KRChoksey - IC - 19.06.17 PDF

Apcotex Industries Limited
INITIATING COVERAGE 19th June 2017

India Equity Institutional Research II Initiating Coverage II 19th June, 2017 Page 2
Apcotex Industries Limited Increasing share of NBR going to boost financial performance
CMP Target Potential Upside Market Cap (INR Mn) Recommendation Sector
INR 373 INR 447 20.0% 7740 Buy Chemicals
Company Overview
Incorporated in 1986, Apcotex is one of the leading producers of Synthetic Rubber (NBR & HSR) and Synthetic Latex (Nitrile, VP
latex, XSB & Acrylic latex) in India. The company has one of the broadest range of Emulsion Polymers available in the market today.
The company’s major raw materials are Butadiene, Acrylonitrile and Styrene, which are petrochemical based products. Apcotex has
plant in Taloja, Maharashtra with capacity of 55,000 MT for Synthetic Latex and 8,000 MT for High Styrene Rubber (HSR). Another
plant is in Valia, Gujarat which was acquired last year from Omnova with the capacity of 12,000 MT for Nitrile Butadiene Rubber
(NBR) and 8,000 MT for HSR.
MARKET DATA Investment Rationale
Shares outs (Mn) 21 Increasing share from NBR to augur well for the group going ahead
EquityCap (INR Mn) 104 NBR is used in the widest range of products, however Apcotex has not been addressing
to all applications. Hence, the addressable market for APCO remains limited. It is
Mkt Cap (INR Mn) 7740 estimated that addressable market size for APCO is 40-45 KTA for domestic market out of
52 Wk H/L (INR) 435/282 which APCO produces 8-9 KTA (~70% utilisation), while the rest has been imported. This
represents ~20% market share for Apcotex. In terms of market penetration, APCO is the
Volume Avg (3m K) 35.9
only player post acquisition of OMNOVA in India, who is specialized in manufacturing of
Face Value (INR) 5 NBR product. It is expected that domestic demand for NBR could increase at a CAGR of
Bloomberg Code APCO IN 10-15% in the next 4-5 yrs. The growth will be largely driven by industrial capex. The
conveyor belt being largely catered to industrial demand contributed ~21% to the overall
domestic NBR market in 2016, which we expect to improve in the coming period. Further,
SHARE PRICE PERFORMANCE the company has been planning to spend ~INR 300mn for improvement in the efficiency
of overall NBR plant, which could aid financial performance of the segment in the years to
125 come. In terms of the realization, NBR products are price accretive to the overall business
given NBR is more solid product and hence, product weight will be more than standalone
business products. Thus, any increase in the revenue share from NBR will certainly
110
improve financial performance of the company in medium to long term.
95 Strong Govt Initiatives for Infra spending going to boost Construction Chemical Market
going ahead
Water proofing is considered as the largest revenue contributor to APCO for its
80
construction latex segment followed by concrete admixtures. In terms of Water proofing
Jun-16
Oct-16
Aug-16
Jun-17
Dec-16
Apr-17
Feb-17
market, the domestic market size is estimated at INR 5bn, which is expected to grow at a
CAGR of 15-17% over the next 2-3yrs. We expect the growth will be largely driven by
Sensex Apcotex Inds. redevelopment of old properties. Further, upcoming construction has also been
witnessing decent demand of water compounds owing to increase in the awareness
MARKET INFO among developers. In terms of business revenue mix, B2B remains the key revenue
contributor with more than 85% share, of which Pidilite remains a key player to the
SENSEX 31056 segmental revenue. It is believed that more than 10% of Pidilite revenue comes from Dr
Fixit brand and APCO is one of the key suppliers for raw material of Dr Fixit. Further, we
NIFTY 9588
expect with acquisition of Nina water proofing system by Pidilite, the construction
revenue share will likely to increase in the years to come. We expect all this could
attribute higher demand for APCO’s water proofing products in medium to long term.
Pidilite has been contributing ~5-6% to the overall consolidated revenue, which we expect
could improve going ahead resulting into better growth opportunities for the
construction business.
SHARE HOLDING PATTERN (%)
Particulars Mar 17 Dec 16 Sep 16
Promoters 57.9 57.9 57.89

FIIs
DIIs 0.07
0
0.07
0
0.07
0
20% 65%
Others 42.03 42.04 42.04
Revenue CAGR between FY 17 PAT CAGR between FY 17 and
Total 100 100 100 and FY 19 FY 19
ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Dhavan Shah, dhavan.shah@krchoksey.com, 91-22-6696 5574 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Bhavik Shah, bhavik.shah@krchoksey.com, 91-22-6696-5568 Thomson Reuters, Factset and Capital IQ

Apart from this, for the concrete admixtures, the industry size has been estimated at INR 15bn, which is also expected to grow at
a CAGR of 15% over next 2-3yrs. The growth will be supported by robust govt initiatives for ‘Smart cities’ and ‘Affordable housing’.
It is expected that India has to develop 110 mn dwelling units by 2022, which could require an investments to the tune of US$ 2
trillion over the next 4-5yrs. This could translate into robust demand for cement and thereby mortar admixtures.
Increasing Carpet demand for Domestic & International markets to aid financial performance for APCO
The industry size for India handmade carpet and other textile flooring has been pegged at around INR 120-150bn in 2016,
registered a CAGR of ~18% over FY12-16. The export constitutes more than 85% share of the overall domestic handmade carpet
production, of which US and Europe leading the table in terms of largest demand drivers. The revenue contribution from US and
Europe in FY16 stood at 47% (38% in FY12) & 31% (40% in FY12) respectively. We believe US remains the key market for India’s
handmade carpets, which has been growing at ~28% CAGR over FY12-16. The key reason could be owing to 12% growth in the US
residential market as against mere 4% growth in non residential market. It is estimated that around 62% of the overall carpet
demand in US comes from residential category followed by 29% from non residential and 9% from Transport. Hence, uptick in the
US housing data could attribute more demand to the domestic carpet industry and thereby SB latex. Apart from this, APCO has
hired special team to improve export market share for entire range of products. Any positive development in terms of branding
could result in better revenue growth going ahead. In terms of the domestic demand, Despite India has witnessed subdued
demand for carpet products from residential market largely on account of its elevated cost structure, we expect that surge in per
capita income along with growing shift towards home decor furnishing and increase in manufacturing of cost effective synthetic
fibre carpets should augur well for the carpet demand and thereby carpet backing products in the years to come.
Improvement in the OMNOVA’s operational performance to perk up Group Financial Performance:

Valia plant before acquisition was operated at around 50% utilization largely on account of poor product quality and hence,
operational performance remained subdued with a loss of INR 87mn in FY15. We believe the same has witnessed an improvement
presently with OPM inched up to 4-5%. The key factor for enhancement in the operational performance is attributed to vast
experience of APCO’s management to handle product quality along with decent customer penetration. The management expects
OMNOVA’s OPM to reach upto base business in the next 3-4 yrs time horizon. The base business (Synthetic Rubber and latex) has
been delivering 12-13% OPM. We expect OMNOVA on conservative basis could deliver 5-6% OPM in FY18 with revenue contribution
of around 36%, which could lift group OPM to around 10.2% in FY18 as against 7.4% in FY17 with possibility of scaling up to around
12.4% in FY19. Further, cash conversion cycle for Omnova stood at 121 days in FY15 as against base business of 45 days in FY15. We
believe such increase was largely owing to higher receivable days from Omnova (consol receivables increased to 115 days in FY16
from 50days in FY15); however the same has been curbed to 73 days in FY17. With constant focus to manage working capital cycle
by APCO management, we expect debtor days could improve to 65 days over FY17-19. This in turn could improve cash conversion
cycle further. All this could result in better return ratios in the years to come. We expect ROE & ROCE of the business could
improve by 839bps & 959bps respectively over FY17-19.


Valuation & Recommendation
The constant focus of management to diversify its presence across different product applications in latex and synthetic rubber
facilitated them to strengthen APCO’s dominance into the sector. This can be evident from the fact that the company has been
holding around 40% market share in Paper latex industry. Further, the same in Construction, Carpet and HSR (High Styrene
Rubber) remain at around 35%, 65% and 80% respectively. Apart from this, acquisition of Omnova has unlocked potential
opportunities in NBR (Nitrile Butadiene Rubber), which is largely catered through Imports in domestic market at present. We
believe that improvement in the NBR product quality and thereby increase in the plant utilization along with reduction of power &
fuel cost post capex of INR 300mn could assist robust financial performance in medium to long term.
In terms of the peer comparison, there is no perfect match in regards to same business lines; however few products from BASF
and Dow have been catered to similar applications. Hence, we have considered them for peer valuations as they are the largest
players in the world chemical market. In regards to financial performance, the revenue of APCO grew at a CAGR of 12% over FY12-
15, while the same from BASF and Dow fell by 4% & 5% CAGR respectively over FY12-15. Further, decent revenue growth along with
reduction in RM cost owing to fall in oil prices during FY15 resulted APCO’s operational performance to up by 26% CAGR over FY12-
15. However the same for BASF and Dow remained at mere -6% & 8% CAGR respectively. We expect poor operational performance
for BASF and Dow was primarily on account of subdued top-line growth. In terms of other financial matrix such as ROE, D/E and
Cash/TA, all ratios were remained at encouraged level for APCO with ROE hovered at around 18%, while D/E and Cash/TA were at
0.5x and 9% respectively. We believe all of this depicts the strong foothold of the company in the concentrated business areas.
In terms of valuations, APCO has been trading at 15x on 2yr fwd basis of our earnings estimates as against 14x for BASF and Dow.
We believe, although valuations are almost at par with industry average, robust growth outlook owing to increase in the
penetration from NBR along with expected improvement in the efficiency from Valia plant post capex could outline strong
financial performance visibility and thereby could demand higher valuations going ahead. Moreover, excess land at Valia could
help company to go for brownfield capex at less outgo with asset turn of around 2.5-3x. Apart from this, entering into newer
applications for NBR could also unlock next lag of growth opportunities for the group. This all provides strong business outlook
from medium to long term perspective. In terms of PEG, the stock has been available at 0.23x, while the same for BASF and Dow
are available at around 1.3x on 2yr fwd basis. This also provides comfort in terms of demanding higher valuations and hence
assigning a P/E multiple of 18x (PEG: 0.3x), we have arrived a target price of INR 447, an upside potential of 20%. We have a BUY
rating on the stock.
Exhibit 1: CAGR between FY12-15 across Different Financial Parameters
Apcotex BASF Dow

Revenue 11.7% -3.6% -4.9%
EBITDA 26.4% -6.4% 8.1%
PAT 29.1% -9.2% 23.2%
Avg Gross Margins 25.5% 25.8% 18.7%
Avg OPM 9.2% 14.9% 14.3%
Avg NPM 5.1% 6.4% 5.9%
Avg ROE 18.2% 17.8% 13.0%
Avg ROCE 22.3% 13.4% 0.0%
Avg Cash/TA 8.8% 2.8% 8.9%
Avg D/E 0.5x 0.5x 0.8x
Source: KRChoksey Research, Bloomberg

Exhibit 2: APCO 2yr Fwd P/E band
Price 5x 10x 12x 15x 17x 20x 25x 30x

800
700
600
500
400
300
200
100
0
Mar-16
Jan-13
Nov-13
May-16
Mar-17
May-17
Mar-12
Jan-14
Mar-15
May-12
Nov-14
Mar-13
May-15
Jan-16
Jul-16
Sep-16
Nov-16
May-13
Jan-17
Jul-12
Sep-12
Nov-12
Mar-14
May-14
Jan-15
Jul-15
Sep-15
Nov-15
Jul-13
Sep-13
Jul-14
Sep-14
Source: Company, KRChoksey Research
Exhibit 3: APCO PEG Ratio vis-a-vis its Average
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Nov-13
Mar-16
Mar-17
Jan-13
Nov-14
May-16
Mar-12
Jan-14
Mar-15
May-15
May-12
Mar-13
Jan-16
Jul-16
Sep-16
Nov-16
Jan-17
May-13
Mar-14
May-14
Jul-12
Sep-12
Nov-12
Jan-15
Jul-15
Sep-15
Nov-15
Jul-13
Sep-13
Jul-14
Sep-14
PEG Average
Exhibit 4: Key Financials
Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E

Net Revenue 3,550.8 2,683.5 3,901.4 4,801.8 5,580.5
EBITDA 414.7 374.4 289.3 490.8 691.0
PAT 246.8 246.7 190.9 349.1 516.6
EPS 11.8 11.9 9.2 16.8 24.8
OPM 11.7% 14.0% 7.4% 10.2% 12.4%
NPM 7.0% 9.2% 4.9% 7.3% 9.3%
P/E 31.6x 31.5 x 40.7x 22.3x 15.0x
Source: KRChoksey Research, Note: EPS for FY15 adjusted for bonus


Quick Business Snapshot
APCO has been into three business verticals. (i) Synthetic Latex (ii) Synthetic Rubber and (iii)
NBR. The company has been selling four kinds of latex such as VP latex, Carboxylated latex, SB
latex and Nitrile latex under synthetic latex segment. These different latexes have been catered
Business Model to different industries such as Auto, Paper, Construction, Carpet, Textile. Under synthetic rubber,
it sells products to footwear industries, while NBR products find application in automotive
components, rice de-husking rolls, rubber hoses, moulded rubber products, and other industrial
products. Synthetic latex contributes ~50% to the overall revenues, while synthetic rubber and
NBR constitutes ~15% & 35% share in the overall basket.
• APCO’s Valia plant possesses a land parcel of 115 acres out of which only 8-9 acres of land is
used presently. Remaining quantum of land can be used for brownfield expansion at lower than
average cost for other industry players
Strategic Positioning
• Taloja’s plant in Maharashtra is strategically located with a mere distance of 33 KMS from JNPT
Port, provides an edge in terms of lower logistic cost
APCO had acquired Omnova in 2016, which is into NBR segment. After acquisition, raw material
requirements such as Butadiene, Styrene has been increased, which provides comfort in terms of
Competitive Edge overall raw material cost and thereby product pricing. Apart from this, it has been one shop
solutions for products such as latexes and emulsion polymers and hence getting leverage against
peers, who are catering to only few applications.
• Revenues grew at a CAGR of 20% over FY10-15, however the growth slowed post Omnova
acquisition during FY15-17
Financial Structure • EBITDA increased at a CAGR of 26% over FY10-15 with average OPM of ~9%
• PAT was up by 24% CAGR over FY10-15 with average NPM of ~5%
• Average ROE & ROCE stood at 18% & 20% respectively over FY10-15
Key Competitors • BASF and Dow Chemicals
• Ability to handle raw material which are explosive, toxic and inflammable
Entry Barriers • Highly technology intensive plant, which is more cost burden to new players
• ITC, JK Paper, Obeetee Industries, Relaxo Footwear, Pidilite Industries, MRF to name a few
Client Base


About the Company:
Incorporated in 1986, Apcotex industries (APCO) is one of the leading manufacturer of Synthetic Latex and Synthetic rubber in
India. Under synthetic latex, it manufactures VP latex, SB latex, Carboxylated latex and Nitrile latex. In terms of the industry focus
areas for latex, the company caters to Tyre, Paper, Construction, Textile and Paint industries. Apart from this, the company also
produces synthetic rubber products, which are catered to footwear and Auto industries. In terms of raw material, Butadiene,
Styrene are key RM. The key raw materials for both products are having complex process to convert into finish product, which has
led few players to cater the potential market. APCO has vast experience in this industry and for the same reason, it has been able
to hold in excess of 50% domestic market share. Further, the company has been expanding its reach to different international
markets, which helped company to expand export revenue contribution from 8% in FY13 to 12% in FY17. In terms of the plant
capacity, synthetic latex has 55,000 MT capacity, while the same for HSR stands at 8000 MT.
During Feb’16, the company had acquired Omnova, which is into emulsion polymers business. This has unlocked potential
opportunity for the company. Omnova is specialized into offering solutions for Nitrile rubber, Nitrile powder and Nitrile blends. It
has been amalgamated with Apcotex in FY17. The valia plant has capacity of 20,000 MT of which 12,000 MT for NBR and 8,000 MT
for HSR
Business Overview
Apcotex industries (Erstwhile Standalone business):
The company had been offering solutions for synthetic latex and synthetic rubber under standalone business. Synthetic latex
was contributing 85% to the standalone revenue, while the rest was from synthetic rubber.
Synthetic Latex:
Synthetic latex is obtained from crude oil. The key properties of Synthetic latex are resist heat aging, abrasion resistance and
softening. APCO has been providing different latex solutions to different industries, which has application of binding. The
different latexes sold by the company has been explained as follows:
Carboxylated SB Latex SB / Styrene Acrylic Latex

Vinyl Pyridine Latex Nitrile Latex
(Usage in Paper, Textile (Usage in construction &
(Usage for tyres industry) (Usage in Auto industry)
and Paint business) Paint industry)
•For dipping of Nylon, •For Paper and •For Bonding and •For Asbestos jointings,
Rayon, Polyester tyre Paperboard coating Waterproofing in Brake Shoe Lining
Cord Construction
•For Carpet Backing
•For acrylic emulsion
•For Textile Finishing paints and distempers
•For highly loaded paints

and distempers
In terms of the plant capacity, it has increased its capacity from 40,000 MTPA to 55,000 MTPA in 2013. The capacity is located
at Taloja facility in Maharashtra. The plant has been operating at around 70% utilization presently improved from around 50-
55% in FY14.
Synthetic Rubber:
Under Synthetic rubber, it has been manufacturing High styrene rubber (HSR). The High styrene rubber is suitable for the
manufacture of high-hardness and low-density products. It has been used for:
1. Shoe-making: hard soles, heel, rigid foam sole, imitation leather shoes etc.
2. Floor materials: rubber floor tile, industrial products like rubber roll, washer, hard rubber tube and other sponge
products
3. Sports industry: balls, roller skate
4. Electrical insulating material
5. High-grade bike cover tyres, various printing pastern roller, slab rubber


APCO has been catering HSR to mainly footwear industry presently. The plant capacity is 8,000 MT per annum located at Taloja.
Standalone Revenue contribution:
40-45%
15% 10-12% 10-12% 10-12% 5-6%

1-2% 1-2%
Paper & Paper Synthetic Tyre Carpet Construction Auto Textile Paint
products Rubber
Apcotex solutions (erstwhile Omnova solutions)
APCO had acquired Omnova in Feb’16 for a transaction value of INR 360mn. The transaction was from internal accruals. Omnova
is a manufacturer of Nitrile Butadienes Rubber (NBR), Nitrle-PVC Polyblend, Nitrile Powder and High Styrene Rubber (HSR),
which find application in automotive components, rice de-husking rolls, rubber hoses, moulded rubber products, and other
industrial products. It is the only producer of Nitrile rubber in India, while it is the second largest manufacturer of high styrene
rubber after Apcotex. We believe this has helped APCO to expand its presence into different industry resulting into unlocking the
potential opportunities. The plant of the company has been located at Valia with a capacity of 20,000 MT per annum. It has a land
area of around 115 acres, which provides enough scope for any brownfield expansion in the years to come.
Omnova Revenues (INR bn)

2.4
2.19
2.2 2.12
2 1.87
1.8
1.6
2013 2014 2015
One shop solutions for NBRs:
NBR Bale NBR PVC Carboxylated Oil extended

Hot Polymers NBR Powder
Rubbers Polyblends NBRs Nitrile Rubber
•Brakes & •Rice Roll & •Textile Cots & •Cements, •Hoses, •Gaskets, Hoses
Jointing sheets Hoses Aprons Adhesive and Sealants, & Products, in
Brake lining Footwear and which oil
Shoe sole resistance is
required


Group Clientele List:
Management Team:
Name Designation Executive / Non-Executive
Atul C Choksey Chairman Non-Executive
Girish C Choksey Director Non-Executive
Amit C Choksey Director Non-Executive
Manubhai G Patel Independent Director Non-Executive
S Sivaram Independent Director Non-Executive
Abhiraj Choksey Managing Director Executive
Shailesh Shankarlal Vaidhya Independent Director Non-Executive
Kamlesh Vikamsey Independent Director Non-Executive
Priyamvada Bhumkar Independent Director Non-Executive
Yashodhan B Gadgil Executive Director Executive
Shareholding Pattern:
0.07% 0%
42.03%
57.90%
Promoters Others DIIs FIIs



Investment Rationale
Increasing share from NBR to augur well for the group going ahead
The global synthetic rubber market size is estimated at 19,864 KTA in 2016 of which Nitrile rubber
constitute mere 4% share of the overall pie. NBR is used in the widest range of products, however
Apcotex has not been addressing to all applications. Hence, the addressable market for APCO
remains limited. It is estimated that addressable market size for APCO is 40-45 KTA for domestic
market out of which APCO produces 8-9 KTA (~70% utilisation), while the rest has been imported.
This represents ~20% market share for Apcotex. In terms of market penetration, APCO is the only
player post acquisition of OMNOVA in India, who is specialized in manufacturing of NBR product.
We expect primary reason for such low market share in NBR as against its core products such as
latex could be largely on account of issues on the product quality as Omnova had less technology
efficient plant. For the same reason, management has been working on improvising plant
Improvement in the product technology and thereby product quality. This could help them to extend their market share in
quality along with decent medium to long term. It is expected that domestic demand for NBR could increase at a CAGR of 10-
industrial capex outlook to 15% in the next 4-5 yrs. The growth will be largely driven by industrial capex. The conveyor belt
provide opportunities to being largely catered to industrial demand contributed ~21% to the overall domestic NBR market in
improve its market share 2016, which we expect to improve in the coming period. Further, the company has been planning to
further spend ~INR 300mn for improvement in the efficiency for NBR plant, which could aid financial
performance of the segment in the years to come. In terms of the realization, NBR products are
price accretive to the overall business given NBR is more solid product and hence, product weight
will be more than standalone business products. Thus, any increase in the revenue share from NBR
will certainly improve financial performance of the company in medium to long term.
Exhibit 5: Global Synthetic Rubber Capacity Exhibit 6: India NBR Demand for 2017 (in KTA)
Contribution Product wise (%)
2% NBR
4% SBC
8% 8
13%
9% ESBR
Production
5% SSBR
Imports
BR 40
24% Demand
32
IR
25%
10% EPDM
IIR
CR
Source: KRChoksey Research, India Rubber Statistics
Exhibit 7: NBR End Use Consumption for India Market in 2016 (%)
Share from Conveyor belt is Auto Components

28%
expected to improve
primarily on account of
revival in the industrial Conveyor Belts
activity 50%
21% Others
Source: KRChoksey Research, CPMA India


In terms of the export demand, the market size is estimated at 794 KTA. Although APCO has not
been catering to international market presently, any positive development can provide abundant
opportunity to improve overall financial performance in medium to long term. We believe with
acquisition of Omnova, consumption of butadiene has been increased in the group. This could
provide them more purchasing power and hence benefiting in terms of lower RM cost is
anticipated. We expect lower RM cost along with better product quality could position APCO’s
Large land bank at Valia
products on much competitive form in the international market and hence inching up market share
along with potential growth
is inevitable. Moreover, the valia plant is situated on the land area of 115 acres, of which 8-9 acres
opportunities in global NBR
has been used for present running plant. Thus, rest area can be used to meet any incremental
market provides strong
demand going ahead. It is estimated that 1 MT of brownfield capex could cost to the tune of INR
revenue visibility at low
50,000, while it can take 12-18 months for commissioning. Further, asset turn could be around 2.5-
capex outgo
3x and hence, provides strong revenue visibility for long term given a huge land bank it holds. In
terms of the market penetration, NBR market is currently catered by few players mainly on account
of complex process in terms of handling the RM (Butadiene, Styrene and Acrylonitrile) along with
requirement of technology efficient plants etc. This itself resulted market to remain oligopoly. We
believe APCO being into this market since long with decent customer penetration could remain the
strongest player in overall pie and hence, improvement in the overall performance is expected.
Entry into other Nitrile
Apart from this, entering into newer application for NBR could improve business outlook for long
products provides strong
term.
financial performance
visibility for medium to long
term

Strong Govt Initiatives for Infra spending going to boost Construction Chemical Market going
ahead
Construction chemicals are chemical compounds used in the constructing activities. The industry
has been classified among five different segments such as (i) Concrete Admixtures (ii) Water
proofing (iii) Flooring Compounds (iv) Repair & Rehabilitation and (v) Miscellaneous. Apcotex has
been catering to all segments, however Water proofing being considered as the largest revenue
contributor to the construction latex segment followed by concrete admixtures. In terms of Water
proofing market, the domestic market size is estimated at INR 5bn, which is expected to grow at a
Increasing the Dr Fixit
CAGR of 15-17% over the next 2-3yrs. We expect the growth will be largely driven by redevelopment
revenue share for Pidilite
of old properties as the later has been facing issues with more water leakages. Further, upcoming
provides strong revenue
construction has also been witnessing decent demand of water compounds owing to increase in the
visibility for APCO’s
awareness among developers. In terms of business revenue mix, B2B remains the key revenue
construction chemical
contributor with more than 85% share, of which Pidilite remains a key player to the segmental
segment
revenue. It is believed that more than 10% of Pidilite revenue comes from Dr Fixit brand and APCO
is one of the key suppliers for raw material of Dr Fixit. Further, we expect with acquisition of Nina
water proofing system by Pidilite, the construction revenue share will likely to increase in the years
to come. We expect all this could attribute higher demand for APCO’s water proofing products in
medium to long term. Pidilite has been contributing ~5-6% to the overall consolidated revenue,
which we expect could improve going ahead resulting into better growth opportunities for the
construction business. Apart from this, the B2C segment has been niche at the moment, which we
expect likely to grow in the coming time given more builders are adopting water proofing
technologies in newer projects. Further, better monsoon than previous year could also increase the
demand for water proofing and hence, all this could translate into robust growth opportunities for
the construction business in medium to long term.
Company sells water

proofing products under Exhibit 11: India Construction Chemical Market Size (INR bn) & Segregation among different
‘APCOBUILD’ brand to B2C. segments
Increasing penetration
towards B2C will improve
the revenue visibility further Construction Chemicals
for the segment (INR 35 bn)
Concrete Water Proofing Flooring Repair and Miscellaneous

Admixtures Chemicals Compounds Rehabilitation
(18%)
(42%) (14%) (14%) (12%)
Source: KRChoksey Research, FICCI
Exhibit 12: Indian Water Proofing chemical industry (in INR Bn)
12
Govt initiatives for ‘Smart
cities’, ‘Affordable housing’, 10
10
and surge in Infra Spending 8
provides vivid future for 6
Construction Chemical
segment from medium to 4 5
long term perspective 2
0
2014 2019E
Source: KRChoksey Research, FICCI

In terms of the concrete admixtures, the industry size has been estimated at 15bn, which is also expected to grow at a CAGR of
15% over next 2-3yrs. The growth will be supported by robust govt initiatives for ‘Smart cities’ and ‘Affordable housing’. It is
expected that India has to develop 110 mn dwelling units by 2022, which could require an investments to the tune of US$ 2 trillion
over the next 4-5yrs. Further, increase in the urbanization could also improve demand outlook for admixtures. All these could
translate into robust demand for cement and thereby mortar admixtures. Apart from this, increase in the infra spending for Road
development, Airports etc could also fuel higher demand for SB latex. The concrete admixtures contribute ~20% to the
construction latex revenue, which we expect to aid owing to aforementioned rationales.
Exhibit 13: India Cement Production vis-à-vis Capacity (in MMT)
500 453 464 80%

411 420 433
392
400 357 368 354
319 330 75%
285 283 305
300 248 256 270
231
70%
200
65%
100
0 60%
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
Capacity Production Utilization

Source: KRChoksey Research
Exhibit 14: Infrastructure spending (Budget)
Particulars (INR in Bn) Budget FY16-17 Budget FY17-18

Roads & Highways 579.8 640.0
Railways 400.0 550.0
Housing 150.0 230.0
Others 1,082.7 2,541.4
Total Infra Spending 2,212.5 3,961.4

Increasing Carpet demand for Domestic & International markets to aid financial performance for
APCO
SB Latex is used in carpet backing for both non-synthetic fibres (largely handmade and woven by
Wool or Silk) and synthetic fibres (largely machine-made and tufted by nylon, polypropylene or
polyester). Apcotex manufactures SB latex at its Taloja plant in Maharashtra and enjoys ~65% market
share in carpet backing products in India. Carpet backing contributes ~10% of the overall revenue for
Increase in the per capital the company. Currently, key customers for SB latex are Obeetee Industries and ABC Industries.
disposable income along Obeetee industries being the largest manufacturer in this segment has been delivering its carpet
with change in the products to various five star hotel chains with Taj being one of the prominent customer for the
preference towards home company. Further, Obeetee has collaboration with various designers such as Tarun Tahiliani,
decors to contribute higher Raghavendra Rathore and David Abraham, who helps to strengthen their penetration in the overall
demand for domestic carpet industry. In terms of the domestic market growth, Despite India has witnessed subdued demand for
industry going ahead carpet products from residential market largely on account of its elevated cost structure, we expect
that surge in per capita income along with growing shift towards home decor furnishing and
increase in manufacturing of affordable synthetic fibre carpets should augur well for the carpet
demand and thereby carpet backing products in the years to come.
The industry size for India handmade carpet and other textile flooring has been pegged at around
INR 120-150bn in 2016, registered a CAGR of ~18% over FY12-16. The export constitutes more than
Uptick in US home sales to 85% share of the overall domestic handmade carpet production, of which US and Europe leading
contribute decent growth for the table in terms of largest demand drivers. The revenue contribution from US and Europe in FY16
domestic carpet industry stood at 47% (38% in FY12) & 31% (40% in FY12) respectively. We believe US remains the key market for
given its dominance to the India handmade carpets, which has been growing at ~28% CAGR over FY12-16. The key reason could
overall carpet imports from be owing to 12% growth in the US residential market as against mere 4% growth in non residential
India market. It is estimated that around 62% of the overall carpet demand in US comes from residential
category followed by 29% from non residential and 9% from Transport. Hence, uptick in the US
housing data could attribute more demand to the domestic carpet industry and thereby SB latex.
Apart from this, APCO has hired special team to improve export market share for entire range of
products. Any positive development in terms of branding could result in better revenue growth
going ahead.
Exhibit 15: India’s exports contribution from Carpets and other Textile Floor Coverings
200
180
160 172
140
120
100 111 113

96
80
77
60
59
40
20
0
2012 2013 2014 2015 2016 2019E
Source: KRChoksey Research, Ministry of Commerce

Exhibit 16: Major countries contributing to India’s exports from Carpets and other Textile Floor Coverings
120%
100%
33% 29% 27%

37% 32%
80%
3% 3%
3% 3% 6% 6%
60% 3% 9% 7% 7%
7% 12%
3% 4% 7% 9%
12% 10% 8% 7%
40%
47%
20% 38% 41% 42% 42%
0%
2012 2013 2014 2015 2016
USA GERMANY UAE UK AUSTRALIA Others
Source: KRChoksey Research, Ministry of Commerce
Exhibit 17: Carpets & Rugs demand by Market (USA)
Transport
9%
Non-
Residential
buildings
29% Residential
buildings
62%

Improvement in the OMNOVA’s operational performance to perk up Group Financial

Performance:
Omnova has a capacity of total 20,000 MT, of which 12,000 MT is for NBR and rest is for HSR.
Currently, NBR facility has been operating at ~80% utilization, while NBR blend operates at ~50-55%
utilization. The company has not been manufacturing HSR from Valia plant presently on account of
stressed demand scenario; however the same has been operated through Taloja plant. In terms of
operational performance, Valia plant before acquisition was operated at around 50% utilization
largely on account of poor product quality and hence, operational performance remained subdued
Improvement in the NBR with a loss of INR 87mn in FY15. We believe the same has witnessed an improvement presently
plant efficiency post capex of with OPM inched up to 4-5%. The key factor for enhancement in the operational performance is
INR 300mn provides visibility attributed to vast experience of APCO to handle product quality along with decent customer
of improvement in the penetration. In terms of revenue contribution, Valia plant contributes around 35% to the overall
operational performance for revenues in FY17, which we expect to inch up post debottlenecking of plant. This could assist
the segment improvement in the operational performance of the segment and thereby group financial
performance. The management expects OMNOVA’s OPM to reach upto base business in the next
3-4 yrs time horizon. The base business (Synthetic Rubber and latex) has been delivering 12-13%
OPM. We expect OMNOVA on conservative basis could deliver 5-6% OPM in FY18 with revenue
contribution of around 36%, which could lift group OPM to around 10.2% in FY18 as against 7.4% in
FY17 with possibility of scaling up to around 12.4% in FY19.
Exhibit 18: Revenue (in INR mn) & OPM (%)
6,000 16.0%
14.0%
12.4% 14.0%
5,000 11.7%
10.2% 12.0%
4,000
Group OPM to expand by 8.5% 10.0%
500bps over FY17-19 largely 7.4%
on account of improvement 3,000 8.0%
5,580
in the NBR segment’s 4,802 6.0%
operational performance 2,000 3,901
3,551
2,970 2,684 4.0%
1,000
2.0%
0 0.0%
FY14 FY15 FY16 FY17 FY18E FY19E
Revenue OPM
Further, cash conversion cycle for Omnova stood at 121 days in FY15 as against base business of 45
days in FY15. We believe this has resulted APCO’s cash conversion cycle to increase to 127 days post
Cash conversion cycle to consolidation in FY16. We believe such increase was largely owing to higher receivable days from
improve from 94 days in FY17 Omnova (consol receivables increased to 115 days in FY16 from 50days in FY15); however the same
to 80 days in FY19 has been curbed to 73 days in FY17. With constant focus to manage working capital cycle by APCO
management, we expect debtor days could improve to 65 days over FY17-19. This in turn could
improve cash conversion cycle further. All this could result in better return ratios in the years to
come. We expect ROE & ROCE of the business could improve by 839bps & 959bps respectively
over FY17-19.

Exhibit 19: Cash Conversion Cycle going to better-off (in Days)
140
127
120
100 94
87
80
80
60 54
45
40
20
0
Exhibit 20: ROE & ROCE expected to come pre-acquisition level (%)
35.0% 32.6%
30.0%
25.0%
ROE & ROCE to improve by 21.2%
839bps & 959bps 18.7% 24.7% 18.8%
respectively over FY17-19 20.0% 17.9%
15.0% 11.6% 17.6%

15.4%
14.5%
10.0% 13.2%
9.3%
5.0%
0.0%
ROE ROCE


Risks & Concerns
Workmen strike to impact financial performance in future:

There was a production loss in Taloja plant due to worker’s strike in Q4FY17. This had impacted
revenues to the tune of INR 0.2bn, which represents ~5-7% of the overall FY17 revenues.
Although there was no other instance of workmen strike since last 3 decade, any unexpected
outcome could hamper revenue growth in future.
Loss of customer to hurt top-line growth:

The revenue for FY17 was also impacted on account of loss of sales from one of the paper
customer, who was contributing ~5% to the overall revenues. APCO has been catering to
various other large customers across different product baskets, who have been contributing
~5-10% to the overall revenues. Any loss of business from those due to uncertain event could
impact financial picture of the company.
Adverse movement in the RM prices to drive poor operational performance:

Butadiene, Styrene and Acrylonitrile are the key RM for production of latex, NBR and synthetic
rubber. Although prices of RM has been dependent on crude oil prices, there was inverse
movement in past with regards to both prices. Further, these raw materials are manufactured
by few players and hence any cartelization could lift the RM prices and thereby impact the
financial performance of the business. Although the company could pass on RM differences to
end users, any adverse movement in demand outlook could impact gross margins and thereby
the operational performance.
Fire at any plant to impact business outlook:

Butadiene, Styrene and Acrylonitrile are complex raw materials to manage. These raw
materials are also exposed to fire in case of any blunder in handling, which could result in fire at
plant. APCO has already best system in place, which helped them to manage both plants
without any hazardous event since its incorporation. Nevertheless, any unfortunate event
could impact production growth and thereby earnings visibility.


Income Statement (INR Millions) FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Net Revenues 2,734.0 2,970.3 3,550.8 2,683.5 3,901.4 4,801.8 5,580.5
Cost Of Revenues (incl Stock Adj) 2,062.8 2,266.4 2,502.0 1,755.3 2,692.2 3,254.6 3,717.5
Gross Profit 671.2 704.0 1,048.8 928.2 1,209.2 1,547.2 1,862.9
Employee Cost 107.8 115.9 141.0 152.2 293.5 336.1 379.5
Other Operating Expenses 328.2 336.8 493.0 401.7 626.5 720.3 792.4
EBITDA 235.2 251.3 414.7 374.4 289.3 490.8 691.0
Other Income -0.2 24.3 55.8 73.5 82.5 97.8 113.7
EBITDA, including OI 235.0 275.6 470.5 447.9 371.8 588.6 804.7
Depreciation 31.1 67.7 89.8 89.4 121.0 138.5 159.4
Net Interest Exp. 23.5 41.4 32.4 24.2 28.6 24.4 15.3
EBT 180.4 166.5 348.3 334.3 222.2 425.7 630.0
Taxes 52.4 35.1 101.5 87.6 31.3 76.6 113.4
Tax Rate 29.0% 21.1% 29.1% 26.2% 14.1% 18.0% 18.0%
Net Income 128.1 131.4 246.8 246.7 190.9 349.1 516.6
NI Excl Extra Items 128.1 131.4 246.8 246.7 190.9 349.1 516.6
NI Incl Extra Items 128.1 131.4 246.8 246.7 190.9 349.1 516.6
Basic EPS (INR) 6.1 6.3 11.8 11.9 9.2 16.8 24.8
Shares Outstanding 10.4 10.4 10.4 20.8 20.8 20.8 20.8
Balance sheet (INR Millions) FY13 FY14 FY15 FY16 FY17 FY18E FY19E
SOURCES OF FUNDS
Share Capital 52.2 52.2 52.2 104.1 104.1 104.1 104.1
Reserves 729.7 800.5 945.3 1,768.1 1,959.0 2,308.1 2,824.7
Total Shareholders Funds 782.0 852.8 997.5 1,872.2 2,063.1 2,412.1 2,928.7
Long Term Borrowings 217.6 167.0 83.7 0.0 0.0 0.0 0.0
Net Deferred Tax liability 65.8 63.8 55.9 0.0 34.3 34.3 34.3
Other long term liabilities 10.2 10.2 13.3 13.8 31.4 39.3 30.5
Long term provisions 10.9 16.4 17.8 19.9 26.1 26.2 45.7
Current Liabilities and Provisions
Short term borrowings 206.4 229.4 143.9 170.5 222.4 192.4 122.4
Trade Payables 193.7 250.1 202.6 341.3 221.8 262.2 320.0
Other Current Liabilities 168.8 171.8 198.6 318.5 220.4 288.4 304.8
Short Term Provisions 62.5 72.3 93.4 144.4 2.7 3.3 3.8
Total Current Liabilities 631.4 723.6 638.5 974.7 667.4 746.4 751.1
Total Liabilities 1,717.8 1,833.8 1,806.6 2,880.6 2,822.3 3,258.3 3,790.3
APPLICATION OF FUNDS :
Net Block 649.9 677.9 632.5 947.4 937.4 1,049.0 1,189.6
Non-current investments 225.2 244.5 307.6 178.1 236.4 236.4 236.4
Deferred tax assets 0.0 0.0 0.0 67.3 0.0 0.0 0.0
Long term loans and advances 56.4 69.1 63.0 106.2 86.2 104.9 106.7
Other Non Current Assets 8.5 7.6 2.7 60.5 21.1 26.2 30.5
Current Assets, Loans & Advances
Inventories 107.9 171.0 152.2 433.4 445.0 498.2 548.6
Sundry Debtors 471.8 517.1 487.0 838.4 781.8 904.7 990.6
Cash and Bank 154.0 61.2 44.3 98.1 61.9 150.5 352.7
Loans and Advances 26.6 37.2 55.8 74.1 191.3 196.7 228.6
Other Current assets 3.9 37.0 42.7 77.2 61.1 91.8 106.7
Total Current Assets 764.3 823.5 782.0 1,521.1 1,541.1 1,841.9 2,227.2
Total Assets 1,717.8 1,833.8 1,806.6 2,880.6 2,822.3 3,258.3 3,790.3


Cash Flow Statement (INR Millions) FY13 FY14 FY15 FY16 FY17 FY18E FY19E
PBT & Extraordinary 180.4 166.5 348.3 358.8 222.2 425.7 630.0
Depreciation 31.1 67.7 89.8 94.0 121.0 138.5 159.4
(Inc) / Dec in Working Capital 90.4 -119.7 -5.7 -512.4 -332.3 -118.9 -103.9
Taxes -47.4 -30.6 -97.8 -70.2 -31.3 -76.6 -113.4
Others 24.7 15.2 -14.5 -52.7 71.9 24.4 15.3
Cash from Ops. 279.1 99.0 320.0 -182.6 51.5 393.1 587.4
Purchase of Fixed Assets -257.3 -57.8 -75.7 -400.4 -111.1 -250.0 -300.0
Others -23.2 1.2 0.1 755.3 0.0 0.0 0.0
Cash from Investing -280.5 -56.7 -75.6 354.9 -111.1 -250.0 -300.0
Proceeds from issue of shares 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Borrowings (Net) -117.4 -38.7 -167.2 -56.8 51.9 -30.0 -70.0
Others -70.6 -96.4 -93.1 -111.6 -28.6 -24.4 -15.3
Cash from Financing -188.0 -135.1 -260.3 -168.4 23.3 -54.4 -85.3
Net Change in Cash -189.4 -92.7 -15.8 3.9 -36.2 88.7 202.1
BF Cash 343.3 154.0 61.2 44.3 98.1 61.9 150.5
END Cash 154.0 61.2 44.3 98.1 61.9 150.5 352.7
Ratio Analysis FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Profitability
Return on Assets (%) 7.5 7.2 13.7 8.6 6.8 10.7 13.6
Return on Capital (%) 18.8 18.7 32.6 18.8 11.6 17.9 21.2
Return on Equity (%) 16.4 15.4 24.7 13.2 9.3 14.5 17.6
Margin Trend
Gross Margin (%) 24.6 23.7 29.5 34.6 31.0 32.2 33.4
EBITDA Margin (%) 8.6 8.5 11.7 14.0 7.4 10.2 12.4
Net Margin (%) 4.7 4.4 7.0 9.2 4.9 7.3 9.3
Liquidity
Current Ratio 1.2 1.1 1.2 1.6 2.3 2.5 3.0
Quick Ratio 1.0 0.9 1.0 1.1 1.6 1.8 2.2
Debtor Days 63 64 50 115 73 69 65
Inventory Days 14 21 16 59 42 38 36
Creditor Days 26 31 21 47 21 20 21
Cash conversion cycle 52 54 45 127 94 87 80
Solvency
Total Debt / Equity 0.5 0.5 0.2 0.1 0.1 0.1 0.0
Interest Coverage 8.7 5.0 11.7 14.8 8.8 18.4 42.2
Valuation Ratios
EV/EBITDA 17.7 16.9 9.8 20.9 27.4 15.9 10.9
P/E 60.9 59.3 31.6 31.5 40.7 22.3 15.0
P/B 5.0 4.6 3.9 4.2 3.8 3.2 2.7


ANALYST CERTIFICATION:
We, Dhavan Shah [B.Com, MS(Finance)], research analyst, & Bhavik Shah [MMS(Finance)], research associate, author and the name subscribed to this report, hereby
certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our
compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Terms & Conditions and other disclosures:

KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock
Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vide SEBI Registration No. INH000001295 under SEBI (Research Analyst)
Regulations, 2014.
We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research
Analysis activities.
KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that
the analyst covers.
The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is
strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other
person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable
basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing
so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations
and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or
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of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive
this report at the same time. KRCSSPL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal,
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It is confirmed that, Dhavan Shah [B.Com, MS(Finance)], research analyst, & Bhavik Shah [MMS(Finance)], research associate, of this report have not received any
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Phone: 91-22-6633 5000; Fax: 91-22-6633 8060.
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Apcotex Industries Limited

INITIATING COVERAGE 19th June 2017

MARKET DATA Investment Rationale

SHARE HOLDING PATTERN (%)

Particulars Mar 17 Dec 16 Sep 16

Promoters 57.9 57.9 57.89

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Improvement in the OMNOVA’s operational performance to perk up Group Financial Performance:

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Exhibit 1: CAGR between FY12-15 across Different Financial Parameters

Apcotex BASF Dow

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Exhibit 2: APCO 2yr Fwd P/E band

Price 5x 10x 12x 15x 17x 20x 25x 30x

Source: Company, KRChoksey Research

Exhibit 3: APCO PEG Ratio vis-a-vis its Average

Exhibit 4: Key Financials

Particulars (INR Mn) FY15 FY16 FY17 FY18E FY19E

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Key Competitors • BASF and Dow Chemicals

Source: Company, KRChoksey Research

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Apcotex industries (Erstwhile Standalone business):

Carboxylated SB Latex SB / Styrene Acrylic Latex

•For highly loaded paints

Source: Company, KRChoksey Research

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Standalone Revenue contribution:

15% 10-12% 10-12% 10-12% 5-6%

Source: Company, KRChoksey Research

Apcotex solutions (erstwhile Omnova solutions)

Omnova Revenues (INR bn)

Source: Company, KRChoksey Research

One shop solutions for NBRs:

NBR Bale NBR PVC Carboxylated Oil extended

Source: Company, KRChoksey Research

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Promoters Others DIIs FIIs

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Source: KRChoksey Research, India Rubber Statistics

Share from Conveyor belt is Auto Components

Source: KRChoksey Research, CPMA India

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Company sells water

Concrete Water Proofing Flooring Repair and Miscellaneous

Source: KRChoksey Research, FICCI

Source: KRChoksey Research, FICCI

ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569

Apcotex Industries Limited

Exhibit 13: India Cement Production vis-à-vis Capacity (in MMT)

500 453 464 80%

Capacity Production Utilization