10.0 Other capital 0 0 0 0 0
Other operational income Reserves and surplus 141 137 103 95 40
Raw material (or COGS) 732 959 863 1,006 1,136 Networth 215 211 176 168 114
Personnel cost 47 50 63 67 67 Total loans 287 561 745 1,010 833
Other expenses (or SG&A) 190 218 243 332 366 Minority interest 0 0 0 0 0
EBITDA 84 109 22 98 84 Sources of funds 501 771 921 1,178 946
Growth (%) 10.1 29.2 -80.2 356.7 -14.6 Fixed assets 542 524 531 1,065 1,059
EBIT 61 90 -4 74 26 Capital WIP 4 31 476 15 31
Pre tax profit 10 54 -39 -34 -68 Def tax assets/- liability 19 -50 -40 -14 0
Taxes 2 58 -7 -26 -14 Current assets 393 632 531 700 641
Add: Exceptional items 0 0 0 0 0 Inventories 114 138 203 277 225
Add: Extraordinary items 0 0 0 0 0 Sundry debtors 219 329 119 257 275
Less: Minority Interest 0 0 0 0 0 Cash & bank balances 5 27 2 21 12
Reported net profit 9 -4 -32 -8 -54 Loans & advances 46 89 164 146 129
Adjusted net profit 9 -4 -32 -8 -54 Current liabilities & prov. 308 172 342 293 428
Margin (%) 0.8 -0.3 -2.7 -0.6 -3.3 Current liabilities 132 146 166 250 218
Diluted share cap. (mn) 73.50 73.50 73.50 73.50 73.50 Provisions and others 176 26 176 43 211
Diluted EPS (`) 1.17 -0.56 -4.34 -1.14 -7.40 Net current assets 85 460 190 407 213
Growth (%) 751.5 -147.7 678.0 -73.7 547.6 Others (net) -5 -6 -11 -23 -37
Total Dividend + Tax 7,934 10,221 2,971 265 277 Application of funds 501 771 921 1,178 946

Reported net profit 9 -4 -32 -8 -54
-Inc/dec in working cap. -33 -121 165 -126 1 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 0 0 0 0 0
BV/Share (`) 2.9 2.9 2.4 2.3 1.5
Cash from operations (a) 0 -124 169 -86 -7
ROIC (%) 9.5 -1.1 -0.4 1.7 2.0
-Inc/dec in investments 0 43 0 0 0
ROE (%) 4.1 -1.9 -16.5 -4.9 -38.6
Capex -15 -9 -452 -73 -9
Net Debt/equity ratio (x) 1.1 2.5 4.2 5.9 7.2
Others 101 -232 80 -72 185
Valuation ratios (x)
Cash flow from inv. (b) 86 -199 -372 -146 176
PER NA NA NA NA NA
Inc/-dec in capital 7,934 10,221 2,969 265 277
PBV 86.3 88.0 105.0 110.3 163.0
Dividend+Tax thereon -7,934 -10,221 -2,971 -265 -277
EV/EBITDA 24.8 21.9 NA 28.9 31.9
Inc/-dec in loans -89 274 184 265 -178
EV/Sales 2.0 1.8 2.2 1.9 1.6
Others 2 70 -4 -15 0
Turnover ratios (no.)
Financial cash flow ( c ) -88 344 178 250 -177
Debtor days 76 90 36 62 61
Inc/-dec in cash (a+b+c) -2 22 -25 19 -9
Inventory days 40 38 62 67 50
Creditor days 66 55 70 91 70

28 September 2017 India | Sector | Company Update
Ultramarine & Pigments | Not Rated

Specialising in sulphonation
Ultramarine & Pigments Ltd (U&PL) specialises in the manufacture of inorganic pigments, Mehul Thanawala
organic surfactants and dry mix detergents. It operates under 3 major verticals: (i) surfactants
Alok Ranjan
(62% of revenues), produced in various concentrations and forms, including alpha olefin Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
sulphonates and lauryl and lauryl ether sulphates; (ii) pigments (30% of revenues), with U&PL Pramod Krishna
being one of the worlds largest manufacturers of ultramarine blue; and (iii) IT-enabled pramod.krishna@jmfl.com | Tel: (91 22) 61781074
services (ITES) (12% of revenues), which includes its digital publishing and BPO businesses.
Management aims to add more verticals, either in the existing businesses or new divisions,
and double revenues over the next 5 years. We do not have a rating on the stock.
Surfactants (62% of revenues): The key products manufactured in this segment are (i)
Linear Alkyl Benzene Sulphonic Acid (LABSA), surfactants used for laundry products that
UP&L manufactures with high active content of 90% and 96% concentrations; (ii) Alpha
olefin sulphonates (AOS), surfactants with high detergency, high dampness/foaming
properties and compatible with hard water in India; U&PL specialises in the manufacture
of ready-to-use liquid, paste or noodle surfactants depending on customer requirements;
(iii) Sodium Lauryl Sulphate (SLS), surfactants that act as strong degreasers and hence are
found in several industrial surfactant formulations including floor cleaners and (iv) Sodium
Lauryl Ether sulphates (SLES), anionic surfactants used in personal care products such as
shampoos, hand washes and body washes. In FY17, the company undertook a
debottlenecking of its surfactants plant, leading to a 20% increase in capacity. U&PLs
sulphonation segment has registered a CAGR of 23% over the past 5 years. Key Data UMP IN
Pigments (30% of revenues): UP&L manufactures a variety of inorganic pigments with Market cap (bn) INR6.6/$0.1
end use in the paints, plastics, inks, laundries and cosmetics industries. Its key products Free Float 37.4%
are (i) Ultramarine Blue, which has variety of applications, from chairs for the Beijing Shares in issue (mn) 29.18
Olympics to professional artist colours in Europe; it is widely used to make whites whiter, Diluted share (mn) 29.18
to make greys and blacks more attractive and is a unique and attractive reddish blue; (ii) 52-week range 245/146
Ultramarine Violet, a variant of Ultramarine blue; (iii) Bismuth Vanadate Yellow, a non- Sensex/Nifty 31,160/9,736
toxic metal oxide alternative to lead and chromium based yellow pigments and (iv) mixed INR/US$ 65.7
metal based oxides (pigment green 50), cobalt blue (pigment blue 28) and titan brown
Price Performance
(pigment brown 24). UP&Ls pigments segment has posted a CAGR of 9% over the past % 1M 6M 12M
5 years Absolute 15.7 32.3 34.7
Relative* 17.1 25.7 24.3
Financials: UP&L saw revenue/EBITDA/PAT CAGR of 22%/30%/32% over FY15-FY17. * To the BSE Sensex
Increased focus on higher value-added segments enabled UP&L to improve margins by
c.250 bps over the last 2 years to 20%. Key risks to its business are rising competition
from the unorganised sector, shrinking demand for laundry and white washing
applications and shortages in the availability of alpha olefin.

Net sales 1,402 1,502 1,722 2,202 2,554
Sales growth (%) 3.0 7.2 14.6 27.9 16.0
EBITDA 209 251 294 374 501
EBITDA (%) 14.9 16.7 17.1 17.0 19.6
Adjusted net profit 121 144 188 274 324 JM Financial Research is also available on:
EPS (`) 4.2 4.9 6.4 9.4 11.1 Bloomberg - JMFR <GO>,
EPS growth (%) -11.5 18.8 30.2 46.0 18.5 Thomson Publisher & Reuters
ROCE (%) 18.1 19.1 23.4 29.5 27.8 S&P Capital IQ and FactSet
ROE (%) 14.1 15.6 18.8 23.9 22.0
Certification.
Source: Company data, JM Financial. Note: Valuations as of 27/09/2017

Ultramarine & Pigments 28 September 2017

Growth (%) 3.0 7.2 14.6 27.9 16.0 Other capital
Other operational income Reserves and surplus 805 863 936 1,087 1,411
Raw material (or COGS) 588 604 732 1,067 1,267 Networth 863 922 995 1,145 1,469
EBITDA 209 251 294 374 501 Sources of funds 886 924 995 1,145 1,469
Growth (%) -10.2 20.0 17.3 26.9 34.2 Fixed assets 933 977 994 1,167 1,279
EBIT 189 225 280 391 482 Capital WIP 24 13 16 21 2
Add: Net interest income -16 -10 -5 -1 -3 Investments 132 132 132 149 384
Taxes 52 72 88 117 155 Current assets 629 718 856 835 940
Add: Extraordinary items 0 0 0 0 0 Inventories 116 182 204 207 254
Diluted EPS (`.) 4.15 4.93 6.42 9.37 11.10 Current liabilities 37 75 109 166 225
Growth (%) -11.5 18.8 30.2 46.0 18.5 Provisions and others 214 223 224 139 130
Total Dividend + Tax 79 88 105 123 140 Net current assets 378 420 523 530 586
Application of funds 886 924 995 1,145 1,469

Depreciation and amort. 50 40 43 30 39 ROCE (%) 18.1 19.1 23.4 29.5 27.8
-Inc/dec in working cap. -63 2 12 -77 -73 ROE (%) 14.1 15.6 18.8 23.9 22.0
Others 0 0 0 0 0 Net Debt/equity ratio (x) -0.3 -0.3 -0.3 -0.2 -0.4
-Inc/dec in investments 0 0 0 -17 -235 PER 53.0 44.6 34.3 23.5 19.8
Capex -27 -31 -19 -179 -94 PBV 7.5 7.0 6.5 5.6 4.4
Others -42 -29 -78 26 52 EV/EBITDA 29.7 24.6 20.8 16.5 11.7
Cash flow from inv. (b) -69 -60 -96 -169 -277 EV/Sales 4.4 4.1 3.6 2.8 2.3
Inc/-dec in loans -35 -21 -2 0 0 Inventory days 30 44 43 34 36
Others 0 -2 -2 21 162 Creditor days 155 180 166 104 102
Financial cash flow ( c ) -113 -110 -109 -102 22 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) -74 15 37 -45 36

28 September 2017 India | Water Treatment Chemicals | Sector Report
Water Treatment Chemicals

End-to-end solutions providers will prevail
Rapid growth in the Indian economy has driven increased industrialisation across sectors and Mehul Thanawala
thus led to growing urbanisation. A direct consequence of industrialisation is the increased
Alok Ranjan
need for the effective disposal of effluents. With strict environmental regulations, companies Alok.Ranjan@jmfl.com | (+91 22) 6630 3073
have realised the urgent need for efficient water treatment solutions. Additionally, growing Pramod Krishna
urbanisation has increased the need for municipal water and thus driven demand for water pramod.krishna@jmfl.com | Tel: (91 22) 61781074
treatment chemicals. As a result, the Indian water treatment market recorded a 12% CAGR
over FY10-FY15 and is likely to record c.14% CAGR over FY15-FY20. Demand will be mainly
driven by industrial usage in the short term, but increased awareness on water safety as well
as urbanisation will be key long-term growth drivers. We believe this segment will witness
sustainable high growth rates in the medium-to-long term.
Industrial demand will remain the key driver in the near-to-medium term: Within the
industrial sector, growth will be driven by water-intensive segments, like pulp, paper, oil
and gas, chemical processing, mining, bio refining, power and municipal markets. Rapid
industrialisation is leading to the increased chemicals demand for running manufacturing
plants and their corresponding effluent treatment facilities resulting in to c.15% increase
in capex (FY10-FY15) by the industry on water and waste water treatment.
Growing urbanisation, rising income levels/living standards & increased awareness will be
the long-term driver: Indias urban population has increased c.2% in the last five years
(CY11-CY16), leading to growing demand for municipal water supply. The penetration of
municipal water supply is higher in the urban region and thus increased urbanisation will
lead to increased demand for municipal water and therefore the use of water chemicals.
Further, increased awareness about the quality of drinking water and health impact will
lead to increased demand for and usage of water treatment chemicals. Additionally, rise
in sales of packaged drinking water has driven demand.
Shift to advanced products: There has been increasing shift in the water treatment
market towards more advanced products such as coagulants and flocculants from
traditional products such as alum. Similarly, in the corrosion and scale inhibitor market,
there is an ongoing shift from traditionally used heavy-metal-based products to ones that
are more environment-friendly. Manufacturers are increasingly producing patented
formulations with exclusive rights that offer customised solutions in a particular market.
Environment safety a priority: Stringent environmental regulations on the tapping of
water and the discharge of effluents across industries are boosting the water treatment
chemicals market. In the past two years, we have seen increased environmental
regulations on polluting industries in China and other parts of world. Thus, water
treatment chemicals would be widely used either in chemical processes or during
discharge into receiving bodies. Changes in the regulatory environment such as the
implementation of stricter effluent discharge norms have created significant hope for
demand from industries as they adopt environment-friendly effluent treatment practices.
Integrated and sustainable water treatment solutions are the key: Majority of water
treatment players are integrated and end to end water solutions providers. Companies
providing water treatment solutions ranging from designing and building a water
treatment plant to running and maintaining it (including supply of water chemicals) will
be highly attractive. Sustainable solutions will further boost the segments as increased
awareness among end users about the benefits of recycling water in the longer term will
outweigh the capex incurred in the near term. JM Financial Research is also available on:
Key challenges: (1) Poor infrastructure for water and effluent treatments, (2) poor Bloomberg - JMFR <GO>,
legislation and lax enforcement by various agencies, (3) some industries such as Thomson Publisher & Reuters
pharmaceuticals not adopting recycling schemes owing to fear over the quality of S&P Capital IQ and FactSet
recycled water, (4) economics of recycling not being compelling as savings realised are
not enough and (5) greater adoption of desalination, leading to reduced usage of water Please see Appendix I at the end of this
treatment chemicals.
Certification.
Water Treatment Chemicals 28 September 2017
1. Water Treatment Chemicals

1.1Introduction
Water treatment chemicals are used for a wide range of industrial, municipal and household
water treatment purposes and in-process applications such as reducing effluent toxicity as
well as controlling Biological Oxygen Demand (BOD) and Chemical Oxygen Demand (COD).
Within the water treatment chemicals segment, there are two broad categories basic or
commodity chemicals and specialty chemicals. Commodity chemicals include alum, ferric
sulphate, ferric chloride and polyaluminium chloride. These are less expansive but required in
high volume. Specialty water treatment chemicals include antifoams, defoamers, biocides,
disinfectants, boiler water chemicals and industrial cleaning chemicals, among others.
The exhibit below highlights the various product groups for water treatment chemicals.
Exhibit 76. Water treatment chemicals An overview

Product Groups Applications End-use Industries
Biocides and disinfectants
Coagulants and flocculants Industrial Refineries
pH adjustors and water Institutional Power

Water Treatment
Chemicals
Softeners Commercial Mining
Defoamers Private Paper & Textiles
Defoaming agent and Others

Source: TSMG - FICCI, JM Financial
1.2Types of water treatment chemicals

Water treatment chemicals are generally classified either on the basis of type or end-use. On
the basis of type, they can be classified into coagulants, flocculants, biocides, disinfectants,
defoaming agents, pH adjusters, scale inhibitors, corrosion inhibitors, cooling water
treatments, etc.
Exhibit 77. Water treatment chemicals Market share % (FY15)
Source: FICCI-TSMG, Industry, Company, JM Financial
Coagulants and flocculants are the largest segment with 38% market share. They are
used for waste water management and are replacing traditional products such as alum.
Common coagulants and flocculants used for water clarification include aluminium
sulphate, ferric chlorite, and polyaluminium salts. Driven by high growth in industrial and
municipal water treatment, coagulants and flocculants are likely to grow at the fastest
rate within this space.
Biocides and disinfectants are the second largest segment with a 19% market share.
Biocides such as chlorine, sodium hypochlorite, calcium hypochlorite and chlorine dioxide
are used as disinfecting agents. Biocides can be classified into specialty and commodity
biocides. Biodegradable biocides are available these days in accordance with demand for
the use of green, environment-friendly chemicals.
Defoaming agents form the third largest segment, with a 7% market share. Chemicals
used are the polymers of acrylic acid and silicone oils and their derivatives.
pH adjusters form 5% of water treatment chemicals. These include alkalis, acids, lime,
and caustic soda that are used for water softening.
Corrosion and scale inhibitors such as chromates, nitrates, molybdates and other specialty
chemicals are used in boiler and cooling water systems.
Water treatment chemicals can also be classified on the basis of end use. The key end-use
segments can be divided into industrial usage, institutional usage, commercial and private
applications. Industrial and bulk applications include waste water management, cleaning of
rivers and enhancing the efficiency of industrial equipment. The end-use industries are large
power plants, refineries and fertiliser factories to pharmaceuticals, food and beverages,
electronic and automobile companies. Within the industry, water treatment chemicals are
mainly used for the treatment of water in boilers, cooling towers and effluents from
industries and sewage treatment plants.
1.3Key operations in water treatment

Iron and aluminium ions are excellent flocculation and coagulation agents for use in water
treatment. They are used in the preparation of drinking water, treatment of municipal and
industrial wastewater and the processing of sludge.
Precipitation: Precipitation examples include the removal of phosphate and hydrogen

sulphide. Phosphates are a persistent problem in wastewater and act as nutrients for
algae. Phosphates can be effectively removed from water flows by using chemical
precipitation. By adding iron or aluminium salts to water, phosphates precipitate and
settle together with the biological sludge. The presence of sulphur in sewage water is a
potential risk and can lead to the formation of toxic hydrogen sulphide gas. By adding
iron chloride, the sulphide precipitates, thus eliminating this potential danger.
Coagulation and flocculation: Floating particles, which do not settle of their own accord,
can be made to do so by neutralising their electric charge. Colloidal particles have a
negative charge of the metal ions of iron and aluminium. As a result, the particles
coagulate to form flocs, which are large enough to settle. The entire process is a
combination of the right metal salts, the precise dosage and the pH of the water.

2. Global water treatment market overview

The global water treatment market is growing moderately at 4.5%: The global market size of
water treatment chemicals is c.USD 24.5bn in FY15 and is expected to post a CAGR of
c.4.5% over FY15-FY20 to reach a market size of c.USD 30.5bn. In terms of global usage,
North America and in particular the United States uses specialty water treatment chemicals
more intensively than Europe and Japan, particularly organic coagulants and flocculants. In Market for water treatment
terms of water treatment chemicals type, corrosion inhibitors occupied the highest share of chemicals in North America and
c.23% on account of increasing industrialisation and technology development. As expected, Europe is well established and
the power generation segment occupied the highest share of c.30% in the industrial water mature
treatment chemicals market as large amounts of treated water are required to produce
electricity (source: Markets and Markets, Allied Market Research, PR Newswire, FICCI-TSMG).
Exhibit 78. Global water treatment chemicals market
Source: Allied market research, JM Financial
Asia Pacific leads growth, especially China and India: The Asia Pacific region occupied the
highest share of c.31% of the total water treatment chemicals market, with China (expected
CAGR of 10% over FY15-FY20) and India (expected CAGR of 13.8% over FY15-FY20) being
major countries contributing to growth. Rapid industrialisation and population growth,
coupled with scarcity in pure and clean drinking water, are significant factors responsible for
Asia-Pacific accounts for 31% of
the growth of the water treatment chemicals market in the Asia Pacific region. Companies
global market and is expected to
have forayed into the Asia Pacific region due to the increasing use of water treatment
grow at c.6%
chemicals for industrials as well as municipal water. The Asia Pacific market was valued at
c.USD 7.6bn in 2015 and is expected to post a CAGR of 5.6% over FY15-FY22. North
America is the second most lucrative market for new entrants. Increasing demand for water
treatment chemicals from the industrial sector and growing government regulations for
water recycling are the key factors fuelling the growth of the water treatment chemicals
market in this region.

3. Indian water treatment industry overview

In India, the largest consumer of water has been irrigation, which accounts for c.76% of total
water consumption. Industrial, household and other segments constitute 24% of the total
Indian water treatment chemicals
consumption. The industrial and municipal water treatment sectors are driving the growth of
industry market size is only 1.86 %
water chemicals in the short term and long term, respectively. In Indias water treatment
of global industry market size;
chemicals market, corrosion and scale inhibitors accounted for a significant share in revenue
Chinese market is c.8.2% of
terms due to robust demand from power utilities and oil refineries. The opportunity in the
global market
Indian water treatment market can be assessed from the fact that the estimated sewage
generation in the country was c.61,754 MLD in 2015 as against sewage treatment capacity
of c. 22,963 MLD. Thus, nearly 62% of untreated sewage is discharged directly into nearby
water bodies (source: Central Pollution Control Board). Moreover, the decreasing availability
of water and rising environmental concerns are likely to drive expansion in the municipal
water treatment market in India over the next decade.
Indian water treatment chemicals market to post double-digit growth: The Indian water
treatment chemicals market posted a CAGR of 12% over FY10-FY15 to reach USD 458mn,
constituting c.2% of the Indian specialty chemicals industrys size. Operating from a lower
base, the market size of water treatment chemicals is expected to post a CAGR of c.13.8%
over FY15-FY20 to reach USD 874mn in FY20. Urbanization, increasing population, and rapid
industrialization will lead to increase in demand for water by c.20% within the next decade.
Exhibit 79. Indian Water Treatment Chemicals market (USD mn)
CAGR 12%
Industries to drive short-term growth: The customer base of water treatment chemicals is
widespread across diverse industries, from large power plants, refineries and fertiliser
factories to pharmaceuticals, food and beverages, electronic and automobile companies. Five
key industrial sectors (Pulp & paper, Distillery, Sugar and Textile and Tannery) contribute 118 Pulp and paper sector contributes
tonnes per day of pollution load. Most of the sewage and industrial effluents remain highest quantity of BOD load
untreated in India. Also, various industries operating in the country are expected to come up (65%) and effluent discharge
with a number of brownfield and greenfield expansions over the next five years. The (55%) to rivers
Petroleum, Chemical and Petrochemicals Investment Region (PCPIR) and Delhi-Mumbai
corridor are expected to boost investments in the countrys industrial sector over the next
decade, which would augment the demand for water treatment, thereby boosting the water
treatment chemicals market.
Environmental concerns driving companies to go green: On 22Feb17, the Indian Supreme

Court directed all industrial units across the country to set up effluent treatment plants within
three months. According to industry reports, nearly 30% of industrial waste water is not
treated before release and thus, this ruling presents an enormous opportunity for the Indian
water treatment industry to boost its earnings. The countrys Central Pollution Control Board

(CPCB) has been expressing its concerns about the rising pollution in ground water and major
rivers in India. All these factors culminate in presenting a very positive future for the water
treatment industry in India. The market is also expected to be driven by export-oriented
industries such as mining, food processing, chemicals, petrochemicals and textiles.
Additionally, Chinas EPA crackdown on its polluting industries has presented an opportunity
to Indian water treatment companies to provide end-to-end effluent treatment solutions or
to export water treatment chemicals.
Growing urbanisation, increasing awareness and rising living standards to drive long-term
demand: Indias urban population has increased c.2% over CY11-CY16 to reach c.412 mn
people, leading to growing demand for municipal water. Emphasis of the Govt. on creating
100 smart cities will also lead to huge anticipated demand of water. Overall, India is expected
to add c.404mn new urban dwellers between CY15-CY50. For the past ten years, the quality
of water has also been deteriorating across the country owing to the rapid urbanisation.
Additionally, there has been increased awareness among urban users about recycling water.
These factors have led to increasing demand for water treatment chemicals. However, there
is increasing demand for the low-quantity use of chemicals for treatment purposes. Thus, we
will see increased demand for specialty water treatment chemicals vs. traditional chemicals
such as alum and ferric chloride.
In developing countries like India, chemical water purification is conducted at the household
level to provide safe drinking water. However, in urban areas of developing countries, this is
generally done at the municipal level by civic authorities or by water management
organisations. Thus, we believe that urbanisation will be a key long-term growth driver.
Exhibit 80. Indian urban population (% of total)
Source: World Bank, JM Financial
Continued investments by MNCs to participate in high growth Indian market: The

importance of the Indian water treatment market can be assessed from the recent investment
by Solenis, a leading global specialty chemicals company, to establish a direct channel for
industrial water treatment. Having served this region for over 16 years through the joint
venture with Chembond, Solenis decided to have a dedicated team of experienced Namami Gange is massive project
professionals in place to manage the needs of the industrial water treatment market in India. announced in 2014 with an
Under National Water Monitoring Programme, C.275 rivers out of 445 rivers are identified as allocated budget of c.USD 3.12bn
polluted. Additionally, with increased focus by Govt. on projects like Swacch bharat and for 5 years
Namami Gange (cleaning the Ganges by 2020), we will witness increased interest from
MNCs. These projects are vast and will attract players having competencies from water
monitoring, to water management and treatment.


The Indian water treatment chemicals market is highly competitive and mainly has integrated
players such as private companies, MNCs, as well as joint ventures that either provide end-to-
end water solutions or are in the process of expanding in the value chain. This also implies
that most water treatment companies have their own water chemical manufacturing
capabilities as well. Around 70% of the market is dominated by the organised sector, largely
water management multinationals and large-scale domestic companies such as Nalco
chemical India limited, Thermax Limited, Chembond and Ion Exchange India Limited. These
companies have a diverse product portfolio and a strong distribution network to cater to the
Indian market. Within India, the western region of the country is expected to continue its
dominance in terms of the consumption of water treatment chemicals on account of existing
and upcoming oil and gas, pharmaceutical and chemical manufacturing facilities. Among
Indian companies, raw material and labour are the major cost drivers. Following exhibits
highlights the competitive landscape of companies.
Exhibit 81. Snapshot of colourants companies (FY11-FY16)

Revenue (FY16, Avg. Revenue
Company Country Avg. EBITDA,% Avg. ROCE% Avg. ROE%
in mn INR) Growth (CAGR %)
Chembond Chemicals* India 2,710 5% 10% 23%* 17%*
Ion Exchange India 8,694 9% 4% 16% 7%
Ecolab Inc USA 883,697 23% 10% 26% 39%
Kemira Finland 175,747 4% 12% 5% 19%

Source: Bloomberg, Company, JM Financial *FY14 and FY15 not considered.
Exhibit 82. Competitive dynamics of Water treatment companies
Exhibit 83. Valuation metrics for water treatment companies based on consensus
EPS P/E EV/EBITDA
Company Country
Chembond Chemicals India 115 6 10 11 2x 32x 23x 20x 16x 9x NA NA
Ion Exchange India 11 20 NA NA 28x 19x NA NA 9x 7x NA NA
Ecolab Inc USA 4 5 5 6 27x 28x 24x 22x 15x NA 14x 13x
Kemira Finland 1 1 1 1 20x 15x 12x 12x 8x 8x 7x 6x


5. Outlook
Despite the presence of several global players in the water chemicals space, Indian companies
have also grown and are exporting innovative solutions across the world. Unlike certain other
specialty chemicals segments in India, water treatment chemicals largely form an organised
market with integrated players. With water projects and solutions providers having
established in-house water chemical manufacturing capabilities, it would be imperative for
pure-play companies to either integrate forward or develop strong partnerships with
solutions providers.
Key trends such as the shift from traditional (alum) to technically advanced products
(coagulants and flocculants), followed by rising demand for environment-friendly chemicals in
the wake of stricter government regulations and growing urbanisation indicates a positive
outlook for the water treatment chemicals segment. Thus, the high projected growth rate of
c.14% over FY15-FY20 can be easily achievable and even surpassed. While growing scarcity
of usable water is limiting industry growth, this situation has offered a lucrative opportunity
to water treatment companies.
Overall, companies that manufacture and supply water treatment chemicals will be best
served by transforming from pure-play chemical manufacturers to end-to-end service
providers. They could capitalise on the opportunity offered by urban bodies in India that are
moving to the Build-Own-Operate-Transfer model for water treatment management,
either by building their own capabilities or through partnerships. Another critical success
factor could be working closely with regulatory bodies such as pollution boards to
understand and implement evolving environmental regulations governing water safety.

Ion Exchange | Not Rated

An integrated water solutions provider
Ion Exchange (India) Ltd. (IEIL) is a leading player in water, waste water treatment and Mehul Thanawala
environmental solutions catering to diverse segments such as infrastructure, industry,
institutions, municipal, homes and communities. IEIL also manufactures ion exchange resins Alok Ranjan
and specialty chemicals for water and waste water treatment as well as non-water
Pramod Krishna
applications. Its business can be segregated in to three verticals: engineering (60% of pramod.krishna@jmfl.com | Tel: (91 22) 61781074
revenue), chemicals (30%) and consumer products (10%). IEILs long-standing and evolving
technology and application knowledge as well as strong focus on R&D has helped it generate
50 patents and more than 100 commercialised products. IEIL is highly focussed on increasing
its presence domestically and globally with key projects in Sri Lanka and growth in the resins
market in North America. Key Data ION IN
Engineering business key projects driving the business: IEIL has healthy order book of Market cap (bn) INR7.1/$0.1
c.USD 309mn including a Sri Lankan water supply project (EPC) worth USD 194mn, Free Float 47.6%
funded by the World Bank. Although its revenue growth has been sluggish, posting 1.5% Shares in issue (mn) 14.67
over FY12-FY16, realisations from the Sri Lanka project increased its revenue by c.25% Diluted share (mn) 14.67
over FY16-FY17. Management expects the Sri Lankan projects execution to accelerate its 52-week range 638/254
revenue growth over the next three years (FY18-FY20). Over the next 3-5 years, IEIL Sensex/Nifty 31,160/9,736
expects better traction of projects from the Centre, state and municipal levels from FY18. INR/US$ 65.7
Moreover, better margins are also expected due to significant improvement on the
Price Performance
execution of orders from smaller and medium segments and exports.
% 1M 6M 12M
Chemicals business an organised play: IEILs chemicals division has posted c.16% CAGR Absolute -10.0 20.8 69.5
Relative* -8.6 14.2 59.1
over FY10-FY17. The organised sector caters to c.80% of the water treatment chemicals * To the BSE Sensex
market and thus gross margins (c.30%-35%) are fairly attractive compared with the other
two segments. IEIL offers a complete range of water treatment chemicals, specialty
chemicals and customised chemical treatment programmes as a part of its treatment
solutions. The capex in its chemicals business was c.USD 2.34bn Cr in FY17 and
management has guided for similar capex in FY18. Management is confident it can
maintain its revenue growth momentum on the back of continued capex and USFDA
approval for its resins plant at Ankleshwar.
Consumer business revival on the cards: IEILs water management solutions extend
beyond industries to homes, hotels and hospitals under the brand name Zero B, which is
positioned towards the premium end of the market as the company does not want to
enter the highly-competitive economy segment. Although the consumer segment has lost
ground over the past few years, management is planning to revive the business by
focussing on the expansion of ground water treatment solutions by tailoring products to
meet the requirements of specific markets.
Industry outlook favours IEIL: According to Central Pollution Control Board, India does not
have the capacity to treat c.63% of sewage. Thus, the Indian waste water management
industry is expected to record a CAGR of c.8-10% over FY15-FY20. With increasing
environment-related concerns, capex on water and waste water infrastructure is going to
increase, resulting in a significant opportunity for integrated players such as IEIL.
Net sales 8,573 7,930 8,005 8,711 10,241
Sales growth (%) 18.6 -7.5 0.9 8.8 17.6
EBITDA 492 341 466 556 776
Adjusted net profit 141 46 98 153 284 Bloomberg - JMFR <GO>,
EPS growth (%) 22.7 -70.3 114.3 56.4 83.7 S&P Capital IQ and FactSet
ROIC (%) 12.4 4.4 8.0 10.7 21.9
ROE (%) 9.8 3.0 6.3 9.4 15.4
PE (x) 44.3 NA 69.7 44.5 24.2 Please see Appendix I at the end of this
Certification.

Ion Exchange 28 September 2017

Growth (%) 18.6 -7.5 0.9 8.8 17.6 Other capital 0 0 0 0 0
Personnel cost 980 965 975 1,102 1,217 Total loans 704 890 769 798 907
EBITDA 492 341 466 556 776 Sources of funds 2,287 2,491 2,415 2,561 2,949
Growth (%) 55.8 -30.7 36.7 19.4 39.4 Fixed assets 2,006 2,005 2,062 2,334 2,537
Depreciation and amort. 123 106 121 126 133 Net block 1,011 936 845 1,030 1,121
EBIT 416 284 388 496 700 Capital WIP 15 12 144 21 332
Add: Exceptional items 0 0 0 0 0 Inventories 724 755 793 814 1,109
Less: Minority Interest 5 2 17 16 3 Cash & bank balances 260 238 262 334 1,669
Reported net profit 141 46 98 153 284 Loans & advances 990 902 877 1,032 1,099
Adjusted net profit 141 46 98 153 284 Current liabilities & prov. 4,341 3,855 4,113 4,299 6,811
Diluted share cap. (mn) 129.80 140.90 140.90 141.20 142.30 Provisions and others 862 700 951 985 2,851
Growth (%) 1,126.6 -70.3 114.3 56.4 83.7 Others (net) 90 51 37 6 23

Reported net profit 141 46 98 153 284
-Inc/dec in working cap. 279 -259 -130 84 -425 Y/E March FY13A FY14A FY15A FY16A FY17A
Others 4 2 7 -23 1
BV/Share (`) 11.6 10.8 11.1 12.0 13.9
Cash from operations (a) 565 -127 119 300 -29
ROIC (%) 12.4 4.4 8.0 10.7 21.9
-Inc/dec in investments 22 2 1 0 -5
ROE (%) 9.8 3.0 6.3 9.4 15.4
Capex -268 -7 -185 -147 -514
Net Debt/equity ratio (x) 0.3 0.4 0.3 0.3 -0.4
Others -365 -75 277 -123 1,799
Valuation ratios (x)
Cash flow from inv. (b) -611 -81 92 -271 1,280
PER 44.3 NA 69.7 44.5 24.2
Inc/-dec in capital 8,040 10,232 3,043 456 535
PBV 41.6 44.7 43.6 40.1 34.7
Dividend+Tax thereon -8,046 -10,263 -3,103 -468 -541
EV/EBITDA 13.6 21.8 15.6 13.0 7.8
Inc/-dec in loans 143 187 -121 28 109
EV/Sales 0.8 0.9 0.9 0.8 0.6
Others -19 30 -7 28 -19
Turnover ratios (no.)
Financial cash flow ( c ) 118 186 -188 43 84
Debtor days 152 160 163 152 157
Inc/-dec in cash (a+b+c) 72 -23 24 73 1,335
Inventory days 31 35 36 34 40
Creditor days 217 212 221 215 218
Closing cash balance 261 237 262 334 1,669 Source: Company, JM Financial

Appendix 1
Specialty Chemicals A special segment within chemicals
Specialty chemicals companies play in niche areas; they target a particular functional
performance and are thus difficult to be replaced by other competitors. On the other hand, Specialty chemicals segment is
the commodity chemical products of one supplier can be easily changed with anothers. increasingly attracting the
Therefore, basic chemicals companies use cost-competitiveness and scale as their strategy attention of investors worldwide
tool, whereas pure play specialty companies use innovation as a competitive strategy. The
result of these strategies is evident in the comparative analysis of these two segments.
In order to represent each segment of basic and specialty chemicals in the comparative
analysis, we analysed 22 basic and 22 specialty companies. The 22 specialty companies
includes various segments of specialty chemicals such as dyes and pigments, agro and Basic chemicals focus on cost
pharma intermediates, agrochemicals, rubber chemicals, colourants, fluoro-chemicals, etc. competitiveness and scale;
We analyse these companies on qualitative and quantitative parameters (based on financial specialty chemicals focus on R&D,
data between FY11-FY16) to highlight differences between basic and specialty chemicals. new product launches
Exhibit 84. Basic chemicals vs. Specialty chemicals An analytical comparison
Parameters Basic Chemicals Specialty Chemicals
Qualitative
Product type Specification based Performance/functional product
Structure Simple molecular Single molecule/formulation
Production Continuous Mainly batch
Price determination Supply demand balance Performance

Medium to high volume products with lower Low to medium volume products with
Volume and Value
price realisations higher price realisations
Value addition Low to medium Medium to high Specialty companies outperformed
Plants/Facilities Costly, not able to vary product Small, inexpensive, able to switch products basic chemicals on nearly all the
parameters.
Labor requirements Minimal, rely on automation Costly, rely on innovation
Strong R&D leading to new product
Access to secure and cost-efficient raw
Key Success Factors development, high performance-to-price
material, operational efficiency
ratio
Quantitative (FY11-FY16)
Revenue Growth (CAGR) 6% 15%
Raw material cost to sales 62% 54%
R & D expense to sales ~0% ~1-2%
Employee cost to sales 5% 7%

Specialty chemicals: higher gross
EBITDA margin 11% 15%
margins, profit margins, ROCE and
Profit Margin 4% 8% ROE
ROCE 12% 24%
RONW 11% 20%
Exhibit 84 clearly illustrates the financial superiority of specialty chemicals when compared
with basic/diversified chemicals. On average, raw material costs as a percentage of sales are
8-9% lower compared with specialty chemicals, mainly on account of high value addition
leading to higher realisations. For example, in the fluorine value chain, price of PTFA powder
ranges at INR 700-1300/kg, nearly 35x-65x the price of raw material, fluorspar which is sold
at INR 20/kg. Gross margins of specialty chemicals companies are typically higher but get
partially offset by higher R&D and employee expenses due to higher focus on new product
development. Also, EBITDA and profit margins are higher in the specialty chemicals segment
owing to higher gross margins and lower power and fuel costs. Overall, specialty chemicals
can be characterised as a sector which exhibits high growth, high margins and delivers better
returns on capital employed and equity.

Appendix 2
Specialty chemicals Transitions, worth looking at
Introduction
Over the past 4-5 decades, at various stages, various countries have led the specialty
chemicals business. US led the industry after World War II until the late 1980s, manufacturing
chemicals for use in oil field services, electronics, plastics, etc. Gradually, Europe took over
and dominated the business mainly through exports, while the US and Japan remained key
producers. However, with trade liberalisation, technology transfer, reducing economic
barriers and rapid economic growth in developing countries, the specialty chemicals industry
expanded rapidly in China, especially after it joined the WTO in Dec01. The high growth The industry initially saw a
seen in Chinas specialty chemicals industry may be attributed to low labour costs, low energy leadership change from the US to
and regulatory costs (compared with developed markets) and a highly-developed basic Europe
chemicals segment. Although China has seen strong growth in the specialty chemicals
US/Europe/Japan remained major
segment, recent structural changes have reduced its competitiveness and gradually, India
players until the 2000s
maybe able to emerge as a fast-growing specialty chemicals hub.
In this Appendix, we try and understand what drove this change why did the US become
the leader and why then did the industry move to other regions? We analysed the cycle of
the specialty chemicals industry in developed countries such as the US and Japan as well as
Europe (comprising 8 large exporters: Germany, France, Italy, the UK, Spain, Netherlands,
Belgium and Poland). We also highlight its gradual shift towards growing Asian countries
such as China and India.
1.US led the specialty chemicals industry: Pre-1990

US led the specialty chemicals industry on the back of cheap raw material: During the 1980s,
the US accounted for approximately half (46%) of global sales of specialty chemicals clearly In the 1980s, the US domestic
highlighting its predominance. Western Europe accounted for 34% and Japan accounted for market accounted for 46% of
15%. We note that the US had easy access to raw material (including energy) as it was one global sales
of the worlds largest producers of oil. Thus the first driver (low raw material costs) made the
US the global leader in specialty chemicals.
Also, we note that in those early days, most of the specialty chemicals were used oilfield
work and electronics; therefore, the demand centre was also the US. Electronics chemicals
was the fastest growing segment, with demand being driven by its use in plasma processing Europe and Japan were the second
materials, materials for photovoltaic cells, conformal coatings, etc. In 1983, the diagnostic and third largest markets in
chemicals segment in the US generated revenue of c.USD 4.5bn, with a 10% annual growth specialty chemicals
rate. Demand for oilfield chemicals was directly dependent on demand for crude petroleum
and these chemicals grew c.21% during 1978-1982 (Exhibit 85).
Exhibit 85. US high-growth specialty chemicals segments (1983)
Electronic chemicals led growth on

the back of a boom in integrated
circuit manufacturing

The following exhibit illustrates the trade balance, demand and production data and the
specialty chemicals segments contributing to high growth rates.
Exhibit 86. US demand, trade and production data of specialty chemicals - 1983 (in USD bn)
US specialty manufacturers mainly

focussed on catering to domestic
demand
It is pertinent to note from the above exhibit that the US was not importing specialty
chemicals but was largely manufacturing them. This provided a strong demand base for US
producers of specialty chemicals. Thus, the second factor (domestic demand) also supported US specialty chemicals industry
the US specialty chemicals industry. Moreover, the average growth rate for the US speciality posted 5% CAGR in 1983
chemicals industry was c.5% during 1983, one of the highest among major manufacturers.
The US also enjoyed the remaining 3 factors: innovation, strong IPR and relatively low focus
on environment (leading to lower compliance costs).
2.Emergence of Europe as major specialty chemicals export hub 1990-2002

Gradually, Europe started to make inroads in the US domestic market: We note that even
during the early 1980s, Europe was the second largest region for specialty chemicals, but had
slowly started gaining global leadership. In 1983, US specialty chemicals exports were 7x the
value of its imports, but import was growing 2x export growth.
Around this period (early-to-mid 1980s), three factors started impacting the specialty
chemicals industry: 1) the oil shocks of the previous decade (1973 and 1979) possibly resulted
High dependency on imported
in declining profitability for European companies, which were more dependent on imported
feedstock pushed European firms
crude; 2) in the US, there was increased focus on pollution (the last major refinery in the US
towards specialty chemicals
>1,00,000 barrels/day was built in 1977); and 3) the US started becoming increasingly
dependent on imported crude (Exhibit 87).
Exhibit 87. US net imports of crude oil and petroleum products (1000 barrels per day)
16000
14000
12000
10000
8000
6000
4000
2000
0
Jan-1981
Jan-2001
Jan-1973
Jan-1977
Jan-1985
Sep-1987
Jan-1989
Jan-1993
Jan-1997
Jan-2005
Jan-2009
Jan-2013
Jan-2017
May-1974
Sep-1975
May-1978
Sep-1979
May-1982
Sep-1983
May-1986
May-1990
Sep-1991
May-1994
Sep-1995
May-1998
Sep-1999
May-2002
Sep-2003
May-2006
Sep-2007
May-2010
Sep-2011
May-2014
Sep-2015

These three factors led to: 1) increased cost of raw material for US companies, thus making
the US lose the strategic advantage to Europe and 2) increased regulatory/effluent treatment
costs for US companies. Therefore, by by late-1980s and early-1990s, the US lost its
leadership in specialty chemicals, while European firms emerged as major specialty chemicals
players, especially in terms of exports.
Europe despite some hiccups maintained the lead for the next decade: By 1991, Europe
was the largest producer of specialty chemicals (38% of the global export market share).
However, its market share declined sharply by c.7% during 1991-1995 (Exhibit 88) due to
factors such as the disintegration of the Soviet Union and reunification of Germany.
However, its strengthening trade links with Eastern Europes low cost (wage and production)
countries such as Poland and Czech Republic helped recover the falling exports market share.
The global economy also did well in the late 1990s with the US economy growing 5.1%
during 1995-2000. The weakening of the EUR further helped Europe gain global market
share in the early 2000s. Hence, Europe broadly maintained a share of >30% till about 2005.
Exhibit 88. Specialty chemicals export market share (%)
Europe lost the maximum market

share vs. the US and Japan
Source: Oxford Economics, JM Financial
3.Declining competitiveness of Europe & the emergence of China as the fastest-

growing specialty chemicals manufacturer 2002-2012
Chinas WTO entry and other factors led to a sharp decline in Europes market share: China
was granted the permanent most favoured nation status by the US in 2000 and this was
shortly followed by its entry into the WTO. This opened up a vast market with cheap labour
and much less regulatory and compliance costs, resulting in Europe/US losing nearly 6%/2%
of the worlds export market share at the expense of China/India, who gained c.6%/c.1.5%,
a trend expected to continue over the years. Among developed countries, US/Europe were
losing exports market share, but Japan kept its market share intact as it benefitted from the
geographical proximity to fast-growing markets such as China, leading to strategic benefits
of reduced transportation costs and time.
Among the three developed regions, Europe lost significant market share not due to the slow
growth in its destination market, but mainly due to the deterioration of its competitiveness.
Europes declining competitiveness trend was seen not only in the specialty chemicals
segment but also in the overall chemicals sector. Exhibits 89-91 show that Europe lost its
domestic and ROW market share.

Exhibit 89. EU losing share in the domestic chemicals market (EUR bn)
EU lost 6% chemicals market

share in the domestic market
81%
Source: Cefic, JM Financial
Exhibit 90. EU losing share in ROW chemicals market (EUR bn)
EU lost 3.3% chemicals market

share in ROW market
Exhibit 91. EU chemical sales: a falling share in a growing market
Mature market, ageing

population, declining
competitiveness affected Europes
share in overall sales of chemicals
Source: Oxford economics, Cefic, Industry, JM Financial
As shown in exhibit 91, Europes share of global chemical sales decreased significantly from
32% in CY93 to 17% in CY13, mainly due to the dilution effect, which continued over a
period of time. Growth in post-recession Europe remains slow, mainly due to its mature
markets and ageing population. Exhibit 92 also illustrates the increase in the consumption of
chemicals in emerging markets compared with Europe. The resulting market share loss in
domestic and export sales points at Europes declining competitiveness and Chinas increased
penetration in Europe and the US markets.
Exhibit 92. Chemicals consumption - emerging economies saw fastest growth (2003-2013)

We assessed the competitiveness of Europes specialty chemicals industry using parameters
such as energy costs, labour costs, R&D expenses, regulatory burdens, proximity to high-
growth markets and currency movements.
Energy costs: While the energy cost impact is higher in basic chemicals, even downstream
sectors are affected due to the rising cost of basic chemicals, which are used as feedstock. Costs of energies such as natural
Since Europes basic chemicals companies depend on imports for most of the feedstock, it gases and basic chemicals affected
leads to lower competitiveness vs. the US and China (closer proximity to the Middle East). competitiveness
Overall, the specialty chemicals industry also felt the heat of the high energy costs that
plagued the basic chemicals industry.
Labour costs: Labour costs have been instrumental in driving the specialty chemicals
industrys transition from the West to the East. Labour data reveals that Europes chemical
sector wages are significantly higher than the US. While the gap with Japan has all but
disappeared, the gap with the US has been widening since 2010. Chinas labour costs
have rapidly risen, but on a very low base vs. Europe and the US. This made China
increasingly attractive to global players.
Exhibit 93. Hourly wages in major producers of chemicals
In 2012, the labour cost in China

was only 7% of Europes
Source: Oxford economics, Cefic, JM Financial
Research and Development: R&D is an important driver of competitiveness in the specialty

chemicals sector. However, there has been a steady decline in R&D activity over the past
20 years in the developed world. In Europe, the decline has been fairly steady, from about
2.75% of the sector output in CY92 to 1.5% in CY12. As expected, Japan has

demonstrated higher R&D intensity than others. However, China increased its R&D
spending dramatically in the early 2000s as it entered the WTO. Moreover, R&D spending
in absolute terms is growing more rapidly in China than it is in developed countries.
Exhibit 94. R&D spending in major producers of chemicals (in %)
R&D spending in Europe declined

to 1.25% of output during 1992-
2012
Source: Oxford economics, Cefic, JM Financial
Regulatory costs: Among major specialty chemicals producing countries, China has the
lowest regulatory burden and Europe the highest. Over the past 7 years, the US
regulatory burden has also risen. A further granular analysis indicates that within Europes Compared with China, US and
chemicals industry, agrochemicals (c.16% of value added) and specialty chemicals (c.23% Japan, Europe had the highest
of value added) have the highest regulatory burdens. During CY03-CY13, compliance regulatory burden in 2013
costs were driven by the introduction of REACH regulations in CY07 and CLP in CY08.
Energy legislations also contributed to the rising costs, especially after CY12. This led to
doubling of regulatory costs.
Exhibit 95. Business regulatory burden - CY13
Source: Oxford economics, World economic forum, JM Financial
We believe the decline in Europes competitiveness vs. the US and China was led by the
multiple parameters discussed above. Despite decreasing cost competitiveness, Europe could
have maintained its exports market share had it continued on the path of innovation.
Therefore, product and process innovation are critical factors for Europe/US to deliver
maximum value to customers and compensate for cost disadvantages vs. China and India.
China rising as a growth leader: During the end of the 1990-2013 period, China emerged as
one of the fastest growing specialty chemicals manufacturers. This was driven by the growth
in its basic chemicals industry, its entry in to the WTO in CY01 and the gradual shift from
basic to specialty chemicals. China grew c.13% over CY08-CY16.
The parameters discussed above will remain critical, helping identify the next leader in the
specialty chemicals segment. Overall, this period saw a decline in Europes competitiveness
and the emergence of China as the next leader.
Key reasons for Europes reduced exports share Declining competitiveness
Exhibit 96. Europe regulatory cost Specialty, Agrochemicals & basic chemical sector
Within chemicals, agrochemicals

and specialty chemicals incur the
highest regulatory costs
4.Emergence of India on the specialty chemicals map: Post 2013

Specialty chemicals industry moves towards emerging markets: From the tri-polar (US, Europe
and Japan) specialty chemicals producing world in the 1990s, we have moved to a multi-
platform chemicals producing world, where regions are competing for investments. Over the Specialty chemicals industry saw
years, other countries recognised the strategic importance of the specialty chemicals industry the transition from a tri-polar to
and thus China and India have made successful efforts to build large and increasingly multi-polar world
sophisticated production facilities. The reasons for the emergence of developing countries are
energy, feedstock advantages, cost effectiveness, increasing focus on R&D and end-use
market growth.
India rapidly closing the gap: In the current scenario, India looks similar to what China used
to be in the specialty chemicals market during the early 2000s. While it has remained in
Chinas shadow for long, it gradually is emerging out of it with its own structural benefits
and the spillover effect of Chinas declining competitiveness. India has a c.35% labour cost
advantage over China. Moreover, Indias labour cost growth rate was only 6% vs. 20% in
China over FY06-FY15. In terms of market penetration, Indias specialty chemicals usage is at India has emerged as the fastest
a nascent stage, with the penetration level of some segments below 0.2%. For example, growing major specialty chemicals
3 3
Indias current expenditure on admixtures is only USD 1/m vs. USD 2/m in China and USD manufacturer
3
4.5/m in USA Similarly, the usage of pesticides in India is 0.58kg/ha compared with 2kg/ha in
China. Also, according to an NCAER survey, the Indian middle class could grow from 31
million households in 2008 to 148 million households by 2030 with 4x consumption power.
Additionally, Indias urban population is expected to increase by 275 million people by CY30.
The above factors will result in consumption-led double-digit growth in key end markets. We
have analysed Indias competitiveness on various competitive parameters in our main section.
In summary, Asian economies will drive growth in the specialty chemicals industry. In order
to participate in the growth of emerging markets, the US and Europe should either have
export competitiveness or thorough investments in these growing markets. We observe
that the second route has been most productive and favourable for these US/European
companies.

Appendix 3
Oleochemicals: Driving consumers towards GREENER products
Oleochemicals are derived from natural oils and fats taken from animals and plants. Growing
demand for green products and sustainable solutions, coupled with regulatory changes in
recent times, has brought oleochemicals into focus. Oleochemical-based products are Exhibit a. Expected increase in oleochemical
becoming popular across specialty chemicals segments owing to their advantages including production (2016-2025)
their eco-friendly image, low toxicity and fine dermatological compatibility. Oleochemicals are
mainly used in personal and household care products, pharmaceuticals, food and beverages.
With constant growth of raw material availability and emerging end use in areas such as bio-
lubricants and surfactants, the global oleochemicals market is expected to reach c.USD 26bn
by end-CY19, with a c.4.2% CAGR over CY14-CY19. By region, Asia-Pacific is the
production leader and the fastest growing market. We believe oleochemicals will continue to
grow at a faster rate but may face challenges such as feedstock unavailability and growing
number of alternative uses for its raw materials
Asia-Pacific to be the production leader India emerges as a frontrunner: Asia-Pacific will
remain the major manufacturer of oleochemicals due to widespread availability of raw Source: Industry, JM Financial
material and consequent up-stream integration for all major companies. Apart from
production, Asia-Pacific is the fastest growing oleochemicals market, with consumption
recording c.5.1% CAGR during CY14-CY19. Within Asia-Pacific, India is a key market Exhibit b. Oleochemcial route
with market size of c.USD 1.6bn in FY15, expected to grow at c.5% over FY15-FY20 due
to increasing consumption of oleochemical-based products such as personal care items
and detergents. Therefore, there is also potential for new installed capacities for the
manufacture of oleochemcials in India.
Higher crude oil prices will boost oleochemicals capacity: In CY15, fatty acids and alcohols
ranked #1 and #2 in terms of market share by type in the global oleochemicals segment.
The production capacity for fatty alcohols and fatty acids was only 4.5 million and 11.5
million tonnes, respectively in CY15. A capacity increase for both will be strongly
influenced by crude oil prices (synthetic alcohols). Higher crude oil prices will drive the
demand for alternate sources of raw materials for personal and household care products,
leading to a focus on increasing oleochemicals capacity. Additionally, major capacity
additions are likely in the Asia-Pacific region owing to high dependence on crude oil Source: JM Financial
imports and the expanding market for oleochemicals-based products.
Emerging applications to drive rapid expansion: Oleochemicals are gaining popularity

Exhibit c. Global oleochemical market
among companies that manufacture lubricants, polymers and surfactants. The use of
biolubricants will help bypass the high cost of disposing synthetic lubricants. Biolubricants
have a c.3% market share and industry reports indicate that by FY20, it will account for
9% of the market, implying a CAGR of 19%. Like biolubricants, biopolymers are
substituting synthetic polymers. Although the biopolymers market is in the infancy stage,
it is expected to post a CAGR of 40% to reach c.20mn tonnes by FY20, accounting for
7% of the global polymers market. Among surfactants, Methyl Ether Sulphonate (MES) is
an oleochemical-based substitute for the commonly-used Linear Alkyl Benzene Sulfonate
(LABS). MES performance is better than LABS due to excellent characteristics such as high
purity and active level with no volatile organic compound.
Challenges ahead: The key challenge for the oleochemicals segment is linked to the
affordability of oleochemical-based products. Oleochemical prices are affected by: (1)
Feedstock availability Feedstock availability is a key concern for companies operating in the
oleochemicals segment or those planning to enter it. Historically, 12%-14% of the worlds
vegetable oil production has been used to manufacture oleochemicals. Oleochemicals
production depends on favourable climatic conditions and only geographies such as India,
Malaysia and Indonesia offer climates suitable for palm tree plantations. (2) Alternative uses
of vegetable oil: Increased requirement of biodiesels (derived from vegetable oils) could push
price of vegetable oil. Thus, manufacturers of chemicals may find it less attractive to use
oleochemicals vs. petroleum feedstocks.

APPENDIX I
JM Financial Inst itut ional Secur ities Lim ited

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Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%
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The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.
Important Disclosures
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company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
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international markets. It also renders stock broking services primarily to institutional investors and provides the research services to its institutional
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the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or
sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
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Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
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The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts)
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company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the
time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or
developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities
may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The
investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of any
use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to
make modifications and alterations to this statement as they may deem fit from time to time.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any
transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or
other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional
Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not
be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves
of and to observe such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala (ruchir.jhunjhunwala@jmfl.com) on +65 6422 1888
in respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial
Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the
United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of
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This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for
purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in
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requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading
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Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM
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are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are
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Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of
the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities
or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only
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no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as
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this research report or the information contained herein.

Indian Specialty Chemicals Growth Catalysts

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Indian Specialty Chemicals Growth Catalysts

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28th Sep 2017

Aksharchem India (Not Rated) 53

Asahi Songwon (Not Rated) 55

Atul Limited (Not Rated) 57

Clariant Chemicals (Not Rated) 59

Meghmani Organics Ltd. (Not Rated) 61

Sudarshan Chemicals (Not Rated) 63

Ultramarine & Pigments (Not Rated) 76

Water Treatment Chemicals 79

JM Financial Institutional Securities Limited Page 2

Indian Specialty Chemicals

JM Financial Institutional Securities Limited

1. Specialty Chemicals Distilling the common into the

Exhibit 1. Specialty chemicals - differentiation matrix

Fine chemicals Specialty chemicals

Specialty chemicals cost more per

Source: Kline and Company, Inc., JM Financial

Exhibit 2. Chemical industry value chain

JM Financial Institutional Securities Limited Page 4

2. Unveiling the key catalysts behind specialty chemicals

Source: TSMG-FICCI, Global Market Insights, JM Financial

2.2 Drivers for the specialty chemicals industry

JM Financial Institutional Securities Limited Page 5

3. Where does Indias specialty chemicals industry stand?

Source: TSMG-FICCI, JM Financial

Indian specialty chemicals grew by

Exhibit 5. Indian specialty chemicals segment - Forecast (USD bn)

28 Indian specialty chemicals grew 2x

Source: TSMG & FICCI, Company, JM Financial

Exhibit 6. Specialty chemicals market size - India vs. Global

JM Financial Institutional Securities Limited Page 7

4. Confluence of identified drivers suggests high growth

We have previously identified drivers of specialty chemicals as:

Competitive cost of manufacturing,

Investment in R&D, and

An ecosystem to support the industry and innovation

4.1 Domestic availability of raw materials at competitive prices

Source: Make in India, JM Financial

JM Financial Institutional Securities Limited Page 8

200 148 136 115

Source: CEFIC, JM Financial

Exhibit 9. End-use industries market growth rate

Source: IBEF, IJIRD, Industry, Company, JM Financial

JM Financial Institutional Securities Limited Page 9

Exhibit 10. End-use industries growth in China growth slowed down

Paper & Pulp

Food & Beverages

Source: IHS Markit, JM Financial

Exhibit 11. Chinas specialty chemical market (USD bn)

80 Chinas specialty chemicals market

Source: IHS, McKinsey Analysis, Industry, JM Financial

JM Financial Institutional Securities Limited Page 10

Exhibit 12. Indian specialty chemicals Industry - Forecast (USD bn)

Source: TSMG & FICCI, Company, JM Financial

Exhibit 13. Penetration ratio of Indian specialty chemicals

0.40 Construction chemicals, polymer

Source: Industry, Company, JM Financial

JM Financial Institutional Securities Limited Page 11

4.3 Competitive cost of manufacturing

Exhibit 14. Countries with most STEM graduates (In mn)

Source: Forbes Statista, JM Financial

Exhibit 15. Research excellence

Number of publications (thousands) Percentage of publications among 10% most cited

Source: Data from OECD, JM Financial