Initiating Coverage March 2016 Sector: Chemicalassetmultiplier.co.in/docs/AM_Monthly.pdf · Initiating Coverage March 2016 Sector: Chemical ... Aroma Performance Chemicals . ... New

Initiating Coverage

March 2016

Sector: Chemical

Camlin Fine Sciences Ltd.

March 2016

| Camlin Fine Sciences Ltd. 1

Company Background

Camlin Fine Sciences Ltd. (CFSL) is one of India's leading manufacturers and exporters of Bulk Drugs, Fine Chemicals and Food Grade

products.

CFSL presence can be divided in three segments :

CFSL is the market leader with 45% share in the global anti-oxidant industry.

CFSL is one of the major global producers of Vanillin based on Catechol/ Guaiacol route.

CFSL

Anti-

oxidants

Aroma Performance

Chemicals

March 2016


Camlin Fine Sciences Ltd. (CFSL)

CMP INR 77 Target Price (TP) INR 116 Recommendation Buy

CFSL

NSE Code CAMLINFINE

BSE Code 532834

Equity Shares (mn) 95.9mn

52-Week Range (INR) 76-129

Market Cap (INR bn) INR 7.44bn

Avg. Value traded

(INR mn)/Vol‘000

(INR 31.5mn) /

315 shares

Free Float (%) 60%

Rs. in mn 2015 2016E 2017E

Revenue 5,554 5,013 6,463

EBIDTA 842 949 1,311

PBT 528 534 908

PAT 550 347 590

EPS 5.7 3.6 6.2

March 2016


Camlin Fine Sciences Ltd (CFSL) is one of India's leading manufacturers and exporters of Bulk Drugs, Fine Chemicals and

Food Grade products.

Today, CFSL is the world's second largest manufacturer and marketer of food grade antioxidants TBHQ and BHA. Its

facilities are HACCP and ISO 9001: 2000 certified.

In 2006, Fine Chemical Division of Camlin Limited was de-merged into a separate company - Camlin Fine Sciences

Limited. Total promoter share shareholding was 40.1% at 30th September 2015 and was 52.5% at 30th September 2014.

(None of the shares have been pledged).

CFSL has manufacturing facilities in Tarapur (owned), Mahad and Khopoli (outsourced), Ravenna (Italy) and Indaiatuba

(Brazil).

Key Managerial Personnel

Chairman Mr. Dilip D. Dandekar

Managing Director Mr. Ashish D. Dandekar

Executive Director & CFO Mr. Dattatraya R. Puranik

March 2016


Investment Summary

Global leader in anti-oxidants

EBITDA CAGR of 31% over FY 12-15

New Capacity additions drive revenue growth from FY16; New plant at Dahej to start in 2H FY18.

YoY EPS growth of 70% in FY17; expected to rise further in FY18 because of the low base effect in FY16.

Our target price over the next 12 months is Rs.116/-(20x next 4 quarters EPS of Rs.6)

March 2016


Global Leader in Anti-Oxidants, Adding Capacity in Performance Chemicals

Cam

lin F

ine

Sci

en

ce L

td.

Antioxidants

TERT-BUTYL HYDROQUINONE

(TBHQ) As an antioxidant

BUTYLATED HYDROXYANISOLE

(BHA) As an antioxidant

Aroma

Vanillin As a food flavouring agent

Ethyl Vanillin As a food flavouring Agent

Performance Chemicals

Guaiacol As an intermediate for manufacturing

Vanillin

Veratrole As an Intermediate for the

pharmaceutical and agrochemical industry

Tertiary Butyl Catechol (TBC)

An important polymerization inhibitor for the petrochemical industry.

Hydroquinone Mono Methyl Ether (MEHQ)

a polymerisation inhibitor in the petrochemical industry

March 2016


Segment Application of Vanillin & Ethyl Vanillin

Food Segment

Bakery products, Confectionery, Nutritional Supplements Powder, Drinking Chocolate, Puddings, Custard Powder,

Flavoured Milk, Vanilla

Sugar Flavour & Fragrance

Flavours, Fragrance, Perfumes, Attar.

Incense Sticks

Segment Incense Sticks

Pharma Pharma Syrups, Compressed Tablets & biscuits, Pharma

API.

Cattle Feed Segment Cattle Feed

March 2016


Antioxidants

• The applications in food are primarily to increase the shelf life for the processed food manufacturers.

Aroma

• Purpose of using Vanillin & Ethyl Vanillin – These products are used to give food and beverages a flavour of vanilla, to enhance other flavours or to mask or smoothen unwanted off-flavours.

Performance Chemicals

• Performance Chemicals have a wide range of applications in the field of paints & inks manufacturing, resins, for rubber stabilization, as petroleum additives & stabilizers for biodiesel, acrylic acid, butadiene & for polymers such as polystyrene, polyvinyl chloride etc.

• Veratrole is an important intermediate for the pharmaceutical and agrochemical industry.

March 2016


CFSL expands in Brazil and North America

CFCL Mauritius Pvt. Ltd.

CFS Europe S.p.A.

• Engaged in manufacture and sale of key raw materials required by CFCL

CFS do Brasil Indústria, Comércio, Importação e Exportação de Aditivos Alimentícios Ltda.

• Manufactures and markets customized blends to cater to the Latin American market.

• Handles distribution of bulk antioxidants and vanillin.

Solentus North America Inc.

• Engaged in sales, marketing and distribution of antioxidants, food ingredients, blends, formulations etc. in USA and Canada

March 2016


EBITDA CAGR of 31% over 4 years

Amount in Rs

mn

FY12

FY13

FY14

FY15

Sales Rs. 3,394 3,829 5,172 5,706

EBITDA Rs. 409 572 713 929

EPS Rs 0.41 1.61 3.06 5.75

ROIC 31% 41% 47% 46%

ROE 7% 23% 31% 41%

CAGR (FY12-15)

Sales 19%

EBITDA 31%

EPS 141%

March 2016


Dahej Plant to start in FY18 – A Game Changer

New facility is being set up at Dahej SEZ for manufacture of 9000 MT p.a. of Hydroquinone and 6000 MT p.a. of Vanillin - Expected date of commissioning is September, 2017.

Green process for production of Guaiacol manufacturing commissioned - March, 2015. (patent applied)

CFSL is setting up new subsidiary Companies in China and Mexico to service these markets.

CFSL has started developing natural shelf life extension products, which will also be launched to complete the basket of antioxidants.

Capex plans in the performance chemicals division are expected to be completed in FY16. This Division had already shown a growth of over 40% in FY15. The capex will boost the coming quarters as well.

March 2016


Management led by Dandekar family

Mr. Ashish S. Dandekar (Managing Director)

B. A. in Economics and Management Studies from Temple University, USA

He has wide experience of 30 years in the field of Pharmaceuticals and Fine Chemical Products including Business Planning,

Information Systems, Research & Development, Product Development and Marketing.

The CFSL Senior Management Team also includes:

Chairman : Mr. Dilip D. Dandekar

Executive Director & CFO : Mr. Dattatraya R. Puranik

Executive Director : Mrs. Leena A. Dandekar

March 2016


Corporate Governance

No Red Flags to Worry About

A practicing company secretary has confirmed compliance with the conditions of Corporate Governance as stipulated in the

Listing Agreements.

Camlin voluntarily complies with the following non-mandatory matters relating to corporate governance –

Non-executive Chairman to the Board,

Reporting of internal auditor to the Audit Committee and

Separate posts for Chairman and Managing Director.

Annual Report mentions that CFSL did not enter into any materially significant related party transactions, which had potential

conflict with the interest of CFSL at large.

The biggest transaction appears to be services rendered to CFSL by key management personnel and their relatives amounting

to Rs. 1.14 mn

March 2016


Remuneration is Within Limits

Remuneration to KMP: Remuneration to Managing Director, Whole-time Directors and/or Manager was Rs 30.10mn against

ceiling as per the Companies Act of Rs 35.74 mn. All other directors were paid remuneration of Rs 7.51mn. Total managerial

remuneration was Rs 37.61mn against overall ceiling as per the Companies Act of Rs 39.310 mn

Remuneration to KMPs (Rs in Mn)

FY15 FY14 % change YoY

Mr. Ashish S. Dandekar 17.7 16.6 7%

Mr. Dilip D. Dandekar 3.3 1.8 83%

Mrs. Leena A. Dandekar 6.3 - -

Mr. Dattatraya R. Puranik 6.1 5.0 23%

TOTAL 33.4 23.6 42%

Total as % of Consolidated PAT 6% 8%

Total Employee Cost 414 355 17%

Total Remuneration to KMP as % of Total Employee Cost

8% 7%

Information sharing with investors: Company website shows one presentation made to investors after FY15 results

announcement. Company does not appear to be conducting any conference calls with investors/analysts after

announcement of quarterly results as there are no transcripts available of the website.

March 2016


Global Leader in Antioxidants

For FY 2015; 82% of the CFSL’s revenue constitutes of International revenue and balance 18% of India revenue.

CFSL was successful in holding on to its share in major markets and registered a growth in the emerging markets of South

America and Asia by extensive customer reach.

With more than 45% of the global market share, CFSL is the World’s largest producer and exporter of Food Grade

antioxidants TBHQ and BHA.

CFSL has a secure raw material supply and has become 100% backward integrated in procuring Hydroquinone (HQ), which

forms around 55% of its raw material cost.

CFSL is creating distribution hubs in key markets like North America, Asia and Latin America.

March 2016


Aggressive Expansion in Performance Chemicals

PRODUCT MARKET DEMAND COMMENTS

Guaiacol

Enhanced capacity by 100%. Its further downstream use for Vanillin will be visible by

FY17.

Tertiary Butyl Catechol

(TBC)

5000 MT/p.a.

worldwide CFSL is expected to achieve 16% market share.

Veratrole 2000 MT/p.a. CFSL aims to capture 70% market share in FY16.

HQMME 6000 MT/p.a. CFSL will commence manufacturing with a capacity of 1200 MT/p.a. by FY16.

4-Methoxy Acetophenone

There are very few manufacturers of this product in the world. The production is

expected to be commenced by FY16.

MDB-Methylene

Dioxybenzene

5000 MT/p.a.

worldwide

CFSL has started the pilot plant trials of the products and expect the production to be

commenced by FY16

1-Chloro-2,5-Dimethoxy

Benzene 2000 MT/p.a.

CFSL has started the pilot plant trials of the products and expect the production to be

commenced by FY16

March 2016


Risks are well mitigated

• The risk of over dependence on few overseas suppliers for key raw material and its price sensitivity.

• This has been taken care by acquisition of Borregaard Italia S.p.A. (i.e. CFS Europe S.p.A.) making it in-house supplier of raw materials

Business Risk

• Currency fluctuation risk due to export sales and corresponding key raw materials imports;.

• This has been mitigated by effective forex management policy and the natural hedge provided by exports as CFSL is a net exporter.

Financial Risk

• Regulatory risk refers to CFSL’s exposure to changes in legislation and regulations.

• This could include events like governmental price regulations, taxation, tariff policies, or new regulations banning a product or imposing manufacturing, marketing and use restrictions making it unjustifiable to produce.

Regulatory Risk

March 2016


Quarterly Update

Consolidated P&L Account

(Rs. In mn) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Net sales 1,110 1,696 1,216 1,137 1,187

Other Operating Income -9 7 17 14 19

Total Earnings 1,101 1,703 1,233 1,151 1,206

Less: Operating Expenses 952 1,454 940 943 1,057

EBITDA 149 248 293 208 149

Depreciation 37 63 40 42 44

PBIT from Operations 112 185 253 167 106

Other Income 21 62 11 14 6

PBIT 133 247 264 181 112

Interest 62 66 61 55 62

PBT before Exceptional Items 71 181 203 126 50

(Contd.)

March 2016


Quarterly Update

Consolidated P&L Account

(Rs. In mn) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

PBT before Exceptional Items 71 181 203 126 50

Exceptional Income/ (Expense) - 4 - -45 -

PBT after Exceptional Items 71 185 203 80 50

Tax expenses 8 -34 64 30 24

PAT 64 219 139 51 26

Share of Associates / Minority

Interest - -0.1 - - -

PAT after Minority Interest 64 219 139 51 26

March 2016


Quarterly Update

The other expenses rose to 34% of sales in 3QFY16 as compared to the annual cost of 27% in FY2015. The company has not

issued any explanation for such a steep increase in expenses.

EBITDA margins increased from 11.8% in 3QFY15 to 12.3% in 3QFY16.

According to media reports, the plant in Italy was shut for 7 weeks in December quarter. In FY15 it was closed for 4 weeks in

September quarter. This has resulted in lower international earnings.

According to media reports, CFSL incurred operational expenses of Rs85mn spent on Blends business for process refinement

and yield improvement. This will reduce power cost and result in better production output leading to improving profitability

in the future.

There was a tax credit entitlement in FY15 which resulted in negative tax outflow. Where as in FY16, normal tax rates are

applicable. Hence, the performance should be compared at PBT levels instead of PAT levels.

In FY15 CFSL reported bad debt provisions of Rs83m and losses due to exchange fluctuations of Rs41mn. Quarterly break up

of these expenses is not available. These expenses may have recurred in FY16 and make QOQ and YOY comparisons

meaningless.

During the 9MFY16, Tax impact on consolidated accounts include charge of tax in Italian books to the extent of Rs.49.13 mn,

which also includes Rs.33.34 mn which is not payable due to the possibility to offset against existing tax credit; thereby giving

positive cash accruals during the current financial year. However, the charge of Rs.49.13 mn in the Italian books is impacting

the PAT during the current period of 9MFY16. This may have to be reversed if the offset is granted.

March 2016


Plans for FY16E and beyond

CFSL has started Green process for production of Guaiacol manufacturing commissioned - March, 2015. For which patent

application has been made.

CFSL is setting up new subsidiary Companies in China and Mexico to service these markets.

CFSL’s new plant at Dahej SEZ in Gujarat for manufacturing catechol, hydroquinone and vanillin is expected to be

commissioned in September 2017. It has the capacity to manufacture 9,000 tonnes per annum of hydroquinone and 6,000

tonnes per annum of vanillin.

CFSL has enhanced capacities for the existing and new products and brought about cost efficiencies during FY15. Full benefit

of these actions will be seen from FY16E.

CFS ANTIOXIDANTES DE MEXICO S.A. DE C.V., Mexico (CFS Mexico) has entered into an agreement to buy 65% stake in

DRESEN QUIMICA S.A.P.l.de C.V., Mexico (Dresen) along with its group companies for a consideration of USD 7.8 Mn. Dresen

is engaged in manufacturing and distributing specialty intermediate chemical solutions used by the feed, food and other

industrial products. The acquisition is set to be completed by 2nd May 2016. The prospects and costs of this acquisition have

not been factored in our estimates.

March 2016


Financial Analysis

Profit & Loss A/c Ratios

FY14 FY15 FY16E FY17E FY18E Comments

EBITDA margin 14% 15% 19% 20% 21% EBITDA margin is steadily increasing.

PBT margin 7% 10% 10% 14% 15%

PAT margin 6% 10% 7% 19% 10% Tax rates to normalize FY 16 onwards

EPS Rs. 3.1 5.8 3.6 6.2 11

Balance Sheet Ratios

RoCE 47% 46% 38% 46% 43%

RoE 31% 41% 20% 26% 34% Return on Equity displays a steady increase.

Debt Equity Ratio 0.31 1.10 1.00 1.05 1.00

Five Stage Du Pont Analysis

PAT /PBT 82% 104% 65% 65% 65% Negative tax outflow led to high ratio in FY 2015

PBT /PBIT 59% 69% 69% 78% 79%

PBIT /Sales 12% 14% 15% 18% 19%

Sales / Capital Employed

408% 330% 252% 256% 229%

Capital Employed / Net Worth

136% 125% 119% 115% 148%

RoE 31% 41% 20% 26% 34%

March 2016


Assumptions for Forecasts of FY16-18

Due to the acquisition of CFS Europe S.P.A, there was an entitlement to tax benefit in FY2015. Hence there was no tax

outflow during the year. FY2016 onwards, CFSL will pay tax at normal rates.

The other expenses have risen to 31-37% of sales in FY16 as compared to adjusted cost of 27% for FY2015. The company

has not issued any explanation for such a steep increase in expenses. We build in other expenses at 34% of sales for

remaining part of FY16 and for FY17, based on our assumption of increased costs of operation due to new business

acquisitions.

The cost of raw materials has come down in FY16 largely due to lower crude oil prices. We have assumed the material

cost to remain at the current levels.

Our forecast is based on starting Dahej plant by end September 2017 adding to revenues from 2H FY18

March 2016


Profit & Loss Account

Particulars (Amt In Rs. Mn) 2014 2015 2016E 2017E 2018E

Net Sales 5,085 5,554 5,013 6,463 10,660

Direct Costs

Cost Of Material Consumed 2,757 2,705 2,010 2,405 3,851

Employee Benefit Costs 355 414 411 601 991

Gross Profit 1,973 2,436 2,592 3,457 5,818

SG&A 1,336 1,581 1,706 2,198 3,624

EBITDA 637 854 886 1,260 2,193

Depreciation & Amortisation 118 162 169 187 253

EBIT & Other Income 519 692 717 1,073 1,940

Other Income(net) 98 112 106 95 100

EBIT Before Exceptional Item 617 804 823 1,168 2,040

Interest 247 238 243 260 420

Profit Before Exceptional Item 371 566 580 908 1,620

(contd…)

March 2016


Profit & Loss Account

Particulars (Amt In Rs. Mn) 2014 2015 2016E 2017E 2018E

Profit Before Exceptional Item 371 566 580 908 1,620

Exceptional Item - 4 -45 - -

Foreign Exchange Gain/(Loss) -22 -41 - - -

PBT 349 528 534 908 1,620

Tax Expense 61 -22 188 318 567

PAT 287 550 347 590 1,053

Minority Shareholders (Gain)/Loss 0.25 0.14 - - -

Net Profit 287 550 347 590 1,053

EPS 3.0 5.7 3.6 6.2 11.0

March 2016


Balance Sheet - Liabilities

Particulars (Amount In Rs. Mn) Mar-14 Mar-15 Mar-16E Mar-17E Mar-18E

Shareholders’ Funds 933 1,349 1,704 2,235 3,183

Non-Current Liabilities

Long Term Borrowings 285 281 269 269 1,469

Other Long Term Liabilities 39 37 40 40 40

Long Term Provisions 10 15 16 16 16

Total 334 333 325 325 1,525

Current Liabilities

Short Term Borrowings 1,040 1,210 1,431 2,084 1,719

Trade Payables 1,000 1,066 961 1,240 2,044

Other Current Liabilities 419 340 358 358 358

Total Current Liabilities 2,459 2,615 2,750 3,681 4,121

Total Liabilities 3,726 4,297 4,779 6,241 8,829

March 2016


Balance Sheet - Assets

Particulars (Amount In Rs. Mn) Mar-14 Mar-15 Mar-16E Mar-17E Mar-18E

Non-current Assets

Fixed Assets 1,052 1,092 1,937 2,650 3,397

Non-Current Investment 12 11 11 11 11

Long Term Loans &Advances 15 42 61 61 61

Other Non-current Assets 80 164 141 141 141

Total 1,159 1,310 2,150 2,863 3,610

Current Assets

Inventories 1,092 1,364 1,236 1,594 2,628

Trade Receivables 1,013 1,134 1,030 1,328 2,190

Cash & Bank Balance 158 193 157 251 195

Other Current Assets 304 296 206 206 206

Total 2,568 2,987 2,629 3,378 5,220

Total Assets 3,726 4,297 4,779 6,241 8,829

March 2016


Cash Flow Statement

Particulars (Amount In Rs. Mn) 2014 2015 2016E 2017E 2018E

Cash Flows from Operating Activities 267 463 1,003 660 634

Cash Flows from Investing Activities -322 -263 -1,014 -900 -1,000

Cash Flows from Financing Activities -63 -155 -77 334 310

Net increase in cash and cash

Equivalents

-117 45 -88 94 -56

Cash And Cash Equivalents

as at the beginning of the year

162 45 90 2 96

Closing Cash 45 90 2 96 40

Margin Money 113 102 155 155 155

Cash And Cash Equivalents

as at the end of the year

158 192 157 251 195

Free Cash Flow -95 180 -11 -240 -366

March 2016


Target Price is 51% Higher than Current Price

Particulars Rs. per share

EPS of next 4 quarters 6

PE Multiple 20

Target Price by end December 2016 116

Current Market Price 77

Price to Earnings Chart

10

15

20

25

30

35

-

20

40

60

80

100

120

140

CMP PE Average 23 Min 14 Median 24 Max 33

March 2016


Valuation

EPS Of FY16 Hurt By Increase In Tax Rate

PAT estimates for FY16 are not comparable to FY15 due to the negative tax rate in FY15. Tax credit entitlement of Italian subsidiary acquired led to this situation.

Risks to Valuation

Mark to Market Gains / Losses and Bad Debt provisions are reported only on an annual basis by the company.

The valuation will be impacted due to lower EPS.

Relative Valuation : Compared To Peers

There are no listed comparable peers for CFSL. Globally Solvay operates in this segment but has many other businesses as well.

Relative Valuation - Self At Different Time

Acquisition in Europe has changed nature of business materially in FY15.

The company has started giving consolidated financials for the first time in FY 2016.

March 2016


Disclaimer

I, Prashant Vaishampayan, Research Analyst Registration no INH 000002608 ( valid till 2 Feb 2021) comply with the qualification and certification requirements under SEBI (Research Analyst) Regulations, 2014. All of the views expressed in research reports issued by me reflect my personal views about the Subject Company or companies at the given point of time and I do not receive/accept any kind of compensation, directly or indirectly related to specific recommendations or views expressed in reports issued by me. I/my relatives does not at any point of time of issuing the reports have any material conflict of interest in the subject company neither I was/am/will be engaged in market making activity for the subject company. The investment discussed or views expressed in reports issued by me may not be suitable for all investors. The user assumes the entire risk of any use made of this information. I/any person connected with my report, accept no liability arising from the use of research document. The recipients of research document should rely on their own investigations and should consult their own advisors to determine merit and risks of such investments. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions including those involving futures, options and other derivatives as well as non-investment grade securities – involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed in research reports will be based on the current opinions as of the date appearing in research report. While I endeavor to update on a reasonable basis the information discussed in research reports, there may be regulatory, compliance, or other reasons that prevent me from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. In so far as reports include current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Documents

Initiating Coverage March 2016 Sector: Chemicalassetmultiplier.co.in/docs/AM_Monthly.pdf · Initiating Coverage March 2016 Sector: Chemical ... Aroma Performance Chemicals . ... New