November 28, 2014 Camlin Fine Sciences Limited Taking a leap from chemicals to super chemicals

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1 November 28, 2014 Taking a leap from chemicals to super chemicals

2 Recommendation BUY Snapshot CMP (Rs.) 2 P a g e Rs.58 Target Price (Rs.) Rs.85 (Upside 46%) Stock Details BSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo (Rs) Avg. Volume (Monthly in lakh) Face Value (Rs) Dividend(%) (FY 14) Shares o/s (Crs) CAM IN / Relative Performance 1Mth 6Mth 1Yr CFIN IN (%) (0.9) NIFTY (%) Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 CAMLIN FINE SCIE Shareholding Pattern as on 30 September 2014 Promoters Holding 54.8% Institutional (Incl. FII) 6.1% Corporate Bodies 10.2% Public & others 28.8% Vishal Jajoo Sr. Research Analyst ( ) id: vishal.jajoo@nirmalbang.com NSE CNX NIFTY INDEX Camlin Fine Sciences is one of the leading manufacturers and exporters of food grade anti-oxidants and industrial chemicals. Investment Rationale Scaling up of capacity coupled with change in product mix: Camlin Fine Sciences is in the process of scaling up the capacity from 6600 tonnes to tonnes. The company is also in the process of changing the product mix which should not only lead to an improvement in revenues but also margins. Earnings set to see multi-fold rise: On the back of above mentioned initiatives, the overall PAT figure is expected to jump ~2.5x from FY 13 figure of Rs.15 crore to Rs.35 crore. No further leveraging of the Balance Sheet: The company has already leveraged the Balance Sheet with regard to the expansion in new capacity. We do not expect further leveraging atleast for the next two years. Moving from chemicals to super chemicals: Camlin Fine is moving from a chemicals manufacturer to a super chemicals company. While the company attained backward integration in the year 2011, the capacity enhancement and product mix will lead to an improvement in the earnings in phase 1. While plant in Brazil is set up, the company is in the process of setting up facilities in North America and Europe. Post this, the company is in the process of setting up a plant in China considering the availability of key raw material Phenol. Valuation & Recommendation Camlin Fine reported net sales of Rs.508 crore in FY 14, an increase of 36.1 per cent y-o-y. Adjusted PAT for the year stood at Rs.28.7 crore, an increase of 90 per cent y-o-y. While the improvement in the margins are expected to continue going forward as well coupled with the growth in topline, we see the company reporting a PAT of Rs.35 crore on a topline of Rs.590 crore in FY 15E. This translates into an EPS of Rs.3.7 for FY 15E. Considering the global leadership position in key chemicals, effective backward integration exercise leading to an overall improvement in margins, the company s strategy to forward integrate itself deriving higher realisation, we value the share at 23x FY 15E earnings to arrive at a price target of Rs.85(upside: 46 per cent) by December Particulars (Rs Cr) Net Sales Growth (%) EBITDA PAT EPS (Rs) P/E (x) FY' % FY' % FY' % FY'15E %

3 INVESTMENT RATIONALE Expansion in capacity coupled with backward integration Camlin Fine Sciences (Camlin Fine) is one of the largest players across the globe in the anti-oxidant industry. The company has a per cent market share in the TBHQ (Tertiary Butyl Hydroquinone) segment and 70 per cent in the BHA (Butyl Hydroxyl Anisole) segment. Having resolved the issues with regard to raw material availability Camlin Fine is strategically placed to forward integrate itself Earlier, Camlin Fine had its own set of problems with regard to availability of key raw material. The company was not only exposed to the volatility in raw material prices but also the availability of the same. The company acquired Borregaard Italy (Camlin Fine Europe now) in order to ensure supply of raw material. This has lead to the raw material/sales ratio improving from 59 per cent in FY 12 to 52 per cent in FY 14 respectively. The company contemplates to enhance the capacity expansion along with an internal change in the product mix. The full benefits of the same should get reflected from FY 16E onwards. The acquisition of Borregaard Italy was a turnaround point since no capacity addition took place in Hydroquinon across the globe, with only five manufacturers controlling the production of this particular commodity. catapults the company into a different league Shelf life extension is a big challenge for the food industry because of continuous evolution and demand and hence this segment presents a huge opportunity where the company wants to position itself, beginning with antioxidants. In addition to being the global leader in manufacture of TBHQ and MHA but being backwardly integrated, the company has an added advantage. The same has been highlighted in the form of a flow chart below: 3 P a g e

4 Borregaard Italy HQ5000 Selling price : USD7 per kg 45: 55 Mid FY 16 60:40 Catechol Selling price: USD 3.25 per kg TBHQ BHA Sale/MEHQ TBC Guaiacol Veratrole SALE Unutilised: 2000 Vanillin Free sale to Vanillin Roll out of green process for Guaiacol will give a distinct competitive and strategic edge in the market for Vanillin. (Global size of Vanillin is 20,000 tonnes and Camlin Fine is targeting a 25 per cent market share over the coming years). 4 P a g e

5 Almost 2.5x jump in net profit from FY 13 to FY15E As mentioned in the table below, we expect the net sales of the company to be Rs.590 crore and PAT to be around Rs.35 crore for FY 15E. Particulars HQ 5000 and Catechol Realisation The present mix right now on the installed capacity of 6600 tonnes per annum 45:55 HQ is USD7 per kg and Catechol is USD3.25 per kg. Totalling to USD. Total realization is USD The total increase in the capacity From 6600 tonnes to tonnes Proposed mix on the enhanced capacity 60:40 (Source: Nirmal Bang Research) - Significant improvement in realization. With the enhancement in capacity, coupled with the change in product mix, we expect the topline to increase from Rs.383 crore in FY 13 to Rs.590 crore in FY 15E. With the apportioning of fixed cost, we expect an improvement in margins as well. An opportunity to grow downstream business After successful implementation of Step 1: backward integration and having witnessed success in the same, the company is contemplating step 2: which should take place in H2FY 15. Post this event, the company is contemplating to switch to the blends segment in the TBHQ and BHA categories. The intention is to address the markets like pet food, animal feed and acqua feed, going forward. Segment Mode Addressable market TBHQ Blends Pet Food Animal feed BHA Blends Acqua feed (Source: Nirmal Bang Research) Catechol is a by-product which is manufactured in the process. Over the last two years, significant amount of Catechol has been produced in the industry. FMC, manufacturer of pesticides is the largest consumer of Catechol. Catechol also finds application in downstream products like TBC(Tert-butyl Catechol) and polymerization of monomers. 5 P a g e

6 1. Just like pharma companies, FMCG companies have to know the complete backend trail with regard to each and every product including the origin, manufacture and batch details. 2. Camlin Fine on the back of their earlier pharmaceutical background possesses the entire gamut of certificates with regard to approvals and the company management is wellacquainted with the processes which an FMCG company has to adhere, to meet the required guidelines. The journey of moving from chemicals to super chemicals The company which undertook the backward integration initiative in the year 2011 with the acquisition of Borregaard Italy and has seen improvement in margins since then (from 12.2 per cent in FY 12 to 14.1 per cent in FY 14 mainly led by savings on the raw material front) is now ready for the next leap of growth. Post the expansion of capacity in chemicals, the company is in the process of changing the internal mix and going forward, the strategy is to forward integrate into the blends segment. As a part of the expansion strategy, the company has set up entities in Brazil (green field plant), North America and Europe. Location Name of the subsidiary/ step down subsidiary Purpose Brazil Solentus Do Brazil Expanding the base in key markets North America Solentus North America Catering to the markets of the US and Canada Europe/Rest of the world (Source: Nirmal Bang Research) Over the next three years, the company is planning to set up a plant in China due to availability of key raw material Phenol. The capex for the same is contemplated to the tune of Rs.75 crore, funded marginally through a mix of debt and internal accruals. The present debt figure should not see any significant increase over the next couple of years as the company has already set up the required facilities and no major capex (except for the maintenance part) is needed. 6 P a g e

7 Focus on Research & Development Since the company is exploring new markets and launching new products, research and development continues to be an area of focus. To further enhance the developmental abilities, the company is setting up a dedicated R&D and process development facility in Tarapur with state of the art equipments and infrastructure. The company is contemplating green processes, new products and creating IPRs to ensure growth for the future. The process development and R&D teams have made a breakthrough by development of a green process for Guaiacol, a key raw material intermediate for pharmaceutical applications and Vanillin. The new green process is currently at the stage of worldwide application. With this process innovation, the company will have a strategic edge in the market. The strength of being a producer of Catechol coupled with the new green process for Guaiacol will give a distinct competitive and strategic edge in the market for Vanillin. Natural hedge to a significant extent While the company has successfully mitigated the risk of availability of raw material, the volatility on the currency front has been hedged naturally to a significant extent on the back of global exports and corresponding imports in foreign currency. Competitive landscape Globally the company is competing with various players in a number of geographies. However, the major ones are as follows: 1. Rhodia Specialty Chemicals Limited (a subsidiary of Solvay) Manufactures similar product and more or less in the same manner 2. Mitsui Chemicals and Eastman Chemical Company Both manufacture but through a different process of Acetone and not Catechol RISKS & CONCERNS Restriction imposed by any geography The company is presence into various geographies and exports to more than 50 countries across the globe. Any restriction imposed on any key commodity can be negative for the company. Restriction imposed on any particular chemical Any blanket ban by any health authority on any key product of the company can have a negative impact on the financial performance. Significant change in the consumption pattern of end consumer The growth of the company depends on the consumption pattern of the end consumer. Any shift towards consumption of natural products will lead to lowering of consumption of processed foods. This will lead to overall reduction in consumption of the company s products. 7 P a g e

8 COMPANY BACKGROUND Camlin Fine Sciences is one of the India's leading manufacturers and exporters of food grade antioxidants and industrial chemicals. The company exited the pharmaceutical business in the early 2000s and focused more on the specialty niche products business. Camlin Fine Sciences was demerged in the year 2006 from the Camlin Group and it was a mirror holding with an investor getting one share of Camlin Fine Sciences and one share of Camlin Limited (Kokuyo Camlin now). VALUATION AND RECOMMENDATION Camlin Fine reported net sales of Rs.508 crore in FY 14, an increase of 36.1 per cent y-o-y. Adjusted PAT for the year stood at Rs.28.7 crore, an increase of 90 per cent y-o-y. While the improvement in the margins are expected to continue going forward as well coupled with the growth in topline, we see the company reporting a PAT of Rs.35 crore on a topline of Rs.590 crore in FY 15E. This translates into an EPS of Rs.3.7 for FY 15E. Considering the global leadership position in key chemicals, effective backward integration exercise leading to an overall improvement in margins, the company s strategy to forward integrate itself deriving higher realisations, we value the share at 23x FY 15E earnings to arrive at a price target of Rs.85, an upside of 46 per cent by December P a g e

9 Financials Profit & Loss Account FY'12 FY'13 FY'14 FY'15E Balance Sheet ( Rs. Cr.) FY'12 FY'13 FY'14 FY'15E Net Revenues Equity Capital Other Income Reserves & Surplus Total Income Networth Raw material cost Secured loans Employee expenses Unsecured loans Other expenses Total loan funds Total Expenses Total Liabilities PBIDT Net Block Depreciation Investments Interest Current Investments Profit before tax Current Assets Taxes Current Liabilities Extra-ordinary item Net Profit Total Assets Quarterly results (standalone) Dec.13 Mar.14 Jun.14 Sep.14 Net Sales Other Income Cash flow (Rs. Cr.) FY'12 FY'13 FY'14 FY'15E Total Income Profit before tax Total Expenses Net cash from operations PBIDT Net cash from investments (9.2) 18.6 (32.6) (36.0) Interest Net cash from financing activities 38.1 (21.4) (4.5) (5.5) Depreciation Net change in cash (11.4) (5.8) Taxes Minority Interest PAT Profitability Ratios FY'12 FY'13 FY'14 FY'15E Valuation Ratios FY'12 FY'13 FY'14 FY'15E EBITDA margin 12.2% 15.5% 14.0% 14.4% Marketcap/Sales PAT margin 1.1% 4.0% 5.7% 5.9% Fully diluted EPS Growth Ratios FY'12 FY'13 FY'14 FY'15E P/E Net Sales growth 106.8% 11.5% 36.1% 16.0% EBITDA growth 70.5% 41.8% 23.5% 19.0% PAT growth 85.4% 297.4% 90.7% 21.5% 9 P a g e

10 Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 10 P a g e