himadri speciality chemical (himche) - icici...

January 12, 2018

ICICI Securities Ltd | Retail Equity Research

Initiating Coverage

Niche profile; moving up the value chain…

Himadri Speciality Chemical (HSCL) is an integrated manufacturer of

speciality carbon chemicals with coal tar distillation capacity of 4 lakh

tonne annually. HSCL is the industry leader in manufacturing coal tar

pitch (CTP, market share of ~70%) that finds application in aluminium

production. It is the third largest manufacturer of carbon black

domestically that is used as a reinforcement material in tyre production.

On the innovation side, HSCL through a decade long indigenous research

has also developed advance carbon material with intended use in

batteries for electric vehicles (EV). With the present capacity being

optimally utilised thereby depicting robust profitability, impressive

expansion under way, we expect HSCL to clock sales, PAT CAGR of

22.7%, 38.0%, respectively, in FY18-20E. Growth is expected to be largely

back ended in FY20E as new capacity gets commissioned. We value

HSCL at | 245 i.e. 26x P/E on FY20E EPS of | 9.3 and assign BUY rating.

Advance carbon material: Innovation to the core

HSCL through three decades of experience in the complex carbon

industry and a decade long indigenous research has developed advance

carbon material with intended use in manufacturing Li-ion batteries for

electric vehicles (EV), Consumer Electronics (Mobile phones etc.) and

Energy storage Solutions. The company has already started supplying

small batches to end customers and is on the way for a 20,000 tonne

capacity expansion in this domain at a capex of ~| 500 crore with likely

commissioning in early FY20E. It will fetch high margins with intended

RoCE ~30%+ and provide fillip to earnings from FY20E onwards. Note,

HSCL is one of the only few listed players with exposure to the EV story.

Carbon black; moving up the value chain

HSCL has the capacity to manufacture 1.2 lakh tonne of carbon black and

is running at optimum utilisation levels thereby recording sales of ~1 lakh

tonne in FY17. However, with robust product demand under way and

favourable economics, HSCL has announced a 60,000 tonne expansion

(capex of ~| 300 crore) in this domain, which will be targeted towards

value add speciality grade and likely commissioning in early FY20E.

Improving operational matrix; healthy growth visibility

In FY18E, HSCL is on track to clock sales, PAT of ~| 1940 crore, ~| 220

crore, respectively (EBITDA margins ~22%, RoIC ~20%). With impressive

capex plan underway and firm financing plans (assumed fresh equity

proceeds of ~| 500 crore) amid robust product demand, the growth

visibility is healthy at HSCL. We expect HSCL to command premium

valuations among its peers on account of 1) leadership position in base

business (CTP) 2) increasing share of speciality grade carbon black and 3)

successful breakthrough in advance carbon material technology.

Exhibit 1: Financial Performance

(Year-end March) FY16 FY17 FY18E FY19E FY20E

Net Sales (| crore) 1,151.0 1,318.5 1,943.2 2,050.5 2,926.1

EBITDA (| crore) 141.9 227.0 423.9 453.6 708.1

Net Profit (| crore) (16.4) 81.2 218.4 245.7 415.8

EPS (|) NA 1.9 4.9 5.5 9.3

P/E (x) NA 99.0 39.3 34.9 20.6

Price / Book (x) 8.7 7.5 4.8 4.3 3.6

EV/EBITDA (x) 61.5 37.7 19.0 18.5 12.0

RoCE (%) 4.7 10.6 15.4 15.2 20.6

RoIC (%) 4.5 11.1 20.1 20.8 21.5

Source: Company, ICICIdirect.com Research

Himadri Speciality Chemical (HIMCHE)

| 192

Rating Matrix

Rating : Buy

Target : | 245

Target Period : 12-18 months

Potential Upside : 28%

YoY growth (%)

(YoY Growth) FY17 FY18E FY19E FY20E

Net Sales 14.6 47.4 5.5 42.7

EBITDA 60.0 86.8 7.0 56.1

Net Profit NA 169.0 12.5 69.2

EPS NA 151.8 12.5 69.2

Valuation summary

FY17 FY18E FY19E FY20E

P/E 99.0 39.3 34.9 20.6

Target P/E 126.2 50.1 44.5 26.3

EV / EBITDA 37.7 19.0 18.5 12.0

P/BV 7.5 4.8 4.3 3.6

RoNW 7.5 12.2 12.2 17.3

RoCE 10.6 15.4 15.2 20.6

Stock Data

Stock Data

Market Capitalization | 8033 crore

Total Debt (FY17) | 754 crore

Cash & Investments (FY17) | 172 crore

EV | 8615 crore

52 week H/L 196 / 40

Equity capital | 41.8 crore

Face value | 1

MF Holding (%) 1.5

FII Holding (%) 1.2

Comparative return matrix (%)

Return % 1M 3M 6M 12M

Himadri Specialty 21.5 14.2 159.3 342.2

Phillips Carbon Black 56.4 61.0 131.6 498.7

Price movement

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Jul-17

Apr-17

Jan-17

Oct-16

Jul-16

Apr-16

Jan-16

Oct-15

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Price (R.H.S) Nifty (L.H.S)

Research Analyst

Chirag J Shah

[email protected]

Shashank Kanodia, CFA

[email protected]


Company background

Himadri Speciality Chemical (HSCL), founded and promoted by the

Choudhary group, began its journey in 1987 as a private limited company

called Himadri Casting Pvt Ltd. In 1990, the company entered the coal tar

distillation business by setting up a 4800 MT capacity in Howrah (West

Bengal). After three decades, HSCL has evolved as India’s leading fully

integrated specialty carbon company by tapping into the entire carbon

value chain with a wide range of high demand specialised products. The

company has grown exponentially with total installed capacity of 400,000

MT of coal tar distillation, 120,000 MT of carbon black, 68,000 MT of SNF

(concrete add mixture) and a 20 MW power plant strategically spread

across eight zero discharge facilities across India (West Bengal, Odisha,

Chhattisgarh, Gujarat, Andhra Pradesh). As of 2017, HSCL commands a

staggering market share of ~70% of total domestic coal tar pitch demand

catering to aluminium & graphite electrode manufacturers. The company

is the third largest carbon black manufacturer domestically commanding

a market share in excess of ~15%. HSCL is also the only company in

India to manufacture anode material for lithium ion batteries, which find

application in high growth sectors like smart phones, consumer electrical,

electric vehicles and energy storage solutions.

Innovation has always been bedrock for success at HSCL and runs

through their DNA. This has facilitated them to tap into the entire carbon

value chain using a single raw material i.e. coal tar. This is further

illustrated by the fact that they have a dedicated team of 52 researchers at

their research and development facility at Mahistikry, which is recognised

and approved by the Department of Science and Technology and

Industrial Research – Government of India.

Expansion plans

HSCL is currently executing a de-bottlenecking exercise that will augment

its coal tar distillation capacity by 1 lakh tonne to 5 lakh tonne per annum

(capex outlay ~| 20 crore) and is due to be commissioned in Q4FY18E.

This will suffice the coal tar distillation requirement in the next few years

(2020). The company has also announced an impressive capex plan of

~| 630 core in the advance carbon (20,000 tonne) and speciality carbon

black (30,000 tonne) business segments that are due to be commissioned

in early FY20E.

Exhibit 2: HSCL Timeline –integrated vertical expansion

s

Commissions new distillation unit at

Andhra Pradesh. Expands capacity at

both facilities

Commissions coal tar

distillation plant in

Howrah (1990);

comes out with IPO

Vision to create a vertically integrated

carbon complex in Mahistikry.

Commissions & expands distillation unit

and commercialises a by-product at this

plant

Expands distillation capacity.

Commissions carbon black, SNF

and 12 MW power plant at

Mahistikry

1990-92 2004-06

Establishes new pitch melting

facilities at Korba and Chattisgarh.

Aquires SNF unit at Vapi

Expands carbon black & power plant capacity.

Brownfield expansion enhanced distillation

capacity by 60% at Mahistikry

Moving higher on the value chain by

setting up specialty carbon black and

advance carbon material plant

1993-99 2007-09 2010-11 2012-17 2018-20E

Sets up 100% export-oriented unit in Falta.

Commissions CTP plant in China. Recognises

R&D centre by GoI at Mahistikry


Shareholding pattern (%) – Q3FY18

Shareholder's Category Holding (%)

Promoters 49.0

Institutional Investors 2.8

General Public 48.3

FII & DII holding trend (%)

0.3

0.7

1.4

2.2

1.21.5

0.3

0.6

1.5

0.2

0.20.3

0.0

0.5

1.0

1.5

2.0

2.5

Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18

%

FII DII

Major Public shareholders (%) – Q3FY18

Name Holding (%)

BC India Investments 24.7


Manufacturing process

Coal tar is the basic raw material for HSCL, which is obtained as a by-

product while manufacturing metallurgical coke in steel making process

(blast furnace route). HSCL is the largest procurer of coal tar from steel

plants in India. Coal tar is then distilled at high temperature and pressure

to mainly yield coal tar pitch along with other co-products such as

residual oil that is used for manufacturing carbon black and naphthalene.

Exhibit 3: Manufacturing process

Source: Neptune Hydrocarbons, ICICIdirect.com Research

In the advance carbon space, the company manufactures both

intermediates as well as the final product. Intermediates are coke granules

and coke powder while the final product is the anode material of the

lithium Ion battery (LIB) itself.


Product profile

Exhibit 4: Product Profile

Product Name Product Diagram/Picture Specifications End User Industries

Aluminum grade

pitch

Used to make pre baked anode material for

aluminum manufacturing. It accounts for ~3.5%

in value terms and ~10% in volume terms per

tonne of aluminum

Power lines & cables, automobiles,

construction, packaging (cans, foils, caps

etc.) and consumer durables.

Graphite grade

binder pitch

Used as a binding agent in the manufacture of

high quality electrodes in the manufacture of

graphite through the electric arc furnace route. It

accounts for ~44% in volume terms per tonne of

graphite

Steel, refractory, batteries, brake linings,

etc.

Graphite

grade zero QI

impregnating

pitch

Used in graphite electrode manufacturing

process to cover pores and enhances the life of

the electrode. They have lower quinoline

insoluble content and used in larger quantities to

density graphite electrodes

Graphite manufacturing

Special and

other Pitches

Special pitches are further processed to impart

certain properties to enhance the product quality

of the final product

DRDO in manufacture of long range

warhead missiles. Refractory, water

proofing solutions, manufacture of

ultramarine blue among others

Advanced

Carbon Material

Manufactured by distilling coal tar to create

specialised pitch, which then undergoes

carbonisation, graphitisation and powder

treatment to finally be used as anode material in

lithium ion batteries

Fast growing sectors like electric vehicles,

consumer electricals (laptops, smart

phones, and power storage equipment

Carbon Black

and Creosote

Oils

~35% of coal tar distilled yields useful oils that

are further processed to manufacture

downstream VAP's. Carbon black is used as a

reinforcement material in tyres and other

industrial rubber goods. Creosote oils are used as

preservative oils to elongate life of wood and as

wash oil in steel plants

Tyres, plastic master batches, printing inks,

conveyor belts, hoses and pipes and fibre

coatings among others

Refined

Naphthalene,

SNF and PCE

Total ~10% of coal tar distilled yields

naphthalene that is sold as naphthalene balls of

flakes. It is also further processed to manufacture

value added products like SNF and PCE that are

used to increase strength in concrete ad mixtures

and agrochemical industries

Infrastructure, commercial construction,

dyes and pigments, agrochemicals, leather

and high performance concrete

Coal Tar Pitch for aluminum, graphite and other industries

Value added by-products from coal tar distillation process



Investment Rationale

1) Coal tar pitch: Himadri’s dominance to sustain; cash cow

Coal tar pitch (CTP) is a complex carbon compound that is derived

through a technology intensive high temperature coal tar distillation

process. It is a critical input material used in the manufacture of anode.

This is, in turn, used in aluminium and graphite smelters. Quality of CTP

has a far reaching impact on the purity of the metal produced as well as

ability to reduce power consumption and elongate anode life. As a basic

rule, 1 tonne of aluminium production requires 0.1 tonne of CTP while 1

tonne of graphite electrode production requires 0.44 tonne of CTP.

Together this accounts for ~95%+ of total domestic CTP demand. As of

FY17, Himadri has a distillation capacity of 400,000 MT and operated at

optimal utilisation levels of ~95%+. Himadri’s clientele encompasses all

metal majors like Vedanta, Hindalco, Balco, Nalco, HEG and Graphite

India. The company has successfully monetised its vast experience and

technical know-how by developing multiple value added grades of pitch

that find application in long range warhead missiles, refractory,

ultramarine blue pigments, carbon paste and paints among others.

Reasons for high reliance on Himadri for CTP

CTP needs to be maintained and transported at 250°C. Hence, it

cannot be imported. Due to this reason, it also cannot be

transported over a long distance, thereby making it imperative for

a CTP manufacturer to be located close to its end users. This

indeed is a natural advantage for HSCL as it has its major plants

near the end customers. HSCL has its own customised fleet of

140+ tankers for transportation of the same

Lack of a suitable substitute for CTP; no threat

The cost of stopping and restarting aluminium, graphite smelters

is very high resulting in these capacities running on a continuous

basis. In turn, this results in a continuous and steady demand for

high quality CTP and hence client stickiness

Large steel plants had in the past, shut down their coal tar

distillation capacity as they were unable to achieve the required

efficiencies in terms of quality demanded by aluminium and

graphite manufacturers. It is a non-core activity and they do not

intend to restart operations; implying limited competition.

\

Exhibit 5: Domestic aluminium production trend

1,6

63,0

84

1,7

18,6

00

1,7

35,8

75

2,0

38,0

60

2,3

90,1

29

2,8

92,2

00

3,0

94,6

54

3,3

11,2

80

3,4

76,8

44

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

tonne


Exhibit 6: Domestic graphite production trend

119,6

55

118,8

50

115,4

00

111,2

00

100,6

00

117,4

00

138,8

00

130,0

00

136,5

00

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


tonne


CAGR over 2012-17: 11.7%

CAGR over

2017-20E: 6.3%

CAGR over 2012-17: -0.4%

CAGR over

2017-20E: 5.2%

Of the total CTP sales at HSCL, Aluminium industry

constitutes ~85% of sales volume while graphite industry

constitutes the remaining ~15% of sales volume


The abundant supply of quality bauxite (10% of global supply), low cost

labour and ahead of time impressive capex executed by major private

players allowed India to emerge as a low cost producer of primary

aluminium globally. As a result, domestic aluminium production grew

robustly at 11.7% CAGR in FY12-17. Going forward, given the higher

base, domestic aluminium demand is expected to grow at a healthy

CAGR of ~6.3% primarily on the back of demand pull from housing,

automobiles, power and consumer durables segments. This, in turn,

ensures steady demand for HSCL’s core product i.e. CTP resulting in

steady EBITDA and cash flow generation in FY17-22E.

Going forward, given the steady growth in aluminium and graphite

demand, the domestic CTP market is expected to reach ~407,744 MT by

FY20E at an implied CAGR of 6.2%. In the prevailing scenario, HSCL has

proactively initiated a debottlenecking exercise to further augment its

distillation capacity to ~500,000 MT with likely commissioning by

Q4FY18. Hence, this leaves the company in good stead to maintain its

market share at ~70% if not higher over FY17-20E.

CTP demand: Global perspective

As per industry estimates, total CTP demand as of CY16 is pegged at 6.7

MT. It is obtained through distillation of coal tar. Availability of coal tar is

pegged at 22.6 MT. This, in turn, is a by-product of metallurgical coke, the

production of which is pegged at 700 MT. Going forward, global CTP

demand is expected to reach 8 MT by CY20E, implying a CAGR of 4.5% in

CY16-20E. Key growth drivers are expected to be the underlying healthy

demand in the aluminium and graphite electrode space.

Exhibit 8: CTP demand (Region bifurcation)

South America

3%

North America

7%

Europe & CIS

16%

Asia &

Australasia

15%

ME & Africa

10%

China

49%

Source: Rain Industries Annual Report, ICICIdirect.com Research

Exhibit 9: CTP production (Region bifurcation)

China

59%

ME & Africa

3%

Asia &

Australasia

15%

Europe & CIS

18%

North America

3%

South America

2%


Exhibit 7: Domestic CTP market trend

218,9

57

224,1

54

224,3

64

252,7

34

283,2

77

340,8

76

370,5

37

388,3

28

407,7

44

100,000

170,000

240,000

310,000

380,000

450,000


tonne

Total CTP Demand


Alternatively, domestic graphite electrode production is

expected to be robust given the limitations of graphite

production in China and capitalisation of the opportunity by

Indian players. This is also expected to result in steady

demand for CTP in FY17-20E and is beneficial for HSCL

Metallurgical coke is a critical input for manufacturing steel

through blast furnace route. Hence, it is concentrated more

in the eastern world, mainly China. As a thumb rule, 1 tonne

of met coke yields 0.04 tonne of coal tar

Given the high strength to weight ratio, corrosion

resistance, ductility, malleability, non-combustible and

nontoxic nature of aluminium as a metal, we believe the

demand for aluminium will remain robust, going forward.

Aluminium will continue to find key applications in the

transport, packaging, construction, electrical power and

consumer durable sectors

CTP Demand Segments

Others

9%Graphite

Electrode

11%

Aluminium

80%



Aluminium metal gaining acceptance; bodes well for CTP demand

Aluminium is one of the most important and widely used metals in

transport, construction, packaging and electrical sectors. The global

aluminium industry demand as of CY16 was at 60 MT, growing at a robust

pace of 5.8% CAGR over 2006-16.

On the global front, construction (~25%), transportation (~24%) and

packaging (~17%) constitute the major aluminium demand segments. On

the domestic front, electric power (~48%) is the major demand driver

followed by transportation (~15%) & construction (~13%) sectors.

Exhibit 11: Global aluminium demand bifurcation

Construction

25%

Transportation

24%Packaging

17%

Electricals

12%

Machinery &

Equipment

10%

Consumer

Durables

6%

Others

6%

Source: LME, ICICIdirect.com Research

Exhibit 12: Domestic aluminium demand bifurcation

Electric Power

48%

Transportation

15%

Construction

13%

Packaging

8%

Consumer

Durables

7%

Machinery &

Equipment

7%

Others

2%

Source: Bloomberg, ICICIdirect.com Research

Exhibit 10: Global aluminium demand trend

33.9

38.140.0

37.7

42.4

46.349.2

52.353.9

57.759.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

million t

onne


Exhibit 13: Domestic aluminium demand trend

1.7 1.7 1.7

2.0

2.4

2.93.1

3.33.5

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


million t

onne


Aluminium being a metal lighter than steel and given its

ability to be recycled without losing its quality results in

improved efficiency in the transportation sector and it being a

preferred input material for the packaging sector, respectively

India’s present per capita primary aluminium consumption is

less than 5 kg against the global average of 12-15 kg

Indian aluminium demand has grown robustly over FY12-17 to

reach 2.9 million tonne in FY17, implying a CAGR of 11.7%.

Going forward, the government’s initiatives like Housing for All

by 2022 and strong infrastructure expenditures augur well for

domestic aluminium demand over the next four to five years.

With steady aluminium demand prospects and domestic

production capacity at 4 million tonne, we expect utilisation

levels to rise and deliver growth of 6.3% CAGR in FY17-20E


Global shift in graphite electrode dynamics; domestic industry set to gain

Domestic graphite electrode production over FY12-17 was largely flat at

~115,000 tonne on account of cheaper imports from China. However,

2018 has witnessed a structural change in the graphite electrode sector

globally. This has had a positive impact on domestic manufacturers like

HEG and Graphite India. Their cumulative sales in H1FY18 were to the

tune of ~66,000 tonne. Going forward, in FY18-20E, we expect domestic

graphite production to remain elevated at ~137,000 tonne, which ensures

steady demand prospects for CTP, going forward.

Construction chemical; big opportunity; exposure through SNF

Construction chemicals are compounds imparting value enhancing

properties that improve the strength of construction structures, reduce

the usage of cement, water and include anti corrosive properties. The

benefits derived from lower lifecycle costs and better energy efficiency

are multifold compared to the 2-5% higher costs associated with the

usage of these chemicals. As of 2014, the Indian construction chemicals

industry size is pegged at | 3500 crore and is expected to grow to | 7040

crore by FY20E, implying a CAGR of 15% in FY14-20E.

Exhibit 15: Construction chemicals industry

3500

7040

0

1000

2000

3000

4000

5000

6000

7000

8000

FY14 FY19E

| c

rore

Source: TSMG, ICICIdirect.com Research

Exhibit 16: Construction chemicals industry bifurcation

Admixtures

42%

Adhesives &

Sealants

18%

Flooring

14%

Waterproofing

14%

Repair and

Rehabilitation

12%

Source: TSMG, ICICIdirect.com Research

Admixtures, the largest segment within construction chemicals, were at

~| 1500 crore (42%) as of FY14. These chemical compounds are used in

the first stage of construction and are primarily used to enhance the

tensile strength and durability of concrete by reducing the water content.

Himadri is the largest manufacturer of sulphonated naphthalene

formaldehyde (SNF) in India with an annual capacity of 68,000 tonne. It

also manufactures five grades of PCE admixtures thereby making it the

biggest beneficiary of increasing infrastructure focus in the country.

Exhibit 14: Domestic graphite production trend

119,6

55

118,8

50

115,4

00

111,2

00

100,6

00

117,4

00

138,8

00

130,0

00

136,5

00

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


tonne

Source: ICICIdirect.com Research

The fortunes of the graphite electrode sector have been on

an uptrend. Over the last few months, spot graphite

electrode prices have registered a notable increase. Key

triggers have been 1) consolidation of graphite electrode

market globally, 2) ~20% of global graphite electrode

capacity (ex-China) shutting down in the last three years, 3)

increase in steel production through EAF route (outside

China) coupled with an increase in global steel prices, 4)

closure of steel capacity in China leading to a decline in

exports of both steel & graphite electrodes from the region

The construction chemical market in India is still largely

untapped with admixtures penetration at ~10%, which is

much lower than the global average mainly due to low

awareness levels, cost conscious nature of consumers.

However, government regulations firming up in line with

international best practices, increased construction and

infrastructure activities in first tier cities along with growing

awareness of benefits associated with construction chemicals

is expected to result in a robust 15% CAGR in FY14-19E


2) Carbon black: Industry in sweet spot, HSCL a key beneficiary

Carbon black is an industrial chemical primarily used as a reinforcement

material for manufacturing tyres. It is the basic element that imparts black

colour to the target substance. The speciality grade carbon black is a

refined product and finds application in plastics & paints, which come in

direct contact with humans. Total global consumption of carbon black is

pegged at ~13 MT in CY16 with industry expected to grow at ~4% CAGR

in CY16-20E. In value terms, the carbon black industry size is pegged at

US$14 billion as of CY16. With no major capacity addition under way, the

industry is in a sweet spot with robust demand and profitability, going

forward. The management commentary of two of the largest

manufactures (Orion Carbon, Cabot Corporation) suggests good times

will sustain for a longer time period. This is also attributable to curtailment

of incremental supply from China due to environment clampdown.

Exhibit 17: Carbon black demand trend

9.8

13.2

16.1

0

2

4

6

8

10

12

14

16

18

2007 2015 2020E

million t

onne (

MT)

Source: Industry Reports, ICICIdirect.com Research

Exhibit 18: Carbon black demand bifurcation

Paints &

Plastics

10%

Non-tyre

Rubber

Products

20%

Tyre

70%


In terms of end usage, majority i.e. ~70% of carbon black is used in

manufacturing tyres, ~20% towards non tyre rubber products and ~10%

as a pigmentation agent in paints & plastics.

Globally, three major players viz. Orion Carbon, Cabot Corporation and

Birla Carbon constitute a lion’s 35%+ market share of the carbon black

market. Orion is a market leader (25% market share) in speciality grade

carbon black (~1 MT) while Cabot is the market leader (14% market

share) in rubber grade carbon black (~12 MT).

Exhibit 19: Top three players in speciality grade carbon black

Market share (%)

Orion, 25

Cabot, 23

Birla, 17


Exhibit 20: Top three players in rubber grade carbon black

Market share (%)

Cabot, 14

Birla, 13

Orion, 7


CAGR over

2007-15: 3.8%

CAGR over

2015-20E: 4.0%


HSCL is the third largest manufacturer of carbon black in India with a

capacity of 1.2 lakh tonne and total domestic consumption pegged at 8

lakh tonne implying a market share in excess of 15%. The company

manufactures carbon black through the coal tar oil route, which is

primarily obtained as a by-product of coal tar distillation process while

manufacturing coal tar pitch. The company has a higher share (>10%) of

non-tyre grade carbon black sales thereby realising better margins than

its competitors. On the back of robust product demand, it is currently

running at almost full capacity utilisation levels with sales volume of ~1

lakh tonne in FY17. Robust domestic demand is also supported by limited

imports on account of anti-dumping duty imposed by the Government of

India, which has been enforced till November 2020 (US$400/tonne).

Going forward, sensing the capacity constraints, the company is in the

midst of expanding its carbon black manufacturing capacity by 60,000

tonne incurring a capex of ~| 300 crore. It is a speciality grade carbon

black line meant primarily for export markets and is expected to fetch

~30% EBITDA margins with realised RoCE in excess of 40% at optimum

utilisation levels (~80%).

Thus, with robust demand drivers in place (proxy on consumer play;

automobile demand; paints and plastic demand), we expect the carbon

black division to clock robust sales and profitability once the new capacity

gets commissioned in FY20E. The notable point here is that the new

capacity is of speciality grade carbon black, which will indeed fetch better

realisations and, consequently, enhanced EBITDA margins.

Exhibit 21: Carbon black capacity in India (1 million tonne)

472,000

315,000

120,000

85,000

-

100,000

200,000

300,000

400,000

500,000

PCBL SKI India Himadri CCIL

tonne


Exhibit 22: New capacity return matrix

Particulars Units Amount

Capacity tonne 60,000

Optimum Utilization levels % 80

Production tonne 48,000

Sales tonne 48,000

Realisation |/tonne 100,000

Sales | crore 480

EBITDA margins % 30

EBITDA | crore 144

Depreciation | crore 15.0

EBIT | crore 129

Incurred Capex | crore 300

RoCE % 43



3) Advance carbon material: Forward integrating to align with disruption

Capitalising on its forte of forward integration, HSCL has now emerged as

the only Indian company to successfully manufacture advanced carbon

material (ACM) from in-house distilled coal tar. ACM is used as anode

materials in lithium-ion batteries. HSCL has the capability to produce

anode material of both synthetic and natural varieties for lithium-ion

batteries. Over the last decade, HSCL has developed best-in-class

proprietary technology, which involves coal tar treatment into advance

carbon material, carbonisation, classification and graphitisation. HSCL has

slowly and steadily developed the capability to produce both intermediate

(coke power, coke granules) and final anode material. With customer

approvals in place and robust capex plan (| 480 crore for an exit capacity

of 20,000 tonnes by FY20E), HSCL is at an inflection point to become a

key global player in the anode material space by FY20-21E. With the

commissioning of the new ACM facility by FY20E, we expect the share of

revenue and EBIDTA of ACM in consolidated financials to meaningfully

rise from 0.4% & 0.5% in FY18E to 20.8% & 21.9%, respectively, in FY21E.

Global lithium ion battery industry

Lithium batteries are becoming the most competitive in the field of power

applications. It is used in mobile phones, tablets and digital cameras,

offering simplification and cost reduction over multi-cell designs. The key

advantage of these batteries is that they find applications that require

lightweight and high-energy density solutions. These batteries provide the

highest energy density per weight.

The market for the lithium ion battery is growing at a brisk pace and is

expected to grow at 26% CAGR in CY16-25. The expected demand for the

same would be at 650 GWh in CY25 from 80 GWh in CY16 on the back of

rising stock of electric vehicles and energy storage requirements.

Exhibit 23: Global lithium ion battery demand

80

650

0

100

200

300

400

500

600

700

2016 2025

GW

h

Source: BMI, Company, ICICIdirect.com Research

Exhibit 24: Application of lithium ion batteries

(% Share) 2013 2020E

Consumer electronics 60.3 23.9

Automotive 18.3 30.0

Grid and renewable energy storage 6.9 37.5

Industrial 14.5 8.5

Source: Frost & Sullivan, ICICIdirect.com Research

As of 2013, in terms of applications, 60.3% of batteries were used in the

global consumer electronics sector whereas the share of automotive and

renewable & grid storage was at 18.3% and 6.9%, respectively. However,

applications of lithium ion battery are going to dramatically shift towards

the automotive (30% share) and grid & renewable energy storage (37.6%)

by 2020 as both segments together will consume ~68% of overall

batteries produced by then.

Global EV Sales trend (volume)

226,0

00 320,0

00

104,0

00

133,0

00

207,0

00

322,0

00

500,0

00

159,0

00

112,0

00

84,0

00

-

100,000

200,000

300,000

400,000

500,000

600,000

2012 2013 2014 2015 2016

unit

s

PHEV EV



As per TMR, the global lithium ion batteries market is highly consolidated

with the leading three companies accounting for 57% of the market in

2016. These three companies are: Panasonic Corporation, LG Chem

Power Inc, and Samsung SDI Co Ltd. Some of the other companies

operating in the market are: Hitachi Chemical Corporation, Toshiba

Corporation, Johnson Controls Inc, GA Yuasa Corporation and

Automotive Energy Supply Corporation (ASEC).

The performance of the batteries depends heavily on the materials from

which they are made. The four main materials that are used in the

manufacture of lithium ion battery are a) cathode materials (forms 45%

cost of the battery), b) anode materials (form 15% of the battery cost), c)

separators (form 10% of the battery cost) and d) electrolyte (form 10% of

the battery cost).

Exhibit 25: Cost break-up of lithium ion battery

Other materials

20%

Separator

10%

Electrolyte

10%

Anode material

15%

Cathode

material

45%

Source: EU, ICICIdirect.com Research

Exhibit 26: Cost per tonne of material in CY15

21429

13158

14516

0

5000

10000

15000

20000

25000

Cathode Anode Electrolyte

US

$/tonne

Source: EU, ICICIdirect.com Research

Dynamics of anode material industry

The anode material is an important ingredient in the manufacture of the

lithium ion battery and forms 15% of the total cost of battery. In sync with

the robust growth in usage of lithium ion battery, the market for anode

material has exhibited robust CAGR of 26% in 2010-16 at 143,000 tonnes.

Going ahead as well, the trend is expected to remain robust as the

demand for the same is expected to be 369,000 tonnes and 780,000

tonnes in 2020 and 2025, respectively.

Exhibit 27: Global shipment of lithium ion anode materials

113,000

780,000

369,000

292,000

232,000

181,000

143,000

86,000

67,000

53,000

43,000

37,000

-

250,000

500,000

750,000

1,000,000

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E

2020E

2025

tonne

Source: BMI, Company, ICICIdirect.com Research

https://www.transparencymarketresearch.com/lithium-ion-battery-market.html


There are four types/route through which anode material is manufactured.

They are viz. a) artificial graphite, b) natural graphite, c) amorphous

carbon and d) metal based. As of CY16, artificial graphite (51% share) and

natural graphite (44% share) type formed ~95% of total anode materials

manufactured. Going ahead, it is estimated that share of artificial graphite

will rise from 51% in CY16 to 55.1% by CY20E while share of natural

graphite based anode will decline from 44% in CY16 to 32% in CY20E.

As of CY15, two countries i.e. Japan and China dominated the

manufacturing of the anode materials globally commanding 67% market

share. In CY11, three producers together had a market share of 65% with

Hitachi Chemicals having a share of 34%, Nippon Carbon (19%) and BTR

Energy (12%). However, the dominance continued in 2015 with these

three companies commanding 61% of the market. Still, many new players

have emerged and have/are putting capacity in place to address this huge

market opportunity. The other key players include Shanshan Tech (50000

tonne capacity), Hunan Shinzoom (13000 tonne), Jiangxi Zinchen (20000

tonne), Mitsubishi (10000 tonne), Nihon carbon (6000 tonne). The key

observation from the above trends is that even though incremental

capacities have been put up by new players they all come from the Asian

region i.e. primarily from China and Japan.

Exhibit 28: Types of manufacturing and share of each type

47 44 41.2 38.1 35.1 32

49.150.7

52.153.5

54.455.1

3.9 5.3 6.7 8.4 10.5 12.9

0

20

40

60

80

100

2015 2016 2017 2018E 2019E 2020E

%

Natural Graphite Artifical Graphite Others


Exhibit 29: Global landscape of anode material manufacturers

Company Country Capacity (MT)

Shanshan Tech China 50,000

Hunan Shinzoom China 13,000

Jinagxi Zichen China 20,000

Donnguan Kaijin China 10,000

Fujjan XFH New energy China 5,000

Shenzhen Sinuo China 5,000

Jinagxi Zhengtuo China 5,000

Tianjin B&M China 2,500

BTR China 40,000

Showa Denko Japan 3,000

Nihon Carbon Japan 6,000

Toda Kogyo Japan -

Mitsubishi Japan 10,000

JFE Japan 5,000

Hitachi Chem Japan 40,000


HSCL is only Indian player (proposed capacity of 20,000

tonne), which is pursuing mega capacity expansion plans in

the anode material space


High margin ACM foray to take HSCL into higher orbit

HSCL has emerged as the only Indian player that has successfully

ventured into the advanced carbon material, used in manufacture of

anode material for lithium ion battery via its own proprietary technology.

The company is one among three companies globally to develop anode

material from coal tar distillation process (the other two are JFE Chemical

and China Steel). The key advantage for HSCL is the backward integration

in terms of raw material (coal tar) and power (20 MW of captive power

coupled with 10 MW of CPP planned) compared to the external

dependency of inputs for its global competitors. The company currently

manufactures and supplies intermediate anode material (coke granules

and coke powder) to its global customers, mainly anode material

manufactures based in Asian region. Going ahead, with proven

technology, efficient cost curve and customer approvals, HSCL has now

laid a mega capex plans wherein it has undertaken capacity expansion

plan to 20,000 tonnes per annum by FY20E.

ACM segment to alter performance profile of HSCL from FY20E onwards

The total outlay for the mega capex of 20,000 tonnes is pegged at | 480

crore, which will be commissioned throughout FY20E, which is when

HSCL commences supplying final anode material. As mentioned earlier,

HSCL will continue to sell intermediate anode materials in FY18E-19E on

an expanded capacity. Going forward, we have been conservative in our

realisation assumptions on the advance carbon material front and build in

a modest drop although, last couple of years have witnessed no serious

pricing pressure in this space.

Exhibit 31: Advanced carbon material – volume trend (total)

300

14,000

1,500

10,000

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Total Volume

tonne



Exhibit 32: Advance carbon material – realisation trend (blended)

253,000

391,291

411,562

275,000

-

100,000

200,000

300,000

400,000

500,000


|/tonne

Blended Realisations


Exhibit 30: Capacity trend

600

3,000

20,000 20,000

-

5,000

10,000

15,000

20,000

25,000

FY18E FY19E FY20E FY21E

tonne


Hence, going ahead, we expect the exit capacity to grow at

a parabolic rate from 600 tonnes in FY18E to 3,000 tonnes

in FY19E and 20,000 tonnes by FY20E. In the first two legs

of the expansion, HSCL will be selling the intermediate

anode materials while the last phase will see HSCL

augmenting the supplies of the final anode material.

Currently, the company as of H1FY18 has expanded its

capacity of 60 tonnes per annum to 600 tonnes per annum

and dispatched ~73 tonnes of anode material in Q2FY18.

Going into FY20E, with the commissioning of the new anode

material facility, HSCL is likely to witness drastic change in its

product mix, gross margins and EBIDTA margins given the

commencement of sale of final intermediate material. In

volume terms, we build in combined sales volume estimates of

10,000 tonne in FY20E and 14,000 tonne in FY21E. In terms of

blended realisations, we factor in ~| 411,562/tonne and ~|

391,291/tonne for FY20E and FY21E, respectively.


We expect that with commissioning of the new ACM facility by FY20E, the

share of revenue and EBIDTA in consolidated financials will meaningfully

rise from 0.4% and 0.5% in FY18E to 20.8% and 21.9% in FY21E

respectively. Hence, with such a high margin business contributing more

than ~15% of EBITDA, overall consolidated margins of HSCL are

expected to improve from 17.1% FY17 to 24.2% in FY20E.

High margins, scale to lead to RoCE of 30%+ for segment

Our back of the envelope calculations suggest the ACM segment can

generate an RoCE in excess of 30% based on our estimates of

realisations, capacity utilisation and EBIDTA margins.

Exhibit 33: Advance carbon material – revenue share & EBITDA share trend

0.4

1.9

16.5

20.8

0.5

2.1

20.5

21.9

0

5

10

15

20

25

FY18E FY19E FY20E FY21E

%

Share of Revenues Share of EBIDTA


Exhibit 34: New capacity return matrix

Particulars Units Amount

Capacity tonne 20,000

Optimum Utilization levels % 80

Production tonne 16,000

Sales tonne 16,000

Realisation |/tonne 400,000

Sales | crore 640

EBITDA margins % 30

EBITDA | crore 192

Depreciation | crore 25

EBIT | crore 167

Incurred Capex | crore 500

RoCE % 33



Risks & Concerns

Forex exposure

HSCL is involved in a business, which involves a lot of forex transactions

both on the P&L account and balance sheet front. On the P&L front, the

company is a net importer as it imports a part of its raw material

requirements. HSCL incurs forex loss as a regular P&L item, which was

very abrupt in the past as HSCL used to run a lot of open positions.

Hence, this led to muted profitability.

Exhibit 35: Forex loss trend

Particulars Units FY13 FY14 FY15 FY16 FY17

Imports | crore 498 358 530 327 522

Exports | crore 78 109 110 119 112

Net Imports | crore 420 249 420 208 410

USD/INR | 54 61 61 66 67

Forex Loss | crore 79 78 7 18 20

Forex Loss as a % of EBITDA % 67.0 83.0 6.3 12.7 8.8


Currently, however, HSCL hedges its operations fully and is less

susceptible to foreign exchange risk. It is expected to witness lower

profitability in case of sharp depreciation of the Indian rupee.

Delay in commissioning new capacity

HSCL is largely operating at optimum utilisation levels (~80%) on the

present capacity base of 4 lakh tonne of coal tar distillation and 120,000

tonne of carbon black manufacturing. The entire investment argument of

HSCL, however, hinges on further capacity addition in the speciality grade

carbon black and advanced carbon material space. Hence, any delay in

commissioning of the aforesaid capacity will limit the topline and

bottomline growth at HSCL, adversely impacting our target price.

Exhibit 36: Variance Analysis

23000 28000 33000 38000 43000

5000 223 228 233 238 243

7500 229 234 239 244 249

10000 235 240 245 250 255

12500 241 246 251 256 261

15000 247 252 257 262 267

Target Price

Advance C

arbon

Materia

l S

ale

s

Volu

me in F

Y20E

Carbon Black Sales Volume (Speciality Grade) in FY20E


Inability to penetrate speciality carbon market

The company is executing an impressive capex in the speciality carbon

black segment, which fetches higher realisations and margins, however is

difficult to penetrate. The new products that are due to be manufactured

by HSCL will have to be accepted by its customers, which follow a

stringent approval process. Hence, there is a risk of penetration in the

speciality carbon market that is dominated by a few global carbon black

manufacturers. As a mitigation measure, HSCL has already started seed

marketing the speciality carbon material in international markets.

Unavailability of coal tar

Coal tar is a key raw material for HSCL and is primarily a by-product

obtained from coking coal to coke conversion. The company is

dependent on steel mills for coal tar and also imports ~40% of its

requirements from outside India. Therefore, amid the trend of declining

BF route steel production due to stringent pollution control norms, there

is a case of declining coal tar availability, which can limit utilisation levels

at HSCL with consequent risk on associated profitability.

In terms of sensitivity’ for every 5000 tonne decline in sales

volume of advance carbon material our target price reduces

by | 12/share and for every 5000 tonne decrease in sales

volume of carbon black (speciality grade) our target price

reduces by | 5/share

Foreign currency debt as percentage of total debt

63.766.5

41.440.1

35.2

29.1

10

20

30

40

50

60

70

FY12

FY13

FY14

FY15

FY16

FY17

%


In absolute terms, its total debt as of FY17 was at | 754 crore

with foreign currency debt at | 219 core implying foreign

currency debt as a percentage of total debt at 29.1%


Financials

Healthy volume led growth to drive 22.7% CAGR topline growth

HSCL has a coal tar distillation capacity of 4 lakh tonne with our back of

the envelop calculation depicting utilisation levels of 100% for FY17.

Going forward, the company is executing a de-bottlenecking exercise,

which will augment its coal tar distillation capacity by 1 lakh tonne and is

due for commissioning in Q4FY18E. Going forward, given the robust

product demand and HSCL’s prerogative to maintain its market share in

the CTP business segment, we expect utilisation levels to remain elevated

in FY18-20E. Consequently, we expect the company to record total

carbon sales volume growth of 8.8% CAGR in FY17-20E. We expect HSCL

to record carbon sales of 4.6 lakh tonne in FY20E vs. 3.6 lakh tonne

reported in FY17.

Exhibit 37: Capacity and utilisation levels trend

400,0

00

400,0

00

425,0

00

500,0

00

500,0

00

77

99103

93

105

-

100,000

200,000

300,000

400,000

500,000

600,000

FY16 FY17 FY18E FY19E FY20E

tonne

0

20

40

60

80

100

120%

Installed Capacity Utilization levels


Exhibit 38: Carbon sales volume trend

299,137

356,902

386,188403,700

459,942

-

100,000

200,000

300,000

400,000

500,000


tonne


Consequent topline growth at HSCL is expected at 22.7% CAGR in FY18E-

20E. We expect HSCL to report net sales of | 2926 crore in FY20E vs.

| 1943 crore expected in FY18E. On the growth trajectory front, FY19E

would be a year of consolidation with ~5% volume growth with pent up

sales expected in FY20E as new capacity gets commissioned.

Exhibit 39: Revenue trend

1,151

1,318

1,9432,050

2,926

-

500

1,000

1,500

2,000

2,500

3,000

3,500


| c

rore


CTP pitch is expected to continue to command a lion’s share in overall

revenues with its share in total topline expected at 40%+ over FY17-20E

(down from present levels of 50%+). Speciality carbon black and advance

carbon material will command a revenue share of ~25% in FY20E.


EBITDA to stage impressive 29.3% CAGR over FY18E-20E

We expect EBITDA to stage an impressive CAGR of 29.3% in FY18E-20E

wherein we build in conservative 240 bps improvement in EBITDA

margins i.e. from 21.8% in FY18E to 24.2% in FY20E. The expansion in

margins is conservative given the new product segment i.e. advance

carbon material & speciality carbon black will fetch at least 25% EBITDA

margins for HSCL. This coupled with operational efficiencies realised by

HSCL on account of higher utilisation levels, higher value added products,

usage of in-house waste power and new innovative product solutions are

expected to keep EBITDA margins elevated.

Exhibit 40: EBITDA & EBITDA margins (%) trend

142

227

424

454

708

12.3

21.8 22.1

24.2

17.2

-

100

200

300

400

500

600

700

800


| c

rore

-

5.0

10.0

15.0

20.0

25.0

30.0

%

EBITDA EBITDA Margins


Given the hedged positions on forex transitions and contractual terms

incorporating foreign exchange fluctuations, we expect volatility in

EBITDA margins to be minimal, going forward.

PAT to grow 38.0% CAGR in FY18E-20E

Going forward, robust topline growth coupled with margin expansion is

expected to lead to 38.0% CAGR in PAT in FY18E-20E. We expect HSCL

to report PAT of | 246 crore in FY19E vs. | 218 in FY18E (reported H1FY18

PAT at | 100 crore+). In FY20E, however, growth is expected to be

exponential with PAT expected at | 416 crore given the incremental

capacity of value added products gets commissioned and HSCL records

incremental sales from them.

Exhibit 41: PAT trend

(16.4

)

81.2

218.4

245.7

415.8

1.9

4.9

5.5

9.3

(50)

-

50

100

150

200

250

300

350

400

450


| c

rore

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

|/share

Net profit EPS


We expect HSCL to clock EBITDA of | 454 crore in FY19E

and | 708 crore in FY20E. Inflection in earnings takes place

in FY20E as the new capacity gets commissioned

We expect HSCL to report an EPS of | 5.5/share in FY19E

and | 9.3/share in FY20E vs. | 4.9/share in FY18E


Inefficiency a thing of past, core returns ratios clocking 20%

In the past, return ratios were dismal with HSCL clocking single digit

return ratios. A part of this is attributable to volatility in the foreign

exchange rate and HSCL’s business model being susceptible to foreign

exchange risk. Other portion is attributable to constricted contractual

terms with its key customers thereby resulting in HSCL absorbing all trade

shocks of abnormal price movements (both raw material & end product).

Exhibit 42: RoIC, RoCE & RoE trend

17.3

-1.8

7.5

12.2 12.2

20.6

4.7

10.6

15.4

15.2

21.5

20.820.1

11.1

4.5

-5

0

5

10

15

20

25


%

RoE RoCE RoIC


Going forward, however, improved profitability in FY18E and negotiations

of contractual terms has resulted in a resurging efficiency with FY18E

RoIC expected at ~20%. Given the robust product demand outlook, we

expect RoIC to remain in the 20% band, going forward.

Debt at controlled level; debt: equity steadily on decline

Absolute debt peaked out in FY14. Since then, the company has been on

a declining trend with absolute debt as on FY17 at | 754 crore with

consequent debt: equity at 0.7x. Going forward, assuming the fresh

issuance of equity to the tune of ~| 500 crore for funding the new capex

programme amid steady cash flow and incremental requirement of funds

for working capital needs, we expect no meaningful change in absolute

debt levels in FY18E-20E. Debt: equity, however, is expected to decline to

0.3x by FY20E.

Exhibit 43: Debt; debt: equity trend

858.5

754.1

737.0

707.0

707.0

920.7

1,0

77.9

1,7

86.1

2,0

15.6

2,4

10.0

0.9

0.7

0.4

0.4

0.3

0

500

1,000

1,500

2,000

2,500

3,000


| c

rore

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

x

Debt Equity Debt:Equity


Exhibit 44: Net working capital days (trend)

135

127

120

115 115

100

105

110

115

120

125

130

135

140


days


The net working capital cycle is elongated with net working capital (NWC)

days at 127 days in FY17. It is largely on account of finished goods

inventory being maintained by HSCL for supplying just in time to key

customers in the CTP business segment.

We expect HSCL to clock RoE of 12% and 17% in FY19E and

FY20E, respectively. RoCE is expected at 15% & 21%,

respectively, in the aforesaid period

We expect absolute debt at | 737 crore in FY18E & | 707

crore in FY19E vs. | 754 crore in FY17

Going forward, given HSCL’s focus on improving the

working capital cycle we have build in 120 days for FY18E

and 115 days for FY19E & FY20E


Valuation

Himadri Speciality Chemical (HSCL) is an integrated manufacturer of

speciality carbon chemicals. HSCL is the industry leader in manufacturing

coal tar pitch and is the third largest manufacturer of carbon black

domestically. The company through a decade long indigenous research

has also developed advanced carbon material with intended use in

batteries for electric vehicles (EV). In FY18E, HSCL is on track to clock

sales and PAT of ~| 1940 crore & ~| 220 crore, respectively (EBITDA

margins ~22%, RoIC ~20%). With an impressive capex plan underway

and firm financing plans (assumed fresh equity proceeds of ~| 500 crore)

amid robust product demand, the growth visibility is healthy over the next

five years. Going forward, we expect HSCL to clock sales, PAT CAGR of

22.7% & 38.0%, respectively, in FY18-20E. We value HSCL at | 245 i.e.

26x P/E (average of 38% PAT CAGR and 17% RoCE over FY18E- 20E) on

FY20E EPS of | 9.3 and assign BUY rating.

In the listed space, there is no comparable peer to HSCL. However, there

are some companies that are present in one or two business domains.

HSCL optically looks expensive on the valuation front in comparison to

them. However, we believe HSCL will command premium valuations in its

domain and listed space in general on account of 1) leadership position in

base business (CTP, 70% market share) 2) increasing share of hard to

penetrate, speciality grade carbon black segment and 3) successful

breakthrough in the emerging advance carbon material technology.

Exhibit 45: Peer comparison (financials) (| crore)

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Himadri Specialty 8033 754 1324 1943 2050 2926 227 424 454 708 17.1 21.8 22.1 24.2 81 218 246 416

Phillips Carbon Black 5126 738 1927 2723 2983 3127 260 429 487 522 13.5 15.7 16.3 16.7 73 242 291 335

Rain Industries 15206 6958 9260 11440 13616 11724 9260 2333 2779 3079 100.0 20.4 20.4 26.3 314 772 1106 1078

Sales (| crore) EBITDA (| crore) EBITDA Margin (%) PAT (| crore)

Company

Market Cap

(| crore)

Debt

(| crore)


Exhibit 46: Peer comparison (valuation)

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Himadri Specialty 8033 99.0 39.3 34.9 20.6 37.7 19.0 18.5 12.0 7.5 4.8 4.3 3.6 7.5 12.2 12.2 17.3

Phillips Carbon Black 5126 59.2 17.8 14.8 12.9 18.7 11.2 9.8 8.6 4.2 3.4 2.8 2.4 13.8 31.3 28.7 26.1

Rain Industries 15206 48.5 25.6 16.6 11.3 12.1 9.2 7.7 7.0 5.0 4.2 3.3 2.5 7.6 17.7 23.2 25.5

ROE (%)EV/EBITDA (x) P/B (x)

Company

Market Cap

(| crore)

P/E (x)


Trading Multiples

Exhibit 47: Two year forward EV/EBITDA

-50

0

50

100

150

200

250

300

350

400

450

500

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

(|

)

Price 29x 25x 21x 17x 13x 9x 5x

Source: Reuters, ICICIdirect.com Research

The premium is also justified given the presence of HSCL in

the disruptive technology in the automobile industry (EV) and

the enormous opportunity before it, amid high valuations that

such businesses command currently


Financial Summary

Exhibit 48: Profit and Loss (| crore)


Net Sales 1,151.0 1,318.5 1,943.2 2,050.5 2,926.1

Other Operating Income 0.8 5.7 - - -

Total Operating Income 1,151.8 1,324.2 1,943.2 2,050.5 2,926.1

Other Income 11.0 7.9 11.9 10.8 9.0

Total Revenue 1,162.8 1,332.1 1,955.1 2,061.3 2,935.1

Raw Material Expenses 831.0 887.0 1,318.5 1,377.5 1,931.2

Employee Expenses 29.6 35.9 46.9 53.3 64.4

Other Operating Expense 138.3 154.4 152.3 164.0 219.5

Foreign Exchange Loss/(Gain) 11.1 20.0 1.6 2.1 2.9

Total Operating Expenditure 1,010.0 1,097.2 1,519.4 1,596.9 2,218.0

EBITDA 141.9 227.0 423.9 453.6 708.1

Interest 110.0 80.5 78.3 68.6 60.1

PBDT 31.9 146.5 345.6 385.0 648.0

Depreciation 63.7 31.0 32.3 34.5 54.4

PBT (20.9) 123.4 325.2 361.3 602.6

Total Tax (4.5) 42.2 106.8 115.6 186.8

PAT (16.4) 81.2 218.4 245.7 415.8


Exhibit 49: Balance Sheet (| crore)


Equity Capital 41.8 41.8 44.7 44.7 44.7

Reserve and Surplus 878.9 1,036.1 1,741.4 1,970.9 2,365.3

Total Shareholders funds 920.7 1,077.9 1,786.1 2,015.6 2,410.0

Total Debt 858.5 754.1 737.0 707.0 707.0

Deferred Tax Liability 47.6 89.7 89.7 89.7 89.7

Minority Interest 59.7 9.1 9.1 9.1 9.1

Liability side total 1,886.5 1,930.8 2,621.9 2,821.5 3,215.8

Total Gross Block 1,493.1 1,526.2 1,545.5 1,625.5 2,405.5

Less Total Accumulated Depreciation 392.3 423.2 456.1 490.6 545.0

Net Block 1,100.8 1,103.0 1,089.5 1,135.0 1,860.6

Total CWIP 27.3 9.4 30.0 530.0 10.0

Total Fixed Assets 1,128.2 1,112.3 1,119.5 1,665.0 1,870.6

Other Investments 149.6 191.6 680.0 280.0 120.0

Other Non Current Assets 12.0 12.1 12.1 12.1 12.1

Inventory 315.0 392.1 505.8 533.7 761.6

Debtors 199.9 215.6 319.4 309.0 440.9

Loans and Advances 116.1 122.0 136.0 143.5 175.6

Other Current Assets 10.8 10.6 7.8 8.2 11.7

Cash 102.7 118.4 121.5 160.6 198.7

Total Current Assets 744.6 858.7 1,090.5 1,155.0 1,588.5

Creditors 88.5 149.3 186.3 196.6 280.6

Provisions 1.7 2.0 1.9 2.0 2.8

Other Current Liabilities 57.1 92.0 92.0 92.0 92.0

Total Current Liabilities 147.4 243.3 280.2 290.6 375.4

Net Current Assets 597.2 615.4 810.3 864.4 1,213.1

Assets side total 1,886.5 1,930.8 2,621.9 2,821.5 3,215.8



Exhibit 50: Cash flow statement (| crore)


Profit after Tax (16.4) 81.2 218.4 245.7 415.8

Depreciation 63.7 31.0 32.3 34.5 54.4

Cash Flow before working capital changes 47.3 112.2 250.6 280.2 470.2

- - - - -

Net Increase in Current Assets 170.4 (98.5) (228.7) (25.4) (395.4)

Net Increase in Current Liabilities (32.7) 95.9 36.9 10.4 84.8

Others 110.0 80.5 78.3 68.6 60.1

Net cash flow from operating activities 295.1 190.1 137.1 333.8 219.7

(Purchase)/Sale of Fixed Assets (33.5) (15.1) (40.0) (580.0) (260.0)

Liquid Investments 9.1 (41.9) (488.5) 400.0 160.0

Other Non Current Liabilities (15.1) (8.6) - - -

Net Cash flow from Investing Activities (39.5) (65.6) (528.5) (180.0) (100.0)

Inc / (Dec) in Equity Capital 3.3 - 2.9 - -

Inc / (Dec) in Loan Funds (220.7) (104.3) (17.1) (30.0) -

Total Outflow of dividend & interest (110.0) (83.0) (89.0) (84.7) (81.6)

Others 75.7 78.5 497.6 - 0.0

Net Cash flow from Financing Activities (251.7) (108.8) 394.4 (114.7) (81.6)

Net Cash flow 3.9 15.7 3.1 39.1 38.2

Cash and Cash Equivalent at the beginning 98.8 102.7 118.4 121.5 160.6

Closing Cash/ Cash Equivalent 102.7 118.4 121.5 160.6 198.7


Ratios

Exhibit 51: Ratio Analysis


Per Share Data

EPS (0.4) 1.9 4.9 5.5 9.3

Cash EPS 1.1 2.7 5.6 6.3 10.5

BV 22.0 25.8 40.0 45.1 53.9

Operating profit per share 3.4 5.4 9.5 10.1 15.8

Operating Ratios

EBITDA / Total Operating Income 12.3 17.2 21.8 22.1 24.2

PAT / Total Operating Income (1.4) 6.2 11.2 12.0 14.2

Return Ratios

RoE (1.8) 7.5 12.2 12.2 17.3

RoCE 4.7 10.6 15.4 15.2 20.6

RoIC 4.5 11.1 20.1 20.8 21.5

Valuation Ratios

EV / EBITDA 61.5 37.7 19.0 18.5 12.0

P/E (490.7) 99.0 39.3 34.9 20.6

EV / Net Sales 7.6 6.5 4.1 4.1 2.9

Sales / Equity 1.3 1.2 1.1 1.0 1.2

Market Cap / Sales 7.0 6.1 4.1 3.9 2.7

Price to Book Value 8.7 7.5 4.8 4.3 3.6

Turnover Ratios

Asset turnover 0.6 0.7 0.7 0.7 0.9

Debtors Turnover 5.8 6.1 6.1 6.6 6.6

Creditors Turnover 13.0 8.8 10.4 10.4 10.4

Solvency Ratios

Debt / Equity 0.9 0.7 0.4 0.4 0.3

Current Ratio 7.1 4.9 5.1 5.0 4.9

Quick Ratio 3.6 2.3 2.5 2.3 2.2



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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