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Chemicals
THEMATIC January 17, 2022
Backing the right business model Key Recommendations

SRF Ltd BUY
Chemical companies re-rated 2-3x in the last three years on 20-25%
earnings growth given improved pricing, benign crude and positive Target Price: `. 3,054 Upside 15%
sentiment on China+1 theme. This enabled industry to generate OCF
Aarti Industries SELL
(`1,856bn) with capex at `900bn over FY16-21; the industry is gearing
for capex of `460bn over the next two years. Increasing capex will Target Price: `. 890 Downside: 20%
burden gross block turnover (1.4x in FY21 vs 1.8x in FY18) and rising
input costs will hurt margins (OPM 17% in FY21 vs 14% in FY18). The Deepak Nitrite BUY
Indian chemicals story is no more a generic broad-based one as we are
cautious on project execution challenges, delay in RM price pass-on and Target Price: `. 3,117 Upside: 17%
China+1 not playing out meaningfully due to limited petrochem infra. Atul Ltd BUY
Prefer companies with integrated business models, adherence to QSHE
and better execution capability. Initiate with BUY on SRF, Atul, Deepak Target Price: `. 11,525 Upside: 10%
and Vinati, and SELL on Navin and Aarti.
Vinati Organics BUY
In the midst of capex cycle, demand environment needs to be strong
In FY16-21, industry revenues grew 8% with capex of `900bn (top 5/10 account Target Price: `. 2,352 Upside: 14%
for 29%/37%). Investments were made in downstream (for growth) and Navin Fluorine SELL
backward integrated (to reduce RM volatility). Capex was largely funded
internally as industry had strong cash conversion (OCF/EBITDA: 90%) and Target Price: `. 3,516 Downside: 16%
simultaneously expanded margins. In light of rising crude and unstable
operating environment we remain cautious on increasing capital intensity but
We prefer companies with strong
prefer SRF and Deepak Nitrite which have strong execution capabilities. execution capabilities and high QSHE
Basic chemical segment’s share to remain dominant focus
Basic chemicals formed 79% of industry revenue in FY21 vs 84% in FY16. Its Execution Process
QSHE
capability Integration
share is expected to remain high with improving domestic demand and import
SRF
substitution. Even China’s basic chemical segment contributes ~80% to overall
industry revenues. In the last five years, basic chemical companies improved Aarti
EBITDA margin to 17% in FY21 from 11% in FY16 along with balance sheet Deepak
improvement. With scale, faster execution and nimble-footed management, Atul
basic chemicals can also be a profitable segment. Deepak Nitrite, Aarti and Atul Vinati
will continue to gain traction given wide product baskets, higher exposure to
Navin
domestic industry, vertical integration and scale.
Source: Company, Ambit Capital research
CSM to remain major theme for a decade Strong, Relatively strong, Average
(1) As China continues to move up the economic-development ladder and
expand in industries like semiconductors and electronics and (2) Europe (25%
share in US$200bn global CSM industry) and China (15%) become environment
conscious, global demand for conventional agrichem/pharma molecules will be
incrementally met by countries like India. India (10% share) is rightly placed as it
offers (1) stable political environment with transparent policies/practices (very
relevant in present times), (2) legacy of IP protection (thanks to PI & Divis), (3)
R&D culture with technology transfer capabilities and (4) adherence to QSHE
standards. With strong base of working with global innovators, SRF, PI, Navin
Fluorine have an edge to scale operations.
Being selective and backing the right business models
FY18-21 were crucial in the limited history of the Indian chemical industry: (1)
capex intensity increased 2x between FY16-21, (2) earnings CAGR of 16% for Research Analysts
leading top-12 chemical companies and (3) sector become one the most Ankit Gor
expensive (25x 2-year fwd P/E), at par with FMCG and IT. Hereon, we are ankit.gor@ambit.co
cautiously optimistic on the sector as capex run-rate would increase in the next
Tel: +91 22 6623 3132
five years (further pressure on asset turn) and with volatile RM (persists) will have
negative impact on RoCE and FCF. We suggest investors to be company-specific Kumar Saumya
and back those with superior execution capabilities, vertical integration, and kumar.saumya@ambit.co
strong financial health to absorb operational and macro shocks. Tel: +91 22 6623 3242
Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may
have a conflict of interest that could affect the objectivity of this report. All Investors including US Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers and Disclosures at the end of this Report.
Chemicals
CONTENTS
The Narrative in Charts ……………………………………………………………..4
In the midst of a capex cycle ………………………………………………………..6
Basic chemicals to remain integral part of the industry ……………………….15
Will specialty chemicals companies remain in favour? …………………………20
CRAMs to remain the major theme for the next decade ………………………26
Betting on the right business model ………………………………………………31
Valuations – Favorable operating environment driven valuations ……………34
COMPANIES
SRF Limited (BUY): Not resting on laurels ……………………………………….37
Aarti Industries (SELL): Walking a tight rope …………………………………….61
Deepak Nitrite: Ready to join the big league …………………………………..79
Atul Limited (BUY): Profitable, sustainable, scalable ………………………….101
Vinati Organics (BUY): Niche chemistry at work ………………………………117
Navin Fluorine (SELL): Growth vs profitability conundrum……………………135
January 17, 2022 Ambit Capital Pvt. Ltd. Page 2

Chemicals
Exhibit 1: Valuation snapshot of our coverage universe

3m- P/E EV/EBITDA P/B
Mcap ADTV
Companies CMP (`) TP (`) Upside (%) Rating
(US$ bn) (US$ FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
mn)
SRF 10.7 16 2,657 3,054 15% BUY 47 40 33 29 24 21 9 8 6
Aarti Inds. 5.4 26 1,099 890 -20% SELL 60 49 42 35 29 25 8 7 6
Deepak Nitrite 4.9 18 2,661 3,117 17% BUY 34 30 27 23 20 18 11 8 7
Atul 4.1 22 10,511 11,525 10% BUY 45 36 32 31 25 22 7 6 5
Vinati Organics 2.9 40 2,072 2,352 14% BUY 66 43 35 50 32 27 12 10 8
Navin Fluorine 2.8 42 4,203 3,516 -16% SELL 82 58 48 58 41 34 11 10 8
Exhibit 2: Financial estimates of our coverage universe

Sales EBITDA PAT FY22-24 CAGR (%) RoE(%)
(` bn)
FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E Sales EBITDA PAT FY21 FY22E FY23E
SRF 111 131 153 28 34 40 17 20 24 17% 18% 19% 22% 21% 21%
Aarti Inds. 61 71 82 12 15 18 7 8 10 16% 21% 20% 15% 15% 15%
Deepak Nitrite 62 68 77 16 18 21 11 12 13 12% 13% 12% 38% 31% 28%
Atul 47 54 61 10 12 14 7 8 10 14% 18% 19% 17% 18% 18%
Vinati Organics 15 20 24 4 7 8 3 5 6 29% 36% 37% 20% 25% 25%
Navin Fluorine 14 19 23 3 5 6 3 4 4 29% 32% 31% 14% 18% 19%
Exhibit 3: DCF assumption of our coverage companies

Sales Sales Avg Avg capex/ capex/
RoCE RoCE
CAGR CAGR EBITM EBITM GB GB Terminal Implied
WACC
FY21- FY25- FY21- FY25- FY21- FY25- FY21- FY25- Growth (%) FY24E P/E
25E 35E 25E 35E 25E 35E 25E 35E
SRF 20% 18% 26% 26% 14% 8% 20% 29% 5% 11% 38
Aarti Inds. 21% 19% 21% 22% 21% 8% 14% 18% 5% 12% 34
Deepak Nitrite 19% 18% 27% 26% 21% 10% 36% 35% 5% 12% 32
Atul 19% 20% 22% 24% 18% 8% 22% 40% 5% 13% 35
Vinati Organics 34% 25% 33% 35% 15% 12% 27% 45% 5% 13% 40
Navin Fluorine 25% 26% 26% 28% 24% 12% 23% 37% 5% 13% 40

Chemicals
The Narrative in Charts

Exhibit 4: Industries increasing capex intensity is weighing Exhibit 5: The capex intensity is led by the top-12
on GB turn; FY16-20 growth stood at 20% companies (by market cap)
CAPEX (Rs Bn) GBT (x) (RHS) Top12-Revenue share (%) Top12-CAPEX share (%)
250 1.9 50%
200 40%
1.6
150 30%
100 20%
1.3
50 10%
- 1.0 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY16 FY17 FY18 FY19 FY20 FY21
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 6: Higher profitability and WC improvement Exhibit 7: Top 12’s majority of cash inflows over FY16-21 (`
enhanced cash generation 971bn) went into capacity expansion and acquisition
OCF (RS bn) CAPEX (Rs bn) OCF (%) Debt (%) Equity (%)
700 CAPEX (%) Acquisition (%) Dividend (%)
600 CWIP (%) Investment (%) Cash (%)
Other (%)
500
100% 3%
13% 8%
400 7%
80% 16% 5%
9%
300 60%
32%
200 40% 72%
100 20% 36%
- 0%
FY16 FY17 FY18 FY19 FY20 FY21 Inflows Outflows
Exhibit 8: Industry gross margin is negatively related to Exhibit 9: Rising raw material prices risks near term
crude (-0.9) profitability
GPM - Industry Crude (USD/Bbl) (RHS) Caustic soda Soda Ash EDC
Ethylene Benzene Propylene
48% 140 Acetic acid Acrylonitrile Caprolactam
46% 120 3,000
44% 100 2,500

2,000
42% 80
1,500
40% 60
1,000
38% 40
500
36% 20
-
34% -
Q4FY21
Q1FY21
Q2FY21
Q3FY21
Q4FY21
Q1FY22
Q2FY22
Q3FY22
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: Company, Ambit Capital research Source: Company, Ambit Capital research, *prices in USD/tn

Chemicals
Exhibit 10: High growth of specialty chemical companies Exhibit 11: With improved growth trajectory, share in
(14% over FY16-21) is driving their share within the industry industry capex is also rising for specialty companies
Speciality Basic Share of industry

30% 28%
100% 26%
25% 23%
80% 21% 20%
20% 18%
60% 84% 82% 82% 81% 81% 79%
15%
40%
10%
20% 5%
16% 18% 18% 19% 19% 21%
0% 0%
Exhibit 12: CSM offers strong growth proposition Exhibit 13: Revenue of CSM companies have grown at
13% CAGR with stable GB turn
CSM growth 2019-24E Revenue (Rs bn) GBT (RHS)

22%
200 1.4
18%
18% 1.2
160
1.0
14%
120 0.8
10%
10% 0.6
80
6% 0.4
40
0.2
2%
Global CSM growth India's CSM growth - -
FY16 FY17 FY18 FY19 FY20 FY21
Source: Company, Frost and Sullivan, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 14: Our coverage universe re-rated sharply on Exhibit 15: Relative mapping of our coverage universe
expectations of improved earnings growth based on our estimates
45 1Y fwd P/E Median 35%

Vinati
40
30%
FY21-24 PAT CAGR
35 SRF
25% Aarti
30 Navin
25 20% Deepak
20 15% Atul
15
10%
10
5 5%
- 0%
Aug-20
Aug-15
Nov-16
Jun-16
Jun-21
May-19
Oct-19
Mar-15
Mar-20
Sep-17
Feb-18
Apr-17
Jan-16
Jul-18
Dec-18
Jan-21
- 20 40 60
FY24 P/E
Source: Company, Bloomberg, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research

Chemicals
In the midst of a capex cycle

The Indian chemicals industry will continue to invest in capacities as it offers
best growth (15-20%) and Indian manufacturers move towards downstream
products/chemistries. The increased capital investments will be supported by
stable working capital, low leverage on balance sheet (D/E 0.4x) and strong
cash conversion (OCF/EBITDA averaged 90% over FY16-21). Margin and
gross block turnover will remain volatile near term due to volatile operating
environment but in the long term investments will strengthen the operating
framework of the industry as nearly 45% of incremental capex (` 213bn over
FY22-23E) will come from top-121 (by market cap) listed companies which are
entering (1) new chemistries (SRF into fluoro-polymers, PI into
pharmaceuticals CSM), (2) forward vertical integrations (Deepak Nitrite into
solvents, Navin into high performance products, Vinati into antioxidants) and
(3) backward integrations (Atul in MCA).
Expansion at an accelerated pace in the last five years

The Indian chemicals industry is pinning its hopes on demand growth aided by
gradual shift in supply from China as global customers look to reduce sourcing
concentration. Capex intensity is increasing at an accelerated rate with anticipation of
demand. Industry (Chemical universe of 114 listed companies considered to proxy
industry) capex has grown at 12% CAGR over FY16-21 against sales growth of 8%,
thus impacting GBT.
Exhibit 16: Capex in FY21 took a breather due to Covid-19 Exhibit 17: Strong cash generation supported by stable
induced challenges; FY16-20 growth stood at 22% working capital and improving margins supporting
capex; OCF improved in FY21 on account of receipt of
outstanding fertilizer subsidies
CAPEX (Rs Bn) GBT (x) (RHS) 700 OCF (RS bn) CAPEX (Rs bn)
250 1.9
600
200 500
1.6
150 400
300
100
1.3 200
50
100
- 1.0 -
Source: Company, Bloomberg, Ambit Capital research, we include 114 listed Source: Company, Bloomberg, Ambit Capital research
Indian companies to represent the Chemical Industry
Top-121 Indian chemical companies account for 45% of total asset additions
Top-12 companies have expanded aggressively and accounted for 45% of the total
industry capex in FY21 compared to 41% in FY16. Of top-12, UPL (excl. Arysta
acquisition), SRF, Tata Chemicals and Aarti Industries were the most aggressive.
During FY16-FY21, revenues of top-12 companies have grown at a CAGR of 10%
while their capex grew at a CAGR of 14%. Faster paced capex have impacted their
GBT.
1
Top-12: UPL, SRF, PI Inds, Aarti Inds, Atul, Bayer Crop, Deepak Nitrite, Coromandel,
Sumitomo Chemical, Tata Chemicals, Vinati Organics and Navin Fluorine
Chemicals
Exhibit 18: Top 12’s improving revenue share is driving optimism for increased capex
Top12-Revenue share (%) Top12-CAPEX share (%)

50%
45%
41% 40%
40% 38%
35% 35%
34% 34%
31% 30% 29% 29%
30%
20%
10%
0%
Exhibit 19: FY20 and FY21 saw sharp uptick in capex run- Exhibit 20: Working capital improvement and improved
rate with companies like SRF and Aarti substantially profitability supported OCF in FY20 and FY21
increasing their investments
CAPEX - Top12 (Rs bn) GBT (x) (RHS) OCF - Top12 (Rs bn) CAPEX (Rs bn)
90 1.7 250
80
70 200
1.4
60
150
50
1.1
40
100
30
20 0.8
50
10
- 0.5 -

Chemicals
Capex for strengthening capabilities

Companies have expanded capacities into downstream products to improve growth
potential, backward integrated to mitigate RM volatility and reduced dependency on
China and others, while companies like UPL spent on products and on registrations.
Exhibit 21: The investments done by leading chemical companies over FY16-21
capex (Ex-acquisitions)
Company Growth Investments Capability enhancements
cumulative 5Y (` bn)
New varieties of Mancozeb (Unizeb Glory), Tridium, Zeba, Investments into overseas subsidiaries and
UPL 94
Triziman and Evolution. product registrations.
MPP facilities (`7bn), capacities for agrochemicals (` 4bn),
Chloromethane capacity expansion (`5bn), R&D
SRF 62 Refrigerants capacity expansion (` 5bn), Technical textile (`
centre at Rajasthan, HFC-125 acquisition
2bn) and packaging (` 23bn).
PI 21 Six new MPPs. R&D centre at Udaipur
Chlorination capacity addition (` 6bn), nitration capacity
addition (`2bn), pharma intermediates, Co-investments New R&D facilities at Navi Mumbai and land
Aarti 49
into dedicated capacities for long term contracts (`5bn) acquisition at Dahej
and Toluene chain (` 2bn).
Ambernath pharma facility (` 1.1bn), doubling para cresol
Atul 16 Backward integration for feedstock capacities
capacity, Epoxy resins, sulphur black, resorcinol and 2-4D
Deepak Nitrite 19 Phenol-Acetone plant (` 14bn), IPA (` 2bn) Brownfield expansions and integrations.
Butyl Phenol capacity (` 2.4bn),ATBS capacity ( ` 1.1 bn ),
Vinati Organics 7 Backward integration to IB capacity (` 1.5bn)
IBB capacity (` 0.8bn)
Navin Fluorine 5 Second and third cGMP plant (` 1.8bn) Integration of Manchester Organics
Gross block turnover in check; margins moving up led by benign crude

Gross block turnover ratio for the industry and top-12 companies peaked in FY18
and FY16 respectively as capex intensity was higher than revenue growth. Industry
players were the most aggressive between FY18-21. GBT of most top-12 companies
declined, however Deepak Nitrite, Navin Fluorine and SRF were able to improve or
maintain ATR, leading to improvement in RoE as well.
Exhibit 22: GBT and RoE movement – NFIL and DN are top performers
GBT RoE
Remarks
FY16 FY21 FY16 FY21
Navin Fluorine 1.4 1.8 14% 16%

 Ramp-up of high margin CRAMs capacity
 Higher growth in Spechem segments
Deepak Nitrite 1.9 2.0 15% 40%
 Ramp up of Phenol capacity
 Improved margins in fine and specialty segment
SRF 0.8 1.0 17% 20%
 High growth in specialty chemical segment
 Favourable spreads in packaging film segment
Vinati Organics 1.4 1.1 27% 19%  Muted demand in ATBS due to lower crude oil prices
Atul 2.5 2.1 21% 19%  Aromatics and polymers products were laggard
PI Industries 2.6 1.9 30% 19%

 QIP money on the balance sheet impacted return ratios.
 Lower domestic growth and acquisition of Isagro impacted GBT
Aarti 1.6 1.0 24% 16%  Aggressive capacity addition and muted sales growth
Industry 1.7 1.4 12% 15%  GBT peaked out in FY18
Top-12 1.6 1.0 16% 15%  GBT peaked out in FY16
Crude oil prices and margins are inversely correlated

Over the last five years, EBITDA and gross margin improved at the industry level
mainly due to lower crude oil prices since most RM is crude-based; lower crude oil
prices helped margins. Last ten years’ data suggests that crude oil prices and margins
are inversely correlated. Bulk/basic and fertilizer companies are more negatively
correlated to crude oil price movement than companies in spechem and agrichem. In
FY21, industry EBITDA margin improved by 300bps YoY to 17% because of lower oil
prices and various cost saving measures adopted by companies to mitigate the
impact of Covid-19. Industry gross margin is negatively correlated to crude (-0.9).

Chemicals
Exhibit 23: Industry gross margin is negatively correlated Exhibit 24: Top12 gross margins are negatively correlated
to crude (-0.9) to crude (-0.8)
GPM - Industry Crude (USD/Bbl) (RHS) GPM - Top12 Crude (USD/Bbl) (RHS)
48% 140 60% 140
46% 120 120
55%
44% 100 100
50%
42% 80 80
45%
40% 60 60
40%
38% 40 40
36% 20 35% 20
34% - 30% -
FY14
FY15
FY11
FY12
FY13
FY16
FY17
FY18
FY19
FY20
FY21
FY15
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19
FY20
FY21
Source: Bloomberg, Company, Ambit Capital research Source: Bloomberg, Company, Ambit Capital research
Exhibit 25: Margin movements of major chemical companies

GM OPM
Companies Remarks
FY16 FY21 FY16 FY21
SRF 49% 52% 21% 25%

 Share of high margin spechem has improved to 29% in FY21 from 16% in FY16
 Favourable spreads in packaging segment
P I Industries 44% 43% 21% 22%  Rising share of agri CSM (73% in FY21 vs 62% in FY16)
Aarti Inds. 44% 53% 19% 22%

 Lower crude oil prices and better pricing (China tailwind)
 Rising share of pharma revenue (18% in FY21 vs 14% in FY16)
Atul 49% 55% 18% 25%
 Backward integrations
 The ramp up of phenol plant
Deepak Nitrite 40% 48% 12% 29%  Improved margins in fine and specialty segment
Vinati Organics 53% 59% 33% 37%
 Better product mix towards ATBS and ATBS capacity expansion
 Backward integration with IB capacity of 18KT supported the margins.
 The ramp up of CRAMs facility
Navin Fluorine 54% 54% 17% 26%  Improving share of specialty sales
 Better pricing of R22

Chemicals
Mini capex cycle for the industry, more to follow

The industry has witnessed first capex cycle; we believe it was a mini capex cycle and
more are yet to come since it was largely funded through internal accruals. During
the last five years, companies (114) did a cumulative capex of `900bn supported by
strong OCF of `1,855bn on account of better cash conversion (OCF/EBITDA
averaged 90% over FY16-21). During this span, balance sheets of companies
improved meaningfully with D/E at 0.4x in FY21 compared to 0.9x in FY16.
Exhibit 26: Higher margins of Top-12 companies reflecting Exhibit 27: The receipt of fertilizer subsidy in FY21
in better RoCE vs industry bolstered industry cash conversion vs Top-12
RoCE - Industry RoCE - Top12 OCF/EBITDA - Industry OCF/EBITDA - Top12

17%
140%
15%
120%
13%
100%
11% 80%
9% 60%
7% 40%
5% 20%
Exhibit 28: Companies invested ~ 50% of OCF for capex during FY16-21
OCF (Rs bn) Capex (Rs bn)

2,000
1,500
1,000
500
-
Industry Top-12

Chemicals
Exhibit 29: Strong cash conversion led by improvement in Exhibit 30: OCF/EBITDA bloated in FY21 due to receipt of
working capital requirements improved industry leverage pending fertilizer subsidy
Industry LT debt (Rsbn) D/E (RHS) OCF/EBITDA

1,200 1.0 140% 129%
1,000 120% 110%

0.8 102%
100%
800 80%
0.6 80% 73%
600
0.4 60%
400 44%
40%
200 0.2
20%
- - 0%
Source: Company, Bloomberg, Ambit Capital research *the industry debt is Source: Company, Bloomberg, Ambit Capital research
higher in FY21 as UPL funded Arysta acquisition with US$ 3bn debt
Remaining OCF utilized for acquisition and dividend

About 50% of OCF was used for capex by the industry and top-12 players. It is
interesting to note that UPL accounts for 30% and 65% to the total industry and top-
12 players’ debt respectively. UPL’s debt increased from `48bn in FY16 to `236bn in
FY21 primarily due to US$ 3bn (`204bn) loan taken to finance Arysta’s acquisition.
Exhibit 31: UPL financed its Arysta acquisition of Exhibit 32: Top 12 companies had total inflows of `971bn
(US$4.2bn) using debt (70%) over FY16-21
FY16 (Rs bn) FY21 (Rs bn) OCF (%) Debt (%) Equity (%)
CAPEX (%) Acquisition (%) Dividend (%)
250
CWIP (%) Investment (%) Cash (%)
Other (%)
200
100% 3%
150 13% 8%
7%
80% 16% 5%
100 9%
60%
50
32%
- 40%
72%
SRF
UPL
Tata Chem
Atul
Navin
Aarti
Deepak
Vinati
Coromandel
PI
20% 36%
0%
Inflows Outflows
Slew of IPOs/QIPs in the last three years provided liquidity

Leading companies are expected to generate decent OCF which will take care of
expansion plans. However, the last 2-3 years witnessed increased equity raises via Of the total fund raised through
IPOs and QIPs in the chemical sector to fulfill growth aspirations, debt repayment, IPO in 2021, chemical companies
acquisition and OFS. These fund raisings pose concerns over the consistent need for account for 12% share.
equity dilution to fund growth.

Chemicals
Exhibit 33: Fund raising via primary and secondary markets in the last few years
Fund raised (bn) OFS (` bn) Year Purpose
IPO
Chemplast Sanmar 38.5 25.5 FY22 Repayment of borrowings.
Clean Science 15.5 15.5 FY22 -
Galaxy Surfactant 9.4 9.4 FY19 -
India Pesticides Limited 8.0 7.0 FY22 Working capital requirement.
Anupam Rasayan 7.6 - FY21 Repayment of debt.
Heranba 6.3 5.7 FY21 Working capital requirement.
Fine Org 6.0 6.0 FY19 -
Laxmi Organics 6.0 3.0 FY21 Fund capex of subsidiary Yellowstone Fine Chemicals.
Amy Organics 5.7 3.7 FY22 Capital requirements for R&D facility, equipments and debt payment.
Tatva Chintan 5.0 2.8 FY22 Capital requirement for expansion at Dahej and new R&D facility.
Rossari Biotech 5.0 4.5 FY21 Repayment of debt and fund working capital.
Advance Enzyme 4.1 3.6 FY17 Repayment of borrowings.
Capital requirement for capacity expansion and working capital
Chemcon 3.2 1.6 FY21
requirements.
Neogen Chemicals 1.3 0.6 FY20 Repayment of borowings.
Shree Pushkar 0.6 - FY16 New facility and capacity expansion.
QIP
PI Industries 20.0 - FY20 Fund diversification into pharmaceuticals.
Aarti Ind 12.0 FY22 Fund capex requirement of ` 45bn over FY22-24.
Fund growth initiatives, greenfield site at Gujarat and deleverage balance
Aarti Ind 7.5 FY19
sheet.
SRF 7.5 FY21 Repayment of debt.
Deepak Fertilizers 5.1 FY22 Fund Ammonia and Technical Ammonium Nitrate expansion.
Phillips Carbon 4.0 FY22 Fund greenfield capacity expansion at Tamil Nadu
Deepak Nitrite 3.8 FY16-18 Fund Phenol-Acetone plant capex
Rossari Biotech 3.0 FY22 Inorganic growth opportunities
Camlin Fine 2.0 FY17-18 capex towards di-phenol plant
Bodal 2.2 FY18 Capacity for Thionyl Chloride, dyes and vinyl sulphone.
Capex for H-Acid, CPC blue crude and value added specialty precipitated
Aksharchem 0.7 FY18
silica
Near-term hiccups; long-term growth driver intact

To make sure forthcoming assets are being utilised profitably, demand scenario
needs to be robust along with stable input costs. We believe it is too much to ask for
in the near term, as:
 There is a risk to already done capex (not yet fully utilised) and upcoming capex –
companies with better revenue visibility and strong product pipeline to perform
better.
 China+1 theme may not play out meaningfully due to limited feedstock
infrastructure – companies with right mix of domestic and export revenues to
benefit as they don’t depend much on export markets.
 Project execution/ramp-up challenges – companies with history of better
execution capabilities to outpace others.
 Volatile RM prices – vertically integrated companies will be able to mitigate
margin volatility more efficiently.

Chemicals
Exhibit 34: Feedstock prices are on the rise, which may impact near-term profitability
Price rise is imminent across basic
Caustic soda Soda Ash EDC Ethylene Benzene Propylene chemicals, chlorine-based
Acetic acid Acrylonitrile Caprolactam MEG LAB Toluene chemicals, benzene value chains,
3,000
ethylene chains, and vegetable
oils. The closure of plants across
2,500 China & USA along with logistic
challenges has further escalated
2,000 the shortage of RM.
1,500
1,000
500
-
Q4FY21 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22
Source: Bloomberg, Ambit Capital research, *prices in USD/tn
Exhibit 35: Margins are expected to soften due to rising RM and logistics costs
Top 12 GM (%) Top 12 OPM (%)

60%
53% 52% 52%
51%
50% 48% 48%
46%
40%
30%
21% 22% 21%
20% 19%
20% 18% 18%
10%
Q4FY21 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22

Chemicals
India is on a strong footing in the long run

India’s chemicals industry is on a strong footing supported by improving domestic as
well as export demand. India has 4% share of the global chemicals industry (4%
share of specialty as well) and even a marginal shift of sourcing from China (~37%
share of global market) will significantly boost growth of the industry. The specialty
segment will be the primary beneficiary as the domestic manufacturers forward
integrate into downstream high value intermediates.
Exhibit 36: The global specialty chemical market is expected Exhibit 37: ..while the Indian specialty chemicals market
to grow at 3%... is expected to grow at 12%
Global speciality chemical (USD bn) China North America Western Europe
Japan India Global
CAGR 3%
900 CAGR 5% 850 16%
800 750
12%
700 12%
595
600
500 8%
400 6%
300
4% 3% 3%
200 2%
1%
100
0%
-
China North Western Japan India Global
2015 2020 2025
America Europe
Source: Aarti presentation, Ambit Capital research Source: Aarti presentation, Ambit Capital research
Exhibit 38: India accounts for 4% share of the global Exhibit 39: Indian specialty chemical industry is skewed
specialty chemicals market towards agrochemicals and dyes & pigments
Agrochemical
China
3%
Dyes and pigments
15% North America 3% 9% Flavor and fragrance
26% 3%
29% Surfactant
Western Europe 4%
11% Textile
Japan 4% Polymer
4% 6% Construction
India
8% 21% 6% Personal care
22%
Other Asia 11% Neutraceuticals
15%
Water chemicals
Other
Other
Source: AR of companies, Ambit Capital research Source: FICCI, Ambit Capital research

Chemicals
Basic chemicals to remain integral part of

the industry
Basic chemicals form the key building blocks for the value chain. The Indian Despite having around 40% market
chemicals industry’s 79% revenues (84% in FY16) come from basic chemicals. It will share globally, Chinese chemical
continue to be a major revenue contributor as (1) India has a huge local demand industry is also skewed towards
base which is growing at about 7-8%, (2) relatively low involvement of technology basic chemicals with nearly 80%
and R&D, (3) ample availability of skilled and semi-skilled work force and (4) large revenue share.
import substitute opportunity in basic chemicals worth more than USD15bn.
Exhibit 40: Revenues of basic chemicals companies have grown at 7% CAGR over
FY16-21
Basic chem sales (Rs bn) GBT (x) (RHS)
2,500 2.0
2,000 1.8
1,500 1.6
1,000 1.4
500 1.2
- 1.0
Exhibit 41: Revenue share of basic chemicals remained Exhibit 42: Higher growth and margin of specialty
around 80% segment results in increasing share of EBITDA
Speciality Basic Speciality Basic
100%
100%
80% 80%
60% 81% 81% 79% 60% 80% 79% 81% 78% 78% 77%
84% 82% 82%
40% 40%
20% 20%
16% 18% 18% 19% 19% 21% 22% 22% 23%
20% 21% 19%
0%
0%
81% of industry capital employed by basic chemicals companies

Thirty years ago, China started as a supplier of basic and commodity chemicals to the
world, even presently it remains the largest supplier of basic chemicals. India has a Capital employed share of basic
long way to go; basic chemical provides a strong chemistry base and execution chemicals at 62% ex of fertilizers.
experience to scale and build upon to become a value-added product manufacturer.
We believe India is on the right path as 81% of capital employed is by basic
chemicals companies. (Please note we include fertilizer companies in basic chemicals).
We believe investments in basic chemicals will continue as global innovators prefer
their suppliers to be backward integrated to ensure (1) minimum pricing volatility, (2)
optimum quality and (3) timely supply. This will gradually reduce India’s dependency
on China for many products. There is huge scope for companies to set up capacities
of products which are imported in India.

Chemicals
Exhibit 43: Investments by major basic chemicals companies in key products

Expected
Domestic Domestic
Export Import Growth
Product Capacity Demand Players capex
(KT) (KT) for the
(KT) (KT)
next 5Y
Himadri Specialty:  Himadri invested `4bn on 60KT capacity

180KT expansion.
Carbon Black 1,438 1,060 144 197 5% Phillip Carbon: 603KT  Phillip investing ` 12bn on 150KT capacity
Birla Carbon: 315KT expansion.
India
 Birla Carbon investing ` 4bn for 72KT capacity.
No players presently.  MFL investing ` 2bn for 50KT capacity expansion.
Epichlorohydrin - 70 - 70 10% Two players are  DCM investing ` 4bn for 50KT capacity
entering expansion.
Laxmi: 127KT
Jubilant Ingrevia:
Ethyl Acetate 560 370 110 2 11% 150KT
Godavari Bio: 100KT
GNFC: 50KT
No players presently.  Meghmani LLP adding 13.5KT (` 0.7bn)
Three players are
PAP - 27 - 27 5%
entering under PLI
 Sadhna Nitrochem adding 36KT (` 1.8bn)
scheme  Valiant Organics added 12KT capacity in FY21
IFFCO: 2.5MMT  India will add about 7MMT in next 10 years.
Nagarjuna: 2MMT  HURL will add 2.2MMT
Chambal: 2MMT
Ammonia 16,000 16,014 2 2,416 -  RCFL will add 0.7MMT
KRIBHCO: 1.25MMT
RCFL: 1.2MMT  DFCL is adding 371,300tn with ` 10bn
DFCL: 129KT investment.
HOCL: 40KT
Phenol 277 400 20 170 7% SI: 37KT
 DN invested ` 14bn in greenfield 200KT Phenol
DP: 200KT and 120KT Acetone capacity
HOCL: 25KT
Acetone 167 240 11 82 7% SI: 22KT
 Deepak Nitrite invested ` 14bn in greenfield
DN 120KT 200KT Phenol and 120KT Acetone capacity
IPA 100 240 10 164 10%

DN: 30KT  Deepak Nitrite increasing capacities by 30KT with
DFCL: 70KT capex of ` 400-500mn.
Reliance: 800KT
Chemplast: 300KT
PVC Resin 1,500 3,000 - 1,500 7% Finolex: 270KT
 Chemplast investing ` 200mn to debottleneck
30KT capacity
DCM: 70KT
DCW: 90KT
Butylated Phenol - 25 - 25 6%  VOL invested ` 2.4bn in 37KT capacity.
Source: Company, Bloomberg, Ambit Capital research
Exhibit 44: Basic chemicals which are majorly imported, offers import substitution
opportunities
Key product imported India demand (KT) India import (KT)
Styrene 880 877
MDI 110 110
Acetic Acid 1,090 930
Acrylonitrile 150 150
IPA 240 164
Maleic Anhydride 73 67
Citric Acid 88 91
Methanol 2,500 2,286
Source: Company, GoI, Ambit Capital research

Chemicals
Scale + wide product basket + vertical integration:

Formula for successful basic chemical companies
Companies with a blend of scale, wide product basket, vertical integration and off-
course execution capabilities can remain in the business profitably over the long run
and mitigate risks from volatile raw materials. Over the years, many Indian chemicals
companies like Atul, Aarti and Deepak Nitrite successfully expanded businesses with
these traits and expanded share of value-added products.
Atul Limited - A remarkable example of backward integration
It is the most diversified company with presence across end-users like flavours &
fragrance, cosmetics, textiles, paints/coating, pharmaceuticals, tyres, wind energy
and automobiles including others. After attaining economically viable scale in
products, to gain cost/market leadership, the company backward-integrated. Over
the long run, this enabled it to improve its margins despite crude oil price volatility
and Chinese competition. About 50% of revenue comes from para cresol, epoxy
resin, sulphur black and 2,4 D. For these products (except epoxy resin), the company
is backward-integrated.
Exhibit 45: ATLP’s value proposition
Key Products Major RM Remarks
Para Cresol Benzene India is Benzene surplus, easy availability from refineries
Backward integrated to entire Sulphur chain via 50%
Sulfuric Acid
subsidiary Amal Ltd.
Epoxy Resin Bisphenol-A Completely imported, India has no capacity
In recent AGM, is announced to expand Caustic Soda
Epichlorohydrin (ECH) (NaoH) capacity to get chlorine (by-product), Chlorine is
key RM to make ECH.
Sulphur Black Dye Intermediates It is backward integrated to H-acid and Vinyl Sulphone
Sulfuric Acid
Caustic Soda It has existing capacity of 48,000 TPA
Recently backward integrated MCA with JV with Nouryon,
2,4 D Monochloroacetic Acid (MCA)
to expand further by FY23
Aarti Industries – Showcased how to leverage chemistry capabilities by going

downstream
It is world’s third largest benzene player. Over the years it has forward and backward
integrated to the entire benzene chain, which helped it to remain cost competitive
despite fierce competition from China. In FY21, about 14% of total export revenue
came from China. Its key user industries are dye & pigments, coating,
pharmaceuticals and agrichemicals. Due to backward integration and chemistry
expertise, it has won two long-term contracts from global majors like Bayer and
Sabic.

Chemicals
Exhibit 46: ARTO’s benzene value chain
Exhibit 47: ARTO’s toluene value chain
Deepak Nitrite – A case of superior execution capabilities

From its initial days, Deepak Nitrite always focused on import substitute products.
Over the years it created scale with backward integration in most of its products like
sodium nitrite/nitrate, OBA and Isopropyl Alcohol (IPA). It provides wide products to
many end-user industries such as agrichemical, pharmaceutical, textile, paper, home
care and fuel additive. In FY19, it successfully executed and ramped up Asia’s largest
single location phenol plant. The company has about 55% India market share in
phenol and acetone. It plans to go downstream in the phenol-acetone chain in many
import substitute products in the near to medium term.

Chemicals
Exhibit 48: Extensive value chain - DN has ample of opportunities to expand
IPA
DN’s presence
Source: Company, Ineos, Ambit Capital research
Tracking footprints of global basic chemical players

We studied a few global chemicals majors and tracked their footprints to understand
critical parameters to become successful. It is interesting thing to note that all have
the common traits of scale, a wide product basket and vertical integration, which
enabled sustainable growth for these companies. BASF, the largest chemical
manufacturer, leverages its strength through presence across the value chain.
Exhibit 49: Diversified end-user industries with focus on improving share of specialty chemicals
Revenue Revenues
Company Segments Outlook
share (USD Bn)
Chemical 14% 9
Materials 18% 13
BASF expects improved performance in surface technology,
Industry Soln 13% 9
chemicals and agrochemicals. However, it expects that
BASF Surface Technology 28% 20 Industry solutions (dispersion and pigment) to have muted
performance in current fiscal. The management is upbeat on
Nutrition and Care 10% 7
e-mobility.
Agriculture 13% 9
Other 4% 3
Advanced Intermediates 33% 2
Specialty Additives 28% 2 Lanxess in confident in specialty additive segment especially
Lanxess rubber based additives and lubricants. It plans for higher
Consumer protection 18% 1 allocation to antioxidants and process accelerators.
Engineering Materials 19% 1
Petrochemicals and specialities 87% 27
Sabic has aligned it focus towards thermoplastics for Electric
SABIC Agri-nutrient 5% 2 Vehicles, oligomers (light weight polymers) for 5G
infrastructure and renewable specialty chemicals.
Hadeed (metals) 8% 2
Specialty additives 26% 4
Nutrition and care 25% 4
Evonik has its vision directed towards active food ingredients,
Evonik Smart material 27% 4
sustainable nutrition, cosmetic and healthcare solutions.
Performance material 16% 2
Services 6% 1
Olefins & Polymers North America 25% 3
Olefins & Polymers Europe 41% 5 Ineos is focussed largely on basic chemicals. It will continue to
Ineos focus on upstream products with reduction in carbon
Chemical intermediaries 47% 6 footprints.
Intersegments -13% (2)

Chemicals
Will specialty chemicals companies remain

in favour?
India’s specialty chemicals industry size is USD32bn and is expected to grow
at 12% while the global specialty chemicals industry is expected to grow at 3-
4%. In the coming years, India’s global share would increase from 4% now
on the back of (1) gradual increase in order book given global innovators
are keen to diversifying sourcing, (2) improvement in realisations, (3)
increased traction in CRAMs businesses and (4) strong domestic demand for
home & personal care and flavours & fragrance products. There are 29
specialty chemicals companies in our universe (114 companies). Revenues
and EBITDA have clocked a CAGR of 14% and 19%, respectively, over the last
five years.
Exhibit 50: Specialty chemicals in India is expected to grow Exhibit 51: Indian chemicals industry skewed towards
at 12% agrochemicals and dyes & pigments
Indian Specialty Chemical Industry (US$Bn)

CAGR 12% Agrochemical
70 64
Dyes and pigments
3%
60 3% 9%
Flavor and fragrance
CAGR 10%
3%
50 29% Surfactant
4% Textile
40 4%
32 Polymer
6%
30 Construction
22
6% Personal care
20 22%
11% Neutraceuticals
10 Water
Other
0
2015 2019 2025
Source: Industry, FICCI, Ambit Capital research Source: FICCI, Ambit Capital research
Exhibit 52: Segment-wise industry outlook and nature

End market
2014-19 2019-25 Entry Product Presence of large Overall
growth
CAGR CAGR barrier Specialization players attractiveness
potential
Agrochemicals 9% 10%
Flavour and Fragrance 16% 17%
Dyes & Pigment 7% 10%
Personal care 16% 15%
Surfactant 6% 11%
Textile 10% 12%
Construction 14% 15%
Polymer 13% 10%
Water Chemicals 15% 15%
Source: Industry, FICCI, Ambit Capital research, High, Medium, Low

Chemicals
Exhibit 53: Our specialty universe has delivered 14% Exhibit 54: EBITDA improvement in FY21 was led by
revenue growth favorable raw material prices and cost control measures
(Covid-led)
Revenue (Rs bn) GBT (x) (RHS) 120 EBITDA (Rs bn) OPM (RHS) 22%
700 2.5
CAGR 19%
600 100
19%
500
2.0 80
400
16%
300 60
1.5
200 13%
40
100
- 1.0 20 10%
Favourable shift in global trade terms to benefit India

Given supply disruption in China, we observe (multiple media reports also suggest) a
favourable shift in the buying/procurement patterns (trade terms) globally for a more
sustainable ecosystem as innovators now desire more stability and consistency over
lower prices.
Exhibit 55: Favorable shift in global landscape
Hence,
Innovators/formulators innovators/formulators
There was an
fulfilled their Innovators/formulators became large while
imbalance in trade
Earlier (Before 2016) intermediate therefore had an upper intermediate
terms (favouring
requirements through hand manufacturers
innovators/formulators)
China and India. remained scattered and
small.
This trend offers scalable

Slowdown at Chinese opportunity to integrated
Innovators/formulators
suppliers' end is affecting Hence, trade terms are and trusted suppliers. For
globally are scouting for
Now (After 2016) the supply chain of getting favourable within e.g. Aarti and Navin
reliable and compliant
innovators/formulators in the value chain. have secured multi year
intermediate suppliers.
China. contracts from global
innovators.
Schaeffler group supply chain crisis due to China “…number of large global customers graduating from
shutdown having a large number of outsourcing vendors to a smaller
number…
Dec-2017: “…Schaeffler Group, suffered supply chain crisis
after shut down of a key supplier in China due to non- “…Companies can no longer ignore the A larger number of global industrial players are graduating
environmental compliance…” (Link) tremendous risks associated with environmental from vendor enlistments to strategic partnerships; the
non-compliance issues in China. What worked in conventional cost arbitrage model is being replaced by
China Environment Ministry’s reply to Schaeffler knowledge arbitrage; short-term opportunism is being
the past may no longer work today or in the
letter on losses due to sudden shutdown: “…When replaced by long-term stability and sustainability”…from
choosing a supplier, the Schaeffler should have considered future” …from Yipiang (Lee) Li, Partner @ Aarti AR17- Chairman Speech
whether it obeys China’s environmental rules…” FaegreBD (Link)
This reflects a change in the perception of global
Schaeffler announced the company would re-route clients, which should gradually balance the trade
sourcing from its India arm terms.
Source: Company, CIPS, faegredrinker, Ambit Capital research

Chemicals
Exhibit 56: Key characteristics of spechem companies

Competition Working capital Margins RoCE Customer stickiness
Technical strength
Faces competition in SRF has lowest working The share of commodity
SRF Volatile margins and market
commoditised products capital requirement products in the business
lead to volatile leadership in key
which contribute ~55% to supported by integrated mix makes margins
return ratios. prodcuts drive
revenue. processes. volatile.
stickiness.
Faces competition in PI being an export Contractuaal long term

P I Industries More than 90% share
domestic formulation focussed company has 80 sales agreement has led Stable margin
of patented molecules
business that contributes days of working capital to stable margin delivery And stable RoCE
in CSM business.
27% to revenues. Requirements. of 22%.
Aarti is lowest
Aarti has highest
Aarti faces competition return ratio within
Aarti Inds. working capital require-
in benzene chain from China Volatile margins due to this peer group as the Aarti has 70% revenue
ment owing to higher
which has majority Influence of crude prices. increased capital from spot sales.
inventory to support
contribution to revenue. intensity is hurting
spot sales.
asset turn.
Atul is present in basic Prudent capital

Atul Atul has stable working Basic chemical products
chemicals which has Volatile margins due to management of
Capital requirement aver- purchase preference is
competition threat In Influence of crude prices. promoters reflects
-aging 70 days. mainly cost led.
global and domestic market in stable RoCE.
Deepak derives 75% of its

Deepak Nitrite revenue from basic chemicals Deepak has stable working Volatile margins due to Volatile margins Basic chemical products
Capital requirement aver- lead to volatile purchase preference is
(incl Phenol) and thus is prone Influence of crude prices.
-aging 65 days. return ratios. mainly cost led.
to competition risks.
Vinati has higher

Technology driven
Vinati has monopoly share in working capital
Vinati Organics ATBS supported by process Stable margin led margins lead to Global leadership in key
requirement as its
by technology driven best return ratio as product (ATBS) with
Excellence and this alleviates supplies its main product
process. capital requirement lowest cost process.
Competition risks. O&G industry which has
is low.
higher payable days.
Navin has built expertise in Export oriented operation Through CSM requires
Navin Fluo.Intl. pharma CSM where it has Leads to higher cash con- Navin’s margins reflect
upfront investments, NFIL End to end capabilites in
value offering from -version days averaging lowest dependence onhas efficiently utilized Fluorine space provides
key starting molecule 80 days. crude price movement.
capital to deliver superior Customer stickiness.
to final products return ratios.
Basic chemical products
The basic chemical companies The specialty chemical Since RoCE is function
The working capital is are prone to lower
are more prone to threat from companies offer stable of margin and capital
a function of mode customer stickiness as
competition. The specialty margins compared to basic management. The
Overall of sales, key geography purchasing decision more
chemical products are more chemical companies due company with superior
and the user industry price led compared to
technology and knowledge to lower influence of management will deliver
the company caters to. specialty which is also
oriented. crude prices. better RoCE.
quality led.
Source: Company, Ambit Capital research, low, high medium
Flat RoE in last five years as capex was done ahead of time
Of the total 114 listed chemicals companies considered to proxy Indian chemical
industry, there are 29 specialty chemicals companies which have added gross block
at a CAGR of 16% against revenue CAGR of 14% during FY16-FY21. Capex was
largely led by CRAMs players like SRF, PI Industries, Anupam Rasayan and Hikal
followed by Flavour and Fragrance companies like Privi Organics. Cumulatively, in
the last five years, specialty chemicals companies have completed capex of `210bn
(23% of industry capex). Since revenue grew at a lower rate than capex, asset
turnover ratio declined to 1.6x from 1.8x in FY16, which kept RoE flat at 17% despite
improvement in margins.

Chemicals
Exhibit 57: Specialty revenue grew at 14% CAGR Exhibit 58: Capex growth at 17% CAGR supported by
internal accruals
Revenue (Rs bn) GBT (RHS) OCF (Rs bn) CAPEX (Rs bn)
700 2.5 90
80
600
2.0 70
500 60
400 1.5 50
40
300 1.0
30
200
20
0.5
100 10
- - -
Exhibit 59: RoE was flat over the last five years due to Exhibit 60: Specialty’s share of industry capex is on an
slowing asset turns uptrend
20% RoE (%) Share of industry (RHS)

30% 28%
26%
18% 25% 23%
18%
18% 18% 18% 18% 21% 20%
17%
20% 18%
15%
16%
10%
5%
14% 0%

Chemicals
Exhibit 61: What makes a good specialty chemical company?

Parameter Rational Remark
RoCE gives good sense of how efficiently the company’s manufacturing facility
Capital 5Y avg RoCE of Vinati, Navin & PI is >25%, led
is being run. However, some businesses due to their product basket have
efficiencies by strong R&D and unique processes.
lower GBT. This ideally has to be made up by higher operating margins.
Product margins are a good reflection of the quality of a product.
Operating OPM of Navin & PI is stable with higher revenue
Product/process superiority reflects in margins. This should serve as a good
margins share from CRAMs/CSM business
benchmark to revalidate the strength of a company’s product basket.
R&D capabilities and product complexities act as an entry barrier. Better
process capabilities could be gauged by multiple factors such as better purity Vinati - lowest cost producer of ATBS with 65%
Product/process
profile products creating pricing premium for the products, demonstrated global market share. PI has earned innovators’
capability
capabilities of doing new product development, backward and forward trust of by respecting IP rights.
integration etc.
Given that specialty chemicals will largely remain an export-led opportunity,
SRF, PI and Navin has superior client base with
Global orientation global orientation became an important parameter. We measure it through
higher exposure to markets like US and Europe
export share, last 5-years growth and current client base.
Given the B2B nature of the businesses, cash conversion is an important
Deepak Nitrite, SRF and Atul has better cash
Cash conversion parameter. This is also a reflection of the sourcing capabilities and inventory
conversion (OCF/EBITDA)
management of a company.
Scalability is a function of the product segment the company is operating in,
the ability of the company to enter into new adjacencies/chemistry areas, cross Deepak Nitrite, SRF and PI have showcased
Scalability
selling new products to existing clients, and promoter vision/execution track extraordinary execution capabilities.
record
Source: Company, Industry, Ambit Capital research
Indian specialty chemicals companies in the global

value chain
Global chemicals players have integrated capacities with integrations from
petrochemicals to final product, while Indian chemicals companies are dependent on
imports (India has net chemicals imports of US$15bn) primarily due to limited
petrochemical infrastructure.
Exhibit 62: Vertical integration cushions business operations against volatile macro environments
Indian Specialty
Basic Specialty
Petrochemical Formulations Final Products
intermediates intermediates
Global Specialty
Source: Ambit Capital research
BASF – A case in point

BASF is a Euro 59bn (CY20) fully integrated chemical company. It is the largest
chemical company in world with presence in around 90 countries. The product
portfolio comprises of six segments namely Chemicals, Materials, Industrial solutions,
Surface Technology, Nutrition and Care and Agriculture solutions each contributing
14%, 18%, 13%, 28%, 10% and 13% respectively.

Chemicals
Exhibit 63: BASF’s six mega composite (Verbund) sites

What is Verbund?
Verbund sites are end to end
integrated sites that facilitates
presence across value chain from
feedstock to final product
These sites are self-sustainable with end-to-end capabilities. Production plants,

energy and material flows are all integrated. It creates an ecosystem to develop the
final consumer product right from the cracker stage. The various byproducts at
different stages form new product chains and add efficiency to the overall setup. It
also provides operating nimbleness to respond flexibility to fluctuating demand.
Exhibit 64: Integration advantages
Where does India stand?

We believe India has long way to go in terms of achieving size and scale in basic and
specialty intermediates. China, for the last more than 20 years (now going towards
formulations) has been supplying basic chemicals to nations like India and specialty
intermediates to formulators across the globe. China is moving up the economic
development ladder and will expand capacities in sophisticated industries like
semiconductors, advanced electronics and aerospace. Global demand for
conventional agrichem/pharma molecules will be incrementally met by countries like
India.

Chemicals
CRAMs to remain the major theme for the

next decade
Global pharmaceuticals and agrichemical companies are finding ways to
capture cost efficiencies across the value chain and are resorting to
outsourcing of part of core as well as non-core processes. As pressure to
bring new crop protection solutions to the market increases and with many
molecules coming off patent in the coming years, multinational companies
are striving to get newly discovered molecules to commercial scale as quickly
as possible or else they would risk losing market share.
India has an edge
The major sourcing destination for all MNCs is China, but things are changing in
favour of countries like India as it (1) offers a stable political environment with
transparent practices (very relevant in current context), (2) has legacy of IP respect and
protection (thanks to PI & Divis), (3) has availability of accumulated chemicals
expertise across the value chain, (4) increased adherence to QSHE compliances laid
down by empowered authorities, (5) entrepreneurial spirit and (6) lower cost of
production and availability of relatively cheap skilled labour.
Exhibit 65: India has 10% share of global specialty Exhibit 66: Growing domestic capabilities will drive
chemicals CSM market which is poised to grow at 10% over growth of India’s specialty chemicals CSM market
2019-2024
CSM growth 2019-24E

3% 2% 20%
18%
North America
11%
Europe 15%
34%
China
10% 10%
India 10%
APAC
15%
MEA
5%
Other
25%
0%
Global CSM growth India's CSM growth
Source: Company, Frost and Sullivan, Ambit Capital research Source: Company, Frost and Sullivan, Ambit Capital research
Exhibit 67: India offers conducive environment
Stable
political
environment
with
transparent
policies
Lower cost of
production
History of IP
and
protection
availability of
cheap labor
CRAMs
Strong
QHSE Focus technical
expertise
Source: Ambit Capital research

Chemicals
CRAMs: Driven by R&D

CRAMs companies have grown at 13% CAGR supported by better revenue delivery
from PI, Anupam Rasayan and Astec Lifesciences. Over FY16-21, CRAMs companies
witnessed (1) Capex intensity, 13% CAGR, (2) increasing working capital
requirements (60 days in FY16 to 75 days in FY21) hurting cash conversion
(OCF/EBITDA averaged 78% over FY16-21) and while QIP (PI Industries) and IPO
(Anupam Rasayan and Neogen) money lying on balance sheet has resulted in lower
RoE for these companies.
The need for continuous process and product development require CSM/CRAM-
focused companies to invest heavily in R&D. R&D spends of these companies stood at
2.2% as against the industry average of 0.4% and against the specialty chemical
companies’ average of 1.1%.
Exhibit 68: R&D efforts of major chemical companies
FY16-21 % of
(` in mn) FY16 FY21 Details
CAGR sales
UPL has a global R&D network with more than 20 R&D facilities comprising of 750
UPL 1,288 1,530 3% 0.4%
professionals. It holds more than 13,600 product registrations.
SRF has consistently spent more than ` 1bn on its R&D initiatives over the last four years.
SRF 789 1,105 7% 1.3% It has five R&D facilities comprising of more than 400 professionals. SRF has filed for more
than 240 patents out of which more than 90 are approved.
PI has its R&D facility in Udaipur comprising of more than 350 professionals. PI has filed
P I Industries 815 1,368 11% 3.0% more than 100 patents and has worked on novel catalysts, enzyme tech and green
chemistry.
Aarti is not just aggressively investing into building capacities but also investing into R&D.
Aarti Inds. 160 867 40% 1.9% It has four facilities which focus on downstream products in high value chlorination,
hydrogenation and ammonolysis.
Atul 195 292 8% 0.8% The R&D team of Atul focuses on product discovery and process improvements.
Deepak has an R&D facility in Nandesari and it is process to set up another facility at
Deepak Nitrite 82 152 13% 0.3% Vadodara. The research is focussed on product discovery across platforms and process
improvements.
Navin has three R&D facilities. The Surat based centre focuses on fluorinated
Navin Fluorine 192 217 2% 1.8% intermediates and basic raw material while the Dewas and UK unit focuses on advanced
fluoro intermediates and their applications.
Incumbent majors eye pharma

Recent management commentaries and incremental hiring data indicate that
incumbent CRAMs players (PI and SRF) are shifting towards pharmaceutical products
in order to improve their addressable market size while prominent players in
pharmaceutical products (NFIL and Hikal) are eyeing new applications and products
to leverage technological expertise. Meanwhile, other players (Astec and Anupam)
are building scale to gain share of the incremental opportunities coming to India.
Exhibit 69: Pharma revenue of CSM players; PI and Astec Exhibit 70: Contributions to CRAMs revenue
are 100% into agrochemicals
Pharma (Rs bn) Pharma (%) Agri (%)

6.0
100%
5.0
80%
4.0
60%
3.0
2.0 40%
1.0
20%
-
Anupam SRF Navin Hikal 0%
PI SRF Navin Astec Hikal Anupam

Chemicals
Exhibit 71: PI and SRF have focused on scaling up their pharma segment
Company Name Designation (Joined) Previously
Navin Dirk Sartor CEO-CRAMS & MOL (2020) Sai Life Sciences
Navin James Faust VP, Business Development - CRAMS (2020) FAREVA, US Army, PCAS
PI Vinod Acharya GM, Process Development (2019) Cipla
PI Pradeep Jain President, Operations (2021) Jubilant, Neuland, Dr.Reddy
PI Srinivas PV President, CTO (2019) Cipla, Biocon, IICT
SRF Nitin Saurabh Head-Process Engineering Lab (2019) Sun Pharma, Ranbaxy
SRF Deepak Jain Chief Manager & Head Technical (2019) Cadila, Lupin, Dr.Reddy
Hikal Vivek Kaushal VP, Business Development - Pharma (2021) CBC Corp, Fuji Chemical
Hikal Parasuram Chavakula VP, Head Supply Chain (2021) Cipla, Chematek, Glenmark
Hikal Mamta Wadhwa VP, Business Development (2021) Frost & Sullivan
Source: Company, LinkedIn, Ambit Capital research
What innovators are looking for?

In the last decade, Indian CRAMs companies acquired a solid base of clients
(innovators), products and processes to scale the business and to take maximum
advantage of emerging situation around the China+1 theme. Innovator companies
are evaluating companies (outside China) having: (1) strong R&D culture, (2) history
of managing patented products value chain and then scale, (3) high focus on QSHE
standards, (4) strong technology transfer ability and (5) scalable potential for generic
off-patented products. Indian companies have all the characteristics of being
preferred partners. Many like SRF, PI, Navin Flourine and Hikal showcased
outstanding capabilities and gained innovators’ trust and respect over the years.
Exhibit 72: PI and SRF are best equipped for the CRAMs opportunity
History Technical
R&D QSHE Remarks
and Scale strength
PI has strongest technical and R&D capabilities (3% of sales) that enable it to
P I Industries
handle patented agrochemicals
SRF has invested into stregthening its R&D capabilities (2% of sales) that
SRF
enable it handle complex fluorine based agrochemicals.
Navin has leveraged its technical expertise into fluorine chemistry and strong
Navin Fluorine R&D (2% of sales) to capture niche pharma CSM space with end to end value
offering.
The CSM molecules contribute 25% to the revenue and Astec is strengthening
Astec Lifescience its product pipe line with R&D investments doubling in last two years to `
220mn (4% os sales)
Hikal has 60% contribution from CSM which is largely skewed towards
Hikal
pharma. It invests nearly 3.5% of its sales into R&D initiatives.
Anupam derives 60% of its revenue from multi year supply contracts. It invests
Anupam Rasayan 0.5% of its revenue into R&D and currently has enarly 70 molecules in R&D
stage
Punjab Chemical invests 0.3% of its revenue into R&D initiatives and CSM
Punjab Chemicals
contributes 64% to its revenue.
Source: Company, Ambit Capital research best, good, average
Agrichemicals is the major revenue contributor; focus on pharma now

The agrochemicals sector is one of the most regulated ones, and regulatory
guidelines change rapidly, forcing companies to supply more data to meet
regulations, conduct more testing at different locations and risk assessment analysis
to remain competitive. This changed the relationship between CRAMs and
agrochemicals companies from a ‘buyer-supplier’ relationship to a ‘strategic partner’
one in the last decade. Selection of outsourcing partner is key as it plays a critical role
in meeting the global guidelines for regulatory approvals. Over the past few years,
Indian companies have scaled up agrichemical CRAMs revenues and are now
increasingly focusing to enter/expand in pharmaceutical space. Though pharma entry
and scale-up will not be linear as compared to agrichem as its gestation period in
terms of product approval and compliances are much higher than that of agrichem.
Companies like Navin and Hikal will have an edge as they are currently working with
many innovators like Sanofi and Pfizer including others.

Chemicals
Exhibit 73: Agrichem revenue contribution in CRAMs of leading

CRAMs-focused companies
35 Agchem CSM revenue (Rs bn)
30
25
20
15
10
-
Astec Punjab Chem Anupam Hikal SRF PI
Exhibit 74: Strong outlook guided by major CRAMs players with pharma in focus
Companies Outlook
 Looking at acquisition opportunities in pharma.

P I Industries  It has already beefed up its workforce to scale up its new pharma segment.
 Developed a novel fungicide and a novel insecticide and it is following up with innovators to launch the product.
 SRF continues to augment its capacity with two new facilities for agrochemicals commercialized at Dahej.
SRF
 The focus is to significantly scale pharma segment over next three year (from 15% share in spechem business to ~20%).
 SRF has hired four people (2 R&D, 1 Sales and Marketing and 1 Product Planning) who will focus on the pharma segment of the
speciality chemicals.
 Focus on moving up the value chain into more complex chemistries and targeting opportunities in USA markets
 Over next 3-4 years NFL will position itself in fluorine adjacencies where it is witnessing good opportunities and less competition.
Navin Fluorine
 Targeting a growth of 30% over three years in CRAMs segment.
 To undertake major debottlenecking exercise in cGMP3, to start construction of cGMP4 in FY24.
 Plans to launch four new CSM products in agrochemicals.
Astec  Targeting R&D enhancements for fluorination, flow and chiral chemistry
 To will roll out four new products in non-triazole category of fungicides and herbicides.
 Multiple expansion projects underway with product pipeline of 10-12 for pharma and 6-8 products in agrochemicals.
Hikal  It has signed up a ten year supply agreement in animal nutrition.
 Company is targeting a revenue of ` 5bn (` 1.2bn currently) in animal nutrition over next three years.
 Working on continuous photo chemistry.
 Company has bagged two orders of ` 11bn and ` 5.4bn order from life sciences companies.
Anupam Rasayan
 Entering into bi-annual price agreement with clients from existing annual agreements.
 Aiming to increase CSM/CRAMs share from 60% to 70%.
 Targeting sales of ` 25-30bn in 3-5 years (FY21 at ` 6.8bn)
Punjab Chemicals  CSM/CRAMs contributed 64% to the sales out of which 30% was from innovative molecules.
 Diverse customer base: Adama, Kureha, Bayer, Nippon Kayaku, Corteva, UPL, Mylan and Lorez.

Chemicals
CRAMs companies lead the pack

Exhibit 75: CRAMs sales have grown at 13% CAGR Exhibit 76: Capex also grew at 13% CAGR
Revenue (Rs bn) GBT (RHS) CAPEX (RS bn) Share of industry (RHS)
200 1.4 30 75%
1.2 25
160 60%
1.0
20
120 0.8 45%
15
80 0.6 30%
10
0.4
40 15%
0.2 5
- (0.1) - 0%
Exhibit 77: Inflated equity with QIP/IPO money hurting RoE Exhibit 78: R&D (% of sales) highest in
CRAMs-focused companies
RoE (%) D/E (x) (RHS) CRAMs Specialty Industry

25% 0.8 3.0%
2.5%
20%
0.5 2.0%
15%
1.5%
10%
0.3 1.0%
5% 0.5%
0.0%
0% -
Exhibit 79: Performance of CRAMs companies
Revenue CAGR (FY16-21) PAT CAGR (FY16-21)

30%
25%
20%
15%
10%
5%
0%
PI SRF Navin Hikal Anupam

Chemicals
Betting on the right business model

In this section, we applied various filters to see how leading chemicals
companies are stacked up and compared them on many softer aspects. We
have also tried to assess chemistry or product concentration risk for
companies and steps they are taking to reduce concentration and compared
their businesses with global peers to see how global companies have
extended value chain over the years.
Currently, there is an increased focus to move up the value chain into margin
accretive high value products among the basic chemicals manufacturers
(Aarti, Atul, Deepak) while the specialty chemical manufacturers (SRF, Navin,
Vinati and PI) are eyeing for product adjacencies for growth.
Exhibit 80: Evaluating companies on softer aspects
Deepak Nitrite Atul Aarti SRF Navin Vinati PI
Technocrat
Professional
promoter runs driven, promoters Technocrat Professionally run, Professionally run, Promoters with Promoters with
Promoter
day- to-day promoters, promoters only promoters/board help of help of
background and involves in
involvement operations with strategic decision involvement level take key strategic only take key professional runs professional runs
help of is high. decisions strategic decisions the business the business
making
professionals
Mid-level
Medium Medium Weak Strong Strong Medium Strong
management
Pay scale to mid

Moderate Moderate Weak Moderate High Weak High
management
ESOPs No No No Yes (limited) Yes No Yes (limited)

Nitritation Phosgenation Chlorination Fluorination Fluorination Nitritation Suzuki Coupling
Oxidation Chlorination Nitritation Hydrogenation Hydrogenation Chlorination Halogenation
Key Chemistry
expertise Diazotisation Hydrogenation ammonolysis Bromination Hydrogenation Pyrazoles
Fluorination Sulphonation Hydrogenation Wolf Kischner
Chlorination Bromination Oximes
R&D Capabilities Medium Medium Medium High High High High
Customer
Low Medium Low High High High High
stickiness
ESG: How serious are Indian companies?

For chemicals companies it is more important to have ESG practices in place. Like any
other corporates, chemical companies are under pressure from investors and
consumers to improve Environment, Social, and Governance (ESG) practices across
their value chain. Due to this heightened scrutiny, chemicals companies are taking a
holistic approach to improving ESG practices. Indian chemicals companies are
gradually improving to adopt best ESG practices. According to us, Aarti is leading on
the Environment metric (at least on the disclosure aspects), Atul on Social and PI on
Governance.
Exhibit 81: ESG and board strength
Aarti Atul Deepak Navin PI SRF Vinati
Responsible care,
Lot of
Safety and protection Together for Partnership with With large share
improvement in A large scale
to environment is its sustainability and global of patented Early adopter of
QSHE front in last infrastructure with
QSHE key priority but there Nicer Globe are innovators molecules, it is QHSE. It was the
few years with compliant
is lack of data on the multiple global makes it crucial for PI to first to adopt ETP.
quantitative data structure.
Annual report. compliances of mandatory to focus on QSHE.
to support.
Deepak. focus on QSHE
Board members Good

Independent
associated with representation on Board lacks
Family members chairman and Mix of promoters Mix of promoters
Quality of Board company since long board. Promoter is technical
and professionals. good mix of and professionals. and professionals.
time. Needs fresh Chairman and background.
professionals.
perspective. CEO.
Source: Company, Ambit Capital research Strong, Relatively strong Average, Weak

Chemicals
Growth versus FCF

High capital intensity of the sector will sustain as the Indian chemicals industry is one
of the few sectors offering high growth opportunity (15-20%), but current valuations
suggest it is no more a plain vanilla sector pick but a stock-specific story where
investors need to be careful on business’ value-chain integration and managements’
project execution capabilities. The industry’s GBT (1.4x) will remain muted and
margins (OPM 17%) will remain volatile in the medium term but investments will
strengthen the industry’s product and chemistry capabilities. As the industry would be
in investment phase for 3-5 years, we don’t expect most leading chemicals
companies to generate FCF.
Exhibit 82: Free cash flow outlook of leading chemical companies
FY20 FY21 FY22E FY23E FY24E

10
8
6
4
2
-
(2)
(4)
(6)
(8)
(10)
(12)
SRF Aarti Deepak Atul Vinati Navin
Growth + capex = higher valuation?

We studied companies across sectors to see FCF movement in their growth phase.
Companies with higher revenue growth and high capex intensity tend to generate
low FCF but have higher valuations. If chemical companies continue to post high
growth along higher reinvestment will tend have higher valuations even with limited
positive FCF.
Exhibit 83: Companies commanding premium valuations
P/E Sales (` bn) Sales CAGR (%) Capex (` bn) FCF (` bn)
TTM FY23E FY24E FY21 FY16-21 FY16-21 FY16-21
Astral 123 78 64 32 14% 11 9
APL Apollo 64 31 25 85 15% 13 10
Minda Ind 149 52 39 64 20% 26 1
Amber 139 44 33 30 23% 7 1
Whirlpool 67 35 31 59 11% 9 15
GMM Pfaundler 77 34 31 10 28% 2 1
HLE Glasscoat 158 N/A N/A 5 39% 1 1

Chemicals
Need to diversify to be relevant, where global peers have expanded?

Indian chemicals companies have product/process concentration though they are
expanding to products across the same value chain and/or entering new chemistries.
There are ample growth opportunities beyond that. We studied global peers of Indian
companies to understand where the next leg of opportunities is in terms of products
(forward/backward), processes and chemistries. It is important to note that India has
a limited petrochemical infrastructure, which can limit growth opportunities.
Exhibit 84: Product concentrations and de-risking opportunities – How companies are taking the lead?
Companies Chemistry/product concentration Opportunities and tracking global peers’ footprint
 Global players in Benzene derivatives like J&K Scientific are diversifying into building
blocks of semiconductors. These are benzene based products called Anthracenes and
Aarti derives ~65% of its revenue from Anthraquinones.
Aarti Inds
Benzene based products.  Aarti is entering chloro-toluene value chain. The global chloro-toluene market size
currently stands at USD 2.3bn and is expected to grow at 6.3%. Global players include
Valtris, Iharanikkei, Shandong Exceris etc.
 Deepak has announced investment into Phenol downstream derivatives with focus on
solvents.
Deepak
Phenol contributes 55% to the revenues.
 India currently imports more than US$ 1bn of phenol downstream including Epoxy,
Nitrite MIBK, BPA and Polycarbonates.
 We believe it will initially focus on solvents like MIBK, MEK, MIK, Bisphenol-A together
with IPA which will provide import substitution opportunity of more than US$ 1bn.
 SRF has opportunity in Pharma CRAMs/CSM. The company is targeting to grow Pharma
share to 25% over next 2-3 years.
 The fluorine expertise allows SRF to move towards fluoro polymers like PTFE (ongoing
Diversified across product segments but `4bn capex).
SRF 95% of Chemical revenue is derived from
 The global players like Chemours and Daikin Chemicals have diversified across other
Agrochemicals. fluoropolymers and elastomers like PCTFE (Polychlorotrifluoroethylene), PVDF, FKM,
FEP (Fluorinated ethylene propylene) etc. The global fluoropolymer market is valued at
US$ 3bn and is expected to grow at 7.1% over FY20-25 supported by smart grids, 5G
and EVs.
 Vinati has invested ` 2.4bn into the 35KT capacity of Butylated Phenol which will
substitute India's import of 25KT and captive use for downstream AO (Anti-oxidants). It
is investing ` 2bn into AO capacity of 40KT which will target domestic demand of
Vinati ATBS contributes 50% to the revenue. nearly 40KT.
 The PAP investments which are currently on hold at pilot stage will provide additional
market of about 40KT towards pharma and rubber antioxidant applications.
 It can forward integrate in the ATBS value chain like global peer Toagosei did.
 Navin is investing into fluorine adjacencies and high value products in High
Performance Pigments (HPP) (ongoing ` 4bn investment).
Widely diversified, products are built

 It has opportunity in fluoropolymers, electronics, chemicals and agrochemical CSM
Navin space apart from the new HPP segment.
around fluorine molecule.
 Global majors like Solvay have diversified downstream into electronic chemicals and
semiconductor gases through products like Sulfur Hexafluoride. The fluorine based
chemicals are used as cleaning agent and high tech films in electronics.
 Atul is most diversified and integrated chemical player. Atul has ongoing investment of
Atul is well diversified across segments ` 15bn in existing products like caustic, p-cresol, MCA and APIs.
Atul
and products.  It can leverage its expertise with entry into HPP with products like anthraquinone,
Ketone based solvents with its existing capability in base chemicals.
 PI is looking to acquire a pharma unit and then leverage its capabilities in
pharmaceutical space.
PI High dependency on agrochemicals  Nearly 80% of Indian CSM is skewed towards agrochemicals and pharma. The market
size of US$ 20bn is expected to grow at 18% with shift of demand from China and
reducing focus of innovators on manufacturing capacities.

Chemicals
Valuations – Favorable operating

environment driven valuations
The market-cap weighted two-year forward P/E of our coverage universe has
risen significantly over the last one year. The leading chemical companies
(SRF, Aarti, Atul, Vinati, Deepak Nitrite, PI and Navin) have re-rated 2-3x
supported by profit growth of 30-35% (FY18-21) owing to improved pricing
environment, increased capacity building, benign crude oil prices and
positive sentiment around China+1 theme.
Exhibit 85: Our coverage universe trades at 35x Exhibit 86: The top 12 companies trade at a lower
multiple of 23x because UPL, Coromandel and Tata
Chemical command lower multiples
45 30 1Y fwd P/E Median

1Y fwd P/E Median
25
30 20
15
15 10
- -
Aug-15
Aug-20
May-19
Jun-16
Mar-20
Jun-21
Nov-16
Oct-19
Mar-15
Sep-17
Feb-18
Apr-17
Jan-16
Jul-18
Dec-18
Jan-21
Aug-20
Aug-15
Jun-16
Jun-21
May-19
Nov-16
Oct-19
Mar-15
Mar-20
Sep-17
Feb-18
Apr-17
Jan-16
Jul-18
Dec-18
Jan-21
SRF Ltd (market cap `787bn, current market price `2,657, target price `3,054,
15% upside)
The reverse DCF suggests current valuations are pricing in 17% revenue at 26%
EBITDAM over FY21-35E at 11% WACC (13% CoE) and 5% terminal growth. We are
confident of better delivery from SRF and pencil in higher growth of 18% over FY21-
35E at 26% EBITDAM in our DCF template and price it at `3,054. This implies 38x
FY24E P/E, below specialty peers like Vinati and Navin that are at 40x and above
basic chemical peers like Aarti and Atul that are at 34x and 35x respectively.
Aarti Industries (market cap `398bn, current market price `1,099, target
price `890, 20% downside)
The reverse DCF suggests the current valuations are factoring in 19% revenue CAGR
over FY21-35 and 23% EBITDAM at 12% WACC (13% CoE) and 5% terminal growth.
Given the rising crude prices which directly reflects on the raw material cost of Aarti,
we build in 19% revenue growth (led by capacity expansion) but 22% EBITDAM and
arrive at the target price of ` 890, implying 34x FY24 P/E in line with other basic
chemical peer Atul.
Deepak Nitrite (market cap `363bn, current market price `2,661, target price
`3,117, 17% upside)
We believe Deepak has process and chemistry expertise at par with other basic
chemical peers like Atul and Aarti. However, based on our estimates, current
valuation of 27x FY24E P/E is at a discount to 32x FY24 and 42x FY24 P/E of Atul and
Aarti respectively. We factor in growth of 18% CAGR over FY21-35 and 26%
EBITDAM at 12% WACC (13% CoE) and 5% terminal growth to arrive at TP of `3,012,
which values DN at par with Atul and Aarti. Reverse DCF suggests current market
valuation is factoring in 17% revenue CAGR and 26% EBITDAM.

Chemicals
Atul Ltd (market cap `311bn, current market price `10,511, target price
`11,525, 10% upside)
Reverse DCF suggests current valuation of 32x FY24E (our estimate) factors in 18%
revenue CAGR over FY21-35E and 24% EBITDAM at 13% WACC (13% CoE) and 5%
terminal growth. We are confident that Atul will deliver better growth and hence
factor in 19% revenue CAGR in our DCF template and price it at `11,525, which
implies 35x FY24E P/E.
Vinati Organics (market cap `219bn, current market price `2,072, target
price `2,352, 14% upside)
Reverse DCF suggests that current valuations are pricing in 26% revenue growth and
35% EBITDAM over FY21-35E at 13% WACC (13% CoE) and 5% terminal growth
while we factor in 27% revenue growth and 35% EBITDAM over FY21-35E in our DCF
template to arrive at the target price of `2,352, implies 40x FY24 P/E in line with
specialty peers like Navin.
Navin Fluorine (market cap `208bn, current market price `4,203, target price
`3,516, 16% downside)
The consensus is building in 28% revenue and PAT growth over FY21-24 while build
in revenue/PAT growth of 25%/21% over FY21-24 as we see slower ramp up of new
investments and focus diverting to lower margin and overcrowded agrochemical
space. The reverse DCF suggests that current valuations are factoring in 30%
EBITDAM and 25% revenue growth over FY21-35E at 13% WACC (13% CoE) and 5%
terminal growth while we factor in 25% revenue growth at 27% EBITDAM in our DCF
template to arrive at a target price of ` 3,516, implies 40x FY24 P/E in line with
specialty peer like Vinati
Exhibit 87: DCF assumptions of our coverage universe
Sales Sales Avg Avg
Capex/GB Capex/GB RoCE RoCE Terminal
CAGR CAGR EBITM EBITM Implied
Growth WACC
FY21- FY25- FY21- FY25- FY24E P/E
FY21-25E FY25-35E FY21-25E FY25-35E (%)
25E 35E 25E 35E
SRF 20% 18% 26% 26% 14% 8% 20% 29% 5% 11% 38
Aarti Inds. 21% 19% 21% 22% 21% 8% 14% 18% 5% 12% 34
Deepak Nitrite 19% 18% 27% 26% 21% 10% 36% 35% 5% 12% 32
Atul 19% 20% 22% 24% 18% 8% 22% 40% 5% 13% 35
Vinati Organics 34% 25% 33% 35% 15% 12% 27% 45% 5% 13% 40
Navin Fluorine 25% 26% 26% 28% 24% 12% 23% 37% 5% 13% 40
Exhibit 88: Explanations to our relative mapping table on the first page
Execution Process
QSHE Remarks
capability Integration
SRF has successfully executed large investments in the past. It has integrated capacities to build on future
SRF
downstream value chain.
Aarti has developed process capabilities with its integrated nitration, chlorination and hydrogenation
Aarti
capabilities. However, the slow ramp up of new capacities is reflected on its falling GBT.
Deepak has successfully executed and ramped up its greenfield Phenol-Acetone facility. The company is
Deepak
focussing forward integration of its existing product portfolio.
Atul has been conservative in large scale investments. The company will be capitalizing about ` 15bn of
Atul
capex over next two years.
Vinati has focussed on capitalizing on its global leadership in ATBS and thus has slower capital intensity
Vinati compared to peers. However, the recent investments into butyl phenol and forward integration into
antioxidant capacities will pave way for future growth of the company.
Navin has been prudent in its capital investments and has primarily focussed on ramping up existing
Navin capacities. It is moving into product adjacencies with its new HPP (High Performance Product) plant and MPP
(multi-purpose plant).

Chemicals
Exhibit 89: IBAS framework

Atul Aarti Vinati SRF PI Navin Deepak
Very strong on
Long history and process Strong in
wide presence innovation. Very Very strong Strength lies in fluorination, Strong capabilities
across Limited at an absolute good at capabilities in speed entered into with backward
different chemical scale. Good in terms of backward fluorination; to bring the high value and integrations across
Innovation segments but engineering efficiencies and forward expanding product to long gestation value chain which
process and addition of integration across other market. An CRAMs business leads to
innovation has downstream products. and chemistries efficient to serve global competitive pricing
been consequently as well. executor pharma to customers.
limited. doing innovators.
cost innovation
Very strong Notable brand
brand in across global
Credible brand Relatively weaker but
limited set of Very strong pharma and Gaining presence
with improvements on QSHE Very strong brand
products. Ranks brand among agrichem in export markets,
multiple and growing capabilities among
Brand in top 5 clients as well as innovators. It is market leadership
customers across on product front would clients as well as
percentile in among the best in multiple
different drive sharp improvement among employees.
vendor employees. company to products.
segments. hereon.
rankings such as work focusing in
Ecovadis R&D.
Clear With solid R&D
vision of the culture it has
promoter world class
Well-managed An able second
Promoter family is a with quality Focused on facilities with
Wide set-up with company; generation
technocrat and offers execution. Good professional cGMP plants at
different CEOs sharp execution promoter. Prudent
ample techno capital management. Dewas.
Architecture managing capabilities; capital allocation,
management allocation. Strong 1st and Menchester
different strong execution delivery
capabilities Seemingly lacks 2nd line of Organics from
businesses. capital and ambitions well
within the family. ambition to managers. UK provides
allocation. within capabilities.
grow support to
beyond the acquire new
existing track. customers.
Strong Strong team
High quality
relationships delivering on
human High quality
Widest matrix of with Strong customer multiple fronts.
Well-engineered capital; very strong human
Strategic chemistry clients; base with world Operating the
Benzene-derivative R&D capital; Good
Asset capabilities partnerships class pharma largest single
manufacturing facilities. team and years of relationship with
and client base. with plant in Dewas. location Phenol-
operational Japanese clients
global R&D Acetone plant over
experience.
institutes 100% utilizations.
DN has become
the preferred
PI has perfected
Slow and steady It has higher supplier for
Strong at R&D and the
Has been a good execution. share of pharma domestic
Wide set of infrastructure. business model.
executor in a semi- Possibly the and agri CSM, downstream
product Asset Widening client
commodity best company in which gives it an product
Overall capabilities but discipline is weak base
business and this edge to manufacturers
somewhat less from beyond agri will
has gradually built on space gradually outperform on which is a perfect
aggressive. an investor point of drive
value-added products. looking various financial symbiotic
view long-term
to gain scale parameters. dependency in
scalability
times of global
turbulence.

SRF Limited
BUY
INITIATING COVERAGE SRF IN EQUITY January 17, 2022
Not resting on laurels Chemicals
With complex chemistries’ expertise and client relationships, specialty Recommendation

chemicals revenues clocked 26% CAGR over FY16-21 and will grow at Mcap (bn): `787/US$10.5
20% despite high base. Also, underutilized refrigerant capacity will now 3M ADV (mn): `3,038/US$41
come into play at better realisations. TTB (contract renegotiated) and CMP: `2,657
PFB (spread contraction) would post CAGR of 25% and 20%. SRF trades
TP (12 mths): `3,054
at a discount to peers NFIL and Vinati since it has 54% revenues from
Upside (%): 15%
TTB and PFB, and we expect this to reduce to 51% by FY25E given 23%
revenue CAGR in chemicals segment. Superior execution history,
professional team and ability to evaluate opportunities beyond the Flags
medium term make SRF stand out among peers. Current valuation Accounting: GREEN
factors in 17% revenue CAGR and 26% EBITDAM over FY21-35E; we Predictability: AMBER
factor in 18% growth to arrive at TP of `3,054 (38x FY24 P/E). Earnings Momentum: AMBER
Competitive position: STRONG Changes to this position: POSITIVE Catalysts

Ahead of time to be ahead of the curve  Chemical revenue contribution to
With a knack of envisaging investments beyond the medium term, SRF has improve to 47% by FY25E from 43%
been ahead of time, be it (1) capex in specialty chemicals in FY16-18 in FY21.
translating into revenue 61% revenue CAGR during FY18-21, (2) adding film  Refrigerant business to bring
capacity in FY17 (in a bad cycle) and benefiting in upcycle in FY20-21, and (3) operating leverage with increase in
expanding HFC capacities in FY20 to capture growth FY22 onwards. We utilization.
believe this will continue and ensure sustainable growth in the years to come.
 Investments in fluoropolymers
Chemicals segment to be a major growth driver provide long-term revenue visibility.
Chemicals revenue contribution increased to 43% in FY21 from 31% in FY16.
SRF leveraged halogenation capabilities to become a top-5 player globally in Performance (%)
fluorination. Over FY21-24, we expect 23% revenue CAGR for chemicals driven
250 SRF Sensex
by strong molecule pipeline, pharma focus, capacity ramp-up in refrigerant gas
200
(operating leverage) and entry into fluoropolymers.
150
TTB gets one-up; PFB continues to see moderation 100
Given higher prices globally, SRF has renegotiated supply contracts upward 50
with tyre companies. This will improve its overall profitability FY22 onwards. In 0
Jan-21
Aug-21
Sep-21
Oct-21
Nov-21
Jan-22
Mar-21
Jun-21
Feb-21
Dec-21
Jul-21
Apr-21
May-21
PFB, spreads are declining owning to capacity addition globally. SRF’s revenue
growth will be supported by new capacities in Thailand and Hungry.
Chemicals business to drive valuations
Chemical will drive profitability (FY21-24 EBIT CAGR of 29%) and contribute Source: Bloomberg, Ambit Capital Research
52%/56% (FY24/FY25) to EBIT vs 40% in FY21. SRF has strong pipeline in
existing chemicals business and entry into fluoropolymers (FY23) would ensure
growth for the next ten years. Lower multiple businesses like TTB & PFB (offers
scale/operating leverage) enabled steady FCF and provided growth capital to
chemicals business. With increase in chemicals contribution, multiples will
continue to expand. Risks: Project execution challenges and slowdown in global
agrochemical industries.
Key financials
Research Analysts
Year to March (Consol) FY20 FY21 FY22E FY23E FY24E
Net Revenues (` mn) 72,094 84,000 111,271 130,597 153,026
Ankit Gor
ankit.gor@ambit.co
EBITDA (` mn) 14,551 21,333 28,374 33,563 39,787
Tel: +91 22 6623 3132
APAT (` mn) 9,159 11,983 16,789 19,891 23,886
Diluted EPS (`) 31 40 57 67 81 Kumar Saumya
RoE (%) 20 20 22 21 21 kumar.saumya@ambit.co
P/E (x) 86 66 47 40 33 Tel: +91 22 6623 3242
SRF Limited
The Narrative In Charts

Exhibit 1: Specialty chemicals will drive future growth
Ramping capacities: Ramp Spechem & Chemicals to drive

Expanding footprint: Maiden
up of capacities amidst packaging ramp- growth: Steady
overseas plants at Thailand and
volatile pricing environment. up: Spechem asset product pipeline and
South Africa. HFC134a capacity
Three new specialty chemical sweating along with Refgas to drive growth
180 tripled. Investments weighed on 35%
plants commissioned at Dahej demand-supply
ATR & margin softened due to
in FY18. mismatch in PFB.
160 weakness in ref gas.
30%
140
120 25%
100
20%
80
60 15%
40
10%
20
- 5%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
CB (Rs bn) TTB (Rs bn) PFB (Rs bn) Other(Rs bn) RoCE (RHS) (%) EBITDAM (RHS) (%)
Exhibit 2: Increasing capex intensity towards chemicals will Exhibit 3: Chemicals revenue and EBIT contribution to
support growth and reduce volatility improve led by 18%/26% revenue CAGR in specialty
chemicals and refrigerant gas
CB (Rs bn) TTB (Rs bn)
PFB (Rs bn) Other(Rs bn) CB (Rev share) (%) CB (EBIT share) (%)
Unall. (Rs bn) GB turn (%) (RHS)
24 1.40 60% 56%
51%
20 50%
1.20 40%
16 40%
12 1.00 30%
8
20%
0.80
4
10%
- 0.60
0%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
FY16 FY21 FY25E

SRF Limited
Exhibit 4: Chemicals margins to improve owing to Exhibit 5: TTB margins will remain around 20%; FY20 and
operating leverage in refgas and product-mix in spechem FY21 witnessed lower offtake from the auto segment
CB EBIT (%) TTB EBIT (%) TTB (Rs bn) EBIT (%) (RHS)
PFB EBIT (%) Lam. Fabrics EBIT (%) 30 30%
30% 25 25%
25% 23%
21% 22% 20 20%
20%
15 15%
15%
10% 10 10%
5% 5 5%
0%
- 0%
FY22E
FY23E
FY24E
FY17
FY16
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
FY17
FY16
FY18
FY19
FY20
FY21
Exhibit 6: SRF is expected to generate positive FCF from Exhibit 7: Despite strong chemicals performance, RoE and
FY23E GB turnover ratio to remain at 21% and 1x, respectively,
due to margin contraction in TTB and PFB businesses
OCF (Rs bn) FCF (Rs bn) OCF/EBITDA (%) (RHS) RoE (%) RoCE (%) GB turn (x) (RHS)
30 120%
25% 1.4
25
100% 1.2
20%
20 1.0
80% 15%
15 0.8
10 60% 10% 0.6
5 0.4
40% 5%
0.2
-
20% 0% -
FY22E
FY23E
FY24E
FY20
FY16
FY17
FY18
FY19
FY21
-5 FY22E
FY23E
FY16
FY17
FY18
FY19
FY20
FY21
FY24E
-10 0%
Exhibit 8: SRF’s valuation multiple has responded positively Exhibit 9: We believe SRF’s current valuation multiple will
to increasing revenue contribution from chemical segment; improve as chemicals share of revenues improves hereon
SRF trades at 41x consensus estimates
Chem Rev share (%) 1Y FWD P/E 35%

Vinati
50% 45
30%
FY21-24 PAT CAGR
40 SRF Aarti
40% 35 25% Navin
30 Deepak
30% 20%
25
20 Atul
20% 15%
15
10 10%
10%
5
5%
0% -
FY22E
0%
FY15
FY20
FY16
FY17
FY18
FY19
FY21
- 20 40 60
FY24 P/E

SRF Limited
SRF’s journey and evolution

Incorporated in 1970, Delhi-based SRF Ltd (Shri Ram Fibres Ltd) operates in
four segments: 1) Chemicals (CB, 43% of sales), 2) Technical Textiles (TTB,
15%), 3) Packaging Films (PFB, 39%) and 4) Others (3%). With a leading
position in most of its products globally, SRF largely caters to automobiles,
tyres, air conditioners, refrigerators, pharmaceuticals, agrochemicals,
mining, manufacturing and packaging industries. India contributes 43% to
consolidated revenue. SRF leveraged its fluorination expertise towards
diversifying its business into high growth specialty chemicals and as such the
revenue contribution from this segment improved from 18% in FY11 to 43%
in FY21. Chemical revenue and EBIT share is expected to improve on the back
of strong client relationships, solid product pipeline in spechem and increase
in refgas offtake along with better realisations.
Exhibit 10: Specialty chemicals will lead future growth with increasing capital allocation
Expanding footprint: Ramping up capacities: Spechem & Chemicals to

Maiden overseas plants at Ramp-up of capacities packaging ramp- drive growth:
Thailand and South Africa. amidst volatile pricing up: Spechem asset
HFC134a capacity tripled.
Steady product
environment. Three new sweating along pipeline and
Investments weighed on ATR
& margin softened due to specialty chemical plants with demand- Refgas to drive
weakness in ref gas. commissioned at Dahej in supply mismatch in growth
FY18. PFB.
180 35%
160 30%
140
25%
120
100 20%
80 15%
60
10%
40
20 5%
- 0%
CB (Rs bn) TTB (Rs bn) PFB (Rs bn) Other(Rs bn) RoCE (RHS) (%) EBITDAM (RHS) (%)
Phase 1 (FY11-14) (Expanding footprints): During this period, revenue grew at

5% CAGR and OPM averaged 19%. SRF invested ` 25bn to expand global footprint
and build capacities in specialty chemicals (chemical complex at Dahej) and
packaging segment. SRF added BOPP line in South Africa (30KT) and BOPET film line
at Thailand (30KT). It commissioned its second R134a plant taking the total capacity
to 17.5KT. RoCE averaged 18% during this period.
Phase-2 (FY15-18) (Ramping up capacities): Revenue grew at 7% supported by
new capacities added in the previous phase. OPM averaged 18% impacted by volatile
pricing environment. SRF invested ` 32bn during this period. The acquisition of
DuPont’s Dymel (pharma grade HFC 134a) helped entry into pharma segment. SRF
commenced BOPP (34KT) and BOPET (32KT) line at Indore. The volatile pricing
environment and gradual ramp up of capacities resulted in RoCE averaging 12%
during this period.
Phase-3 (FY18-21) (Spechem and packaging ramp-up): Revenue grew at 15%
and OPM averaged 20% during this period supported by favorable demand-supply
scenario in packaging business. Investments in chemical segment during earlier
phase translated into 61% growth in spechem business. The refrigerant business
transitioned from R22 to R32 and blends. It also acquired R125 assets of a global
player for US$ 10mn. SRF commissioned green-field Chloromethane plant to double
its capacity. SRF invested ` 53bn in capacity augmentations and RoCE averaged at
14% during this period.

SRF Limited
Phase-4 (FY21 onward) (Chemicals to drive growth): We expect SRF to deliver

revenue/PAT CAGR of 22%/26% over FY21-24E supported by capital outlay of ` 60bn
towards specialty chemical capacities, fluoro-polymer (PTFE), refrigerant capacity
addition, BOPP line (60KT/45KT) at Indore/Thailand and capacity expansion in
technical fibers. The RoCE is expected to average 20% during this period supported
by growth in higher margin specialty chemical business.
Exhibit 11: Segmental overview
Segments Chemicals Technical Textiles Packaging films
(Revenue
share) (Sales 43%) (Sales 15%) (Sales 39%)
Sub-segments
 Industrial
 Refrigerants
 Specialty  Tyre Cord  Industrial  Belting  BOPET /BOPP
Chemicals Fluorochem Fabrics Yarn fabrics films
Sales share (%) 3% 12% 28% 10% 2% 3% 39%
OPM 25-30% 15-25% (Cyclical) 10-35% (Cyclical)
RoCE (FY16-21
12% 20% 19%
avg)
Second Amongst the
Mkt Position Leader in India Leader in India Leader in India Second Globally Leader in India
Globally leading in India
 Chloromethanes
 Chloroform  R22  Fluorospecial
 Grey
ty molecules  BOPET Films
 Methylene  R134a
used in
 Nylon TCF  Polyester fabric
Products  BOPP Films
Dichloride  R32 formulation  Polyester TCF Yarn  Dipped
fabric  Metalized Films
 Carbon Tetra  Blends  CRAMs
Chloride
 FLORON,
 PETLAR and
Brand - DYMEL and - - - -
OPLAR
SUPERTRON
 Conveyor
 Refrigerants  Household
 Fishnet belts in
 Pharma  Velcro Coal,  Packaging
User industry  Pharma  Auto refrigerant  Tyres
Cement &
 Agrochem  Sewing  Solar Panels
 Agrochem  Industrial mining
threads
industry
 AHF for R22
 Tri-  Caprolactam  PTA, MEG for
 Fluorspar for AHF chloroethylene  Benzene, (50%
Key RM  Sulphur  Fluorine, imported &
 Polyester  Polyester BOPET
for R134a
chips yarns  Polypropylene
 Chlorine  Di-  Bromine, 50% from
GNFC) for BOPP
chloroethylene
for R32
6 plants (India (3),
Plants 2 plant (Bhiwadi and Dahej) 4 plants (MP, TN (3)) Hungary, Thailand,
South Africa)
Capacity 100KT 50KT - 55KT 68KT 19KT ~300KT
Methylene Chloride Global Specialty BOPP: MMT (%
Global Industry (a.k.a. US$ 20-23bn (7-8% CSM market at US$ 5bn growing growth)
- -
size Dichloromethane) US$ growth) US$ 200bn at 4-5% p.a. BOPET: 4.3MMT
2bn (5% growth) growing at 10% (6.8% growth)
Dow Chem, Kem One, GFL, Navin, Navin, Solvay, Shifeng, Century Toray, Jindal Poly,
Peers
GACL Honeywell, DuPont Lanxess Enka, Madura Polyplex, Uflex
Source: Company, Ambit Capital Research

SRF Limited
Ahead of the time to be ahead of the curve

Along with superior execution track record, management’s ability to think
ahead for a decade and more has always played out in its favour. This
enables it to remain ahead of the curve always. SRF avoids taking short
sighted views and takes investment calls beyond business cycles. In this
section, we have listed a few examples to exhibit this.
 In FY13-18, SRF invested about `30bn in the chemicals segment to expand

product portfolio and enhance capabilities in fluorospecialty chemicals
(spechem). This led to 61% revenue CAGR for the spechem segment over
FY18-21.
Exhibit 12: CB accounted for 55% of the capital outlay over Exhibit 13: Spechem revenue CAGR at 38% over last 10
the last decade years; most of the growth was in FY18-21
CB CAPEX (Rs bn) Specialty Chem revenue (Rs bn)

10 30
9
8 25 CAGR 38%
7
20
6
5 15
4
3 10
2
1 5
-
-
FY12
FY15
FY11
FY13
FY14
FY16
FY17
FY18
FY19
FY20
FY21
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Capex skewed towards fluoro specialty over the last decade

The fluorospecialty chemicals segment contributes ~65% to the chemical segment. It
was built as a value-add extension to the core fluorine expertise of the refrigerant
business. Management consciously focused on the fluorospecialty segment since it
can be scaled given large market size with sophisticated agrichem and pharma
customers and can provide much-needed stability to profitability.
Exhibit 14: Major investments in the specialty chemical segment
Announcement Description Capex (` mn) Commissioning
May-14 MPP2 1,400 -
Aug-14 MPP for P17 1,130 Mar-15
Feb-15 Enhancing the R&D capability 250 Nov-16
May-15 Dedicated plant Pharma at Dahej 437 Jan-16
Aug-16 Setting up MPP3-Agrochem and pharma 1,800 Dec-17
Aug-16 Electrochemical Research at Bhiwadi 680 NA
Nov-16 Augmenting MPP and new cGMP 1,280 NA
May-17 Specialty Chemical for Agro Industry+Modifications in R-134A, P11/12 plant 2,000 Nov-18
Aug-17 P-33 for Agro Industry 850 May-18
Feb-18 P-34, Carbon Monoxide, Ethylene 810 FY20
Feb-19 MPP for agro intermediate 1,660 Oct-19
Apr-19 De-bottleneck Specialty chemicals in Dahej 1,400 FY20
Aug-19 PTFE and R-22 4,240 FY22
Nov-19 Specialty Chemical for agro, pharma and other specialty industries (Capacity 1600tpa) 400 Jun-20
Feb-20 Speciality chemicals (Capacity: 2,150 tpa) 2,380 Nov-20
Nov-20 Facility for P16, Key intermediate 175 Jul-21
May-21 MPP 4 at Dahej 3,750 Jul-22

SRF Limited
 Announced packaging film capacity in Thailand and Hungry (FY18)

despite capacity underutilization globally. These capacities came into play
in FY20 and FY21.
Exhibit 15: Investments into PFB fructified during FY19-21
BOPET plant at BOPET expansion and BOPET line at Hungary

Thailand and BOPP greenfield BOPP line and Thailand in FY21.
plant at South Africa in India in FY17 Backward integration to
35 PET chips. 50%
30 40%
25
30%
20
20%
15
10%
10
5 0%
- -10%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
PFB Revenue (Rs bn) PFB EBIT (%)
Capacity addition ahead of demand growth: SRF has consistently added

packaging capacities in order to maintain its market share. SRF will invest `4bn to
add a 60KT BOPP line at Indore which will commission in January 2022.
Exhibit 16: Packaging segment had 36% share in total capital outlay over the last
decade
450 BOPET (KT) BOPP (KT)
400
350 CAGR 15%

300
250
200
150
100
50
-
FY10 FY14 FY17 FY21 FY24E
 Announced that it would double HFC capacities in FY18 (operational in

FY20), remained underutilized in FY21; expanded capacities are
profitably being utilized now.

SRF Limited
Exhibit 17: Refrigerants have grown at 13% CAGR over the last decade; capabilities in place for next generation
hydrofluoroolefins
12 HFC capacity doubled

R32 capacity added
10
R134a capacity added
8 Acquired DYMEL
from DuPont
6
-
Refrigerants (Rs bn)
HFC expansion already announced: With Government of India’s regulatory

restrictions (under Montreal Protocol) kicking in on capacity addition from December
2023, SRF has announced that it would expand its HFCs capacity by 15KT with capital
outlay of `5.5bn. This capacity will commercialize in July-2023. The acquisition of
R125 in FY18 supplemented SRF’s presence across all three major HCFs. SRF
acquired DuPont’s DYMEL (R134p) in FY15 which provided it with the technology
knowhow for its pharma grade gases.
Exhibit 18: SRF’s refrigerant capacities across product categories
HCFC - R22 (KT) HFC - R134a (KT) HFC - R32 (KT) HFC - R125 (KT)
80
70
60
50
40
30
20
10
-
FY17 FY19 FY21 FY24E

SRF Limited
SRF’s architecture supplements market leadership

Strong presence across geographies and product categories helped the company
maintain its market share and leadership in the domestic market (industrial
chemicals, specialty fluorochemicals, refrigerants, NTCF and industrial yarn).
Exhibit 19: SRF’s manufacturing infrastructure with global presence in the packaging segment
Segment Location Established in Products
 Refrigerants
Rajasthan (Bhiwadi) 1989  Chloromethane
 Specialty Chemicals
Chemicals  Refrigerants
Gujarat (Dahej) 2012
 Industrial Chemicals
 Chloromethane
 Specialty Chemicals
TN (Manali) 1974  NTCF
Tamil Nadu (Viralimalai) 1983

 NTCF
 Belting Fabric
Technical Textile  NTCF
MP (Malanpur) 1992 (acquired from CEAT Tyre)
 Industrial yarns
TN (Gummidipoondi)
1995 (Acquired from Thapar DuPont  NTCF
Ltd)  Belting Fabric
Uttarakhand (Kashipur) 1995
 BOPET
 Metallizing
MP (Indore SEZ) 2004
 BOPET
 Metallizing
Thailand (Rayong) 2013
 BOPET
 Metallizing
Packaging films
South Africa (Durban) 2013
 BOPP
 Metallizing
Hungary (Jaszfenyszaru) 2018  BOPET
 BOPET
MP (Industrial area, Pithampur) 2017  BOPP
 Metallizing
TN (Gummidipoondi) 2011  Coated Fabrics
Other
Uttaranchal (Kashipur) 2010  Laminated fabrics

SRF Limited
Chemical business to be a major growth

driver
Before FY19, chemicals capex was majorly funded by TTB’s cash flows, which
has enabled company to build state-of-art infra for the chemicals business in
Dahej and Bhiwadi. We believe the chemicals division will remain a key
growth driver (1) with more molecules moving to MPP and dedicated plant,
(2) focus on improving pharmaceutical revenues (currently ~5% of spechem
revenues) in spechem, (3) ramp-up of refrigerant gas capacities set up in
FY20 and increasing HFC capacities and (4) foray into fluoropolymer. We
expect the chemical division revenue to post a CAGR of 23% in FY21-24.
Exhibit 20: Within chemicals, specialty chemicals will Exhibit 21: Improving trajectory of molecules in the large
continue to dominate revenue mix commercial stage
FY17 FY18 FY19 FY20 FY21
Industrial Chem Refrigerants Specialty Fluoro Polymer
No. of molecules worked 47 46 50 69 50
100% Under process
19 17 NA 38 40
90% development
Pilot stage 16 29 20+ 16 15
80%
70% MPP stage 18 13 20+ 34 15
60% Dedicated plants 5 6 20+ 15 15
50% Source: Company, Ambit Capital research
40%
30%
20%
10%
0%
FY22E
FY23E
FY24E
FY18
FY20
FY16
FY17
FY19
FY21
Incremental hiring favouring pharma segment

Pharma comprises only 5% of the specialty chemicals segment and management has
reiterated its medium-term guidance to grow the pharma segment’s contribution to
15% in the next 2-3 years. In this pursuit, it is incrementally hiring people with a
pharma background.
Exhibit 22: SRF is best known to retain talent with one of the lowest attrition rates in
the peer group
Name Designation Year Previously
Nitin Saurabh Head-Process Engineering Lab 2019 Sun Pharma, Ranbaxy
Deepak Jain Chief Manager & Head Technical 2019 Cadila, Lupin, Dr.Reddy
Arun Kumar AVP - Strategic sourcing 2018 Dr.Reddy's, Jubilant Life Sciences
Rajesh Kumar Head – Pilot plant 2019 Jubilant Life Sciences
Refrigerant gas: Aptly placed to benefit from industry tailwinds with

backward integration
SRF started refrigerant gas operations in 1989 at Bhiwadi (Rajasthan). It is now
India’s leading refrigerant gas company and has a strong global distribution network
(60+ countries). Under the Floron, Dymel and Supertron brands, SRF has a wide
range of refrigerants such as R22, R134a, R32 and HFC blends (R125, R404a, R407c,
R410a) which find applications in room, automotive & industrial ACs and
refrigerators. It is one of the few companies having backward integration to basic
building blocks, chloromethanes and anhydrous hydrogen fluoride (AHF), which
enabled it to scale and expand product offerings. Recently imposed ADD (Anti-
Dumping Duty) on R32 and HFC blends will ensure better pricing for these gases for
SRF. It is expected to gain market share significantly as other players like GFL and
NFIL do not have concrete plans to expand or enter into HFCs.

SRF Limited
Exhibit 23: SRF’s presence across refrigerant gases

Category Product Details
R22 is getting replaced by R32 in most of the cases; SRF has launched R467A (blend of R32, R125, R134a,
HCFC R22
R600a) which can used instead of R22 in many cases.
Launched FY17 (developed in-house), only Indian manufacturer,
HFC R32
Market scenario is conducive in recent times, India imposed ADD on HFCs
SRF is the only manufacturer of R134a in India (developed in-house)
HFC R134a
In coming years R134a to be replaced by HFO1234YF.
Acquired it in Jan-2015 from DuPont (brand DYMEL)
Objective: Convert its technical grade to propellant
R134p (pharma grade) Plant: Dahej (India)
HFC
(acquired in FY15) The acquisition provided technological know-how for setting up its own cGMP facility to manufacture
R134a (pharmaceutical-grade) at Dahej
(…”SRF filed the Drug Master File for Dymel’s R134a pharma gas with the US FDA”…MDA AR18)
R125
HFC Acquired in FY18 from global leader for ~US$ 10mn
(acquired in FY18)
410: Room & commercial ACs
R410a,R404a, R125, R404c,
HFC blends 404: Commercial & transport refrigeration
R407a
407: Room & light commercial ACs and refrigeration
In coming years R134a to be replaced by HFO1234yf, Europe has started using it in high end luxury cars
Price of 1234fy ~10x higher than R134a
HFO HFO 1234yf Global R134a consumption is ~400k tons vs R1234yf at ~15k tons currently
Du Pont and Honeywell have patent for this, which will get expire in 2023. SRF has developed technology in-
house and is expected to launch after patent expires.
Improving demand, limited capacities and imposition of duties are driving prices of
refrigerant gases higher in the domestic market.
Exhibit 24: Prices of key refrigerant products (`/kg) of SRF witnessing improvement
600 R125 R134 R32
450
300
150
-
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22
Source: Company, Export data, Ambit Capital research
Operating leverage to come into play

Spechem capacity expansion via the brownfield route and capacity ramp-up in
refrigerants (higher fixed cost) along with better realisations would improve margins
as well as RoCE for the chemicals segment. We expect chemicals segment EBIT
margins to improve to 23% in FY24 from 20% in FY21.

SRF Limited
Exhibit 25: Margins are more stable now with improved share of specialty chemicals
Chloromethane Refrigerant Specialty

Fluoropolymer EBITM(%) (RHS)
80 30%
70
25%
60
20%
50
40 15%
30
10%
20
5%
10
- 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, Ambit Capital research; revenue in ` bn
Capex addition will remain in favour of chemicals

Hereon, SRF will be investing at an annual run-rate of `20bn with capex share
skewed towards high-growth and stable-margin specialty chemicals. We believe the
share will improve further as it planning to spend: (1) `5.5 bn in expanding fungible
HFC capacities, which will come on stream in 2QFY24, (2) `4.2bn in fluoropolymer
(initially with PTFE) plant that will be operational by end-FY23, and (3) investments for
spechem at the Dahej plant will continue in the range of `1bn to `3bn. We also
foresee a spechem greenfield plant as the Dahej has limited room for expansion.
Exhibit 26: Chemicals segment will continue to receive higher capex share; improving
margins and growth (23% CAGR FY21-24E) will lead to improved return ratio
CB capex (Rs bn) CB RoCE (%)

12 20%
18%
10
16%
14%
8
12%
6 10%
8%
4
6%
4%
2
2%
- 0%

SRF Limited
TTB segment gaining traction with

improved visibility
SRF is a domestic market leader in 135KT domestic NTCF market with nearly
40% market share and stands to benefit primarily from supply chain
disruptions in global trade. The industry has renegotiated price contracts
with OEMs and this is evident from improved profitability of the industry
peers. The EBIT margin profile of the segment is expected to step up from
14% levels (FY17-19) to 22% (FY22-24E). We expect 25%/40% revenue/EBIT
CAGR from this segment over FY21-24E on back of new capacity of greige
fabric (9KT) and yarn (15KT) and improved margins.
Upward contract renegotiation to improve profitability
SRF posted decadal high Technical Textile Business (TTB) EBIT margin of 27% in
1QFY22 despite 32% QoQ rise in caprolactam (key RM) price. This outperformance
was driven by renegotiation of NTCF’s (Nylon Tyre Cord Fabric) conversion margin
with customers given higher international prices and improved demand from
MHCV/LCV segments. SRF is confident of maintaining elevated margins for the
foreseeable future. To validate this, we interacted with second-largest player in NTCF
(Century Enka) and it echoed similar profitability trend for upcoming quarters. NTCF’s
margin has structurally reset to higher levels and will benefit domestic players (80%
market share). SRF is the leading NTCF manufacturer with four plants in India. NTCF
is used in non-radial tyres as a reinforcement material. We expect revenue CAGR of
25% over FY21-24 with average EBIT margin of 20%.
Exhibit 27: Technical textile sub-segments and management’s outlook
Segments Tyre Cord Fabric Polyester Industrial Yarn Belting fabrics
% sales of TB 68% 14% 18%
 These are Nylon and Polyester fabrics used

 These are polyester yarns
 These are polyester fabrics used as
used in fishnet, sewing
Profile as reinforcement materials inside bias tyres reinforcement materials inside the
thread, velcro, narrow
to give them shape & strength. conveyor belts.
webbing etc.
Market position No.2 Globally No.1 Domestic No.2 Globally
 Nylon TCF: Bias tyre (heavy vehicles)  Safety belts, fishnets, ropes,
 Conveyor Belts (for metal & mining,
Application cement, steel, power transmission,
 Polyester TCF: Radial tyre (light vehicles) shades, velcro, ropes
infrastructure and food industries)
 Caprolactam is the raw material for
Key RM Nylon6 resins which is used to  Polyester chips  Polyester yarns
manufacture NTCF
Capacity (KT) 57 68 19
Competition  Century Enka, Madura

 Aggressive Chinese
 Aggressive Chinese competition
competition
 Healthy growth to continue led by the
Key developments and
 No capex plans for this division in the  Growth in-line with the expansion of domestic CM base,
near-term. Cash generation to be used to belting fabric and tyre cord product range and capacity in FY19.
growth
nurture the chemical business. industries. SRF shut its unviable South African
subsidiary in FY18.
 Chinese players are

 Focus on customized solution for
Management commentary
 Customers continue to favour domestic
dumping their products in
customers. SRF is aiming to build its
supplies owing to supply chain volatility belting fabric facility in Viralimalai as
in AR21 India. SRF is focussed on
which is leading to import substitution. the largest single location site in the
value-add products.
world.
SRF has leadership in domestic market

Domestic NTCF demand stands at 135KT, within which SRF holds 40% market share
followed by Century Enka (24%) and Madura Industrial Textile (16%). The remaining
20% demand is met by imports from China, Thailand and Russia. SRF being a leader
primarily benefitted from dwindling global supply chain.

SRF Limited
Exhibit 28: Domestic NTCF supply chain dynamics Exhibit 29: SRF primary beneficiary of slowing imports
30% TTB EBIT (%)
25%
16%
20%
20%
Import
SRF 15%
24% Century Enka
Madura 10%
41%
5%
0%
3QFY21 4QFY21 1QFY22 2QFY22
Covid disruptions and benefits

FY20 and FY21 saw adverse impact on the primary user industries of technical
textiles. Automobile and infrastructure segments were two of the most impacted
industries. However, the disruption has also brought benefits and the volatile global
supply chain has increased reliance on domestic manufacturers.
Exhibit 30: FY20-21 was impacted by Covid disruptions Exhibit 31: Industry EBITM has stayed stable
which impacted the auto and infra industries hardest
SRF TTB (Rs bn) Century Enka (Rs bn) Madura (Rs bn) SRF TTB (%) Century Enka (%) Madura (%)
25 20%
20
15%
15
10%
10
5%
5
- 0%
Source: Company, Ambit Capital research, Madura’s FY21 numbers are not Source: Company, Ambit Capital research, Madura’s FY21 numbers are not
currently available currently available
TTB’s way forward

We expect the TTB segment to deliver 25% revenue CAGR over FY21-24 (10% in
FY22-24E) supported by new capacities – 9KT fabric and 15KT yarn. The new
capacities are expected to commercialize by 4QFY23.

SRF Limited
Exhibit 32: Revenue and margins are expected to improve Exhibit 33: Return ratios will be supported by elevated
margins
TTB revenue (Rs bn) TTB EBIT (%) (RHS) TTB Capital employed (Rs bn) TTB RoCE (%) (RHS)
30 30% 18 40%
16 35%
25 25%
14 30%
20 20% 12
25%
15 15% 10
20%
8
10 10% 15%
6
4 10%
5 5%
2 5%
- 0%
- 0%
FY24E
FY22E
FY23E
FY18
FY19
FY20
FY21
FY23E
FY22E
FY24E
FY18
FY19
FY20
FY21

SRF Limited
Packaging Films – Moderation to continue

After a splendid performance in FY20 and FY21, profitability is moderating in
the packaging segment due to contraction in spreads. The spread contraction
is guided by expectation of capacity addition at global levels and rising PTA,
MEG, PP prices. For SRF, despite contraction in margins, revenue and EBIT
contributions are not majorly impacted since new capacities at Thailand and
Hungry will provide additional volume. We expect revenue and EBIT CAGR of
20% and 1% respectively over FY21-24. We expect average EBIT margin of
17% over FY22-24 vs 27% in FY21.
Exhibit 34: New capacity ramp-up will support revenues Exhibit 35: Additional supplies globally will impact
margins and return ratios
PB revenue (Rs bn) PB EBIT (%) (RHS) PB EBIT (Rs bn) PB RoCE (%) (RHS)
60 30% 10 30%
9
50 25% 25%
8
40 20% 7 20%
6
30 15% 5 15%
4
20 10% 3 10%
2 5%
10 5%
1
- 0% - 0%
FY22E
FY19
FY18
FY20
FY21
FY23E
FY24E
FY22E
FY23E
FY24E
FY18
FY19
FY20
FY21
BOPET demand supply overview

The world will add 38% incremental capacity against 26% incremental demand over
FY21-24. The excess supply is weighing on prices.
Exhibit 36: Global demand of BOPET films have grown at 7% over the last decade
Demand (MMT) Capacity (MMT) Utilization (%) (RHS)

9.0 100%
7.5
80%
6.0
60%
4.5
40%
3.0
20%
1.5
- 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Polyplex, Ambit Capital research
BOPP demand-supply overview

The world will add 18% incremental capacity vs 32% incremental demand over FY21-
24. The focus will be on improving plant utilization from the lows of 67% in 2020.

SRF Limited
Exhibit 37: BOPP demand has grown at 4% over the last decade
Demand (MMT) Capacity (MMT) Utilization (%) (RHS)
16.0 78%
14.0 76%
12.0 74%
10.0 72%
8.0 70%
6.0 68%
4.0 66%
2.0 64%
- 62%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Source: Company, Polyplex, Ambit Capital research
Pressure from input side

The prices of raw materials PTA and MEG are rising owing to strong crude prices. The
contracting spreads will reflect on the margin trajectory in the short to medium term.
Exhibit 38: Input prices are dependent on crude
PTA (Rs/kg) MEG (Rs/kg) PP (Rs/kg) Crude (RHS) (US$/bbl)
140 100
120
80
100
80 60
60 40
40
20
20
- -
3QFY21
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
4QFY21
1QFY22
2QFY22
3QFY22
Source: Company, Bloomberg, Indiapetrochem, Ambit Capital research
Sharp margin contraction in 2QFY22

SRF has nearly 60% volume share of BOPET films and contraction in BOPET spreads
affect segmental margins adversely. 2QFY22 saw this playing out with rising
PTA/MEG prices leading to sharp margin contraction.
Exhibit 39: Margins contract with rising input prices; revenue supported by new
capacities
Packaging rev (Rs bn) Packaging EBIT (%) (RHS)
12 35%
10 30%
25%
8
20%
6
15%
4
10%
2 5%
- 0%
3QFY21
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
4QFY21
1QFY22
2QFY22

SRF Limited
Growth with balance sheet improvement

SRF has improved its balance sheet with efficient capital allocation. It has fed
capital to right business segments at the right time. Over the last few years,
capital allocation to the chemicals segment has improved and so has
margins and return ratios. Management’s capital allocation strategy will
prioritize specialty chemicals followed by refrigerant gas, packaging films
and technical textiles.
Exhibit 40: FCF will improve from FY23 led by 23% growth in revenue over FY21-24E
and improving margins
OCF (Rs bn) FCF (Rsbn) D/E (x) (RHS)

30 1.0
25 0.9
0.8
20
0.7
15 0.6
10 0.5
5 0.4
0.3
-
FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E 0.2
-5 0.1
-10 -
Stable RoCE of 20%

We expect SRF to deliver stable RoCE of about 20% supported by margin
improvement in the chemicals segment (highest capital employed). The focus on the
pharma segment will guide chemical margins while packaging and technical textile
segment will see softness in margins owing to contraction in spreads.
Exhibit 41: ROCE will be supported by margin improvement Exhibit 42: With strong OCF, net debt/EBITDA will improve
in the chemicals segment hereon
Chemicals RoCE (CB) Technical textile RoCE (TTB) 3.5 D/E Net debt/EBITDA
Packaging Films RoCE (PFB)
3.0
40%
35% 2.5
30%
2.0
25%
20% 1.5
15% 1.0
10%
0.5
5%
0% -
FY22E
FY23E
FY24E
FY16
FY18
FY20
FY17
FY19
FY21
FY22E
FY23E
FY24E
FY16
FY17
FY18
FY19
FY20
FY21

SRF Limited
Improving growth trajectory demands

improved valuations
Over the years SRF has displayed sharp management acumen to diversify
across product categories into margin accretive businesses. It built its
strength across new age products in refrigerant categories where its peers
struggled and gradually moved their focus out of this segment. It used the
cash flows of its commoditized segment to leverage its fluorine expertise into
specialty fluorochemicals (61% CAGR over FY18-21) focusing on
agrochemicals. SRF now stands at the cusp of a new growth period where it
will find support from strong demand of agrochemicals, increased focus on
pharma chemicals, strong pricing environment in refrigerants and pricing
power in NTCF due to its leadership position. The reverse DCF suggests
current valuations are pricing in 17% revenue at 26% EBITDAM over FY21-
35E at 11% WACC (13% CoE) and 5% terminal growth. We are confident of
better delivery from SRF and pencil in higher growth of 18% over FY21-35E at
26% EBITDAM in our DCF template and price it at `3,054. This implies 38x
FY24E P/E, below specialty peers like Vinati and Navin that are at 40x and
above basic chemical peers like Aarti and Atul that are at 34x and 35x
respectively.
Historically, the stock’s valuation has responded positively to increasing revenue
share of the chemical business.
Exhibit 43: Stock has re-rated with increasing contribution from chemicals segment
50% Chem Rev share (%) 1Y FWD P/E 45

40
40% 35
30
30%
25
20
20%
15
10% 10
5
0% -
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E
Initially TTB & PFB funded chemical growth; chemicals is self-sufficient now
Lower multiple businesses like TTB and PFB have funded growth for chemical capex in
the past. Hence, these businesses are equally vital for overall growth of the company.
TTB and PFB provided much-needed scale, operating leverage and product-mix,
which enabled the company to navigate challenges in the chemicals division in the
initial period. Henceforth, we believe the chemicals division will be on its own, given
(1) strong traction in spechem (26% revenue CAGR during FY16-21) along with a
strong product pipeline and (2) refrigerant capacity expansion. The chemicals division
is expected to grow at a CAGR of 23% over FY21-FY24E.
Growth with balance sheet improvement
Over FY16-FY21, SRF was one of the rapidly growing chemical companies with
earning CAGR of 23%. The growth was driven by the chemicals and PFB divisions.
During this period, SRF undertook a capex of 62bn (54% chemicals and 40% PFB).
Despite being aggressive on capex, SRF generated cumulative FCF of `1.6bn along
with improvement in D/E ratio from 0.9x in FY16 to 0.5x in FY21. Owning to better
capacity utilization of spechem capacity and packaging films (better spreads and
demand), RoE improved to 20% in FY21 against 17% in FY16.

SRF Limited
Improvement in chemicals contribution to profitability can bridge valuation

gap with NFIL and ARTO
SRF has an edge over peers with its strong R&D culture (3% of chemicals revenues),
right human talent (mid to senior-level professionals are with the company for an
average 10 years), strong client relationships and ability to evaluate opportunities
beyond the medium term. With levers in the chemicals business, focus on pharma
and flouoropolymers, we expect chemicals revenue contribution to improve to
45%/47% by FY24/FY25, which can enable it to bridge the valuation gap with peers
like NFIL and ARTO.
Exhibit 44: Our DCF inputs consider higher than priced-in growth Exhibit 45: DCF output values SRF at 38x FY24E P/E
FY16-21 FY21-25E FY25-35E 1Y-FWD
Sales CAGR 13% 20% 18% Total PV of FCFF 286,498
EBITDA Average 20% 26% 26% Terminal Value 648,578

Enterprise Value 935,076
Wcap/Sales 12% 14% 14%
Net debt 30,324
Capex/GB 12% 14% 8%
Equity value 904,752
WACC 11%
Share Price 3,054
Terminal growth 5% P/E FY24E 38
Our estimates are above consensus over the medium term (FY22-24E) as we factor in
higher growth and improved margins attributed by the specialty chemicals and
refrigerant segments.
Exhibit 46: Ambit’s estimates are largely in line with consensus
Particulars (`. mn) Ambit's estimates Consensus estimates Difference
(` mn) FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
Net Sales 111,271 130,597 153,026 109,761 127,531 148,675 1% 2% 3%
EBITDA 28,374 33,563 39,787 27,085 31,730 36,882 5% 6% 8%
PAT 16,789 19,891 23,886 15,634 18,648 22,075 7% 7% 8%
EBITDAM (%) 25.5% 25.7% 26.0% 24.9% 24.9% 24.9% 56 bps 85 bps 115 bps
NPM (%) 15.1% 15.2% 15.6% 14.0% 14.2% 14.2% 104 bps 102 bps 140 bps
Exhibit 47: Segmental revenue and margin estimates

CAGR
(` bn) FY21E FY22E FY23E FY24E FY21-24 Remark
(%)
Chemical revenue (` bn) 36.4 45.5 55.5 67.9 23% Higher capital intensity towards chemical segment
Better realizations and increased capacity in India will contribute to
Technical textile revenue (` bn) 12.4 20.0 21.9 24.1 25%
NTCF growth.
Packaging revenue (` bn) 32.9 42.2 49.3 57.0 20% Primarily supported by new line at Indore
Others (` bn) 2.3 2.6 2.8 3.1 10%
Chemical EBIT (%) 20.0% 21.0% 22.0% 23.0% High value pharma molecules will support margin improvements
We expect the margins to normalize to 20%, however it will remain
Technical textile EBIT (%) 14.3% 23.5% 22.0% 20.0%
elevated from historical levels of near 14%.
Packaging EBIT (%) 27.3% 18.5% 17.0% 16.0% Spread contraction will lead to contraction in margins.

SRF Limited
Annual report insights

Exhibit 48: Key points from annual reports of last five years
Year Key points
 Turnaround in global packaging business of the company.
FY16  Acquired Dymel, a pharma grade refrigerant.
 Announced set up of pilot plant for next generation HFO 1234yf. SRF becomes the first technology developer outside USA and Europe
 50% market share in the domestic fluorochemical business.
 Developed HFC blending capability with production of R410, R407.
FY17  Launched R22 cans under the brand name ‘Floron’.
 New BOPET and BOPP line commercialised at Indore facility.
 Deeper penetration in NTCF market with supplies to Tier-II players.
 Refrigerant business transitioning from HFC22 to HFC blends and HFC32. SRF acquired HFC 125 assets from a global player for a
consideration of US$ 10mn. This will strengthen presence across all three major HFCs.
FY18
 Chloromethane capacity doubled with a greenfield capacity at Dahej.
 Muted agrochemical industry dampened the performance of specialty chemical segment.
 Two new cGMP plants P32 and P34 for agrochemicals were commissioned in record time.
 Signed agreement to sell engineering plastics business to DSM India.
FY19
 Agrochemical industry witnessed recovery in the second half of the fiscal.
 Launched new product ‘Supertron’ for car and room air conditioners.
 Packaging and chemical business supported profitability growth in a difficult year.
 Commissioned multi facilities for specialty chemicals and enhanced HFC capacities.
 R&D team developed R-467 a substitute for R22.
FY20
 Announced investments into fluoro-polymer PTFE with expansion of R22 capacity (feedstock).
 Announced set up of a BOPP line in Thailand.
 Technical textile plant in Thailand was shut down as it was economically unviable to operate in subdued demand environment.
 Announced investment into 4th MPP plant at Dahej.
 Commissioned a refrigerant application lab at Rajasthan.
FY21  Announced investment into expansion of chloromethane capacity at Dahej to over190KT.
 The BOPP line at Thailand was commissioned and operations in Hungary started during the fiscal.
 SRF allotted 1.76 million shares in the QIP at ` 4,250 (FV ` 10) and raised ` 7.5bn in Oct, 2020.

SRF Limited
Risks and catalysts

Risks
Project execution risk: SRF has mapped out an annual capital outlay of `20bn with
nearly 50% going towards the high-growth and high-margin chemicals segment. Any
slowdown in capex execution will pose a risk to our earnings estimates.
Slowdown in user industries: SRF has multiple segments comprising refrigerants,
specialty chemicals, packaging and technical textiles, which in turn cater to the
demands of multiple user industries. Slowdown in these user industries poses a risk to
our earnings estimates. SRF’s specialty chemicals segment is concentrated towards
agrochemicals and a slowdown in global agrochemical industry will pose downside
risk to our growth estimates.
Slower ramp-up of new products: We believe new products (PTFE) and pharma
would contribute positively to margins of the chemicals segment. However, any
slowdown in ramp-up of the new product pipeline would deter margin expansion of
the segment.
Catalysts
 Improving revenue share of chemicals segment to drive valuations: We
believe higher growth in the chemicals segment will improve the share of the
chemicals segment from 43% in FY21 to 47% in FY25. Historically, valuation
multiples have responded positively to rising chemicals share (exhibit 8).
 Refrigerant segment will benefit from ramp-up in favorable pricing
environment: We expect the refrigerant segment to deliver 26% revenue CAGR
over FY21-24 as the expanded capacity (FY20) will be ramped up gradually in a
favorable pricing environment for refrigerants.
 Fluoropolymers provide long-term visibility: SRF is investing nearly `4bn in
fluoropolymer capacity which we expect to come online by FY23-end. It is initially
starting with PTFE and will gradually expand into other polymers. The global
fluoropolymer market size stands at about US$7.7bn and growing at 6.5%
(source: alliedmarketresearch).
Exhibit 49: Explanations to our flags on the first page
Segment Score Remark
Accounting GREEN SRF stands in D1 (top decile) of our forensic accounting framework.
Predictability AMBER Multiple products and multiple user industries make predictability difficult
Volatile operating environment and contracting spreads in the packaging segment may keep the momentum
Earning Momentum AMBER
slow in the near term.
Exhibit 50: Forensic accounting contributors Exhibit 51: Forensic score percentile relative to sector

SRF Limited
Financials
P/L statement
YE: Mar (` mn) FY20 FY21 FY22E FY23E FY24E
Net revenues 72,094 84,000 111,271 130,597 153,026
Revenue growth (%) -6.3 16.5 32.5 17.4 17.2
- Op. expenses 57,543 62,667 82,897 97,033 113,239
EBITDA (Excl. OI) 14,551 21,333 28,374 33,563 39,787
EBITDA margins (%) 20.2 25.4 25.5 25.7 26.0
- Interest expenses 2,008 1,340 1,248 1,286 1,267
- Depreciation 3,886 4,531 5,619 6,787 7,881
+ Other income 490 664 879 1,032 1,209
- Tax -1,246 4,144 5,596 6,630 7,962
Effective tax rate (%) -14 26 25 25 25
Reported PAT 10,393 11,983 16,789 19,891 23,886
+/- Extraordinary items 1,234 - - - -
Adjusted PAT 9,159 11,983 16,789 19,891 23,886
EPS (`/share) 31 40 57 67 81
Balance sheet
YE: Mar (` mn) FY20 FY21 FY22 FY23E FY24E
Share capital 585 603 2,972 2,972 2,972
Reserves & Surplus 48,749 67,962 82,232 99,140 119,443
Networth 49,334 68,564 85,205 102,112 122,415
Total Debt 41,714 35,119 36,487 37,292 35,357
Def. tax liab. (net) 1,755 3,862 3,862 3,862 3,862
Capital employed 92,803 107,545 125,553 143,266 161,634
Net Fixed assets 77,609 85,992 100,373 113,585 125,705
Investments 2,069 4,167 4,167 4,167 4,167
Net Working capital 11,871 14,566 19,319 22,671 26,561
Cash and bank balance 1,255 2,820 1,695 2,844 5,202
Capital deployed 92,803 107,545 125,553 143,266 161,634
Net debt 40,459 32,299 34,792 34,449 30,155
WC (days) 43 50 50 50 50
DE (x) 0.8 0.5 0.4 0.4 0.3

SRF Limited
Cash flow statement

PAT 9,159 11,983 16,789 19,891 23,886
+ Non cash items 2,221 6,637 5,619 6,787 7,881
Cash profit 11,380 18,620 22,408 26,678 31,767
- Incr/(Decr) in WC -3,703 2,695 4,753 3,352 3,890
Operating cash flow 15,082 15,925 17,655 23,326 27,877
- Capex 17,865 12,914 20,000 20,000 20,000
Free cash flow -2,783 3,011 -2,345 3,327 7,876
- Dividend 805 1,410 2,518 2,984 3,583
+ Equity raised - 7,500 - - -
+ Debt raised 4,229 -6,595 1,368 805 -1,935
- Investments 1,062 2,098 - - -
- Misc. items 314 -1,158 -2,370 - -
Net cash flow -734 1,566 -1,125 1,148 2,358
+ Opening cash 1,989 1,255 2,821 1,696 2,844
Closing cash 1,255 2,821 1,696 2,844 5,202
Key ratios
YE: Mar FY20 FY21 FY22 FY23E FY24E
P/E (x) 86 66 47 40 33
P/BV (x) 3.1 2.3 9.2 7.7 6.4
EV/EBITDA (x) 56 38 29 24 21
RoE (%) 20 20 22 21 21
RoCE (%) 13 17 20 21 22
Fixed Asset turnover (x) 1.0 0.9 1.0 1.0 1.0
Dividend (%) 27 48 85 101 121
Dividend yield (%) 0.4 0.4 0.3 0.4 0.5
Dividend payout (%) 7.7 11.8 15.0 15.0 15.0
Debtors days 45 55 55 55 55
Creditor days 63 69 69 69 69
Inventory days 61 64 64 64 64
Revenue growth (%) (6.3) 16.5 32.5 17.4 17.2
EBITDA growth (%) 7.4 46.6 33.0 18.3 18.5

Aarti Industries
SELL
INITIATING COVERAGE ARTO IN EQUITY January 17, 2022
Walking a tight rope Chemicals
Aarti is the most vertically integrated Indian chemical company with Recommendation
expertise in various chemistries. It is also one of the most capex- Mcap (bn): `398/US$5.3
intensive companies. During FY16-21, it undertook cumulative capex of 3M ADV (mn): `892/US$12
`49bn (23% CAGR) while earnings CAGR was 15%. It has guided to CMP: `1,099
2x/3x revenues by FY24/FY27 for expected capex of ~`75bn for the next TP (12 mths): `890
five years. This could lead to subdued return ratios as GB turns will Downside (%): 20
come under pressure. Given ~70% of revenue is on spot basis, Aarti is
prone to market/RM volatility, which can impact utilization and
Flags
profitability. With not enough OCF to fund aggressive capex, it has to
rely on debt and equity-raise for expansions. Current valuations price Accounting: RED
in 19% revenue CAGR over FY21-35E at 23% EBITDAM. We expect 19% Predictability: AMBER
CAGR and 22% EBITDAM to arrive at TP of `890 (34x FY24E P/E). Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: NEUTRAL Catalysts

Vertical integration, Chinese competition and selling on spot basis  Earning growth of 22% over FY21-
Vertical integration enabled it to utilize byproducts, maintain consistency and 24E vs consensus of 30%
cater multiple end-user industries. Its products directly compete with China, so  Limited scope of margin expansion;
any production challenges in China impart volatility to profitability. About 70% EBITDAM to remain near 21% over
of revenues are spot, implying limited long-term revenue visibility and higher FY22-24E vs consensus estimate of
dependency on market forces. expansion to 23%
Aggressive growth and capex targets leave little room for mistakes  GB turns will decline to 0.8x by
FY24E vs 1.0x in FY21.
In FY16-21, Aarti doubled gross block, and with subdued revenue growth GB
turn dropped to 1x from 1.6x in FY16. Aarti has laid out ambitious plans to
2x/3x revenues and PAT by FY24/FY27 supported by cumulative capex of Performance (%)
`75bn. We see little room for error especially given limited execution (large Aarti Industries Sensex
projects) history and lack of bandwidth/professionalism. 200
RoE will further taper due to decline in GB turn 150

100
With revenue/PAT CAGR of 22/22% (our estimates) over FY21-FY24E along
with average OPM of 21%, RoE should fall to 15% by FY24 from 16% in FY21. 50
RoE is in downturn mode since FY17 (25%). Aarti generated cumulative OCF of 0
Jan-22
Jan-21
Sep-21
Oct-21
Nov-21
Aug-21
Apr-21
Mar-21
Jun-21
Dec-21
Feb-21
Jul-21
May-21
`41bn for capex of `49bn, which resulted in negative FCF. We except FCF to
remain negative till FY25.
Valuations factoring in turnaround in numbers
With expectation of acceleration in earnings, Aarti trades higher than Vinati, Source: Bloomberg, Ambit Capital Research
SRF and ATLP which have better execution history, higher/same earnings
growth (except ATLP) and superior business models. It trades at 49x/42x on our
FY23/24 earnings estimates which already factors in a turnaround in numbers
FY22 onwards. Risks: Rising contractual revenues, better execution and higher
earnings growth.
Key financials
Year to March (Cons) FY20 FY21 FY22E FY23E FY24E
Research Analysts
Net Revenues (` mn) 41,863 45,061 60,658 71,088 82,309
Ankit Gor
EBITDA (` mn) 9,773 9,815 12,132 14,928 17,696
ankit.gor@ambit.co
APAT (` mn) 5,361 5,234 6,693 8,207 9,594
Tel: +91 22 6623 3132
Diluted EPS (`) 15 14 18 23 26
Kumar Saumya
RoE (%) 19.1 16.2 15.3 14.6 15.0
kumar.saumya@ambit.co
P/E (x) 75 77 60 49 42
Tel: +91 22 6623 3242
Aarti Limited

Exhibit 1: New platforms and specialty products will guide future performance
140 Expanding footprints: Long term contract wins: Enhancing Aggressive

Geographical expansion investment 40%
Muted realizations, capabilities:
120 & process improvements outlook: ` 50bn
capacity expansions, long Accelerated
capex plan over
term supply agreements investments weigh FY22-24 with ` 35bn
100 30%
signed on return ratios focused on new
80 products
20%
60
40
10%
20
- 0%
Chemical (Rs bn) Pharma (Rs bn) Home and Personal (Rs bn) RoCE (%) (RHS) EBITDAM (%) (RHS)

Aarti Limited
Exhibit 2: Pharma revenue share has improved Exhibit 3: …with margin expansion, thereby supporting
gradually… profitability
Chemicals Pharma Pharma EBIT (Rs bn) Chem. EBIT (Rs bn)
Chem. EBIT (%) (RHS) Pharma EBIT (%) (RHS)
100% 15 30%
80%
10 20%
60%
40%
5 10%
20%
0% - 0%
Exhibit 4: Intensive capex program will continue to weigh Exhibit 5: Declining GB turns coupled with no margin
on GB turns improvement will impact return ratios
CAPEX (Rs bn) GB Turn (x) (RHS) RoE (%) RoCE (%) EBITDAM (%) (RHS)
16 2.0 30% 30%
FY16-21 CAGR 23%
1.6
12
20% 20%
1.2
8
0.8
10% 10%
4
0.4
- - 0% 0%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
FY19
FY16
FY17
FY18
FY20
FY21
FY22E
FY23E
FY24E
Exhibit 6: Aarti’s valuation multiples track margin Exhibit 7: Given the of 22% earnings growth we don’t find
improvements which are a direct beneficiary of lower comfort in current valuations
crude prices
GM 1Y FWD PE (RHS) Crude (US$/bbl) (RHS)

35%
Vinati
60% 120
30%
FY21-24 PAT CAGR
50% 100 SRF

25%
Aarti Navin
40% 80 20% Deepak
30% 60 15%
Atul
20% 40 10%
5%
10% 20
0%
0% -
10
20
30
40
50
60
-
FY18
FY13
FY14
FY15
FY16
FY17
FY19
FY20
FY21
FY22
FY24 P/E
Source: Company, Bloomberg, Ambit Capital research Source: Company, Ambit Capital research

Aarti Limited
Aarti’s Journey and evolution

Incorporated in 1984, Gujarat-based Aarti has emerged as a leading player
in Benzene-based derivatives. Its operating segments are: 1) specialty
chemicals (Benzene and Toluene derivatives) – 83% of sales and 2)
pharmaceuticals – 17% of sales. With over 250 products, it serves more than
700 domestic and 400 export clients. It supplies intermediates to the
pharmaceuticals, agrochemicals, polymers, paints, surfactants and colourant
industries.
Exhibit 8: Business timeline – Aggressive capacity expansion and slower ramp up take a toll on financial performance
140
Expanding footprints: Enhancing Aggressive
Long term contract wins:
Geographical expansion, investment outlook: 40%
120 Muted realizations, capacity capabilities:
process improvements and ` 50bn capex plan
expansions, long term Accelerated over FY22-24 with `
scale up of Pharma
100 supply agreements signed investments weigh 35bn focused on new
30%
on return ratios products
80
60 20%
40
10%
20
- 0%
Chemical (Rs bn) Pharma (Rs bn) Home and Personal (Rs bn) RoCE (%) (RHS) EBITDAM (%) (RHS)
Phase 1 (FY11-14) (expanding footprint): During this period, revenue grew at

22% CAGR led by inroads into America (34% share of exports in FY14 compared to
19% in FY11) and quadrupled hydrogenation capacity from 9KT to 36KT. Exports
grew at 30% CAGR during this period. The shift towards continuous manufacturing
process in hydrogenation and nitration and improvement in pharmaceuticals margins
contributed to the overall margin improvements. OPM averaged 15% and gross block
grew at 24% CAGR during this period.
Phase-2 (FY15-18) (long-term contract wins): Revenue grew at 9% CAGR
impacted by lower crude prices. The exports were also muted during the period,
however, the pharma segment outperformed with 22% CAGR sales growth and
margin expansion to 14%. Aarti embarked upon multiple expansions in this period
including NCB, PDA, caffeine and calcium chloride capacity expansions. The green
field capacities included Ethylation unit at Dahej for agrochemicals and nitro-toluene
at Jhagadia. This was an eventful period as Aarti signed its first two long term supply
agreements in FY17.
Phase-3 (FY18-21) (enhancing capabilities): Revenue grew at 6% CAGR led by
muted crude prices and uncertain demand environment. Pharma segment continued
to deliver superior performance with sales growth of 16% CAGR and margin
improvement to 23.5%. Gross block grew by 18% on account of expansion in
chlorination capacity to 175KT and capacity additions in pharma. OPM averaged 22%
during this period.
Phase-4 (FY22 onward) (aggressive investments): We expect Aarti to deliver
revenue/PAT CAGR of 22%/22% led by capacity addition in NCB, PDA, entry into
chloro toluene value chain and sales under two long term contracts. The focus on
value added product will help in stable margins during this period.

Aarti Limited
Exhibit 9: Aarti’s business overview

Segment Specialty Chemicals (83% of sales) Pharmaceuticals (17% of sales)
Product chains Benzene Chain Toluene Chain Sulphur chain API Xanthine
Sales mix 55-60% 8-10% 14-16% 10% 7%
EBIT (%) 18% 24%
RoCE (%) 19% 20%
 NCB Chain: PNCB,
ONCB  Nitro toluenes,  Oleum,
 DCB Chain: DCB and  Toluidine,  API: 48 APIs
 Caffeine based
Products
TCB derivatives
 Sulfates, Intermediates
 Sulphonic and  Sulphuric acid CRO/CMO
intermediates
 PDA Chain: benzoic acids
Polydiacetylene
 Agrochemical
 Dyes and pigments  Solvent  Dyes and Textile  API: Anti-cancer,
Anti-Asthama, Anti-
Engineering  Cosmetics  Surfactant  Beverage
hypertensive etc.
User Industry  Polymer  Polymer  Water treatment  Nutraceuticals
 Pharmaceuticals  Intermediates:
 Leather  Pesticides
Oncology,
 Pharma
 Fragrance  Construction  Drugs diabetology
 Rubber and other
BASF,Clariant,Archroma, Sun Chemical, Atul,
Clients Sudarshan, Solvay, Toray, Sabic, Bayer, Syngenta, Largely domestic Sanofi, Cipla, Lupin, Sun Pharma, Teva, Dr. Reddy
UPL, 3M
Raw material Benzene, Aniline, Nitric Acid, Sulphur, Olefins, Toluene, Chlorine
 Chlorination: 175KT
 Nitration: 75KT  Nitro-Toluene: 30KT
 Sulfates: 65KT
Capacities  Sulphuric Acid:  2 USFDA units  Caffeine: 3.6KT
 PDA: 12KT  Ethyl derivative: 10KT
200KT
 Hydrogenation: 36KT
 Increasing NCB
(Nitration) capacity to
CAPEX 105KT: ` 1.5bn
 ` 2bn in Chloro
 ` 5bn capex planned over next 2-3 years
Toluenes
 De-bottleneck 2.5KT
PDA capacity: ` 800mn
 Global Benzene  Global Toluene
products market size is market size is US$
Industry size
US$ 62bn growing at 30bn growing at
 US$ 190bn API market
about 4%. about 4%.
32%
High growth segment on
FY21-24E Rev CAGR 17% 15% 16%
account of expansion in
product offerings
A global company with a focus on complex chemistries

Established in 1975, Aarti Industries gradually evolved from a manufacturer of basic
chemicals to complex products. It is now a leading player in benzene-based
derivatives (~75% of overall chemical revenues). Using benzene as the key raw
material, Aarti produces value-added products through multiple steps such as
chlorination, nitration, hydrogenation and oxidation. Aarti has 200+ products, 700+
domestic customers and 400+ export customers across 60 countries. The global
market shares of its various products range from 25-40%. The company is ranked
among the five largest global companies in nearly 75% of its key products. Helmed
by technocrat promoters, Aarti continues to focus on expanding its chemistry
capabilities and consistently adding new chemistry blocks to expand its portfolio of
value-added products.

Aarti Limited
Exhibit 10: Aarti’s benzene-based product chain
Exhibit 11: Aarti’s toluene-based product chain
Exhibit 12: Aarti’s sulphur-based product chain

Aarti Limited
Exports to China improving rapidly

Aarti has been one of the few companies in India which is incrementally supplying to
Chinese manufacturers. Its investments in process improvement have made it cost
competitive against Chinese suppliers.
Exhibit 13: Domestic market has a dominant share Exhibit 14: Share of China has nearly doubled over last
seven years
Export share to China (%)

India 14%
14%
3% Europe
10%
North
6%
America 8%
China
9%
56%
Japan
12%
RoW
FY14 FY18 FY21

Diverse end-user basket: Aarti has built its expertise around basic aromatics, i.e.
benzene which enables it to address a diverse set of user industries and mitigates
slowdown concerns in any particular sector.
Exhibit 15: Agchem and pharma contribute 50% of revenues
Agrochem
10%
30% Pharma
20%
Dyes
Polymer &
20% 20% additives
Other

Aarti Limited
Exhibit 16: Mind map of diverse value chains – Product basket catering to diverse end use industries
State-of-the-art infrastructure with focus on EHS

The company has a total of 20 plants across Gujarat and Maharashtra. From FY23,
the specialty chemical division will have additional investments in the chlorotoluene
chain and a UMPP plant for new value-added products around its core competency.
The pharma segment will get `5bn worth of investments over the next two years.
Exhibit 17: Aarti has increased focus on EHS and sustainability
Number Location Remark
Specialty Chemicals 15 Vapi, Jhagadia, Dahej, Kutch, Tarapur New investments towards Chloro-Toluene chain and UMPP (Universal MPP).
Pharmaceuticals 5 Tarapur, Dombivali, Vapi 2 USFDA, 3 WHO/GMP approved.
R&D Centre 4 Vapi, Dombivali, Navi Mumbai Aarti spent ` 0.87bn on R&D in FY21. It has a team of 400 employees in R&D.
EH&S Responsible care, EcoVadis, OHSAS-18001, ISO-9001,14001

Aarti Limited
Aggressive growth and capex targets,

leaving little room for mistakes
Aarti has the highest capex intensity amongst all leading listed Indian
chemical companies. Its capex CAGR was 23% over the last five years with
total investments of `49bn followed by SRF (16% CAGR and total capex of
`62bn) and UPL (16% CAGR and total capex of `94bn (ex-acquisition)).
During this period, its gross block asset turnover ratio (ATR) dropped to 1x Over the last five years, Aarti has
from 1.6x in FY16. The situation was similar for the majority of its peers but raised ` 19.5bn via QIP preceded
their ATR did not witness a steep fall. This has impacted Aarti’s return ratios. by PI Industries which raised `
Going ahead, capex intensity will remain high, leaving little room for 20bn.
mistakes. Any uncertain external/internal events can adversely impact its
earnings significantly since by then the asset base would have become huge.
We are estimating cumulative capex of `75bn over FY22-26E.
Exhibit 18: Completed key expansions in the last two years

Projects Location Remarks
P-1 Agrochem and specialty Dahej This greenfield project was completed in FY20.
P-2 Agrochem intermediate Dahej This was part of the first contract. Total investment incurred ` 4bn. Project completed in FY21.
Chlorination Jhagadia Capacity expanded to 175KT from 105KT. Expansion completed in 2QFY21 with total investment of ` 2bn.
R&D Unit Navi Mumbai ` 0.8bn invested for new R&D. Commissioned in 2HFY20
Land acquisition Gujarat ` 0.8bn invested on a land parcel for future expansions
Hereon, Aarti has plans for annual capex of `15bn totaling `45bn over FY22-24. A
majority of these investments (`30bn) will be directed towards new chemistries and
value-added products. This will also include building chloro-toluene capabilities and
investments in MPPs (multi-purpose plants) to secure CMO opportunities around its
value chain.
Exhibit 19: Upcoming projects in FY22
Revenue
Projects Location Completion Investment Remark
potential
Pharma expansions Vapi, Tarapur 1HFY22 ` 2bn ` 3-4bn A greenfield unit at Vapi and doubling the capacity at Tarapur.
P1-1HFY22 Aarti is expanding its NCB capacity as current capacity
NCB expansion Vapi ` 1.5bn ` 3-4bn
P2-2HFY22 utilization has crossed 80%.
2nd Long term contract Dahej 1HFY22 ` 3bn ` 5bn The supplies under contract will begin in 2HFY22.
3rd Long term contract Jhagadia 1HFY22 ` 1bn ` 0.9bn The supplies under contract will begin in 2HFY22.
Exhibit 20: Intensive capex program will continue to weigh Exhibit 21: Declining GB turn coupled with no margin
on GB turns improvement will impact return ratios
CAPEX (Rs bn) GB Turn (x) (RHS) RoE (%) RoCE (%) EBITDAM (%) (RHS)
20 2.0 30% 30%
14 15 15
15 13 1.5
12 20% 20%
10 8 1.0
5 6
5 10% 10%
5 0.5
- - 0% 0%
FY17
FY16
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E

Aarti Limited
Investments yet to fructify

Aarti has invested `25bn over the last two years, which are yet to fructify due to the
difficult macro environment. However, with continued intensity, return ratios will
remain under pressure since the demand environment remains uncertain coupled
with the inflationary raw material environment.
Exhibit 22: SRF outperforms Aarti despite higher Exhibit 23: Aarti had to resort to equity dilution to fund
investments capex
Cumulative FY16-21 CAPEX (Rs bn) PAT CAGR (%) (RHS) Cumulative FY16-21 CAPEX (Rs bn)
70
Cumulative FY16-21 FCF (Rs bn) 62
70 62 70% 60
60 60% 49
49 50
50 50%
40
40 40%
30 30% 30
19 21 19
20 16 20% 20 16
5 7
10 10% 7
10 5
- 0%
-
Navin
SRF
PI
Aarti
Deepak
Atul
Vinati
Navin Vinati Atul Deepak Aarti SRF

-10
-20
Source: Company, Ambit Capital research, *excludes acquisitions Source: Company, Ambit Capital research
How far is free cash for Aarti?

With the stated investment objectives, we believe free cash generation is a far-
fetched story for Aarti since cash conversion days are also expected to remain stable
at around 85 days. We expect Aarti to post FCF from FY26.
Exhibit 24: Aarti – Long wait for free cash
OCF (Rs bn) FCF (Rs bn) OCF/EBITDA (RHS)

15 120%
10 100%
5 80%
- 60%
-5 40%
-10 20%
-15 0%

Aarti Limited
Ambitious growth target – Will wait for

delivery
In May 2019 (two months after 1st QIP), management gave a revenue
guidance of 15-20% YoY despite weak commentary and guidance from its
global agrichemical customers. Subsequently, in August 2019, it reduced
revenue/PAT guidance citing slowdown in agrichemical and automobile
industries. Management has presented aggressive revenue and PAT
guidance in the 2nd QIP in June 2021. Given the history, we would like wait
for delivery. We estimate 22% revenue and PAT CAGR over FY21-24.
Exhibit 25: Ambitious growth guidance
Exhibit 26: New capacities will support 22% growth over Exhibit 27: Aarti’s margins are sensitive to crude price
FY21-24E movement and rising crude prices pose a threat to
consensus margin estimates
90 14% Crude (US$/bbl) (RHS) GM

CAGR 8% CAGR 22%
80 12% 60% 120
70
10% 55% 100
60
50 8%
50% 80
40 6%
30 45% 60
4%
20
10 2% 40% 40
- 0% 35% 20
FY22E
FY23E
FY24E
FY16
FY17
FY18
FY19
FY20
FY21
30% 0
FY16
FY22
FY13
FY14
FY15
FY17
FY18
FY19
FY20
FY21
Revenue (Rs bn) PATM (%) (RHS)

Aarti Limited
Valuations – Higher expectation built in

the current valuation
We believe street is very optimistic on the management guidance of revenue
and profitability delivery. The consensus estimates are factoring in
revenue/PAT CAGR of 25%/30% over FY21-24 which is in line with
management commentary. We are cautious on the outlook given the
underperformance in the past and hence we build in revenue/PAT CAGR of
22% over FY21-24. The reverse DCF suggests the current valuations are
factoring in 19% revenue CAGR over FY21-35 and 23% EBITDAM at 12%
WACC (13% CoE) and 5% terminal growth. Given the rising crude prices which
directly reflects on the raw material cost of Aarti, we build in 19% revenue
growth (led by capacity expansion) but 22% EBITDAM and arrive at the target
price of ` 890, implying 34x FY24 P/E in line with other basic chemical peer
Atul.
Historically, valuations have favorably priced in margin improvements owing

to softness in crude.
Exhibit 28: Aarti’s historical valuations have improved in line with industry
GM 1Y FWD PE (RHS) Crude (US$/bbl) (RHS)

60% 120
50% 100
40% 80
30% 60
20% 40
10% 20
0% -
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
A perspective on asset turn and EBITDA turn

Aarti is among the leading players in benzene chemistry with strong technical
capabilities complimented by backward integration. However, the business and
operational acumen do not reflect on its numbers. It is one of the most aggressive
chemical companies in terms of capex intensity and has more than doubled (2.5x) its
gross block during FY16-FY21; at the same time, the asset turnover ratio declined
from 1.6x in FY16 to 1x in FY21, the lowest in 10 years. Considering the RM pass-
through (cost plus) pricing model, we have also analyzed EBITDA/GB, and it has also
declined to 0.22x in FY21 (lowest in 10 years) from 0.30x in FY16. Falling asset turns
have in turn put pressure on RoE, which has come down to 16% in FY21 from 24% in
FY16. Since capex intensity will increase further, we expect GBT and RoE to remain
under pressure despite earnings growing at 22% CAGR between FY21-24 vs 15%
between FY16-21.

Aarti Limited
Exhibit 29: Slower ramp-up of capacities will continue to impact performance
GB (Rs bn) GB turn (RHS) EBITDA/GB (RHS)

120 1.8
1.6
100
1.4
80 1.2
1.0
60
0.8
40 0.6
0.4
20
0.2
- -
Need to improve management bandwidth: To expand from here, Aarti needs to

increase management’s bandwidth by hiring more professionals. In the last two years
there are no major hiring apart from two people in the design and technology team.
Simultaneously, Aarti has to bring the pay scale of KMPs to the industry level; for
example, the remuneration of the CFO is far lower than industry standards.
Exhibit 30: Our DCF inputs factor in lower than consensus Exhibit 31: DCF output values Aarti at 34x FY24 P/E
margins
FY16-21 FY21-25E FY25-35E (` mn) 1Y-FWD
EBITDAM Average 21% 21% 22% Terminal Value 270,934
Capex/GB 19% 21% 8%
Net debt 32,922
WACC 12%
Terminal growth 5%
Source: Company, Ambit Capital research Share Price 890
Implied P/E FY24E 34
We differ from consensus as we build in slower ramp-up (higher spot sales) and lower
margins in the currently volatile crude environment.
Exhibit 32: Ambit’s estimates factor in lower margin than consensus owing to slower ramp-up of capacities
Ambit's estimates Consensus estimates Difference
Particulars (` mn)
FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
Net sales 60,658 71,088 82,309 59,869 75,009 87,069 1% -5% -5%
EBITDA 12,132 14,928 17,696 13,052 16,639 19,815 -7% -10% -11%
PAT 6,693 8,207 9,594 7,383 9,563 11,377 -9% -14% -16%
OPM 20.0% 21.0% 21.5% 21.8% 22.2% 22.8% -180 bps -118 bps -126 bps
NPM 11.0% 11.5% 11.7% 12.3% 12.7% 13.1% -130 bps -120 bps -141 bps
Exhibit 33: Segmental revenue and margin assumptions

` bn FY21 FY22E FY23E FY24E CAGR (%) Remark
Specialty chemicals (` mn) 41.5 54.3 65.7 76.6 23% Gross revenue of specialty chemicals
Pharma (` mn) 8.7 10.5 12.0 13.5 16% Gross revenue of pharma segment
Specialty Chemical EBIT (%) 18.1% 19.0% 19.5% 20.0% Raw material and slower ramp up will impact core margins.
Pharma EBIT (%) 23.5% 20.0% 20.0% 20.0% Segment had high margin in FY21. We believe 20% is more sustainable.

Aarti Limited

Major events over the last five years
Year Key points
 Aarti's is one of the lowest-cost producers of benzene derivatives in the world.

 Company adopts a cost-plus pricing for its various speciality chemicals, its topline is linked with input costs
FY16  Expansion in NCB, PDA, Chlorination and Calcium Chloride capacity.
 Greenfield expansion in nitro-toluene, ethylation unit and specialty chemical complex.
 More than 60% of pharma exports to regulated markets.
 1st long term contract of ` 40bn for supply of agrochemical for a period of ten years.
FY17  Investing ` 750mn to double R&D capabilities.
 Acquired land parcel for future expansions.
 Nitro-toluene facility commissions in Jhagadia.
 Second long term contract of ` 100bn to supply specialty chemical intermediate over 20 year period.
FY18
 Initiates CRAM services in Pharma.
 Demerger of home and personal care segment into a separate entity.
 Third supply contract of ` 9bn signed for supply of jointly developed specialty chemical intermediate.
 Initiates expansion of NCB capacity to 108KT.
FY19
 ` 7.5bn raised via QIP
 Initiates publishing separate sustainability report of the company.
 1st Long term contract was terminated due to change in customer's strategy.
FY20
 CAPEX plan in progress. CAPEX target to ` 10-12bn.
 Sticks to its investment plan in a difficult year. Aarti invested ` 13bn.
FY21
 2nd & the 3rd long term contract commissioning had been impacted due to challenges of Covid-19 and is expected to be commissioned
in the second half of FY21-22
 Growth capex plan to invest ` 30-35bn over FY22-24 will be funded by second QIP of ` 12bn.

Aarti Limited
Key risks and Catalysts

Risks
Faster ramp-up of capacities
Contrary to what has been delivered in the past, faster ramp-up of new capacities
can result in improvement in GB turns. This poses upside risks to our margin and RoE
estimates.
Increase in contractual sales agreement
We see threat to our estimates if management is able to tie up its capacities to
contractual manufacturing operations (CMO) through new supply contracts. This
would give better revenue visibility and help ramp up capacities faster than in the
case of spot sales of catalogue products.
Improve in management bandwidth and professionalism
If management decides to improve overall professionalism, it can help better/faster
execution. This will also uplift overall corporate governance concerns.
Downward trend in crude oil prices
History suggests that Aarti’s margins are directly related to crude oil prices. Lower the
oil price the better it is for overall profitability. There will be risks to margin
assumptions if crude oil prices start trending downwards.
Catalysts
 Rising crude price and slower ramp up will disappoint on consensus
earning assumptions: We are building in 22% earning CAGR over FY21-24
against consensus expectations of 30%. We bake in higher raw material costs due
to rising crude and higher fixed costs on account of aggressive ` 45bn capex plan
over FY22-24. Hence, we see margin delivery of near 21% over FY22-24 contrary
to street estimate of margin expansion to 23% by FY24.
 Declining GB turn and flat margin puts pressure on return ratios: We see
GB turn declining to 0.8x based on our revenue growth assumption of 22% over
FY21-24 and since we are building flat margin performance we see further
pressure on return ration. We see RoE declining to 15% vs 16% in FY21.
Accounting RED Ranks D8 in our forensic accounting decile in the zone of darkness.
Predictability AMBER Large bucket of products and diverse user industries make predictability difficult.
Earning Momentum GREEN With new capacities coming into operation, we believe the earnings momentum will be positive.

Aarti Limited

Aarti Limited
Financials
Income statement
Net revenues 41,863 45,061 60,658 71,088 82,309
Revenue growth (%) -0.6 7.6 34.6 17.2 15.8
- Op. expenses 32,090 35,246 48,526 56,160 64,612
EBITDA (Excl. OI) 9,773 9,815 12,132 14,928 17,696
EBITDA margins (%) 23.3 21.8 20.0 21.0 21.5
- Interest expenses 1,248 864 1,128 1,193 1,481
- Depreciation 1,852 2,313 2,787 3,664 4,448
+ Other income 88 7 303 355 412
- Tax 1,294 1,293 1,704 3,585 2,436
+/-Extraordinary items - - - 6,000 -
Effective tax rate (%) 19 19 20 22 20
Reported PAT 5,468 5,352 6,816 12,842 9,743
+/- Extraordinary items - - - 4,500 -
+/- Minority interest 107 118 123 135 149
Adjusted PAT 5,361 5,234 6,693 8,207 9,594
EPS (`/share) 15 14 18 23 26
Balance sheet
Share capital 871 871 1,813 1,813 1,813
Networth 29,787 35,029 52,719 59,694 67,849
Minority interest 946 122 245 380 529
Total Debt 26,489 30,683 25,721 33,927 40,133
Def. tax liab. (net) 2,110 2,339 2,339 2,339 2,339
Net Fixed assets 38,862 48,905 60,368 71,705 82,256
Investments 370 635 635 635 635
Cash and bank balance 2,473 4,123 500 1,006 1,334
Net debt 24,016 26,559 25,221 32,922 38,799
WC (days) 108 93 93 93 93
DE(x) 0.9 0.9 0.5 0.6 0.6

Aarti Limited
Cash flow statement

PAT 5,361 5,234 6,693 8,207 9,594
+ Non cash items 2,032 2,543 2,787 3,664 4,448
Cash profit 7,393 7,777 9,480 11,870 14,042
- Incr/(Decr) in WC 293 -3,118 5,011 3,475 3,630
- Capex 11,302 12,357 14,250 15,000 15,000
Free cash flow -4,203 -1,461 -9,781 -6,605 -4,587
- Dividend 610 805 1,004 1,231 1,439
+ Equity raised 432 2 12,000 - -
+ Debt raised 445 4,193 -4,961 8,206 6,206
- Investments 39 265 - - -
- Misc. items 1,595 14 -123 -135 -149
Net cash flow -5,569 1,650 -3,623 505 328
+ Opening cash 8,042 2,473 4,123 500 1,006
Closing cash 2,473 4,123 500 1,006 1,334
Ratios
YE: Mar FY20 FY21 FY22E FY23E FY24E
P/E (x) 75 77 60 49 42
P/BV (x) 13.5 11.4 7.6 6.7 5.9
EV/EBITDA (x) 43.6 43.4 35.1 29.1 24.8
RoE (%) 19.1 16.2 15.3 14.6 15.0
RoCE (%) 14.2 11.9 13.0 13.1 13.2
Dividend (%) 34 44 55 68 79
Dividend yield (%) 0.4 0.4 0.3 0.3 0.4
Dividend payout (%) 11 15 15 15 15
Revenue growth (%) -1 8 35 17 16
EBITDA growth (%) 1 0 24 23 19
PAT growth (%) 9 -2 28 23 17

Deepak Nitrite
BUY
INITIATING COVERAGE DN IN EQUITY January 17, 2022
Ready to join the big league Chemicals
Import substitution has always been a theme for Deepak Nitrite. With Recommendation
leadership in sodium nitrates, nitro-toluene and phenol-acetone, it is Mcap (bn): `363/US$4.6
transforming to a specialty chemicals company with building blocks 3M ADV (mn): `2,629/US$35
already in place. `20bn capex (FY22-23) will focus on high-value CMP: `2,661
products: (1) new platforms - fluorination & photo-chlorination and (2) TP (12 mths): `3,117
downstream products of phenol-acetone. We believe it is ready to join
Downside (%): 17%
the big league with (1) strong execution history, (2) mix of 2nd
generation promoters & professionals and (3) a decade’s visibility to
expand into the phenolic chain. With improved RoE (5/3 Yr average of Flags
23%/34%) and FCF supporting strong project pipeline, DN can re-rate Accounting: GREEN
further. Current valuations price in 17% revenue CAGR and 26% Predictability: AMBER
EBITDAM over FY21-35E; we expect 18% revenue CAGR and 26% Earnings Momentum: GREEN
EBITDAM to arrive at TP of `3,117 (32x FY24E P/E).
Catalysts
Competitive position: STRONG Changes to this position: POSITIVE
 Better product mix and operating
Share of VAP is improving led by Fine & Specialty division leverage to drive average RoCE to
VAP share has improved to ~25% from ~15% (in FY17) driven by Fine & 36% (FY22-FY24) vs 23% over FY16-
Specialty (FNS) division that caters to agrichem and pharma industries (~60%) FY21.
and other derivative products. Past R&D efforts have fructified now as it is  Share of VAP to improve to 35% in
working with customers like Bayer, Lanxess and Syngenta. With `3.5bn FY24 from 25% currently.
investments in platforms like fluorination and photo-chlorination and a recently
 Phenol downstream chain offers
won long-term contract, VAP share would improve to ~35% by FY24E. US$1bn import substitution
Downstream products of phenol-acetone to mitigate volatility opportunity.
After gaining >50% India market share in phenol & acetone, DN is expected to
expand phenol-acetone capacities along with downstream products like IPA,
MIBK, Bisphenol-A and polycarbonate. Products across the value chain offer Performance (%)
opportunity of >`75bn and will keep DN occupied for a decade. We expect
DN Sensex
Deepak Phenolics to deliver revenue/PAT CAGR of 22% over FY21-FY24. 300
Strong financial health with balance improvement 240
Product mix, better spreads and FCF enabled it to strengthen balance sheet; it 180
prepaid debt taken for the phenol project and will be net-debt-free by FY24. 120
Growth was supported by WC days improvement to 59 days from 83/65 days 60
5/2 years ago, which improved cash conversion (OCF/EBITDA averaged 67%
0
over FY16-21) and RoCE (5/3 Yr average at 22%/30%) was also strong.
Jan-21
Jul-21
Nov-21
Jan-22
Sep-21
Mar-21
May-21
A further rerating on the cards

The stock has done well on successful commissioning/ramp-up of phenol plant
and growth in FNS, which drove earnings CAGR of 65% (FY16-21). As Source: Bloomberg, Ambit Capital Research
proportion of value-added products increases followed by earnings growth,
stock will further re-rate. Now it is at 15-20% discount to closest peers; we
believe it all ingredients to trade higher. Risks: Delay in project roll out and
contraction in phenol spreads below US$ 650/tn (~60% of profits) pose a
downward risk to our earnings estimates.
Key financials Research Analysts
Ankit Gor
Net Revenues (` mn) 42,297 43,598 61,792 68,447 77,027
ankit.gor@ambit.co
EBITDA (` mn) 10,258 12,470 16,048 18,055 20,508
Tel: +91 22 6623 3132
APAT (` mn) 6,110 7,758 10,735 11,882 13,483
RoE (%) 46.2 39.6 38.0 31.1 27.6 kumar.saumya@ambit.co
P/E (x) 59 47 34 30 27 Tel: +91 22 6623 3242
Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its res earch reports. As a result, investors should be aware that Ambit Capital may
Deepak Nitrite

Exhibit 1: New platforms and phenol-acetone downstream products will guide future performance
90 Expanding footprints: Business re-organization: Phenol plant New platforms 45%

Launched fuel additives and Re-organized products into begins operations: and products:
80 started commercial Strategic Business Units and Pricing tailwind in New platforms 40%
production of optical announced Phenol-Acetone Performance and products will
70 drive growth
35%
brightening agents (OBA) project. Products, ramp up of
60 and expanded export Phenol-Acetone 30%
operations capacities plant.
50 25%
40 20%
30 15%
20 10%
10 5%
- 0%
Standalone(Rsbn) Phenolics (Rsbn) RoCE (%) (RHS) EBITDAM (%) (RHS)
Exhibit 2: FNS revenue growth will improve over FY21-24 Exhibit 3: Margin improvement supported by increasing
supported by new products and supply contracts under investments in R&D towards process efficiencies
agrochemical intermediates
R&D investment (Rs mn)

14 CAGR 20% 50%
160 Share of SA revenue (RHS) 0.9%
12
40% 140 0.8%
10
120 0.7%
8 30%
0.6%
6 100
20% 0.5%
4 80
10% 0.4%
2 60
0.3%
- 0% 40 0.2%
FY24E
FY22E
FY23E
FY16
FY17
FY18
FY19
FY20
FY21
20 0.1%
- 0.0%
FNS (Rs bn) EBIT margin (%) (RHS) FY16 FY17 FY18 FY19 FY20 FY21
Exhibit 4: Phenol downstream provides US$1bn import Exhibit 5: Plants and products
substitution opportunity Plant Main products
Import (US$ mn) FY19 FY20 FY21
Dahej Phenol, acetone, basic, performance and derivatives
Bisphenol 125 93 87 Nandesari Nitrate and nitrites and FNS products
MIBK 43 26 43 Roha Acetophenone, Xylidine, Cumidine and other FNS products
Epoxy 89 93 90 Taloja Toluidine, Xylidine, ABTF and other FNS products
Polycarbonate 528 372 363 Hyderabad DASDA
Caprolactam 142 106 75 Source: Company, Ambit Capital research
MEK 59 27 45
IPA 123 105 198
Cyclohexanone 40 42 22
Total 1,149 864 923
Source: GoI, Ambit Capital research

Deepak Nitrite
Exhibit 6: Improved cash flow outlook with sustained Exhibit 7: …support debt reduction
growth and margin delivery…
OCF (Rs bn) FCF (Rs bn) Total Debt (Rs bn) D/E (x) (RHS)
OCF/EBITDA (RHS)
14 1.4
20.0 120%
12 1.2
15.0 100% 10 1.0
10.0 80% 8 0.8

6 0.6
5.0 60%
4 0.4
- 40% 2 0.2
FY19
FY16
FY17
FY18
FY20
FY21
FY24E
FY22E
FY23E
-5.0 20% - -
FY23
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY24
E
E
E
-10.0 0%
Exhibit 8: We factor in phenol spread of US$650 Exhibit 9: Improving margins boost return ratios;
increasing capex will weigh on asset turns in medium
term; we expect RoCE to average 35% over FY21-35E
Phenol spread (USD/tn) RoE (%) RoCE (%) EBITDAM (%)

Deepak Phenolics EBIT (%) (RHS)
800 30% 50% 35%
700 45%
25% 30%
40%
600 35% 25%
20%
500 30% 20%
25%
400 15% 15%
20%
300 15% 10%
10%
200 10%
5%
5% 5%
100
0% 0%
- 0%
FY17
FY18
FY16
FY19
FY20
FY21
FY22E
FY23E
FY24E
FY19 FY20 FY21 FY22E FY23E FY24E
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Exhibit 10: Deepak’s valuation multiples have followed Exhibit 11: Deepak offers best risk-reward ratio among
margin profile; industry re-rating drove valuation in FY17 peers; we value it at 32x FY24E
which gradually fizzled out, but stock re-rated sharply in
FY20 when street was convinced that margins would
remain elevated
EBITDAM (%) (LHS) 1Y FWD P/E 35%

Vinati
35% 35
FY21-24 PAT CAGR
30%
30% 30 SRF
25% Aarti
25% 25 Navin
20% Deepak
20% 20
15% Atul
15% 15
10%
10% 10
5%
5% 5
0%
0% -
- 20 40 60
FY22E
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY24 P/E

Deepak Nitrite
Deepak’s journey and evolution

Deepak Nitrite, incorporated in 1970, began its journey with a sodium nitrite
and sodium nitrate plant in Vadodara. It continued to gradually diversify into
dye intermediates, agrochemical and pharmaceutical intermediates, fuel
additive, brightening agents, phenol, acetone, Isopropyl Alcohol (IPA) and
other basic and specialty products with focus on import substitution. DN has
more than 70% market share in sodium nitrite, nitro-toluene and fuel
additive in the domestic market. Phenol and acetone command nearly 55%
market share in India. Over the last decade, DN has clearly demonstrated
three different phases of its life cycle.
Exhibit 12: Evolution of Deepak Nitrite from `8bn revenue in FY12 to `8bn PAT in FY21
90 Expanding footprints: Business re-organization: Phenol plant begins New platforms 45%
Launched fuel additives and Re-organized products into operations: Pricing and products:
80 started commercial Strategic Business Units and tailwind in New platforms 40%
production of optical announced Phenol-Acetone Performance Products, and products will
70 brightening agents (OBA) and ramp up of Phenol- drive growth 35%
project.
expanded export operations Acetone capacities.
60 30%
50 25%
40 20%
30 15%
20 10%
10 5%
- 0%
Standalone(Rsbn) Phenolics (Rsbn) RoCE (%) (RHS) EBITDAM (%) (RHS)
Phase 1 (FY11-14) (Expanding footprints): During this period, revenue grew at

24% CAGR led by new product fuel additives (2-EHN: Diesel cetane improving
chemical) and expanding footprints in export markets. Since the new products were in
the bulk segment the OPM averaged 8% during this period.
Phase-2 (FY15-18) (Process integration and business re-organization):
Revenue grew at 8% CAGR supported by forward integration of DASDA (Di-amino
stilbene disulphate acid) into OBA (optical brightening agents) at Dahej and market
seeding activities for upcoming phenol plant. DN announced a CAPEX of ` 14bn for
200KT phenol and 120KT acetone, under its 100% subsidiary Deepak Phenolics
Limited (DPL) in FY15. Benign crude prices reflected in improved gross margins and
OPM averaged 11% during this period.
Phase-3 (FY18-21) (Entry into phenol): Revenue grew at 38% CAGR supported by
ramp-up at phenol-acetone facility (ramped up to 100% within two quarters of
commercialization) and superior realizations in PP as DASDA and OBA prices shot up
due to global supply-chain imbalance. The price-led revenue growth in PP boosted
profitability and OPM averaged 20% during this period.
Phase-4 (FY22 onward) (New products and platforms): We expect DN to deliver
a revenue/EBITDA/PAT CAGR of 21%/18%/20% aided by improved traction in
specialty chemical segment (FNS 20% CAGR over FY21-24E) which will be supported
by expanded basket of products to be announced in coming period. The margin will
taper down a little as the prices normalize. We expect RoE/RoCE to average 34%/37%
over FY21-24E supported by sustained margin in FNS and margin accretive new
product pipeline.

Deepak Nitrite
Exhibit 13: Business snapshot

Deepak Nitrite Deepak Phenolics
Basic Fine and Performance
Phenol Acetone IPA
Chemicals (BC) Specialty (FNS) Products (PP)
Sales (FY21) (` bn) 8 8 3 14 8 4
Revenue contribution (%) 17% 17% 7% 32% 18% 9%
EBIT contribution (%) 16% 28% 2% 53%
Dyes and pigments, Pharma, dye,
Paper, Textile, Laminates, Paints, Healthcare, Personal Care,
User Industry Explosives, Rubber, agrochemical
Detergents Auto, Adhesives Paint, Acrylics Pharma
O&G, Agrochemicals intermediates
70% Dealer, 30% 30% Dealer,
500+, BASF, Indian Oil, Reliance, Clariant, Monsanto, Lanxess, Bayer, 80%
Direct 70% Direct
Customers Sun Chemical, Essar, consumption in
Century, Gargi, Aurobindo,
Syngenta, Goodyear Pharma
Vinati Atul, Alembic
Exports 47% 16%
Nitrates, Nitrites,
Toluidine, Fuel Xylidine, Cumidine, OBA (60%), DASDA
Major Products Phenol Acetone IPA
additive, Nitrosyl Oximes, Agrochem (40%)
Sulphuric Acid
Market Position (India) >70% market share in Nitrites, Xylidine, Cumidine, Oximes and others 55% 55% 12%
Soda Ash, Nitric acid, Xylene, Toluene, Benzene, Phenol co-
Key Raw Materials DASDA, Sulphuric Acid Acetone
Benzene, Toluene Benzene Propylene product
Propylene from BPCL, Indian Oil
Raw material sourcing 25-30% import, rest local sourcing
Benzene from OPAL, Reliance
Plants Nandesari, Taloja, Roha, Hyderabad, Dahej Dahej
Capacity (KT) - 200KT 120KT 30KT
Utilization (%) 80-85% 100%
Domestic demand (KT) US$ 175bn industry 400KT 240KT 250KT
Growth expectation (FY21-24) 19% 20% 22% 30% 5% 16%
Market leader in Phenol and Acetone
Competition Domestic benzene based players.
Deepak Fertilizer is leader in IPA
 Cost leadership
 Technical skill  Fully integrated
 Import substitution
Deepak's Focus
 Large scale
 Bespoke products  Quality intensive
 Lowest thermal footprint
production Asset sweating
 Dependent on  Industry
 Price volatility
Challenges user industry dependent  Need downstream products for Acetone
 Lower utilization consumption as it is a slow moving product.
 Long contracts  RM volatility
Moved up the value chain building integrated processes
DN built its expertise in benzene chemistry offering products with specialization in
nitration, hydrogenation and diazotization. The business works on two philosophies:
a) focus on import substitution products and b) gaining scale in base chemicals and
forward integrating into value-added derivatives.
First in India for many products
From its first product ‘Sodium Nitrate’ to its latest foray into ‘Phenol and acetone’,
DN has largely focused on products where domestic demand was largely import-
dependent. DN announced `14bn capex in FY15 to put up a 200KT phenol and
120KT acetone plant. This was aimed at addressing 280KT domestic demand of
phenol then and was mainly catered by 230KT of imports. Currently, the domestic
demand of phenol has reached 400KT (7% CAGR) with nearly 140KT of imports.
Build and scale model
DN aims to build a critical mass in the basic product segment before forward-
integrating into value-added downstream products. The backward integration helps it
cushion pricing volatility of raw materials and offer better pricing to its customers.
Value-added downstream products enable captive consumption of commoditized
products and offer better profitability at unit cost as they have better realizations with
niche applications, higher barriers to entry and sticky customer relations. Apart from
the initial Xylidine, Cumidine and Oximes, Deepak has graduated into other high-
value fine and specialty chemicals like P-Phenylenediamine, Trifluoromethyl
Acetophenone and Methoxylamine Hydrochloride which form the core of its FNS
exports.

Deepak Nitrite
Exhibit 14: Forward integrating into value-added products

Raw material Forward integrations
Sodium Nitrite Phenyl Hydrazine, Adenine
Nitro Acetophenone Amino Aceto Phenone
DASDA OBA
Nitro-Toluene Toluidine
Xylidine Xylenol
Cumene Phenol, Acetone
Acetone IPA
Toluene Amino-Benzotrifluoride
Mainly four segments: The products are segregated into four segments, namely
basic chemicals (nitrates, nitro-toluene and aromatics and fuel additives), fine and
specialty chemicals (aromatic amines, color, agrochemical and pharma
intermediates), performance products (optic brightening agents) and phenol (phenol,
acetone and IPA).
Exhibit 15: Ramp-up of phenol capacities skewed revenue share (FY21) in its favour;
FNS offers best EBITM followed by BC and phenolics; PP EBIT share will improve as
prices stabilize
BC FNS PP Phenolics
100%
80%
60%
40%
20%
0%
Revenue share (%) EBIT share (%)

Deepak Nitrite
Fine and specialty chemicals – Moving up

the value chain
Over the last five decades, Deepak has built its expertise in basic chemicals
around processes involving nitration, hydrogenation, oxidation and
diazotization of organic and inorganic chemicals. It is now utilizing this
expertise to forward integrate into high-value products. Presence across the
value chain allows it to offer best pricing while alleviating margin volatilities
from raw materials. We believe the current product profile of FNS is very
sticky (20% revenue CAGR over FY21-24E) with sustainable margins (EBIT at
32% over FY22-24E) driven by strong process-focused R&D, strong mid-level
management team, diversified user industry and new investments in
platforms like fluorination and efficient processes like photo-chlorination.
Building a strong R&D culture
DN is increasingly investing in amplifying its R&D initiatives. R&D activities are aimed
at: a) process improvements and b) product discovery. The process development team
focuses on cost rationalizations and innovative processes to develop products while
the product discovery team focuses on leveraging existing expertise and product
basket to develop new products. Over the last ten years DN has invested `1bn, the
results of which reflect in segmental margins. The management plans to double its
R&D investments as it is in the process of setting up a world class technology center in
Vadodara apart from the existing facility at Nandesari. The R&D team comprises 73
employees, including 13 PhDs. Mr. Swapnil Yerande is the Head of R&D.
Exhibit 16: Investments have grown at 23% CAGR over FY18-21 R&D spends fructified, as during
FY16-21, FSC revenues grew by
160
CAGR 13% 13% CAGR with EBIT margin
140 improvement from 25% in FY16 to
120 CAGR 6%
44% in FY21.
100
80
60
40
20
-
R&D investment (Rs mn)
Exhibit 17: Experienced R&D and technical teams

Earlier engagements
Name Qualification Role at Deepak
Company Role
BASF Research Manager
Swapnil Yerande PhD, Vienna University Head R&D Hikal Assistant Manager
GVK Biosciences Senior Associate
Vinod Gupta PhD, ICT Mumbai R&D Manager Huntsman Research Scientist
Alchemy Engineering Science Institute Technical Dir.
Amin Ismaili B.E. Chemical Head- Process Engineering Cadila GM
Alembic DGM
Covalent Labs Head – Technical service
Venkatasubbarao Chukka IIM, Raipur Head-Technical service
Hetero Drugs Manager – Technical service
UPL Environmental Engineers GM – Projects
Anil Kumar Komath Engineer, Calicut Uni Head- Projects
Gharda Chemical Project Manager
Navin Fluorine DGM – Technology
S Suman B.Tech, Harcourt Butler GM - Technology
Jubilant Life Sciences Production Manager

Deepak Nitrite
Differentiated products with marquee customers

The fines and specialty segment was built on the pedigree of specialty chemicals like
Xylidines, Oximes and Cumidines which were the intermediates for agrochemicals,
pharmaceuticals and dyes & pigments. The product basket has expanded gradually
building on the process expertise and forward integration of existing base chemicals.
Exhibit 18: New product offerings to scale up fine and specialty revenues
Products Customers Usage
2 Methyl Para Phenylene Diamine Sulfate HFC Prestige Dye Intermediate
Hydroxybenzotrifluoride H Essers Wilrijk Intramar Dpt Agrochemical solvent
Trofluoromethyl Acetophenone Bayer Agrochemical solvent
MMDPA HFC Prestige, Americal Chemical Dye Intermediate
Amino benzotrifluoride Lanxess Agrochemical solvent
Methoxylamine Hydrochloride Brenntag (Bayer) Agrochemical solvent
Exhibit 19: Prominent clients Exhibit 20: EU has largest share of exports
3%
15%
EU
46%
Asia
USA
RoW
37%
Strong traction in revenue and profitability; to set up greenfield plant with

capex of ` 3bn
The FNS segment has grown at 18% over FY18-21 supported by expanding product
portfolio backed by R&D investments and brownfield expansions. Export is the primary
market for these products with nearly 70% exported in value terms. The forward
integration of base chemicals is yielding favorable margins and supporting the
standalone performance of the company. The company is undertaking capex of `3bn
(in newly formed 100% subsidiary, Deepak Clean Tech) to extend product offerings to
pharmaceuticals and agrichem industries. This will be a greenfield plant on the newly
acquired 110 acres at Dahej. We expect revenue CAGR of 20% and EBITDA CAGR of
10% over FY21-24E.

Deepak Nitrite
Exhibit 21: FNS EBITM is expected to normalize around 32%
FNS (Rs bn) EBIT margin (%) (RHS)

14 50%
45%
12
40%
10 35%
8 30%
25%
6 20%
4 15%
10%
2
5%
- 0%

Deepak Nitrite
Phenol-acetone plant – An example of

execution capabilities
DN delivered on large scale project execution when it successfully
commercialized Asia’s largest single location plant with capex of `14bn. This
plant is formed under 100% subsidiary, Deepak Phenolics Limited (DPL). It is
backward-integrated with 200,000tn phenol and 120,000tn acetone. It
sources raw materials benzene and propylene locally from IOCL, Reliance
and other refineries. DN successfully ramped up its phenol plant within six
months of starting operations. It was able to capitalize on the increasing
reliance on import of phenol by domestic manufacturers. Currently it holds
about 55% market share in phenol and acetone in India.
Key Indian players with

Exhibit 22: Phenol demand in India has increased at 7% CAGR over FY16-21 capacities:
KT Phenol Acetone
Phenol Import (KT) Phenol demand (KT)
450 Deepak 200 120
400
400 HOCL 40 24
SI 36 20
350
300 282
248
250
200 171
150
100
50
-
Source: Company, Ambit Capital research, GoI
Exhibit 23: ` 14bn phenol project funding pattern Exhibit 24: QIP details
FY16 FY17 FY18
Shares (Mn) 11.8 14.4 5.7
Price (`) 71 104 264
13%
Value (Mn) 833 1,500 1,500
Debt
QIP
27%
60% Internal accrual

Deepak Nitrite
Exhibit 25: Phenol segment will grow at 22% over FY21-24E supported by debottlenecking phenol capacities, doubling IPA
capacity and improved realizations
50 CAGR 22% 35%
30%
40 CAGR 68%
25%
30 20%
15%
Trading
20 10%
5%
10
0%
0 -5%
Phenol (Rs bn) EBITDAM (RHS)
The ramp-up of phenol capacities in improving operating spread led to rise in profit
contribution from 11% in FY20 to 55% in FY21. We expect a profit contribution of
60% over FY22-24E from the phenol segment.
Exhibit 26: Improving spread and downstream derivative IPA contributing to margin
improvement; 1QFY21 posted lower utilization
Phenol spread (US$/tn) Phenol EBIT (%)

1,000 40%
800
30%
600
20%
400
10%
200
- 0%
1QFY21
2QFY21
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
3QFY21
4QFY21
1QFY22
2QFY22

Deepak Nitrite
Long value chain offers visibility for a decade

After entering into IPA (acetone derivative) in FY21, the company is planning to enter
into phenol-acetone derivatives, which will reduce margin volatility and also expand
overall addressable market. To evaluate this chain, we have analyzed how global
majors have evolved over the years in this chemistry.
Exhibit 27: Global demand of Phenol at 11MMT is growing at 2%; demand in China and India is growing at 7%
W. Europe E. Asia N. America China APAC Central and East Europe M.E. and africa S. America
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Exhibit 28: Deepak accounts for 2% of global phenol capacity of 12.7MMT
20%
15%
10%
5%
0%
PTT Phenol
Taiwan Pros
Versalis
Hind Org
Borealis
China Blue Star

Deepak Phenolics
Rosneft
Kazanorgsintez
LG Chem
CEPSA
INEOS
PKN Orlen
Ufaorgsintez
FCFC
Rhodia
CSPC
Lihuayi Weiyuan
Deza as
Shell
Altivia
Mitsui Phenols
PetroChina Jilin
SI Group
AdvanSix
Mitsui
Mitsubishi
CEPSA Quimica
Olin
Novapex
Sasol
Petro-Rabigh
Chang Chun
Mt. Vernon
Saudi Kayan
Kumho P&B
Yanhua
Kingboard
Sinopec Sabic
Gaoqiao
DOMO
Shanghai Sinopec

Deepak Nitrite
Branching out in the downstream chain

At the start of FY21, it operationalized its first downstream IPA (Isopropyl Alcohol)
plant with a 30KT initial capacity. The management has already announced its `7bn
investment in two downstream solvents. This excludes the ongoing investments in
captive power plant and 30KT expansion of IPA capacity. We believe the import
substitution in phenol-acetone downstream derivatives offers a significant opportunity
of ~US$1bn for DN to capitalize on over the next 5-10 years.
Exhibit 29: Phenol acetone chain offers a US$1bn opportunity
IPA
IPA
Currently present
Source: Company, Ineos, Ambit Capital research
All downstream products are being imported in India

Currently India imports nearly US$1bn of phenol downstream products. Deepak will
look to tap these markets and offer domestic supply of products. The import
substitution helps small domestic players secure raw material locally and alleviate
forex and inventory issues.
Exhibit 30: Import of key downstream products in India
Product FY16 FY17 FY18 FY19 FY20 FY21
Bisphenol 51 58 90 125 93 87
MIBK 34 26 48 43 26 43
Epoxy 107 97 101 89 93 90
Polycarbonate 318 304 397 528 372 363
Caprolactam 69 75 118 142 106 75
MEK 42 25 56 59 27 45
IPA 60 72 96 123 105 198
Cyclohexanone 27 43 36 40 42 22
Total 708 700 942 1,149 864 923
Source: GoI, Ambit Capital research

Deepak Nitrite
`7bn capex for downstream products, to become self-sufficient in power

At an existing location (Dahej), DN is planning brownfield capex to forward integrate
into two products which will be derivatives of phenol and acetone. Of the total `7bn From current IPA capacity of
announced capex, `5bn would be for two products and `2bn for utilities required for 30,000tpa, it is going to double
these new products. Revenue from these products is expected to start by FY24. Since 60,000tpa in 3QFY22, with capex
phenol-acetone has higher power consumption, DN has planned to install a co-gen of ` 0.50bn
power plant of 28MW (to commission in 3QFY22) with capex of `1.8bn. In FY21,
DPL’s power cost was `1.3bn. The new power plant should suffice for DPL’s power
requirements along with other operations at the Dahej plant. Imports are outpacing
demand growth due to paucity of capacity.
Exhibit 31: Probable new product addition and expansions

Tentative
Products Import (KT) Application
capacity* (KT)
 Cyclo:25-
30KT Cyclohexanone is used in Nylon 6, MIBC is used as
Cyclohexanone and MIBC 144
solvent in pharma and cosmetics
 MIBC: 60-
65KT
Bisphenol 120 65-70KT Polycarbonate and epoxy
PAP/Paracetamol 24 3KT Pharma intermediate
Tertiary Butyl Phenol 20 13KT Perfume, resin
Salicylic acid 15 19KT Pharma intermediate
Source: Company, Ambit Capital research,*As per EC filing documents
Basic chemicals will continue to support profitability

The basic product segment comprises chemistries and expertise on which specialty
products are built. The product offerings comprise inorganic salts, nitro-toluenes, fuel
additives etc. We expect this segment to deliver 17%/15% revenue/EBIT CAGR over
FY21-24E supported by capacity expansions in nitrates and nitro-toluenes and
improved realizations.
Exhibit 32: Improving domestic demand, sticky customers and improved pricing will
support margins
14 CAGR 18% 30%

12 25%
10
20%
8
15%
6
10%
4
2 5%
- 0%
BC (Rs bn) EBIT (%) (RHS)

Deepak Nitrite
Performance products: Recovering gradually

The performance product division of DN benefitted from global supply shortage of Major domestic OBA
DASDA in FY19 which resulted in superior realizations for the segment. The segment capacities: Deepak 21KT, Khyati
comprises DASDA (Diamino Stilbene Disulfonic Acid) and forward integrated product 12KT, Meghmani Dye 4KT,
OBA (Optical Brightening agents) contributing 40% and 60% respectively. India Meghmani Ind 4KT, Daikafill 2KT
consumes about 12KT of DASDA 35% of which is met by imports from China. DN is
the only DASDA manufacturer in the country with 7KT capacity while Tsaker Chemical
is the global leader with 55KT capacity. There are other small manufacturers located
in China and Europe catering to global DASDA demand of about 65KT. The supply-
demand mismatch in FY19 led to significant rise in DASDA and OBA prices (OBA is
forward-integration of DASDA) which benefitted backward-integrated players like
DN.
Exhibit 33: Recovery in demand will drive offtake and realizations; we expect EBITM
to revert to a normalized 10% by FY22-end
PP - Sales (Rs bn) EBIT (%) (RHS)

9 60%
8 CAGR 20%
50%
7
40%
6
5 30%
4 20%
3
10%
2
0%
1
- -10%

Deepak Nitrite
Valuations – Possibility of further re-rating

Over the last five years, DN has showcased above par execution capability
and operation resilience. It executed one of the largest single plant
investments of `14bn for India’s largest phenol-acetone (200KT phenol and
120KT acetone) plant and successfully ramped it up to full capacity within two
quarters in FY19. Customers are relying on the products from DN’s integrated
product process capabilities, which is evident from margin improvement
across segments (BC EBITM of 12%/25% in FY16/21; FNS EBITM of 25%/43%
in FY16/21). We believe it has process and chemistry expertise at par with
other basic chemical peers like Atul and Aarti. However, based on our
estimates, current valuation of 27x FY24E P/E is at a discount to 32x FY24 and
42x FY24 P/E of Atul and Aarti respectively. We factor in growth of 18% CAGR
over FY21-35 and 26% EBITDAM at 12% WACC (13% CoE) and 5% terminal
growth to arrive at TP of `3,117, which values DN at par with Atul and Aarti.
Reverse DCF suggests current market valuation is factoring in 17% revenue
CAGR and 26% EBITDAM.
Historically, valuation multiples have followed improvement in margin profile.
Industry re-rating drove valuations in FY17 which gradually fizzled out but the stock
re-rated sharply in FY20 when the street was convinced that margins would remain
sticky.
Exhibit 34: Valuation multiples track margins; DN currently trades at 29x consensus
estimates
35% EBITDAM (%) (LHS) 1Y FWD P/E 35
30% 30
25% 25
20% 20
15% 15
10% 10
5% 5
0% -
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E
Product and pricing becoming sticky

DN initially benefitted from pricing tailwind in the PP segment due to global supply
constraints. However, with quick ramp-up of phenol capacities, favorable operating
spreads, and improvement in BC and FNS margins led by R&D focus on process
intensification resulted in sustained margin delivery. Product margins are now
supported by long-term relationships with over 500 global customers and improving
demand at end-user industries.
Management focus on growth
Deepak has already delivered on its execution capabilities by fully ramping up its
phenol plant within months of commissioning in 2HFY19. It is currently operating the
plant consistently at over 100% utilization. With base chemical capacities in place, it
is now stepping up investments in downstream phenol derivatives which offer nearly
US$1bn import substitution opportunity. DN is onboarding new projects like CRAMs
and fluorination which offer new growth avenues. The strong cash generated by
existing processes is incrementally invested to fuel growth aspirations of the company.

Deepak Nitrite
Current capex plan of `11bn

The current `11bn capex plan comprises `3.5bn for two new molecules at Deepak
Clean Tech (newly incorporated 100% subsidiary), ` 0.5bn for capacity expansion in
basic chemicals and `7bn at Deepak Phenolics. The investment of `5bn in Deepak
Phenolics will be directed towards two downstream solvents (one phenol-based and
another acetone-based) and the remaining will be for the captive cumene capacity.
These investments are expected to commercialize by early FY25.
Upside remains with improved growth prospects
We expect return ratios (RoCE at 33% in FY24 vs 38% in FY21) to taper in the
medium term weighed down by lower asset turns (GB turns at 1.5x in FY24 vs 2x in
FY21). However, we expect asset turns to gradually improve from FY25 (average 1.9x
in FY21-35E) driving RoCE (average 35% over FY21-35E) as new capacities ramp up.
Exhibit 35: Our DCF input factor in higher than priced-in growth Exhibit 36: DCF output values DN at 32x FY24E P/E
FY16-21 FY21-25E FY25-35E ` mn 1Y-FWD
EBITDA average 17% 27% 26% Terminal Value 292,928

Wcap/sales 18% 16% 17%
Net debt 3,036
Capex/GB 35% 21% 10%
WACC 12%
Share Price 3,117
Terminal growth 5% P/E FY24E 32
Our estimates factor in 21% revenue growth over FY21-24E compared to 19% growth
in consensus estimates. We believe higher growth will be led by improved demand
sentiment at end-user industries like pharma and agrochemicals.
Exhibit 37: Ambit’s estimates factor in higher than consensus growth
Ambit's estimate Consensus estimates Difference
` mn
Sales 61,792 68,447 77,027 62,049 65,630 73,080 0% 4% 5%
EBITDA 16,048 18,055 20,508 16,098 17,351 19,792 0% 4% 4%
PAT 10,735 11,882 13,483 10,829 11,660 13,136 -1% 2% 3%
OPM 26.0% 26.4% 26.6% 25.9% 26.4% 27.1% 3 bps -6 bps -46 bps
NPM 17.4% 17.4% 17.5% 17.5% 17.8% 18.0% -8 bps -41 bps -47 bps
Exhibit 38: Segmental assumptions

FY21 FY22E FY23E FY24E CAGR Remarks
BC revenue (` bn) 7.6 10.0 11.2 12.6 18% Pricing benefits and improved demand scenario drive growth.
FNS revenue (` bn) 7.7 9.0 11.0 13.2 20% Improving product portfolio drives growth.
Normalizing prices with recovery in end user industries like textile and
PP revenue (` bn) 3.0 4.0 4.6 5.2 20%
paper.
Phenolics revenue (` De-bottleneck existing capacities, doubling IPA capacity and improved
25.6 39.2 42.1 46.5 22%
bn) prices.
We assume higher spread than the long term average of US$ 500/tn
Phenol spread
654 650 650 650 as we believe the chemical prices will remain elevated for next five
(US$/tn)
years.
We assume higher acetone prices than long term average of ` 89/kg
Acetone price (`/kg) 139 100 100 100 as the consumer behaviour has changed towards personal hygiene
and the paucity of IPA capacity in domestic market
Forward integration will demand higher reliance on captive basic
Basic EBIT (%) 25.3% 27.0% 24.0% 24.0%
chemicals
F&S EBIT (%) 43.4% 32.0% 32.0% 32.0% New product pipeline will support margin.
PP EBIT (%) 7.4% 10.0% 10.0% 10.0% The margins will recover gradually with normalizing prices.
Phenol EBIT (%) 24.8% 23.8% 24.0% 23.5% Spreads are expected to remain elevated than long term average.

Deepak Nitrite

Exhibit 39: Annual report key takeaway
Year Key points
 Management announced Phenol-Acetone project in FY15. The project outlay is finalized at ` 12bn.
FY16  Company raises first round of funding through QIP. It raised ` 833mn at ` 71/share.
 Management is confident of value led growth.
 Capital outlay revised to ` 16bn.
 Second round of QIP of ` 1.5bn at ` 104/share.
FY17
 Roha plant catches fire. Management expects to receive compensation from insurers.
 Deepak is aiming to capture growth opportunities in end-user segment.
 Roha plant resumes operation.
 Third round of QIP of ` 1.5bn at ` 264/share.
FY18
 Company starts customer outreach program after getting the leadership team in place for Deepak Phenolics.
 The crackdown in China will help agrochem, dyes and pigment segment
 Phenol plant begins operation on 18th November.
 Management announces its plan to foray into downstream derivatives.
FY19
 Profitability in performance product improves as DASDA prices increase significantly.
 Management confident of growth and market share gains.
 Deepak commissioned IPA (Isopropyl Alcohol) plant with initial 30KT capacity, its first downstream product at Deepak Phenolics.
FY20  Maulik Mehta, s/o Deepak Mehta, takes over as CEO of the company from Umesh Asaikar.
 Acquired 125acre land for ` 1bn at Dahej for future expansion
 Focus on people and safety. Despite disruptions all orders were executed and no customers were lost.
 Phenol plant operated at 115% utilization during the year. Doubling IPA capacity to 60KT.
FY21  ` 3bn will be invested into new products based on environmental friendly technologies.
 Added new platforms like fluorination and photo-chlorination.
 New R&D centre is being developed at Vadodara.

Deepak Nitrite
Risks and Catalysts

Risks
 Project delays: Our numbers factor in increased capex intensity which will
support growth. Any delay or change in stance of management towards capacity
expansion will pose downside risk to our estimates.
 Price contraction: The phenol unit contributes nearly 55% to DN’s total profit
pool. Any contraction in phenol-acetone spreads will negatively impact our
earnings estimates. The breakeven spread for Deepak Phenolics is about
US$350-400/tn while we build in a spread of US$650/tn.
 Macro headwinds: DN supplies to a diverse set of user industries, and while this
alleviates concerns of client concentration, it exposes it to multiple sectors’
demand-supply dynamics. India is a key market for DN with nearly 70% revenue
contribution. Any slowdown in the domestic market will pose a threat to earning
visibility.
Catalysts
 Improving product mix will support margins and return ratios: The
improving specialty chemical product pipeline vs legacy products and use of
efficient processes like photo-chemistry will improve VAP to 35% from 25%
currently. This will support margins. EBITDAM is expected improve from 26% in
FY22 to nearly 27% in FY24 and RoCE is expected to average at 37% over FY21-
24.
 Phenol downstream offers US$1bn incremental opportunity: DN has always
been agile to capture import substitution opportunities like sodium nitrate initially
and then phenol-acetone. The current capex plan earmarks `7bn towards phenol
downstream project, which opens up a nearly US$1bn import substitution
opportunity in phenol downstream on top of the US$525mn expected revenue in
FY21 from Deepak Phenolics.
Exhibit 39: Explanation of our flags at the first page
Segment Score Remarks
There are no material deviations/restatements of historical reported numbers. The company has strong
Accounting GREEN cash conversion supported by prudent working capital management. Company stands in D5 (Zone of
safety on our forensic accounting framework.
Predictability AMBER Volatile prices of finished as well as raw material make predictability difficult.
Earning momentum is expected to sustain in the medium term given improved realizations across
Earning Momentum GREEN
product categories. The recovery in performance product prices poses an upside risk to our estimates.

Deepak Nitrite
Financials
Income Statement
Net revenues 42,297 43,598 61,792 68,447 77,027
Revenue growth (%) 56.7 3.1 41.7 10.8 12.5
Op. expenses 32,039 31,127 45,744 50,392 56,519
EBITDA (Excl. OI) 10,258 12,470 16,048 18,055 20,508
EBITDA margins (%) 24.3 28.6 26.0 26.4 26.6
Interest expenses 1,149 742 561 474 264
Depreciation 1,397 1,526 1,779 2,438 3,074
Other income 352 215 644 743 855
Tax 1,954 2,659 3,617 4,003 4,542
Reported PAT 6,110 7,758 10,735 11,882 13,483
Adjusted PAT 6,110 7,758 10,735 11,882 13,483
EPS (`/share) 45 57 79 87 99
Balance Sheet
Share capital 273 273 273 273 273
Networth 15,719 23,467 32,971 43,468 54,232
Total Debt 11,077 5,901 7,081 5,992 3,373
Def. tax liab. (net) 796 1,078 1,515 1,330 1,506
Net Fixed assets 20,043 20,842 29,063 36,625 43,550
Investments 24 1,893 1,893 1,893 1,893
Cash and bank balance 314 335 552 1,088 1,054
Net debt 10,763 5,566 6,529 4,904 2,319
WC (days) 55 59 60 60 61
DE(x) 0.7 0.3 0.2 0.1 0.1

Deepak Nitrite
Cash Flow Statement

PAT 6,110 7,758 10,735 11,882 13,483
Non cash items 1,419 1,808 2,216 2,253 3,251
Cash profit 7,529 9,566 12,951 14,135 16,733
Incr/(Decr) in WC 1,497 165 2,682 1,125 1,430
Capex 3,943 2,326 10,000 10,000 10,000
Free cash flow 2,089 7,076 269 3,010 5,304
Dividend 613 750 1,232 1,385 2,719
Debt raised -926 -5,176 1,180 -1,089 -2,619
Investments -0 1,869 - - -
Other 493 -739 - - -
Net cash flow 57 20 217 536 -34
Opening cash 258 315 335 552 1,088
Closing cash 315 335 552 1,088 1,054
Ratios
P/E (x) 59 47 34 30 27
P/BV (x) 23 15 11 8 7
EV/EBITDA (x) 36 29 23 20 18
RoE (%) 46 40 38 31 28
RoCE (%) 36 38 41 35 33
Fixed Asset turnover (x) 2 2 2 2 2
Dividend (%) 225 275 451 508 997
Dividend yield (%) 0 0 0 0 1
Revenue growth (%) 57 3 42 11 13
EBITDA growth (%) 148 22 29 13 14
PAT growth (%) 252 27 38 11 13

Deepak Nitrite
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Atul Limited
BUY
INITIATING COVERAGE ATLP IN EQUITY January 17, 2022
Profitable, sustainable, scalable Chemicals
Atul is one of the most integrated chemical companies, which enabled it Recommendation
to withstand crude cycles and Chinese aggressiveness. This can be seen Mcap (bn): `311/US$4.2
from improving financial matrix; e.g. RoE improved to 20% in FY21 3M ADV (mn): `373/US$5
from 12% in FY10. Atul believes in growth with financial prudence, and CMP: `10,511
despite moderate capex, its earnings growth (19%) during FY16-21 was
TP (12 mths): `11,525
better than peers like ARTO. Its yearly capex run-rate will increase to
Upside (%): 10
`6bn (`3bn in the past) from internal accruals. In the medium to long
term, we expect it to backward-integrate in products like
Epichlorohydrin and enter into CRAMs/CSM. Current valuations are Flags
pricing in 18% growth over FY21-35E at 24% EBITDAM. We feel Accounting: GREEN
confident about management pedigree and factor in 19% growth to Predictability: AMBER
arrive at TP of `11,525, which implies 35x FY24E P/E. Earnings Momentum: AMBER
Competitive position: STRONG Changes to this position: POSITIVE Catalysts

Vertical integration provides cushion against volatility  RoIC of 30% is expected to sustain
Backward integration to basic building blocks like caustic-chlorine, sulphuric over FY22-24E.
acid, H-acid, VS (Vinyl Sulfone) and MCA (monochloroacetic acid) has
 Increase in capex run-rate from
mitigated RM volatility and enabled Atul to reduce China dependency to ~15% `3bn to `6bn a year.
from >30% five years ago. Forward integration to derivatives of p-cresol and
resorcinol enhanced overall addressable market. We believe it can continue to  Backward integration provides
fill the gaps across the value chain. cushion in events like logistics
challenges and Covid-19.
Capex intensity to increase, a step out of conservatism
During FY16-21, it undertook cumulative capex of `16bn. In the next two
Performance
years, it will invest `15bn, of which about 50% will be capitalised in 2HFY22
and the remaining in FY23. This will include backward integration to sulphuric 180 Atul Sensex
acid derivatives, MCA, pharma expansion and setting up caustic plant. We
expect revenue CAGR of 18% over FY21-24 aided by increased capital outlay. 140
Industry-leading financials 100

With prudent capital use, Atul has industry-leading financials with 5/10 years
average RoE of 18%/19% and RoCE of 23% along with strong FCF. Supported 60
Jan-21
Jan-22
Oct-21
Nov-21
Aug-21
by strong board (blend of knowledge and experience), execution history, focus

Sep-21
Mar-21
Jun-21
Dec-21
Feb-21
Jul-21
Apr-21
May-21
on QSHE and a healthy balance sheet, we believe it is well-positioned to

benefit from the potential shift of supply chains from China. Key man risk
remains one of the concerns.
Source: Bloomberg, Ambit Capital Research
Valuations offer further upside
Industry-leading RoIC (30% vs 22% peer average), healthy FCF and rising
capex run-rate can be drivers which will narrow valuation gap with peers like
ARTO (5% discount to our ARTO on consensus). We initiate coverage with TP of
`11,525 (35x FY24E P/E) which factors in 19% growth over FY21-35E with
EBITDAM of 24% and 5% terminal growth at 13% WACC. Key concerns:
Succession planning is not clearly defined.
Key financials
Year to March (Cons) FY20 FY21 FY22E FY23E FY24E Research Analysts
Net Revenues (` mn) 40,931 37,315 47,265 53,837 61,434 Ankit Gor
EBITDA (` mn) 9,020 9,171 9,926 12,060 13,823 ankit.gor@ambit.co
APAT (` mn) 6,665 6,558 6,851 8,400 9,627 Tel: +91 22 6623 3132
RoE (%) 22.7 18.8 16.7 17.8 17.5 kumar.saumya@ambit.co
P/E (x) 46 47 45 36 32 Tel: +91 22 6623 3242
Atul Limited

Exhibit 1: Atul’s management steps up investments to drive growth
70 Enhancing product basket Capex: Muted China support: Accelerating 50%

and reach: Expanding product realizations and slowing Performance was investments:
60 portfolio, geographical asset turn due to capacity supported by Increased capital
footprint, process expansion in dyes and production bottlenecks intensity will drive
40%
50 intensification intermediates. in China. Domestic growth
market remained muted
40 during this period.
30%
30
20
20%
10
- 10%
Performance chemicals (Rs bn) Life Sciences (Rs bn) Other (Rs bn)
RoCE (%) (RHS) EBITDAM (%) (RHS)

Atul Limited
Exhibit 2: Diversified end-user industry exposure Exhibit 3: Atul’s RoIC has averaged 29% over FY16-21; it
mitigates product concentration risks had `13bn of equity and mutual investments and `3bn
cash on the books as of Mar’21
Aromatics Polymer Colors RoE (%) RoCE(%) RoIC (%)

Bulk Crop protection Pharma 40%
Floras
35%
100% 3%
12% 30%
80% 25%
26% 43%
20%
60%
15%
40% 38%
10%
54% 5%
20%
24% 0%
0%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
Performance Chemicals Life Sciences
Exhibit 4: Atul’s RoIC at par with specialty chemicals Exhibit 5: Consistent FCF and cash conversion near 80%
companies like Vinati and Navin
FY16-21 average RoIC FY16-21 average RoCE OCF (Rs bn) FCF (Rs bn)
OCF/EBITDA (RHS)
35%
12.0 120%
30%
10.0 100%
25%
8.0 80%
20%
6.0 60%
15%
4.0 40%
10%
2.0 20%
5%
- 0%
FY17
FY16
FY18
FY19
FY20
FY21
FY24E
FY22E
FY23E
0%
SRF Aarti Deepak Navin Vinati Atul
Exhibit 6: Atul’s valuation multiple has positively Exhibit 7: Strategic assets – Manufacturing units
responded to capex intensity; Atul trades at 34x FY23E
consensus earnings
Site Products
Capex (Rs bn) 1Y Fwd P/E Atul village (GJ) All mojor products
7.0 35
Ankleshwar (GJ) p-cresol and its derivatives
6.0 30
Tarapur (MH) Disperse and reactive duyes
5.0 25 Panoli (GJ) products related to tissue culture
4.0 20 Ambernath (MH) Pharmaceuticals
3.0 15 Source: Company, Ambit Capital research
2.0 10
1.0 5
- 0
FY18
FY14
FY15
FY16
FY17
FY19
FY20
FY21
FY22

Atul Limited
Atul’s journey and evolution

Atul Ltd (Atul), a Lalbhai group company, is one of India’s largest
integrated chemical conglomerates founded in 1947. It operates in two
segments namely Performance Chemicals (~70% of sales) and Life
Science Chemicals (~30% of sales). Over the years it has built an
integrated ecosystem of process that supports its leadership position in
products like p-cresol, epoxy resin, resorcinol, sulphur black and 2-4D
(dichlorophenoxyacetic acid) which caters to a wide array of industries
like home and personal care, agrochemicals, pharmaceuticals, flavor and
fragrance, aerospace and automobiles. Exports contributed 47% to sales
in FY21 with major share of aromatics and agrochemicals. Atul supplies
to 4,000 customers while engaging with 2,250 distributors across the
country. The retail sales of crop protection and epoxy brand ‘Lapox’
contribute 8% to the revenue.
Exhibit 8: Atul’s management steps up investment to drive growth
70 Enhancing product basket Impacted by crude: Muted China support: 40%

Accelerating
and reach: Expanding realizations and slowing asset Performance was investments:
60 product portfolio, turn due to capacity supported by
geographical footprint, expansion in dyes and production Increased capital
50 process intensification intermediates. bottlenecks in China. intensity will drive
Domestic market growth 30%
Capex ` 4bn Capex ` 9bn
40 remained muted
Capex ` 18bn
during this period.
30 Capex ` 9bn
20%
20
10
- 10%
Performance chemicals (Rs bn) Life Sciences (Rs bn) Other (Rs bn) RoCE (%) (RHS)
Phase 1 (FY11-14) (Enhancing product basket and reach): During this period,
revenue grew at 17% led by expanding global footprints, expanding product portfolio
and dealer network and increased investments in group companies. The volatile
crude prices during the period and higher share of basic chemicals reflected in lower
but improving margins. The focus on process and yield improvement reflected in OPM
improvement from 10% in FY11 to 15% in FY14.
Phase-2 (FY15-18) (Impacted by crude): Revenue growth began to slow down.
Atul reported a revenue growth of 7% impacted by a fall in crude oil prices which
translated into lower basic chemical prices. However, improved processes and lower
RM prices reflected in improved OPM which averaged at 17% during this period.
Phase-3 (FY18-21) (China support): Environment led production bottlenecks in
China supported performance, however, lower crude prices, slower domestic market
(nearly 50% domestic revenue share) continued to impact topline performance. Atul
reported revenue growth of 4% during this period. Favorable product mix (falling
share of agrochemicals and improving share of pharmaceutical and dye
intermediates) reflected in improved OPM which averaged 20% during this period.
Phase-4 (FY22 onward) (Accelerating investments): We expect Atul to deliver
revenue/EBITDA/PAT CAGR of 18%/15%/14% supported by increased capex intensity
towards sulphuric acid derivatives, MCA capacity expansion, pharmaceutical (poly
drug) and setting up a caustic soda plant (for Epichlorohydrin).

Atul Limited
Exhibit 9: Atul’s business overview

Performance Chemicals Life Science Chemicals
Particulars
(67% of the total revenues) (33% of the total revenues)
Sub-
Aromatics Polymers Colours Bulk Chemicals Crop Protection Pharmaceuticals Floras
segments
Sales 15% 24% 16% 8% 17% 14% 1%
Export share 62% 32% 47% 45% 52% 40% -
OPM 20-25% 15-20%
RoCE 22% 21%
 Sulphur  Resorcinol
Black (50%) (65%)
 P-Cresol
   2,4-D
(45%)
Azo dyes Resorcinol RF
(Herbicides)
 Dapsone (4,4  Tissue culture
 Epoxy resins  VAT dyes resins DCDPS) raised date
 P-Anisic (80%) 
(70%)
Key Products Aldehyde  Reactive Chlorosulphonic
 Indoxacarb
 Amino acid palm plants
 Sulfones dyes acid derivatives  Range of date
 P-Anisyl

(Insecticides)
Alcohol  Poly-urethane  Disperse Anisole
 Isoprothiolane
 Phosgene products
dyes  Sulphuric acid derivatives (B2C)
 P-Cresidine (Fungicides)
 HP  Caustic &
pigments Chlorine
 LAPOX
Brands  POLYGRIP  8+ brands  50+ brands  Date Delights
 LACARE (new)
 Agriculture
 Cosmetics
   (major)

End-use Aerospace Textile Rubber/tyre Life science  Food (B2C)
industries  Perfumes
    Non-

Automobiles Paints UV absorber
Agriculture
Health care  Food
(Top-3)  Food-
 Wind mills  Plastics  Wood adhesive  Animal feeds ingredients
beverage  Household
 Toluene
 2, 4 DNCB

 Sulphuric
 
Chlorobenzene
Key RM acid
Bisphenol-A  H-Acid Benzene  Monochloroace
 Dimethyl Sulfate
  Epichlorohydrin  Sulphuric  Sulphuric acid tic acid (MCA)
Phenol
acid
 Sulfur trioxide
 Chlorine
Capacity (tpa) 48,000 48,500 33,300 1,60,000 44,600 55,000 -
 P-Cresol:  Resorcinol:  Amino acid:
Global  Epoxy resin:8bn  Agrochemical:
255mn  Dyes: 6bn 564mn
60bn
22bn
Industry size (India 285mn)
(US$)  Fragrance  HPP: 5bn  Chlor-alkali:  Phosgene: 4bn
 Sulfone: 393mn  2,4D: 5bn
13.5bn 46bn  APIs: 190bn
Global share
Global share India share Global share India share
Atul Market  2,4-D (16%) Global share
Share  P-Cresol  Epoxy resin  Sulphur  Resorcinol 
(42%) (27%) Black (16%) (46%)  Indoxacarb Dapsone (50%)
(7%)
 Tokyo  Aditya Birla  Bhanu

 AminoChem:  Meghmani
40k tpa Organics Atul is the only
Chemical Chem. (~15k Dyes player in India to
Major Peers
 Sasol tpa)  Hebei
 Sumitomo: 30k  Insecticides Atul is the world’s produce tissue
globally tpa India
Phenolic  Hexion Inc Satur leading player in culture raised
 Lanxess AG  BASF  Bodal
 Mitsui: 20k tpa  Bharat Rasayan Dapsone API. date palms.
(exited)

Atul Limited
Diversified company with infrastructure

that provides business longevity
Atul’s integrated processes and diversified end user industry exposure
cushions it form market vagaries which is evident from consistently
improving and less volatile margins (EBITDAM FY10/FY21 10%/25%). The
integrated processes help alleviate raw material sourcing concerns and
provide pricing power to the company which is evident from 35% (FY21) RoIC
delivered in line with specialty peers like Vinati. We believe Atul is the best
in class basic chemical manufacturer in the domestic industry offering long
term revenue visibility.
Perfect mix of vertical integration, diversified product portfolio and scale
It has experienced several business/economic cycles and has emerged stronger and
more nimble-footed after every cycle. Atul has backward integrated its capacities in
most of the products to be competitive with global peers; it is a leading company for 900 Products
many products globally and domestically. Over the years, the company has
400 Formulations
developed several niche chemistries and products to serve a diverse set of end-use
industries. Its balance sheet is getting stronger with every passing year: 1) ten-year 38,000 retail outlets
cumulative OCF/FCF was `39bn/`17bn and 2) ten-year average RoE/RoCE was
19%/23%. We believe it is difficult for Indian chemical companies to replicate Atul’s
business model which reflects its progress in technology, high-quality products and
QSHE standards.
Exhibit 10: Key products and user industries
Sub-segment Products User Industry
Cosmetics
P-Cresol
Aromatics Perfume
P-Anisic Aldehyde
Personal care
Epoxy Aerospace
Polymers Sulfones Auto
Polyurethane Energy
Sulphur Black Textile
Colours
Dyes Paints and coating
Rubber
Resorcinol
Bulk Chemicals UV Absorber
Anisole
Adhesive
2, 4-D Herbicide
Crop Protection
Indoxacarb Insecticides
Pharmaceuticals Dapsone Health care
Backward integration ensures sustainability

After attaining economically viable scale in products, to gain cost and market
leadership, the company has backward-integrated. Over the long run, this has
enabled it to improve its margins despite crude oil volatility and Chinese competition.
About 50% of revenues come from para cresol, epoxy resin, sulphur black and 2,4 D,
for which it is backward-integrated.
Exhibit 11: Atul’s value proposition
Key Products Major RM Remarks
Para Cresol Benzene India is Benzene surplus, easy availability from refineries
Sulfuric Acid
Epoxy Resin Bisphenol-A Completely imported, India has no capacity
In recent AGM, is announced to expand Caustic Soda (NaOH)
Epichlorohydrin (ECH) capacity to get chlorine (by-product), Chlorine is key RM to
make ECH.
Sulphur Black Dye Intermediates It is backward integrated to H-acid and Vinyl Sulphone
Sulfuric Acid
Caustic Soda It has existing capacity of 48,000 TPA
Monochloroacetic Acid
2,4 D Recently backward integrated MCA with JV with Nouryon
(MCA)

Atul Limited
Exhibit 12: Backward-integrated facility and prominent market share result in

stable margins; Atul has consistently focused on process intensification and
building new applications for its products
Product mix Capacity ramp-up
70% Process efficiencies
60%
50%
40%
30%
20%
10%
0%
FY13
FY11
FY12
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY24E
FY22E
FY23E
GM(%) OPM(%)
Exhibit 13: Backward integration enables market leading position in most products
Product Sub-segment Global market share
P-cresol Aromatics 42%
P-cresidine Aromatics 20%
P-anisic alcohol Aromatics 75%
P-anisic aldehyde Aromatics 95%
Epoxy resin Polymer 27% (India)
Dapsone Pharma 50%
2,4-D Crop Protection 16%
Indoxacarb Crop Protection 7%
Best-in-class return ratios

Atul offers best return on invested capital (at par with Vinati) within our coverage
universe. Its RoIC has averaged 29% over FY16-21 against RoCE of 24% since it has
surplus capital tied up in investments (`13bn into equity and mutual funds) and `3bn
in cash as on 31st March 2021.
Exhibit 14: Atul’s RoIC averaged 29% over FY16-21 Exhibit 15: It has one of the best RoIC levels among peers
ICT (x) RoIC (%) (RHS) FY16-21 average RoIC FY16-21 average RoCE
2.5 40% 35%
35%
2.0 30%
30%
25% 25%
1.5
20% 20%
1.0 15%
15%
10%
0.5
5% 10%
- 0% 5%
FY17
FY16
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
0%
SRF Aarti Deepak Navin Vinati Atul
Source: Company, Ambit Capital research,*ICT=Invested Capital turnover, Source: Company, Ambit Capital research
Invested capital excludes cash and bank and other investments from the
overall capital

Atul Limited
Solid infrastructure with strong focus on compliance

Atul’s plants are situated in the western part of India, in Gujarat and Maharashtra.
From the initial days of manufacturing dyes (high on effluent generation) for Arvind
Limited, Atul has always given high importance to the environment and has taken
adequate measures to make most of its plants Zero Liquid Discharge. It has a land
parcel in Atul village (situated near Vapi) of around 1,250 acres (~45% utilized)
which ensures ample availability of land for future expansions for the next 10 years.
This also means RoIC would remain higher amongst peers as land cost is 15-20% of
the overall project cost which is secured in Atul’s case.
Exhibit 16: Strategic manufacturing assets
Site Started Approx. Area (acres) Products
Atul village (GJ) 1947 1,250 All major products
Ankleshwar (GJ) 1988 33 p-cresol and its derivatives
Tarapur (MH) 2007 N/A Disperse and reactive duyes
Panoli (GJ) 2015 40 products related to tissue culture
Ambernath (MH) 2019 45 Pharmaceuticals
Exhibit 17: Key subsidiaries and JVs; mostly complementing the existing knowhow of
products and chemistries
Name Relation Holding Business
Atul Bioscience Subsidiary 100% Pharma intermediates
Rudolf Atul Chemicals JV 50% JV with Rudolf GmbH for textile chemicals
Amal JV 50% Sulphuric acid, oleum and downstream
DPD Subsidiary 98% Date palm tissue culture
Partnered with Nouryon for 32KT MCA (Mono Chloro
Anaven JV 50%
Acetic Acid)
Atul Rajasthan Date
Subsidiary 74% Date palm tissue culture
Palm
Focus on environment is high, converting plants to ZLD

While we don’t get a lot of quantitative metrics in the annual reports in terms of
water consumption, recycling and renewable share in total power consumption, Atul
has charted its own path to improve its contribution to the environment.
Exhibit 18: Always has been environment-conscious
Year Measures taken
FY21 Installed Zero Liquid Discharge (ZLD) system at Tarapur Site
Installed a 1,000 kL per day reverse osmosis plant and multiple effect evaporator for sustainability of ZLD operations at Ankleshwar
Implementation is under progress to make the North & South sites at Atul fully ZLD. Projects to recover and recycle water from processed
waste are in progress for 2,4-D and Resorcinol plants.
FY20 Installed ZLD system at Ankleshwar Site
Completed 1,600 m long above-ground effluent pipe line project in phase one
Constructed 450 kld capacity effluent treatment plant
FY19 Introduced treatment of residue by centrifugation
FY18 Harvested 850 mn litres of rainwater at Atul site
Installed and commissioned tertiary treatment at one of the effluent treatment plants
FY17 Commissioned a microbiology research laboratory to find better ways to treat pollutants

Atul Limited
Increasing capex aggression for the first

time
Atul has been relatively less aggressive in terms of capex compared to its
peers. During FY16-21, it undertook cumulative capex of `16bn while industry
peers were more aggressive. This is one of the reasons for muted revenue
growth of 8% CAGR during the same period. For the first time, the company
will capitalize `15bn of fixed assets between FY21-23. This will include
expansion of existing products – doubling MCA capacity and enhancing
caustic soda capacity and new products like RF resin and 1,3-CHD. These
products are a mix of forward and backward integration.
Exhibit 19: Revenue growth was impacted by lower realizations owing to crude prices
and lower volumes due to weak domestic demand
45 FY16-21 CAGR 8% 3.5

40 3.0
35
2.5
30
25 2.0
20 1.5
15
1.0
10
5 0.5
- -
Revenue (Rs bn) GB turn (x) (RHS)
Capex vs earnings growth

Atul’s capex intensity has been lower compared to peers despite better cash flow due
to management’s approach of sweating existing assets fully before adding new
capacities. Atul also creates new applications for its existing products which expands
its addressable market.
Exhibit 20: Atul and Aarti’s products are more basic where realizations are directly
dependent on crude price; however, lower crude drives margin expansion. Deepak’s
earning growth was driven by ramp-up of greenfield phenol-acetone capacity
Cumulative FY16-21 CAPEX (Rs bn) PAT CAGR (%) (RHS)

70 70%
62
60 60%
49
50 50%
40 40%
30 30%
19 21
20 16 20%
10 5 7 10%
- 0%
Navin Vinati Atul Deepak PI Aarti SRF

Atul Limited
Capex for the next two years to be `15bn

In its FY21 AGM, the company discussed a capex program of `15bn for the next two
years; this includes capitalisation of ongoing as well as upcoming capex. Of the total
capex, `3.5bn is to be non-revenue generated capex, mainly for backward
integration and environmental matters. We expect total revenue of `57bn in FY24
once the mentioned capex comes on stream by FY23.
Exhibit 21: Major capex details
Segments/products ` mn Details
To set up 300 tpd caustic soda capacity and 50 MW power plant. Most
Atul Products (100%
7,500 of the caustic and chlorine to be used captively for various products.
subsidiary)
Currently it has 130tpd capacity of caustic soda.
It plans to enter into slew of value-added products in the cosmetic
Aromatics 2,000 segment like Anethole, Avobenzone, Raspberry Ketone, Octocrylene
and Octyl Methoxy Cinnamate
Pharmaceuticals 1,000 Further capex in recently acquired Polydrug Labs
Sulphuric acid and its
750 Capacity expansion into Amal Ltd. (50% JV)
derivatives
Exhibit 22: Key triggers across the segments; banking on demand improvement and increased investments in asset creations
Revenue CAGR
Segments Key growth triggers
(FY21-24E)
 Capacity addition of p-cresol
Aromatics 16%  Entry into new cosmetic ingredients
 Growth in dietary supplements, vitamin-E, antioxidants, personal care products
 Focus on specialty & multi-functional resin.
Polymer 20%  Brand (retail) business expansion
 Higher demand for low-weight materials in aerospace, automotive, medical and wind mill
industries
 Increase in Sulphur Black capacity to meet the growing export demand as China gradually
Colours 20% exiting due to stricter environment norms.
 Entry into the HPP category
 Increasing Resorcinol capacity, as two out of four major global players have exited the market -
Bulk 19% Mitsui: 20k tpa (exited), Indspec: 10k tn (exited)
 Moving up the Resorcinol value chain - 1,3 CHD (Cyclohexanedione)
Crop Protection 18%  Doubling MCA capacity
Pharmaceuticals 20%
 The acquisition of Polydrug Laboratories’ Ambernath plant for ` 2bn to generate nearly ` 4bn in
sales in three years

Atul Limited
Valuations – Improved revenue visibility

will drive price action
Over the years, Atul has invested in people and processes which is reflected
in its improving margin trajectory (exhibit 12). It has not just rolled out new
products but also developed adjacent applications for its key products which
improved its addressable market. Management has been cautious on
expanding capacities (`16bn capex in FY16-21) given the volatile demand
environment (FY16-21 revenue CAGR of 8%) in the domestic market (53%
share in FY21). Management is finally stepping up investments (`6bn/year,
all from internal accruals) which coupled with process capabilities provides
confidence in an improved earning trajectory (FY21-24 PAT CAGR at 14%).
Reverse DCF suggests current valuation of 32x FY24E (our estimate) factors in
18% revenue CAGR over FY21-35E and 24% EBITDAM at 13% WACC (13%
CoE) and 5% terminal growth. We are confident that Atul will deliver better
growth and hence factor in 19% revenue CAGR in our DCF template and price
it at `11,525, which implies 35x FY24E P/E.
Historically, the stock’s valuation has reacted favorably to incremental capex. We
believe the capex rollout will continue as the company is also looking at forward-
integration to ketones and backward integration to EPCH, including CRAMs/CSM
opportunities and other value-added products.
Exhibit 23: Increasing capex intensity is improving revenue visibility and driving
valuations
Capex (Rs bn) 1Y Fwd P/E

7.0 35
6.0 30
5.0 25
4.0 20
3.0 15
2.0 10
1.0 5
- 0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Basic building blocks enable steady improvement in profitability

Atul is one of few Indian chemical companies with strong building blocks to support
downstream products. This enables it to improve EBITDA margin gradually from 9% in
FY10 to 25% in FY21 when other chemical companies have witnessed wide volatility
in profitability. We expect Atul will continue to expand building blocks in the products
like EPCH and others, which will offer stability in margins.
Discount peers like ARTO; strong FCF and industry-leading RoCE and RoIC
Atul is the most capital efficient companies amongst peers with healthy FCF and
industry-leading RoCE. With increase in capex run-rate it can narrow the valuation
gap with peers. Our one-year forward DCF TP of `11,525 implies 35x FY24 P/E,
which is at a 14% discount to specialty peers like Vinati and Navin and in line with
Aarti. Succession planning would remain a key risk to the company’s prospects going
ahead as Mr Sunil Lalbhai is the key person handling core affairs of the company
while the next generation, though young, is yet to fully involve themselves in the
executive decision-making process.

Atul Limited
Exhibit 24: Our DCF inputs factor in higher than consensus Exhibit 25: We value Atul at 35x FY24E P/E
growth 1Y-FWD
FY16-21 FY21-25E FY25-35E Total PV of FCFF 118,735
Sales CAGR 8% 17% 19% Terminal Value 212,044
EBITDA Average 19% 22% 24% Enterprise Value 330,779
Wcap/Sales 20% 21% 20% Net debt -10,421
CAPEX/GB 21% 18% 8% Equity value 341,201
WACC 13% Share Price 11,525
Terminal growth 5% Implied P/E FY24 35
We factor in higher than consensus margins for FY24E as we believe current margins
are depressed due to raw material price volatility which seems temporary. We believe
margins will improve hereon led by the integrated process capabilities of Atul.
Exhibit 26: Ambit’s estimates factor in slightly higher margins in the medium term
Particulars (` mn)
Net Sales 47,265 53,837 61,434 47,008 53,902 61,199 1% 0% 0%
EBITDA 9,926 12,060 13,823 9,896 12,049 13,537 0% 0% 2%
PAT 6,851 8,400 9,627 6,824 8,394 9,426 0% 0% 2%
OPM 21.0% 22.4% 22.5% 21.1% 22.4% 22.1% -5 bps 5 bps 38 bps
NPM 14.5% 15.6% 15.7% 14.5% 15.6% 15.4% -2 bps 3 bps 27 bps
Exhibit 27: Segmental revenue and margin assumptions

` bn FY21 FY22E FY23E FY24E CAGR (%) Remarks
Capacity expansion, entry into high performance pigments
Performance chemical sales 23.2 30.1 34.3 39.1 19% and
improving demand scenario will drive growth
Doubling MCA capacity and acquisition of new pharma unit
Life science chemical sales 11.5 14.4 16.7 19.3 19% at
Ambernath will drive growth
Performance chemical EBIT margin 26% 20% 21% 22% Improve gradually as raw material volatility subsides
Life science chemical EBIT margin 19% 14% 15% 16% Improve gradually as raw material volatility subsides

Atul Limited

Major events over the last five years
Year Key points
 Sales volume grew by 3% YoY due to subdued global environment and volatile crude prices
FY16  Completed five expansion projects worth ` 2.1bn.
 Targeting sales of ` 40bn by 2018
 Sales volume grew by 16% YoY but realizations contracted
 Colour segment and retail crop protection performed poorly.
FY17
 Completed three expansion projects worth ` 1.2bn.
 ` 40bn sales target deferred.
 Sales volume grew by 12% YoY.
FY18  Atul pays off its debts to become debt free company.
 Focus on: a) process improvement, b) introducing new products, c) growing retail business
 Sales grew north of 20% but volume growth was only 3% YoY.
 Crop protection witnessed strong demand and higher realization for a key herbicide.
FY19
 Atul is broadening product categories to increase addressable market.
 Reiterates commitment to grow retail sales.
 Sales volume grew by 2%. Sales potential of ` 54bn.
FY20
 Focus on broadening market reach, manufacturing efficiencies and introducing new products in Aromatics.
 Mandates: a) Become world class in people productivity and lean on fixed costs, b) Become process efficient, c) R&D in all functions, d)
conserve cash and e) Work with customers on ideas with large potential
 Performance was impacted by plant closure during lockdown.
FY21  Projects worth ` 7.3bn are delayed and are expected to commercialize in 3QFY22.
 Sales potential of ` 55bn including investments of ` 7bn at subsidiaries.

Atul Limited
Risks and Catalysts

Risks
 Execution risk: Our estimates build in a capitalization of assets worth `15bn
over FY22-24E. Any delay in these projects will be detrimental to revenue and
profitability.
 Key man risk: Sunil Lalbhai is the key person in all matters of the company. He
was responsible for Atul’s superior performance over the past decade and was
instrumental in inculcating the group’s values in the executive team, which is also
reflected in employee stickiness. The next generation, though young, is yet to fully
involve themselves in the executive decision-making process.
 Crude volatility: Atul is majorly into basic chemicals which face realization
headwinds based on volatility in crude prices. It has successfully expanded the
end-user segment to alleviate any concern from demand slowdown in a
particular industry but price realizations continue to be regulated by crude prices,
though comparatively less than other peers like ARTO.
Catalysts
 RoIC sustains at 30% over FY22-24E: Atul has one of the best RoIC levels
among peers despite being a basic chemicals manufacturer. Its RoIC averaged
29% over FY16-21 at par with specialty chemicals peers like Vinati and Navin
which delivered 29% and 26% RoIC respectively. The volatile demand
environment led to lower capex and surplus funds are tied up in investments
(`13bn into equity and mutual funds) and `3bn in cash as on 31st March 2021.
These funds are now being used to augment capacities and drive future growth.
We expect Atul will deliver 30% RoIC over FY21-24 despite capacities under
ramp-up stage.
 Increased capex rate to `6bn/year: Unlike the average investment size of
`2.5-3bn on capacity expansion, the current capex rate has been stepped up to
`6bn towards MCA, caustic, p-cresol and other backward integration etc. This will
improve the operational strength of the company as it is already a market leader
in key products (exhibit 13). The investments in backward integration will also
alleviate sourcing constraints in a volatile logistics environment.
Segment Score Remarks
Accounting GREEN Atul ranks in the ‘Zone of Safety’ (D4) on our forensic accounting decile.
Volatile prices of finished as well as raw materials make predictability difficult. Management interacts
Predictability AMBER
with investors and analysts only once a year.
Earnings momentum is expected to improve hereon, but operating headwinds (freight, power, raw material)
may create volatility in the short term.

Atul Limited
Financial
Income statement
Net Revenue 40,931 37,315 47,265 53,837 61,434
Revenue growth (%) 1.4 -8.8 26.7 13.9 14.1
- Op. expenses 31,911 28,144 37,340 41,778 47,611
EBITDA (Excl. OI) 9,020 9,171 9,926 12,060 13,823
EBITDA margins (%) 22.0 24.6 21.0 22.4 22.5
- Interest expenses 94 94 50 43 43
- Depreciation 1,302 1,363 1,787 2,332 2,789
+ Other income 780 1,030 945 1,346 1,659
- Tax 1,745 2,217 2,259 2,758 3,162
Reported PAT 6,659 6,528 6,776 8,273 9,487
+/- Extraordinary items -50 -73 -114 -179 -197
+/- Minority interest 45 43 39 52 57
Adjusted PAT 6,665 6,558 6,851 8,400 9,627
EPS (`/share) 225 221 231 284 325
Balance sheet
Share capital 297 296 296 296 296
Networth 31,549 38,265 43,746 50,886 59,069
Minority interest 264 306 345 397 454
Total Debt 1,216 1,420 1,081 1,081 1,081
Def. tax liab. (net) 1,148 1,351 1,351 1,351 1,351
Net Fixed assets 15,083 16,681 21,144 25,062 27,273
Investments 11,220 13,611 13,611 13,611 13,611
Cash and bank balance 354 3,482 2,150 4,100 8,584
Net debt 862 -2,062 -1,069 -3,018 -7,503
WC (days) 66 76 76 76 76
DE(x) 0.0 0.0 0.0 0.0 0.0

Atul Limited
Cash Flow statement

PAT 6,665 6,558 6,851 8,400 9,627
+ Non cash items 1,060 1,567 1,787 2,332 2,789
Cash profit 7,724 8,124 8,638 10,732 12,416
- Incr/(Decr) in WC -984 50 2,050 1,324 1,544
- Capex 3,620 2,961 6,250 6,250 5,000
Free cash flow 5,089 5,113 338 3,158 5,872
- Dividend 814 592 1,370 1,260 1,444
+ Equity raised - -499 - - -
+ Debt raised 568 204 -339 - -
- Investments 3,700 2,391 - - -
- Misc. items 1,333 -1,292 -39 -52 -57
Net cash flow -191 3,128 -1,332 1,950 4,485
+ Opening cash 545 354 3,482 2,150 4,100
Closing cash 354 3,482 2,150 4,100 8,585
Key Ratios
P/E (x) 46 47 45 36 32
P/BV (x) 10 8 7 6 5
EV/EBITDA (x) 33.8 33.2 30.7 25.1 21.6
RoE (%) 22.7 18.8 16.7 17.8 17.5
RoCE (%) 27.0 23.6 20.8 22.3 22.1
Dividend (%) 275 200 463 426 488
Dividend yield (%) 0.7 0.3 0.4 0.4 0.5
Revenue growth (%) 1 -9 27 14 14
EBITDA growth (%) 18 2 8 21 15
PAT growth (%) 53 -2 4 22 15

Vinati Organics
BUY
INITIATING COVERAGE VO IN EQUITY January 17, 2021
Niche chemistry at work Chemicals
After attaining global leadership in ATBS and IBB, Vinati entered

Recommendation
products with larger addressable market like Butylated Phenols and
forward-integrated to antioxidants to mitigate risk of product Mcap (bn): `219/US$2.9
concentration. Earnings growth would accelerate from FY22 as: a) ATBS 3M ADV (mn): `134/US$2
volume growth revives from 17k (FY21) to 40k by FY24 and b) new CMP: `2,072
projects (BP, AO, IB derivatives) will contribute 33% to FY24 revenue. TP (12 mths): `2,352
Given slew of new products, earnings should post 32% CAGR with Upside (%): 14%
average RoE of 23% over FY22-24E. With growth vigor and
management credibility, valuations would remain high. Execution must Flags
be watched as management bandwidth is limited. DCF-based TP of Accounting: GREEN
`2,352 implies 40x FY24E factoring 27% revenue CAGR and 35% Predictability: AMBER
EBITDAM over FY21-35E vs 26% CAGR priced in current valuations. Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Catalysts
Flagship product ATBS is gaining traction
One of the main usages of ATBS is Enhanced Oil Recovery (EOR) used in  Earnings growth of 32% over FY21-
extraction of shale gas. Demand was poor during FY20 and FY21 due to 24E vs 15% over FY16-21
lower crude price. ATBS demand is picking up with rising crude price; demand  ATBS to deliver 34% revenue CAGR
can be met via capacity expansion to 40KT from 26KT (FY20). Near-term over FY21-24E
margins will be in check as Acrylonitrile (RM) prices are increasing.
 GB turns to improve to 1.5x by FY25E
Entry into new products to mitigate product concentration risk vs 1.1x in FY21.
ATBS and IBB contribute ~70% of revenues. To reduce this risk, Vinati has
entered BP and forward integration AOs. It will provide better control over BP Performance (%)
chain as key RMs are available indigenously – IB (produced internally) and
phenol (procured locally). For this chain, it will invest `5.4bn which is expected 200 Vinati Sensex
to generate revenues of `7bn by FY24. These products offer a wider
addressable market but have lower margins. 160
Improved revenue visibility, revenue to gather pace FY22 onwards
120
We expect the business to rebound after the lull in FY20/FY21 on the back of
(1) higher ATBS utilization, 94% in FY23 vs 41% in FY21; (2) Improved IBB
80
offtake due to the ramp-up of BASF’s Texas Ibuprofen plant; and (3) ramp-up Aug-21
Mar-21
Jun-21
May-21
Oct-21
Nov-21
Sep-21
Feb-21
Apr-21
Dec-21
Jan-21
Jul-21
Jan-22
of BP and AO capacities; 27% revenue contribution in FY24E. We expect
revenue/PAT CAGR of 37%/32% over FY21-24E.
Valuations to remain elevated: highest earnings growth amongst peers
For next leg of growth, Vinati has chosen growth over margins. This will ensure Source: Bloomberg, Ambit Capital Research
industry leading earnings growth with lower margins (next 5-year average
OPM at 33% vs last 5-year at 35%). Market gives premium to Vinati for
research-led clean and green chemistry approach, which would sustain for the
next five years. We build in 27% revenue CAGR and 35% average EBITDAM
over FY21-35E to arrive at TP of `2,352 (40x FY24E P/E). Risks: Slowdown in
key user industry like O&G, increased competition in AO and BP and limited
management bandwidth.
Key financials
Year to March (Cons.) FY20 FY21 FY22E FY23E FY24E Research Analysts
Net Revenues (` mn) 10,289 9,543 14,809 20,420 24,459 Ankit Gor
EBITDA (` mn) 4,138 3,525 4,414 6,771 8,126 ankit.gor@ambit.co
APAT (` mn) 3,336 2,693 3,293 5,033 6,150 Tel: +91 22 6623 3132
P/E (x) 64 79 66 43 35 Tel: +91 22 6623 3242
Vinati Organics

Exhibit 1: ATBS and new products will drive growth; AOs to contribute 17% to revenues in FY24E
Process integration: Slowdown in user Leadership in Product portfolio

Backward integration into IB. industry: Growth remained ATBS: Investment expansion: ATBS,
Falling ATR due to capex into muted and stretched WC into BP and New specialty
50 requirements weighed on expansion of ATBS products, AOs, BP 70%
new capacities
return ratio. capacity. Working drive growth. RoCE
40 60%
capital remained improves with
stretched and improving asset 50%
30 impacted RoCE. turn.
40%
20
30%
10 20%
- 10%
ATBS IBB IB BP Others
New Product AOs RoCE (%) (RHS) EBITDAM (%) (RHS)
Exhibit 2: Recovery in O&G industry drives ATBS demand; Exhibit 3: Improved revenue visibility supported by new
Vinati being a global leader with 65% market share in this products and improved demand sentiment in key
product is primary beneficiary product (ATBS)
ATBS Capacity (KT) Utilization (%) (RHS) Revenue CAGR (%) PAT CAGR (%)
45 120% 40%
40
100%
35
30%
30 80%
25
60%
20 20%
15 40%
10
20% 10%
5
0 0%
FY19
FY16
FY17
FY18
FY20
FY21
FY22E
FY23E
FY24E
0%
FY18-21 FY21-24E

Vinati Organics
Exhibit 4: Strong growth coupled with stable cash flows and Exhibit 5: Vinati’s plants and products
improving cash conversion Plant location Products Technology
OCF (Rs bn) FCF (Rs bn) OCF/EBITDA (RHS) Institut Francais du
Mahad, Maharashtra IBB, NBB, Other
Petrole (IFP), France
8.0 120% National Chemical
Laboratory (NCL)
ATBS, IB, HP-MTBE,
100% Lote, Maharashtra Pune for ATBS
6.0 BP
Saipem SpA, Italy
for IB
80%
4.0 Source: Company, Ambit Capital research
60%
2.0
40%
0.0 20%
FY17
FY16
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
-2.0 0%
Exhibit 6: Improvement in asset turns will drive return Exhibit 7: We believe Vinati offers best earnings growth
ratios over FY21-24 at favorable valuations
GB Turn (x)(RHS) RoE (%) RoCE (%)

50% 2.5 35% Vinati
FY21-24 PAT CAGR
30%
40% 2.0 SRF
25% Navin
30% 1.5 20% Deepak
Aarti
15%
20% 1.0 Atul
10%
10% 0.5 5%
1.4
1.3
1.5
2.1
1.5
1.1
1.4
1.5
1.5
0%
0% -
- 20 40 60
FY17
FY16
FY18
FY19
FY20
FY21
FY24E
FY22E
FY23E
FY24 P/E
Exhibit 8: Valuations have tracked revenue growth outlook; Vinati trades at 40x consensus FY23E P/E
50 60%
Slowdown in O&G ATBS market share gain
industry after exit of Lubrizol 45%
40
30%
30
15%
20
0%
10
-15%
- -30%
Rev gr (YoY%) (RHS) 1Y FWD P/E

Vinati Organics
Vinati’s journey and evolution

Incorporated in 1989, Maharashtra-based Vinati Organics (Vinati) is a global
leader in niche specialty chemical products with a market share of 65% in
two leading products – ATBS and IBB. It operates in a concentrated industry
which has strong barriers for potential entrants. Its key products are 1) ATBS
(49% sales), 2) IBB (21%), 3) IB (10%), 4) BP (13%) and 5) other downstream
products (7%). It largely caters to water treatment, enhanced oil recovery
(EOR), pharma (Ibuprofen), perfumery, construction, acrylic fibres, home &
personal care and paint & plastics industries. Vinati started with 1,200tpa
capacity of IBB at its Mahad plant. In 2002, it entered into ATBS where it
went on become a global leader with 65% market share in 2018. Vinati has
focused on niche products with smaller addressable market (ATBS 50KT
global market) but has refined its processes to achieve superior margins.
Management focusses on green chemistry with both its plant having zero
liquid discharges. In its next leg of growth, it is focusing on BP, AOs and
other specialty chemicals to drive future growth.
Exhibit 9: Higher growth in ATBS and product-mix will improve on margins and return ratios from FY23
Process integration: Leadership in Product portfolio

Slowdown in user
Backward integration of ATBS: Investment expansion: ATBS,
industry: Growth
ATBS into IB. Falling asset into BP and New specialty
remained muted and
turn due to investments expansion of ATBS products, AOs, BP
50 stretched working capital 70%
into new capacities capacity. Working drive growth. RoCE
requirements weighed on
capital remained improves with
return ratio. 60%
40 stretched and improving asset
impacted RoCE. turn.
50%
30
40%
20
30%
10 20%
- 10%
ATBS IBB IB BP Others New Product AOs RoCE (%) (RHS)
Phase 1 (FY11-14) (process integration): During this period, revenue grew at

29% CAGR supported by extension of product offerings like IB and HP-MTBE.
The green-field 12KT capacity of IB at Lote (MH) was ramped up during this
period. The backward integration with IB capacity contributed to margin
improvements and OPM averaged 22% during this period. RoCE during this
period was at 30%.
Phase-2 (FY15-18) (slowdown in primary user industry): Revenue declined at
1% CAGR on account fall in product prices owing to crude. The fall in crude prices led
to muted investments in O&G industry which impacted the off take of its key product
ATBS. IBB sales were impacted on account of issues at customer’s end. Vinati was
able to improve its margin on account of favorable raw material prices and
continuous investments into process improvements. OPM averaged at 30% while the
RoCE was 31% during this period.
Phase-3 (FY18-21) (leadership in key product): Gradual recovery in O&G
industry and expanded capacity of IBB and IB reflected in 9% revenue growth. Vinati
invested in new capacities for BP which will be forward-integrated into antioxidants
(US$5bn market). ATBS demand and pricing improved on account of exit of Lubrizol.
Vinati seized the opportunity and expanded its ATBS capacity to 40KT. OPM
continued to improve supported by improvements in gross margin and averaged 36%
while RoCE was stable at 31% on account of new capacities.

Vinati Organics
Phase-4 (FY22 onward) (product portfolio expansion): We expect revenue to

grow at 37% CAGR over FY21-24 supported by favorable demand in ATBS, scale-up
of antioxidant capacities and new products for agrochemical, fragrance and polymer
industry. The new products and antioxidants have lower margins and thus we expect
PAT CAGR of 31% over FY21-24.
Exhibit 10: Vinati’s product overview

ATBS IBB IB BP Others (HP-MTBE, TBA,
Segments
(Started in 2002) (Started in 1992) (Started in 2010) (Started in 2020) DAAM, PTBBA| PTBT| IBAP)
Sales Mix 49% 21% 10% 13% 7%
Export share 95% 70% Domestic Domestic 20%
OPM 40-45% 20-25% 15-20% 15-20% 20-25%
Market share 65% Global 65% Global 70% domestic N/A N/A
Industry 97%
Product purity 99.7% 99.8% N/A N/A
Vinati 99.5%
 Favourable demand
environment
 Demand will pick up as
 Use of plant waste into
Growth trigger channel inventory  Uptick in utilization  Captive use
 Ramp up of expanded
normalizes.
Commercial products
capacity
 Oilfield chemical
 Perfume
 Personal care
 Water treatment
 Intermediate of  Intermediate for  Antioxidant
 Paints
User Industry Ibuprofen ATBS and BP s
 Construction
   Pharma
Fragrance Agrochemical  Plastics and
 Paints and additives
lubricants
 Agrochem
BASF
Clients BASF, Dow, Exxon Mobil, SNF Bio-cause Gharda, Bayer, UPL - -
Shashun
Generally 70% of sales are under contract and under formula based pricing model which protects absolute EBITDA.
Nature
Highly sticky customers as leadership position in key products.
Capacity 40KT 25KT 40KT 36KT 20KT
Global growth 10-15% 3-5% 5-6% 3-5% 3-5%
Savla Chemicals SI Group
IOL Chemicals
TPC Group BASF
Peers Toagosei SI group
Lanxess Songwon
Albemarle
Exxon Mobil Oxiris

Vinati Organics
Global edge, superior profitability from

integration and a greener process
Vinati has always focused on (1) greener processes which generate less/no
effluents, (2) unique R&D-driven process which offers cost leadership with
less/no competition and (3) backward-integrated capabilities; for example,
in 2010 it entered IB, which is internally used in ATBS and now in BP. Earlier
focus was on products with limited addressable market size to attain global
leadership, like ATBS (~65% market share) and IBB (~65% market share).
But of late, it has entered products such as BP and antioxidants which offer a
larger addressable market. It is known for its impeccable product selection
and backward/vertical integration creates synergy with existing products.
Exhibit 11: Vinati’s framework for product selection
R&D driven
product/process
20% RoI on Less crowded

investment market
Green process Limited

(Less/no adressable
effluents) market size
Product development pipeline: Vinati’s R&D team is focused on developing

alternate products and attaining better process efficiencies. It also has tie-ups with
research institutions (NCL, Pune) for process development. At any given time, Vinati
has 10-15 products in the pipeline with a vision for next 10 years.
Exhibit 12: Vinati’s product development pipeline
R&D stage: 6-8 products (Through institutional

tie-ups)
Pilot stage: 2-3 products at

pilot stage (PAP currently)
Launch:
1/10
product

Vinati Organics
Scaling up over the last decade

Vinati’s focus on process innovation has helped it sustain market share against
Chinese competition. Over the last decade its market share in ATBS improved from
30% in FY10 to 65% in FY21, though partly supported by exit of competitor Lubrizol
which had ~20% market share. Vinati was quick to react and expanded its capacities
to gain market share vacated by the outgoing player.
Exhibit 13: Leadership position in products comprising nearly 80% of sales
Export Revenue Revenue
Market Market
Key products share in contribution contribution
size (KT) share
revenue (FY16-21) (FY21-24)
ATBS 50 65% 95% 51% 50%
IBB 30 65% 70% 21% 13%
IB* 10 70% Domestic 9% 7%
BP* 25 - Domestic 3% 12%
Antioxidants (upcoming)* 12 - - 9%
Source: Company, Ambit Capital research, *Domestic size and share as focus on import substitution^FY21
Outsourcing research to prominent institutions

Vinati outsourced its process development initiatives through tie-ups with prominent
research institutions. This reduced its overhead costs and fast-tracked the
development process.
Exhibit 14: Global technology partnerships
Products Technology partner
ATBS NCL, Pune
IBB IFP, France
IB Saipem SpA, Italy
IBAP NCL, Pune
PTBT/PTBA IICT, Hyderabad
PAP NCL, Pune
Integrated processes enable control on all product parameters: Vinati started

with IBB capacities of 1,200tn in 1992 and gradually moved on to ATBS (2002) and IB
(2010). It has focused on an integrated business model developing products that are
forward/backward/vertical integration of existing products, processes and raw
material. Both of its plants are Zero Liquid Discharge (ZLD) and effluents are utilized
to produce downstream derivatives.
Exhibit 15: Backward integration into IB enabled it to achieve global scale and cost leadership
Toluene & Propylene Acrylonitrile MTBE
IBB ATBS IB
NBB TBA HP-MTBE Methanol
(21% of sales) (48% of sales) (10% of sales)
Isobutyl
Acetophenone TBA PTBT
Butylated
Phenol
1) PTBP
PTBBA 2) OTBP
3) 2,4 DTBP
4) 2,6 DTBP
RM Key product Downstream New Product

PTBMB

Vinati Organics
Pricing model insulates from raw material volatility

Vinati has a fixed pricing which it charges over the raw material prices. This leads to
stable absolute profitability but margins improve in a declining RM environment.
Exhibit 16: Efficient pricing model enables Vinati to tide over rough times
Factors Details
Fixed US$/kg + Raw Material Cost
Pricing model (This protects the EBITDA/tn but in a rising crude price scenario it increases
the working capital requirement, thereby impacting RoCE)
ATBS price renegotiation on quarterly basis
Price revision
Other products monthly
Most contracts have no clause for exchange rates + RMC are taken in US$
Contract sale
Net forex exposure: Export sales – RMC = Surplus (~25% in Vinati) (hence
(70%- primarily exports)
1% change in USD/INR = 0.25% GM impact)

Vinati Organics
Improved revenue visibility; revenue to

gather pace FY22 onwards
After a muted performance over FY16-21 with revenue/PAT growth of
10%/15% we see the growth trajectory improving with revenue/PAT growth
of 37%/32% expected over FY21-24E owing to improved demand of ATBS
(utilization improving to 94% by FY23E), improved off-take of IBB (recovery in
demand of ibuprofen) and new capacities of AO and BP. Vinati offers best
earning growth prospects within our coverage universe.
Vinati is well-placed to deliver one leading profit growth levels of 32% over FY21-
24E. Improved demand for key products and new investments will drive this growth in
the medium term.
Muted FY20-21: Performance was impacted primarily due to:
 Muted EOR activities owing to lower crude oil prices. EOR is one of the highest
margin applications of ATBS. This application forms ~25% of the ATBS sales.
 Lower demand from key user industry impacted the product pricing. ATBS prices
remained range bound between ` 220/kg to ` 250/kg.
 The expanded IBB capacity (in FY19) remained underutilized as there were
technical glitches at BASF (Texas) ibuprofen plant. Vinati had expanded its IBB
capacity for supplies to BASF.
What has changed now? We expect the business to rebound FY22 onwards
primarily due to:
 Uptick in EOR activities given the rise in crude oil prices (up 18% in six months)
and we expect ATBS utilization to improve to over 90% by FY23.
 Improved IBB offtake due to the ramp-up of BASF’s Texas Ibuprofen plant.
 Ramp-up of BP plant; we expect 9% revenue contribution from BP in FY24.
 Entry into antioxidants offers a larger addressable market (global annual demand
of 300KT).
We expect revenue/PAT CAGR of 37%/32% between FY21-24E and believe Vinati has
adequate capacities to generate incremental revenues of ~`15bn over the next three
years.
Product concentration to reduce: Historically, ATBS and IBB have contributed
nearly 70% to overall revenues. Higher-margin ATBS has also helped the company
generate higher profitability. Since ATBS and IBB overall market size is limited and
growing around 10% and 5% respectively, Vinati’s revenue grew at a CAGR of 9%
during FY16-21. The revenue is expected to diversify with foray into new products (BP
and antioxidants) and is expected to grow at 37% over FY21-24.
Exhibit 17: Diversification into new products will contribute to growth and improvement in GB turns will drive return ratios
30 60%
FY11-21 CAGR 11% FY21-24E CAGR 37%
25 50%
20 40%
15 30%
10 20%
5 10%
- 0%
ATBS IBB IB BP Others
New Product AOs RoCE (%) (RHS) EBITDAM (%) (RHS)

Vinati Organics
ATBS utilization to improve: Uptick in EOR activities in shale gas as crude oil
prices are rising
Enhanced oil recovery (EOR), also called tertiary recovery, is the extraction of oil from
an oil field that cannot be extracted otherwise. Vinati supplies ATBS to
surfactant/polymer manufacturers, which in turn supply the final product to oil
extractors. Shale gas extraction has muted activity when crude oil prices are lower.
The activity has increased currently since crude oil prices are moving upward from the
COVID lows. We expect an improvement in utilisation of ATBS capacity and expect
ATBS revenue to grow at a CAGR of 34% over FY21-24 supported by increase in
capacity to 40,000tpa. Product margins will remain in check in the near term as the
prices of key RM acrylonitrile are rising and Vinati may undercut prices to sell from its
expanded capacities.
Exhibit 18: Oil recovery and water treatment are two key Exhibit 19: Utilization will retrace the FY20 highs
applications of ATBS
EOR Water treatment Construction ATBS Capacity (KT) Utilization (%) (RHS)
Pharma Other 50 120%
40 100%
20% 80%
25% 30
60%
20
40%
12%
10 20%
18%
0 0%
15%
FY21
FY16
FY17
FY18
FY19
FY20
FY22
FY23
FY24
E
E
Crude is the primary driver: ATBS sales track crude price movement as crude is the
primary user industry for ATBS. Lately, base chemical prices have started rising and
Acrylonitrile, a key raw material for ATBS, has seen a significant jump in prices in
India due to supply chain issues in China given India is dependent on imports of this
chemical. Therefore, we are cautious on the margin outlook of this segment in the
short term.
Exhibit 20: ATBS sales track crude oil movements; FY19 saw Exhibit 21: Supply chain constraints pushing up raw
benefits of crude price improvement and exit of second material prices
competitor Lubrizol (~20% global market share)
Crude (US$/bbl) ATBS rev gr. (%) (RHS) Acrylonitrile (US$/tn) QoQ (%) (RHS)
3000 60%
120 80%
2500 45%
100 60%
30%
2000
80 40% 15%
1500
60 20% 0%
1000
-15%
40 0%
500 -30%
20 -20%
0 -45%
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
0 -40%
FY19
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY20
FY21

Vinati Organics
IBB offtake to improve, capacities in place

Vinati expanded IBB capacity to 25,000tpa from 16,000tpa in FY19. Capacity
utilisation was low (~60%) during FY19-20 due to technical issues at the BASF (key
customer) plant. IBB offtake is now increasing as BASF has resumed operations at its
Texas plant (5,000tn ibuprofen capacity) in 2QFY21. IBB sales are further supported
by the rising demand for Ibuprofen globally (global demand at 35,000tn). Improved
pricing and higher operating leverage should result in IBB revenue CAGR of 10%
between FY21-24.
Exhibit 22: Utilization will gradually improve from FY22
Capacity (KT) Utilization (%) (RHS)

30 100%
25
80%
20
60%
15
40%
10
20%
5
0 0%
Entry into butylated phenols to expand product offerings

Vinati started its BP plant in 4QFY20 with a capacity of 36,000tpa and a capital Global butylated phenols market
outlay of `2.4bn. However, due to initial teething issues and Covid-19 challenges, stands at 400,000 tpa, growing at
overall utilisation remained sub-par in FY21. BP finds applications in the ~5%
agrochemical, plastic and fragrance industries. Domestic market requirement for BP is
around 25,000tpa (100% imported). Vinati has developed a cleaner and cost-
competitive process vs global peers. Old Indian players like Herdillia - now SI Group,
Balmer Lawrie and Naik Naware have exited the market due to RM (IB) unavailability.
Vinati is backward-integrated to IB and is the only manufacturer of BP in India. We
estimate it will replace imports of around 15KT in the next 3-4 years and expect a
contribution of 10% to FY24 sales.
The major BP variants manufactured by Vinati:
 Para-Tertiary Butyl Phenol (PTBP): PTBP has highest volume amongst other
and is largely imported from Korea, Taiwan, Singapore and Russia. There are two 2,4-DTBP and 2,6-DTBP to be
grades of PTBP – technical grade used for perfumery application and standard internally utilised to manufacture
grade that is used in resin/ink applications. antioxidants.
 Ortho-Tertiary Butyl Phenol (OTBP): It is imported from Switzerland and
Taiwan. It goes entirely into the manufacturing of perfumery products. All leading
Indian perfumes manufacturing companies are the users of OTBP.
 2,4-Di Tertiary Butyl Phenol (2,4-DTBP) and 2,6-Di Tertiary Butyl Phenol
(2,6-DTBP): These are smaller in volume terms and used for manufacturing
antioxidants which are used as additives for plastics. 2,4-DTBP and 2,6-DTBP are
imported into India from Switzerland, Taiwan, Singapore and China.

Vinati Organics
Exhibit 23: BP capacity will forward-integrate into antioxidants
FY23 onward the additional production

4.0 50%
will be used as raw material for AOs.
40%
3.0
30%
2.0
20%
1.0
10%
0.0 0%
FY20 FY21 FY22E FY23E FY24E
BP (Rs bn) Utilization - Ext sale (%) (RHS)
Antioxidants: Double backward-integration to provide an edge

Initially, Vinati entered into AOs via promoter-owned company Veeral Additives to
get confidence on scale, market and technology. It then bought the entire stake (20%)
from the technology partner and decided to merge the entity with itself in FY21.
Merger with Veeral Additives’ amalgamation is under process and expected to
complete in 4QFY22. Post amalgamation, promoter’s stake in Vinati will increase to
74.32% from 74.06%.
Why antioxidants are required in polymer?
AOs are added to plastics to inhibit degradation mainly caused by thermo-
mechanical or thermo-oxidative conditions. It extends product's life, enhance the
appearance and maintain its strength, stiffness and flexibility. The quantity of AOs
generally added to polymers is 0.1% of its weight. (i.e. 1,000 MT of AO required per
1 million MT of polymers) and mainly there are four types of AOs used in polymer.
Market dynamics and competition
Global demand at about 300,000 tpa is growing at 4-5%. BASF, Songwon, SI Group,
Addivant, Adeka, Jiyi, Richyu, Everspring and Kaoching are the leading global
manufacturers of AOs. India’s demand stands at about 10-12KT which is mainly
serviced by imports. India imports around 6-7KT of AOs annually. There are two
domestic manufacturers HPL Additives and Songwon with capacities of 8KT and 1KT
respectively. The domestic produced quality is below par and thus market requires
imports. The major consumers of these AOs in India are the polymer manufacturers
such as Reliance Inds, IOCL, ONGC and MRPL amongst others. The demand is
expected to increase as new petrochemical complexes come up in India. Vinati also
intends to supply AOs to the growing polymer market in the Middle-East.
Exhibit 24: Demand-supply of major AOs to be produced by Vinati
Demand (KT) Import (KT) Usages Key RM Proposed capacity by Vinati (KT)
Gives excellent processing stability and long term heat aging
AO1010 5.5 2.3 2,6 DTBP 8
characteristics.
It has low colour generation characteristics and is used
AO1076 0.6 0.6 2,6 DTBP 8
whenever colour is of major importance.
Gives excellent protection to melt flow & colour during
AO168 4.4 3.5 2,4 DTBP 8
thermal processing.
Total 10.5 6.5 24
Vinati to have an edge with complete backward integration

Vinati will have better cost matrix compared to peers as it is one of the few
companies in the world having double backward integration to key raw materials –
2,4-DTBP, 2,6-DTBP and IB. The company is undertaking capex of `3bn in Veeral
Additives for AO capacity of 24KT and 8KT for intermediate Metilox. The plant is
expected to generate revenue of `5bn at full utilization. BP and AO will contribute
revenue of R 7bn at optimum capacity utilization.
Vinati Organics
Valuations: Growth vs margins

Vinati has focused on niche product and green efficient processes to deliver
industry leading product margins. The process expertise and product quality
has helped it gain 65% global market share in ATBS and IBB. With limited
growth opportunity in existing product due to smaller addressable market,
management is diversifying into new products like BP and AO which offer
forwards integration of existing capabilities. We expect profitability to
improve hereon despite lower margins (33% FY24 vs 37% in FY21). The
reverse DCF suggests that current valuations are pricing in 26% revenue
growth and 35% EBITDAM over FY21-35E at 13% WACC (13% CoE) and 5%
terminal growth while we factor in 27% revenue growth and 35% EBITDAM
over FY21-35E in our DCF template to arrive at the target price of ` 2,352,
implies 40x FY24 P/E in line with specialty peers like Navin.
Historically, the stock has reacted positively to growth delivery.
Exhibit 25: Stock has re-rated on positive growth outlook
Rev gr (YoY%) (RHS) 1Y FWD P/E

50 60%
45%
40
30%
30
15%
20
0%
10
-15%
- -30%
Leveraging process expertise

Over the years, Vinati has grown with the core principle of differentiated process
which offers differentiated profitability. For example, in ATBS, with process refinement
it generates less/no effluents at the same time making OPM of more than 40%.
Nearest competitor in Japan is not even close in terms of profitability. It is also
backward-integrated to IB, which is a key RM for ATBS and BP. With upcoming AO
capacity, it will be double integrated from IB-BP-AO. Vertical integration gives it
pricing power in the global market and reduces margin volatility.
For the next 5-10 years we believe revenue growth will be faster (37% in FY21-24E vs
9% in FY16-21) as the company is choosing growth over margins. The average RoE is
expected to be 23% over FY21-24E (vs 25% during FY16-21) supported by higher
gross block turns. FCF will remain strong (31% CAGR over FY21-24E) with improving
cash generation on account of faster cash conversion cycle (86 days FY24E vs 127
days in FY21) and lower capex requirements.
Vinati trades at 35x our FY24E expected earnings. Our DCF-based TP of `2,352
values the stock at 40x FY24E. We factor in diversifying revenues from new products
and AOs, improved performance in ATBS and stable performance in the rest of the
products. We factor in 27% revenue growth and 35% EBITDAM over FY21-35E at 13%
WACC and 5% terminal growth vs the currently priced in 26% revenue growth at 35%
EBITDAM. Our FY21-24 growth estimates for revenue/EBITDA/PAT are
37%/32%/32%.

Vinati Organics
Exhibit 26: Our DCF inputs consider higher growth Exhibit 27: DCF target of `2,352 implies 40x FY24E P/E
FY16-21 FY21-25 FY25-35 1Y-FWD
EBITDAM 35% 33% 35% Terminal Value 165,386

Wcap/sales 26% 27% 23%
Net debt 959
Capex/GB 11% 15% 12%
WACC 13%
Share Price 2,352
Terminal growth 5% P/E FY24 40
We build in lower EBITDAM than consensus primarily on account of higher fixed cost
share during ramp-up phase of new capacities. However, over the longer horizon of
FY21-35E, we are in line with priced-in average EBITDAM of 35%.
Exhibit 28: Ambit’s estimates are largely in line with consensus
Ambit estimates Consensus estimates Difference
Particulars (` mn)
Net Sales 14,809 20,420 24,459 14,958 19,591 24,503 -1% 4% 0%
EBITDA 4,441 6,771 8,126 4,872 6,657 8,373 -9% 2% -3%
PAT 3,293 5,033 6,150 3,613 4,929 6,198 -9% 2% -1%
OPM 29.8% 33.2% 33.2% 32.6% 34.0% 34.2% -277 bps -82 bps -95 bps
NPM 22.2% 24.6% 25.3% 24.2% 25.2% 25.3% -192 bps -51 bps -15 bps
Exhibit 29: Product-wise revenue assumptions

(` bn) FY21 FY22E FY23E FY24E CAGR Remark
ATBS 4.6 8.3 10.0 11.0 34% Favourable prices and ramp up of capacities.
IBB 2.0 2.1 2.4 2.7 10% Channel inventory will normalize
IB 0.9 1.2 1.3 1.3 12%
BP 1.2 2.1 2.5 2.5 27% Revenue will plateau with scale up of AOs
Others 0.7 0.8 0.9 1.1 17%
New Product - - 1.1 1.6 N/A
AOs - - 2.0 4.0 N/A Revenue contribution will start from FY23E
Total 9.4 14.6 20.2 24.1 37%

Vinati Organics

Exhibit 30: Key takeaways from annual reports
Year Key points
 Company will continue to launch innovative and superior quality products at affordable prices.
 Company will continue to expand business with emphasis on process innovation and upgraded technology.
FY16
 CAPEX of ` 2bn over FY16-17 on new product and co-gen power plant.
 Tripartite agreements with USA and Japan based chemical companies for supplying customised products.
 Primary objective on expanding product portfolio and cash flow generation.
 Focus will remain mainly on developing better and greener processes for the products with high purity level and cost efficiency.
FY17  Three large CAPEX for IB derivatives, Butyl Phenol and PAP.
 Targeting to double revenue by FY21.
 Announced 8MW captive co-gen power plant at Lote facility which will lead to annual cost saving of ` 80mn.
 Announced buyback of 200K shares in FY18.
 Exit of key competitor Lubrizol supported sales growth of ATBS.
FY18
 Recalibrating business model to gain higher market share in products.
 Simplified business model to help dedicated management teams fully utilise the resources.
 Company will sustain and grow its market share backed by integrated business model and wide portfolio.
 The global market share in ATBS improved from 45% to 65%.
 IBB sales were impacted due to brownfield expansions undertaken by its key customer.
FY19  Crude prices remain a key determinant of operational cost. Management has arrived at formula based contract pricing with its
customer.
 Planned an increase in ATBS capacity to 40KT with CAPEX of ` 1.1bn. The capacity will come online in 2QFY20.
 The greenfield capacity of Butyl Phenol will come online in 2QFY20.
 Leadership position in multiple products helped deliver a robust performance despite multiple economic challenges.
FY20  Vinati is sole manufacturer of Butyl phenol in India. The capacity will ramp up over next 2-3 years to deliver ` 4bn on full utilization.
 There was pressure from oil related application of some products.
 ATBS sales saw recovery in 2HFY20 owing to recovery in crude price. The 4QFY20 saw strong volume offtake.
FY21
 Maintained market share of 65% in IBB and ATBS.
 Proposed merger of Veeral Additives with the company. This will drive the vertical integration into antioxidants with captive raw material
(Butyl Phenol) capabilities.

Vinati Organics
Key risks and Catalysts

Risks
Slowdown in key user industry: Vinati’s reliance on ATBS is reducing as the
revenue contribution from this product is expected to come down from 57% in FY22E
to 46% in FY24E, but it still remains a major contributor. Any slowdown in the key
user industries of ATBS, mainly O&G, will result in lower-than-expected growth in the
product’s revenues and profitability since ATBS is the highest margin product.
Increase in competition: There can be increased competition and further margin
pressure in new products. AOs and BP require phenol as a raw material. With phenol
capacities now in the domestic market, we see the possibility of new entrants in these
products.
Limited management bandwidth: Capex intensity is increasing and management
bandwidth is more or less similar, so there is project execution risk which may delay
product rollouts and pose downside risks to our estimates.
Catalysts
 Improved growth trajectory: We expect Vinati to deliver 32% PAT growth over
FY21-24E vs 15% delivered over FY16-21. The recovery in demand for ATBS,
improved off-take of IBB and new products like BP and AO will contribute to the
growth of the company.
 ATBS will deliver 34% revenue growth over FY21-24E: The improved
demand from EOR with improved crude prices will drive ATBS utilization to 94%
by FY23E.
 RoE improvement driven by higher GB turn: We expect Vinati’s RoE to
improve to 25% by FY24 driven by improvement in GB turn from 1.1x in FY21 to
1.5x in FY24E led by improving utilization in key products ATBS and IBB.
Exhibit 31: Explanations to our flag on the first page

Accounting GREEN Vinati ranks in D1 (first decile) on our forensic accounting framework.
Predictability AMBER Volatility in crude prices reflect on realizations of its key product ATBS.
Earning momentum GREEN The ramp up of new capacities will reflect positively on the earnings momentum of the company.

Vinati Organics
Financials
Profit and loss statement
Net revenues FY20 FY21 FY22E FY23E FY24E
Revenue growth (%) 10,289 9,543 14,809 20,420 24,459
- Op. expenses -8.8 -7.3 55.2 37.9 19.8
EBITDA (Excl. OI) 6,150 6,017 10,395 13,648 16,333
EBITDA margins (%) 4,138 3,525 4,414 6,771 8,126
- Interest expenses 40.2 36.9 29.8 33.2 33.2
- Depreciation 11 2 9 96 96
+ Other income 332 429 533 680 809
- Tax 449 258 518 715 978
Effective tax rate (%) 908 659 1,098 1,678 2,050
Reported PAT 21 20 25 25 25
Adjusted PAT 3,336 2,693 3,293 5,033 6,150
EPS (`/share) 3,336 2,693 3,293 5,033 6,150
Balance sheet
Share capital 103 103 106 106 106
Networth 12,795 15,434 17,976 21,856 26,598
Total Debt 44 126 1,600 1,600 1,600
Def. tax liab. (net) 704 779 779 779 779
Net Fixed assets 7,817 8,126 11,093 12,513 14,704
Investments 2,274 2,887 2,887 2,887 2,887
Cash and bank balance 537 69 38 641 3,025
Net debt -493 57 1,562 959 -1,425
WC (days) 84 127 105 104 86

Vinati Organics
Cash flow statement

PAT 3,336 2,693 3,293 5,033 6,150
+ Non cash items 190 504 533 680 809
Cash profit 3,526 3,198 3,826 5,713 6,959
- Incr/(Decr) in WC -924 2,343 1,080 1,857 167
Operating cash flow 4,450 855 2,746 3,855 6,792
- Capex 1,490 738 3,500 2,100 3,000
Free cash flow 2,960 116 -754 1,755 3,792
- Dividend 565 617 754 1,152 1,408
+ Debt raised -98 82 1,474 - -
- Investments 1,309 613 - - -
- Misc. items 489 -563 - - -
Net cash flow 499 -468 -31 603 2,384
+ Opening cash 38 537 69 38 641
Closing cash 537 69 38 641 3,025
Key ratios
P/E (x) 64 79 66 43 35
P/BV (x) 9.0 9.1 12.1 10.0 8.2
EV/EBITDA (x) 27.7 39.7 49.7 32.3 26.6
RoE (%) 28.6 19.1 19.7 25.3 25.4
RoCE (%) 34.0 22.5 24.0 30.5 31.2
Dividend (%) 275 300 357 546 667
Dividend yield (%) 0.2 0.2 0.2 0.3 0.3
Debtors days 72 106 90 90 70
Revenue growth (%) -9 -7 55 38 20
EBITDA growth (%) -2 -15 25 53 20
PAT growth (%) 18 -19 22 53 22

Navin Fluorine
SELL
INITIATING COVERAGE NFIL IN EQUITY January 17, 2022
Growth vs profitability conundrum Chemical
NFIL has evolved into a leading fluorochemicals company with focus on Recommendation
pharma and agrochemicals. Thrust on R&D and customer relationships Mcap (bn): `208/US$2.7
enabled pharma business scale-up (40% of revenues in FY21 vs 29% in 3M ADV (mn): `868/US$12
FY17). Of late, CRAMs is witnessing a bit of cyclicality owing to low base. CMP: `4,203
To maintain growth momentum, NFIL is entering contracts with margins TP (12 mths): `3,516
and RoCE below or similar to that of current projects. With accelerated Downside (%): 16%
capex run-rate and incremental revenues at similar margins,
profitability should remain at existing levels. Current valuations imply Flags
(reverse DCF) 25% revenue CAGR and 30% EBITDAM over FY21-35E; we
Accounting: RED
expect 27% EBITDAM. Though NFIL remains a preferred CRAMs/CSM
Predictability: GREEN
play, it is the most expensive stock (48x FY24E) in our coverage. TP of
Earnings Momentum: AMBER
`3,516 implies 40x FY24E P/E.
Competitive position: STRONG Changes to this position: NEUTRAL Catalysts
R&D DNA with better understanding of customer requirements
 Exits at mid-senior positions pose
In 2000/2011, NFIL entered high-value businesses (HVBs) like threat to smooth execution
spechem/CRAMs and has since then focused on complex products and
processes which require stronger R&D (2% of sales) and technological  EBITDAM expected to remain flat
capabilities. It has also imbibed customer orientation in every segment which at ~26% over FY22-24E.
has strengthened over the last three years. With customers like Bayer, BASF,  Limited upside to return ratios.
Corteva, Sanofi and Pfizer, NFIL has a strong customer basket. RoE will stagnate at ~19%
Capabilities in place; execution is the key focus area
Over the years, NFIL built a base of processes/people. Under leadership of Mr. Performance (%)
Radhesh Welling, NFIL gained traction in HVBs with improving product
pipeline. Project execution and people management will remain focus areas Navin Fluorine Sensex
200
given NFIL operates in a talent-intensive industry. NFIL will need to expedite
mid to senior-level hiring to ensure smooth execution. 160
Opted for growth; profitability to remain range-bound 120

Since the spechem segment has limited capacity headroom (~80% utilization) 80
Jun-21
Aug-21
May-21
Oct-21
Nov-21
Mar-21
Sep-21
Feb-21
Apr-21
Jan-21
Jul-21
Dec-21
Jan-22
and CRAMs has its own gestation period, NFIL is moving into product
adjacencies like HPP, which offers growth but lower margins and capital
turnover. This puts a ceiling to RoE/RoCE (19%/25% FY24E) expansion hereon.
Also, the agrochemicals segment is already very crowded and incumbents are
Source: Bloomberg, Ambit Capital Research
eyeing growth opportunities outside this space.
Valuations pricing optimism
NFIL trades at 48x our FY24E earnings estimates, which makes it the most
richly valued stock in our coverage universe. Consensus is pricing in margin
expansion (EBITDAM at 26%/29% in FY22/24E) over FY22-24E while we
maintain flat margin outlook (EBITDAM 25%/26% in FY22E/FY24E) on lack of
margin-accretive opportunities. Risks: Faster-than-expected ramp-up of HPP
against 14% expected contribution in FY23, new project wins which are
margin-accretive and faster delivery in CRAMs.
Research Analysts
Key financials
Ankit Gor
Revenues (` mn) 10,615 11,794 13,921 19,051 23,158 ankit.gor@ambit.co
EBITDA (` mn) 2,634 3,093 3,499 4,978 6,074 Tel: +91 22 6623 3132
APAT (` mn) 4,085 2,420 2,506 3,545 4,317
Kumar Saumya
EPS (`) 83 49 51 72 87
P/E (x) 50 85 82 58 48 Tel: +91 22 6623 3242
Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its res earch reports. As a result, investors should be aware that Ambit Capital may
Navin Fluorine

Exhibit 1: Profitability to remain range-bound as new projects are not margin-accretive
ENTRY into CRAMs: Gaining momentum: Hiring talents:

Growth in
Building up capabilities for Scale up and expansion Expanding
adjacencies: NFIL
CRAMs. of CRAMs capacities. geographical
25 plans to grow in 70%
presence and
product adjacencies
building up strong
like HPP. 60%
team.
20
50%
15 40%
10 30%
20%
5
10%
- 0%
HVB (Rs bn) Legacy business (Rs bn) RoCE (%) RHS EBITDAM (%) (RHS)

Navin Fluorine
Exhibit 2: R&D spends grew at 17% CAGR over the last Exhibit 3: GB turns will be subdued while EBITDAM will
decade to support scale-up of HVB businesses peak at ~26% as new businesses offer lower/same
margins; thus return ratios have limited room for
expansion
R&D (Rs mn) % of sales (RHS) 40% GB Turn (RHS) (x) RoE (%) 2.5
250 3%
2.0
3% 30%
200
2% 1.5
150 20%
2% 1.0
100
1% 10%
0.5
50
1.4
1.3
1.7
2.0
1.8
1.8
1.5
1.4
1.4
1%
0% -
- 0%
FY16
FY17
FY18
FY19
FY20
FY21
FY22E
FY23E
FY24E
FY19
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY20
FY21
Exhibit 4: NFIL focused mostly on export-led CRAMs and Exhibit 5: NFIL is among the leading investors in R&D
Spechem to move from legacy business. Exports have with initiatives accounting for nearly 2% of sales
grown at 16% CAGR over last five years supported by
CRAMs and Spechem
Export (Rs bn) % of sales (RHS) PI Navin Aarti SRF Atul Deepak Industry
7 60% 3.5%
6 3.0%
50%
2.5%
5
40% 2.0%
4
30% 1.5%
3 1.0%
20%
2 0.5%
1 10% 0.0%
Navin
SRF
Industry
Aarti
PI
Deepak
Atul
- 0%
Exhibit 6: NFIL re-rated on in line with margin expansion… Exhibit 7: ...but it remains the costliest stock in our
universe; we don’t see margin expansion hereon
1Y FWD P/E EBITDAM 35%
60 30% Vinati
30%
FY21-24 PAT CAGR
50 SRF
28% 25% Aarti
40
Deepak
20% Navin
30 25%
15% Atul
20
23%
10 10%
- 20% 5%
Nov-18
Nov-19
Mar-20
Nov-20
Nov-21
Mar-18
Mar-19
Mar-21
Jul-18
Jul-19
Jul-20
Jul-21
0%
- 20 40 60
FY24 P/E

Navin Fluorine
Navin Fluorine’s journey and evolution

Navin Fluorine, a Padmanabh Mafatlal Group company, was incorporated in
1967. The company primarily focuses on fluorine chemistry, producing
refrigeration gases, inorganic fluorides and specialty organofluorines and
also offers Contract Research and Manufacturing Services. Its manufacturing
facilities are located at Surat in Gujarat, Dewas in Madhya Pradesh and a
new site is under development at Dahej in Gujarat. Refrigerants (R22) and
inorganic fluorides formed the primary business till 2000 when NFIL decided
to venture into specialty fluorochemicals to alleviate the business risk arising
from phase-out of HCFC gases under the Montreal Protocol. The specialty
fluorochemical segment leveraged the fluorine chemistry expertise gained
under the legacy refrigerant and fluorides segment. The user industries
under specialty chemicals were pharmaceuticals and agrochemicals.
Venturing into CRAMs
NFIL has a 25% JV with Gujarat
In 2011, NFIL ventured into CRAMs with its R&D centre at Surat and cGMP plant at Fluorochemicals Ltd (GFL) and
Dewas and acquisition of Manchester Organics Limited, UK, in 2012. NFIL focused on GMDC for beneficiation of
the pharmaceutical segment for its CRAMs division as it offered better growth and fluorspar ores.
profitability. Then nearly 40% of new discoveries in the pharma segment had the
fluorine molecule. Captive capacities of AHF (Anhydrous Hydrofluoric Acid) enabled
backward integration of the value chain and helped maintain the quality required for
pharmaceutical products.
Exhibit 8: Evolution of Navin Fluorine
ENTRY into CRAMs: Gaining momentum: Hiring talents: Change of stance:

25 Building up capabilities for Scale up and expansion Expanding NFIL plans to grow 70%
CRAMs. of CRAMs capabilities. geographical in product
presence and adjacencies like HPP 60%
20 and agrochemicals
building up strong
50%
team.
15 40%
10 30%
20%
5
10%
- 0%
HVB (Rs bn) Legacy business (Rs bn) RoCE (%) RHS EBITDAM (%) (RHS)

Phase 1 (FY11-14) (building up CRAMs segment): Revenue grew at just 4% CAGR
impacted by pricing pressure in refrigerants and loss of income from sale of carbon
credits. EU Emission Trading Scheme restricted marketability of carbon credit
instruments. RoCE averaged 28% during this period supported by one-time receipt of
carbon credit dues in FY12. This period is significant in NFIL’s journey as the
foundation for CRAMs business was laid by the research facility at Surat and
manufacturing facility at Dewas.
Phase-2 (FY15-18) (scaling up capacities): Revenue grew at 16% CAGR during
this period with ramp-up of cGMP1 and cGMP2. The revenue contribution from
CRAMs improved from 5% in FY15 to 22% in FY18. Margins expanded with
improvement in product mix and RoCE averaged 19% during this period. NFIL
acquired 49% stake in the UK-based Manchester Organics Limited to bolster its
CRAMs capabilities.
Phase-3 (FY18-21) (hiring new talent): Revenue grew at 9% CAGR owing to
muted performance in CRAMs division due to issues at customer end. Favorable raw
material price environment supported margins and RoCE averaged 23% during this
period. NFIL commercialized third CRAMs facility at Dewas in FY20 and set up a
marketing unit in the USA to accelerate business development activities. Radhesh
Welling joined as the Managing Director in FY19.

Navin Fluorine
Phase-4 (FY22 onwards) (entering into adjacencies): We expect NFIL to deliver

revenue/PAT CAGR of 25%/21% over FY21-24 supported by expanding capacities
(new multipurpose plant, investment in high performance products and agrochemical
supply contracts) and strong order visibility through multi-year contracts. We are
cautious on margin outlook as we believe new businesses are not margin-accretive.
State-of-the-art infrastructure
NFIL segregates its business into four segments: Specialty Chemicals (Spechem) (38%
of revenue), CRAMs (24%), Refrigerant gas (18%) and Inorganic Fluorides (IF) (16%).
Refrigerant gas and IF are classified under legacy businesses while Spechem and
CRAMs are under High Value Businesses (HVB). Over the years, it has
strengthened HVB segments to diversify away from its legacy business of refrigerants
and IF.
Exhibit 9: Manufacturing assets of NFIL
Location Plant details Products
Inorganic Fluoride
Surat (GJ) Chemical complex spread over 135 acres Refrigerants
Specialty Chemicals
cGMP1 (FY13)
Dewas (MP) cGMP2 (FY16) CRAMs
cGMP3 (FY20)
Dahej Operational in FY17 Specialty Chemicals, HPP
MOL facility. NFIL leveraged MOL's capabilities to position CRAMs, Catalogue of over 50,000 compounds and over 3,000 IP
UK
itself in CRAMs space. protected compounds
Exhibit 10: Business snapshot

High Performance
Inorganic Fluorides Refrigerants Specialty Chemicals CRAMs
Segment Product
(Since 1967) (Since 1967) (Since 2000) (Since 2011)
(From 2023)
Sales mix (%) 16% 18% 38% 24% 13% in FY24
Export (%) 12% 46% 40% 100%
OPM (%) 15-20% 20-25% 20-30% 25-35% 25-30%
 Fluorspar (25% of
 AHF (Anhydrous
Hydrofluoric Acid)
Raw materials
RM)
(49% of RM)
 Boric Acid  Fluorine based specialty
-
 Sulphur
 Chloromethane
 Spor 11 intermediates
(15% of RM)
 AHF  Life sciences
 Ammonium intermediates Single fluorine based
Products  R22  Life sciences products
 Fluoride  Agrochem product contract
 Sodium Fluoride intermediates
 Steel  Industrial  Agrochemicals Single customer
User Industry  Pharmaceuticals
 Glass  Pharma  Pharmaceuticals direct sales
 Piramal  Lupin
Clients
 Jindal  Godrej  Dr Reddy’s  USA, EU and Japan
-
 Saint Gobain  Exports to Middle  Piramal based pharma majors
East and Africa  Corteva
Plant Surat Surat Surat, Dahej Dewas, UK Dahej
 This segment is
expected to
Growth
 FY18-21: 10%  FY18-21: -5%  FY18-21: 26%  FY18-21: 11% grow at 15%
 FY21-24E: 14%  FY21-24E: 6%  FY21-24E: 25%  FY21-24E: 23% post
commercializatio
n in FY23E.
 Non-emissive usage
 Improving industrial  Management is  New supply
 The product is
demand outlook contracts
 Ramp up of new cGMP3 under supply
working on next
Growth Drivers  Debottlenecking of contract and will
 New products generation  Improving demand
ramp up over
capacities
 New geographies refrigerants in user industries
FY23-25E.
 Favourable pricing
 Hindustan  GFL  SRF  SRF
Peers
Fluorocarbon  SRF  Wuxi  Wuxi
 Solvay  Daikin  Lonza  Lonza
 Arkema  Chemour  Rhodia  Rhodia

Navin Fluorine
Capabilities in place, execution is key

NFIL has gradually diversified into high-margin business propositions like
CRAMs for pharmaceuticals which leveraged its fluorination chemistry
expertise of legacy business (fluorides and refrigerants). It is now gradually
building up its team in key geographical markets of North America and
Europe to take on new projects in specialty chemicals and CRAMs. These
opportunities will enable future growth. However, we see spechem revenue
contribution higher compared to CRAMs over FY21-24.
Exhibit 11: Limited growth opportunity for legacy business
120% Legacy (%) HVB (%)
100%
27%
80%
55%
66%
60% 77%
40%
20%
0%
FY11 FY16 FY21 FY24E
Developed CRAMs capabilities

NFIL forayed into the CRAMs business which is scalable with better profitability
(>25% OPM) to leverage its 40+ years of expertise in fluorination chemistry and
reduce dependency on refrigerants (phase-out risk) and inorganic fluorides
(commoditized). Despite being a high-gestation business, NFIL could scale up CRAMs
sales to ` 2.8bn in FY21 (24% of overall sales) led by its expertise in fluorine and a
strong pharmaceuticals customer base.
Exhibit 12: Gradual shift towards high growth products
NFIL efficiently utilised ~Rs 4bn received through the sale of carbon
credits between FY11-13 to scale up the CRAMs business by integrating
MOL (100% subsidiary) and investing in Dewas, Madhya Pradesh.
Inorganic fluorides Refrigerant Gases Specialty fluorochemicals CRAMs

(Started in 1967) (Started 1967) (Started 2000) (since 2011)
Sales:16% Sales:18% Sales:38% Sales:24%

OPM: 15-20% OPM: 20-25% OPM: 20-30% OPM: 25-35%
CRAMs infrastructure at Dewas

NFIL has three cGMP plants at Dewas with cumulative investments of `2.1bn. Total
revenue potential of these facilities is about `4.5bn. It has already secured required
approvals for six cGMP plants. NFIL has world class infrastructure at Dewas, Madhya
Pradesh. The cGMP3 plant is expected to go under bottlenecking which will support
growth in FY22 and FY23. We expect NFIL to announce cGMP4 in the end of FY23.

Navin Fluorine
Exhibit 13: CRAMs scale-up with capacity augmentation
6,000 CRAMs Revenue (Rs mn)
5,000
3rd cGMP plant in FY20
with capital outlay of `
4,000 2nd cGMP plant in 1.15bn
1st cGMP plant in FY13 FY16 with capital outlay
with capital outlay of ` of ` 650mn
3,000 250mn
2,000
1,000
-
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Faster growth in spechem, incremental revenues at lower profitability

NFIL started specialty fluorochemical division in 2000. It caters to pharmaceuticals,
agrichemicals and industrials. NFIL manufactures off-patent generic molecules to
major pharmaceuticals and agrichemicals companies across the globe. Growth was
muted during FY16-18 (-3% CAGR) due to the global slowdown in its pharmaceutical
and agrochemical industries. However, FY19 marked a recovery with 33% YoY
growth to `3bn led by product additions, geographical expansion, disruption in
supply from China and increasing use of fluorine in pharmaceutical and
agrochemical intermediates. We expect revenue CAGR of 26% between FY21-FY24,
but since newly won orders are mainly in the agrochemical segment where
technology is also provided by customers, NFIL would be a toll manufacturer and thus
we expect margins to be lower than that of the existing business.
Exhibit 14: Revenue composition of specialty chemicals Exhibit 15: Spechem growth supported by new contracts
Legacy Spechem CRAMs HPP Other

30
25
20%
CAGR 26% CAGR 25%
20
40% Pharma
Agrochemical 15
Industrial
10 38%
40%
5 25% 38%
-
FY18 FY21 FY24E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research, (` bn)

Navin Fluorine
Building strong R&D culture

NFIL has invested over `2bn over the last decade to strengthen its capabilities from
CRAMs. It has three R&D centres. The Surat centre is focused on fluorinated
intermediates, basic key raw materials and advanced intermediates contributing to
organic, inorganic and specialty chemicals. The Dewas and MOL centres are focused
on advanced fluoro-intermediates and their applications in the synthesis of
pharmaceuticals at various stages utilizing a wide spectrum of chemistry. The R&D
initiatives are also focused on cost optimization and sustainable process and
products. The R&D initiatives have helped NFIL to improve its product mix and hence
its margins to 26% (vs 14% in FY13). The company has also expanded its R&D team
to strengthen its technology transfer and design capability to exploit emerging
opportunities like electronic components using fluorochemicals in electric vehicles.
Exhibit 16: NFIL is one of the leading chemical companies in terms of R&D
investments as it focusses on the pharmaceutical segment
PI Navin Aarti SRF Atul Deepak Industry

3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
PI Navin Aarti SRF Atul Deepak Industry
Now focus should be on execution

Over the years, it has built a base of process, products and people. Under the
leadership of Mr. Radhesh Welling business has started gaining traction in HVBs with
an improving product pipeline. Project execution along with people management will
remain a key focus area as it is in a talent-intensive industry. In the wake of recent
exits at senior and mid-senior levels, we believe NFIL will need to expedite mid to
senior-level hiring to ensure smooth execution.

Navin Fluorine
Increasing capex intensity, incremental

revenue to have same/lower profitability
NFIL’s board has always been prudent on capital allocation. Over FY16-21,
NFIL invested `5bn to expand capabilities and capacities across divisions. It
always takes calibrated steps while announcing new capex and also
considers many options if the original plan does not work. NFIL has
established itself with proven capabilities in the fluorine value chain and
after gaining acceptance of customers it has now embarked on larger capex.
Upcoming projects in product adjacencies
NFIL will invest `7.6bn over the next two years for upcoming projects for new
products and applications:
 High performance product (HPP): Investment of `4.4bn on a dedicated facility
at Dahej for a seven-year supply contract. The project has a revenue potential of
`28bn with 20-22% RoCE. The project is expected to commission in 1QFY23.
 Multi-purpose plant (MPP): Investment of `1.95bn for an MPP which will
manufacture new products. The project has expected annual revenue of nearly
`2.7bn and 20-22% RoCE. The capacity will commission in 1HFY23.
 New capacity for agrochemical contract: Investment of `1.25bn for a new
capacity of agrochemical fluoro-intermediate with peak annual revenue of
`1.6bn and 20-22% RoCE. This is a supply contract for five years and the capacity
is expected to commission in 4QFY23.
Exhibit 17: New projects will drive growth for NFIL
Project CAPEX Commencement Profitability Product
`4.4bn
OPM 25% New applications in fluorine chemistry.
HPP (includes ` 0.7bn on captive 1QFY23
RoCE 20-22% NFIL will manufacture intermediate and final product.
power plant)
OPM 25%
MPP ` 1.95bn 1HFY23 New specialty chemical product.
RoCE 20-22%
New supply OPM 25%

` 1.25bn 4QFY23 Key agrochemical fluoro intermediate.
contract RoCE 20-22%
Growth vs profitability
It looks like NFIL has opted for revenue growth over profitability as incremental
opportunities in specialty chemicals are skewed towards agrochemicals which is a
generically lower-margin business compared to pharmaceuticals. We believe the
revenue share of pharmaceuticals (40% of the revenue in FY21) will decline hereon in
favour of agrochemicals in the overall revenue mix. We see stagnation in margins
and return ratios hereon as GB turns continue to come down.
Exhibit 18: Declining GB turn will weigh on return ratios
GB Turn (RHS) (x) EBITDAM (%) RoE (%) 2.5
40%
2.0
30%
1.5
20%
1.0
10% 0.5
0% -

Navin Fluorine
Legacy business: Limited opportunities

NFIL’s legacy business contributes nearly 34% to revenues and comprises
refrigerants and inorganic fluorides. Refrigerants contribute 50% to the
legacy business and primarily comprise R22 which is in phase-out mode
under the Montreal Protocol. India will phase out R22 production by 2030.
The capacities can be used only for non-emissive purposes as raw materials
for other products like fluoro-polymers etc. Inorganic fluorides contribute the
remaining 50% to the legacy business and find applications in the metal and
glass industries. Fluorides business will continue to track economic growth.
Exhibit 19: Gradual phase-out of R22 capacities Exhibit 20: Other viable options in the refrigerant chain
Application Product Remarks
HCFC Phase out
Considering Dec-23 timeline to set up
100% Refrigerants R32/R134
HFC capacities, it can put up R32/R134 plant
SRF recently announced ` 4.24bn capex
80% PTFE
fluoropolymer to set up PTFE plant. Currently, from India
Only GFL makes PTFE.
60% Source: Company, Ambit Capital research
40%
20%
0%
2013 2015 2020 2025 2030 2040
Source: Company, GoI, Ambit Capital research
Improved product mix: NFIL’s product mix will improve in favour of high-value
businesses with new projects commissioning from FY23. The ramp-up of these
capacities coupled with lower growth in legacy business will further improve the
margin and return profile of the company in the long term.
Exhibit 21: We expect the legacy business to grow at 10% Exhibit 22: Share of legacy business to trend down in
over the next three years favor of HVB
Onorganic Fluorides (Rs bn) Refrigerants (Rs bn) 60% Legacy business (%)
6
CAGR 10% 50%
5
40%
4
30%
3
20%
2
1 10%
- 0%
FY22E
FY23E
FY24E
FY23E
FY18
FY22E
FY24E
FY19
FY16
FY17
FY19
FY20
FY21
FY16
FY17
FY18
FY20
FY21

Navin Fluorine
Valuations
NFIL has displayed the operational agility to transform its business from the
slow growth legacy verticals like inorganic fluorides and refrigerants to
CRAMs and specialty chemicals and now it is moving to product adjacencies
like HPP, however, it has not been able to diversify its refrigerant segment
into new age products and thus its product R22 is witnessing phase out risk.
The consensus is building in 28% revenue and PAT growth over FY21-24
while build in revenue/PAT growth of 25%/21% over FY21-24 as we see
slower ramp up of new investments and focus diverting to lower margin and
overcrowded agrochemical space. The reverse DCF suggests that current
valuations are factoring in 30% EBITDAM and 25% revenue growth over
FY21-35E at 13% WACC (13% CoE) and 5% terminal growth while we factor in
25% revenue growth at 27% EBITDAM in our DCF template to arrive at a
target price of ` 3,516, implies 40x FY24 P/E in line with specialty peer like
Vinati.
The stock re-rated sharply in FY21 factoring in sales recovery on expanding margins
which was aided by reducing contribution of legacy business in the overall product
mix.
Exhibit 23: NFIL re-rating was driven by sales recovery on expanding margins
60 1Y FWD P/E EBITDAM 30%
50
28%
40
30 25%
20
23%
10
- 20%
May-18
Mar-20
Nov-18
May-19
Nov-19
May-20
Nov-20
May-21
Nov-21
Mar-18
Mar-19
Mar-21
Jan-19
Jan-20
Jan-21
Sep-21
Jul-18
Jul-19
Jul-20
Jul-21
Sep-18
Sep-19
Sep-20
We believe the incremental business flow may continue to drive sales growth but the
shift of focus towards agrochemicals, contracting contribution of CRAMs and higher
fixed costs during ramp-up of new capacities will weigh on profitability. We also
expect slower ramp-up of capacities will pressure GB turns in the medium term (GB
turns at 1.8x/1.4x in FY21/24E).
Exhibit 24: Our DCF inputs consider lower than consensus Exhibit 25: DCF output values NFIL at 40x
margins
FY16-21 FY21-25E FY25-35E ` mn 1Y-FWD
EBITDAM Average 23% 26% 28% Terminal Value 120,404

Net debt -2,035
Capex/GB 12% 24% 12%
WACC 13%
Share Price 3,516
Terminal growth 5% Implied P/E FY24 40
Source: Company, Bloomberg, Ambit Capital research Source: Ambit Capital research
We differ from consensus as we factor in lower margins due to agrochemicals and

slower ramp-up of new capacities as the HPP fluorochemicals product is a new
product for NFIL.

Navin Fluorine
Exhibit 26: Ambit’s estimates factor in margin constraints of new businesses

` mn Remarks
Net Sales 13,921 19,051 23,158 13,843 20,024 24,771 1% -5% -7% Slower ramp of new capacities
Agrochemical is not margin-
EBITDA 3,499 4,978 6,074 3,575 5,519 7,012 -2% -10% -13% accretive. The ramp-up of new
capacity will weigh on margins.
PAT 2,506 3,545 4,317 2,688 4,053 5,061 -7% -13% -15%
OPM 25.1% 26.1% 26.2% 25.8% 27.6% 28.3% -70 bps -143 bps -208 bps
NPM 18.0% 18.6% 18.6% 19.4% 20.2% 20.4% -142 bps -164 bps -179 bps
Exhibit 27: Segmental revenue assumptions

` bn FY21 FY22E FY23E FY24E CAGR (%) Remarks
Growth will track industrial demand growth. Pricing benefit will contribute
Inorganic Fluorides 1.9 2.4 2.7 2.9 14%
to additional growth.
Refrigerants 2.1 2.3 2.4 2.5 6% Gradual phase out of R22 capacities and demand.
Spechem 4.5 5.2 6.5 8.8 25% New contracts and product adjacencies will drive growth.
De-bottleneck of capacities and probable addition of new plant by end of
CRAMs 2.8 3.3 4.2 5.2 23%
FY23.
HPP Chemicals - - 2.6 3.0 - This product is under supply contract and will ramp up fully by FY25E.
Other 0.5 0.6 0.6 0.7 13%
Total revenue 11.8 13.9 19.0 23.1 25%

Navin Fluorine

Exhibit 28: Key insights from the annual report
Year Key points
 Acquired remaining 49% stake of Manchester Organics for GBP 6.3mn
FY16
 Entered into an agreement with Honeywell on H-1234 yf manufacturing project. HFO-1234yf is a next-generation hydrofluoro-olefin
(HFO) refrigerant.
 The new capacity at Dewas was commissioned.
 Specialty chemical performance was impacted due to multiple headwinds faced by global agrochemical industry.
 Mafatlal group restructured under the succession plan of promoter family. Mr. V. P. Mafatlal will lead NFIL.
FY17
 NFIL commissioned the pilot plant for the new generation refrigerant gas HFO-1234 yf.
 Footprints in China to secure cost and quality of key raw material of CRAMs and specialty chemicals.
 NFIL announced capacity expansion due to increased customer enquiries.
 Specialty segment remained muted due to slowdown in global agrochemical industry.
FY18
 Footprints in the USA to improve CRAMs penetration in key market.
 Talent acquisition accelerated to drive business growth.
 Radhesh Welling appointed as the Managing Director of the company.
FY19  Specialty chemical segment revived supported by improved demand sentiments in domestic and export markets.
 Third expansion at Dewas was announced.
 NFIL signed US$ 410mn contract to supply a new High Performance Product (HPP) to a global customer.
 R22 facing demand issues due to pending phase out schedule.
FY20
 Third cGMP plant was commissioned at Dewas. This enables NFIL to handle larger projects and complex chemistries.
 New subsidiary Navin Fluorine Advanced Sciences Limited was formed to undertake new product investments.
 Two new customers acquired for inorganic fluoride.
FY21  NFIL divested its stake in Convergence Chemical Pvt Ltd. It was a JV with Piramal Enterprise where NFIL held 49% stake.
 Focus on talent acquisition for business development and strengthening R&D capabilities.

Navin Fluorine
Risks & catalysts

Risks
Faster ramp-up HPP capacity: The HPP product is a `4bn annual supply contract
that is expected commence from 1QFY23 where NFIL will supply the intermediate
and final products to the customer. Since this is a new product area for NFIL we are
factoring in slower ramp-up with contribution of 14% in FY23E and growth of 15% to
full utilization by FY25E. Faster ramp-up of this product will improve revenue growth
of the company.
New orders providing higher margins: We are watchful of the margin profile of
new order flows. If the new orders have a higher margin profile then it will pose an
upside risk to our margin estimates.
Strong order flow in CRAMS: The CRAMs facility is operating at near full utilization
and NFIL will undertake debottlenecking activities in FY22 while a new plant is
expected by the end of FY23E. The strong order flows will lead to early expansion of
capacities which will pose upside risks to our revenue and margin estimates.
Catalysts
 Increasing attrition at mid-senior level: We are seeing exits of mid-senior
staff at NFIL (e.g. COO Anurag Roy) which may pose execution challenges amidst
multiple on going capex.
 Pressure on margin and return ratios: The consensus estimates are building
27.6%/28.3% EBITDAM for FY23/24 while we build in 26.1%/26.2% EBITDAM
over this period due to higher fixed costs during ramp up phase and move
towards agrochemicals. We see slower ramp up weighing on GB turn (1.4x in
FY24 vs 1.8x in FY21) and thus we expect RoE will hit a ceiling of 19% by FY24.
Exhibit 29: Explanation to our flags on the first page
Accounting RED NFIL ranks in D9 (ninth decile) on our forensic accounting framework.
Predictability GREEN Major share of specialty and non-commoditized products. Management has been vocal on growth guidance.
The earnings momentum may remain subdued in the short term given the volatile operating environment but
upcoming projects will drive growth in the medium term.

Navin Fluorine
Financial
Profit and Loss
Net revenues 10,615 11,794 13,921 19,051 23,158
Revenue growth (%) 6.6 11.1 18.0 36.8 21.6
- Op. expenses 7,981 8,701 10,423 14,073 17,084
EBITDA (Excl. OI) 2,634 3,093 3,499 4,978 6,074
EBITDA margins (%) 24.8 26.2 25.1 26.1 26.2
- Interest expenses 20 18 17 17 20
- Depreciation 370 442 531 768 947
+ Other income 333 945 390 533 648
- Tax -1,436 1,108 835 1,182 1,439
Effective tax rate (%) -56 31 25 25 25
Reported PAT 4,013 2,470 2,506 3,545 4,317
+/- Associate income -72 51 - - -
Adjusted PAT 4,085 2,420 2,506 3,545 4,317
EPS (`/share) 83 49 51 72 87
Balance Sheet
Share capital 99 99 99 99 99
Networth 14,121 16,339 18,261 20,980 24,291
Total Debt 362 316 294 345 386
Def. tax liab. (net) -151 207 207 207 207
Net Fixed assets 5,677 6,350 10,534 12,816 14,869
Investments 1,954 991 991 991 991
Cash and bank balance 2,838 5,439 2,667 1,535 1,532
Net debt -2,476 -5,123 -2,372 -1,190 -1,145
WC (days) 92 110 105 105 105

Navin Fluorine
Cash Flow statement

PAT 4,085 2,420 2,506 3,545 4,317
+ Non cash items -130 800 531 768 947
Cash profit 3,955 3,220 3,037 4,313 5,264
- Incr/(Decr) in WC 2,046 172 488 1,620 1,302
- Capex 1,350 1,115 4,715 3,050 3,000
Free cash flow 560 1,934 -2,167 -357 962
- Dividend 544 545 584 826 1,006
+ Debt raised 176 -46 -22 51 41
- Investments -2,320 -964 - - -
- Misc. items 44 -295 -0 0 -
Net cash flow 2,468 2,601 -2,772 -1,132 -3
+ Opening cash 370 2,838 5,439 2,667 1,535
Closing cash 2,838 5,439 2,667 1,535 1,532
Key ratios
P/E (x) 50 85 82 58 48
P/BV (x) 15 13 11 10 8
EV/EBITDA (x) 77 66 58 41 34
RoE (%) 33 16 14 18 19
RoCE (%) 20 23 19 24 25
Fixed Asset turnover (x) 2 2 1 1 1
Dividend (%) 549 550 590 834 1,016
Dividend yield (%) 1 0 0 0 0
Revenue growth (%) 7 11 18 37 22
EBITDA growth (%) 21 17 13 42 22
PAT growth (%) 172 -38 1 41 22

Navin Fluorine
Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research Strategy / Accounting / Home Building / Consumer Durables (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Alok Shah, CFA Consumer Staples (022) 66233259 alok.shah@ambit.co
Amandeep Singh Grover Mid/Small-Caps / Hotels / Real Estate / Aviation (022) 66233082 amandeep.grover@ambit.co
Ankit Gor Mid-Caps / Chemicals / Textiles / Packaging (022) 66233132 ankit.gor@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 66233295 ashwin.mehta@ambit.co
Bharat Arora, CFA Strategy (022) 66233197 bharat.arora@ambit.co
Dhruv Jain Mid-Caps / Home Building / Consumer Durables (022) 66233177 dhruv.jain@ambit.co
Eashaan Nair Economy / Strategy (022) 66233229 eashaan.nair@ambit.co
Gaurav Jhunjhunuwala Media / Telecom / Oil & Gas (022) 66233227 gaurav.jhunjhunuwala@ambit.co
Jaiveer Shekhawat Mid/Small-Caps (022) 66233251 jaiveer.shekhawat@ambit.co
Jashandeep Chadha, CFA Metals & Mining / Cement (022) 66233246 jashandeep.chadha@ambit.co
Karan Khanna, CFA Mid/Small-Caps / Hotels / Real Estate / Aviation (022) 66233251 karan.khanna@ambit.co
Karan Kokane, CFA Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Kumar Saumya Chemicals (022) 66233242 kumar.saumya@ambit.co
Mitesh Gohil Banking / Financial Services (022) 66233197 mitesh.gohil@ambit.co
Namant Satiya Consumer Staples (022) 66233259 namant.satiya@ambit.co
Nancy Gahlot Strategy / Forensic Accounting (022) 66233149 nancy.gahlot@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Parth Majithia Strategy / Forensic Accounting (022) 66233149 parth.majithia@ambit.co
Pratik Matkar Banking / Financial Services (022) 66233252 pratik.matkar@ambit.co
Prashant Nair, CFA Healthcare (022) 66233171 prashant.nair@ambit.co
Satyadeep Jain, CFA Metals & Mining / Cement (022) 66233246 satyadeep.jain@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Vamshi Krishna Utterker Technology (022) 66233047 vamshikrishna.utterker@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
Shiva Kartik India (022) 66233299 shiva.kartik@ambit.co
Soumya Agarwal India (022) 66233062 soumya.agarwal@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Singapore
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co

Navin Fluorine
SRF Limited (SRF IN, BUY) Vinati Organics Ltd (VO IN, BUY)
3,000 2,500
2,500 2,000
2,000
1,500
1,500
1,000
1,000
500 500
0 0
Oct-19
Oct-20
Oct-21
Oct-19
Oct-20
Oct-21
Jan-19
Apr-19
Jul-19
Jan-20
Apr-20
Jul-20
Jan-21
Apr-21
Jul-21
Jan-22
Jan-19
Apr-19
Jul-19
Jan-20
Apr-20
Jul-20
Jan-21
Apr-21
Jul-21
Jan-22
SRF Ltd Vinati Organics Ltd
Aarti Industries Ltd (ARTO IN, SELL) Navin Fluorine International Ltd (NFIL IN, SELL)
1,400 4,500
1,200 4,000
3,500
1,000 3,000
800 2,500
2,000
600 1,500
400 1,000
500
200
0
0
Oct-19
Oct-20
Oct-21
Apr-19
Apr-20
Apr-21
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Oct-19
Oct-20
Oct-21
Apr-19
Apr-20
Apr-21
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Navin Fluorine International Ltd

Aarti Industries Ltd
Atul Limited (ATLP IN, BUY) Deepak Nitrite Ltd (DN IN, BUY)
12,000 3,500
10,000 3,000
8,000 2,500
2,000
6,000
1,500
4,000
1,000
2,000 500
0 0
Oct-19
Oct-20
Oct-21
Oct-19
Oct-20
Oct-21
Apr-19
Apr-20
Apr-21
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Apr-19
Apr-20
Apr-21
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Atul Ltd Deepak Nitrite Ltd

Navin Fluorine
Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 month
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts ca n take time to react to development.
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital Private Ltd. Ambit Capital Private Ltd. research is disseminated and available
primarily electronically, and, in some cases, in printed form. The following Disclosures are being made in complian ce with the SEBI (Research Analysts) Regulations, 2014 (herein after referred to as the
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Navin Fluorine
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Chemicals

THEMATIC January 17, 2022

Backing the right business model Key Recommendations

In the midst of a capex cycle ………………………………………………………..6

Basic chemicals to remain integral part of the industry ……………………….15

Will specialty chemicals companies remain in favour? …………………………20

Betting on the right business model ………………………………………………31

Valuations – Favorable operating environment driven valuations ……………34

SRF Limited (BUY): Not resting on laurels ……………………………………….37

Aarti Industries (SELL): Walking a tight rope …………………………………….61

Deepak Nitrite: Ready to join the big league …………………………………..79

Atul Limited (BUY): Profitable, sustainable, scalable ………………………….101

Vinati Organics (BUY): Niche chemistry at work ………………………………117

Navin Fluorine (SELL): Growth vs profitability conundrum……………………135

January 17, 2022 Ambit Capital Pvt. Ltd. Page 2

Exhibit 1: Valuation snapshot of our coverage universe

Exhibit 2: Financial estimates of our coverage universe

Exhibit 3: DCF assumption of our coverage companies

January 17, 2022 Ambit Capital Pvt. Ltd. Page 3

The Narrative in Charts

46% 120 3,000

44% 100 2,500

January 17, 2022 Ambit Capital Pvt. Ltd. Page 4

Speciality Basic Share of industry

CSM growth 2019-24E Revenue (Rs bn) GBT (RHS)

45 1Y fwd P/E Median 35%

January 17, 2022 Ambit Capital Pvt. Ltd. Page 5

In the midst of a capex cycle

Expansion at an accelerated pace in the last five years

Top12-Revenue share (%) Top12-CAPEX share (%)

Source: Company, Ambit Capital research

January 17, 2022 Ambit Capital Pvt. Ltd. Page 7

Capex for strengthening capabilities

Gross block turnover in check; margins moving up led by benign crude

Navin Fluorine 1.4 1.8 14% 16%

PI Industries 2.6 1.9 30% 19%

Crude oil prices and margins are inversely correlated

January 17, 2022 Ambit Capital Pvt. Ltd. Page 8

Exhibit 25: Margin movements of major chemical companies

SRF 49% 52% 21% 25%

Aarti Inds. 44% 53% 19% 22%

January 17, 2022 Ambit Capital Pvt. Ltd. Page 9

Mini capex cycle for the industry, more to follow

RoCE - Industry RoCE - Top12 OCF/EBITDA - Industry OCF/EBITDA - Top12

OCF (Rs bn) Capex (Rs bn)

January 17, 2022 Ambit Capital Pvt. Ltd. Page 10

Industry LT debt (Rsbn) D/E (RHS) OCF/EBITDA

1,000 120% 110%

Remaining OCF utilized for acquisition and dividend

Slew of IPOs/QIPs in the last three years provided liquidity

January 17, 2022 Ambit Capital Pvt. Ltd. Page 11

Near-term hiccups; long-term growth driver intact

January 17, 2022 Ambit Capital Pvt. Ltd. Page 12

Source: Bloomberg, Ambit Capital research, *prices in USD/tn

Top 12 GM (%) Top 12 OPM (%)

Source: Company, Ambit Capital research

January 17, 2022 Ambit Capital Pvt. Ltd. Page 13

India is on a strong footing in the long run

January 17, 2022 Ambit Capital Pvt. Ltd. Page 14

Basic chemicals to remain integral part of

81% of industry capital employed by basic chemicals companies

January 17, 2022 Ambit Capital Pvt. Ltd. Page 15

Exhibit 43: Investments by major basic chemicals companies in key products