cd equisearch pvt ltdsuch as oilfield chemicals , cosmetic chemicals and water treatment chemicals....

CD Equisearch Pvt Ltd Sep 23, 2019

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Atul Ltd

No. of shares (m) 29.66

Mkt cap (Rs crs/$m) 11274/1585

Current price (Rs/$) 3801/534

Price target (Rs/$)

4663/65.5

52 W H/L (Rs.) 4149/2830

Book Value (Rs/$) 917/12.9 Beta 0.4

Daily volume NSE (avg. monthly) 15180

P/BV (FY20e/21e) 3.7/3.0

EV/EBITDA (FY20e/21e) 11.2/9.8

P/E (FY20e/21e) 18.8/16.3

EPS growth (FY19/20e/21e) 56.4/38.5/15.5

OPM (FY19/20e/21e) 19.0/19.6/19.4

ROE (FY19/20e/21e) 18.0/21.0/20.4

ROCE(FY19/20e/21e) 17.7/20.7/20.2

D/E ratio (FY19/20e/21e) 0.0/0.0/0.0

BSE Code 500027

NSE Code ATUL

Bloomberg ATLP IN

Reuters ATLP.NS

Shareholding pattern %

Promoters 44.7

MFs / Banks / FIs 22.9

FPIs 6.9

Govt. Holding 0.0

Public & Others 25.5

Total 100.0

As on June 30, 2019

Recommendation

BUY

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

(Figures in Rs crs)

FY17 FY18

FY19

FY20e FY21e

Income from operations 2833.94 3295.77 4037.51 4608.49 5285.37

Other Income 52.55 25.91 34.86 38.50 52.88

EBITDA (other income included) 562.00 531.10 801.64 941.62 1080.08

Adjusted PAT 320.65 276.35 432.17 598.69 691.58

EPS(Rs) 108.11 93.17 145.70 201.84 233.15

EPS growth (%) 16.4 -13.8 56.4 38.5 15.5

Company Brief

Atul Ltd manufactures value added chemicals by blending basic chemicals

and natural resources for diverse industries -agriculture, construction,

textiles, pharmaceuticals and automobiles - from its plants in Valsad,

Bharuch (Gujarat) and Thane (Maharashtra).

Quarterly Highlights

� Propelled by high operating margins in both LSC and POC businesses,

overall OPMs rose by a staggering 6.5% to 23.1% last quarter (19.2% in

Q4). EBIT margins of LSC segment jumped from 13.8% in Q1FY19 to

20.1%, while that of POC advanced to 20% from 13.5%, resulting in

operating profit growth of some 59%. Ye revenues rose by a stately 14%

to Rs 1041 crs when compared to Rs 913 crs in the same period a year ago.

� Despite modest fall in other income and timid rise in depreciation

expense, profit before tax surged by a massive 59.6% and post tax

earnings by 81% last quarter. Prices of some chemicals rose sharply last

fiscal not least due to stricter implementation of environmental norms in

China which resulted in shortages. Trade war between China and USA

barely help matters for led to slowdown in global economy.

� By some estimates, the Indian specialty chemical industry is expected to

grow by 12-13% over the next five years driven by growth in end-user

industries. Besides, increasing governmental focus on affordable housing

and enhanced spends on infrastructure development is pushing demand

for performance enhancing specialty chemicals.

� The stock currently trades at 18.8x FY20e EPS of Rs 201.84 and 16.3x

FY21e EPS of Rs 233.15. Despite no small base, earnings growth would

barely show signs of waning - though largely boosted by recently cut

corporate tax rate. Shifting manufacturing bases to India and domestic

chemical industry shifting from unorganized to organized sector would

scarcely have miniscule structural effect. But this beneficial dynamics are

often attended with increasing regulatory compliance and oversight, a

not so puny hurdle for manufacturers of developing economies. With

improved outlook overall, we revise upwards post tax earnings for

current fiscal by some 26%. On balance we maintain our buy rating on

the stock with revised target of Rs 4663 (previous target: Rs 4169) based

on 20x FY21e earnings.

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CD Equisearch Pvt Ltd


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Outlook & Recommendation

Global Specialty Chemicals Update

According to the latest update of Mordor Intelligence, global market for specialty chemicals is estimated to rise by a CAGR of

5.2% during 2019-2024 driven by robust construction activities in Asia-Pacific , Middle East & African regions, and growth of

oil exploration and production activities. Asia Pacific region is estimated to contribute most to the growth during the forecast

period not least due to increasing industrial activities in agriculture, food, cosmetics, and other manufacturing sectors in

countries like China and India. Yet demand should stifle due to increasing environmental regulations and decreasing fossil

fuel reserves, the report contends.

Research & Markets posits that growing demand from end user industries such as textiles, food and automobiles would

support of take of specialty chemicals in future. Other demand propelling factors for specialty chemicals include technological

advancements and increasing demand of various specialty chemicals in emerging economies. It reckons that the global

specialty chemicals market is expected to grow during the next five years due to growing demand from various applications

such as oilfield chemicals , cosmetic chemicals and water treatment chemicals.

Indian credit rating firm, Crisil, contends that closure of plants in European Union and China, owing to increasing

environmental concerns has opened up no small business opportunities for Indian specialty chemical firms. It further states

that export opportunities for Indian players have improved with global players actively looking to diversify their supply risk.

Yet it feels that slowdown in the global economy is likely to hamper the overall growth potential for chemicals. The rating

agency asserts that Indian firms need to update their product mix and accelerate investments in R&D to fully benefit from the

merging export opportunity.

Bottlenecks to growth of the sector barely escape attention of investors. Crisil feels that lack of infrastructural development and

R&D investment acts as hindrance to the growth of the sector. Other factors plaguing domestic production growth include

threat of cheaper imports and unavailability of raw materials. Government support in the form of feedstock availability and

protection from aggressive imports is vital for the industry, Crisil contends.

According to a report by IHS Markit, the specialty chemicals industry is becoming more commoditized not least due to

advances in supply-chain management, strategic sourcing, and e-commerce which have increased transparency and customer

awareness. The report states that some specialty chemical companies are trying to raise barriers to entry into their markets by

becoming more service oriented. The trend of providing services alongside products has long been the way to do business in

some specialty chemical sectors, including automotive coatings, fluid catalytic cracking catalysts, pharmaceutical ingredients,

and water treatment. With growth rates slowing and commoditization increasing, more specialty chemical companies have

increased the service component of their portfolios.

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Financials & Valuation

Shifting supply base to India emanating from stricter environmental norms in China and rapid growth in domestic

consumption are factors that would drive the growth of Indian specialty chemical industries over the next few years. By some

estimates, the Indian specialty chemical industry is expected to grow by 12-13% over the next five years driven by growth in

end-user industries. Besides, increasing governmental focus on affordable housing and enhanced spends on infrastructure

development is pushing demand for performance enhancing specialty chemicals. Diversified product portfolio of Indian

chemical manufacturers enables them to gainfully tap this burgeoning demand.

Atul's ongoing capital projects of some Rs 500 crs spanning debottlenecking of existing capacities, erecting new capacities of

existing products, safety and environment protection has the potential to generate additional sales of some Rs 1000 crs.

Specifically, plans are afoot to establish capacities of cosmetic ingredients, commercialize new pigments, enhance product

portfolio of textile chemicals, expand resins, formulations and specialty intermediates and increase CRAMS business with

strategic customers. Market share expansion opportunities would be tapped in resins, dyes & pigments, besides others.

No meanly volume expansion is expected in Atul's pharmaceutical, aromatics and polymers over the next two years. Yet large

scale gains in margins are ard to come by both for LSC and POC business not least due to base effect and slowdown in global

agrochemicals and automobile industries - pinching demand for specialty chemicals. OPM as a result is estimated to rise by

some 60 bps in current fiscal resulting in some 18% growth in operating profit. Thanks to recently announced corporate tax

cut by GOI, post tax earnings is estimated to rise by 38.5% this fiscal before moderating to 15.5% next fiscal. Little stymied by

buoyancy in earnings, return on capital would discernibly ascend over the next couple of years - ROE estimated to rise to

20.4% by FY21 from 18% in FY19.

Yet risks abound ranging from lengthy product approval / qualification process for polymers and pharmaceutical businesses

to loathsome weather related risks for crop protection business to meeting ever tightening norms of environmental protection

for colors business. Its colors business growth in barely elevated by its limited product portfolio in pigments and heavy

reliance on China for key dye intermediates. Commodity nature of the products adversely impinge margins of Atul's bulk

chemicals and intermediates. Though measures have been taken to improve product efficiencies, competition from China

continue to plague Atul's aromatics business.

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The stock currently trades at 18.8x FY20e EPS of Rs 201.84 and 16.3x FY21e EPS of Rs 233.15. Better than expected OPMs

(19.6% Vs 16.9% estimated) last fiscal resulted in nearly 6% higher EPS than estimated. Post tax earnings for current fiscal

has also been revised upwards by 25.9% all thanks to recently announced corporate tax cuts. Yet not impregnable slowdown

in global agrochemical and automobile industries emerging from ravaging trade wars could barely secure robust of take of

specialty chemicals. Still shirking of debt helps counter no smallish risks from business slowdown of epic scale. On balance

we maintain our buy rating on the stock with revised target of Rs 4663 (previous target: Rs 4169) based on 20x FY21e

earnings. For more info, refer to our December report.

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Cross Sectional Analysis

Company Equity (Rs crs)

CMP (Rs crs)

Mcap (Rs crs)

Inc. from ops. (Rs crs)

Profit (Rs crs)

OPM (%)

NPM (%)

Int. coverage

ROE (%)

Mcap / IO P/BV P/E

Aarti Inds. 43 1624 14073 4555 529 21.2 11.6 4.9 25.2 3.1 5.4 25.3

Atul Ltd 30 3801 11274 4166 498 20.5 11.9 102.9 19.9 2.7 4.1 22.6

Deepak Nitrite 27 287 3908 3287 289 18.9 8.8 5.2 27.7 1.2 3.3 13.5

Sudarshan Chem 14 329 2278 1513 58.11 14.2 3.8 10.7 11.1 1.5 4.1 39.2 ;calculations on ttm basis ROE of IC adjusted for revaluation reserves; book value adjusted for goodwill & revaluation reserves wherever applicable;

Mustering on emerging opportunities in specialty chemicals space - ranging from curtailed imports due to rising production of

downstream products to increased orders for Indian chemical firms as global companies commence risk diversification from China -

Aarti has reaffirmed its massive expansion plan of Rs 1000 -1200 crs this fiscal. Brandishing its wherewithal of undertaking complex

projects, Aarti recently signed a $125m deal with a global chemical conglomerate for a high value specialty chemical intermediate for

a period of 10 years. The production facility for this product would come up in Dahej at an investment of $15m by Q4FY21.For

funding the setting up of two manufacturing units at Dahej SEZ, Gujarat for synthetic organic products, Aarti recently raised Rs 750

crs through a QIP (at Rs 1397 per equity share), which would keep a tab on its burgeoning debt. Business growth next fiscal would

await emerging trends in export markets for agrochemicals and commissioning of long term supply of herbicide intermediate

sometime early next year.

Backed by 13% growth in volumes of specialty pigments and 4% in non-specialty portfolio, Sudarshan Chemicals recorded 10.1%

growth in revenues in Q1 while OPMs slid to 15.6% compared to 16% in the same quarter a year ago. Despite pricing pressure on

select intermediates, gross margins improved as input price rises were passed on to the customers. Its overseas strategy is aimed at

greater engagement with overseas clients and tapping profitable opportunities for growth, which partially helped it report ~9%

growth in export revenues last fiscal.

Supported by strong volume growth and higher realizations (triggered by approval of new high performance OBAs) helped it report

eye-popping growth in revenues and profits - Revenues jumped nearly threefold to Rs 226 crs in Q; profits rose remarkably from Rs 3

crs to Rs 131 crs. Supply disruption for key some products prodded realizations, which in turn were exploited through higher

capacity utilization. Deepak's phenolics barely escaped the brunt of compression in spreads in phenol on account of global slowdown

in auto industry which impacted demand for phenol based derivatives. Despite over 90% capacity utilization of phenol plant during

Q1, EBITDA declined 16|% to Rs 77 crs from Rs 92 crs in Q4FY19.

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Financials

Quarterly Results Figures in Rs crs

Q1FY20 Q1FY19 % chg. FY19 FY18 % chg. Income from operations (net) 1040.55 912.78 14.0 4037.81 3295.77 22.5

Other Income 9.97 14.82 -32.7 34.86 25.91 34.5

Total Income 1050.52 927.60 13.3 4072.67 3321.68 22.6

Total Expenditure 800.30 761.66 5.1 3271.03 2790.58 17.2

PBIDT (other income included) 250.22 165.94 50.8 801.64 531.10 50.9

Interest 1.87 1.86 0.5 7.41 12.74 -41.8

Depreciation 31.76 28.38 11.9 118.91 110.38 7.7

PBT 216.59 135.70 59.6 675.32 407.98 65.5

Tax 68.94 54.25 27.1 244.32 130.97 86.5

PAT 147.65 81.45 81.3 431.00 277.01 55.6

Profit/loss of associate & JV 1.09 1.36 -19.9 5.02 4.23 18.7

MI 1.41 1.42 -0.7 3.79 4.76 -20.4

Net profit after MI & JV 147.33 81.39 81.0 432.23 276.48 56.3

Extraordinary Item - - - 0.06 0.13 -55.5

Adjusted Net Profit 147.33 81.39 0.8 432.17 276.35 56.4

EPS (F.V. 10) 49.67 27.44 81.0 145.70 93.17 56.4

Segment Results Figures in Rs crs

Q1FY20 Q1FY19 % chg. FY19 FY18 % chg.

Segment Revenue

Life Science Chemicals 349.79 310.59 12.6 1352.13 1130.67 19.6

Performance & Other Chemicals 732.77 654.96 11.9 2879.84 2368.88 21.6

Others 5.55 7.39 -24.9 33.01 56.38 -41.5

Sub Total 1088.11 972.94 11.8 4264.98 3555.93 19.9

Inter - Segment Revenue 47.56 60.16 -20.9 227.17 218.01 4.2

Income from ops. (gross) 1040.55 912.78 14.0 4037.81 3337.92 21.0

Segment EBIT

Life Science Chemicals 70.15 42.82 63.8 230.09 131.81 74.6

Performance & Other Chemicals 146.77 88.67 65.5 462.78 290.36 59.4

Others 1.12 2.10 -46.7 3.49 7.88 -55.7

Sub Total 218.04 133.59 63.2 696.36 430.05 61.9

Interest 1.87 1.86 0.5 7.41 12.74 -41.8

Other Unallocable Exp. (net of income) -0.42 -3.97 -89.4 13.63 9.33 46.1

PBT 216.59 135.70 59.6 675.32 407.98 65.5

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Consolidated Income Statement Figures in Rs crs

FY17 FY18 FY19 FY20e FY21e


Growth (%) 9.2 16.3 22.5 14.1 14.7

Other Income 52.55 25.91 34.86 38.50 52.88

Total Income 2886.49 3321.68 4072.67 4646.98 5338.25

Total Expenditure 2324.49 2790.58 3271.03 3705.36 4258.18

EBITDA (other income included) 562.00 531.10 801.64 941.62 1080.08

Interest 25.17 12.74 7.41 11.59 11.51

EBDT 536.83 518.36 794.23 930.02 1068.57

Depreciation 95.44 110.38 118.91 131.19 146.23

Tax 122.71 130.97 244.32 201.31 232.43

Net profit 318.68 277.01 431.00 597.53 689.91

Profit/loss of associate & JV 4.67 4.23 5.02 5.80 6.56

MI 0.38 4.76 3.79 4.65 4.89

Net profit after MI 322.97 276.48 432.23 598.69 691.58

Extraordinary item 2.32 0.13 0.06 - -

Adjusted Net Profit 320.65 276.35 432.17 598.69 691.58

EPS (Rs.) 108.11 93.17 145.70 201.84 233.15

Segment Results Figures in Rs crs


Segment Revenue

Life Science Chemicals 907.50 1130.67 1352.13 1520.19 1733.94

Performance & Other Chemicals* 2039.11 2150.87 2652.67 3050.33 3507.78

Others 49.44 56.38 33.01 37.96 43.66


Segment EBIT

Life Science Chemicals 147.89 131.81 230.09 266.03 307.77

Performance & Other Chemicals 303.36 290.36 462.78 549.06 631.40

Others 5.68 7.88 3.49 4.56 5.24

Sub Total 456.93 430.05 696.36 819.65 944.41

Interest 25.17 12.74 7.41 11.59 11.51

Other Unallocable Exp. (net of income) -9.63 9.33 13.63 9.22 10.57

PBT 441.39 407.98 675.32 798.84 922.34

*adjusted for inter-segment revenues

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Consolidated Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 29.68 29.68 29.68 29.68 29.68

Reserves 1936.26 2214.24 2676.03 3139.69 3769.25

Total Shareholders Funds 1965.94 2243.92 2705.71 3169.37 3798.93

Minority Interest 15.25 20.01 23.80 28.45 33.34

Long term debt 0.38 0.00 43.14 35.64 27.14

Total Liabilities 1981.57 2263.93 2772.65 3233.46 3859.41

APPLICATION OF FUNDS

Gross Block 1187.06 1295.26 1469.56 1694.56 1894.56

Less: Accumulated Depreciation 161.03 267.98 365.27 496.46 642.69

Impairment

Net Block 1026.03 1027.28 1104.29 1198.10 1251.87

Capital Work in Progress 58.99 96.20 172.27 150.00 175.00

Investments 428.94 469.84 752.01 968.70 1475.25

Current Assets, Loans & Advances

Inventory 419.24 411.43 511.82 563.00 591.15

Sundry Debtors 518.96 723.40 698.47 733.39 770.06

Cash and Bank 28.30 49.39 54.50 83.02 82.20

Other Assets 157.67 165.57 188.67 210.61 234.36

Total CA & LA 1124.17 1349.79 1453.46 1590.02 1677.78

Current liabilities 578.00 557.87 547.36 507.84 541.19

Provisions 9.60 10.87 29.87 9.91 10.70

Total Current Liabilities 587.60 568.74 577.23 517.75 551.89

Net Current Assets 536.57 781.05 876.23 1072.27 1125.88

Net Deferred Tax -101.42 -124.54 -138.96 -151.99 -160.52

Other Assets (Net of liabilities) 32.46 14.10 6.81 -3.63 -8.09

Total Assets 1981.57 2263.93 2772.65 3233.46 3859.41

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Key Financial Ratios


Growth Ratios

Revenue (%) 9.2 16.3 22.5 14.1 14.7

EBIDTA (%) 13.1 -5.0 51.0 17.5 14.7

Net Profit (%) 16.4 -13.8 56.4 38.5 15.5

EPS (%) 16.4 -13.8 56.4 38.5 15.5

Margins

Operating Profit Margin (%) 18.0 15.3 19.0 19.6 19.4

Gross Profit Margin (%) 18.8 15.7 19.7 20.2 20.2

Net Profit Margin (%) 11.2 8.4 10.7 13.0 13.1

Return

ROCE (%) 16.8 13.3 17.7 20.7 20.2

ROE (%) 18.4 13.5 18.0 21.0 20.4

Valuations

Market Cap / Sales 2.5 2.4 2.6 2.4 2.1

EV/EBIDTA 12.1 13.7 13.1 11.2 9.8

P/E 22.0 28.1 24.6 18.8 16.3

P/BV 3.7 3.6 4.1 3.7 3.0

Other Ratios

Interest Coverage 18.4 33.0 92.1 69.9 81.2

Debt-Equity Ratio 0.1 0.0 0.0 0.0 0.0

Current Ratio 2.5 3.0 3.5 4.4 5.0

Turnover Ratios

Fixed Asset Turnover 3.2 3.3 3.9 4.1 4.4

Total Asset Turnover 1.6 1.6 1.7 1.6 1.5

Debtors Turnover 5.9 5.3 5.7 6.4 7.0

Inventory Turnover 5.5 6.7 7.1 6.9 7.4

Creditors Turnover 7.1 7.0 7.8 9.5 10.4

WC Ratios

Debtor Days 61.8 68.8 64.3 56.7 51.9

Inventory Days 66.5 54.3 51.5 52.9 49.5

Creditor Days 51.2 52.1 46.8 38.3 35.0

Cash Conversion Cycle 77.1 71.0 69.0 71.3 66.4

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Cumulative Financial Data Figures in Rs crs FY10-12 FY13-15 FY16-18 FY19-21e

Income from operations 4561 7157 8724 13932

Operating profit 508 1015 1476 2697

EBIT 435 886 1311 2427

PBT 340 793 1246 2396

PAT after EO 232 541 873 1722

Dividends 45 78 117 186

OPM (%) 11.1 14.2 16.9 19.4

GPM (%) 10.1 13.5 17.4 20.0

NPM (%) 5.2 7.7 9.9 12.3

Interest coverage 4.6 9.6 20.0 79.5

ROE (%) 14.5 17.5 16.4 19.5

ROCE (%) 11.0 15.0 15.6 19.4

Debt-equity ratio* 0.6 0.2 0.0 0.0

Fixed asset turnover 4.7 5.6 3.8 4.2

Total asset turnover 1.9 2.1 1.6 1.6

Debtors turnover 5.3 6.0 5.0 6.2

Inventory turnover 4.9 5.5 5.9 7.5

Creditors turnover 6.0 7.5 6.6 8.5

Debtors days 68.4 61.0 73.0 58.7

Inventory days 73.7 66.4 62.2 48.9

Creditor days 60.3 48.8 55.7 42.8

Cash conversion cycle 81.8 78.7 79.4 64.8

Dividend payout ratio (%) 18.7 13.5 13.6 10.9 FY10-12 implies three years ending fiscal 12; *as on terminal year

Sparked by a no modest rise in volumes in several businesses including pharmaceuticals, aromatics and polymers last fiscal,

revenues surged by a blistering 22.5% last fiscal. Piggy riding on strong base cumulative revenues during FY19-21e would all

but match astounding revenue growth of FY13-15 period (56.9% - see table). OPM s which has surged no meanly across

businesses - the rise continued in Q1FY20 - for EBIT margins of both LSC and POC rose by a barely lowly 536 bps and 395 bps

respectively. Largely as a consequence of that and also lower tax liability (precipitating from sharp in corporate tax rates)

cumulative post tax earnings would nearly double in FY19-21e period.

Resurrection of capacity utilization (though not much for just Rs 19 crs is planned for debottlenecking of existing products

which could generate additional sales of Rs 39 crs) and expansion of capacity of existing products (Rs 370 crs investment

planned) could barely stymie fixed asset turnover - 4.2x estimated for FY19-21e period compared to 3.8x in FY16-18 period.

Return on capital would as a result of both higher earnings and healthy asset utilization would rise at no small rate - ROE

estimated to rise by over 300 bps (see table). Better working capital management would help shorted cash conversion cycle to

65 days from some 79 days.

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Financial Summary – US dollar denominated million $ FY17 FY18 FY19 FY20e FY21e

Equity capital 4.6 4.6 4.3 4.2 4.2

Shareholders funds 293.9 334.6 378.6 432.3 519.7

Total debt 25.9 2.4 7.9 7.5 6.4

Net fixed assets (incl CWIP) 163.7 169.1 179.9 185.0 196.0

Investments 66.2 72.2 108.7 136.2 207.4

Net current assets 77.1 113.3 118.8 142.0 148.5

Total assets 296.3 337.7 388.3 441.3 528.2

Revenues 422.4 511.4 577.7 647.8 743.0

EBITDA 83.2 82.4 114.7 132.4 151.8

EBDT 79.5 80.4 113.6 130.7 150.2

PBT 65.3 63.3 96.6 112.3 129.7

PAT 47.8 42.9 61.8 84.2 97.2

EPS($) 1.61 1.45 2.08 2.84 3.28

Book value ($) 9.9 11.3 12.8 14.6 17.5

*income statement figures translated at average rates; balance sheet and cash flow at year end rates; projections at current rates($71.14/$

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Exchange Rates Used- Indicative

Rs/$ FY14 FY15 FY16 FY17 FY18 FY19

Average 60.5 61.15 65.46 67.09 64.45 69.89

Year end 60.1 62.59 66.33 64.84 65.04 69.17

All $ values mentioned in the write-up translated at the average rate of the respective quarter/ year as applicable. Projections converted at

current exchange rate. Cumulative dollar figure is the sum of respective yearly dollar value.

cd equisearch pvt ltdsuch as oilfield chemicals , cosmetic chemicals and water treatment chemicals....

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