India Specialty Chemicals Shaking Up The Status Quo

31 May 2021
SECTOR UPDATE
INDIA SPECIALTY CHEMICALS
India Specialty Chemicals

SHAKING UP THE STATUS QUO
Structural growth for India’s specialty chemicals Our top picks: CRAMS/CSM
Indian players on rising industry is a decadal growth players (Navin Fluorine and
'China plus one' strategy opportunity PI Industries) & UPL
31 May 2021
SECTOR UPDATE
INDIA SPECIALITY CHEMICALS
TABLE OF CONTENTS

Dayanand Mittal
03 Introduction Dayanand.Mittal@jmfl.com
Tel: (+91 96) 1938 8870
04 Key charts
MAIN THEMES Krishan Parwani

Krishan.Parwani@jmfl.com
10 India’s Specialty Chemical Industry is a decadal growth opportunity Tel: (+91 96) 6209 5500
20 India’s Specialty Chemicals Industry to witness growth across segments We acknowledge the support
of Prashanth Kamath in the
23 Agrochemicals – Immense growth potential preparation of this report.
29 Fluorochemicals – Adoption on the rise
32 CRAMS/CSM business provides long term growth visibility
COMPANIES
34 UPL — Uniquely Placed (BUY, TP INR 1,000)
47 PI Industries — Ever Resilient ‘PI’e (BUY, TP INR 2,995)

JM Financial Research is also
58 SRF — Adaptive chemistry at work (BUY, TP INR 7,600) available on: Bloomberg - JMFR
<GO>, Thomson Publisher &
73 Navin Fluorine — Fluor’intined the chemistry (BUY, TP INR 3,760) Reuters S&P Capital IQ and
FactSet and Visible Alpha
85 Galaxy Surfactants — Specialty care opportunity fully priced in (HOLD, TP INR 3,360)
Please see Appendix I at the end
95 Fine Organics — Go – Green chemistry (HOLD, TP INR 3,160) of this report for Important
Disclosures and Disclaimers and
104 Anupam Rasayan — Right Place at the Right Time (HOLD, TP INR 780) Research Analyst Certification.
You can also access our portal
www.jmflresearch.com
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31 May 2021
SECTOR UPDATE
Shaking up the Status Quo

We believe India’s specialty chemicals industry is a decadal growth story; hence, it is still not late to participate in the value-creation
process. India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness, driven by: a) the availability of low-
cost labour (vs. China); b) lower regulatory costs (China’s tightening environmental norms have raised its regulatory costs); c) rising
availability of low-cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D expertise. India’s specialty
chemicals industry is expected to continue to clock a 12% CAGR until CY25 (as seen over CY14-19; this is higher than the 6.4% CAGR
expected for the global industry). This would be led by: a) robust domestic consumption growth (given India’s low per capita
consumption); b) rising import substitution (on account of the government’s favourable policy measures); and c) strong growth in
exports (due to rising adoption of the ‘China plus one’ strategy by global MNCs).
We prefer CRAMS (contract research and manufacturing services) / CSM (custom synthesis manufacturing) players as they provide long-
term growth visibility. Hence, our top picks are: a) Navin Fluorine (NFIL) and PI Industries (PI) due to their strong presence in
CRAMS/CSM markets; and b) UPL due to its robust growth outlook, reducing debt concerns and attractive valuations. NFIL offers
complex fluorination expertise to pharma players as a part of its CRAMS business while PI could repeat its agrochem CSM success in
pharma/other specialty chemicals businesses. We also assume coverage with: a) BUY on SRF due to rising contribution from the
chemicals business; b) HOLD on Galaxy Surfactants (Galaxy) and Fine Organics (FOIL) on valuations; and c) we initiate on Anupam
Rasayan (ARIL) with HOLD on the recent sharp ~50% rally in share price.
We prefer CRAMS/CSM players as they provide long-term Navin Fluorine and PI are our top picks due to their strong
growth visibility presence in CRAMS/CSM market
India has been marking its presence in the global CRAMS market NFIL’s timely diversification from the legacy refrigerant and
where it commands ~6% market share (at USD 11.5bn in CY19, inorganic fluoride business has driven margin expansion and
of USD 200bn global market). India’s CRAMS market is likely to overall growth. NFIL’s growth prospects seem even brighter with
post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global higher contribution from specialty chemicals and CRAMS
market). India’s CRAMS market caters to: a) Pharmaceuticals segments on account of long-term contract and capacity
(45%); b) Agrochemicals (35%); and c) Personal care and other expansions. NFIL’s CRAMS business is 100% pharma-focused.
industries (20%). CSM is a niche segment within the CRAMS We value the company at INR 3,760 (based on 40x FY23E EPS)
space and caters to patented products that require more R&D and assume coverage with a BUY rating.
efforts. We believe Indian CRAMS/CSM players are well set to PI is currently India’s largest CSM player in the agrochemicals
benefit as more innovators shift focus on core competencies and space and its order book size has grown ~15x over the last 10
outsource production via long-term contracts to low-cost years. Moreover, its entry into performance, fine chemicals along
manufacturing destinations such as India. These long-term with pharma APIs/intermediates is likely to put it in the league of
contracts provide long-term revenue growth visibility compared global CSM players offering services across segments. We
with other specialty players. Navin fluorine and PI Industries are estimate PI to demonstrate 25% earnings CAGR over FY21-23E.
our top picks as both have a strong presence in the CRAMS We value the company at INR 2,995 (based on 40x FY23E EPS)
market. and assume coverage with a BUY.
UPL also our top pick due to robust growth outlook, HOLD on Galaxy and FOIL on valuations; Initiate on ARIL
reducing debt concerns and attractive valuations with HOLD given recent sharp rally
UPL is uniquely placed to register a healthy 13%/23% We assume coverage on Galaxy with a HOLD rating (TP INR
EBITDA/PAT CAGR over FY21-23E on account of: a) revenue and 3,360, based on 30x FY23E EPS) as we believe current valuations
cost synergies arising from the Arysta acquisition; b) robust 9% largely capture: a) the strong medium-term growth visibility in
revenue CAGR over FY21-23E aided by an R&D-backed product the performance surfactants segment; b) tie-ups for additional
pipeline coupled with new product launches from recent specialty care volumes with global MNCs and local majors; and
collaborations; and c) lower interest costs led by reduced debt. c) positive operating leverage arising from the ramp-up in
Further, UPL is trading at attractive valuations of 7.8X FY23E additional capacities.
EV/EBITDA (vs. the pre-Arysta acquisition 5-year average multiple Although we believe FOIL is the clear winner of the rising
of ~9.5X). We assume coverage with a BUY rating (TP of INR adoption of green chemicals, current valuations leave limited
1,000/share). upside, in our view. Hence, we assume coverage on FOIL with a
We assume coverage on SRF with a BUY (SoTP-based TP of INR HOLD (TP INR 3,160, based on 35x FY23E EPS).
7,600, implying 27X FY23E EPS) due to its continuous ARIL is one of the country’s leading CSM players in speciality
investments in the chemicals business and R&D, which has made chemicals and had long-term relationships with 15 MNCs at
it one of the leading fluorine-based specialty chemicals players. end-Sep’20. Drawing comfort from its long-term contracts, we
Increasing contribution from the chemicals business is likely to forecast sales/EBITDA/EPS CAGR of 32%/41%/86% over FY21-
improve overall earnings growth. Hence, we expect SRF to 23E. Given the recent sharp rally in share price, we await a
demonstrate Revenue/EBITDA/PAT CAGR of 25%/19%/18% better entry point and initiate with a HOLD (TP of INR 780 based
over FY21-23E. on 32x FY23E EPS).

Specialty Chemicals 31 May 2021
Key charts
Exhibit 1. Global speciality chemicals industry size (USD bn): expected Exhibit 2. India’s speciality chemicals industry size (USD bn); it is
to post a 6.4% CAGR over CY20-25 expected to post a ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14 CY19 CY25
Source: FICCI, JM Financial Source: FICCI, JM Financial
Exhibit 3. Global CRAMS market likely to reach USD 322bn by CY24E Exhibit 4. Indian CRAMS market likely to reach USD 20.3bn by CY24E
(USD bn) (USD bn)
Source: ARIL DRHP Source: ARIL DRHP
Exhibit 5. Competitive landscape of various sub-segments of the Indian specialty chemicals industry
Global specialty chem Global m arket China Exports as India Exports as China Exports India Exports India Exports as
exports (USD bn, CY18) CAGR CY18-CY23 % of Global % of Global (USD bn, CY18) (USD bn, CY18) % of China
Intermediate for APIs 77 6-7% 11% 4% 8.5 3.1 36%
Agrochemicals 72 2-3% 17% 6% 12.2 4.3 35%
Dyes and Pigments 66 2-3% 12% 5% 7.9 3.3 42%
Plastic additives 15 3-4% 8% 1% 1.2 0.2 13%
Electronic chemicals 15 4-5% 22% 0% 3.3 0 0%
Food/Feed additives 12 2-3% 19% 2% 2.3 0.2 11%
Neutraceuticals 10 4-5% 46% 2% 4.6 0.2 4%
Rubber Chemicals 5 2-3% 27% 2% 1.4 0.1 7%
Flavours and Fragrances 5 3-4% 46% 12% 2.3 0.6 26%
Source: IHS Chemicals, IHS Global Insights, UN Comtrade, JM Financial

Investment thesis
We believe India’s specialty chemicals industry is a decadal growth story; hence, it is still not
late to participate in the value-creation process. India is emerging as a fast-growing specialty
chemicals hub on a rise in its competitiveness, driven by: a) the availability of low-cost labour
(vs. China); b) lower regulatory costs (China’s tightening environmental norms have raised its
regulatory costs); c) rising availability of low-cost feedstock for Indian players; and d) India’s
strong IP protection and improving R&D expertise. India’s specialty chemicals industry is
expected to continue to clock a 12% CAGR until CY25 (as seen over CY14-19; this is higher
than the 6.4% CAGR expected for the global industry). This would be led by: a) robust
domestic consumption growth (given India’s low per capita consumption); b) rising import
substitution (on account of the government’s favourable policy measures); and c) strong
growth in exports (due to rising adoption of the ‘China plus one’ strategy by global MNCs).
We prefer CRAMS (contract research and manufacturing services) / CSM (custom synthesis
and manufacturing) players as they provide long-term growth visibility. Hence, our top picks
are: a) Navin Fluorine (NFIL) and PI Industries (PI) due to their strong presence in CRAMS/CSM
markets; and b) UPL due to its robust growth outlook, reducing debt concerns and attractive
valuations. NFIL offers complex fluorination expertise to pharma players as a part of its
CRAMS business while PI could repeat its agrochem CSM success in pharma/other specialty
chemicals businesses. We also assume coverage with: a) BUY on SRF due to rising
contribution from the chemicals business; b) HOLD on Galaxy Surfactants (Galaxy) and Fine
Organics (FOIL) on valuations; and c) we initiate on Anupam Rasayan (ARIL) with HOLD on
the recent sharp ~50% rally in share price.
India’s Specialty Chemical Industry is a decadal growth opportunity

China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry, which was
valued at ~USD 805bn in CY19. However, India has a limited ~4% share (or ~USD 32bn).
Further, around 25% of the total production of specialty chemicals is exported globally,
amounting to a total USD 200bn in CY19. China is the leading exporter of specialty
chemicals with exports of USD 35bn in CY19, representing ~18% of the overall exports of
specialty chemicals. India has done relatively well in exports of specialty chemicals, which
came in at USD 12bn-15bn in CY19, but still only constitutes 6-7% of total global exports of
specialty chemicals.
Exhibit 6. Global speciality chemicals industry size (USD bn): expected Exhibit 7. India’s speciality chemicals industry size (USD bn); it is
to post a 6.4% CAGR over CY20-25 expected to post a ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14 CY19 CY25
India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness,

driven by: a) the availability of low-cost labour (vs. China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); c) rising availability of low-
cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise.
Indian specialty chemicals industry is expected to continue to post a 12% CAGR until CY25
(as seen during CY14-19 and higher than the 6.4% CAGR expected for the global industry)
due to: a) robust domestic consumption growth; b) rising import substitution; and c) strong
export growth. India’s per capita consumption of specialty chemicals is only USD 23/year (in
value terms) vs. the global average of USD 100/year, which should support domestic
consumption growth. The government’s favourable policy measures should support the
industry with rising import substitution. Further, a large growth opportunity has opened up
after Covid-19 disruptions due to rising adoption of the ‘China plus one’ strategy by several
global MNCs to realign their supply chains. This is likely to boost exports of specialty
chemicals.
India’s Specialty Chemicals Industry to witness growth across segments

Key sub-segment of India’s speciality chemicals industry are: a) Agrochemicals (constituting
29% of the industry); b) Dyes and pigments (22%); c) Surfactants (6%); and d) Food &
fragrance (7%) among others. Indian players have penetrated well in the exports space in API
intermediates, Agrochemicals, Dyes and Pigments and Flavour and Fragrance segments.
Further, the rising adoption of the ‘China plus one’ strategy by various global MNCs augurs
well for future growth opportunities in these segments where India could penetrate deeper
and catch up with China on a global level.
Presence of End m arket
Market size CY14-19 CY19-25E CY25E expected Entry Product Overall
Segm ent Key end m arkets scaled up grow th
(USD Bn) CAGR CAGR m arket size (USD Bn) barriers specialisation attractiveness
Indian players potential
Agrochemicals 9.2 10.0% 12.0% 18.2 Agriculture sector
Dyes and Pigments 7.0 7.3% 10.0% 12.4 Textiles, leather, & paper
F&F and Nutra Food processing,

2.4 16.1% 17.1% 6.2
Ingredients personal care
Laundry care,
Surfactants 2.0 6.4% 11.0% 3.7
dishw ashing
Textile chemicals
1.8 10.4% 11.5% 3.5 Apparel, technical textiles
Construction chemicals
1.4 13.5% 15.0% 3.2 Infrastrucure, real estate
Polymer additives Pipes, White goods

1.3 12.8% 10.0% 2.3
automotive
Personal care
1.0 15.5% 15.0% 2.3 FMCG
chemicals
Water chemicals Industrial & municipal
0.8 14.9% 15.0% 1.9
w ater
: High : Medium
Source: FICCI, JM Financial
Agrochemicals – Immense growth potential

The Indian agrochemicals market (at USD 9.2bn or ~15% share of the global agrochemicals
market worth USD 62.5bn) is the largest sub-segment of the specialty chemicals industry and
posted a 10% CAGR over CY14-19, driven by robust domestic demand and rising exports.
With ~50% of production being exported, India is one of the largest agrochemical exporters
globally. India’s agrochemicals industry has immense growth potential and is expected to
clock a 12% CAGR to reach USD 18.1bn by CY25 (vs. a 6.6% CAGR expected for the global
market) led by: a) a robust growth outlook for domestic agrochemical demand due to rising
demand for food security and to minimise the current 15-20% crop losses; b) tapping of a
large export opportunity driven by its rising cost competitiveness and improving R&D
expertise; c) favourable government policies to double famer incomes; and d) significant
potential to rise up the value chain.
Fluorochemicals – Adoption on the rise

India’s Fluorochemicals (fluorine-based chemicals) market has been supported by the growth
witnessed in Fluorocarbons due to the rising need for refrigeration systems in residential,
industrial and commercial segments. Further, the next leg of growth is being driven by rising
use of fluorine-based chemicals in pharma and agrochemical intermediates, with 30-40% of
new molecules added every year being fluorine based. This is on account of the higher
stability and efficacy that fluorine-based molecules provide.

India’s fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching ~USD
450mn in CY20. Further, rising use of fluorochemicals in pharma and agrochemicals
segments is likely to help the segment clock a 14% CAGR to reach USD 880mn by FY25.
Further, the Indian Hydrogen fluoride market, which is the principal industrial source of
fluorine, is largely consolidated, with SRF being the largest producer (40% of the market)
followed by Navin Fluorine (26%). Hence, although the adoption of Fluorochemicals is on the
rise, there are only a handful of players in India which can take advantage of this change
given the industry has strong entry barriers.
We prefer CRAMS/CSM players (Navin Fluorine and PI Industries) and UPL
India has been marking its presence in the global CRAMS market where it commands ~6%
market share (at USD 11.5bn in CY19, of USD 200bn global market). India’s CRAMS market
is likely to post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global market). India’s
CRAMS market caters to: a) Pharmaceuticals (45%); b) Agrochemicals (35%); and c) Personal
care and others industries (20%). CSM is a niche segment within the contract manufacturing
space and caters to patented products that normally require more R&D efforts.
Exhibit 9. Global CRAMS market likely to reach USD 322bn by CY24E Exhibit 10. Indian CRAMS market likely to reach USD 20.3bn by
(USD bn) CY24E (USD bn)
We believe that Indian CRAMS/CSM players are well set to benefit as more and more
innovators shift focus on core competencies and outsource production via long-term
contracts to low-manufacturing cost destinations such as India. These long-term contracts
also provide long-term revenue growth visibility compared with other specialty players.
Hence, NFIL and PI are our top picks due to their strong presence in CRAMS/CSM markets.
NFIL offers complex fluorination expertise to pharma players as a part of its CRAMS business
while PI could repeat its agrochem CSM success in pharma/other specialty chemicals
businesses. Further, UPL is also our top pick due to its robust growth outlook, reducing debt
concerns and attractive valuations.
Exhibit 11. Valuation summary

M.Cap P/E (x) P/B (x) EV/EBITDA (x) ROE (%)
Com pany Rating TP (INR)
(INR bn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
UPL 620 BUY 1,000 20.2 16.2 13.4 3.0 2.5 2.2 9.8 8.4 7.2 15.3 16.9 17.6
PI 389 BUY 2,995 53.7 41.9 35.2 7.3 6.4 5.5 37.9 27.9 22.5 18.1 16.5 16.9
SRF 384 BUY 7,600 31.7 29.1 22.8 5.5 4.7 4.0 18.5 16.4 13.2 20.3 17.6 19.1
Navin Fluorine 162 BUY 3,760 64.4 55.3 34.6 9.7 8.5 7.0 50.6 40.9 26.1 16.2 16.4 22.2
Galaxy Surfactants 108 HOLD 3,360 35.3 31.2 26.5 8.2 6.8 5.6 23.1 20.2 17.7 25.3 23.7 23.2
Fine Organics 103 HOLD 3,160 80.1 41.1 33.7 12.5 10.0 8.0 46.9 27.9 22.2 16.8 26.9 26.4
Anupam Rasayan 76 HOLD 780 93.0 45.3 31.2 7.4 4.7 4.2 43.8 27.2 20.7 9.5 13.5 14.1
Source: Bloomberg, JM Financial

Navin Fluorine (NFIL): Fluor’intined the chemistry (BUY, TP INR 3,760): Over the years, NFIL
has emerged as a preferred partner when it comes to fluorination chemistry in both
agrochemicals and pharma spaces. Its timely diversification from the legacy refrigerant and
inorganic fluoride business has driven margin expansion and overall growth. In our view,
NFIL’s growth prospects seem even brighter with higher contribution from specialty chemicals
and CRAMS segments on account of long term contract and capacity expansions. We assume
coverage with a BUY rating (TP of INR 3,760 based on 40x FY23E EPS).
PI Industries: Ever Resilient ‘PI’e (BUY, TP INR 2,995): PI currently is India’s largest CSM player
in the agrochemicals space. Its order book size has grown ~15X over the last 10 years. Due to
its impeccable execution capabilities in this space, it has become a preferred CSM partner for
global agrochemicals innovators. Moreover, its entry into performance, fine chemicals along
with pharma APIs/intermediates would likely put it in the league of global CSM players
offering services across segments. We estimate PI to demonstrate 25% earnings CAGR over
FY21-23E. We value the company at 40X FY23E EPS (at a ~25% premium to its 3-year
average) to arrive at a TP of INR 2,995 and assume coverage with BUY.
UPL: Uniquely PLaced (BUY, TP INR 1,000): UPL became the fifth largest global agrochemical
company post Arysta acquisition. It has presence in over 138 countries with strong domain
expertise in: a) complex synthesis and sourcing of Active Ingredients; b) burgeoning presence
in branded generics; and c) farmer logistics and distribution services. We believe UPL is
uniquely placed to register a healthy 13%/23% EBITDA/PAT CAGR over FY21-23E on
account of a) revenue and cost synergies arising out of the Arysta acquisition; b) robust 9%
revenue CAGR over FY21-23E aided by R&D backed product pipeline coupled with new
product launches from recent collaborations; and c) lower interest cost led by reduced debt.
In our view, UPL is trading at attractive valuations of 7.8X FY23E EV/EBITDA (significantly
lower compared to pre-Arysta acquisition 5-year average multiple of ~9.5X 1-year forward
EV/EBITDA). We assume coverage with BUY rating with TP of INR 1,000/share.
SRF: Adaptive chemistry at work (BUY, TP INR 7,600): SRF has over the years adapted well
from being a tyre cord fabrics manufacturer to become one of the leading fluorine based
specialty chemicals player. Its continuous investments in chemicals business and R&D have
laid a good platform for the future growth. Increasing contribution from chemicals business is
likely to improve overall earnings growth. Hence, we expect SRF to demonstrate
Revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY21-23E. We value SRF on SoTP basis
and arrive at a TP of INR 7,600 (implying 27X FY23E EPS). We assume coverage with a BUY.
Galaxy Surfactants: Specialty care opportunity fully priced in (HOLD, TP INR 3,360): Galaxy
Surfactants (Galaxy) has gradually diversified from being a pure high-volume low-margin
performance surfactants player to a low-volume high-margin specialty care ingredients
manufacturer. We expect the company to clock an EPS CAGR of ~20% over FY20-23E, on
the back of a ramp-up of additional capacities and margin expansion arising from an
improved product mix and positive operating leverage. We assume coverage on Galaxy with
a HOLD rating and a TP of INR 3,360/share, based on 30x FY23E EPS.
Fine Organics: Go – Green chemistry (HOLD, TP INR 3,160): Fine organics (FOIL), over the
years, with its strong focus on R&D has become one of the leading players of vegetable oil-
based additives for plastic, food, and cosmetics. With rising demand for environment-friendly
products by customers, oleochemical products are being readily accepted in the market.
Although we believe FOIL is the clear winner of the rising adoption of green (low toxic)
chemicals (which would aid in off-take of incremental capacity and provides long term
growth visibility), current valuations leave limited upside, in our view. Hence, we assume
coverage with a HOLD rating and value the company at 35x FY23E EPS (in-line with 3-year
average multiple) arrive at a TP of INR 3,160.
Anupam Rasayan: Right Place at the Right Time (HOLD, TP INR 780): Anupam Rasayan (ARIL)
is one of the country’s leading CSM player in life science related speciality chemicals. ARIL’s
focus on upgrading processes has allowed it to manufacture products in an energy and cost-
efficient manner by utilising continuous processes for which the company has developed
innovative methods in-house. Drawing comfort from its long-term contracts, we forecast
sales, EBITDA and EPS to post 32%, 41%, and 86% CAGR, respectively, over FY21-23E.
Although we like the structural growth story of CSM business, sharp ~50% rally in share
price in last one month leaves limited upside in near term. Hence, we wait for a better entry
point and initiate on ARIL with a HOLD rating (TP of INR 780 based on 32x FY23E EPS).

Structural earnings growth potential drives our constructive view (despite rich
valuations)
Many Indian speciality chemical companies are trading at rich valuations due to the strong
rally in share prices in last 1-2 years, which may limit near-term upside. However, we maintain
constructive view on the sector from a medium to long-term perspective due to expectation
of 12-13% CAGR in the industry over the next 5-7 years (given strong industry tailwind as
discussed above). Hence, we believe that Indian specialty chemical companies are likely to
maintain their strong >15% revenue and earnings growth, as witnessed in the last 3-5 years,
given their strengthening competitive positioning and increased R&D focus.
Exhibit 12. Speciality chemicals companies peers valuation comparison

Company M.Cap EV/EBITDA P/E (x) P/B (x) ROE (%)
(USD Bn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
Anupam Rasayan 1.1 44.4 33.9 27.2 88.5 44.9 34.9 5.1 4.7 4.2 7.8 11.0 12.8
Navin Fluorine 2.2 49.4 40.2 26.6 56.7 56.7 37.9 10.0 8.7 7.4 15.0 16.2 20.8
Galaxy Surfactants 1.5 24.9 22.0 19.5 38.2 33.3 29.1 8.2 6.9 5.8 23.2 22.3 21.6
SRF Ltd 5.3 20.2 16.9 14.1 27.8 27.8 23.1 5.8 4.9 4.1 19.4 18.5 18.9
Aarti Industries 4.0 24.0 19.2 19.2 42.4 42.4 32.3 8.5 6.6 5.6 16.7 19.2 19.6
Atul Ltd 3.5 22.2 19.3 19.3 33.4 28.9 28.9 6.8 5.7 4.9 18.4 18.1 17.9
Fine Organic 1.3 30.6 25.2 25.2 41.8 35.7 35.7 12.6 10.3 8.3 19.6 25.3 25.8
Vinati Organics 2.5 36.2 29.7 29.7 54.9 40.6 40.6 12.4 10.0 8.3 19.8 23.6 24.0
Balaji Amines 1.3 21.9 18.9 18.9 33.4 28.5 28.5 11.1 8.8 7.1 27.9 25.6 23.6
Alkyl Amines 2.7 51.1 47.9 41.1 74.8 68.9 59.5 24.6 19.5 NM 39.7 31.8 29.7
Neogen Chemicals 0.3 37.0 27.0 21.0 73.2 45.5 34.6 NM NM NM 18.4 25.9 26.4
Exhibit 13. Agrochemical companies peers valuation comparison

Company M.Cap EV/EBITDA P/E (x) P/B (x) ROE (%)
(USD Bn) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
UPL 8.6 10.2 8.9 8.0 15.5 15.5 13.2 3.0 2.6 2.3 15.9 18.6 18.8
Rallis India 0.8 17.5 14.6 12.5 22.5 22.5 19.4 3.8 3.4 3.0 15.0 15.7 16.3
PI Industries 5.5 35.4 30.1 24.9 43.7 43.7 36.0 7.4 6.4 5.5 18.0 15.5 16.3
Dhanuka Agritech 0.6 15.8 13.8 12.4 NM 18.5 16.8 5.3 4.4 3.6 26.7 25.1 23.1
Insecticides India 0.1 7.5 6.3 5.4 13.5 11.0 9.5 1.4 1.2 1.1 10.5 11.9 12.3
Bayer Crop Science India 3.3 29.1 24.6 21.8 34.1 33.0 28.8 8.4 7.0 6.0 21.3 23.1 22.5
Godrej Agrovet 1.5 21.3 16.7 14.8 25.7 25.7 22.6 5.3 4.5 4.0 16.0 18.4 19.2
Sharda Chemicals 0.4 6.8 6.1 5.4 13.4 13.4 12.1 2.0 1.7 1.5 14.3 13.7 13.9
Astec Lifesciences 0.4 21.3 16.8 16.8 33.9 33.9 28.1 8.6 6.9 5.5 22.9 21.5 21.4
Bayer AG 62.7 7.7 7.2 7.2 9.0 8.1 8.1 1.4 1.6 1.4 17.2 19.4 23.4
FMC 15.0 13.4 12.3 11.4 16.3 14.4 13.0 4.6 4.3 3.8 28.8 28.7 30.6
Nufarm 1.4 7.1 6.4 6.3 34.2 19.9 18.2 0.9 0.9 0.9 3.0 4.9 5.0
Exhibit 14. Speciality chemicals companies financials comparison

Sales (INR bn) Sales CAGR (%) EBITDA (INR bn) EBITDA Margins (%) EBITDA CAGR (%) PAT (INR bn) PAT CAGR (%)
Company FY21 FY22E FY23E FY21 - FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 - FY23E FY21 FY22E FY23E FY21 - FY23E
Anupam Rasayan 8 10 12 24.6 1.9 2.5 3.1 25 25 26 27.7 0.8 1.7 2.2 65.2
Navin Fluorine 12 14 20 31.8 3.1 3.8 5.7 26 27 28 36.3 2.3 2.8 4.2 35.0
Galaxy Surfactants 27 31 35 13.2 4.3 4.9 5.5 16 16 16 13.0 2.8 3.2 3.6 14.8
SRF Ltd 80 100 118 21.2 20.2 24.3 29.1 25 24 25 19.9 11.2 13.8 16.8 22.6
Aarti Industries 46 57 69 23.0 10.1 13.0 16.2 22 23 23 26.5 5.3 7.0 9.2 31.2
Atul Ltd 37 46 52 18.8 9.1 10.9 12.5 25 24 24 17.2 6.4 7.6 8.7 16.7
Fine Organic 11 14 16 18.9 2.1 2.9 3.6 18 21 22 31.2 1.3 2.1 2.6 39.1
Vinati Organics 9 13 17 34.8 3.4 5.0 6.1 38 38 37 33.4 2.7 3.9 4.8 32.9
Balaji Amines 13 17 20 23.6 3.5 4.2 4.9 27 25 25 18.4 2.2 2.8 3.2 21.7
Alkyl Amines 12 14 17 19.6 3.8 4.1 4.7 33 29 28 11.5 2.6 2.8 3.3 12.1
Neogen Chemicals 3 5 6 29.7 0.6 0.9 1.1 19 19 20 32.9 0.3 0.5 0.6 45.4
Exhibit 15. Agrochemical companies financials comparison

Sales (INR bn) Sales CAGR (%) EBITDA (INR bn) EBITDA Margins (%) EBITDA CAGR (%) PAT (INR bn) PAT CAGR (%)
Company FY21 FY22E FY23E FY21 - FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 - FY23E FY21 FY22E FY23E FY21 - FY23E
UPL 383 422 458 9.3 83.2 95.9 106.9 22 23 23 3.7 31.0 40.4 47.7 24.2
Rallis India 24 27 31 13.7 3.3 4.0 4.6 14 14 15 3.9 2.3 2.7 3.1 17.2
PI Industries 45 55 65 20.1 10.6 12.4 15.0 23 23 23 -0.7 7.4 9.0 11.0 21.8
Dhanuka Agritech 14 16 17 12.1 2.6 2.9 3.3 19 19 19 0.5 2.0 2.3 2.5 11.2
Insecticides India 14 15 17 9.3 1.4 1.7 1.9 10 11 11 7.6 0.8 1.0 1.2 19.6
Bayer Crop Science India 41 45 49 9.7 7.8 9.2 10.4 19 21 21 5.3 5.8 7.2 8.2 18.8
Godrej Agrovet 62 73 82 14.4 5.6 7.2 8.1 9 10 10 5.0 3.0 4.1 4.7 24.4
Sharda Chemicals 23 25 28 11.5 4.1 4.6 5.2 18 18 19 1.0 2.1 2.3 2.6 10.2
Astec Lifesciences 6 7 8 19.3 1.1 1.4 1.7 20 20 21 4.0 0.7 0.8 1.0 21.4

India’s Specialty Chemical Industry is a decadal growth

opportunity
China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry, which was
valued at ~USD 805bn in CY19. However, India has a limited ~4% share (or ~USD 32bn).
Further, around 25% of the total production of specialty chemicals is exported globally,
amounting to a total USD 200bn in CY19. China is the leading exporter of specialty
chemicals with exports of USD 35bn in CY19, representing ~18% of the overall exports of
specialty chemicals. India has done relatively well in exports of specialty chemicals, which
came in at USD 12bn-15bn in CY19, but still only constitutes 6-7% of total global exports of
specialty chemicals.
India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness,
driven by: a) the availability of low-cost labour (vs. China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); c) rising availability of low-
cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise. India’s specialty chemicals industry is expected to continue to clock a 12% CAGR
until CY25 (as seen over CY14-19; this is higher than the 6.4% CAGR expected for the
global industry). This would be led by: a) robust domestic consumption growth (given India’s
low per capita consumption); b) rising import substitution (on account of the government’s
favourable policy measures); and c) strong growth in exports (due to rising adoption of the
‘China plus one’ strategy by global MNCs).
Overview of the Global and Indian speciality chemicals industry

The chemicals industry can be classified into two categories based on value addition: a)
basic/bulk chemicals (inorganic, organic and petrochemicals) and b) specialty chemicals
(including agrochemicals and fertilisers). Basic chemicals use natural gas, naphtha, salt,
carbonates and several ores as their feedstock whereas specialty chemicals primarily use basic
chemicals as their feedstock. Basic chemicals (or commodity chemicals) are produced and
used in bulk quantities with no major product differentiation among several manufacturers
and sales are primarily driven by price. However, specialty chemicals are usually produced in
batches, produced/used in small quantities and sales are driven by performance. Hence, basic
chemicals focus on cost competitiveness and scale while specialty chemicals focus on R&D
and new product launches; this results in superior margins and is less capex intensive.
Exhibit 16. Typical end-to-end process flow chart of basic and specialty chemicals
Source: EY, JM Financial

The global chemicals industry is large, with sales of around USD 4.0tn in CY19. It is estimated
to post a 6.2% CAGR and reach USD 5.7tn by CY25. Currently, China dominates the global
chemicals industry with ~37% market share whereas India’s share stands at a mere ~4%.
This is evident from India’s per capita chemical consumption, which remains significantly
lower at USD 103/year vs. USD 1,066/year in China and USD 2,265/year in Germany. The
anticipated growth in the global chemicals market is likely to come primarily from the APAC
region, which is estimated to grow at ~7-8% a year, faster than the mature markets.
Exhibit 17. China dominates the global chemicals market (valued at ~ Exhibit 18. Base chemicals constituted ~80% of global chemicals
USD 4tn in CY19) with ~37% share market at USD 3.2tn in CY19; speciality chemicals’ share is 20%
Specialty
chemicals,
USD
Others, 23% China, 37%
800bn,
20%
India, 4%
South
Korea, 5%
Base
Japan, 5%
chemicals ,
USD
3,200bn,
US, 13% EU, 16% 80%
Source: Industry, JM Financial Source: Industry, JM Financial
In CY19, sales of basic chemicals came in around USD 3.2tn (or ~80% of the overall
chemicals industry) while sales of specialty chemicals constituted the remaining ~USD 800bn
(or ~20% of the overall chemicals industry). The global speciality chemicals industry posted a
5.7% CAGR over CY14-19 and it is estimated to post a 6.4% CAGR to reach ~USD 1.2tn by
CY25, led by growth in the APAC region.
Exhibit 19. Global speciality chemicals industry size (USD bn): Exhibit 20. Global specialty chemicals industry break-up by end use
expected to post a 6.4% CAGR over CY20-25 for CY19 (USD 800bn)
1,171
1,200 Agrochemicals,12%
Others, 31%
900 Food
805 additives,
9%
Construction
610 , 9%
600 F&F
Ingredients,
4%
Electronic,
8%
300
Nutra
Ingredients,
5% Surfactants, Water, 6%
5% Polymer
Dyes and
0 pigments, additives,
CY14 CY19 CY25 5% 6%

India's chemicals industry stood at ~USD 180bn in CY19 with the specialty chemicals industry
contributing ~USD 32bn or ~18% of the total chemicals industry. India’s per capita
consumption of specialty chemicals is only USD 23/year (in value terms) vs. the global average
of USD 100/year. The Indian specialty chemicals industry posted a CAGR of ~12% over
CY14-19 driven by a rise in domestic demand from end-user segments and robust export
growth. It is expected to continue to grow, posting a CAGR of +12% until CY25. Key sub-
segments of India’s speciality chemical industry are: a) Agrochemicals (constituting 29% of
the industry); b) Dyes and pigments (22%); c) Surfactants (6%) and d) Food & fragrance
(7%), among others.
Exhibit 21. Indian speciality chemicals industry size (USD bn): expected to continue to post
~12% CAGR over CY20-25
80
64
60
40
32
20 18
0
CY14 CY19 CY25
Exhibit 22. India’s specialty chemicals industry break-up by end use for CY19 (USD 32bn, 4%
of global)
Water, 3%
Nutra - functional Others, 9%
Ingredients, 3% Agrochemicals,
Personal care, 3% 29%
Construction, 4%
Polymer, 4%
Textiles, 6%
Dyes and
Pigments, 22%
F & F - base
ingredients, 7%
Surfactants, 6%
F&F - functional
ingredients, 4%

Rise in China’s dominance of the global chemicals industry over the past two
decades
Over the past 4-5 decades, various countries have led the global chemicals (and speciality
chemicals) industry driven by: a) availability of low-cost feedstock; b) labour and other cost
competiveness; c) relatively low environmental compliance costs; d) focus on R&D and
innovation; and e) domestic demand potential. The US led the industry until the late 1980s,
manufacturing chemicals for domestic use in the oil & gas industry as well as other sectors.
Gradually, Europe took over and dominated the business mainly through exports, while the
US and Japan remained key producers. However, the chemicals industry expanded rapidly in
China, especially after it joined the WTO in Dec’01, due to trade liberalisation, technology
transfer, eased economic barriers, rising cost competitiveness and rapid growth in developing
countries.
Over the past two decades, China and other Asian countries captured market share in the
chemicals industry from developed countries. EU’s total chemicals sales came in at EUR
529bn in CY08 (26.5% market share) and demonstrated only modest a 0.7% CAGR over
CY08-18 to EUR 566bn in CY18 (16.9%). Similarly, North America and Japan lost market
share by 6.0% and 1.6%, respectively, primarily to China, whose market share rose by a
massive 17.6%. China became a leader with ~36% market share, with sales coming in at
EUR 1.2tn in CY18 (12.7% CAGR over CY08-18).
Exhibit 23. Sharp rise in China’s market share over the past two decades to ~36% in CY18
Source: CEFIC, JM Financial
Exhibit 24. China’s chemicals sales (EUR bn) rose ~3x over CY08-18 Exhibit 25. It became the market leader with ~36% share
1,400 50%
1,050 38%
700 25%
350 13%
0 0%
Rest of Asia*
China
EU
Japan
South Korea
Rest of Asia*
China
Rest of world
NAFTA
India
EU
Japan
South Korea
Rest of world
NAFTA
India
CY08 CY18 CY08 CY18

Source: CEFIC, JM Financial Source: CEFIC, JM Financial

China was able to gain market share from EU, North America and Japan due to its: a) high
capex for adding feedstock capacities; b) increased R&D spends; and c) rise in exports.
a) China has incurred high capex for adding feedstock capacities: During CY08-18, China
focused primarily on capacity expansions of basic chemicals (ethylene, propylene, butadiene,
benzene, toluene, PX and menthol) as it added ~45% of incremental global capacity. As per
Sinopec, China’s capacity expansions are likely to ramp up further over CY21-25E and would
account for 69% of global capacity addition of petrochemicals at 25mmt. This is evident
from China’s capital spending in the chemicals industry, which jumped sharply from EUR
31bn in CY08 (29.3% of global) to EUR 87bn in CY18 (45.1% of global).
Exhibit 26. Boom in Chinese petchem capacity additions in the past 15-20 years
32 80%
69%
55%
24 60%
45% 44%
16 40%
8 20%
11%
0 0%
CY96-00 CY07-09 CY12-13 CY18-19 CY21-25E
World (mmtpa) China (mmtpa) China as % of global (RHS)
Source: Sinopec, JM Financial, Note: basic chemicals including ethylene, propylene, butadiene, benzene, toluene, PX and
menthol
Exhibit 27. China’s capital spending jumped to ~EUR 87bn in CY18 Exhibit 28. China accounted for 45% of global capital spending
100 50%
75 38%
50 25%
25
13%
0
0%
China
Latin America
EU
Japan
South Korea
Rest of Asia
RoW
NAFTA
Rest of Europe
India
China
Latin America
EU
Japan
ROW
South Korea
Rest of Asia
NAFTA
Rest of Europe
India
CY08 CY18
Source: CEFIC, JM Financial CY08 CY18
b) China’s robust growth in R&D spends helped capture market share: As highlighted earlier,
specialty chemicals are performance driven and require advanced research and innovation
due to their very nature. China has already captured a ~37% market share in global sales of
basic chemicals. To increase its market share in specialty chemicals, China’s R&D spending
rose almost 4x from EUR 2.5bn in CY08 to EUR 11.8bn in CY18, making it the largest
spender for innovation with 27.4% of global spends. China’s R&D expenses as a % of sales
increased from 0.7% in CY08 to 1.0% in CY18 whereas India’s R&D spends remained
stagnated at 1.6% of sales during the same time.

Exhibit 29. China’s R&D spending (EUR bn) rose almost 4x from EUR Exhibit 30. China became the largest spender for innovation,
2.5bn in CY08 to EUR 11.8bn in CY18 accounting for 27.4% of global R&D spends
12 50%
9 38%
6 25%
3 13%
0 0%
China
China
USA
USA
EU
Japan
EU
Japan
South Korea
South Korea
RoW
RoW
Switzerland
Switzerland
India
India
Brazil
Brazil
CY08 CY18 CY08 CY18
Exhibit 31. China’s R&D expenses as a % sales rose in line with the EU and South Korea’s
numbers
3.9% 3.9%
4%
3%
2% 1.8%
1.5% 1.6%1.6% 1.6%
1.3%
1.0%
1% 0.7%
0%
China
EU
Japan
South Korea
India
CY08 CY18
c) China boosted its exports to increase market share: China’s exports grew substantially
during CY07-17 (11.8% CAGR) and it accounted for 15% of global exports of chemicals in
CY17 (at EUR 103bn). China’s major export destinations are the EU (13.2% of total exports),
US (10.5%), Japan (6.7%) and the rest of Asia (46.4%).
Exhibit 32. China’s CY07-17 exports (EUR bn) saw an 11.8% CAGR Exhibit 33. It gained a 5.4% market share from the EU and USA
300 50%
225 38%
150 25%
75 13%
0 0%
USA
China
USA
China
EU
Japan
EU
Japan
Rest of world*
Rest of world
Saudi Arabia
Saudi Arabia
Brazil
Brazil
India
India
CY07 CY17 CY07 CY17


Strengthening competitiveness of India’s specialty chemicals industry

China forms ~25% (or ~USD 200bn) of the global specialty chemicals industry (valued at
~USD 805bn in CY19), while India has a limited ~4% share (or ~USD 32bn). Further, of USD
200bn of global specialty chemicals exports in CY19, China was the leader with exports of
USD 35bn in CY19 (or ~18% of global exports). India has done relatively well in exports of
specialty chemicals, which came in at USD 12bn-15bn in CY19, but still only constitutes 6-
7% of the total global exports of specialty chemicals.
India is emerging as a fast-growing specialty chemicals hub due to rise in its competitiveness
driven by: a) availability of low cost labour (vis-à-vis China); b) lower regulatory costs (China’s
tightening environmental norms have raised its regulatory costs); and c) rising availability of
low cost feedstock for Indian players; and d) India’s strong IP protection and improving R&D
expertise. Indian specialty chemicals industry is expected to continue to grow at a 12%
CAGR until CY25 (like witnessed during CY14-19 and higher than 6.4% CAGR expected for
the global industry) due to its: a) robust domestic consumption growth; b) rising import
substitution; and c) strong exports growth. India’s per capita consumption of specialty
chemicals is only USD 23/year (in value terms) vs. the global average of USD 100/year, which
should support the domestic consumption growth. While government’s favourable policy
measures should support the industry by rising import substitution. Further, huge growth
opportunity has opened up post Covid-19 disruption due to rising adoption of China plus
one strategy by many global MNCs for realignment of their supply chain. This is likely to
boost exports of specialty chemicals.
Exhibit 34. Global speciality chemicals industry size (USD bn): Exhibit 35. Indian speciality chemicals industry size (USD bn): expected
expected to post a 6.4% CAGR over CY20-25 to continue to post ~12% CAGR over CY20-25
1,171
1,200
900
805
610
600
300
0
CY14 CY19 CY25
Exhibit 36. India’s chemical output stood at USD125bn in CY18 Exhibit 37. It could reach USD 240bn at 9.8% CY18-25E
USD bn USD bn
200 320 65
56
240 240
147
150 240
assumed to -65
125
-34 reduce to
~26% of assumed at a
~38% of ~27% of similar level of
production consumption
consumption ~27% of
100 160
prodcution
50 80
0
0
CY25E CY25E Import CY25E Export CY25E
CY18 CY18 Import CY18 Export CY18
Production Consumption
Production Consumption
Source: FICCI, IHS markit, Oxford economics, ASI,MSIP, CEFIC, NAS, MSIP, CEFIC, BCG Source: FICCI, IHS markit, Oxford economics, ASI,MSIP, CEFIC, NAS, MSIP, CEFIC, BCG

Steep rise in China’s labour costs vis-à-vis those for India’s chemicals players
China’s chemicals sector’s output boomed during CY09-18, but came at a steep cost; China’s
labour costs jumped ~2.5x during that period to USD 5.1/hour (vs. USD 2.1/hour). This steep
rise in China’s labour costs has given Indian players a slight edge to compete against China as
the hourly wage rate in India during CY09-18 grew ~1.6x to USD 2.0/hour (vs. USD
1.2/hour). Further, there is adequate supply of skilled labour in India, strengthening India’s
R&D capabilities. However, India’s labour cost advantage is partly offset as labour productivity
is ~1.8x lower in India vs. China, according to several studies.
Exhibit 38. China’s hourly wage increased ~2.5x compared with ~1.6x Exhibit 39. India is emerging as a hub for the manufacture of
in India during CY09-18 chemicals with adequate supply of skilled labour
6.0
5.0 5.1
4.6
4.5 4.3
4.0
3.6
3.3
USD/hour
3.0 2.9
2.4
2.1 2.0
1.8 1.9
1.6 1.6 1.6 1.7 1.7
1.5
1.5 1.2
0.0
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
China India
Source: CEFIC, UNIDO, CRISIL, MS, Industry, JM Financial Source: DGCIS, Department of Chemicals and Petrochemicals, JM Financial
China’s tightening environmental norms are raising its regulatory costs

China has seen significant tightening in environmental norms since Jan’2015 with the 13th 5
year plan (2016-20) focussing on green development as one of its five key development
concepts. This was followed by strict implementation with frequent surprise inspections in
2016 and penalties and/or temporary plant closures for violations. An environment tax was
also introduced in 2018, penalising companies with high emissions and linking pollution with
tax. In 2018, ~40% of China’s chemical manufacturing capacity was temporarily shut down
for safety inspections, with over 80,000 manufacturing units fined for breaching emission
limits. Further, chemical production is aggressively being relocated to dedicated chemical
parks (covering 90% of the plants vs. 50% currently) with smaller plants to be relocated by
2020 and larger ones by 2025 to help control emissions and waste disposal.
Further, Chinese companies have seen higher environment costs as the Chinese government
has mandated the construction of effluent treatment plants and imposed green tax on the
chemicals industry to combat pollution. China’s new Soil Pollution Prevention and Control
Law came into effect in Jan’19 whereby the non-compliant party can be penalised up to CNY
2mn on the principle of “polluters pay”. The law also adopts the protection-first approach
whereby third-party authentication will be required to justify pollution prevention methods
adopted by the owner. This may make land buying costly and increases operating expenses
for regular inspection and maintenance of land in use.
The rising emphasis on China’s environmental protection is a structural shift driven by rising
income levels of Chinese people and their growing awareness of living conditions in other
countries. Hence, this led to: a) significant rationalisation of Chinese chemical manufacturing
capacity; and b) a sustained and major increase in environmental compliance expenses and
hence cost structure for Chinese companies. This has helped to significantly narrow down the
cost differential between Indian and Chinese chemical companies and is resulting in the
emergence of India as another key major chemical manufacturing hub.

Supportive policies to capitalise on rising adoption of ‘China plus one’ strategy

The past few years have exposed the vulnerabilities of a China-dependent chemicals supply
chain owing to tightening environmental norms, rising labour/environmental/other costs and
high risk of IP threats. Further, several production disruptions due to frequent plant blast
accidents (Jiangsu in Mar’19) and closure of chemical units (govt banning chemical
manufacturing along the Yangtze River) have impacted the supply chain of global players.
Hence, most MNCs are implementing a ‘China plus one’ strategy to de-risk their supply
chains by diversify operations and raw material procurement to countries such as India,
Vietnam, etc. The diversification process has further accelerated due to the US-China trade
war and the ongoing Covid-19 led disruption. Japan’s incentives to companies shifting base
from China highlights its focus to reduce dependence on China.
India’s chemical companies stand favourably placed to take advantage of this structural re-
alignment of global supply chains owing to: a) its stringent environmental norms; b)
availability of skilled manpower and lower labour and other costs; c) rising availability of low-
cost feedstock; d) strong IP protection; and e) improving R&D expertise. Though India also
faces threat from environmental concerns and tightening norms, most large organised
players strictly comply with this norms and are making investments in safety health &
environment (SH&E) to ensure plant sustainability. Hence the threat is limited to smaller
players and may be an opportunity for larger players to capture the market.
Policy focus incentivising ‘Make-in-India’ for import substitution and export promotion: Indian
speciality chemical companies depend heavily on imports, primarily from China, to meet
feedstock requirements. However, they are gradually reducing this dependence on China and
substituting imports by manufacturing key intermediates locally. Further, robust growth in
domestic demand from end-user segments provides immense scope for import substitution,
enabling India to expand its global market share. Additionally, there is a rising opportunity for
Indian companies with a proven track record to be a preferred destination for global
innovators looking to outsource their manufacturing operations to strategic partners. Hence,
this could translate into an increase in contract manufacturing from India as can already be
seen for several Indian chemical companies.
To capitalise on the opportunity created by the rising adoption of the ‘China plus one’
strategy, Indian government has announced various policies incentivising ‘Make-in-India’ for
the chemical sector. The aim is import substitution, export promotion and reduced
dependence on imports for key feedstock/intermediate/active ingredients. Policy measures
include a) a Production Linked Incentive (PLI) scheme as part of the 'AatmaNirbhar Bharat’
package to increase self-reliance and make India a chemical manufacturing hub; b) anti-
dumping duties in few chemical products; and c) a reduced corporate tax rate to incentivise
global/domestic companies to expand their India operations. Hence, the Dept. of Chemicals
and Petrochemicals expects India’s chemical capacity to increase to 37mmt by FY25 (from
33mmt in FY19) coupled with a gradual rise in capacity utilisation to 92% by FY25E (from
85% in FY19). This implies potential output CAGR of ~3.6% over FY19-25E (same as seen
over FY13-19). This comes after India’s share of global chemical output stagnated at ~2.5%
since CY08 (like for China in CY96).
Exhibit 40. India’s chemical production accounted for merely ~2.5% Exhibit 41. India’s chemical production could post a 3.6% CAGR due
of global production over CY08-18 to capacity addition and a rise in utilisation
160 3.0% 40 100%
2.6%
2.5% 30 90%
120 2.4% 2.4% 2.5%
2.1% 2.1%
20 80%
80 2.0%
10 70%
40 1.5%
0 60%
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
0 1.0%
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
Capacity (mmt) Pro duction (mmt)

India chemical output (USD bn) India as % of global (RHS)
Capacity Utilisation (%) (RHS)
Source: Department of Chemicals and Petrochemicals, NSSO, BCG, JM Financial Source: DGCIS, Department of Chemicals and Petrochemicals, JM Financial

Rising availability of low-cost feedstock could reduce import dependence for Indian players
India’s specialty chemicals segment faces challenges while sourcing feedstock domestically as
most of it is consumed for bulk polymer; it therefore has to rely heavily on imports. This is
evident from India’s chemical trade deficit, which widened to USD 25bn in FY19 compared
with USD 8bn in FY11, due to imports rising to USD 56bn in FY19 (from USD 30bn in FY11).
Owing to lack of capacity, India’s primary imports are petrochemicals (valued at ~USD 30bn).
Of this, intermediates constitute 60% (~USD 18bn). This high dependence of imports has
resulted in higher feedstock costs for India’s speciality chemicals industry and has hence hurt
its competitiveness. Hence, as discussed above, the government has been enacting various
policy measures to increase self-reliance and reduce dependence on imports for key
feedstock as part of its 'AatmaNirbhar Bharat’ package.
Exhibit 42. India’s chemicals trade deficit widened to USD 25bn in FY19
USD bn
60 56
49
45 43
40 40 40
39
37
34
30 31
28 29 29 28
30 28 28
22
15
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Imports Exports
Source: Ministry of Chemicals and Petrochemicals, JM Financial
However, industry estimates suggest that India could reduce its reliance on imports by as
much as ~USD 11bn by: a) investing in building blocks that could eliminate imports of
Methanol, Acetic Acid, Styrene, EDC, VCM, etc. and b) setting up on-purpose propane
dehydrogenation (PDH) units that could eliminate imports of phenol, acetone, acrylic acid,
etc. Exhibit 28 highlights that net imports of key chemicals and petrochemicals came in at
USD 5.9bn in FY19; this can be gradually reduced by boosting domestic production.
Exhibit 43. India’s net imports of key chemicals and petrochemicals

USD bn FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Polyvinyl chloride (PVC) 1.0 1.4 1.4 1.4 1.4 1.5 1.7 2.1
Styrene 0.8 1.0 1.1 0.9 0.8 0.8 1.0 1.1
Methanol 0.4 0.5 0.6 0.5 0.5 0.4 0.6 0.8
Acetic Acid 0.3 0.4 0.4 0.4 0.3 0.3 0.4 0.6
Vinyl Chloride Monomer (VCM) 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4
Phenol 0.2 0.3 0.3 0.3 0.2 0.3 0.3 0.3
Mono Ethylene Glycol (MEG) 0.7 0.7 0.8 0.8 0.8 0.9 0.7 0.3
Ethylene dichloride (EDC) 0.1 0.1 0.2 0.2 0.2 0.1 0.2 0.2
Total 3.8 4.5 5.1 4.8 4.5 4.6 5.2 5.9
Source: Ministry of Chemicals and Petrochemicals, JM Financial

India’s Specialty Chemicals Industry to witness growth across

segments
Key sub-segment of India’s speciality chemicals industry are: a) Agrochemicals (constituting
29% of the industry); b) Dyes and pigments (22%); c) Surfactants (6%); and d) Food &
fragrance (7%) among others. Indian players have penetrated well in the exports space in API
intermediates, Agrochemicals, Dyes and Pigments and Flavour and Fragrance segments.
Further, the rising adoption of the ‘China plus one’ strategy by various global MNCs augurs
well for future growth opportunities in these segments where India could penetrate deeper
and catch up with China on a global level.
India’s specialty chemicals industry (which stood at ~USD 32bn in CY19, accounting for 4%
of the global industry) is rapidly expanding. This is taking place as India is emerging as a fast-
growing specialty chemicals hub, taking advantage of huge opportunity created due to the
rise in its competitiveness vis-à-vis Chinese peers. Hence, India’s specialty chemicals industry is
expected to continue to post a CAGR of +12% until CY25 (vs. 6.4% expected for the global
specialty chemicals industry). This would be driven by a) robust domestic consumption
growth; b) rising import substitution; and c) strong exports growth.
Specialty chemicals are mainly used to add value to the finished product and are hence
primarily sold on a B2B basis. Key sub-segment of India’s speciality chemicals industry, based
on end use, are: a) Agrochemicals (constituting 29% of the industry); b) Dyes and pigments
(22%); c) Surfactants (6%) and d) Food & fragrance (7%) among others.
Exhibit 44. India’s speciality chemicals industry size (USD bn); it is Exhibit 45. India’s specialty chemicals industry break-up by end use
expected to post a ~12% CAGR over CY20-25 for CY19 (USD 32bn, 4% of global)
Exhibit 46 highlights the attractiveness of various key segments within the Indian specialty
chemicals industry.
Agrochemicals: This is the largest sub-segment of India’s speciality chemicals industry (at USD
9.2bn) and is expected post +12% CAGR to reach USD 18.1bn by CY25 (vs. 10% CAGR in
the last 5 years). Key reasons for this are: a) a robust growth outlook for domestic demand
given the low consumption vs. global norms (resulting in 15-20% crop losses in India); b) a
large export opportunity and c) the government’s favourable policy measures to double
famer incomes.
Surfactants: This segment is expected to post an 11% CAGR over the next 5 years owing to
rising penetration of home and personal care products, such as cleaning agents and
detergents. This segment is characterised by a large number of unorganised players who
cater to unbranded soap and detergent manufacturers.

Flavours and Fragrances and Nutraceutical segments: Growth in this segment would be
driven by demand for products such as, deodorants, room fresheners and perfumed soaps, as
well as processed food. This is dominated by organised players due to the need for significant
R&D and innovation expertise.
Personal care and water chemicals: This is one of the fastest growing segments in the
industry due to rapid growth in the Indian cosmetics and personal care products market as
well as rising demand for water purification and waste water management. Entry barriers are
high due to the R&D expertise and product innovation required for specialised products.
Dyes and pigments: This is the second largest sub-segment (at USD 7.0bn) and is expected to
post a 10% CAGR until CY25E (vs. a 7.3% CAGR in the last 5 years), driven by growth in
textiles, leather and paper segments. Given the polluting nature of the manufacturing
process, stringent environmental compliance standards and the ability to offer value added-
high performance solutions are key success factors.
Construction chemicals: This segment’s growth in India is driven by housing and

infrastructure projects. It is largely dominated by organised players with a healthy mix of
domestic players and MNCs. Concrete admixtures (40%) account for the majority of the
construction chemicals market in India, followed by adhesives and sealants (20%) and water
proofing chemicals (15%).
Polymer additives: This segment is witnessing robust growth owing to strengthening end-user
markets such as consumer durables, pipes, wires and cables and packaging. The ability to
provide high-margin products, diversification of product portfolio and strong customer base
holds key.
Presence of End m arket
Market size CY14-19 CY19-25E CY25E expected Entry Product Overall
Segm ent Key end m arkets scaled up grow th
(USD Bn) CAGR CAGR m arket size (USD Bn) barriers specialisation attractiveness
Indian players potential
Agrochemicals 9.2 10.0% 12.0% 18.2 Agriculture sector
Dyes and Pigments 7.0 7.3% 10.0% 12.4 Textiles, leather, & paper
F&F and Nutra Food processing,

2.4 16.1% 17.1% 6.2
Ingredients personal care
Laundry care,
Surfactants 2.0 6.4% 11.0% 3.7
dishw ashing
Textile chemicals
1.8 10.4% 11.5% 3.5 Apparel, technical textiles
Construction chemicals
1.4 13.5% 15.0% 3.2 Infrastrucure, real estate
Polymer additives Pipes, White goods

1.3 12.8% 10.0% 2.3
automotive
Personal care
1.0 15.5% 15.0% 2.3 FMCG
chemicals
Water chemicals Industrial & municipal
0.8 14.9% 15.0% 1.9
w ater
: High : Medium

Which verticals have fared well and are likely to bode well for India? Within the specialty
chemicals exports space, India has penetrated well in:
a) API intermediates: Global exports of API intermediate were at ~USD 77bn in CY18 with
India’s share of global export being at ~4% vs ~11% for China. Global API intermediates
market is expected to post a 6-7% CAGR till CY23.
b) Agrochemicals: Global exports of agrochemicals were at ~USD 72bn in CY18 with India’s
share of global export being at ~6% vs ~17% for China. Global agrochemicals market is
expected to post a 2-3% CAGR till CY23.
c) Dyes and Pigments: Global exports of Dyes and Pigments were at ~USD 66bn in CY18 with
India’s share of global export being at ~5% vs ~12% for China. Global Dyes and Pigments
market is expected to post a 2-3% CAGR till CY23.
d) Flavours & Fragrances: Global exports of Flavours & Fragrances were at ~USD 5bn in CY18
with India’s share of global export being at ~12% vs ~46% for China. Global Flavours &
Fragrances market is expected to post a 3-4% CAGR till CY23.
Further, the rising adoption of ‘China plus one’ strategy by various global MNCs for
realignment of their supply chain is likely to bode well for API intermediates, Agrochemicals,
Dyes and Pigments segments where India could penetrate deeper and catch up with China
on a global level. India is also rapidly catching up in plastic additives and food/feed additives
segments. Moreover, though small, flavours and fragrances market could also provide an
opportunity for Indian players to increase their presence on a global scale.
Global specialty chem Global m arket China Exports as India Exports as China Exports India Exports India Exports as
exports (USD bn, CY18) CAGR CY18-CY23 % of Global % of Global (USD bn, CY18) (USD bn, CY18) % of China
Intermediate for APIs 77 6-7% 11% 4% 8.5 3.1 36%
Agrochemicals 72 2-3% 17% 6% 12.2 4.3 35%
Dyes and Pigments 66 2-3% 12% 5% 7.9 3.3 42%
Plastic additives 15 3-4% 8% 1% 1.2 0.2 13%
Electronic chemicals 15 4-5% 22% 0% 3.3 0 0%
Food/Feed additives 12 2-3% 19% 2% 2.3 0.2 11%
Neutraceuticals 10 4-5% 46% 2% 4.6 0.2 4%
Rubber Chemicals 5 2-3% 27% 2% 1.4 0.1 7%
Flavours and Fragrances 5 3-4% 46% 12% 2.3 0.6 26%
Source: IHS Chemicals, IHS Global Insights, UN Comtrade, JM Financial

Agrochemicals – Immense growth potential

The Indian agrochemicals market (at USD 9.2bn or ~15% share of the global agrochemicals
market worth USD 62.5bn) is the largest sub-segment of the specialty chemicals industry and
posted a 10% CAGR over CY14-19, driven by robust domestic demand and rising exports.
With ~50% of production being exported, India is one of the largest agrochemical exporters
globally. India’s agrochemicals industry has immense growth potential and is expected to
clock a 12% CAGR to reach USD 18.1bn by CY25 (vs. a 6.6% CAGR expected for the global
market) led by: a) a robust growth outlook for domestic agrochemical demand due to rising
demand for food security and to minimise the current 15-20% crop losses; b) tapping of a
large export opportunity driven by its rising cost competitiveness and improving R&D
expertise; c) favourable government policies to double famer incomes; and d) significant
potential to rise up the value chain.
Significant growth potential in the Indian Agrochemicals space

India is currently in a ‘food surplus’ stage with rising production of food grains and
horticulture. India is the 2nd largest food grain producer in the world after China, with
production posting a 3.3% CAGR over FY15-20, reaching 287mmt in FY20 (cereals made up
~90% of overall production and the rest came from pulses); it is further estimated to post a
~2.4% CAGR to reach 355mmt by 2030. Additionally, India’s horticulture production
continues to exceed food grain production due to increasing demand for fruits and
vegetables and its more remunerative nature vs. large crop farming. Horticulture production
posted a CAGR of 2.4% over FY15-20, reaching 320mmt in FY20 (fruits and vegetables
together constituted ~90% of total horticulture production).
Exhibit 48. Food grains, oilseeds and horticulture production in India (mmt)
Source: Department of Agriculture Cooperation and Farmer Welfare, JM Financial * FY20 data is provisional
Despite currently being net surplus in production, Indian agriculture continues to face the
following major challenges:
a) Ensuring food security for India’s growing population (to ~1.7bn by 2050 from ~1.3 bn
growing at ~1.3% CAGR) and meeting globally accepted nutrition standards;
b) Declining arable land and soil fertility as well as rising shortage of labour for the agriculture
sector due to a boost in urbanisation;
c) Low productivity per hectare due to lack of awareness for proper agrochemical use and
small landholdings;
d) High dependence on the monsoons and unpredictable weather patterns; and
e) High post-harvest losses.

India needs to not only raise its agricultural output, but also boost productivity to ensure the
country’s food and nutritional security. India’s yield per hectare is significantly lower than the
global average (at 3tn/hectare vs. the global average of 4tn/hectare) primarily due to lower
use of agrochemicals, low-quality seeds and degrading soil quality.

India’s use of agrochemicals is only 0.6 kg/hectare vs. US (2.5 kg/hectare), China (13.1 kg/
hectare), Japan (11.8 kg/ hectare) and Brazil (6 kg/ hectare), as well as other Latin American
countries. This has resulted in higher crop losses. Agrochemicals play a major role in
increasing crop yields by 20-30%; hence, growth in the use of agrochemicals to play a critical
role in improving farm productivity by preventing crop losses.
Exhibit 49. India’s crop yield is significantly lower versus global peers Exhibit 50. India’s agrochemical consumption still very low versus
(tn/hectare) global peers (kg/hectare)
Source: OECD, FICCI, JM Financial Source: FAOSTAT, FICCI, JM Financial
The global agrochemicals market posted a 5.2% CAGR in the last 5 years and was valued at
USD 62.5bn in CY19; it is expected to post a 6.6% CAGR over next 5 years to reach USD
86bn by CY24. The Asia-Pacific region (primarily India, China, Indonesia and Australia)
dominates regional demand for agrochemicals due to the high level of agriculture needed to
feed the growing and already-high population. Europe and North America are also high
demand centres for agrochemicals with major imports of active ingredients from China.
Exhibit 51. The global agrochemicals industry is expected to post a Exhibit 52. Global agrochemicals industry - segmentation by
6.6% CAGR to reach USD 86bn by CY24 geography (USD 62.5bn in CY19)
Source: Frost & Sullivan Research, Anupam Rasayan DRHP Source: Frost & Sullivan Research, Anupam Rasayan DRHP
The Indian agrochemicals market (at USD 9.2bn) is the largest sub-segment of specialty
chemicals industry and posted a 10% CAGR over CY14-19, driven by robust domestic
demand and rising exports. India is the 4th largest producer and is one of the largest
exporters of agrochemicals in the world (~50% of India's agrochemical production is
exported).

The agrochemicals industry in India is expected to post a 12% CAGR to reach USD 18.1bn by
CY25 led by: a) a robust growth outlook for domestic agrochemical demand; b) tapping of
huge export opportunity; c) favourable government policies to double famer incomes; and d)
significant potential to rise up the value chain.
Exhibit 53. India’s agrochemicals industry is expected to post a 12% Exhibit 54. India’s agrochemicals market by export destinations (2019)
CAGR to reach USD 18.1bn by CY25
Source: CEFIC, JM Financial Source: FICCI, Industry research, JM Financial
Robust growth outlook for domestic agrochemical demand

There is immense scope for growth in domestic demand as consumption of agrochemicals in
India is still low vs. peers globally on a per hectare basis. USA and global consumption is ~5x
that of India’s and Japan/China consume ~20x the agrochemicals consumed by India. Indian
crop yield losses are higher at 15-20% on account of weeds, pests, diseases and rodents; this
can be minimised through efficient use of agrochemicals.
The Indian agrochemicals market has historically been dominated by insecticides (53%)
because of the country’s tropical climate and the kind of crops produced (rice and cotton),
whereas globally, herbicides hold the largest share (44% of the market). Rice accounts for
the maximum (26%-28%) share of agrochemical consumption in India followed by cotton
(18%-20%). However, growth in herbicides and fungicides is estimated to outpace the
growth in insecticides in India on account of: a) rising farm labour costs, which have made
the manual removal of weeds uneconomical; and b) robust growth in horticulture cultivation,
which increase adoption of herbicides and fungicides.
Exhibit 55. India’s agrochemical industry break-up Exhibit 56. Global agrochemical industry break-up (CY19)
Source: FICCI, Industry research Source: UPL, JM Financial

Huge export opportunity for Indian agrochemical industry

India has become one of the largest exporters of agrochemicals in the world, with ~50% of
its agrochemical production being exported. India’s export growth has been driven by its
rising cost competitiveness on lower manufacturing costs, availability of skilled manpower,
high quality standards meeting global norms due to improving R&D expertise and strong
environmental, health and safety compliance, among others.
Exhibit 57. Key agrochemical exporters (USD bn in CY19)
Source: World’s Top Exports, FICCI, JM Financial
There exists further scope for improved export opportunities via tie-ups with innovators for
new as well as existing products. Further, Indian players could benefit as there exists a strong
pipeline of ~19 agrochemicals active ingredients worth ~USD 4.2bn going off-patent during
2019-26 (refer to Exhibit below). With a number of products coming off patent, it would
provide companies with significant opportunities to develop off-patent/generic active
intermediates. This is likely to create a large opportunity for export growth for India’s
agrochemicals industry.
Exhibit 58. Key agrochemicals active ingredients going off-patent in 2019-26

Molecules Inventor Opportunity size 2019 (USD Mn)
Bixafen Bayer Crop Science 1200
Chlorantraniliprole Dupont De Nemours 1500
Cyantraniliprole Dupont De Nemours 700-900*
Cyprosulfamide Dupont De Nemours 650-800*
Fenpyrazamine Sumitomo Chemicals 200-300*
Flubendiamide Nihon Nohyahu, Bayer Crop Science 700-900*
Fluopicolide Bayer Crop Science 400-500*
Flupyram Bayer Crop Science 250-350*
Fluxapyroxad BASF 450-500*
Isopyazam Sygenta AG 300-350*
Mandipropamid Sygenta AG 60
Penflufen Bayer Crop Science 50-100*
Penthiopyrad Mitsui Chemicals 600-700*
Pinoxaden Sygenta AG 681
Pyriofenone Ishihara 200-400*
Pyroxsulam Dow Agrochemicals 400-450*
Sedaxane Sygenta AG 350-400*
Thiencarbazone-Methyl Bayer Crop Science 900-950
Valifenalate Belchim 500-600*
Source: Frost & Sullivan Research, India Pesticides DRHP *estimates on best efforts basis

Government’s favourable policy measures to double famer incomes

The Indian government is implementing various reforms, including new farm laws and
schemes such as Fasal Bima Yojna and Kisan Credit Card, to expedite growth in the
agriculture sector; the objective is to double farmer incomes by 2022. Indian agriculture
sector is expected to generate robust growth in the next few years due to increased
investment in infrastructure such as irrigation facilities, warehousing and cold storage. Some
other key agricultural reforms include a) free trade for agricultural produce across country, as
against limitation of sale through APMCs earlier; b) exclusion of various categories from the
Essential Commodities Act, which would enable better supply chain management; and c) an
increase in outlay for previously announced schemes such as the crop insurance scheme,
launch of direct income support by way of PM-Kisan Samman Nidhi, etc.
Improvement in farmer incomes is likely to translate into additional spends on agrochemicals
for improvement in farm productivity; hence is expected to boost demand for agrochemicals.
The government is also trying to promote higher margin businesses such as horticulture and
floriculture by encouraging more exports to likely ensure that farmers are more inclined to
use crop protection measures.
Significant potential to rise up the value chain

The global agrochemicals value chain comprises: a) raw material suppliers (both
petrochemical derivatives as well as natural feedstock); b) active ingredient/technical grade
manufacturers; c) formulators producing end products; d) distributors; and e) end use
customers.
Exhibit 59. Agrochemicals - value chain
Source: Frost & Sullivan Research, Anupam Rasayan DRHP
The key success factors for agrochemical players are:
a) Backward integration of technical active ingredients, which would help formulators

strengthen their margin profiles;
b) A comprehensive product portfolio to cater to the agrochemical needs of farmers; and
c) A strong distribution network, which plays critical role in maximising reach to the
fragmented farmer base.
The process of discovering a new molecule involves a significant amount of time (+10 years)
and capital investment (+USD 300mn). Further, the development of new active ingredients
has also declined due to stringent regulations in the industry. Moreover, Indian agrochemical
players spend on R&D activities is low at ~2% of revenue vs. global majors who spend 6-10%
of revenue on R&D. Hence, only some global majors have been able to successfully focus on
building R&D expertise.

India’s agrochemicals industry is highly fragmented with over 150 active ingredient
manufacturers, more than 1,000 formulators and +200 thousand companies engaged in
distribution. However, is dominated by large organised players owing to the need for robust
R&D capabilities for innovation of improved and safer molecules for domestic and export
markets while small unorganised players are more focussed on the manufacturing of off-
patented generic molecules. Bayer holds the largest market share in India’s crop protection
chemicals market (11% market share) followed by Syngenta (7%) and UPL (7%).
Exhibit 60. Indian agrochemicals market - segmentation (CY19) Exhibit 61. Global agrochemicals market - segmentation (CY19)
Source: FICCI, Industry research * Others refers to Corteva, PI, Dhanuka, Sumitomo, etc Source: Frost & Sullivan Research, Anupam Rasayan DRHP
Key risks for the Indian agrochemicals segment:

a) The agrochemicals business is cyclical in nature and subject to climatic volatility with
seasonal variations. Unfavourable local and global weather conditions (such as drought,
floods, cyclones and natural disasters) may have an adverse effect on business.
b) Further, any change in government policies towards the agriculture sector, a reduction in
subsidies/incentives provided to farmers, export restrictions on crops, etc. could adversely
impact farmer incomes hence their ability to spend on agrochemical products.
c) The rising use of alternative pest management and crop protection measures such as bio-
technology products, pest resistant seeds or genetically modified crops may reduce demand
for agrochemical products. However, companies are trying to address environment-related
concerns by increasingly focussing on producing eco-friendly products such as bio-fertilisers,
micronutrients, bio-stimulants, bio-pesticides and other organic products.

Fluorochemicals – Adoption on the rise

India’s Fluorochemicals (fluorine-based chemicals) market has been supported by the growth
witnessed in Fluorocarbons due to the rising need for refrigeration systems in residential,
industrial and commercial segments. Further, the next leg of growth is being driven by rising
use of fluorine-based chemicals in pharma and agrochemical intermediates, with 30-40% of
new molecules added every year being fluorine based. This is on account of the higher
stability and efficacy that fluorine-based molecules provide.
India’s fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching ~USD
450mn in CY20. Further, rising use of fluorochemicals in pharma and agrochemicals
segments is likely to help the segment clock a 14% CAGR to reach USD 880mn by FY25.
Further, the Indian Hydrogen fluoride market, which is the principal industrial source of
fluorine, is largely consolidated, with SRF being the largest producer (40% of the market)
followed by Navin Fluorine (26%). Hence, although the adoption of Fluorochemicals is on the
rise, there are only a handful of players in India which can take advantage of this change
given the industry has strong entry barriers.
Robust growth outlook for fluorine-based chemicals; pharma and agrochemicals

driving the next leg of growth
Fluorocarbons are mainly used as refrigerants. With global warming, temperatures are rising
and creating the need for refrigeration systems in residential, industrial and commercial
segments (mostly in the automotive industry). This has driven significant growth in the
fluorochemicals market. Additionally, lifestyle changes have boosted demand for refrigerators
and cooling systems.
Over the past few years, fluorine-based chemicals have gained traction in the space of
pharma and agrochemical intermediates with 30-40% of new molecules added every year
are fluorine based. This is on account of higher stability and efficacy that fluorine based
molecules provides. Pharmaceuticals is among the fastest growing sub-segments as adding
fluorine significantly improves the pharmacological properties of a drug in terms of potency,
allowing smaller doses to be effective. Further, fluorochemicals are vital ingredients for
pesticides and herbicides and have replaced bromomethane (which is toxic for the
environment). Fluoride-derived chemicals are used as fumigants to reduce pest infestation of
stored grains and certain other food products.
However, fluorocarbons are highly regulated globally due to their impact on the ozone layer
and greenhouse emissions. Hence, the Montreal Protocol came into effect in 1987 to
regulate their use globally. The protocol requires all countries to freeze the consumption of
ozone depleting substances (such as HCFCs, R-12 and R-22) at baseline levels from 2013,
further start reducing 10% from the 2015 baseline levels going forward. It then mandates
subsequent steps for reduction, leading to a 97.5% phase-out by 2030 and complete phase-
out by 2040. Hence, emissive use is reducing and non-emissive use is likely to continue to be
permitted going forward. Emissive applications include foams, solvents, mobile ACs
(transport segment), stationary ACs (residential and commercial), aerosols, etc. Further, there
is focus on R&D to develop innovative eco-friendly products.

Exhibit 62. R-22 phase out plan as per the Montreal Protocol
Source: Ministry of Environment, Forest and Climate Change, JM Financial
Growth outlook robust for India’s Fluorocarbons industry – led by pharma and
agrochemicals
The Indian fluorochemicals market has posted a 10% CAGR in the last 5 years, reaching
~USD 450mn in CY20. The largest share is held by fluorocarbons, followed by
fluoropolymers. India is a tropical country with one of the lowest penetrations of ACs,
resulting in immense potential for growth, which is also driven by increasing per capita
income, urbanisation and spending power of the middle class.
Additionally, fluorine-based organic and inorganic chemical products are becoming
increasingly popular in the Indian market, which is among the largest API manufacturers
globally. It is estimated that up to 20% of pharmaceuticals in the market or in clinical
development contain a fluorine atom and that 30% of key blockbuster drugs contain
fluorine. Moreover, 50% of agrochemical molecules developed recently contains fluorine.
Industry experts estimate that 1 in 3 new APIs in future would be based on fluorine
chemistry.
Hence, India’s fluorochemicals market is expected to post a CAGR of 14% in coming years to
reach USD 880mn by FY25, the steepest growth in the global market.
Exhibit 63. India’s Fluorochemicals Market (USD mn)
Source: SRF DRHP, JM Financial

Exhibit 64. Key growth drivers for the Indian Fluorochemicals market – segregated by industry segment
2020-2025
Segm ents Key Grow th Drivers
(CAGR)
a) Indian API sector is now grow ing at a promising rate due to its research-based processes, low cost
Pharmaceuticals operations and availability of skilled manpow er 11-12%
b) To meet the global demand, many international players are now integrating w ith Indian companies
a) Many of the key technical grade pesticides are made in India, and w ith many global customers looking to move
Agrochemicals 7-8%
aw ay from China, India w ill be a key destination of production as w ell as consumption.
a) India being an agrarian economy, there is an increased need for cold storage facilities
Refrigeration 9-10%
b) Grow th in industrial as w ell as commercial refrigeration requirements for processed products
a) Out of 53.3mn middle class households – only 52% have ACs giving high scope for grow th
Air Conditioning b) High rise buildings, shopping complexes, malls, hypermarkets w hich are grow ing in tier tw o cities increasing 10-12%
requirements of AC
a) Grow th in urbanization and use of consumer electronics across all economic segments is driving grow th for
Electrical and Electronics the industry 8-9%
b) Preference for smart homes and smart offices is also accelerating the grow th
a) Exports from India is expected to drive grow th especially for component and ancillary manufacturing segments
Automobiles 5-7%
b) Increasing emphasis on electric vehicles and smart vehicles.
a) Other applications like coatings, cookw are, textiles, medical appliances are in niche stage but being
Others 7-8%
accelerated by grow th in Infrastructure and urbanization
Source: SRF, JM Financial
The principal industrial source of fluorine is Hydrogen fluoride (HF). The Indian HF market is
largely consolidated, with SRF being the largest producer, accounting for 40% of the market.
Other major producers of HF are Navin Fluorine (26%), Tanfac Industries (21%) and Gujarat
Fluorochemicals (13%). Hence, although the adoption of Fluorochemicals is on the rise, only
handful Indian players (as discussed above) can take advantage of this change as the industry
possesses following entry barriers:
a) Complex chemistry: Fluorine’s strong reactivity makes it extremely difficult to segregate in

any compound and it requires stringent reaction conditions. Hence, needs players to have
extensive experience in the reaction chemistry segment.
b) High capital requirements from safety perspective and for raw materials: The fluorine
business requires significant investments from safety perspective given fluorine’s reactivity.
There is also significant investment required to ensure sustainable supplies of raw materials,
given the high dependence on imports.
c) Need to develop high-quality R&D expertise: There is a need to make investments to

develop R&D expertise for the manufacture of specialty Fluorochemicals, which would be
used to make innovative products in the agrochemicals and pharmaceuticals industries.
d) Stringent regulatory compliance: Fluorine products are highly regulated in production,

trade and use. Hence, very few companies are capable of maintaining stringent regulatory
standards.

CRAMS/CSM business provides long-term growth visibility

India has been marking its presence in the global CRAMS market where it commands ~6%
market share (at USD 11.5bn in CY19, of USD 200bn global market). India’s CRAMS market
is likely to post a 12% CAGR over CY19-24 (vs. 10% CAGR for the global market). India’s
CRAMS market caters to: a) Pharmaceuticals (45%); b) Agrochemicals (35%); and c) Personal
care and others industries (20%). CSM is a niche segment within the contract manufacturing
space and caters to patented products that normally require more R&D efforts. We believe
that Indian CRAMS/CSM players are well set to benefit as more and more innovators shift
focus on core competencies and outsource production via long-term contracts to low-
manufacturing cost destinations such as India. These long-term contracts also provide long-
term revenue growth visibility compared with other specialty players.
Custom synthesis and manufacturing (CSM) needs more research and development (R&D)
efforts compared with contract research and manufacturing services (CRAMS) as contract
manufacturers produce patented products, wherein each patented product’s manufacturing
can be unique (requiring unique infrastructure). CSM is more of niche segment within the
contract manufacturing space and attracts higher margins than contract research and
manufacturing services of generic molecules. With the increasing infrastructure of contract
synthesis in India, more foreign players with patented products are expected to manufacture
active molecules. As a result, the valuation for CSM or patented businesses is relatively
higher, resulting in higher growth potential of custom synthesis and manufacturing services
in the contract synthesis sector.
Global CSM market likely to register a 10% CAGR over CY19-24E: The global CSM market
was valued at USD 200bn in CY19 and is anticipated to reach USD 322bn by CY24E (10%
CAGR), driven by a) the development of new active ingredients, b) innovators shifting focus
to core competencies and c) outsourcing of production to low-cost manufacturing
destinations. Custom synthesis and manufacturing is used for contract synthesis of
agrochemical technical grades or active ingredients, intermediates and specialty chemical
products along with other fine chemicals, including active pharmaceutical ingredients.
Exhibit 65. Global CSM market likely to reach USD 322bn by CY24E Exhibit 66. Indian CSM market likely to reach USD 20.3bn by CY24E
360 24
322.1
20.3
270 18
200.0
11.5
180 12
142.6
7.2
90 6
0 0
CY14 CY19 CY24E CY14 CY19 CY24E

India CSM market likely to deliver a 12% CAGR over CY19-24E: The India CSM market was
valued at USD 11.5bn for CY19 for specialty chemicals, and is anticipated to reach USD
20.3bn by CY24E (12% CAGR) driven by a) the increasing contract manufacturing trend for
fine chemicals and niche specialty chemicals in India; b) global companies preferring
investment in contract manufacturing in India; and c) India being a low-cost manufacturing
destination with a skilled labour force. Almost 80% of the Indian specialty CRAMS market is
captured by fine chemicals (by value) which are nothing but single molecule compounds
widely used across crop protection chemicals and API industries. These single molecule
compounds are mainly active ingredients in either agrochemical or pharmaceutical
formulation. Agrochemical contract manufacturing in India accounts for a 35% market share
with predominantly export-led demand.
Exhibit 67. Global CSM market by region, 2019 Exhibit 68. India CSM market by application industries, 2019
Others (Personal
2%2% Care & Speciality
6%
Chemicals),
20%
Pharmaceuticals,
12% 45%
37%
15%
Agrochemicals,
35%
26%
North America Europe China APAC India Middle East and Africa Others

31 May 2021 India | Chemicals | Company Update
UPL Ltd | BUY

Uniquely PLaced
UPL became the 5th largest global agrochemicals company after its acquisition of Dayanand Mittal
Arysta. It is present in over 138 countries with: a) domain expertise in complex synthesis dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
and sourcing of active ingredients; b) a burgeoning presence in branded generics; and c) Krishan Parwani
best-in-class farmer logistics and distribution services. We believe UPL is uniquely placed krishan.parwani@jmfl.com | Tel: (+91 96) 6209 5500
to register a healthy 13%/23% EBITDA/PAT CAGR over FY21-23E on account of a)

revenue and cost synergies from the Arysta acquisition; b) robust 9% revenue CAGR
over FY21-23E aided by its R&D-backed product pipeline coupled with new product
launches from recent collaborations; and c) lower interest costs on reduced debt. In our
view, UPL is trading at attractive valuations of 7.8X FY23E EV/EBITDA (significantly lower
compared with the pre-Arysta 5-year average multiple of ~9.5X 1-year forward
EV/EBITDA). We assume coverage with a BUY rating and TP of INR 1,000/share. Recommendation and Price Target
Current Reco. BUY
Likely to sail through Arysta acquisition swiftly: UPL has grown through a slew of 40+
Current Price Target (12M) 1,000
successful acquisitions over the past 25 years. Though its recent Arysta acquisition had Upside/(Downside) 23.2%
disrupted the balance sheet with net debt/EBITDA reaching 6.8x/3.2x/2.2x in
FY19/FY20/FY21, it helped UPL to achieve cumulative revenue and cost synergies of USD Key Data – UPLL IN
443mn and USD 235mn, respectively. It is further looking to achieve cost synergies of USD Current Market Price INR812
Market cap (bn) INR620.2/US$8.6
200mn p.a and revenue synergies of USD 350mn p.a. Hence, we believe UPL is likely to sail
Free Float 63%
through this acquisition rather swiftly owing to synergies arising from Arysta’s presence in
Shares in issue (mn) 764.0
Europe, Latin and North America. Diluted share (mn) 764.0
3-mon avg daily val (mn) INR6,308.6/US$87.1
Strong R&D backed pipeline with new launches in sight: UPL currently has 14-15 new 52-week range 826/388
products in late-stage development, which collectively have peak risk adjusted revenue Sensex/Nifty 51,423/15,436
potential of USD 4.5bn. Moreover, from the new product pipeline, management expects INR/US$ 72.4
80% of sales from differentiated solutions and 20% from post-patent solutions. This, in our
Price Performance
view, should help UPL earn higher gross margins. Further, the company expects to launch % 1M 6M 12M
several formulations based on recent active ingredients tie-ups (with FMC in Mar’21 and Meiji Absolute 33.5 94.3 107.5
in May’21), which bodes well for future growth. Relative* 26.6 66.8 30.9
* To the BSE Sensex
Debt no longer a concern: We believe UPL’s net debt-to-EBITDA is likely to drop to 1.6X in
FY22 and 1.0X in FY23 on robust operating cash flows owing to the strong uptick in
commodity prices. Moreover, we derive comfort from the fact that management would try to
keep the net debt-to-EBITDA at ~1.0X, consistent with past practices.
Estimate revenue/EBITDA/PAT CAGR of 9%/13%/23% over FY21-23E; BUY with TP of INR

1,000/share: We estimate UPL’s consolidated EBITDA to register a 13% CAGR over FY21-23E
on a) a 9% CAGR over FY21-23E and b) a 159bps EBITDA margin expansion as gross margins
normalise to pre-Arysta levels. Further, in our view, UPL’s PAT is likely to register a 23%
CAGR over FY21-23E owing to the decline in interest costs. We value UPL’s consolidated
business at a 9.5X 1-year EV/EBITDA (in-line with its pre-Arysta acquisition 5-year average
multiple of ~9.5X on account of its current high net debt-to-EBITDA) to arrive at a Mar’22 TP
of INR 1,000/share. We assume coverage with a BUY rating.
Financial Summary (INR mn)

Y/E March FY19A FY20A FY21E FY22E FY23E
Net Sales 2,18,370 3,57,560 3,86,940 4,23,828 4,63,914
Sales Growth (%) 24.7 63.7 8.2 9.5 9.5 JM Financial Research is also available on:
EBITDA 38,130 68,220 84,320 97,565 1,08,446 Bloomberg - JMFR <GO>,
EBITDA Margin (%) 17.5 19.1 21.8 23.0 23.4
Adjusted Net Profit 18,534 22,668 30,696 38,380 46,207
Thomson Publisher & Reuters,
Diluted EPS (INR) 24.3 29.7 40.2 50.2 60.5 S&P Capital IQ, FactSet and Visible Alpha
Diluted EPS Growth (%) -10.8 22.3 35.4 25.0 20.4
ROIC (%) 10.0 9.2 12.6 13.4 14.8 Please see Appendix I at the end of this
ROE (%) 15.6 13.4 15.3 16.9 17.6
report for Important Disclosures and
P/E (x) 33.5 27.4 20.2 16.2 13.4
P/B (x) 4.2 3.2 3.0 2.5 2.2 Disclaimers and Research Analyst
EV/EBITDA (x) 23.3 12.6 9.8 8.4 7.2 Certification.
Dividend Yield (%) 0.7 0.5 1.2 1.0 1.2
Source: Company data, JM Financial. Note: Valuations as of 28/May/2021
JM Financial Institutional Securities Limited

UPL Ltd 31 May 2021
Strong R&D backed product pipeline

UPL has 48 manufacturing locations across 11 countries and a formulations portfolio of
1,283 products with over 12,400 registrations. UPL derived ~80% of FY20 revenues from
branded products. It has showcased a strong R&D pipeline over the years with consistent new
products, along with established post-patent active ingredients such as Glufosinate
(Herbicide), Azoxystrobin (Fungicide), Mancozeb (Fungicide), Cypermetrin (Insecticide),
Metribuzin (Herbicide), Sulfentrazone (Herbicide) and Pendimethalin (Herbicide). The post-
patent market is a rapidly-growing vertical and UPL is well-positioned to capture a significant
share through product differentiation and cost efficiency processes. Since its acquisition of
Arysta Lifesciences in Feb’18, UPL has successfully consolidated and integrated various
elements of the value chain. Arysta - being a leader in the bio-stimulants space – would boost
UPL’s position as a Tier-1 CPC and bio-solutions company with end-to-end offerings from
seeds to post-harvest products.
Exhibit 1. UPL’s product registrations have picked up pace Exhibit 2. UPL’s new post-patent active ingredients’ potential
15,000 12 6.0
13,600
12,400
9 4.5
12,000
6 3.0
9,000
3 1.5
5,934 6,181
6,000
4,692 4,976
0 0.0
2020 2021 2022 2023 2024 2025
3,000 Market Value (USD bn)
FY15 FY16 FY17 FY18 FY19 FY20
Number of Active Ingredients (RHS)
Source: Company, JM Financial Source: Company, JM Financial
UPL’s R&D spends rose gradually over FY15-19. It has over 20 R&D facilities and more than
750 R&D professionals, as at end-FY21. Given its strong background in product registrations,
UPL’s R&D division is likely to be able to generate IPs with new mixtures and formulations and
its scale and SG&A efficiency would help reduce costs. Its granted patents increased to 1,266
in FY20 (vs. 1,023 in FY19). It currently has 14-15 new products in late-stage development,
which have a peak risk adjusted revenue potential of USD 4.5bn. Of this, the company
expects peak risk adjusted revenue of USD 2.5bn in the next 5 years. Moreover, from the
new product pipeline, management expects 80% of sales from differentiated solutions and
the remaining 20% from post-patent solutions. This, in our view, should help UPL earn
higher gross margins.
Exhibit 3. Product pipeline of UPL’s post-patent active ingredients

Product type Early stage Late stage Total
Herbicides 5 1 6
Insecticides 10 3 13
Fungicides 15 7 22
BioStimulants 4 2 6
Seed treatments 4 1 5
Total 38 14 52
Source: Company, JM Financial

UPL Ltd 31 May 2021
Moreover, industry estimates suggest that between CY19 and CY26, 19 active ingredients
are expected to go off-patent with an opportunity size of ~USD 4.2bn. This should bode well
for generic players such as UPL, which primarily deals in off-patent branded products. A few
of these molecules could have an annual opportunity size of USD 300-400mn.
Exhibit 4. Key agrochemicals active ingredients going off-patent in 2019-26

Molecules Inventor Opportunity size 2019 (USD Mn)
Bixafen Bayer Crop Science 1200
Chlorantraniliprole Dupont De Nemours 1500
Cyantraniliprole Dupont De Nemours 700-900*
Cyprosulfamide Dupont De Nemours 650-800*
Fenpyrazamine Sumitomo Chemicals 200-300*
Flubendiamide Nihon Nohyahu, Bayer Crop Science 700-900*
Fluopicolide Bayer Crop Science 400-500*
Flupyram Bayer Crop Science 250-350*
Fluxapyroxad BASF 450-500*
Isopyazam Sygenta AG 300-350*
Mandipropamid Sygenta AG 60
Penflufen Bayer Crop Science 50-100*
Penthiopyrad Mitsui Chemicals 600-700*
Pinoxaden Sygenta AG 681
Pyriofenone Ishihara 200-400*
Pyroxsulam Dow Agrochemicals 400-450*
Sedaxane Sygenta AG 350-400*
Thiencarbazone-Methyl Bayer Crop Science 900-950
Valifenalate Belchim 500-600*
Source: Frost & Sullivan Research, India Pesticides DRHP *estimates on best efforts basis
Exhibit 5. UPL’s R&D spends have risen gradually between FY15-19

2,300 4%
1,725 3%
2.5%
2.3%
2.2%
1,150 2%
2.1%
575 1.3% 1%
1.3%
0 0%
FY15
FY16
FY17
FY18
FY19
FY20
Total R&D expenditure (INR mn) R&D as % of stand-alone sales (RHS)

Exhibit 6. UPL expects risk adjusted peak revenue of USD 2.5bn in next 5 years

UPL Ltd 31 May 2021
With the Arysta acquisition, UPL successfully optimised its manufacturing footprint and
increased procurement efficiency. It also strengthened its R&D efforts by in-sourcing R&D
activities to boost efficiency and expanded its bandwidth to access new technologies. At end-
FY21, UPL had achieved cumulative revenue and cost synergies of USD 443mn and USD
235mn, respectively. It further is looking to achieve cost synergies of USD 200mn p.a. and
revenue synergies of USD 350mn p.a.
Exhibit 7. Arysta acquisition likely to bring further revenue and cost synergies
In Mar’21, UPL announced a long-term collaboration with FMC for its Rynaxypyr active
ingredient (AI). Under this agreement, FMC will provide UPL access to products containing
this AI. This means: a) UPL will be able to use this AI for development of formulations and
market around the world; and b) UPL will toll manufacture this AI for FMC in India for the
India market. FMC’s revenues from its two key diamide-class molecules – Rynaxypyr and
Cyazypyr were ~USD 1.6bn in CY19, as per its annual report. Hence, FMC’s global revenues
from Rynaxypyr are likely to have reached ~USD 800-900mn in 2020 (given that its global
sales were USD 500mn in 2011 - see here).
Further, FMC’s India sales from formulations containing this AI were estimated ~INR 15.4bn
in 2016 and are likely to have reached INR 20bn by 2020 (click here). Management in its
FY21 presentation highlighted that with this new AI, the company will be able to develop
value-added solutions; it currently has 17 formulations in the pipeline. Management also
indicated that it intends to launch several formulations in various Latin American and African
countries as early as FY22.
Exhibit 8. FMC’s Rynaxypyr and Cyazypyr revenues were ~USD 1.6bn in CY19
Source: FMC, JM Financial
Exhibit 9. Some of FMC’s Chlorantraniliprole (Rynaxypyr)’s patents have validity untill 2030-2035
Source: FMC, JM Financial

UPL Ltd 31 May 2021
Latin America growth to pick up pace

Latin America is a key market for UPL as the region contributes ~36% to overall revenues. In
Latin America, it has 10 plants, 5 R&D facilities and a portfolio of 516 products. Within Latin
th
America, UPL has become the 4 largest player in Brazil and number 1 player in Mexico and
Columbia. As Brazil is the world’s largest exporter of coffee, soybeans, crop-based ethanol,
cotton, corn, rice and sugarcane, majority of its key brands Unizeb (fungicide), Zartan
(Herbicide), and Lancer gold (insecticide) are targeted towards these crops.
In the 4QFY21 conference call, management highlighted that soybean prices have risen
further due to a cold winter (soybean prices have risen continuously since Mar’20 due to dry
weather). Moreover, corn prices have jumped to the highest level ever in the last 8-9 years.
Given that soybean and corn remain two of the most important crops for Brazil, farmers
should look to increase their soy and corn acreage, in our view. On the back of this, we
expect UPL’s Latin America revenues to demonstrate 12% CAGR over FY21-23E.
Additionally, in FY22, management is looking to launch formulations of Chlorantraniliprole
(patented Technical collaboration with FMC) in Brazil, Mexico, and several other several
countries. This bodes well for the company’s volume growth in the LatAm region.
It is important to note that in FY21, as farmers’ incomes rose, the company was able to hike
prices to offset currency depreciations in the region. Hence, we believe that as crop prices
remain firm, the company will be able to hike prices to offset any a) adverse currency
movements and b) rise in commodity prices.
Exhibit 10. Latin America revenues to demonstrate 12% CAGR over FY21-23E
240 95% 100%
180 75%
120 50%
25% 26%
60 24% 25%
8% 12% 12%
5%
0 0%
FY22E
FY23E
FY16
FY17
FY18
FY19
FY21
FY15
FY20
LatAm revenues (INR bn) YoY growth (%) (RHS)


UPL Ltd 31 May 2021
UPL’s operations in India are spread across key agricultural states, with strong focus on AP,
Maharashtra, Kerala, TN and Punjab. UPL has continuously focused on India with increased
farmer engagements and new product introductions. Its key products are Ulala (insecticide),
Phoskill (insecticide), Saaf (fungicide) and Sathi (herbicide); all have a high brand pull. UPL’s
India operations accounted for 11% of overall revenues in FY20. We expect UPL’s India
revenues to demonstrate an 11% CAGR over FY21-23E.
Exhibit 11. India revenues to demonstrate an 11% CAGR over FY21-23E

60 24%
22%
45 18%
INR bn
30 12%
12%
11% 11%
10%
15 8% 6%
8%
3%
0 0%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
India revenues (INR bn) YoY growth (%) (RHS)
Key crops for UPL in EU are sugar-beet, wine, and oilseeds. Europe contributed 17% of UPL’s
FY21 revenue. In FY21, UPL’s Europe revenue experienced a sharp uptick from new product
launches, such as Argos and Fazor, which are plant growth regulators mainly used on
potatoes. Hence, we estimate UPL’s EU revenues to demonstrate a 7% CAGR over FY21-23E
on account of: a) continued growth momentum from new product launches; b) robust
growth of differentiated and sustainable solutions; and c) synergies arising from the Arysta
acquisition. We estimate RoW revenues to witness a 7% CAGR over FY21-23E due to the
continued strong momentum of Glusifonate in South-East Asia.
Exhibit 12. Europe revenues to witness a 7% CAGR over FY21-23E Exhibit 13. RoW revenues to demonstrate a 7% CAGR over FY21-23E
80 150% 100 104%
60 110% 75 78%
INR bn
INR bn
40 70% 50 52%
20 30% 25 26%
0 -10% 0 0%
FY21E
FY22E
FY23E
FY15
FY16
FY17
FY18
FY19
FY20
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
Europe revenues (INR bn) YoY growth (RHS) (%) RoW revenues (INR bn) YoY growth (RHS) (%)

UPL Ltd 31 May 2021
North America contributed 15% to UPL’s FY21 revenue. For UPL, key crops in the North
American market are tree nuts, fruits, vegetables, and aquatics with key brands being
Manzate, Surflan, Asail, Penncozeb, and Microthiol. UPL has been growing its presence in the
American Midwest, a region where soybean, corn and wheat are predominant. We expect
UPL’s North America revenues to witness a 7% CAGR over FY21-23E due to its strengthening
presence on account of the Arysta acquisition.
Exhibit 14. North America revenues to register 7% CAGR over FY21- Exhibit 15. Geographical revenue break-up
23E
100%
72 64%
54 48% 75%
INR bn
36 32% 50%
18 16% 25%
0 0% 0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY15
FY16
FY17
FY18
FY20
FY21
FY19
FY22E
FY23E
NorthAm revenues (INR bn) YoY growth (%) (RHS) India Europe North America Latin America ROW

UPL Ltd 31 May 2021
Debt no longer a concern

Due to the Arysta acquisition, UPL’s gross debt had sharply jumped to INR 289bn in FY19; as
a result, its net debt-to-EBITDA rose to a staggering 6.8X in FY19. However, management
has made consistent efforts to reduce debt through: a) part pre-payments of existing loans
and b) effective cost controls. On account of these measures, UPL’s net debt-to-EBITDA fell to
2.2X in FY21 (slightly below the management guidance of less than 2X). Going forward, we
believe UPL’s net debt-to-EBITDA is likely to drop to 1.6X in FY22 and 1.0X in FY23 led by
robust operating cash flows owing to the strong uptick in commodity prices. Moreover, we
derive comfort from the fact that management would try to keep the net debt-to-EBITDA at
~1.0X, consistent with past practices.
Exhibit 16. Net debt to EBITDA likely to come down to 1.0X by FY23E
8.0
6.8
6.0
4.0
3.2
2.2
2.0 1.5 1.6

1.1 1.0 1.0
0.7
0.0
FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Low working capital cycle to sustain

Prior to the Arysta acquisition, UPL’s net working capital (NWC) cycle remained at 100-130
days (during FY16-18). However, after the acquisition, it dropped to 97 days in FY20 and 90
days in FY21. This decline in NWC was mainly on account of a decrease in i) inventory days to
89 in FY21 (vs. 93-98 days in FY16-18) and ii) receivable days to 119 in FY21 (vs. 126-133
days in FY16-18). We believe this decline in receivable and inventory days is sustainable as
synergies arising out of the Arysta acquisition would help keeping inventory in check while
rising farmer incomes bode well for receivable days.
Exhibit 17. Net working capital cycle is likely to remain at 90 days in FY22-23E
240
195
180
128
106 110
120 103 97
90 90 90
60
0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E
Inventory days Receivable days Payable days Net working capital

UPL Ltd 31 May 2021
Key Assumptions and Estimates

Exhibit 18. Segment-wise revenue contribution and expected growth
INR m n FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Geographical sales (INR m n)
India 26,219 26,960 29,630 31,890 34,540 38,280 46,770 52,382 58,144
Europe 20,326 19,250 21,480 23,050 57,520 57,140 64,220 68,715 73,525
North America 22,594 26,120 28,880 30,830 49,670 56,350 56,910 60,894 65,156
Latin America 34,063 42,730 53,960 56,920 1,10,740 1,37,640 1,48,630 1,66,466 1,86,441
ROW 17,704 25,420 29,170 31,090 63,690 68,150 70,440 75,371 80,647
Total 1,20,905 1,40,480 1,63,120 1,73,780 3,16,160 3,57,560 3,86,970 4,23,828 4,63,914
YoY grow th (%)
India 3% 10% 8% 8% 11% 22% 12% 11%
Europe -5% 12% 7% 150% -1% 12% 7% 7%
North America 16% 11% 7% 61% 13% 1% 7% 7%
Latin America 25% 26% 5% 95% 24% 8% 12% 12%
ROW 44% 15% 7% 105% 7% 3% 7% 7%
Total 16% 16% 7% 82% 13% 8% 10% 9%
% of total
India 22% 19% 18% 18% 11% 11% 12% 12% 13%
Europe 17% 14% 13% 13% 18% 16% 17% 16% 16%
North America 19% 19% 18% 18% 16% 16% 15% 14% 14%
Latin America 28% 30% 33% 33% 35% 38% 38% 39% 40%
ROW 15% 18% 18% 18% 20% 19% 18% 18% 17%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

UPL Ltd 31 May 2021
Exhibit 19. Revenue growth to remain at 9% CAGR over FY21-23E Exhibit 20. EBITDA margins to improve gradually to 23% by FY23E
500 110 28%
Thousands
68%
Thousands
64% 9%
23% 23%
10%
22%
8% 54% 20%
400 83 20% 18% 21%
18% 19%
17%
41%
300 55 14%
25%
27%
16% 16%
200 7% 28 7%
14%
100 0% 0 0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY22E
FY23E
Net revenue (INR bn) YoY growth (RHS) (%) EBITDA (INR bn) EBITDA margin (%) (RHS)
Exhibit 21. PAT margins to improve to 10% by FY23E Exhibit 22. ROEs and RoCEs to improve after dip in FY19-20
52 14% 30%
10%
12%
11%
39 9% 9% 11% 23%
8%
7% 8%
6%
26 7% 15%
13 4%
8%
0 0%
0%
FY17
FY18
FY19
FY20
FY21
FY15
FY16
FY22E
FY23E
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
PAT (INR bn) PAT margin (%) (RHS)
RoE RoCE

UPL Ltd 31 May 2021
Valuation
We estimate UPL’s consolidated EBITDA to register a 13% CAGR over FY21-23E on account
of a) 9% revenue CAGR over FY21-23E and b) 159bps EBITDA margin expansion owing to
the normalisation of gross margins to pre-Arysta levels. Further, in our view, UPL’s PAT is
likely to register a 23% CAGR over FY21-23E on account of a decline in interest costs. We
value UPL’s consolidated business at a 9.5X 1- year EV/EBITDA (in-line with its pre-Arysta
acquisition 5-year average multiple of ~9.5X on account of the current high net debt-to-
EBITDA) to arrive at a Mar’22 TP of INR 1,000/share. We assume coverage with a BUY rating.
Exhibit 23. We value UPL at INR 1,000/share

FY23 EBITDA (INR
EV/EBITDA
bn) m ultiple (x) Value (INR bn) Value (INR/share)
UPL consolidated 108 9.5 1,046 1,369

Less: Net Debt 109 143
Equity value including m inority 937 1,227
Less: Minority interest 173 227
Equity value 764 1,000
Source: JM Financial, Company
Exhibit 24. UPL 1-year forward P/E ratio

1,000
16.5.x
750
12.0x
500
7.0x
250
0
May-17 May-18 May-19 May-20 May-21
Exhibit 25. UPL 1-year forward P/B chart Exhibit 26. UPL 1-year forward EV/EBITDA chart
1,000 1,000
8.0x
2.5x
750 750
1.7x 6.5x
500 500
4.7x
1.0x
250 250
0 0
May-17 May-18 May-19 May-20 May-21 May-17 May-18 May-19 May-20 May-21

UPL Ltd 31 May 2021
Company profile
th
UPL is the 5 largest agrochemical company in the world, after the acquisition of Arysta
Lifesciences. UPL is a global leader in global food systems, with revenue of USD 3.1bn, UPL is
now present in 130+ countries with market access to 90% of the world’s food basket. UPL
offers an integrated portfolio of both patented and post-patent agricultural solutions for
various arable and specialty crops, including biological, crop protection, seed treatment and
post-harvest solutions covering the entire crop value chain.
Board of Directors
- Mr. Rajnikant Shroff, Chairman and Managing Director
- Mr. Jai Shroff, Global Group CEO
- Mr. Vikram Shroff, Director
- Mr. Arun Ashar, Director
- Mr. Pradeep Goyal, Independent Director
- Dr. Reena Ramachandran, Independent Director
- Mr. Hardeep Singh, Independent Director
- Dr. Vasant Gandhi, Independent Director

UPL Ltd 31 May 2021
Financial Tables (Consolidated)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY19A FY20A FY21E FY22E FY23E Y/E March FY19A FY20A FY21E FY22E FY23E
Net Sales 2,18,370 3,57,560 3,86,940 4,23,828 4,63,914 Shareholders’ Fund 1,46,450 1,92,820 2,08,870 2,44,961 2,79,975
Sales Growth 24.7% 63.7% 8.2% 9.5% 9.5% Share Capital 1,020 1,530 1,530 1,530 1,530
Other Operating Income 0 0 0 0 0 Reserves & Surplus 1,45,430 1,91,290 2,07,340 2,43,431 2,78,445
Total Revenue 2,18,370 3,57,560 3,86,940 4,23,828 4,63,914 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 1,09,040 1,87,430 1,90,960 2,03,437 2,20,359 Minority Interest 33,580 33,120 36,930 47,600 57,567
Personnel Cost 20,950 33,910 37,120 40,832 44,915 Total Loans 2,63,830 2,73,710 2,21,460 2,12,040 1,77,040
Other Expenses 50,250 68,000 74,540 81,994 90,193 Def. Tax Liab. / Assets (-) 18,840 8,330 8,850 11,505 15,079
EBITDA 38,130 68,220 84,320 97,565 1,08,446 Total - Equity & Liab. 4,62,700 5,07,980 4,76,110 5,16,105 5,29,661
EBITDA Margin 17.5% 19.1% 21.8% 23.0% 23.4% Net Fixed Assets 1,86,340 1,85,110 1,84,980 1,86,626 1,81,028
EBITDA Growth 8.8% 78.9% 23.6% 15.7% 11.2% Gross Fixed Assets 0 0 0 0 0
Depn. & Amort. 9,690 20,120 21,730 23,172 24,465 Intangible Assets 0 0 0 0 0
EBIT 28,440 48,100 62,590 74,393 83,982 Less: Depn. & Amort. 0 0 0 0 0
Other Income 2,400 550 1,780 2,399 3,026 Capital WIP 11,660 10,590 8,990 8,990 8,990
Finance Cost 9,630 14,810 20,600 15,083 12,645 Investments 11,560 12,080 11,780 11,780 11,780
PBT before Excep. & Forex 21,210 33,840 43,770 61,709 74,363 Current Assets 4,22,000 4,84,200 4,89,780 5,29,604 5,63,529
Excep. & Forex Inc./Loss(-) -4,510 -6,230 -2,380 -2,618 -2,880 Inventories 92,700 78,500 94,220 1,04,506 1,14,390
PBT 16,700 27,610 41,390 59,091 71,483 Sundry Debtors 1,18,120 1,18,670 1,25,910 1,39,341 1,52,520
Taxes 1,650 5,860 6,860 14,477 17,513 Cash & Bank Balances 28,510 67,520 48,530 63,708 74,569
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 510 400 550 550 550
Assoc. Profit/Min. Int.(-) 860 4,050 6,660 8,270 9,997 Other Current Assets 1,82,160 2,19,110 2,20,570 2,21,500 2,21,500
Reported Net Profit 14,470 17,760 28,710 36,404 44,033 Current Liab. & Prov. 1,57,200 1,73,410 2,10,430 2,11,906 2,26,676
Adjusted Net Profit 18,534 22,668 30,696 38,380 46,207 Current Liabilities 95,590 1,08,640 1,39,030 1,45,141 1,58,320
Net Margin 8.5% 6.3% 7.9% 9.1% 10.0% Provisions & Others 61,610 64,770 71,400 66,765 68,356
Diluted Share Cap. (mn) 764.0 764.0 764.0 764.0 764.0 Net Current Assets 2,64,800 3,10,790 2,79,350 3,17,699 3,36,853
Diluted EPS (INR) 24.3 29.7 40.2 50.2 60.5 Total – Assets 4,62,700 5,07,980 4,76,110 5,16,105 5,29,661
Diluted EPS Growth -10.8% 22.3% 35.4% 25.0% 20.4% Source: Company, JM Financial
Total Dividend + Tax 4,080 3,060 7,640 6,189 7,486
Dividend Per Share (INR) 5.3 4.0 10.0 8.1 9.8
Cash Flow Statement (INR mn)

Dupont Analysis
Profit before Tax 16,840 27,640 41,810 59,121 71,513
Net Margin 8.5% 6.3% 7.9% 9.1% 10.0%
Depn. & Amort. 9,690 20,120 21,730 23,172 24,465
Asset Turnover (x) 0.7 0.7 0.7 0.8 0.8
Net Interest Exp. / Inc. (-) 8,260 13,950 18,670 12,684 9,619
Leverage Factor (x) 2.6 3.0 2.6 2.3 2.1
Inc (-) / Dec in WCap. -5,640 30,500 -2,140 -11,730 -5,434
Others -2,050 3,370 -700 -2,655 -3,574 RoE 15.6% 13.4% 15.3% 16.9% 17.6%
Taxes Paid -3,540 -8,190 -7,250 -14,477 -17,513

Operating Cash Flow 23,560 87,390 72,120 66,115 79,076 Key Ratios
Capex -13,700 -14,750 -16,190 -24,981 -25,000 Y/E March FY19A FY20A FY21E FY22E FY23E
Free Cash Flow 9,860 72,640 55,930 41,134 54,076 BV/Share (INR) 191.7 252.4 273.4 320.6 366.5
Inc (-) / Dec in Investments 4,270 -90 -280 0 0 ROIC 10.0% 9.2% 12.6% 13.4% 14.8%
Others -3,10,250 -11,590 -4,540 0 0 ROE 15.6% 13.4% 15.3% 16.9% 17.6%
Investing Cash Flow -3,19,680 -26,430 -21,010 -24,981 -25,000 Net Debt/Equity (x) 1.6 1.1 0.8 0.6 0.4
Inc / Dec (-) in Capital 0 0 0 0 0 P/E (x) 33.5 27.4 20.2 16.2 13.4
Dividend + Tax thereon 0 0 0 0 0 P/B (x) 4.2 3.2 3.0 2.5 2.2
Inc / Dec (-) in Loans 2,19,660 -16,670 -43,640 -13,662 -37,969 EV/EBITDA (x) 23.3 12.6 9.8 8.4 7.2
Others 69,280 -5,080 -23,490 -8,484 -1,995 EV/Sales (x) 4.1 2.4 2.1 1.9 1.7
Financing Cash Flow 2,88,940 -21,750 -67,130 -22,146 -39,964 Debtor days 197 121 119 120 120
Inc / Dec (-) in Cash -10,810 38,980 -19,270 15,738 10,861 Inventory days 155 80 89 90 90
Opening Cash Balance 39,070 28,260 67,240 47,970 63,708 Creditor days 191 129 151 156 157
Closing Cash Balance 28,260 67,240 47,970 63,708 74,569 Source: Company, JM Financial

PI Industries | BUY
Ever Resilient ‘PI’e
PI Industries (PI) currently is India’s largest CSM player in the agrochemicals space. Dayanand Mittal
Its order book has grown ~15x over the last 10 years and its impeccable execution dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
capabilities in this space have made it a preferred CSM partner for global Krishan Parwani
agrochemical innovators. Moreover, its entry into performance and fine chemicals krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
along with pharma APIs/intermediates is likely to put it in the league of global CSM
players offering services across segments. We expect PI to demonstrate 25%
earnings CAGR over FY21-23E. We value the company at 40x FY23E EPS (at a
~25% premium to its 3-year average 1-year forward multiple) to arrive at a TP of
INR 2,995 and assume coverage with a BUY rating.
CSM order book to sustain growth momentum: Over the years, PI has established itself as a
strong CSM player. Its order book has seen a staggering rise to USD 1.5bn in FY20 (from a Recommendation and Price Target
Current Reco. BUY
meagre ~USD 100mn in FY10). PI’s CSM revenues have witnessed a 14%/20%CAGR over
FY14-17/FY17-20. It has been able to achieve this phenomenal growth on account of its Upside/(Downside) 14.9%
strong R&D expertise. Its R&D expenses saw a healthy 33% CAGR over FY15-20. We expect
PI’s CSM revenues to post a 24% CAGR over FY21-23E, primarily on account of a) improved Key Data – PI IN
capital efficiency driven by slowdown of capex intensity; b) a significant ramp-up of Current Market Price INR2,606
additional capacity; and c) better utilisations led by continuous process improvements.
Free Float 51%
Domestic Agro-chemicals business – niche product portfolio, a key differentiator: Due to its Shares in issue (mn) 151.7
Diluted share (mn) 148.0
niche product portfolio, PI has set up high entry barriers in the domestic business. We expect
3-mon avg daily val (mn) INR1,117.1/US$15.4
PI’s domestic agrochemicals sales to witness an 11% CAGR over FY21-23E and reach INR 52-week range 2,795/1,500
15.5bn by FY23E on account of a) likely substantial contribution from Londax power Sensex/Nifty 51,423/15,436
(herbicide for rice) and Awkira (herbicide for wheat) in coming years; b) synergies from INR/US$ 72.4
IsAgro’s domestic distribution channel; and c) sustained contribution from other older in-
Price Performance
licensed products where it still enjoys a significant market share due to in-licensing/co- % 1M 6M 12M
marketing. Absolute 1.5 17.9 64.1
Relative* -3.7 1.2 3.4
25% earnings CAGR over FY21-23E — BUY: We value the company at 40x FY23E EPS (at a * To the BSE Sensex
~25% premium to its 3-year average 1-year forward multiple) to arrive at a TP of INR 2,995
and assume coverage with a BUY rating. Our premium to its historical and current valuation
is justified on account of a) its entry into performance, fine chemicals and pharma segments,
which would be likely put PI in the league of global CSM players offering services across
segments; b) increased contribution from its domestic operations on account of IsAgro
acquisition and new product launches; and c) increased utilisation of two of its plants (which
are currently at 50-70% utilisation) and two more plants (MPP5 and MPP 10) coming on-
stream in the next 2-3 years.
Key risks: a) slowdown in the global agrochemicals industry; b) any order

deferrals/cancellations; and c) overcoming the acquisition hurdle of suitable pharma assets by
utilising the QIP proceeds effectively to achieve its desired asset turns of 1.5-2.0x

Net Sales 28,409 33,068 42,762 55,581 66,953
EBITDA 5,731 6,977 9,851 13,394 16,390 Bloomberg - JMFR <GO>,
EBITDA Margin (%) 20.2 21.1 23.0 24.1 24.5
Diluted EPS Growth (%) 17.2 8.5 51.6 28.0 19.0
ROE (%) 19.5 18.0 18.1 16.5 16.9
P/E (x) 88.3 81.4 53.7 41.9 35.2
Dividend Yield (%) 0.2 0.2 0.2 0.2 0.3

PI Industries 31 May 2021
Custom Synthesis - Growth to continue in medium term

PI offers custom synthesis and manufacturing (CSM) services to a few major global
agrochemical players. The primary difference between typical CRAMS and CSM is the
differentiation of products. Under CSM, molecules (in most cases, patented molecules) are
synthesised as per customer needs while under CRAMS, generic/off-patent molecules are
developed using contractual research and manufacturing agreements. Due to this, CSM
requires higher R&D efforts compared with CRAMS. Since CSM is only focused on selective IP
products, the whole process of new product development, scale-up and then
commercialisation takes about 2 years.
Over the years, PI has established itself as a strong CSM player in Japan and Germany. Its
order book has seen a staggering rise to USD 1.5bn in FY20 (from a meagre ~USD 100mn in
FY10). Apart from this, there are several other spot contracts that it takes on an annual basis.
However, going forward, management does not foresee a substantial increase in its order
book as the commitment of assets built up is already in place, which provides revenue
visibility for the next 3-4 years. Moreover, its order book has not seen any reduction despite
the significant supply ramp-up which underpins order inflows.
PI’s CSM revenues have witnessed a 14%/20%CAGR over FY14-17/FY17-20. It has been able
to achieve this phenomenal growth on account of its strong R&D expertise. Its R&D expenses
have witnessed a healthy 33% CAGR over FY15-20.
Exhibit 1. PI’s CSM sales as a % of order book has been at 20-23%

1,600 33% 36%
1,200 27%
23% 23%
21%
19% 19%
800 18%
400 9%
0 0%
FY15 FY16 FY17 FY18 FY19 FY20
Order book (USD mn) CSM sales (USD mn)
CSM sales as % of order book (RHS) (%)
Exhibit 2. Lifecycle of a molecule
Source: Hikal, JM Financial

Exhibit 3. R&D expenses have witnessed a healthy CAGR of 33% over FY15-20
1,800 8%
7.3%
1,350 6%
4.6% 3.5%
3.6% 2.9%
900 4%
450 1.5% 2%
0 0%
FY15
FY16
FY17
FY18
FY19
FY20
Total R&D expenditure (INR mn) R&D as % of sales (RHS)
This has also enabled the company to commercialise a higher number of molecules every
year. During FY18/19/20, 4/3/5molecules were commercialised. During FY20, PI synthesised
and developed 48 new molecules. Of these, 18 molecules were successfully scaled up for
development and 6 molecules were transferred to the next stage. Going forward,
management has indicated commercialisation of ~15-20 new molecules over the next two
years on account of increased inquiries and R&D pipeline.
PI’s CSM exports revenues started picking up after it got several breakthroughs in 2013 in the
form of Pyroxasulfone (for Kumiai), Flubendiamide (for Bayer), and so on. Pyroxasulfone was
developed by Kumiai chemicals (with which PI had formed a JV) and it has been the biggest
blockbuster molecule for PI till date as it sales roughly comprise 30-35% of CSM sales
currently. Further, Flubendiamide is a diamide insecticide, which was co-developed by Bayer
(with Nihon Nohyaku). Its global sales reached USD 443mn in 2016. However, after China
banned this molecule’s use on rice in 2016, sales have dropped drastically. Flubendiamide’s
patent has expired recently in Nov’19. Moreover, PI registered a number of technical for
exports consistently during 2014-18 despite the global slowdown in the agrochemicals
industry.
Exhibit 4. PI’s Technical exports registrations over last ten years

Approval Date Technical Type
Nov-09 Fenoxanil Fungicide
May-11 Kresoxim Methyl Fungicide
May-11 Orasastrobin Fungicide
Jan-13 Pyroxasulfone Herbicide
Apr-13 Methidathion Insecticide
Jul-13 Ethion Insecticide
Sep-13 Flubendiamide Insecticide
May-14 Tefruyltrione Herbicide
Apr-15 Pemethrin Insecticide
Jun-15 Lambda Cyhalothrin Insecticide
Jun-15 Propiconazole Fungicide
Dec-15 Metominostrobin Fungicide
Feb-16 Bispyribac Sodium Herbicide
Sep-17 FlazaSulfuron Herbicide
Sep-18 2,4-D Dimethyl Amine Salt Herbicide
Source: CIBRC, JM Financial

PI has been continuously upgrading its existing capacities with the help of technology
developed in-house. In FY20, PI had commissioned two new plants (worth INR 3bn-3.5bn),
which were running at ~50-70% capacity utilisations at end-3QFY21. At the same time, it is
continuously looking at increasing the utilisations of these two plants. Moreover, two more
multi-product plants (MPP) are likely to come on-stream in the next 2-3 years, of which MPP-
5 is likely to be commissioned in 2HFY22 (delayed due to an accident last year).
We expect PI’s CSM revenues to see a 24% CAGR over FY21-23E, primarily on account of a)
improved capital efficiency driven by a slowdown in capex intensity; b) significant ramp-up of
additional capacity; and c) better utilisations led by continuous process improvements.
Exhibit 5. CSM sales likely to see a 24% CAGR over FY21-23E

50,000 40%
37% 35%
37,500 30%
25%
24% 24%
19%
25,000 20%
13%
12,500 10%
9%
1%
0 0%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
CSM sales (INR mn) YoY growth (%) (RHS)

Exhibit 6. Geographical break-up of PI’s overall revenues

100% 3% 3% 4% 4%
8% 5% 8% 10% 8%
6%
23% 14%
75% 22%
36%
39%
29% 38%
22%
50%
14% 26%
25%
42% 40% 37% 34%
26%
0%
FY16 FY17 FY18 FY19 FY20
India Asia (excluding India) North America Europe RoW

Concentration risk likely to fade; inorganic acquisition risk

remains
Currently, PI’s top 5 customers (of 12-15 products) constitute 80-85% of CSM revenues.
Hence, to reduce the concentration risk in terms of both customers and products, PI has over
the years been trying to diversify and foray into other segments such as pharmaceuticals,
nutraceuticals, etc. On the basis of the available technology, management has indicated that
it is starting to enter the API/intermediates space and would like to replicate the success
achieved in the agrochemicals space.
Further, the majority of PI’s upcoming production capacity (at the expense of INR 6bn) at its
Jambusar plant is largely focused towards performance, fine and specialty chemicals; this
indicates that it is actively looking beyond agrochemicals.
Exhibit 7. PI’s expected production capacity coming up at its Jambusar plant

Product category Capacity (MTPA) Number of products
Performance chemicals 13,000 2
Fine Chemicals 7,500 13
Herbicides and intermediates 5,650 17
Pyrazoles 5,500 1
Insecticides and intermediates 4,800 12
Fungicides and intermediates 3,550 8
Fluorospecialty chemicals 2,000 1
Pharma intermediates 1,000 1
Specialty chemicals 1,000 5
Other R&D products 240 1
Total 44,240 61
Source: Company, Environmental clearance, JM Financial
PI has already started supplying advanced intermediates for Covid-19 drugs and is working
on pharma intermediates on a commercial scale with more than 10 products. PI is still
evaluating the percentage allocation of the recent QIP proceeds of INR 20bn to the pharma
business. To provide a jump start to its pharma segment, it is looking to acquire suitable
pharma assets. It remains to be seen how management overcomes the acquisition hurdle and
whether it is able to achieve desired asset turns of 1.5-2.0x. This, in our view, is a key risk.
However, we draw comfort from management’s guidance of ~20-25% revenue contribution
from pharma in the next 3-4 years.
Exhibit 8. PI’s key competitors in the CSM space

Company Country Corporate Structure/Listing CSM Activities
Crop Protection Pharmaceuticals Specialty Chemicals
Saltigo Germany Subsidiary of Lanxess - A listed Company in Germany √ √ √
DPx Holdings Austria Patheon √ √ √
Lonza Switzerland Listed √ √ √
CABB (Finland)UK Not listed √ √ √
PI Industries India Listed in BSE and NSE √ × ×
Source: Company, Industry, JM Financial

Domestic Agro-chemicals business: niche product portfolio

PI, with over 70,000 retail outlets and 10,000 distributors, has ~6% market share in the
domestic agrochemicals business. PI’s domestic products have a significantly lower presence
in the southern belt where the company has been trying to increase its footprint. With the
recent acquisition of IsAgro, PI is going to utilise IsAgro’s strong distribution network for the
horticulture segment and expects to benefit by cross leveraging the marketing channels of
PI and IsAgro.
In the domestic market, PI focuses on manufacturing and/or marketing of agrochemicals

through a) In-licensing of newly launched or patented molecules from multinational
innovators to register and market agrochemicals in India; b) manufacturing and marketing
of branded generic agrochemicals; and c) co-market early stage lifecycle agrochemicals
using its countrywide marketing set up in India. In-licensing gives PI a competitive
advantage by giving access to newly launched or patented products. In-licensed products
account for ~60-65% of PI’s agrochemical sales.
In FY19, PI entered the sugarcane protection segment with the launch of Cosko and
strengthened its position in the rice and chilli protection segment, with the launch of
Fantom. In FY20, PI launched two new products including a wheat herbicide Awrika
(Pyroxasulfone, for phalaris minor weed which had developed resistance to existing
herbicides). Over the next few years, it intends to rationalise low-margin products and focus
on products for rice, wheat, sugarcane, cotton and soybean crops.
In 1HFY21, PI launched Londax Power, which is originally a DuPont product (divested to

Kumiai). For the Indian market, PI is the exclusive distributor of this brand. It also launched
Shield, which is developed through in-house R&D of an existing molecule with new
innovative formulation that has been specifically launched for disease control in rice. Going
forward, PI expects to launch 25 products over next 5 years for row and horticulture corps.
Exhibit 9. PI’s product portfolio in the domestic market

Year Brand Tehnicals Product type Category Crops
1HFY21 Londax Bensulfuron Methyl 0.6% + Pretilachlor 6% GR In-licensed (Kumiai) Herbicide Rice
Shield Iprobenfos Branded generic Fungicide Rice
FY20 Awkira Pyroxasulfone In-licensed (Kumiai) Herbicide Wheat
Cosko SC Rynaxypyr Co-marketed (FMC) Insecticide Cotton, corn, ground nut, chilli
FY19 Fantom Picoxystrobin 6.78% + Tricycloazole 20.33% Fungicide Rice & Chilli
Cosko Rynaxypyr Co-marketed (FMC) Insecticide Fruits & vegetables
FY18 Header Pyraclostrobin Co-marketed (BASF) Fungicide Cotton, wheat, maize
Fender Fluxapyroxad 6.25% + Epoxiconazole 6.25% Co-marketed (BASF) Fungicide Multiple
Visma Pyraclostrobin 12.8% + Boscalid 25.2% Co-marketed (BASF) Fungicide Cotton, wheat, maize
Humesol Humic Acid 18% +Fulvic Acid 1.5% Specialty Multiple
Elite Topramezone Co-marketed (BASF) Herbicide Maize
FY17 Legacee Fenoxaprop-p-ethyl Co-marketed Herbicide Rice
FY16 Vibrant Thiocyclam Hydrogen Oxalate In-licensed (Nippon) Insecticide Rice
Biovita Ascophyllum Nodosum In-licensed PGR Multiple
Perido Propiconazole Fungicide Rice, Wheat, Groundnut, Soybean, Tea
FY15 Keefun Tolfenpyrad In-licensed Insecticide Cabbage, Okra
Bunker Pendimethlin Branded generic Herbicide Rice, Wheat, Cotton, Soybean
FY14 Melsa Pinoxaden Co-marketed (Syngenta) Herbicide Wheat
Pimix Metsulfuron methyl 10% + Chlorimuron etyhl 10% Co-marketed Herbicide Rice
FY13 Osheen Dinotefuran In-licensed (Mitsui) Insecticide Rice, cotton
Fluton Flubendiamide In-licensed (Nichino) Insecticide Rice, cotton, cabbage, tomato, pigeon pea
Cuprina Copper Oxychloride Branded generic Fungicide Fruits & vegetables
FY12 Clutch Pyraclostrobin 5% + Metiram 55% Co-marketed (BASF) Fungicide Tomato, Potato, Grapes
Sanipeb Propineb Co-marketed Fungicide Horticulture crops
Wicket Clodinafop-propargyl Branded generic Herbicide Wheat
Oval Acephate Branded generic Insecticide Cotton, sunflower
FY10 Nominee Gold Bispyribac Sodium In-licensed (Kumiai) Herbicide Rice
Source: Company, JM Financial, Industry

PI - due to its niche product portfolio - has set up a high entry barriers in the domestic
business. We expect PI’s domestic agro chemicals sales to witness a 11% CAGR over FY21-
23E and reach INR 15.5bn by FY23E on account of a) likely substantial contribution from
Londax power (herbicide for rice) and Awkira (herbicide for wheat) in the coming years; b)
synergies arising out of IsAgro’s domestic distribution channel; and c) sustained
contribution from other older in-licensed products where it still enjoys a significant market
share due to in-licensing/co-marketing.
Exhibit 10. PI’s domestic sales likely to witness 11% CAGR over FY21-23E
18,000 50%
39%
13,500 30%
20% 21%
9,000 10%
2% 12% 10%
-10%
4,500 -10%
-13% -13%
0 -30%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
Domestic sales (INR mn) YoY growth (%) (RHS) FY23E

Key risks for this segment:
a) The agriculture industry is seasonal and cyclical in nature and subject to the vagaries of
nature to the extent of monsoon and prevailing climatic conditions. Unfavourable
weather/climatic conditions, poor rainfall, seasonal fluctuations and commodity crop price
variations could adversely affect the company.
b) Agri-input activities could be adversely affected by the introduction of alternative pest

management and crop protection measures such as bio-technology products, pest resistant
seeds or genetically modified crops.
c) If any global innovator, from whom in-licensing is done, establishes a presence in the
Indian market, opportunity will be lost.


Exhibit 11. Segment wise Revenue contribution and expected growth
INR m n FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E
Segm ental Revenue (INR m n)
Domestic 10,669 9,245 9,448 8,534 10,356 9,000 12,550 14,056 15,462
CSM 11,634 12,728 14,385 14,553 18,053 24,660 33,220 41,525 51,491
Total 22,303 21,973 23,833 23,087 28,409 33,660 45,770 55,581 66,953
Revenue YoY grow th (%)
Domestic 20.4% -13.3% 2.2% -9.7% 21.4% -13.1% 39.4% 12.0% 10.0%
CSM 19.2% 9.4% 13.0% 1.2% 24.0% 36.6% 34.7% 25.0% 24.0%
Total 19.8% -1.5% 8.5% -3.1% 23.1% 18.5% 36.0% 21.4% 20.5%
Revenue contribution (%)
Domestic 48% 42% 40% 37% 36% 27% 27% 25% 23%
CSM 52% 58% 60% 63% 64% 73% 73% 75% 77%
We expect PI to demonstrate a 25% revenue CAGR over FY21-23E while strengthening of

EBITDA margins due to positive operating leverage on account of better utilisation is likely to
aid EBITDA to demonstrate a 29% CAGR over FY21-23E.
Exhibit 12. PI’s overall revenue to witness 25% CAGR over FY21-23E Exhibit 13. PI’s EBITDA margins to rise steadily over FY21-23E
70 40% 16,000 28%
24%
23% 21% 23% 24%
21%
29% 30% 20% 20%
53 30% 12,000 21%
23% 16%
16% 20%
35 18% 20% 8,000 14%
8%
18 10%
4,000 7%
2%
0 0%
0 0%
FY15
FY17
FY18
FY19
FY20
FY21
FY16
FY22E
FY23E
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Gross Sales (INR Bn) YoY Growth % (RHS)
EBITDA (INR mn) EBITDA Margin % (RHS)
Exhibit 14. PAT is likely to demonstrate 25% CAGR over FY21-23E Exhibit 15. ROE and ROCE are likely to remain at ~17%
12,000 19% 20%
17% 17% 17% 34%
15%
14%
9,000 14% 13% 15%
28%
10%
6,000 10%
22%
3,000 5% 16%
0 0% 10%
FY15
FY16
FY17
FY19
FY20
FY21
FY18
FY22E
FY23E
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
PAT (INR mn) PAT margin (%) (RHS) RoE RoCE


Valuation
We value the company at 40x FY23E EPS (at ~13-14% premium to its 3-year average 1-year
forward multiple) to arrive at a TP of INR 2,995 and assume coverage with BUY. Our
premium to its historical and current valuation is justified on account of a) entry into
performance, fine chemicals and pharma segments, which would put PI in the league of
global CSM players offering services across segments; b) increased contribution from the
domestic market on account of IsAgro acquisition and new product launches; and c)
increased utilisation of two of its plants (which are currently at 50-70% utilisation) and two
more plants (MPP5 and MPP 10) coming on-stream in the next 2-3 years.
Exhibit 16. PI 1-year forward P/E chart

3,000
42.0x
2,250
32.0x
1,500
21.0x
750
0
Exhibit 17. PI 1-year forward P/B chart Exhibit 18. PI 1-year forward EV/EBITDA chart
3,000 3,000
29.0x
6.5x
2,250 2,250
5.0x 20.0x
1,500 1,500
4.0x 15.0x
750 750
0 0

Company profile
Founded in 1946 as Mewar Oil & General Mills Ltd, PI Industries is a market leader in the
agrochemical market with a unique business model across the entire value chain from R&D
and distribution, to providing innovative solution services.
PI Industries has a broad Agrochemical portfolio pipeline from generic pesticides to focused
speciality products. It also has a robust services suite comprising of R&D, CSM and end-to-
end distribution services.
Exhibit 19. PI Industries' R&D and Manufacturing facilities

Location Type of Facility
Udaipur, Rajasthan R&D plant
Kilo plant
Pilot plant
Manufacturing of intermediates and
Panoli Unit 1, Ankleshw ar, Gujarat active ingredients
Panoli Unit 2, Ankleshw ar, Gujarat Formulations and w arehouse
Jambusar Unit 1, Jambusar, Gujarat active ingredients
Jambusar Unit 2, Jambusar, Gujarat active ingredients
Panoli , Ankleshw ar, Gujarat (Manufacturing facility of Manufacturing of intermediates and
Isagro) active ingredients
Board of Directors
- Mr. Narayan K. Seshadri, Independent Non-Executive Chairman
- Mr. Mayank Singhal ,Vice Chairman and Managing Director
- Dr. Raman Ramachandran , Managing Director & CEO
- Mr. Rajnish Sarna , Executive Director
- Dr. K.V.S Ram Rao, Executive Director
- Mr. Arvind Singhal ,Non Independent - Non Executive Director
- Mrs. Ramni Nirula, Independent Non-Executive Director
- Dr. T.S. Balganesh, Independent Non-Executive Director
- Mr. Pravin K. Laheri, Independent Non-Executive Director
- Ms. Lisa J Brown, Independent Director, Independent Director

Financial Tables (Standalone)

Net Sales 28,409 33,068 42,762 55,581 66,953 Shareholders’ Fund 22,747 26,368 52,910 61,371 71,442
Sales Growth 24.8% 16.4% 29.3% 30.0% 20.5% Share Capital 138 138 152 152 152
Other Operating Income 0 0 0 0 0 Reserves & Surplus 22,609 26,230 52,758 61,220 71,290
Total Revenue 28,409 33,068 42,762 55,581 66,953 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 15,502 18,128 23,865 30,959 37,293 Minority Interest 0 0 0 0 0
Personnel Cost 2,625 3,113 3,659 4,446 5,335 Total Loans 99 5,077 2,574 74 -2,426
Other Expenses 4,551 4,850 5,387 6,782 7,935 Def. Tax Liab. / Assets (-) -127 145 741 930 1,154
EBITDA 5,731 6,977 9,851 13,394 16,390 Total - Equity & Liab. 22,719 31,590 56,225 62,376 70,171
EBITDA Margin 20.2% 21.1% 23.0% 24.1% 24.5% Net Fixed Assets 13,667 18,964 21,321 26,272 30,168
EBITDA Growth 16.5% 21.7% 41.2% 36.0% 22.4% Gross Fixed Assets 14,732 20,784 24,417 30,270 35,936
Depn. & Amort. 926 1,332 1,603 1,939 2,317 Intangible Assets 350 393 493 536 579
EBIT 4,805 5,645 8,248 11,456 14,072 Less: Depn. & Amort. 2,959 4,270 5,873 7,815 10,132
Other Income 600 479 1,133 1,166 857 Capital WIP 1,544 2,057 2,284 3,281 3,786
Finance Cost 59 180 281 44 -39 Investments 1,229 4,542 21,671 19,154 19,154
PBT before Excep. & Forex 5,346 5,944 9,100 12,577 14,968 Current Assets 16,424 17,413 25,625 33,149 40,361
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 5,357 7,199 9,652 10,888 13,115
PBT 5,346 5,944 9,100 12,577 14,968 Sundry Debtors 6,618 5,483 6,206 9,137 11,006
Taxes 1,269 1,521 1,911 3,144 3,742 Cash & Bank Balances 831 1,092 972 7,117 9,003
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 543 643 138 1,062 1,280
Assoc. Profit/Min. Int.(-) 0 0 0 0 0 Other Current Assets 3,075 2,995 8,657 4,945 5,957
Reported Net Profit 4,077 4,423 7,189 9,433 11,226 Current Liab. & Prov. 8,601 9,329 12,392 16,199 19,513
Adjusted Net Profit 4,077 4,423 7,189 9,433 11,226 Current Liabilities 5,141 5,538 8,280 9,405 11,329
Diluted Share Cap. (mn) 138.1 138.1 148.0 151.7 151.7 Net Current Assets 7,823 8,084 13,233 16,950 20,848
Diluted EPS (INR) 29.5 32.0 48.6 62.2 74.0 Total – Assets 22,719 31,590 56,225 62,376 70,171
Diluted EPS Growth 17.2% 8.5% 51.6% 28.0% 19.0% Source: Company, JM Financial
Total Dividend + Tax 739 802 759 971 1,156

Dupont Analysis
Net Margin 14.4% 13.4% 16.8% 17.0% 16.8%
Depn. & Amort. 926 1,311 1,603 1,942 2,317
Asset Turnover (x) 1.3 1.2 1.0 0.9 1.0
Net Interest Exp. / Inc. (-) -541 -299 -221 -1,122 -896
Inc (-) / Dec in WCap. -1,329 -224 -1,071 2,428 -2,012
Others 0 0 -575 0 0 RoE 19.5% 18.0% 18.1% 16.5% 16.9%
Taxes Paid -1,144 -1,025 -1,555 -2,956 -3,518

Free Cash Flow -479 -901 3,902 5,977 4,646 BV/Share (INR) 164.7 191.0 356.8 404.9 470.9
Inc (-) / Dec in Investments 381 -3,313 -6,848 2,517 0 ROIC 19.5% 18.0% 22.2% 25.3% 27.8%
Others 600 479 -14,052 1,166 857 ROE 19.5% 18.0% 18.1% 16.5% 16.9%
Investing Cash Flow -2,756 -9,441 -24,279 -3,210 -5,357 Net Debt/Equity (x) 0.0 0.2 -0.2 -0.4 -0.4
Dividend + Tax thereon -739 -802 -607 -971 -1,156 P/B (x) 15.8 13.6 7.3 6.4 5.5
Inc / Dec (-) in Loans -423 4,798 -2,032 -2,544 -2,461 EV/EBITDA (x) 68.9 57.2 37.9 27.9 22.5
Others 287 0 19,516 0 0 EV/Sales (x) 13.9 12.1 8.9 6.7 5.5
Financing Cash Flow -876 3,996 16,891 -3,515 -3,617 Debtor days 85 61 53 60 60
Inc / Dec (-) in Cash -373 261 -107 6,145 1,886 Inventory days 69 79 82 72 72
Opening Cash Balance 1,204 831 1,079 972 7,117 Creditor days 83 77 86 81 82
Closing Cash Balance 831 1,092 972 7,117 9,003 Source: Company, JM Financial

SRF Ltd | BUY

Adaptive chemistry at work
SRF has - over the years - adapted well from being a tyre cord fabrics manufacturer to Dayanand Mittal
becoming one of the leading fluorine-based specialty chemicals players in the country. dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
Continuous investments in its chemicals business and R&D have laid a good platform for Krishan Parwani
krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
future growth. Increasing contribution from the chemicals business is likely to improve
overall earnings growth. Hence, we expect SRF to demonstrate Revenue/EBITDA/PAT
CAGR of 25%/19%/18% over FY21-23E. We value SRF on an SoTP basis and arrive at a
TP of INR 7,600 (implying 27x FY23E EPS). We assume coverage with a BUY rating.
Chemicals business, strong R&D a growth propellant: We expect SRF’s chemicals business
revenues to witness a 25% CAGR over FY21-23E, led by a 25% CAGR in refrigerants, 20%
Recommendation and Price Target
CAGR in industrial solvents and polymers and an 18% CAGR in speciality chemicals
Current Reco. BUY
segments. SRF’s unique ability to manufacture latest-generation refrigerants gives it an edge Current Price Target (12M) 7,600
in the refrigerant gas segment. Further, its foray into the poly tetra fluoro ethylene (PTFE) Upside/(Downside) 16.6%
space using R-22 as feedstock and additional chloromethane capacities bode well for the
industrial chemicals segment. Its existing client base and new product offerings are growth Key Data – SRF IN
Current Market Price INR6,516
drivers for the specialty chemicals business.
Packaging films margins to normalise: Revenues from its packaging films business are likely to Free Float 42%
see a 27% CAGR over FY21-23E primarily led by: a) additional volumes from the Hungary
plant ramp-up; b) increased capacity utilisation at the Thailand plant; c) continued focus on 3-mon avg daily val (mn) INR1,415.7/US$19.5
value-added-products (launched 4 new products in 1HFY21); and d) gradual contribution 52-week range 6,999/3,370
from 60,000 tpa BOPP Indore line over the next 20 months (capex of INR 4.24bn). However, Sensex/Nifty 51,423/15,436
INR/US$ 72.4
going forward, management has guided for margins to normalise on account of: a)
additional capacities coming online and b) softening of BOPET prices, but commissioning of Price Performance
the resin plant in Thailand is likely to offset the margin decline to some extent. % 1M 6M 12M
Absolute 1.4 26.9 91.1
Gradual pick-up for technical textiles demand : Management highlighted that as at end- Relative* -3.8 9.0 20.5
1HFY21, TT plants were operating at full capacities and volumes improved on the back of * To the BSE Sensex
faster-than-expected recovery in the domestic tyre industry. Hence, we expect technical
textiles revenues to recover along with the recovery in the tyre industry and register 18%
revenue CAGR over FY21-23E, primarily on account of the low base of FY21. Going forward,
we expect technical textiles' margins to improve ~120bps in FY22-23E, primarily on the back
of the margin recovery seen in the latter half of FY21, led by a demand uptick from the
automobile industry and resultant full-capacity utilisations.
Increasing contribution from chemicals business to drive growth — BUY: We expect SRF to
demonstrate Revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY21-23E on the back of
increasing contribution from the chemicals segment; this is likely to offset the moderation in
packaging films’ margins. We value SRF on an SoTP basis to arrive at a target price of INR
7,600 (implying 27x FY23E EPS) and assume coverage on the stock with a BUY rating. Key
risks to our call are a downturn in agrochemicals or slowdown in SRF’s 2-3 key molecules,
which constitute 50-55% of specialty chemicals sales.

Net Sales 76,927 70,621 82,954 1,06,526 1,30,617
Sales Growth (%) 35.3 -8.2 17.5 28.4 22.6 JM Financial Research is also available on:
EBITDA Margin (%) 17.6 20.2 25.5 23.0 23.1
ROE (%) 16.7 20.2 20.3 17.6 19.1
P/E (x) 58.4 40.9 31.7 29.1 22.8
Dividend Yield (%) 0.2 0.3 0.4 0.4 0.5

SRF Ltd 31 May 2021
Chemicals business: strong R&D, a growth propellant

SRF’s chemicals business primarily consists of two sub-segments: i) Fluorochemicals (which
includes refrigerants, pharma propellants, and industrial chemicals); and ii) Fluoro-specialty
chemicals (which supplies intermediates to global agrochemical and pharmaceutical majors).
We expect SRF’s chemicals business revenues to witness a 25% CAGR over FY21-23E, led by
a 25% CAGR in refrigerants, 20% CAGR in industrial solvents and polymers and an 18%
CAGR in the specialty chemicals segment. SRF’s unique ability to manufacture latest-
generation refrigerants in-house gives it an edge in the refrigerant gas segment, while its
foray into poly tetra fluoro ethylene (PTFE) using R-22 as a feedstock and additional
chloromethane capacity bodes well for the industrial chemicals segment. Existing client
relationships and new product offerings are likely to be growth drivers for the specialty
chemicals business.
Exhibit 1. Chemicals revenue to see 25% CAGR over FY21-23E

60,000 70%
52%
45,000 50%
32% 30%
30,000 23% 25% 25% 30%
22%
15,000 5% 10%
-6%
0 -10%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Chemicals revenues (INR mn) YoY growth (RHS) (%)

SRF’s chemicals business margins were impacted severely after FY16 on lower contribution
from the specialty chemicals business led by a slowdown in the global agrochemicals industry
(SRF’s end-consumer industry). However, its contribution has started rising since FY20 with
the recovery in the agrochemicals industry. We believe this continued recovery, along with a
better product mix in refrigerant and industrial segments, augurs well for overall EBIT margins
of chemicals, which are likely to improve to 22% by FY22-23E.
Exhibit 2. Chemicals EBIT margins are likely to improve to 22% by FY22-23E.

12,200 32%
24% 24%
9,150 22% 22% 24%
19% 20%
17% 17%
16%
6,100 16%
3,050 8%
0 0%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Chemicals EBIT (INR mn) EBIT margin (RHS) (%)


SRF Ltd 31 May 2021
SRF manufactures fluorine-based chemicals that help in performance enhancement of end

products and are used primarily in agrochemical/pharmaceutical industries. These fluorinated
compounds have acceptance as 35% of agrochemicals and 30% of modern pharmaceutical
drugs contain fluorine. SRF has built capabilities to provide complete support across the value
chain i.e. easy access to raw materials, in-house R&D, pilot production and dedicated plants
for commercial production. SRF has 2 R&D centres in India and had filed 205 patents (both
product and process) as at end-FY20; of these, 70 have been granted. These specialty
products are manufactured at 2 major locations - Bhiwadi in Rajasthan and Dahej in Gujarat.
Exhibit 3. Number of patents granted sharply rose to 70 in FY20

250
205
200
170
150 135
111
100 81
70
54
50 39
33
25
18 18 13
10 4 6
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
No of patents filed No of patents granted
Exhibit 4. SRF’s R&D expenditure has seen a CAGR of 20% over Exhibit 5. SRF’s cumulative capex in the chemicals business has been
FY12-20 INR 47bn since FY06
1,600 10.0% 50 47
45
8.0%
1,200 6.6% 7.5% 38 35
4.8% 27
800 4.5% 4.5% 5.0% 24
4.0% 25 23
4.3%
3.0% 19
2.5%
400 2.5% 14
13 10
5 6
5
2 2 3
0 0.0%
FY12 FY14 FY16 FY18 FY20
Total R&D expenditure (INR mn) 0
FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20
R&D as % of chemicals revenues (RHS) (%)

SRF Ltd 31 May 2021
Fluoro-specialty chemicals
SRF has developed strong entry barriers for other players in the specialty chemicals business
with its knowledge and expertise in handling and manufacturing fluorine-based molecules.
Key specialty products that SRF manufacturers are Meta Amino Benzotrifluoride (MABTF), 2-
Trifluoromethyl Benzamide, 3-Difluoromethyl-1-methyl-1H-pyrazole-4-carboxylic acid. The
raw materials mainly required in manufacturing the above-mentioned items are
Benzotrichloride, Trichloroacetyl chloride, Pyrazole acid, Sulphuric acid, Hydrofluoric acid,
Methanol and Sodium hydroxide. These products are supplied to global agrochemicals
players such as Syngenta, Bayer, etc.
SRF’s Fluoro-specialty chemicals’ revenues were severely impacted during FY15-18 due to a
slowdown in the global agrochemicals industry. However, with the revival in the industry,
revenues clocked a 69% CAGR over FY18-20. Going forward, despite the high base, we
expect specialty chemicals to register a healthy 18% revenues CAGR over FY21-23E on the
back of a) the growing need for global innovators to outsource R&D and/or production, b)
increasing demand of fluorine-based molecules from pharmaceutical and agrochemical
producers; and c) new capacities coming online.
Exhibit 6. Fluoro-specialty chemicals’ revenues likely to see a 18% CAGR over FY21-23E
44,000
33,000
INR mn
22,000
11,000
0
Refrigerant gases: SRF is the market leader of refrigerant gases in India with ~40% market
share. In the refrigerants space, SRF manufactures R-22, R-125, R-32, R-134a and several
other blends such as R-410a, R-407c, and proprietary R-467a (substitute of R-22), among
others. Of these, HFC-134a is the key product for which it is the sole manufacturer in India.
SRF has been using its fluorination expertise and continuously bringing in new blends such as
R-600a, and R-152a. During FY20, company has brought in an additional capacity of
~13,000 tpa of refrigerant gases at its Dahej plant taking it total capacity at Dahej to
~81,000 tpa.
Management highlighted that in 1HFY21, the refrigerant business’ performance was severely
impacted by a) weak demand from automobile and air-conditioning segments and b)
softening global refrigerant prices. Going forward, we expect the refrigerant gases business
to register a healthy ~25% revenues CAGR over FY21-23E on: a) faster recovery in demand,
in line with growth in passenger cars; b) contribution of additional capacity coming online
and debottlenecking of additional capacity; c) possibility of anti dumping duty (ADD) on R-32
(in the past, government had imposed ADD on import of R-134a from China in Jul’16); and
d) a continued rise in exports.

SRF Ltd 31 May 2021
Exhibit 7. Refrigerant gases to register a 25% revenue CAGR over FY21-23E

16,000
12,000
INR mn
8,000
4,000
0
Industrial solvents: SRF currently manufactures industrial solvents such as chloromethane, tri-
chloro ethylene, and per-chloro-ethylene which are used for de-greasing purposes by various
industries. We expect industrial solvents to clock 20% revenue CAGR over FY21-23E on
account of: a) planned chloromethane capacity expansion; and b) set-up of an integrated
facility for development of PTFE with a R22 plant as feedstock in Dahej.
Exhibit 8. Industrial solvents to register 20% revenue CAGR over FY21-23E

5,200
3,900
INR mn
2,600
1,300
0

SRF Ltd 31 May 2021
Packaging films business: margins to normalise

SRF is among the top 15 players in the global BOPET film supply in terms of installed capacity
(total tonnage). The company has plants in India at Kashipur, Indore SEZ and Pithampur DTA,
and overseas in South Africa, Thailand and Hungary. It provides packaging solutions to food
and non-food category of FMCG and industrial products and manufactures Bi-axially
Oriented Polyethylene Terephthalate (BOPET), Bi-axially Oriented Polypropylene (BOPP) films
and also offers a range of metalised and coated film products to its customers.
India’s packaging films industry has a several growth levers in place including: a) low per-
capita consumption (4.3 kg/person/annum); b) growing demand from the food processing
sector; c) increasing use from pharmaceutical packaging (due to barriers against moisture,
heat, flame, etc.); d) a shift towards flexible packaging driven by its high product-to-package
ratio and e) the recyclable nature of polyester. BOPET/BOPP films markets in India have been
valued at USD 1.1bn/1.4bn and are expected to post a 9.1%/8.4% CAGR over CY20-25E.
Exhibit 9. BOPET market in India is expected to post a 9.1% CAGR Exhibit 10. BOPP market in India is expected to post a 8.4% CAGR
over CY20-25E over CY20-25E
2.0 2.4
1.7 2.1
1.5 1.8
1.1 1.4
1.0 1.2
0.7 0.9
0.5 0.6
0.0 0.0
CY15 CY20E CY25E CY15 CY20E CY25E
Uflex industries and Jiangshu Shuangxing color plastic are some of the major players in the
BOPET market and Jindal PolyFilms, Vibac, Toray plastics, Treofan Group are a few of the
major players in the BOPP market. The following table lists out production capacities of Indian
players in India and overseas.
Exhibit 11. Indian players packaging films production capacities (‘000 tonnes)
Installed Capacity ('000 tonnes) PET Resin/ Chips Coated Film s BOPP Film s BOPET Film s Other Film s/ Plastics
Uflex Limited NA NA 65 256 118
Polyplex Corporation Limited 273 24 35 215 95
Jindal Polyfilms Limited 176 14 466 127 72
SRF Limited 87 7 64 123 60
Ester Industries Limited 67 NA NA 60 30
Garw are Polyster Limited 66 NA 12 48 NA
SML Films NA NA NA 72 32
Total 669 45 642 901 407

SRF Ltd 31 May 2021
The packaging films business is likely to see a 27% revenue CAGR over FY21-23E primarily
led by a) additional volumes from the ramp-up of the Hungary plant; b) increased capacity
utilisation of the Thailand plant; c) continued focus on value-added-products (launched 4
new products in 1HFY21); and d) gradual contribution from 60,000 tpa BOPP Indore line over
the next 20 months (capex outlay of INR 4.24bn).
Exhibit 12. Packaging films likely to see a 27% revenue CAGR over FY21-23E
56,000 49% 50%
41%
42,000 35%
30%
26% 26%
24%
28,000 20%
9%
14,000 5%
4%
-2%
0 -10%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Packaging films revenue (INR mn) YoY growth (RHS) (%)
Packaging films’ EBIT margins have steadily risen through FY15-20 due to positive operating
leverage and value-added products. FY21E is likely to see record 28% margins due to super-
normal price realisations in 1HFY21 on a pandemic-led demand spike. However, going
forward, management has guided for margins to normalise on account of a) additional
capacities coming online and b) softening of BOPET prices. However, commissioning of the
resin plant in Thailand is likely to offset the margin decline to some extent.
Exhibit 13. Packaging films EBIT margins are likely to normalise to 21% by FY22-23E
12,000 32%
27%
21% 21% 21%

9,000 24%
16%
6,000 14% 14% 16%
13%
3,000 5% 8%
0 0%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Packaging films EBIT (INR mn) EBIT margin (%) (RHS)


SRF Ltd 31 May 2021
Technical textiles business: legacy continues

SRF’s technical textiles (TT) business involves the sale of nylon tyre cord fabrics (NTCFs),
polyester tyre cord fabrics, belting fabrics and polyester industrial yarn. NTCF is the key
product under this business segment (70-75% revenue) and its demand is facing a structural
downturn given the trend of radialisation in the tire industry, as steel cords are widely
used in the production of radial tires. Other offerings in this segment are belting fabrics (used
in conveyer belts) and polyester industrial yarn (used in safety belts, fishnets, etc.).
Exhibit 14. SRF had 35% market share in India’s NTCF production of Exhibit 15. SRF had 55% market share in India’s belting fabrics
135,000MT in CY19 production of ~21,000MT in CY19
27%
30%
35%
55%
21% 15%
17%
SRF Ltd MIT Century Enka Imports SRF Ltd Other Local Manufacturing Imports
SRF’s TT revenues declined over the years and capacities were underutilised due to a) the
global slowdown in the automobile industry and b) poor demand from both tyre cord fabric
and polyester industrial yarn segments. Given the unviable economics, the company was
forced to close its TT plant in Rayong, Thailand in FY20. Management highlighted that at
end-1HFY21, TT plants are operating at full capacities and volumes have improved on the
back of the faster-than-expected recovery in domestic tyre industry. Hence, we expect TT
revenues to recover along with the recovery in the tyre industry and register 18% CAGR over
FY21-23E, primarily on account of the low base of FY21.
Exhibit 16. Technical textiles revenues are likely to see 18% CAGR over FY21-23E
22,000 30%
22%
14%
16,500 15%
6%
11,000 -6% 0%
-7% -7%
-9% -9%
5,500 -15%
-22%
0 -30%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Technical textiles revenue (INR mn) YoY growth (RHS) (%)


SRF Ltd 31 May 2021
EBIT margins improved ~550bps during FY16-19 mainly on account of process innovation
and cost reduction. Margins were impacted in FY20 owing to currency appreciation and the
downturn in the automobile industry. Going forward, we expect TT margins to improve
~120bps over FY22-23E, primarily on the back of recovery in margins witnessed in FY21 led
by a demand uptick from the automobile industry and resultant full-capacity utilisations.
Exhibit 17. Technical textiles margins are likely to improve to 15.5% by FY22-23E
3,000 18%
15.1% 15.5% 15.5%
14% 14.3%
13%
2,250 14%
11%
10% 9.5%
1,500 9%
750 5%
0 0%
FY15
FY17
FY18
FY19
FY21
FY16
FY20
FY22E
FY23E
Technical textiles EBIT (INR mn) EBIT margin (%) (RHS)

SRF Ltd 31 May 2021

Exhibit 18. Segment-wise Revenue and EBIT contribution and expected growth
INR mn FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E
Segment revenues
Technical textiles 20,396 19,050 20,102 18,388 17,349 13,576 12,401 15,129 17,247
Chemicals 12,634 16,398 17,214 16,114 24,454 29,750 36,447 45,559 56,948
Packaging films 12,460 13,606 14,092 17,823 26,533 26,040 32,917 42,792 53,063
Others 1,208 1,309 730 4,573 2,716 2,783 2,320 3,132 3,445
Unallocated 91 71 43 49 57 54 87 87 87
Total 46,789 50,434 52,181 56,947 71,109 72,203 84,172 1,06,700 1,30,791
YoY growth (%)
Technical textiles -7% -7% 6% -9% -6% -22% -9% 22% 14%
Chemicals 32% 30% 5% -6% 52% 22% 23% 25% 25%
Packaging films 41% 9% 4% 26% 49% -2% 26% 30% 24%
Others -20% 8% -44% 526% -41% 2% -17% 35% 10%
Unallocated 33% -22% -40% 15% 16% -4% 60% 0% 0%
Total 12% 8% 3% 9% 25% 2% 17% 27% 23%
Technical textiles 44% 38% 39% 32% 24% 19% 15% 14% 13%
Chemicals 27% 33% 33% 28% 34% 41% 43% 43% 44%
Packaging films 27% 27% 27% 31% 37% 36% 39% 40% 41%
Others 3% 3% 1% 8% 4% 4% 3% 3% 3%
Unallocated 0% 0% 0% 0% 0% 0% 0% 0% 0%
Segmental EBIT
Technical textiles 1,957 1,810 2,543 2,529 2,615 1,515 1,769 2,345 2,673
Chemicals 2,983 3,936 3,273 2,694 3,843 5,115 7,281 10,023 12,529
Packaging films 636 1,940 1,970 2,298 4,115 5,556 8,977 8,986 11,143
Others 1 1 1 444 218 318 256 345 380
Total 5,577 7,688 7,787 7,964 10,790 12,504 18,283 21,700 26,725
EBIT margins (%)
Technical textiles 10% 9.5% 13% 14% 15.1% 11% 14.3% 15.5% 15.5%
Chemicals 24% 24% 19% 17% 16% 17% 20% 22% 22%
Packaging films 5% 14% 14% 13% 16% 21% 27% 21% 21%
Others 0% 0% 0% 10% 8% 11% 11% 11% 11%
Total 12% 15% 15% 14% 15% 17% 22% 20% 20%

SRF Ltd 31 May 2021
Exhibit 19. SRF Revenue and Revenue Growth Exhibit 20. SRF EBITDA and EBITDA Margin %
136 35% 40% 32,000 30%
23%
28%
26% 23%
102 17% 23% 28% 24,000 26%
0%
5% 12% 21%
68 15% 16,000 22%
20%
18%
19%
16%
15%
34 3% 8,000 18%
-8%
0 -10% 0 14%
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY15
FY16
FY18
FY19
FY20
FY21
FY17
FY22E
FY23E
FY23E
FY22E
Gross revenue (INR bn) YoY growth (RHS) (%) EBITDA (INR mn) EBITDA margin (%) (RHS)
Exhibit 21. SRF PAT and PAT margin Exhibit 22. SRF ROE and ROCE
20,000 40% 24%
13%
15,000 30% 18%

12%
14%
10,000 13% 20% 12%
10% 8%
9% 8%
5,000 6% 10% 6%
0 0% 0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY16
FY18
FY20
FY15
FY17
FY19
FY21
FY22E
FY23E

SRF Ltd 31 May 2021
Valuation
We expect SRF to demonstrate revenue/EBITDA/PAT CAGR of 25%/19%/18% over FY20-23E
on the back of increasing contribution from chemicals segment which is likely to offset the
moderation in packaging films’ margins. We value SRF on an SoTP basis to arrive at a target
price of INR 7,600 (implying 27X FY23E EPS) and assume coverage on the stock with a BUY
rating.
Exhibit 23. We value SRF at INR 7,600 (implying 27X FY23E EPS)
Value (INR bn) Value (INR/share)
FY23 EBITDA (INR EV/EBITDA
Segm ents
bn) m ultiple (x)
Technical Textile Business 3.2 6 20 351
Chemicals Business 16.6 19 315 5,407
Packaging Films Business 12.6 10 129 2,218
Others 0.4 6 3 48
Total Business EBITDA 33 468 8,024
Less: Gross Debt 30 517
Add: Cash & Cash Equivalents 5 93
TP 443 7,600
FY23E consolidated EPS 286
Im plied P/E m ultiple 27
Source: JM Financial
Exhibit 24. SRF 1-year P/E chart

7,000
29.0x
5,250
17.0x
3,500
12.0x
1,750
0

SRF Ltd 31 May 2021
Exhibit 25. SRF 1-year forward PB chart Exhibit 26. SRF 1-year forward EV/EBITDA chart
7,000 7,000
17x
4.8x
5,250 5,250
3.5x 11x
3,500 2.2x 3,500

9x
1,750 1,750
0 0

SRF Ltd 31 May 2021
Company profile
SRF started off as Shri Ram Fibres in 1970 establishing its first plant in Manali in 1973
becoming one of the first companies in India to start manufacturing nylon tyre cords. Since
then SRF has diversified into Fluorochemicals, Speciality Chemicals, Engineering Plastics and
Packaging Films while expanding its product range in the Technical Textile business.
Exhibit 27. SRF’s manufacturing plants in India and overseas

Business Segm ents Locations Product
Manufacturing Plants in India
Bhiw adi, Rajasthan Speciality Chemicals: Intermediates for API/AI
Agrochemical Industry: Active Ingredients for Herbicides, Fungicides, Insecticides, etc.
Pharmaceutical Industry: Key starting materials for active pharmaceutical intermediates, contract manufacturing
Chemicals Business Dahej, Gujarat of intermediates/AI for agro and pharma innovators. Also used as intermediates that find application in material
sciences, surface chemistry, etc.
Fluorochemicals: Refrigerants and indutstrial chemicals
Kashi, Uttarakhand BOPET films
Packaging films
SEZ Indore, Madhya Pradesh BOPET films and Polyethylene Terephthalene resin
business
Pithampur, Madhya Pradesh BOPET films and BOPP films
Malanpur, Madhya Pradesh Nylon tyre cord fabric
Technical textiles Thiruvallur, Tamil Nadu Nylon tyre cord fabric, dipped nylon tyre cord fabric, polyester tyre cord fabric and polyester industrial yarn
business Manali, Tamil Nadu Nylon tyre cord fabric and dipped nylon tyre cord fabric
Viralimalai, Tamil Nadu Belting fabric
Kashipur, Uttarakhand Laminated fabrics
Other business
Thiruvallur, Tamil Nadu Coated fabrics
Manufacturing Plants Overseas
Duban, South Africa BOPP films
Packaging films
Rayong, Thailand BOPET films
business
Jasfenyszaru, Hungary BOPET films
Exhibit 28. SRF’s R&D facilities

Locations Facilities
Bhiw adi, Rajasthan Pilot Plant, Kilo Lab, R&D and Testing facility (analytical), Engineering Lab and associated effluent treatment plant facilities
Manali, Tamil Nadu General R&D, Exploratory R&D and Testing facility (analytical)
Manali, Tamil Nadu Pilot Plant, Testing facility and library
Gurugram, Haryana IT Softw are, Electronic Library and Computers
Indore, Madhya Pradesh Pilot facility and Testing facility
Board of Directors
- Mr. Arun Bharat Ram, Chairman
- Mr. Ashish Bharat Ram, Managing Director
- Mr. Kartik Bharat Ram , Deputy Managing Director
- Mr. Pramod Gopaldas Gujarathi, Director
- Dr. Meenakshi Gopinath, Director
- Mr. Puneet Dalmia, Independent Director
- Mr. Tejpreet S. Chopra, Independent Director
- Mr. L. Lakshman, Independent Director
- Mrs. Bharti Gupta Ramola, Independent Director
- Mr. Yash Gupta, Independent Director
- Mr. Vellayan Subbiah, Independent Director

SRF Ltd 31 May 2021

Net Sales 76,927 70,621 82,954 1,06,526 1,30,617 Shareholders’ Fund 41,293 49,333 68,564 80,125 94,885
Sales Growth 35.3% -8.2% 17.5% 28.4% 22.6% Share Capital 585 585 603 603 603
Other Operating Income 0 1,473 1,046 0 0 Reserves & Surplus 40,708 48,748 67,962 79,522 94,282
Total Revenue 76,927 72,094 84,000 1,06,526 1,30,617 Preference Share Capital 0 0 0 0 0
Personnel Cost 5,159 5,419 6,214 6,898 7,656 Total Loans 32,887 32,671 29,307 31,107 30,107
Other Expenses 14,395 15,252 16,058 21,333 26,820 Def. Tax Liab. / Assets (-) 3,420 1,612 3,680 3,680 3,680
EBITDA 13,552 14,549 21,452 24,500 30,179 Total - Equity & Liab. 77,600 83,616 1,01,552 1,14,912 1,28,672
EBITDA Margin 17.6% 20.2% 25.5% 23.0% 23.1% Net Fixed Assets 63,589 75,347 83,818 96,291 1,05,855
EBITDA Growth 49.5% 7.4% 47.4% 14.2% 23.2% Gross Fixed Assets 66,633 75,106 94,379 1,12,379 1,28,379
Depn. & Amort. 3,669 3,886 4,531 5,527 6,436 Intangible Assets 1,089 1,185 1,124 1,124 1,124
Other Income 401 491 545 0 0 Capital WIP 7,536 13,933 7,723 7,723 7,723
Finance Cost 2,016 2,007 1,340 1,555 1,505 Investments 1,047 2,033 4,173 4,173 4,173
Taxes 1,853 -12 4,144 4,354 5,559 Cash & Bank Balances 1,896 1,164 2,820 425 1,267
Diluted EPS (INR) 111.6 159.3 205.6 224.1 286.2 Total – Assets 77,600 83,616 1,01,552 1,14,912 1,28,672
Total Dividend + Tax 832 1,185 1,378 1,502 1,918

Dupont Analysis
Net Margin 8.3% 12.7% 14.3% 12.3% 12.8%
Depn. & Amort. 3,669 3,886 4,531 5,527 6,436
Asset Turnover (x) 1.1 0.9 0.9 1.0 1.1
Net Interest Exp. / Inc. (-) 2,016 2,007 1,340 1,555 1,505
Inc (-) / Dec in WCap. -3,165 -239 1,236 -3,283 -3,355
Others -329 -329 -2,963 0 0 RoE 16.7% 20.2% 20.3% 17.6% 19.1%
Taxes Paid -1,502 -1,427 -2,553 -4,354 -5,559

Free Cash Flow -1,607 -847 5,573 -1,137 5,265 BV/Share (INR) 718.4 858.3 1,176.4 1,374.7 1,628.0
Inc (-) / Dec in Investments 332 -927 -1,887 0 0 ROIC 11.6% 14.2% 14.8% 14.4% 15.7%
Others 91 3,015 -966 0 0 ROE 16.7% 20.2% 20.3% 17.6% 19.1%
Investing Cash Flow -10,142 -11,803 -14,997 -18,000 -16,000 Net Debt/Equity (x) 0.7 0.6 0.3 0.3 0.3
Inc / Dec (-) in Capital 1 0 7,500 0 0 P/E (x) 58.4 40.9 31.7 29.1 22.8
Dividend + Tax thereon 0 0 0 -1,502 -1,918 P/B (x) 9.1 7.6 5.5 4.7 4.0
Inc / Dec (-) in Loans 2,677 3,205 -6,856 1,800 -1,000 EV/EBITDA (x) 29.8 27.7 18.5 16.4 13.2
Others -467 -5,177 -1,709 -1,555 -1,505 EV/Sales (x) 5.2 5.6 4.7 3.7 3.0
Financing Cash Flow 2,211 -1,972 -1,065 -1,258 -4,423 Debtor days 49 45 55 56 56
Inc / Dec (-) in Cash 1,026 -731 1,656 -2,395 841 Inventory days 58 61 64 64 64
Opening Cash Balance 869 1,895 1,165 2,820 425 Creditor days 80 71 93 91 91
Closing Cash Balance 1,895 1,165 2,820 425 1,267 Source: Company, JM Financial

Navin Fluorine | BUY

Fluor’intined the chemistry
Over the years, Navin Fluorine (NFIL) has emerged as a preferred partner when it Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
comes to fluorination chemistry in both agrochemicals and pharma spaces. Its
Krishan Parwani
timely diversification from the legacy refrigerant and inorganic fluoride business has krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
driven margin expansion and overall growth. In our view, NFIL’s growth prospects
seem even brighter with higher contribution from specialty chemicals and CRAMS
segments on account of long term contract and capacity expansions. We value the
company at 40x FY23E EPS to arrive at a TP of INR 3,760, and assume coverage
with a BUY rating.
Specialty Chemicals – capacity expansion and new product launches to drive growth: We
estimate NFIL’s specialty chemicals revenues to witness 22% a CAGR over FY21-23E
(reaching INR 6.8bn in FY23E) factoring in: a) de-bottlenecking and improvement in capacity Recommendation and Price Target
utilisation; b) contribution from 2-3 product launches annually; and c) gradual contribution Current Reco. BUY
from the recently-announced capex of INR 1.95bn. For the high performance products, Current Price Target (12M) 3,760
Upside/(Downside) 17.0%
management expects revenue contribution to commence from 4QFY22E. However, we have
conservatively assumed revenue contribution of INR 4.5bn from the beginning of FY23E and Key Data – NFIL IN
a full ramp-up by FY24E. Current Market Price INR3,213
CRAMS business – capitalising on Pharma opportunity: NFIL is uniquely placed to capture the Market cap (bn) INR159.1/US$2.2
Free Float 68%
USD 85bn global Contract Research and Manufacturing Services (CRAMS) opportunity. We
expect NFIL’s CRAMS revenues to witness a 25% CAGR over FY21-23E and reach INR 4.2bn Diluted share (mn) 49.5
by FY23E (assuming 2.0x asset turn on total investment of INR 2.15bn at Dahej) from INR 3-mon avg daily val (mn) INR1,080.6/US$14.9
2.8bn in FY21. We have based our assumptions on the fact that the company was able to 52-week range 3,659/1,470
Sensex/Nifty 51,423/15,436
reach revenues of INR 1.7bn in FY20 on total capex of INR 1.0bn incurred until FY16. INR/US$ 72.4
Refrigerant gases – demand revival coupled with high-value products augurs well: We
estimate refrigerant gases revenue to witness a 14% CAGR in FY21-23E (reaching INR 2.7bn Price Performance
% 1M 6M 12M
in FY23E) driven by: a) the low base of FY21, b) price revival in both domestic and export
Absolute -4.1 19.6 115.8
markets and c) increased use of R-22 as a feedstock to produce high-value products. Relative* -9.0 2.7 36.0
Inorganic fluorides on a strong growth path: NFIL’s inorganic fluorides business had been * To the BSE Sensex
adversely impacted by the pandemic due to lower capacity utilisation of its end-user
segments (primarily steel players and to some extent glass and oil & gas players). However,
due to a) robust growth in global steel prices and b) the low base of FY21, we expect NFIL’s
inorganics fluorides revenue to register a 17% CAGR over FY21-23E (to INR 2.7bn in FY23E).
BUY and a TP of INR 3,750: We estimate NFIL to demonstrate EPS CAGR of 36% over FY21-
23E. We assume coverage with a BUY rating and value the company at 40x FY23E EPS to
arrive at a TP of INR 3,760. Our valuation premium (compared with the 3-year average 1-year
forward multiple of 25x) is justified on account of i) strong visibility arising from incremental
CRAMS revenue; ii) contracted revenue from high-performance products; and iii) gradual
contribution from additional capacities. Key risks: a) cancellation/delay in off-take of its long-
term contracts and b) a slowdown in the global agrochemicals industry

Net Sales 9,959 10,616 11,794 14,088 21,548
EBITDA Margin (%) 21.9 24.8 26.2 27.4 28.0
Diluted EPS Growth (%) -17.2 173.9 -39.6 16.6 59.7
ROE (%) 14.5 32.9 16.2 16.4 22.2
P/E (x) 106.5 38.9 64.4 55.3 34.6
Dividend Yield (%) 0.4 0.4 0.2 0.3 0.4

Navin Fluorine 31 May 2021
Specialty Chemicals – capacity expansion and new product

launches to drive growth
Fluorine-based chemicals, in the last few years, have gained traction in pharmaceutical and
agrochemical intermediates segments. NFIL used its fluorination expertise and ventured out
of the legacy refrigerant and inorganic fluoride businesses and commenced its specialty
chemicals business in 2000. NFIL’s key customers in this segment are Lupin, Dr Reddy’s,
Aurobindo, Bayer Crop, BASF and Syngenta, among others.
NFIL’s specialty chemicals business struggled during FY15-18 with mere 1.6% revenue CAGR
on account of the downturn in global agrochemicals (due to lower commodity prices) as well
as the domestic pharmaceutical industry as the company was not able to commercialise its
key molecules. However, NFIL generated 30% revenue CAGR for specialty chemicals over
FY18-20 driven by: a) engagements with new clients, b) superior pricing, and c) the
production of new molecules. The company expects the growth rate of specialty chemicals
revenue to pick up pace from FY23E after the completion of greenfield capex in FY22E.
Hence, we estimate specialty chemicals revenues to witness a 22% CAGR over FY21-23E
factoring in: a) de-bottlenecking and improvement in its capacity utilisation; b) contribution
from 2-3 new product launches annually; and c) gradual contribution from the recently-
announced capex of INR 1.95bn.
Exhibit 1. Specialty chemicals revenues to witness 22% CAGR over FY21-23E

7,200 33% 35%
27%
25%
5,400 25%
20%
3,600 11% 19% 15%
-5% -1%
1,800 5%
0 -5%
FY16
FY18
FY19
FY20
FY21
FY17
FY23E
FY22E
Specialty chemical revenue (INR mn) YoY growth (RHS)

NFIL’s exports have contributed steadily towards total revenues and we believe exports would
capture a larger share and reach 46% of total revenues by FY23E as the company intends to
cater to the Japanese market where it has a relatively small presence. Japanese customers are
likely to a part of its multi-product plant (MPP) investment.
Exhibit 2. Specialty chemicals exports to rise gradually to 46% of total revenues

100%
37% 38% 40% 40%

46% 43% 42% 44% 46%
75%
50%
63% 62% 60% 60%

54% 57% 58% 56% 54%
25%
0%
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E
Domestic Exports

NFIL’s specialty chemicals product portfolio is well-diversified as it caters to different industries

including: a) pharmaceuticals (40%); b) agrochemicals (40%); and c) specialty pigments,
dyes, polymers and personal care (20%). Some of NFIL’s key products are benzo trifluorides
(~2100 tpa), bromo fluoro benzene (~1500 tpa), and fluoro toluenes (~1150 tpa).
Exhibit 3. NFIL’s specialty chemicals product portfolio is well-diversified across industries

Product nam e Industry
2,4- Difluorobenzyl Amine Pharmaceuticals
2-Amino-Benzotrifluoride Crop protection/pharmaceuticals/Specialty pigments
2- Fluoro Nitrobenzene Pharmaceuticals
2,3,5,6- Tetra fluorobenzyl alcohol Crop protection/personal care
2,4 - difluorobenzoic acid Pharmaceuticals
2- bromo fluoro benzene Pharmaceuticals
2- fluoro phenol Crop protection/pharmaceuticals
2-fluoro propionic acid Pharmaceuticals
2- fluoro 4 bromo aniline Crop protection/pharmaceuticals
2-Amino -5-Chloro Benzotrifluoride Crop protection/Splty Pigment/Dyes
2-Bromo- 4- Fluoro Aniline Crop protection/Pharmaceuticals
2-Chloro-4-Fluoro Toluene Crop protection
2-Fluoro-5-Hydroxy Benzotrifluoride Crop protection
2-Methyl-3(Trifluoromethyl) Aniline Pharmaceuticals
3 - Fluoro Toluene Crop protection/Pharmaceuticals
3 -Amino-Benzotrifluoride Crop protection/Pharmaceuticals
3 -Bromo- 1,1,1-Trifluoroacetone Pharmaceuticals
3 -Chloro Benzotrifluoride Crop protection/Pharmaceuticals
3 -Chloro- 4- FluoroBenzotrifluoride Crop protection
3- Amino- 4- Chloro Benzotrifluoride Pharmaceuticals/Specialty Pigment/Dyes
3- Bromo-Benzotrifluoride Pharmaceuticals
3- Hydroxy Benzotrifluoride Crop protection/Pharmaceuticals
3-(Trifluoromethyl) Cinnamicacid Pharmaceuticals
3-Chloro-2-Fluoro Benzoicacid Pharmaceuticals
4 -Bromo-Benzotrifluoride Pharmaceuticals
4 -Fluoro Aniline Crop protection
4 -Fluoro Anisole Pharmaceuticals
4 -Fluoro Benzaldehyde Pharmaceuticals
4 -Fluoro Benzyl Chloride Crop protection/Pharmaceuticals
4-Fluoro Nitrobenzene Pharmaceuticals/Personal Care
4,4 -Difluro cyclohexane Carboxylic Acid Pharmaceuticals
4,4’ – Difluoro Benzophenone Pharmaceuticals/Hydrocarbon/Polymers/Personal Care
4- Bromo Fluoro Benzene Crop protection/Pharmaceuticals
4- Fluoro Benzonitrile Crop protection/Pharmaceuticals
4- Fluoro Benzyl Amine Pharmaceuticals
4- Fluoro Phenol Crop protection/Pharmaceuticals
4- Fluoro Toluene Crop protection/Pharmaceuticals
4-Trifluoromethyl Salicylic acid Pharmaceuticals
Benzotrifluoride Crop protection/Pharmaceuticals/Specialty Pigment/Dyes
BF3 Acetic Acid Pharmaceuticals/Flavours and Fragrences/Hydrocarbon/Polymers
BF3 Etherate Crop Protection/Pharmaceuticals/Flavours and
Fragrences/Hydrocarbon/Polymers
BF3 Phenol Crop Protection/Pharmaceuticals/Hydrocarbon/Polymers
BF3 THF Crop protection/Pharmaceuticals
BF3. Acetonitrile Crop protection/Pharmaceuticals
Boron Trifluoride(gas) Pharmaceuticals/Hydrocarbon/Polymers
Fluoro Benzene Crop protection/Pharmaceuticals
Methyl -2- Fluoropropionate Pharmaceuticals

High performance products (HPP) – provides long-term visibility

NFIL has recently entered a 7-year revenue agreement contract amounting to USD 410mn
(cumulative over 7 years) as an exclusive supplier to the concerned client for this active
ingredient and final product. Management highlighted that initially it plans to completely rely
on the client for the patented technology. However, with time, it would like to improve the
process and bring in benefits for its existing product portfolio and help develop new
products.
The company is slated to invest USD 51.5mn in the manufacturing facility and USD 10mn in
its captive power plant through its wholly-owned subsidiary (Navin Fluorine Advanced
Sciences Limited) at Dahej. This project is going to be funded through a mix of internal
accruals and debt.
Management expects revenue contribution from this project to commence from 4QFY22E.
However, we have conservatively assumed revenue contribution from the beginning of FY23E
and a full ramp-up by FY24E.
Exhibit 4. NFIL’s High Performance Product (HPP) segment capacity expansion details
Source: Company

CRAMS – capitalising on the Pharma opportunity

NFIL forayed into the CRAMS space in 2011 with an initial capital outlay of INR 0.4bn at
Dewas in MP. After this, the company further commissioned cGMP compliant facilities with
investments of INR 0.6bn in FY16 and INR 1.15bn in FY20. This has allowed NFIL to expand
its product offering from 2-3 compounds in FY19 and provide services such as pre-clinical
trials, clinical research and custom synthesis to global pharma innovators. The company has a
significant presence in EU through Manchester Organics (which it fully acquired in 2015).
NFIL’s CRAMS plant at Dahej is the world’s largest and India’s only high-pressure Sulphur
tetra fluoride (SF4) plant. At this plant, the company also has a proprietary hexafluoro
chemistry platform, which gives it a competitive edge to develop new molecules in future.
Since customers in this segment are global innovators catering to highly regulated markets
such as Europe and the US, the company conducts thorough audit and deliberations of the
pilot facility. This is where having a cGMP facility has a niche advantage over other facilities.
Management expects CRAMS revenue to grow to INR 4.7bn by FY23E (based on an asset
turn of ~2.2x on total investment of INR 2.15bn at Dahej). However, we have conservatively
assumed revenues to witness a 25% CAGR over FY21-23E and reach INR 4.4bn by FY23E
(assuming 2.0x asset turn). We have based our assumptions on the fact that the company
was able to reach INR 1.7bn of revenues by FY20 on total capex of INR 1.0bn incurred until
FY16. Hence, we believe the company is uniquely placed to capture a lucrative chunk of the
USD 85bn global CRAMS opportunity.
Exhibit 5. CRAMS revenues to witness 25% CAGR over FY21-23E Exhibit 6. … led by 2.0x asset turns by FY23E
4,400 250% 2,400 2.6 1.6 2.8
1.4 1.3 2.0
20%
3,300 179% 175% 1,800 2.1
61% 1.8
87%
1.4
2,200 100% 1,200 1.2 1.4
-31% -3%
59% 30%
1,100 25% 600 0.7
0 -50% 0 0.0
FY22E
FY23E
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY16
FY17
FY18
FY19
FY20
FY21
Fixed assets (INR mn) Asset turns (x)

CRAMS revenue (INR mn) YoY growth (RHS)

Refrigerant gas – demand revival coupled with high-value

products augurs well
NFIL introduced refrigerants into India in 1967 shortly after commissioning its manufacturing
plant in Surat, Gujarat. It was later backward-integrated into the manufacture of critical
intermediates, namely sulphuric and hydrofluoric acids. NFIL is primarily engaged in the
manufacture of R-22 with a capacity of 6,110 tpa after the incremental cut of 25% in Jan’20
(as per the Montreal protocol). Of this, ~44% is exported to the Middle East and South Africa
and the remaining is sold in India. NFIL’s customers for R-22 include premium AC
manufacturers such as LG, Samsung, Voltas and large industries like Reliance, Piramal,
Godrej, etc. NFIL also imports R-134a from China and sells it in India under the brand name
Mafron.
NFIL’s refrigerant gases business has been impacted by weak demand largely on account of:
a) the further 25% R-22 production cut in Jan’20 and b) lower exports due to a moderation
in prices. Management is exploring the non-emissive application of HCFCs and expects these
to drive future growth. Hence, we estimate the refrigerant gases business to witness a 14%
revenue CAGR in FY21-23E driven by: a) the low base of FY21; b) price revival in both
domestic and export markets; and c) increased usage of R-22 as a feedstock to produce high-
value products.
Exhibit 7. R-22 phase out plan as per Montreal protocol Exhibit 8. NFIL’s R-22 production (tpa) phase-out plan
10,000
9,400
8,460
7,500
6,110
5,000
3,055
2,500
235
0 0
CY12 CY15 CY20 CY25 CY30 CY40
Source: Ministry of Environment, Forest and Climate Change, JM Financial Source: Company, JM Financial
Exhibit 9. Refrigerant gases revenues to witness 14% CAGR over FY21-23E

3,200 35%
20%
2,400 16% 20%
15%
12%
1,600 8% 5%
-1%
800 -6% -10%
-20%
0 -25%
FY18
FY19
FY20
FY16
FY17
FY21
FY23E
FY22E
Refigerant gases revenue (INR mn) YoY growth (RHS)


Inorganic fluorides on a strong growth path

NFIL has one of the largest Anhydrous Hydrofluoric (AHF) and Aqueous Hydrofluoric acid
manufacturing capacities in India at 30,000 TPA. NFIL is also one of the largest AHF
manufacturers in India. AHF is used for captive manufacture of various inorganic fluorides.
NFIL develops products as per customer needs and supplies primarily to industries such as
stainless steel, glass, oil & gas, abrasives, electronics, pharmaceuticals and agro-chemicals.
These products are primarily high volume in nature, with applications in standard processes.
NFIL’s inorganic fluorides business had been adversely impacted by the pandemic due to
lower capacity utilisation of its end-user segments (primarily steel players and to some extent
glass and oil & gas players). However, due to a) robust growth in global steel prices and b)
the low base of FY21, we expect NFIL’s inorganics fluorides revenue to register a 17% CAGR
over FY21-23E.
Exhibit 10. Inorganic fluorides revenues to register 17% CAGR over FY21-23E
2,800 40%
34%
2,100 28% 25%
23%
20%
1,400 15% 10%
5%
700 -5%
-7%
-11%
0 -20%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
Inorganic fluorides revenue (INR mn) YoY growth (RHS)

Exhibit 11. Key inorganic fluorides products

Product nam e Industry
Aluminium fluoride Frosting of bottles, oil w ell, sugar
Aluminium bi-fluoride Electroplating, Sugar Industry, oil w ell drilling

Anhydrous Hydrofluroic Acid Refigernat gases, oil refinery
Dilute Hydrofluoric acid - 20% to 70% Steel Industry/glass industry
Fluboric acid 50% Electroplating industry
Hexafluroro Phosphoric Acid Pharmaceuticals/atomic
HF Pyridine 55% and 70% Pharmaceuticals/atomic
HF Urea Pharmaceuticals/atomic
Mafrolite (Synthetic cryolite - crushed) Abrasive/Automobiles
Potassium Bi Fluoride Pharmaceuticals/atomic
Potassium Fluoride Pharmaceutical intermediates/ agro chemicals
Potassium flouro borate Foundry flux
Potassium flouro titanate Foundry flux/titanium
Sodium bi fluoride Tin plates
Sodium fluoride Toothplates/pharmaceutical intermediates

Key assumptions and Estimates

Exhibit 12. Segment-wise revenue contribution and expected growth
Segm ental revenues
CRAMS 310 865 1,374 2,575 1,780 1,730 2,790 3,348 4,352
Specialty Chemicals 2,151 2,388 2,279 2,258 3,000 3,810 4,530 5,436 6,795
Inorganic Fluorides 1,051 940 1,203 1,482 1,980 2,070 1,930 2,316 2,663
Refrigerant Gases 1,874 2,170 2,158 2,419 2,790 2,610 2,080 2,496 2,696
High performance products 4,500
Total 5,387 6,362 7,014 8,734 9,550 10,220 11,330 13,596 21,006
YoY grow th (%)
CRAMS 18% 179% 59% 87% -31% -3% 61% 20% 30%
Specialty Chemicals 38% 11% -5% -1% 33% 27% 19% 20% 25%
Inorganic Fluorides -7% -11% 28% 23% 34% 5% -7% 20% 15%
Refrigerant Gases 21% 16% -1% 12% 15% -6% -20% 20% 8%
Total 20% 18% 10% 25% 9% 7% 11% 20% 55%
CRAMS 6% 14% 20% 29% 19% 17% 25% 25% 21%
Specialty Chemicals 40% 38% 32% 26% 31% 37% 40% 40% 32%
Inorganic Fluorides 20% 15% 17% 17% 21% 20% 17% 17% 13%
Refrigerant Gases 35% 34% 31% 28% 29% 26% 18% 18% 13%
High performance products 21%
Exhibit 13. Revenue contribution of high-value products has been on the rise
Revenue break-up
High Value Products 2,461 3,253 3,654 4,833 4,780 5,540 7,320 8,784 15,647
Legacy business 2,926 3,110 3,361 3,902 4,770 4,680 4,010 4,812 5,359
Total 5,387 6,362 7,014 8,734 9,550 10,220 11,330 13,596 21,006
YoY grow th
High Value Products 32% 12% 32% -1% 16% 32% 20% 78%
Legacy business 6% 8% 16% 22% -2% -14% 20% 11%
Contribution
High Value Products 46% 51% 52% 55% 50% 54% 65% 65% 74%
Legacy business 54% 49% 48% 45% 50% 46% 35% 35% 26%
Geographical break-up
Domestic 3,398 3,471 3,747 4,262 5,144 5,493 5,540 6,330 7,226
Exports 1,989 2,891 3,267 4,472 4,406 4,727 5,790 7,266 13,780
Geographical contribution
Domestic 63% 55% 53% 49% 54% 54% 49% 47% 34%
Exports 37% 45% 47% 51% 46% 46% 51% 53% 66%
Source: Company, JM Financial Note: Legacy business refers to Inorganic Fluorides and Refrigerant Gases segment while High Value products business refers to CRAMS, Speciality Chemicals and High performance
products

Exhibit 14. NFIL’s revenue to witness 22% CAGR over FY21-23E Exhibit 15. NFIL’s EBITDA margins likely to continue to expand
22 56% 6,100 30%
53% 28%
27%
26%
17 42% 4,575 26%
25%
19%
23%
11% 22%
7% 3,050 22%
11 18% 8% 28%
20%
8%
15%
6 14% 1,525 18%

16%
0 0% 0 14%
FY16
FY17
FY18
FY19
FY20
FY21
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY22E
Gross revenue (INR bn) YoY growth (RHS) (%) FY23E EBITDA (INR mn) EBITDA margin (%) (RHS)
Exhibit 16. NFIL’s PAT and PAT margin to continue to be robust Exhibit 17. NFIL’ RoE and RoCE likely to improve
5,000 40% 40%
38%
3,750 30% 30%
21%
20%
19% 21%
2,500 17% 20% 20%
15%
12%
1,250 10% 10%
0 0% 0%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY16
FY17
FY18
FY20
FY21
FY19
FY22E
FY23E

Valuation
We expect NFIL to demonstrate EPS CAGR of 36% over FY21-23E. We assume coverage with
a BUY rating and value the company at 40x FY23E EPS to arrive at a TP of INR 3,760. Our
valuation premium (compared with the 3-year average 1-year forward multiple of 25x) is
justified on account of i) strong visibility arising from incremental revenue from CRAMS; ii)
contracted revenue from high-performance products; and iii) gradual contribution from
additional capacities. Key risks: a) cancellation/delay in off-take of its long-term contracts; and
b) a slowdown in the global agrochemicals industry.
Exhibit 18. NFIL 1-Year forward P/E chart

5,500
4,125
60.0x
2,750
37.0x
1,375
9.0x
0
Exhibit 19. NFIL 1-Year forward P/B Chart Exhibit 20. NFIL 1-Year forward EV/EBITDA Chart
3,800 3,800
9.7x 45.0x
2,850 2,850
6.0x
1,900 1,900
22.0x
950 950
2.0x 9.0x
0 0

Company profile
NFIL was established in 1967 and is one of the largest manufacturers of speciality
fluorochemicals. It belongs to the Padmanabh Mafatlal Group – one of India’s oldest
industrial houses. NFIL operates one of the largest integrated fluorochemical complexes in
India with manufacturing locations at Surat and Dahej in Western India and Dewas in Central
India. NFIL has four main strategic businesses namely: a) Refrigeration Gases; b) Inorganic
Fluorides; c) Speciality Fluorides and d) CRAMS.
Board of Directors
- Mr. Vishad P. Mafatlal, Chairman
- Mr. Radhesh R. Welling, Managing Director
- Mr. T.M.M. Nambiar, Non-Independent, Non- Executive Director
- Mr. A.K. Srivastava, Independent Director
- Mr. Pradip N Kapadia, Independent Director
- Mr. S.S.Lalbhai, Independent Director
- Mr. Sujal A. Shah, Independent Director
- Mr. S.G. Mankad, Independent Director
- Mr. H.H. Engineer, Independent Director
- Mrs. Radhicka Haribhakti, Independent Director
- Mr. Ashok Sinha, Independent Director


Sales Growth 9.1% 6.6% 11.1% 19.5% 53.0% Share Capital 99 99 99 99 99
Personnel Cost 1,155 1,308 1,417 1,464 2,185 Total Loans 0 0 0 0 0
Other Expenses 1,855 1,835 1,910 2,516 3,857 Def. Tax Liab. / Assets (-) 348 0 207 167 167
Depn. & Amort. 275 370 442 576 757 Intangible Assets 13 10 8 7 7
EBIT 1,908 2,265 2,651 3,278 5,283 Less: Depn. & Amort. 773 1,044 1,058 2,049 2,806
Other Income 344 333 790 504 549 Capital WIP 393 389 949 365 365
Finance Cost 8 20 18 18 18 Investments 4,836 1,954 991 4,785 5,285
Taxes 770 -1,436 1,108 958 1,292 Cash & Bank Balances 159 1,767 1,319 33 351
Adjusted Net Profit 1,491 4,086 2,468 2,877 4,595 Current Liabilities 858 1,270 1,365 1,564 2,263
Net Margin 15.0% 38.5% 20.9% 20.4% 21.3% Provisions & Others 1,141 894 1,064 762 762
Diluted EPS Growth -17.2% 173.9% -39.6% 16.6% 59.7% Source: Company, JM Financial
Total Dividend + Tax 619 715 394 440 704

Dupont Analysis
Net Margin 15.0% 38.5% 20.9% 20.4% 21.3%
Depn. & Amort. 271 271 14 991 757
Asset Turnover (x) 0.9 0.8 0.7 0.8 1.0
Net Interest Exp. / Inc. (-) -344 -333 -790 -504 -549
Inc (-) / Dec in WCap. -615 -706 -1,255 1,626 -1,331
Others 64 219 652 0 0 RoE 14.5% 32.9% 16.2% 16.4% 22.2%
Taxes Paid -719 -462 173 -958 -1,292

Operating Cash Flow 902 1,566 2,373 4,919 3,400 Key Ratios
Capex -616 -1,077 -987 -2,550 -2,500 Y/E March FY19A FY20A FY21E FY22E FY23E
Free Cash Flow 286 489 1,386 2,369 900 BV/Share (INR) 216.9 285.5 330.1 379.3 458.0
Inc (-) / Dec in Investments -2,717 -4,047 -3,423 -3,794 -500 ROIC 23.8% 43.7% 15.0% 17.5% 26.5%
Others 3,089 5,976 2,039 0 0 ROE 14.5% 32.9% 16.2% 16.4% 22.2%
Investing Cash Flow -243 851 -2,371 -6,344 -3,000 Net Debt/Equity (x) -0.2 -0.2 -0.1 0.0 -0.1
Dividend + Tax thereon 0 0 0 63 -155 P/B (x) 14.8 11.3 9.7 8.5 7.0
Inc / Dec (-) in Loans -704 -822 -465 5 0 EV/EBITDA (x) 71.2 58.8 50.6 40.9 26.1
Others 20 12 14 71 73 EV/Sales (x) 15.6 14.6 13.2 11.1 7.3
Financing Cash Flow -683 -809 -451 139 -82 Debtor days 63 39 85 58 58
Inc / Dec (-) in Cash -25 1,609 -449 -1,286 318 Inventory days 41 54 56 39 39
Opening Cash Balance 184 159 1,767 1,318 32 Creditor days 33 45 45 47 48
Closing Cash Balance 159 1,767 1,318 32 350 Source: Company, JM Financial

Galaxy Surfactants | HOLD

Speciality care opportunity fully priced in
Galaxy Surfactants (Galaxy) has gradually diversified from being a pure high-volume Krishan Parwani
low-margin performance surfactants player to a low-volume high-margin specialty krishan.parwani@jmfl.com | Tel: (+91 96) 62095500
care ingredients manufacturer. We expect the company to clock an EPS CAGR of Dayanand Mittal
~20% over FY20-23E, on the back of a ramp-up of additional capacities and dayanand.mittal@jmfl.com | Tel: (+91 96) 19388870
margin expansion arising from an improved product mix and positive operating
leverage. We assume coverage on Galaxy with a HOLD rating and a TP of INR
3,360/share, based on 30x FY23E EPS.
Specialty care ingredients – to drive margin expansion: Galaxy manufactures ~160 specialty
care ingredients products, catering to sub-segments such as UV absorbers, preservatives,
preservative blends and mild surfactants. Specialty care sales volumes clocked a 7.3% CAGR
over FY14-17 and 9.1% CAGR over FY17-20; we expect a 6.7% CAGR over FY20-23E led
by: a) expansion of its specialty ingredients plant in Jhagadia, taking the total capacity to
Current Reco. HOLD
~135,000 MT/annum (to be operational by 1QFY22) and b) focus on increasing the share of Current Price Target (12M) 3,360
the segment by adding newer product categories and blends, including tie-ups for additional Upside/(Downside) 13.1%
volumes with global MNCs and local majors.
Key Data – GALSURF IN
Performance surfactants – steady growth to continue: The performance surfactant portfolio Current Market Price INR2,971
has ~45 products of which key items include Sodium Lauryl Ether Sulphate (SLES), Fatty Market cap (bn) INR105.3/US$1.5
Alcohol Sulphate (FAS) and Ethoxylated products. Performance surfactants volumes posted a Free Float 33%
5.8% CAGR over FY14-17 and 7.5% CAGR over FY17-20. We expect a 7.6% CAGR over
FY20-23E on the back of: a) commissioning of the new performance surfactants line at 3-mon avg daily val (mn) INR118.0/US$1.6
Jhagadia and multi-purpose plant at Tarapur by 1QFY22 (taking the total performance 52-week range 3,350/1,201
surfactants capacity to ~301,000 MT/annum) and b) leveraging existing clientele and securing Sensex/Nifty 51,423/15,436
INR/US$ 72.4
supply for newer products due to proven quality and low cost.
Per-unit EBITDA margin is an accurate metric to look at: Management has emphasised that Price Performance
% 1M 6M 12M
the company’s raw material cost is a pass-through and hence per unit EBITDA margin is an
Absolute 5.3 53.2 126.1
accurate metric to look at. Galaxy’s EBITDA margins have grown from INR 14.6/kg in FY14 to Relative* -0.1 31.5 42.6
INR 16.5/kg in FY20 due to a gradual rise in the proportion of high-margin specialty care * To the BSE Sensex
ingredients in the overall mix. We expect margins to post a 5.5% CAGR to INR 19.3/kg by
FY23E on account of: a) an improved product mix within both performance surfactants and
specialty care ingredients and b) positive operating leverage arising from the ramp-up of
additional capacity leading to higher capacity utilisations (from 71% at end-1HFY21).
Expect EPS CAGR of 20% over FY20-23E – HOLD on valuation grounds: We assume
coverage on Galaxy with a HOLD rating and TP of INR 3,360/share, based on 30x FY23E EPS.
We believe current valuations largely capture: a) the strong medium-term growth visibility in
the performance surfactants segment; b) tie-ups for additional specialty care volumes with
global MNCs and local majors; and c) positive operating leverage arising from the ramp-up in
additional capacities. Moreover, improved RoCEs of ~22% by FY22-23E, compared with the
historical average of 20%, justify the premium over historical valuations.

Net Sales 27,630 25,964 27,334 30,269 33,087
EBITDA Margin (%) 12.9 14.2 16.8 17.1 17.4
ROE (%) 24.5 23.7 25.3 23.7 23.2
P/E (x) 54.0 45.7 35.3 31.2 26.5
Dividend Yield (%) 0.2 0.5 0.4 0.5 0.6

Galaxy Surfactants 31 May 2021
Specialty care ingredients – to drive margin expansion

Galaxy Surfactants, over the years, has gradually diversified itself from being a pure high-
volume low-margin performance surfactants player to a low-volume high-margin specialty
care ingredients manufacturer. In the specialty care ingredients segment, the company
manufactures ~160 products catering to various sub-segments such as UV absorbers,
preservatives, preservative blends and mild surfactants. A few of its key products are: a) 2-
phenoxyethanol (preservative priced at ~USD 2-2.5/kg); b) Sodium methyl Lauryl Taurate
(mild surfactant priced at ~USD 6/kg); and c) Ethyl hexyl methoxy cinnamate (UV absorber
priced at ~USD 8.5-9/kg). These products are niche and premium in nature and have limited
competitive threat (oligopolistic for most products). This has allowed the company to improve
its margins in the past and is likely to continue to provide margin expansion ability in the long
run as well.
Specialty care product sales volumes clocked a 7.3% CAGR over FY14-17 and 9.1% CAGR
over FY17-20. However, specialty chemical volumes have been recently impacted as demand
for beauty products (UV-absorbing sunscreens, lipstick preservatives, etc.) fell due to the
pandemic. We expect Galaxy’s specialty care ingredient volumes to witness a 6.7% CAGR
over FY20-23E led by: a) expansion of its specialty ingredients plant at Jhagadia, taking the
total capacity to ~135,000 MT/annum (to be operational by 1QFY22 as per management
guidance) and b) the company’s focus on increasing the segment’s share by adding newer
product categories and blends, including tie-ups for additional volumes with global MNCs
and local majors.
Exhibit 1. Specialty care product sales volume likely to witness a 6.7% CAGR over FY20-23E
120
98
88
90 81
79 77
62 67
60
60 56
50
30
0
FY16
FY17
FY18
FY19
FY14
FY15
FY20
FY22E
FY23E
FY21E
Specialty care products sales volume (KT)

Mild surfactants and preservatives within specialty care on the rise

Management - in its FY20 Annual Report - highlighted that its offerings in preservatives
(paraben free) and mild (sulphate free) surfactants contributed ~INR 2.5bn and INR 1.0bn,
respectively, during the year . This indicates that preservatives and mild surfactants’ revenues
accounted for ~35% of total specialty chemicals’ revenues (INR 10.1bn) in FY20. It is
important to note that the company demonstrated a 26% revenue CAGR in the preservative
products category over FY09-20.

Phenoxyethanol – one of its key successful products

In the preservatives products space, the company has highlighted that phenoxyethanol (used
in the home and personal care segment) forms a large part of its volumes and it currently
exports phenoxyethanol to several marquee MNCs such as P&G, L’Oreal, Johnson & Johnson,
Unilever, etc. The global phenoxyethanol market was valued at USD 95.8mn in CY13 and
Galaxy’s share in it was 12.7% (at USD 12.1mn). As per industry estimates, Galaxy’s
phenoxyethanol revenues demonstrated a 10.6% CAGR over CY13-19 and stood at ~USD
22mn in CY19 while the global phenoxyethanol market has only posted a ~2.3% CAGR to
reach ~USD 110mn. Hence, Galaxy grew its market share by ~7% during CY13-19 to reach
~20% at end-CY19. We expect this growth trend to continue led by: a) strong demand from
EU on account of the shift towards paraben-free preservatives and b) increasing demand
from India and AMET markets due to rising awareness and premiumisation.
Exhibit 2. Phenoxyethanol revenues demonstrated a 10.6% CAGR over CY13-19

24 21%
22
18 17%
12
12 13%
6 9%
0 5%
CY13 CY19
Phenoxyethanol revenues (USD mn) Global market share (RHS) (%)
Source: Company DRHP, Industry, JM Financial
We believe that Galaxy has been able to place itself among global majors in a few specialty
care ingredient categories due to its continued focus on R&D. Its R&D expenditures have
been rising, posting an 8.3% CAGR over FY17-20 and constituting 1.5-2% of speciality
product sales. Currently, the company maintains 43 patents (16 in India, 15 in the US, 4 in
the EU and 2 each in China, Japan, Brazil and Russia).
Exhibit 3. Galaxy’s R&D expenditures have been rising consistently

200 1.9% 2.0%
1.8% 172
157 155
1.7%
150 135 1.5%
1.5%
100 1.0%
50 0.5%
0 0.0%
FY17 FY18 FY19 FY20
Total R&D expenditure (INR mn) R&D as % of specialty product sales (RHS) (%)

Performance surfactants – steady growth to continue

Galaxy Surfactants’ performance surfactant portfolio has ~45 products, of which key items
include Sodium Lauryl Ether Sulphate (SLES), Fatty Alcohol Sulphate (FAS) and Ethoxylated
products. These performance products are essential in all rinse-off formulations and are
therefore high-volume in nature. Essentially, performance surfactants are low-margin
products as: a) their formulations do not require much technical expertise (entry barriers are
low) and b) these products are largely commoditised and form an essential portion of raw
material costs for FMCG players, who buy them on a cost-plus contractual basis.
Performance surfactants’ volumes have been growing continuously, posting a 5.8% CAGR
over FY14-17 and 7.5% CAGR over FY17-20. Going forward, we expect this trend to
continue with performance products registering a 7.6% CAGR over FY20-23E on the back
of: a) commissioning of the new performance surfactants line at Jhagadia and multi-purpose
plant at Tarapur by 1QFY22 (taking the total performance surfactants capacity to ~301,000
MT/annum) and b) leveraging the existing clientele and securing supply for newer products
due to proven quality and low cost.
Exhibit 4. Performance surfactants’ sales volume likely to see a 7.6% CAGR over FY20-23E
200
179
169
153
150 144
131 135
115
97 97 99
100
50
0
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
Performance surfactants sales volume (KT)

Exhibit 5. Specialty care volumes in the overall mix to continue to be steady ~35%
100%
34% 37% 38% 35% 34% 37% 36% 35% 34% 35%
75%
50%
66% 63% 62% 65% 66% 63% 64% 65% 66% 65%
25%
0%
FY14
FY16
FY17
FY18
FY20
FY15
FY19
FY21E
FY23E
FY22E
Performance surfactants Specialty care products


Per-unit EBITDA margin is an accurate metric to look at

Management has emphasised that the company’s raw material cost is a pass-through and
hence per unit EBITDA margin is an accurate metric to look at. Galaxy’s EBITDA margins have
grown from INR 14.6/kg in FY14 to INR 16.5/kg in FY20 due to a gradual rise in the
proportion of high-margin specialty care ingredients in the overall mix. We expect margins to
post a 5.5% CAGR to INR 19.3/kg by FY23E on account of: a) an improved product mix
within both performance surfactants and specialty care ingredients and b) positive operating
leverage arising from the ramp-up of additional capacity leading to higher capacity
utilisations (from 71% at end-1HFY21).
Exhibit 6. EBITDA margin (INR/kg) likely to post an 8% CAGR over FY20-23E

25
20.1 20.7
19.6
20
16.7 16.5
14.7 15.3
14.6 14.6
15
12.4
10
0
FY15
FY16
FY18
FY20
FY14
FY17
FY19
FY22E
FY23E
FY21E
EBITDA margin (INR/kg)

Timely capex likely to pave the way for future growth

Galaxy has been consistently looking at new avenues for growth. Management has indicated
likely capex of INR 1.2bn-1.5bn annually over FY21-23E on account of: a) its multi-purpose
plant at Tarapur; b) expansion of the specialty ingredients plant at Jhagdia; c) expansion of its
R&D plant at a cost of INR 250mn and d) maintenance capex of INR 300mn annually.
Exhibit 7. Capex is likely to remain at INR 1.2-1.5bn per annum over FY21-23E
2,800
2,100
1,400
700
0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Capex (INR mn)


Exhibit 8. Segment-wise Volume, Revenue and Realisation contribution and expected growth
Segm ental sales volum es (MT)
Performance surfactants 97,211 98,775 1,15,392 1,30,596 1,35,337 1,43,521 1,53,039 1,68,710 1,78,832
Specialty care products 56,163 59,718 62,087 66,833 79,374 80,716 80,644 87,613 98,127
Total 1,53,374 1,58,493 1,77,479 1,97,429 2,14,711 2,24,237 2,33,682 2,56,323 2,76,959
Volum e YoY grow th (%)
Performance surfactants -0.1% 1.6% 16.8% 13.2% 3.6% 6.0% 6.6% 10.2% 6.0%
Specialty care products 11.9% 6.3% 4.0% 7.6% 18.8% 1.7% -0.1% 8.6% 12.0%
Total 4.0% 3.3% 12.0% 11.2% 8.8% 4.4% 4.2% 9.7% 8.1%
Segm ental revenue (INR m n)
Performance surfactants 11,010 10,054 14,050 15,530 17,410 15,870 17,092 19,030 20,374
Specialty care products 7,110 7,276 7,560 8,130 10,270 10,150 10,242 11,239 12,713
Others 619 689 870 965 -50 -56 0 0 0
Total 18,739 18,019 22,480 24,625 27,630 25,964 27,334 30,269 33,087
Segm ental revenue contribution (%)
Performance surfactants 59% 56% 62% 63% 63% 61% 63% 63% 62%
Specialty care products 38% 40% 34% 33% 37% 39% 37% 37% 38%
Others 3% 4% 4% 4% 0% 0% 0% 0% 0%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
Revenue YoY grow th (%)
Performance surfactants 8.5% -8.7% 39.7% 10.5% 12.1% -8.8% 7.7% 11.3% 7.1%
Specialty care products 13.9% 2.3% 3.9% 7.5% 26.3% -1.2% 0.9% 9.7% 13.1%
Realisations (INR/kg)
Performance surfactants 113 102 122 119 129 111 112 113 114
Specialty care products 127 122 122 122 129 126 127 128 130
Total 122 114 127 125 129 116 117 118 119
Realisation YoY grow th (%)
Performance surfactants 8.6% -10.1% 19.6% -2.3% 8.2% -14.0% 1.0% 1.0% 1.0%
Specialty care products 1.9% -3.8% -0.1% -0.1% 6.4% -2.8% 1.0% 1.0% 1.0%
Total 6.2% -6.9% 11.4% -1.5% 3.2% -10.0% 1.0% 1.0% 1.2%

Exhibit 9. Sales are likely to see 8.4% CAGR over FY20-23E Exhibit 10. EBITDA margins likely to continue its upward trajectory
36 30% 6,000 17% 20%
25% 17%
17%
14%
27 20% 4,500 15%
13% 13%
12% 12%
12%
10% 11% 9% 10%
18 5% 10% 3,000 10%
10%
9 -6% 0% 1,500 5%
-4%
0 -10% 0 0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
FY15
FY16
FY17
FY18
FY19
FY20
FY22E
FY23E
FY21E
Net sales (INR bn) YoY Growth % (RHS) EBITDA (INR mn) EBITDA Margin % (RHS)
Exhibit 11. …which in-turn would improve PAT margin Exhibit 12. RoCEs likely to improve in FY22E onwards
4,000 20% 32%
3,000 15% 24%

12%
9% 11% 11%
7%
2,000 10% 16%
6%
7%
6%
1,000 4% 5% 8%
0 0% 0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21E
FY22E
FY23E
FY15
FY16
FY17
FY18
FY20
FY19
FY21E
FY22E
FY23E

Valuation
We assume coverage on Galaxy with a HOLD rating and TP of INR 3,360/share, based on 30x
FY23E EPS. We believe current valuations largely capture: a) the strong medium-term growth
visibility in the performance surfactants segment; b) tie-ups for additional specialty care
volumes with global MNCs and local majors; and c) positive operating leverage arising from
the ramp-up in additional capacities. Moreover, improved RoCEs of ~22% by FY22-23E,
compared with the historical average of 20%, justify the premium over historical valuations.
Hence, we await a better entry point.
Exhibit 13. Galaxy's 1-year forward P/E chart

3,900
320x
3,100
2,300 25.0x
1,500
15.0x
700
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
Exhibit 14. Galaxy's 1-year forward P/B chart Exhibit 15. Galaxy's 1-year forward EV/EBITDA chart
3,900
3,900
3,100 20.0x
5.5x 3,100
2,300 2,300 13.0x

4.5x
1,500 1,500
3.0x 9.0x
700 700
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21

Company profile
Galaxy Surfactants was founded in 1940 and is one of the leading players in the Surfactants
and Specialty Care Ingredients space, exclusively focussing on catering to the Home and
Personal Care Industry. Galaxy caters to 1750+ customers in more than 75 countries with 5
plants in India, 1 in Egypt and another in the US.
Exhibit 16. Galaxy’s manufacturing facilities

Installed Capacity
Location Num ber of facilities Features
(MTPA)
Tarapur, Maharashtra 3 33,647 Batch processing plants for manufacturing all types of surfactants
One of the largest sulfation facilities in India, Galaxy also manufactures ethoxylates,
Taloja, Maharashtra 1 1,53,741
betaines, alkanoamides, fatty acid esters and syndet soap noodles at this complex
Located very close to ethylene oxide source. The company manufactures both
Jhagadia, Gujarat* 1 1,31,000
performance surfactants and speciality care products
This facility is close to the Suez Canal and is strategically positioned so as to address
Suez, Egypt* 1 1,17,500
the needs of markets in AMET, Europe and Americas
Ow ned by Tri-K Industries
New Hampshire, USA 1 600
Manufactures various grades of proteins for cosmetic applications
Source: Company, JM Financial, MTPA is Metric tonnes per annum * environmental clearances for expansion and additional land available at Jhagadia and Suez plants
Exhibit 17. Tier wise segregation of clientele

T1 T2 T3
Unilever, P&G, L'oreal, Dabur, Godrej, Emami,
Clients Lotus, VLCC, etc.
Colgate, Revlon, etc. Patanjali, etc.
Contracts Long term Both long term and spot Both long term and spot
High on account of
Margin profile Low and steady Better than T1 clients
know ledge/process share
New product Company helps them w ith

Usually 2-3 years Easier than T1 clients
approval tim e end to end process
Board of Directors
- Mr. Unnathan Shehar, Managing Director
- Mr. S Ravindranath, Chairman and Non-Executive Independent Director
- Mr. K Ganesh Kamath, Executive Director
- Mr. K. Natarajan, Executive Director
- Mr. G. Ramakrishnan, Non-Executive Director
- Dr. Nirmal Koshti, Non-Executive Director
- Mr. Vaijanath Kulkarni, Non-Executive Director
- Mr. Uday K. Kamath, Non-Executive Director
- Shashikant Shanbhag, Non-Executive Director
- Mr. Subodh Nadkarni, Non-Executive Independent Director
- Dr. M G Parameswaran, Non-Executive Independent Director
- Mrs. Nandita Gurjar, Non-Executive Independent Director


Personnel Cost 1,604 1,781 1,954 2,164 2,366 Total Loans 2,532 3,196 1,530 530 0
Depn. & Amort. 512 622 712 1,058 1,178 Intangible Assets 233 1,424 1,424 1,424 1,424
Other Income 47 59 94 528 777 Capital WIP 826 660 660 660 660
Finance Cost 300 238 142 113 29 Investments 69 135 135 135 135
Taxes 859 584 836 1,138 1,338 Cash & Bank Balances 257 545 1,123 1,783 3,545
Net Margin 7.1% 8.9% 10.9% 11.2% 12.0% Provisions & Others 992 1,069 1,121 1,121 1,121

Dupont Analysis
Net Margin 7.1% 8.9% 10.9% 11.2% 12.0%
Depn. & Amort. 494 456 712 1,058 1,178
Asset Turnover (x) 2.5 2.0 1.9 1.9 1.8
Net Interest Exp. / Inc. (-) 253 179 48 -415 -748
Inc (-) / Dec in WCap. 85 -103 502 -547 -525
Others 0 0 0 0 0 RoE 24.5% 23.7% 25.3% 23.7% 23.2%
Taxes Paid -859 -584 -836 -1,138 -1,338

Free Cash Flow 995 257 3,045 1,976 2,377 BV/Share (INR) 247.3 301.2 364.0 438.8 527.3
Inc (-) / Dec in Investments 0 0 0 0 1 ROIC 20.5% 20.2% 22.9% 22.4% 23.4%
Others 46 -1 94 528 777 ROE 24.5% 23.7% 25.3% 23.7% 23.2%
Investing Cash Flow -1,743 -2,579 -1,106 -972 -722 Net Debt/Equity (x) 0.3 0.2 0.0 -0.1 -0.2
Dividend + Tax thereon 213 496 -393 -468 -554 P/B (x) 12.0 9.9 8.2 6.8 5.6
Inc / Dec (-) in Loans -388 664 -1,666 -1,000 -530 EV/EBITDA (x) 30.1 29.3 23.1 20.2 17.7
Others -886 -1,128 -502 -375 -309 EV/Sales (x) 3.8 4.1 3.8 3.4 3.0
Financing Cash Flow -1,060 32 -2,561 -1,843 -1,393 Debtor days 56 62 62 62 62
Inc / Dec (-) in Cash -19 288 577 661 1,763 Inventory days 46 46 46 46 46
Opening Cash Balance 276 257 545 1,123 1,783 Creditor days 46 45 48 48 48
Closing Cash Balance 257 545 1,123 1,783 3,546 Source: Company, JM Financial

Fine Organics | HOLD

Go - Green Chemistry
Fine organics (FOIL), over the years, with its strong focus on R&D has become one Krishan Parwani
of the leading players of vegetable oil-based additives for plastic, food, and Krishan.Parwani@jmfl.com | Tel: (91 96) 62095500
cosmetics. With rising demand for environment-friendly products by customers, Dayanand Mittal
oleochemical products are being readily accepted in the market. Although we Dayanand.Mittal@jmfl.com | Tel: (91 96) 1938870
believe FOIL is the clear winner of the rising adoption of green (low toxic) chemicals
(which would aid in off-take of incremental capacity and provides long term growth
visibility), current valuations leave limited upside, in our view. Hence, we assume
coverage with a HOLD rating and value the company at 35x FY23E EPS (in-line with
3-year average multiple) arrive at a TP of INR 3,160.
Unique positioning of FOIL gives it an edge: FOIL is the largest manufacturer of oleochemical-
based additives in India. It sits in a very unique position where it is competing based on its
technology developed in-house for process improvement and project implementation, giving Recommendation and Price Target
it an edge. FOIL is the largest producer of slip additives in the world. Current Reco. HOLD
Capacity expansion to support top line growth: FOIL has entered significant capacity Upside/(Downside) 5.2%
expansion phase in FY19-20, during which company added two plants at its Ambernath
Key Data – FINEORG IN
facility, with capacities of 8,000 and 32,000 metric tonnes per annum (MTPA), which
Current Market Price INR3,003
boosted the company’s total production capacity to 101,300 MTPA. On top of that, in Market cap (bn) INR92.1/US$1.3
Nov’20, company further commissioned 10,000 MTPA capacity at its Patalganga facility. Free Float 25%
Moreover, additional capacity of 10,000 MTPA by FY22 is expected to come up on account Shares in issue (mn) 30.7
of its JV with Zeelandia. Management expects ramp-up of these facilities to be gradual and Diluted share (mn) 30.7
3-mon avg daily val (mn) INR269.5/US$3.7
all its plants to reach optimum utilisation by FY24E. 52-week range 3,569/1,852
Sensex/Nifty 51,423/15,436
Imminent gross margin improvement draws comfort: Due to the pandemic, key raw materials INR/US$ 72.4
used by FOIL have witnessed sharp ~20-40% price increases. This, coupled with management
refraining from long-term contracts (owing to the pandemic) with its customers severely Price Performance
impacted its gross margins, which were at 34% in 3QFY21 (down 820 bps YoY). However, % 1M 6M 12M
going forward, we expect margins to normalise gradually as the company re-negotiates the Absolute 7.7 16.7 56.2
Relative* 2.1 0.2 -1.5
margins on a cost-plus basis, starting 1QFY22. * To the BSE Sensex
Expect EPS CAGR of 54% over FY21-23E – HOLD on valuation grounds: On the back of
additional production from recently-added capacities, we estimate FOIL’s revenues to register
a 22% CAGR over FY21-23E (and reach INR 16.8bn in FY23E). Normalcy in gross margins to
39% (vs. 35% in FY21) is likely to push EBITDA to register a 45% CAGR over FY 21-23E (and
reach INR 4.0bn in FY23E). As a result, FOIL’s EPS is likely to see a 54% CAGR over FY21-23E
(and reach INR 2.7bn in FY23E). Although we believe FOIL is the clear winner of the rising
adoption of green (low toxic) chemicals (which would aid in off-take of incremental capacity
and provides long term growth visibility), current valuations leave limited upside, in our view.
Hence, we assume coverage with a HOLD rating and value the company at 35x FY23E EPS
(in-line with 3-year average 1-year forward multiple) to arrive at a TP of INR 3,160.

Net Sales 10,440 10,262 11,213 14,094 16,797
EBITDA Margin (%) 21.3 23.0 17.1 22.9 24.0
Diluted EPS Growth (%) 27.3 29.1 -31.0 94.7 21.9
ROE (%) 28.1 29.2 16.8 26.9 26.4
P/E (x) 71.4 55.3 80.1 41.1 33.7
Dividend Yield (%) 0.2 0.3 0.4 0.4 0.5

Fine Organics 31 May 2021
Primarily operates in two segments

FOIL primarily operates in a) Plastic additives and b) Food & Other additives. FOIL has a
diversified customer base with less than 4% of exposure to one particular customer.
a. Plastic Additives
Plastic Additives provide key functionality to the end plastic product or to the processing
of plastic. Some key features/properties that can be imparted by additives to plastic or
plastic processing are:
i. Anti-fog: Sometimes, a thin layer of moisture (or fog) forms on a plastic film,
reducing visibility inside, particularly in places such as a supermarket. Adding an
anti-fog additive to the plastic ensures that the fog does not stick to the film.
ii. Filler dispersants: A solid material dispersed in a liquid requires an additive to make
the dispersion process easier and more stable (eg. adding carbon black to a tyre). It
needs to disperse properly to ensure consistency. A filler dispersant ensures that the
filler is dispersed properly in the plastic.
iii. Pigment wetting agents: Wetting agents are chemicals that increase the spreading
and penetrating properties of a liquid by lowering its surface tension, that is, the
tendency of its molecules to adhere to each other. Thus, a pigment wetting agent
improves the spread/consistency of pigment on the base surface.
iv. Flow improvers: As the name suggests, flow improvers improve the flow of the
plastic. The specific flow improver to be used would depend on the plastic (PE, PP,
PVC, etc).
v. Anti-static additives: These are additives that prevent/reduce generation of static

electricity. These are useful in specific applications such as in oil and gas installations
or in specific weather conditions (cold and dry weather).
vi. Plasticisers: Plasticisers are additives that increase/produce flexibility and reduce
brittleness. FOIL does not manufacture plasticisers.
vii. Slip additives: These additives reduce friction between the plastic and a surface.
Thus, for example, they help faster release of plastic items from a mould. They work
when the additive migrates or moves to the surface of the article, creating a layer to
facilitate lesser friction.
viii. Processing aids: Processing aids are designed to improve the melt processability and
handling of plastic or give finished articles improved aesthetic properties by
removing flow marks and dye lines, thereby improving the parts gloss and clarity.
ix. Lubricants: Lubricants, as the name suggests, assist in the internal lubrication for the
resin and reduce friction between the polymer melt and the surface.
x. Impact modifiers, stabilisers and flame retardants: FOIL does not manufacture these
additives.
We note that the above is just a broad classification of additives. The additive required
for one type of plastic/processing application may not work for a different plastic or for
an application at a different temperature or other processing parameters.

b. Food Additives
Food additives broadly comprise two types: direct and indirect. Direct food additives are
substances that are added to a food for a specific purpose, such as the addition of
refined wheat flour, sugar, yeast, etc. in bread. There can be indirect additives present
due to packaging, storage or other handling. Food additives are strictly regulated and
monitored by the government to ensure safe health of the people.
FOIL makes three kinds of food additives
1) Emulsifiers: An emulsifier is a substance used in food manufacturing to help

combine liquids of different viscosities. Thus, a bakery which makes a bread is
essentially mixing flour, sugar, yeast, etc. in a particular proportion to make dough.
An emulsifier ensures consistency of the mixture so that the texture, taste, look and
feel of the bread is uniform. Among FOIL’s products, emulsifiers form the largest
group (~24-26 products).
2) Anti-fungal agents/preservatives: As the name suggests, one of the biggest

problems for ready-to-cook/pre-mixes is fungus. This is visible in bread and
consumers will not buy products with fungus. Using anti-fungal agents increases
the shelf life of the bread.
3) Specialty products: FOIL has ~7-10 products in this group and some are made on
specific client requests. As an example, FOIL makes a cloudifier. A clouding agents
or cloudifier is a type of food additive used to make beverages such as fruit juices
look more cloudy and thus more natural-looking and visually appealing, typically by
creating an emulsion of oil droplets.
c. Other Additives
In this segment, FOIL makes various other additives that are used in rubber (eg. in the
wiper of a car) for the general purpose of reducing friction. Since this is a small segment
and is clubbed with food, we just highlight some applications below:
1) Rubber additives: As stated above, this includes products such as additves for the
wiper of an automobile to reduce friction.
2) Cosmetic and pharma additives: In cosmetics, fatty alcohols are used as emollients
and thickeners; they help improve the viscosity or thickness of creams and lotions.
3) Animal feed applications: There is a lot of concern about the use of antibiotics in
animal feed. Natural vegetable oil-based products are a potential alternative and
FOIL is working on developing such products.

Oleo chemicals – gaining traction

Demand for oleochemical-based products is a structural growth story: Oleochemicals are
biodegradable and less toxic than their petro-based counterparts. This makes oleochemical-
based products an attractive alternative to synthetic petrochemical products. With rising
demand for environment-friendly products by customers, oleochemical products are being
readily accepted in the market, assisted by increasing population and rapid economic growth.
FOIL is the largest manufacturer of oleochemical-based additives in India. It sits in a very
unique position where it is competing based on its technology developed in-house for
process improvement and project implementation, giving it an edge. FOIL is the largest
producer of slip additives in the world.
Exhibit 1. Comparison: Oleochemical-based additives vs. petrochemical-based additives

Parameter Oleochemical-based additives Petrochemical-based additives
Type Natural Synthetic

Raw material sources Vegetable oil derivatives Crude derivatives
Sustainability Yes, sustainable source of raw material No, fossil fuel derived raw material
Biodegradable Yes, sustainable source of raw material No
Environment friendly Yes, sustainable source of raw material No, fossil fuel derived raw material
Application in food Yes No
Application in polymer Yes No
Source: CRISIL Research, Industry
Capacity expansion to support top line growth

FOIL has historically grown cautiously based only on internal accruals and debt to fund any
capex. Typically, after adding capacity, FOIL has been able to fully utilise the capacity within
3-4 years. This has been feasible because, as discussed previously, FOIL first works with
customers to understand the challenges that they are facing, then develops an application
and then moves to production. Thus, by the time the production of a new product starts,
there is already a fair amount of understanding of demand and the target customer base is
ready and product has already been approved.
FOIL had entered significant capacity expansion phase in FY19-20 during which company
added two plants at its Ambernath facility, with capacities of 8,000 and 32,000 metric
tonnes per annum (MTPA), which boosted the company’s total production capacity to
111,300 MTPA. On top of that, in Nov’20, company further commissioned 10,000 MTPA
capacity at its Patalganga facility. Moreover, additional capacity of 10,000 MTPA by FY22 is
expected to come up on account of its JV with Zeelandia. Management expects ramp-up of
these facilities to be gradual and all its plants to reach optimum utilisation by FY24E.
Exhibit 2. FOIL’s capacity is likely to increase to 131,000MTPA by FY22E

140,000 131,300 131,300
116,300
111,300
105,000
69,300
70,000 64,300
55,900 55,900
35,000
0
FY21E
FY16
FY17
FY18
FY19
FY20
FY22E
FY23E
Installed capacity (MTPA)

Source: Company, JM Financial, MTPA: Metric tonne per annum

Gross margins likely to improve with easing of RM prices

FOIL’s key raw materials are majorly fatty acids such as stearic acid (for manufacturing
Stearamide), erucic Acid (for manufacturing Erucamide), propionic acid, lactic acid, tartaric
acid, adipic acid, etc. These raw materials are usually imported from various countries such as
Malaysia, Sweden, Thailand, and Germany. Prices of these key raw materials are roughly in
the range of USD 1-1.5/kg.
Due to the pandemic, key raw materials used by FOIL have witnessed a sharp ~20-40% price
increases. This, coupled with management’s decision of not entering long term contracts
(owing to the pandemic) with its customers has severely impacted its gross margins, which
were at 35.2% in FY21 (vs. 40.9% in FY20 and 37.3% in FY19). However, going forward,
we expect margins to normalise gradually as the company is likely to re-negotiate the
margins on cost plus basis, starting 1QFY22.
Fine organics manufactures fatty amides such as stearamide, erucamide, oleamide, etc. from
fatty acids (stearic acid, erucic acid) using ammonia. In this process there is some ammonia
gas is released which is contained and converted into liquid. Apart from this, in this reaction,
only water is produced. Hence, minimal effluent treatment cost to treat this water.
Exhibit 3. Fine’s fatty amide manufacturing process
These amides are slip additives for which FOIL is the largest producer in the world. Hence, we
have tried to analyse gross margin of one of fine’s product erucamide. 0.99kg of erucamide
gets produced from 1kg of erucic acid and 0.05kg of ammonia (for simplicity, we have taken
unit quantities, actual process uses 10kg of erucic acid). Prior to the pandemic, gross margins
for erucamide would have been ~39% (assuming dated prices).
Exhibit 4. Mass balance of Erucamide production from Erucic Acid
Source: Company, JM Financial, prices taken do not represent current prices and are taken from open sources
Exhibit 5. Erucic acid prices have risen sharply since Oct’20

5,600
4,200
2,800
1,400
0
May-20
May-21
Jan-20
Jun-20
Mar-20
Jan-21
Feb-20
Feb-21
Mar-21
Jul-20
Apr-20
Oct-20
Apr-21
Dec-19
Aug-20
Nov-20
Dec-20
Sep-20
Erucic Acid Spot (USD/MT)


Exhibit 6. FOIL’s gross margins to normalise after experiencing a dip in FY21

8 42%
6 40%
4 38%
2 36%
0 34%
FY15
FY16
FY18
FY19
FY20
FY17
FY21
FY22E
FY23E
Gross profit (INR bn) Gross margin (%) (RHS)
Exhibit 7. Revival in EBITDA margins likely from FY22E Exhibit 8. …which in-turn would improve PAT margins
4,000 25% 2,600 18%
3,000 23% 1,950 16%
2,000 20% 1,300 13%
1,000 18% 650 11%
0 15% 0 8%
FY15
FY16
FY17
FY18
FY19
FY20
FY16
FY17
FY18
FY19
FY20
FY21
FY21
FY15
FY22E
FY23E
FY22E
FY23E
EBITDA (INR mn) EBITDA margin (RHS) (%) PAT (INR mn) PAT margin (%) (RHS)
Exhibit 9. ROCE vs ROE

36%
27%
18%
9%
0%
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
RoE RoCE

Valuation
On the back of additional production from recently added capacities, we estimate FOIL’s
revenues to register a 22% CAGR over FY21-23E (and reach INR 16.8bn in FY23E). While
normalcy in gross margins to 39% (vs. 35% in FY21) is likely to aid EBITDA to register a 45%
CAGR over FY 21-23E (and reach INR 4.0bn in FY23E). As a result, FOIL’s EPS is likely to see a
54% CAGR over FY21-23E (and reach INR 2.7bn in FY23E). Although we believe FOIL is the
clear winner of the rising adoption of green (low toxic) chemicals (which would aid in off-
take of incremental capacity and provides long term growth visibility), current valuations leave
limited upside, in our view. Hence, We assume coverage with a HOLD rating and value the
company at 35x FY23E EPS (in-line with 3-year average multiple) arrive at a TP of INR 3,160.
Exhibit 10. FOIL 1-year forward P/E chart

4,000
47.0x
3,000
38.0x
2,000
20.0x
1,000
0
May-19 Nov-19 May-20 Nov-20 May-21
Exhibit 11. FOIL 1-year forward P/B Chart Exhibit 12. FOIL 1-year forward EV/EBITDA Chart
4,000 4,000
36.0x
11.8x
3,000 3,000
9.2x
24.0x
2,000 2,000
5.0x
16.0x
1,000 1,000
0 0
May-19 Nov-19 May-20 Nov-20 May-21 May-19 Nov-19 May-20 Nov-20 May-21

Company profile
Fine Organics is a leading producer of specialty additives for foods, plastics, rubbers, paints,
inks, cosmetics, coatings, textile auxiliaries, lubes and several other specialty applications. Fine
Organics has a diversified base with expertise in i) Emulsifiers used for anti-fungal agents,
bread improvers, beverage clouding agents etc; ii) Oleochemistry used in Polyolefins,
Styrenics, Polyamides & other engineering polymers, Rubbers and Elastomers and 3) CosPha
(Cosmetic and Pharmaceuticals) applications which serve as base ingredients.
Exhibit 13. Fine’s manufacturing facilities

Location Num ber of Facilities
Ambernath 3
Dombivili 1
Badlapur 1
Patalganga 1
Navi Mumbai (R&D centre) 1
Board of Directors
- Mr. Prakash Kamat, Executive Director and Chairman
- Mr. Mukesh Shah, Managing Director
- Mr. Jayen Shah, Executive Director and Chief Executive Officer
- Mr. Tushar Shah, Executive Director and Chief Financial Officer
- Mr. Bimal Shah, Executive Director
- Mr. Mahesh Sarda, Independent Director
- Mr. Prakash Apte, Independent Director
- Mr. Parthasarathi Thiruvengadam, Independent Director
- Mr. Kaushik Shah, Independent Director
- Mrs. Pratima Umarji, Independent Director

Financial Tables (Standalone)

Personnel Cost 599 694 762 876 981 Total Loans 1,130 915 567 567 567
Other Expenses 1,074 1,143 1,268 1,395 1,542 Def. Tax Liab. / Assets (-) 4 -62 -73 -73 -73
EBITDA Growth 35.5% 6.2% -18.6% 67.9% 24.9% Gross Fixed Assets 2,464 4,192 4,453 5,926 7,472
Other Income 202 205 170 260 250 Capital WIP 1,063 58 263 263 263
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 790 1,195 1,089 1,544 1,841
Taxes 942 507 413 753 918 Cash & Bank Balances 1,031 2,056 2,564 2,459 3,239
Reported Net Profit 1,290 1,665 1,149 2,238 2,729 Current Liab. & Prov. 874 1,401 1,598 1,692 1,918
Adjusted Net Profit 1,290 1,665 1,149 2,238 2,729 Current Liabilities 562 918 1,128 1,221 1,447
Net Margin 12.4% 16.2% 10.3% 15.9% 16.2% Provisions & Others 312 483 471 471 471
Diluted EPS Growth 27.3% 29.1% -31.0% 94.7% 21.9% Source: Company, JM Financial

Dupont Analysis
Net Margin 12.4% 16.2% 10.3% 15.9% 16.2%
Depn. & Amort. 171 347 468 467 603
Asset Turnover (x) 1.9 1.5 1.5 1.6 1.5
Net Interest Exp. / Inc. (-) -184 -157 109 232 222
Inc (-) / Dec in WCap. 158 595 -166 -933 -515
Others 0 0 -216 0 0 RoE 28.1% 29.2% 16.8% 26.9% 26.4%
Taxes Paid -942 -507 -415 -753 -918

Capex -816 -728 -466 -1,473 -1,546 Y/E March FY19A FY20A FY21E FY22E FY23E
Free Cash Flow 620 1,721 877 531 1,492 BV/Share (INR) 165.8 205.7 241.0 300.8 373.8
Inc (-) / Dec in Investments -24 -275 4 0 0 ROIC 25.5% 32.1% 22.4% 35.4% 34.0%
Others -124 79 60 0 0 ROE 28.1% 29.2% 16.8% 26.9% 26.4%
Investing Cash Flow -964 -924 -402 -1,473 -1,546 Net Debt/Equity (x) 0.0 -0.2 -0.3 -0.2 -0.2
Dividend + Tax thereon -277 -361 -92 -403 -491 P/B (x) 18.1 14.6 12.5 10.0 8.0
Inc / Dec (-) in Loans 594 -216 -347 0 0 EV/EBITDA (x) 41.5 38.5 46.9 27.9 22.2
Others 171 76 53 -232 -222 EV/Sales (x) 8.9 9.0 8.1 6.5 5.4
Financing Cash Flow 488 -500 -386 -635 -713 Debtor days 58 52 57 60 60
Inc / Dec (-) in Cash 960 1,026 555 -104 780 Inventory days 28 42 35 40 40
Opening Cash Balance 71 1,031 2,008 2,564 2,459 Creditor days 23 39 43 40 40
Closing Cash Balance 1,031 2,056 2,563 2,460 3,239 Source: Company, JM Financial

31 May 2021 India | Chemicals | Initiating Coverage
Anupam Rasayan | HOLD

Right Place at the Right Time
Anupam Rasayan (ARIL) is one of the country’s leading CSM player in speciality chemicals Krishan Parwani
with two distinct business verticals: a) life science-related specialty chemicals (~95% of krishan.parwani@jmfl.com | Tel: (+91 96) 6209 5500
revenues in FY20) and b) other specialty chemicals. ARIL had long-term relationships with 15 Dayanand Mittal
dayanand.mittal@jmfl.com | Tel: (+91 96) 1938 8870
MNCs at end-Sep’20; this has helped it expand its product offerings and geographic reach.
ARIL’s focus on upgrading processes has allowed it to manufacture products in an energy
and cost-efficient manner by utilising continuous processes for which the company has
developed innovative methods in-house. Further, it has expanded its commercialised product
portfolio from 25 items in FY18 to 34 in FY20 and 36 in 1HFY21. Drawing comfort from its
long-term contracts, we forecast sales, EBITDA and EPS to post 32%, 41%, and 86% CAGR,
respectively, over FY21-23E. We expect the company’s ROEs to demonstrate continuous
improvement and reach ~14% by FY23E (from ~10% in FY20 owing to front-ended capex). Current Reco. HOLD
Although we like the structural growth story of CSM business, sharp ~50% rally in share Current Price Target (12M) 780
price in last one month leaves limited upside in near term. Hence, we wait for a better entry Upside/(Downside) 2.4%
point and initiate on ARIL with a HOLD rating (TP of INR 780 based on 32x FY23E EPS).
Key Data – ANURAS IN
 Operates in an industry with high entry barriers: The CSM industry has significant entry Current Market Price INR762
barriers, including customer validation and approvals, expectation from customers for Market cap (bn) INR76.1/US$1.1
Free Float 100%
process innovation and cost reduction. ARIL, over the years, has established relationships
with various MNCs, such as, Syngenta, Sumitomo, and UPL Limited. Diluted share (mn) 86.2
3-mon avg daily val (mn) INR0.0/US$0.0
 High visibility of long-term growth: ARIL completed a major leg of capex of ~INR 9.5bn 52-week range 850/472
(including ~INR 2.1bn for backward integration) over FY16-20 to commission 2 new Sensex/Nifty 51,423/15,436
facilities (in Jhagdia and Sachin). Hence, we expect ARIL’s revenue to reach INR 14.0bn by INR/US$ 72.4
FY23E (vs. INR 5.3bn in FY20) on a gradual ramp-up of additional capacity. Moreover,
Price Performance
ARIL has recently received an order of INR 11bn from a leading life sciences MNC and has
% 1M 6M 12M
signed a letter of intent (LOI) for the it (click here). Under this agreement, it would Absolute 19.0 0.0 0.0
manufacture and supply 3 products for the next 5 years. This, along with its existing Relative* 12.9 0.0 0.0
contracts, gives us comfort on the company’s long-term growth potential * To the BSE Sensex
 Margin expansion should further aid profitability: ARIL’s EBITDA margins are likely to
expand (after a possible moderation in FY21E) on higher-than-expected utilisation of
recently-commissioned facilities. EBITDA margins could further rise 0.5-1% in FY23E given
its recent decision to invest INR 430mn to set up a solar power plant, which, according to
the company, could result in annual cost savings of INR 100mn. Further, we expect ARIL’s
ROEs to improve to ~14% by FY23E on a) an improvement in its net working capital
cycle; and b) debt repayments of ~INR 5.6bn from recent IPO proceeds.
 Initiate with a HOLD due to recent sharp run-up; await better entry point: Although we
like the structural growth story of CSM business, sharp ~50% rally in share price in last
one month leaves limited upside in near term. Hence, we wait for a better entry point and
initiate coverage on ARIL with a HOLD rating and TP of INR 780 (based on 32x FY23E
EPS). Key risks: a) High client concentration; b) inability to enter new or maintain existing
long-term CSM agreements; and c) high dependency on R&D.

Net Sales 5,015 5,289 7,978 11,067 13,970
EBITDA 931 1,349 1,875 2,782 3,738 Bloomberg - JMFR <GO>,
EBITDA Margin (%) 18.6 25.5 23.5 25.1 26.8
Adjusted Net Profit 492 530 706 1,678 2,435
ROE (%) 10.2 9.6 9.5 13.5 14.1
P/E (x) 115.5 109.7 93.0 45.3 31.2
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

Anupam Rasayan 31 May 2021
Contract-driven business provides long-term growth visibility

and entry barriers
 Time to optimally utilise newly-added capacities: In end-Mar’20, ARIL completed a major
leg of capex of ~INR 9.5bn (including ~INR 2.1bn for backward integration). This was
undertaken over FY16-20 to commission two new facilities, one each at Jhagdia (Unit-5)
and Sachin (Unit-6). We expect utilisations of these newly-commissioned facilities to
increase gradually and reach 90% by FY23E. Moreover, a few of the newer products that
ARIL intends to manufacture at these facilities are likely to be of high value. This would
boost average realisations to INR 640/kg in FY23E from INR 380/kg in FY20. As a result,
we expect ARIL’s revenue to register a 32% CAGR over FY21-23E to reach INR 14.0bn by
FY23E.
Exhibit 1. ARIL’s capacity and utilisations on an upward trajectory Exhibit 2. ARIL’s average realisations growing steadily
25,000 23,396 23,438 23,438 93%
23,438 100% 700
640
86% 85%
557
20,000 75% 70%
75% 525 484
60% 447
14,882
15,000 379
12,178
350 324
50%
10,000
175
25%
5,000
0
0 0% FY18 FY19 FY20 FY21E FY22E FY23E
FY18 FY19 FY20 FY21E FY22E FY23E
Installed Capacity (MT) Actual Production (MT) Average realisation on production (INR/kg)
Utilisation (RHS) (%)
 One more contract in the bag: ARIL has recently received an order of INR 11bn from a
leading life sciences MNC and has signed a letter of intent (LOI) for it. Under this
agreement, it is slated to manufacture and supply 3 products for the next 5 years. Of this,
2 would start contributing to the top line from 2HFY23, in our view. This, along with its
existing contracts, gives us comfort on the company’s long-term growth potential.
 Strong and long-term relationships with a diversified customer base across geographies
with significant entry barriers: The CSM industry has significant entry barriers, including
customer validation and approvals, expectation from customers for process innovation
and cost reduction, high quality standards and stringent specifications. Customer
relationships have been led primarily by the company’s ability to develop innovative
processes, meet stringent quality and technical specifications and manufacture products
in a cost-effective, safe and environment-friendly manner. ARIL’s customers are typically
engaged in various industries such as agrochemicals, personal care, pharmaceuticals,
specialty pigments and dyes, and polymers and additives. They are spread across various
geographies and this has helped the company mitigate risks arising from customer,
industry and geographic concentration. ARIL has well-established relationships with
various MNCs such as Syngenta Asia Pacific Pte. Ltd., Sumitomo Chemical Company
Limited, and UPL Limited, across Europe, Japan, United States and India. At end-Sep’20,
ARIL manufactured products for over 45 domestic and international customers, including
15 multi-national companies. Exports constituted 59.7%, 60.0%, 68.1% and 57.7% of
revenues in FY18, FY19, FY20 and 1HFY21, respectively.

 Return ratios to improve significantly: Over FY16-20, ARIL’s return ratios were depressed
by its aggressive expansion plans. As a result, a) Its gross debt mounted to INR 8.2bn at
end-FY20 (from INR 2.5bn at end-FY16) and b) its net working capital (NWC) jumped to
205 days of sales in FY20 (from 102 days in FY16). It should be noted that NWC usually
jumps up for most chemical companies when they introduce a new set of products on
incremental capacity as their customers only tend to release payments after approvals/lab
tests. However, in ARIL’s case, capacity almost doubled from FY18 to FY20. Hence, there
was a higher impact on its NWC vs. peers as most other chemical companies engage in
phase-wise expansions. Going forward, we take comfort from our belief that ARIL’s
FY23E ROE and ROCE (pre-tax) are likely to reach 14% and 18%. This would be driven by
i) debt reduction of INR 5.6bn from recent IPO proceeds, which would lower the interest
payment burden; ii) a significant reduction in NWC to 130 days in FY23E; and iii)
improvement in EBITDA margins on positive operating leverage and commissioning of the
solar plant.
Exhibit 3. ARIL’s ROE likely to improve to 14.1% by FY23E Exhibit 4. ARIL’s ROCE (pre-tax) likely to reach 17.9% by FY23E
16.0 20.0
14.1 17.9
13.5
14.7
12.0 11.4 15.0
10.2
9.6 9.5
9.6
8.0 10.0
8.0 8.3
6.9
4.0 5.0
0.0 0.0
FY18 FY19 FY20 FY21E FY22E FY23E FY18 FY19 FY20 FY21E FY22E FY23E
RoE (%) ROCE (pre-tax) (%)

Exhibit 5. ARIL’s gross debt profile to reduce with IPO proceeds Exhibit 6. ARIL’s working capital days likely to normalise
10,000 250
213
205
200 176
7,500 165
150 130 135 130
5,000 102
100
2,500 50
0
0 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Working capital (days)
Gross Debt (INR mn)

Financials
 Expect revenue/EBITDA CAGR of 32%/41%: We believe ARIL’s revenue is likely to reach
~INR 14.0bn in FY23E (32% CAGR over FY21-23E) on account of a) higher capacity
utilisations of recently-commissioned units and b) a gradual increase in average
realisations on the back of the manufacture of high-value products. We further expect
ARIL’s EBITDA margins to improve to 26.8% in FY23E (vs. 25.5% in FY20) driven by i)
positive operating leverage; ii) optimum utilisation of its plants; and iii) installation of a
solar power plant of 12.5MW, which would reduce power and fuel costs significantly. As
a result, EBITDA is likely to reach INR 3.7bn in FY23E (41% CAGR over FY21-23E).
 Substantial decline in Interest expense to drive 86% PAT CAGR over FY21-23E: ARIL’s
interest expenses had jumped to INR 453mn in FY20 on a sharp increase in borrowings to
INR 8.2bn at end-FY20. With debt repayments to the tune of INR 5.6bn from the recent
IPO proceeds, we expect ARIL’s interest expenses to drop to INR 89mn in FY23E. Hence,
in our view, ARIL’s PAT is likely to demonstrate a staggering 86% CAGR over FY21-23E
and reach INR 2.4bn in FY23E.
Exhibit 7. ARIL likely to register 32% revenue CAGR over FY21-23E Exhibit 8. Exports are likely to remain at 60% of overall revenue
15,000 60% 100%
32% 35%
40% 40% 40% 40%
11,250 45% 75%
7,500 30%
50%
68% 65%
3,750 15% 60% 60% 60% 60%
25%
0 0%
FY18 FY19 FY20 FY21E FY22E FY23E 0%
Revenue from operations (INR mn) YoY growth (RHS) (%) FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, JM Financial Export Sales Domestic Sales

Source: Company , JM Financial
Exhibit 9. EBITDA margins are likely to inch up to 26.8% by FY23E Exhibit 10. PAT is likely to reach INR 2.4bn by FY23E
4,500 30% 3,000 140%
3,375 25% 2,250 105%
2,250 20% 1,500 70%
1,125 15% 750 35%
0 10% 0 0%
EBITDA (INR mn) EBITDA margins (RHS) (%) PAT (INR mn) YoY growth (RHS) (%)
Source: JM Financial, Company Source: JM Financial, Company

Company Background
ARIL is among India’s leading companies engaged in the custom synthesis and manufacturing
of life science-related specialty chemicals and other specialty chemicals, which involve multi-
step synthesis and complex technologies. ARIL’s products are sold to multi-national
corporations (MNCs) for use as additives, ingredients or intermediates that impart particular
characteristics to the customers’ end-use products. ARIL’s key focus in custom synthesis and
manufacturing operations is developing in-house innovative processes to manufacture
products requiring complex chemistries and achieving cost optimisation. The company has
two distinct business verticals:
1) Life science-related specialty chemicals

ARIL manufactures a variety of life science-related specialty chemicals comprising products
related to agrochemicals, personal care and pharmaceuticals (accounted for 95.4%/92.5% of
revenue from operations in FY20/1HFY21). It manufactures agro intermediates and agro
active ingredients for the agrochemicals industry; these are used in the manufacture of
pesticides, insecticides, fungicides, herbicides and nutrients, among others. For the personal
care industry, it provides anti-bacterial and ultra violet protection intermediates and
ingredients, among others. In the pharmaceuticals segment, it focuses on developing
intermediates and ‘key starting materials’ for active pharmaceutical ingredients (APIs), and
may also be used in material sciences and surface chemistry. Going forward, life science
related-specialty chemicals are likely to contribute ~89% to overall revenue by FY23.
2) Other Specialty Chemicals

ARIL’s other specialty chemicals are used in diverse end-user segments, comprising specialty
pigments, specialty dyes, polymer additives and paint additives.
Exhibit 11. Business mix over the years Exhibit 12. Geographical revenue break-up
100% 5%
100%
7% 7% 6%
13% 11%
32% 35%
40% 40% 40% 40%
75% 75%
50% 95%
50%
93% 93% 94%
87% 89%
68% 65%
60% 60% 60% 60%
25% 25%
0% 0%
Life science specialty chemicals Other specialty chemicals Export Sales Domestic Sales

Process Technology - Continuous Processes

ARIL currently uses continuous processes such as diazotisation, hydrolysis, nitration,
chlorination and distillation. Continuous process technology has distinct advantages over the
traditional batch process in reducing the batch cycle time of a chemical production process
and making the process safer and environment-friendly as well as energy and cost efficient.
In addition, continuous process technology is fully integrated and involves a higher level of
automation, maximises quality control and reduces the amount of inventory and storage.
Continuous processes can be undertaken under: i) Flow reactors, i.e. flow chemistry, and ii)
Photo reactors, i.e. photo chemistry.
i) Flow Chemistry: Flow chemistry technology helps improve chemical processes in order to
satisfy the growing demand for chemical sustainability. In addition, performing flow
chemistry can significantly reduce environmental impacts in the laboratory and production
scales. There exists a significant opportunity for flow chemistry technology in specialty
chemicals, specifically pharmaceuticals, as it reduces the cost and lead time significantly. The
reactions under flow chemistry are carried out at gram-per-kilogram levels with flow of 10-
300 kilograms per hour, and are undertaken in micro and tube reactors.
ii) Photo Chemistry: Photo chemistry technology is a relatively new technology for the
specialty chemicals manufacturing industry and ARIL is currently in the process of developing
a few products for customers using it. Photochemical reactions are induced through the
electronically agitated state. Consequently, the chemical reactivity of the agitated molecules is
considerably different from that of ground state molecules. Photochemical reactions are
currently becoming an important tool in the search of new active compounds for applications
in, among others, specialty chemical and pharmaceutical industries. Photo chemistry
technology offers various benefits in the context of sustainability, including a) shorter and
simplified multi-step synthesis of complex molecules and typically, a high molecular
complexity is generated in one step from simple precursors; b) immense potential for
automation; c) increased accessibility of a portfolio of novel compound families; and d) in
many reactions, the photon acts as a ‘traceless reagent’, and no chemical catalysts or
activating groups are required.
Conventional photo chemical systems require large reactors, while in photo chemistry
technology, reactions can be seen with micro reactors. The narrow channel of a typical micro
reactor provides opportunities to ensure a uniform irradiation of the entire reaction mixture,
resulting in shorter, more selective reactions, high energy and quantum efficiencies, efficient
scale-up and a reduction in the formation of by-products.

Custom Synthesis and Manufacturing

The custom synthesis and manufacturing industry has significant entry barriers, including
customer validation and approvals, expectation from customers for process innovation and
cost reduction, high quality standards and stringent specifications. In particular, typical end
customers are required to register the manufacturer with the regulatory bodies as a supplier
of intermediate products or active ingredients. As a result, any change in the manufacturer of
the intermediate product or active ingredient may require customers to spend significant time
and resources, resulting in customer acquisition becoming a long process. From the product
testing stage, to the batch procurement phase, to the eventual customer approval stage –
acquiring a new end customer typically takes approximately 12 to 24 months depending on
product complexity.
Further, customers in general avoid sharing product-related information with numerous

manufacturers to restrict the spread of confidential information. As a result, customers
typically select manufacturers after carefully reviewing them and tend to develop long-term
relationships with them as well as limit the number of such manufacturers. In addition, the
level of technical skill and expertise that is essential for developing in-house innovative
processes, undertaking complex chemistries and handling some of the raw materials and
intermediates, requires a significant amount of training that can only be achieved over a
period of time. This creates additional entry barriers for new entrants.
ARIL’s custom synthesis and manufacturing agreements are typically long-term in nature
where the validity of the contract is 2-5 years, with certain agreements being automatically
renewed for one year at a time. ARIL depends on a limited number of customers for a
significant portion of its revenues; sales to top 10 customers represented 86.7% and 88.6%
of revenues in FY20 and 1HFY21, respectively.
Additionally, ARIL’s agreements typically require its customers to place purchase orders that
include the quantity and price while certain agreements include the purchase prices in USD
per kilogram and minimum purchase quantities for the products during the tenure of the
agreement. Further, certain agreements require the customers to provide a non-binding
forecast indicating the quantities of the product they intend to purchase for a particular
period.
Exhibit 13. End-to-end process for custom synthesis and manufacturing operations

Board of Directors and Key Managerial Personnel

Board of Directors
 Dr. Kiran C Patel is the Chairman of Board and is a Non-Executive Director. He holds a
degree in bachelor of medicine and bachelor of surgery from Gujarat University and holds
diploma certificates in the speciality of internal medicine and the subspecialty of
cardiovascular disease from the American Board of Internal Medicine. He completed his
fellowship in affiliation with the Columbia University of New York in 1982 and served as a
cardiovascular fellow at the Overlook Hospital from 1980 to 1982.
 Ms. Mona A Desai is the Vice Chairman of Board and a Whole-time Director of ARIL. She
has been on Board since the incorporation of the Company in 2003. She holds a
bachelor’s degree in home science. Ms. Desai was the chairperson of the Board of
Company from April 23, 2013 until 21 August, 2020. She is also a director on the board
of RIRCPL. She has over 18 years of experience in the field of chemicals industry.
 Mr. Anand S Desai is the Managing Director of ARIL. He has been associated with ARIL
since 1992 and was one of the first Directors of Company. He has passed the final
semester examination of the bachelor’s degree in science from Vinoba Bhave University.
He is the zonal chairman of Confederation of Indian Industry (CII), southern Gujarat
region for year 2020 – 2021 and a member of CII’s national committee on chemicals and
petrochemicals for year 2020-21. He has over 28 years of experience in the field of
chemicals industry.
 Mr. Milan Thakkar is a Non-Executive Director of ARIL. He holds a second year junior
college certificate in science from R.D. & S.H. National College and S.W.A. Science
College, Maharashtra. He has been associated with ARIL since 2018 as an additional Non-
Executive Director and was regularised pursuant to approval of the Shareholders by
resolution dated September 30, 2019. He is also a director on the boards of Arochem
Industries Pvt Ltd and Nanavati Developers Pvt Ltd and was previously on the board of
Exochem Ltd and Exichem (HK) Limited.
 Mr. Hetul Krishnakant Mehta is an Independent Director of ARIL. He holds a diploma

degree in chemical engineering from Bharati Vidyapeeth, Jawaharlal Nehru Institute of
Technology, Dhankawadi, Pune and is a founding director of Praveen Laboratories Pvt Ltd
and Advanced Diabetes Centre Pvt Ltd. He has published a patent application in relation
to process for preparation of clopidogrel polymorphous form 1 using seed crystals.
 Dr. Namrata Dharmendra Jariwala is an Independent Director of ARIL. She holds a doctor
of philosophy degree in civil engineering and holds a master’s degree in engineering
(civil). She is currently an assistant professor at Sardar Vallabhbhai National Institute of
Technology, Surat. She has published certain research papers in various journals.
 Mr. Vijay Kumar Batra is an Independent Director of ARIL. He has completed an executive
development program from Wharton School and holds a bachelor’s degree in chemical
engineering from IIT, Delhi. He has been a member of the board of directors of the Flow
Chemistry Society India chapter and is a member of Institute of Chemical Engineers. He
was the managing director of Regent Drugs Ltd and was previously associated with
Albany Molecular Research, Hyderabad Research Centre Private Limited as the managing
director. He has also served as the president and the director of J.K. Drugs and
Pharmaceuticals Ltd.
 Mr. Vinesh Prabhakar Sadekar is an Independent Director of ARIL. He holds a bachelor’s

degree in chemical engineering from University of Bombay. He was a member of the
executive committee and the chairman of human resources committee of Organisation of
Pharmaceuticals Producers of India. He was elected as an honorary fellow of the Indian
Institute of Chemical Engineers. He was previously associated with Navin Fluorine
International Ltd and Cheminova India Ltd as a managing director.

Key Management Personnel
 Mr. Afzal Malkani is company’s CFO. He holds a bachelor’s degree in commerce and is a
qualified chartered accountant. He joined ARIL on October 28, 2005 and was appointed
as CFO with effect from Dec 1, 2014.
 Dr. Nileshkumar Naik is the technical head of ARIL. He holds a doctor of philosophy
degree in chemistry, master’s degree in science (organic chemistry) and a bachelor’s
degree in science (special). He has been associated with company since its incorporation.
 Dr. Anuj Thakar is the R&D (process development) head and Unit II head of ARIL. He holds
a doctor of philosophy degree in chemistry, a master’s degree in science (organic
chemistry) and a bachelor’s degree in science (special). He joined ARIL on Feb 4, 2005.
 Mr. Ravi Desai is the sales head of Company. He holds a master’s degree in computer
applications and a bachelor’s degree in science (special). He joined ARIL on December 22,
2012 and was previously associated with Standard Chartered Bank as an investment
advisor.
Exhibit 14. ARIL’s Management Organisation Chart
Exhibit 15. List of ARIL’s key competitors

Crop Protection Chemicals APIs Imaging Chemicals Other specialty chemicals
PI Industries Divi’s Laboratories Vivimed Labs Sami labs
Deccan Chemicals Dishman Pharma Fujifilm India Sajjan India
Coromandel International Nicholas Piramal Hubergroup India Syschem India
Anupam Rasayan Shasun Chemicals Navin Fluorine International Infinity spec chem
Navin Fluorine International Jubilant Organosys Anubhav corp.
Aarti Industries Cipla Ltd Aamirav ingredients
Hikal Limited Aarti Industries Chemcon spec chem
Anupam Rasayan
Vivimed Labs
Dr. Reddy’s Ltd
Aurobindo Pharma
Laurus Lab (Synthesis division)
Source: ARIL DRHP

Raw materials
ARIL uses phenol and benzene derivatives - such as para chloro phenol and meta dichloro
benzene, bromine, various chloro and fluoro intermediates, solvents and chloro-alkalies - to
manufacture its products. Historically, the company has sourced raw materials from several
vendors in India, China and Japan. However, its dependence on imports from China has
reduced; imported raw materials from China as a percentage of total raw materials purchases
decreased from 17.1% in FY19 to 12.2% in FY20.
The company usually does not sign long-term supply contracts with any of its raw material
suppliers. The purchase price of its raw materials generally follows market prices. The
company typically keeps 5-6 months of inventory including raw materials, work-in-progress
and finished good at its facilities to mitigate the risk of raw material price movements. These
inventory levels are planned based on contractual quantities and expected orders, which are
confirmed due to its long-standing relationships with customers.
Manufacturing facilities
ARIL operates 6 manufacturing facilities in Gujarat, India, with 4 of these located in Sachin
and two located in Jhagadia. Each facility has the ability to manufacture a wide range of
products, which can be inter-changed to address customer requirements. Further, given that
operations are primarily export-oriented, its Sachin facilities’ proximity to Adani Hazira Port
helps reduce freight and logistic costs. Its power requirements are met through the local state
power grid through interstate open access, while water is procured from Gujarat Industrial
Development Corporation. We expect ARIL to utilise its enhanced capacities optimally so its
overall utilisation would reach ~93% by FY23E given robust support by its contracts.
Exhibit 16. Installed capacity and utilisation of ARIL's facilities

Facility FY18 FY19 FY20 FY21E FY22E FY23E
Sachin Unit-1
Installed Capacity (MT) 2,778 3,362 4,542 4,542 4,542 4,542
Actual Production (MT) 2,168 1,784 3,691 3,634 4,088 4,315
Capacity Utilisation (%) 78.0% 77.2% 81.3% 80.0% 90.0% 95.0%
Sachin Unit-2
Sachin Unit-3
Jhagadia Unit-4
Jhagadia Unit-5
Installed Capacity (MT) 5,520 5,520 5,520 5,520
Actual Production (MT) 441 2,208 4,030 4,968
Capacity Utilisation (%) 8.0% 40.0% 73.0% 90.0%
Sachin Unit-6
Installed Capacity (MT) 1,206 1,206 1,206 1,206
Actual Production (MT) 88 905 989 1,085
Capacity Utilisation (%) 7.3% 75.0% 82.0% 90.0%
Total

Key strengths
 Experienced promoters and management team: ARIL is led by experienced Promoters,
some of whom have significant experience in the chemical industry. Mr. Anand S Desai
and Ms. Mona A Desai have an experience of approximately 28 years and 18 years,
respectively, in the chemicals industry. Further, Dr. Kiran C Patel, one of ARIL’s Promoters
and Chairman, is a businessperson experienced in the healthcare sector, and ARIL’s Key
Managerial Personnel have significant experience in the chemical industry. For instance,
Dr. Nileshkumar Naik has been associated with the company since its incorporation, while
Dr. Anuj Thakkar and Mr. Ravi Desai have been associated with the company since 2005
and 2012 respectively.
 Focus on process innovation through value engineering, complex chemistries: ARIL, over
the years, has successfully diversified itself in terms of process capability and expanded its
expertise into multi-step synthesis capabilities and complex chemistries, such as,
etherification, diazotisation and hydrolysis, acylation, hydrogenation, fluorination,
alkylation, nitration, amination, esterification, chlorination and bromination. It has scaled-
up for several new molecules in the area of life sciences related specialty chemicals and
other specialty chemicals, and as a result, expanded its commercialised product portfolio
from 25 products in FY 2018 to 34 products in FY20 and 36 products in 1HFY21.
 …and consistent R&D: ARIL’s focus on upgrading processes has enabled them to
manufacture products in an energy and cost-efficient manner by utilising continuous
processes for which the company has developed innovative methods in-house. Further,
the company intends to focus on early stage process innovation and development to
capitalise on the complete lifecycle of products. ARIL uses continuous and flow chemistry
technology which makes the process safer and environment friendly as well as energy and
cost efficient. ARIL is currently in the process of developing a few products for customers
by undertaking photo chemistry technology and intends to advance this technology to
take it to a commercial scale.

Key risks
 Risk to long-term CSM agreement with various MNCs: ARIL’s CSM agreements are long-
term in nature where the validity of the contract is 2-5 years, with certain agreements
being automatically renewed for one year at a time. The company’s business and financial
condition and results of operations depend on its relationships with MNCs. Any adverse
developments or inability to engage in or maintain such relationships could have an
adverse effect on the company’s business, results of operations and financial condition.
 Raw material pricing and sourcing risk: ARIL does not have long-term agreements with
raw materials suppliers with pricing and production volumes being negotiated for each
purchase order. Hence, any increase in the cost and/or shortfall in the availability or
quality of such raw materials could have an adverse effect on business and results of
operations.
 Foreign exchange fluctuation risk: Exports constituted 59.7%, 60.0%, 68.0% and 57.7%
of revenues in FY18, FY19, FY20 and 1HFY21, respectively. Similarly, expenses in foreign
currency accounted for 20.0%, 17.8%, 17.4% and 25.6% respectively, of total expenses
in FY18, FY19, FY20 and 1HFY21. Hence, fluctuation in the value of the INR against
foreign currencies, to the extent that it is not hedged, could have an adverse impact on
ARIL’s profitability.
 Concentration risk: ARIL depends on a limited number of customers for a significant

portion of its revenues. Revenues generated from sales to top 10 customers represented
86.7% and 88.5% of revenue from operations in FY20 and 1HFY21, respectively. Further,
a significant portion of revenues are from operations from a limited number of markets:
Europe, Japan and India accounted for 36%, 5.8%, and 32%, respectively, in FY20.
 High dependency on R&D and introduction of innovative products: ARIL’s life sciences-
related specialty chemicals business is dependent on R&D and introduction of innovative
products. Inability to identify and understand evolving industry trends, technological
advancements, customer preferences and develop new products to meet customers’
demands may adversely affect the company’s business. Further, newly developed
products may replace existing ones and R&D efforts may not yield new products,
processes and solutions to allow the company to remain competitive.
 Rising use of alternative pest management and crop protection measures: Increasing use
of alternative pest management and crop protection measures such as bio technology
products, pest resistant seeds or genetically modified crops may reduce demand for the
company’s products and adversely affect its business and result of operations.
 Seasonal nature of agrochemicals related business: ARIL’s agrochemicals related business

is subject to climatic conditions and is cyclical in nature. Seasonal variations and
unfavourable weather patterns may have an adverse effect on business. Further, change
in Government policies towards agriculture sector or a reduction in subsidies provided to
farmers could adversely affect agrochemicals business.
 All manufacturing facilities on leasehold land: ARIL’s all manufacturing facilities are
operated on industrial land allotted by industrial development corporations on a leasehold
basis. There is no assurance that these lease agreements will be renewed upon
termination or that company will be able to obtain other premises on lease on same or
similar commercial terms. Further, failure to comply with the conditions of use of such
land could result in an adverse impact on business


Sales Growth 46.9% 5.5% 50.8% 38.7% 26.2% Share Capital 500 500 862 1,149 1,149
Personnel Cost 186 210 241 337 371 Total Loans 6,697 8,180 7,777 2,216 2,216
EBITDA 931 1,349 1,875 2,782 3,738 Total - Equity & Liab. 11,905 14,309 16,836 18,550 20,741
EBIT 706 1,062 1,377 2,249 3,159 Less: Depn. & Amort. 1,011 1,207 1,704 2,238 2,816
Other Income 195 105 132 212 210 Capital WIP 1,906 1,402 1,193 1,393 3,893
PBT before Excep. & Forex 657 714 951 2,261 3,280 Current Assets 4,454 5,786 8,803 10,702 10,687
PBT 657 714 951 2,261 3,280 Sundry Debtors 1,206 1,295 1,749 2,274 2,679
Taxes 155 184 245 583 846 Cash & Bank Balances 18 200 1,767 2,526 914
Assoc. Profit/Min. Int.(-) -10 0 0 0 0 Other Current Assets 1,062 1,068 1,088 1,088 1,088
Reported Net Profit 492 530 706 1,678 2,435 Current Liab. & Prov. 1,320 2,332 3,120 3,773 4,489
Adjusted Net Profit 492 530 706 1,678 2,435 Current Liabilities 738 1,631 2,420 3,072 3,788
Net Margin 9.8% 10.0% 8.8% 15.2% 17.4% Provisions & Others 582 700 701 701 701

Dupont Analysis
Profit before Tax 657 714 951 2,261 3,280
Net Margin 9.8% 10.0% 8.8% 15.2% 17.4%
Depn. & Amort. 225 287 497 533 578
Asset Turnover (x) 0.5 0.4 0.5 0.6 0.7
Net Interest Exp. / Inc. (-) 244 453 559 200 89
Inc (-) / Dec in WCap. -581 -482 -635 -487 -882
Others -31 70 0 0 0 RoE 10.2% 9.6% 9.5% 13.5% 14.1%
Taxes Paid -125 -92 -245 -583 -846

Operating Cash Flow 389 949 1,127 1,924 2,220 Key Ratios
Capex -2,483 -1,804 -800 -1,000 -3,500 Y/E March FY19A FY20A FY21E FY22E FY23E
Free Cash Flow -2,094 -854 326 924 -1,280 BV/Share (INR) 68.0 77.8 102.6 161.3 183.2
Inc (-) / Dec in Investments 12 0 4 0 0 ROIC 5.3% 6.2% 7.1% 10.9% 13.3%
Others -32 22 0 0 0 ROE 10.2% 9.6% 9.5% 13.5% 14.1%
Investing Cash Flow -2,502 -1,782 -796 -1,000 -3,500 Net Debt/Equity (x) 1.3 1.3 0.7 0.0 0.1
Inc / Dec (-) in Capital 0 35 2,198 5,764 0 P/E (x) 115.4 109.7 93.0 45.3 31.2
Dividend + Tax thereon 0 0 0 0 0 P/B (x) 11.2 9.8 7.4 4.7 4.2
Inc / Dec (-) in Loans 2,301 1,170 -403 -5,561 0 EV/EBITDA (x) 88.8 62.3 43.8 27.2 20.7
Others -244 -191 -559 -368 -332 EV/Sales (x) 16.5 15.9 10.3 6.9 5.5
Financing Cash Flow 2,057 1,014 1,237 -165 -332 Debtor days 88 89 80 75 70
Inc / Dec (-) in Cash -56 182 1,567 759 -1,612 Inventory days 142 205 180 150 150
Opening Cash Balance 74 18 200 1,767 2,526 Creditor days 66 121 124 120 123
Closing Cash Balance 18 200 1,767 2,526 914 Source: Company, JM Financial

APPENDIX I
JM Financial Inst itut ional Secur ities Lim ited

Corporate Identity Number: U67100MH2017PLC296081
Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610
Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: sunny.shah@jmfl.com
Definition of ratings
Rating Meaning
Buy Total expected returns of more than 10% for large-cap stocks* and REITs and more than 15% for all other stocks, over the next twelve
months. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 10% upside from the current market price for large-cap* stocks and REITs and
in the range of 10% downside to 15% upside from the current market price for all other stocks, over the next twelve months.
Sell Price expected to move downwards by more than 10% from the current market price over the next twelve months.
* Large-cap stocks refer to securities with market capitalisation in excess of INR200bn. REIT refers to Real Estate Investment Trusts.
Research Analyst(s) Certification
The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.
Important Disclosures
This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.
JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the
investor.
JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
the company(ies) mentioned in this report for rendering any of the above services.
JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell
the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,
or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in,
it may have potential conflict of interest at the time of publication of this report on the subject company(ies).
Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.
The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.
The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations,
2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered
under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this
report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.
While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or
developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may
not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This
report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.

The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of
any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to
make modifications and alterations to this statement as they may deem fit from time to time.
This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.
This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or
other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional
Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be
eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of
and to observe such restrictions.
Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala (ruchir.jhunjhunwala@jmfl.com) on +65 6422 1888 in
respect of any matters arising from, or in connection with, this report.
Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial
Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the
United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of
1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").
This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for
purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule
15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are
not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM
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This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The
research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered
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requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading
securities held by a research analyst account.
JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities,
JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial
Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.
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Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments
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are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside
the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial
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be engaged in only with relevant persons.
Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the
securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as
a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an
exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable
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similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities
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information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the
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agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the
information contained herein.

India Specialty Chemicals Shaking Up The Status Quo

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India Specialty Chemicals Shaking Up The Status Quo

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31 May 2021

India Specialty Chemicals

INDIA SPECIALITY CHEMICALS

MAIN THEMES Krishan Parwani

32 CRAMS/CSM business provides long term growth visibility

34 UPL — Uniquely Placed (BUY, TP INR 1,000)

47 PI Industries — Ever Resilient ‘PI’e (BUY, TP INR 2,995)

Brookfield India Real

JM Financial Institutional Securities Limited Page 2

Shaking up the Status Quo

JM Financial Institutional Securities Limited Page 3

Source: ARIL DRHP Source: ARIL DRHP

JM Financial Institutional Securities Limited Page 4

India’s Specialty Chemical Industry is a decadal growth opportunity

India is emerging as a fast-growing specialty chemicals hub on a rise in its competitiveness,

India’s Specialty Chemicals Industry to witness growth across segments

F&F and Nutra Food processing,

Polymer additives Pipes, White goods

Agrochemicals – Immense growth potential

Fluorochemicals – Adoption on the rise

JM Financial Institutional Securities Limited Page 6

Source: ARIL DRHP Source: ARIL DRHP

Exhibit 11. Valuation summary

JM Financial Institutional Securities Limited Page 7

JM Financial Institutional Securities Limited Page 8

Exhibit 12. Speciality chemicals companies peers valuation comparison

Exhibit 13. Agrochemical companies peers valuation comparison

Exhibit 14. Speciality chemicals companies financials comparison

Exhibit 15. Agrochemical companies financials comparison

JM Financial Institutional Securities Limited Page 9

India’s Specialty Chemical Industry is a decadal growth

Overview of the Global and Indian speciality chemicals industry

Source: EY, JM Financial

JM Financial Institutional Securities Limited Page 10

Source: Industry, JM Financial Source: Industry, JM Financial

JM Financial Institutional Securities Limited Page 11

Source: FICCI, JM Financial

JM Financial Institutional Securities Limited Page 12

Source: CEFIC, JM Financial

CY08 CY18 CY08 CY18

JM Financial Institutional Securities Limited Page 13

World (mmtpa) China (mmtpa) China as % of global (RHS)

JM Financial Institutional Securities Limited Page 14

CY07 CY17 CY07 CY17

JM Financial Institutional Securities Limited Page 15

Strengthening competitiveness of India’s specialty chemicals industry

JM Financial Institutional Securities Limited Page 16

China’s tightening environmental norms are raising its regulatory costs

JM Financial Institutional Securities Limited Page 17

Supportive policies to capitalise on rising adoption of ‘China plus one’ strategy

Capacity (mmt) Pro duction (mmt)

JM Financial Institutional Securities Limited Page 18

Exhibit 43. India’s net imports of key chemicals and petrochemicals

JM Financial Institutional Securities Limited Page 19

India’s Specialty Chemicals Industry to witness growth across

Source: FICCI, JM Financial Source: FICCI, JM Financial

JM Financial Institutional Securities Limited Page 20

Construction chemicals: This segment’s growth in India is driven by housing and

F&F and Nutra Food processing,

Polymer additives Pipes, White goods

JM Financial Institutional Securities Limited Page 21

JM Financial Institutional Securities Limited Page 22

Agrochemicals – Immense growth potential