India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

Aarti Industries is one of the leading global suppliers of specialty chemicals to industries ranging from agrochemicals, dyes, pigments, pharmaceuticals and rubber chemicals. The company uses Benzene as a key raw material to produce the after-derivatives of Benzene. The company has large capacities in these after-derivatives which offer significant economies of scale, besides being value added products. Aarti Industries ranks among top 4 manufacturers globally of these after-derivatives of Benzene.Favorable growth dynamics<ul><li>Capacities shifting from China to India on account of improving cost economics for India due to several cost escalations and environmental controls in China.</li><li>Aarti Industries derives near 50% of revenues from domestic sales and domestic demand drivers are strong given India’s secular trends of increasing consumption driven by urbanization.</li></ul>Reasonable pricing Power and Improving Product Mix<ul><li>The company has reasonable pricing power, evidenced by the fact that EBITDA margins are stable despite volatile input prices. This is because the company is able to pass on almost 80% of input price volatility to its customers.</li><li>The company’s future CapEx is focussed on high-value products of Benzene based derivatives which may improve EBITDA margins. It  has diversified  to Toluene based products which have similar operating margins as that of Benzene based products and can be sold to the existing customer base.</li></ul>Healthy Financials<ul><li>Improvement in ROE from 15% in FY12 to 24% in FY16, driven by PAT margin expansion of 400bps from 5% in FY12 to 9% in FY16 on account of improved product mix. We expect this trend to continue going forward given its focus on higher margin products.</li><li>All future capacity expansion will be funded by internal accruals. We expect the net gearing ratio to come down from 1.08x equity in FY16 to 0.8x equity by FY18e. One should note that nearly 50% of debt is short term borrowing for working capital requirements.</li><li>The company also intends to demerge its noncore operations in pharmaceuticals and home and personal care from specialty chemicals in the future. This may lead to value unlocking as these two business segments are lower margin segments.</li></ul>Valuation Discount to Peers - despite better fundamentalsThe company trades at a PE of 18x FY17e EPS and 14.6x FY18e EPS and an EV/ EBITDA of 9.50x FY17e EBITDA and 7.6x FY18e EBITDA which is at a discount to its to peers. We believe this will correct soon, especially given the fact that company's growth  prospects,  balance sheet, profitability, management quality and customer relationships are superior to the competition.

Aarti Industries is one of the leading global suppliers of specialty chemicals to industries ranging from agrochemicals, dyes, pigments, pharmaceuticals and rubber chemicals. The company uses Benzene as a key raw material to produce the after-derivatives of Benzene. The company has large capacities in these after-derivatives which offer significant economies of scale, besides being value added products. Aarti Industries ranks among top 4 manufacturers globally of these after-derivatives of Benzene.Favorable growth dynamicsCapacities shifting from China to India on account of improving cost economics for India due to several cost escalations and environmental controls in China.Aarti Industries derives near 50% of revenues from domestic sales and domestic demand drivers are strong given India’s secular trends of increasing consumption driven by urbanization.Reasonable pricing Power and Improving Product MixThe company has reasonable pricing power, evidenced by the fact that EBITDA margins are stable despite volatile input prices. This is because the company is able to pass on almost 80% of input price volatility to its customers.The company’s future CapEx is focussed on high-value products of Benzene based derivatives which may improve EBITDA margins. It  has diversified  to Toluene based products which have similar operating margins as that of Benzene based products and can be sold to the existing customer base.Healthy FinancialsImprovement in ROE from 15% in FY12 to 24% in FY16, driven by PAT margin expansion of 400bps from 5% in FY12 to 9% in FY16 on account of improved product mix. We expect this trend to continue going forward given its focus on higher margin products.All future capacity expansion will be funded by internal accruals. We expect the net gearing ratio to come down from 1.08x equity in FY16 to 0.8x equity by FY18e. One should note that nearly 50% of debt is short term borrowing for working capital requirements.The company also intends to demerge its noncore operations in pharmaceuticals and home and personal care from specialty chemicals in the future. This may lead to value unlocking as these two business segments are lower margin segments.Valuation Discount to Peers - despite better fundamentalsThe company trades at a PE of 18x FY17e EPS and 14.6x FY18e EPS and an EV/ EBITDA of 9.50x FY17e EBITDA and 7.6x FY18e EBITDA which is at a discount to its to peers. We believe this will correct soon, especially given the fact that company's growth  prospects,  balance sheet, profitability, management quality and customer relationships are superior to the competition.

Aarti Industries: Global Scale Niche Player in Specialty Chemicals

India

Finolex Industries Limited manufactures PVC pipes and fittings, which are sold primarily to businesses in the agricultural sector.  The Company also manufactures PVC resins, which are used as raw materials for PVC pipes and fittings.

Castrol (India) Limited manufactures and markets automotive and industrial lubricants and specialty products. The Company's products include lubricating oils, greases and brake fluids. The Company also manufactures cable filling compounds, jellies, waxes and other items.

Vinati Organics Limited produces organic intermediates and monomers.

Kansai Nerolac Paints Limited manufactures paints, varnishes and enamels. The Company also fabricates synthetic resins, organic & inorganic pigments and oils. Kansai Nerolac's products are used for decorative, marine and industrial purposes.

Godrej Industries Limited manufactures a variety of specialty chemical products like Alpha Olefin Sulphonate, Fatty Acids, Glycerin and Fatty Alcohols. The company also manufactures edible oils and processed foods and has finance and investment activities as part of their operations.

Chambal Fertilisers and Chemicals Ltd. manufactures ammonia, urea, pesticides and other products for farming and other agricultural applications.  The Company also provides consulting services to farmers on their seeding programs. Chambal operates throughout India.

Chambal Fertilisers & Chemicals (CHMB IN)

Bayer Cropscience Ltd. is involved in cropscience in the area of crop protection , non agricultural pest-control, seeds and plant biotechnology.

Atul Limited is a diversified manufacturer of chemicals. The Company's products include agrochemicals, aromatics, cresol & its derivatives, pharmaceutical intermediates, bulk drugs and bulk chemicals. Atul also manufactures dyestuffs and colors for the textile industry.

Tata Chemicals Ltd. manufactures salt and salt by-products, alkalies and heavy chemicals, pharmaceuticals, fertilizers and agro-chemicals. The Company's salt products include common salt, pure salt and gypsum salt.  Heavy chemicals include soda ash, caustic soda and hydrochloric acid. Tata Chemicals' pharmaceuticals include bromides of ammonium, sodium, potassium and ethyl.

BASF India Limited is a diversified manufacturer of chemicals and specialty chemicals that are used in a number of industries including textiles, paper, construction and paints. The Company's products include a variety of plastics & fiber intermediates, leather auxiliaries, finishing agents, pesticides, tanning agents, dyestuffs, oil & well chemicals and dispersions.

NOF CORPORATION is a diversified chemical producer whose products include processed oil/fats, explosives and other chemical products. The Company has manufacturing/sales subsidiaries in US, Indonesia and China.

K+S AG manufactures and markets within the fertilizer division standard and speciality fertilizers to the agricultural and industrial industries worldwide. In its salt business, the company produces de-icing salt, food grade salt, industrial salt and salt for chemical use.

Incitec Pivot Limited is a fertilizer manufacturer and supplier, and also a supplier for explosives products and services. The Company has operations throughout the United States, Canada, Mexico and Australia.

Hangzhou Oxygen Plant Group Co.,Ltd. manufactures industrial gas machinery products. The Company produces air separation equipment, small-scale air separation equipment, liquefied nitrogen wash cold boxes, liquefied natural gas separation equipment, and other products. Hangzhou Oxygen Plant Group markets its products worldwide.

Zhejiang Longsheng Group Co., Ltd. manufactures a variety of dyes including high intensity and rapid-dying Lonsperse Dye. The Company sells its products domestically and exports worldwide.

Zhejiang Longsheng Group Co., (600352 CH)

Kumho Petrochemical Co., Ltd. manufactures synthetic rubbers, synthetic resins, and rubber chemicals.  The Company's products include styrene butadiene, acrylonitrile butadiene, polystyrene, expandable polystyrene, and antioxidant.  Kumho Petrochemical provides construction, transportation, and financial services through its subsidiaries.

Quaker Chemical Corporation produces, develops, and markets custom-formulated chemical specialty products.  The Company also provides fluid management services for manufacturers around the world, primarily in the steel, automotive, and can industries.

Hengyi Petrochemical Co., Ltd. manufactures polyester and other petrochemical products.

Zhejiang Weixing New Building Materials Co.,Ltd. develops, manufactures and sells plastic pipes.  The Company's products include poly propylene random (PPR) pipe, polyethylene (PE) pipe, high density polyethylene (HDPE) pipe, and polybutene (PB) pipe.

Zhejiang Weixing New Bldg Mtls (002372 CH)

TOKYO OHKA KOGYO CO., LTD. manufactures photoresist for semiconductors.  The Company also manufactures printing materials and semiconductor-assembling machines.

Aarti Industries Limited develops and manufactures basic bulk chemicals, dyes and pigment intermediates, pharmaceuticals and agrochemicals, rubber chemicals, surfactant intermediates, and specialty chemicals. The company sells its products in India and elsewhere throughout the world.

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Aarti Industries (ARTO IN)

Aarti Industries: Global Scale Niche Player in Specialty Chemicals

Aarti Industries is one of the leading global suppliers of specialty chemicals to industries ranging from agrochemicals, dyes, pigments,...

Das Capital Management and Advisors

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52-week Range

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