October 12, N ano. ivesh

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1 October 12, 2017 N ano ivesh

2 Nano Nivesh Key risks to investing in Nano stocks Nano stocks may not be in the limelight and inherently being micro cap in nature will have a high risk return profile We advise clients to be disciplined in investing at all times. Allocate only a small proportion of your investible income to these stocks and diversify well Try to diversify your exposure within the Nano stocks as well by investing equal proportions in several picks These stocks may have low volumes and trade infrequently Micro cap stocks the world over are, to a large extent, affected by the Pump and Dump phenomenon of inflated price buying and depressed price selling As explained above, the clients should be patient and trade only through limit orders on any side of the trade. The risk of volatility remains in such micro cap stocks as they can move up or down with large buy/sell orders The fair value of Nano stocks are subject to expected growth potential in the future. Though due diligence has been done to a fair extent, the actualisation of growth still has a degree of uncertainty attached to it Nano stocks report tries to highlight companies with good and scaleable business models, dependable management and sound financials. However, these stocks may not be in the limelight and have a high risk high return potential. Please watch out for the following factors before investing in these stocks: Allocate a small proportion of your investible income to these stocks and diversify well. If you choose to invest in these stocks, most of your assets allocated towards equity should remain in more stable investments like stocks of large companies. Moreover, try to diversify your exposure within the nano stocks as well by investing equal proportions in several picks. This will help you avoid losing too much of your total wealth if the investments do not turn out well. When you invest in micro-cap stocks there is a higher risk of impairment. These stocks may have low volumes and trade infrequently. This can create a situation in which you may not be able to find any willing buyers for your stocks when you wish to sell. We advise our clients to be patient and trade only though limit orders to avoid volatile fluctuations, both while putting a buy and sell order in these stocks. ICICI Securities Ltd Retail Equity Research

3 Nov-15 Apr-16 Aug-16 Jan-17 Nano Nivesh Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia, CFA shashank.kanodia@icicisecurities.com 10,000 8,000 6,000 4,000 2,000 Buy Price 180 Recommendation Buy Fair value Price performance Price (R.H.S) Nifty (L.H.S) October 12, 2017 Bodal Chemicals (BODCHE) Bodal Chemicals (Bodal) is the largest fully integrated manufacturer of dye intermediates and dyestuff in India catering to the textile, leather and paper industry. Bodal is embarking on a massive expansion plan across the value chain thereby ensuing better margin stability and sustainable profitability growth. With the commissioning of additional dyestuff capacity, LABSA, liquid dyestuff and investments into Trion chemicals & SPS Processors, we expect Bodal to report steady growth in sales & PAT at 9.6% & 12.6% CAGR, respectively, in FY18-20E. Highlights Chinese competitiveness steadily eroding, benefits Indian player: An environmental clampdown amid rising cost of labour, power and reduction in export incentives is steadily eroding the low cost advantage of Chinese manufacturers who control in excess of 70% of global supply of dyestuff & dye-intermediate industry. This opens up a healthy opportunity for Indian players who are aggressively expanding in this domain. Moreover, on search for a credible alternate supply by the end user industry amid adherence to pollution control norms, we believe domestic dye-stuff industry is on a strong footing with robust prospects, going forward New capacity, diversified product profile to drive growth: Bodal has embarked upon a well charted expansion plan across multiple product lines across the value chain offering better stability in margins and a de-risked business model. It is expanding its dyestuff capacity by 12,000 tonne (forward integration) while at the time it is setting up a Thionil Chloride Plant (backward integration) with commissioning expected by H1FY19E. It has also commenced production of LABSA & liquid dyestuff and invested into Trion chemicals, which manufacture disinfectant for swimming pools. Thus, we expect sustainable volume led growth to follow with healthy 16-18% EBITDA margin profile Healthy balance sheet; robust turn ratios; warrant re-rating: Bodal has a healthy balance sheet with debt: equity at 0.4x as of FY17. It has a capital efficient business model wherein it realises ~2.2x as asset turnover & records 15%+ EBITDA margins amid controlled working capital cycle (60 days) thereby resulting in core return ratios in excess of 30%. With impressive capex under way and healthy product demand we expect Bodal to clock sales & PAT CAGR of 9.6% & 12.6%, respectively, in FY18-20E. We value Bodal at i.e. 17.5x-18.5x P/E on FY19E & FY20E average EPS of 12.6/share (incorporating dilution post QIP issue). Key risks- Business specific Volatile end product prices: Realisations of products manufactured by Bodal are volatile and largely follow the trend of crude oil movement (given crude derivatives are its key raw material) and capacity outlook in China (controls majority of market, share in global supply at 70%+). Bodal uses naphthalene and aniline oil as its major raw material for manufacturing various dye intermediates like H-acid, Vinyl Sulphone, K-acid, Gamma acid, etc, which, in turn, are used as raw material for manufacturing various grades of dye-stuff. Therefore, the given the current volatility in crude prices and frequent rebalancing of capacities in China, Bodal also witnesses volatile product realisations and associated profitability. Bodal being a backward integrated company can partly absorb the volatility in realisations. However, it is still subject to price volatility and associated risks. Company specific Effluent treatment, pollution control norms: Bodal adheres to stringent pollution norms and has a captive effluent treatment plant (ETP) plant to treat all effluents before discharging the same to the common discharge points. However, the company is susceptible to routine audits and check, which, if found non-compliant, face the risk of plant shutdown and associated risk of lost production days. In case of any further costs incurred in following the effluent treatment norms specified by the state government, the company stands to lose its ability to manufacture dye-stuff and dye intermediates in a cost effective way. This may result in a muted margin profile with subdued profitability growth, going forward. ICICI Securities Ltd Retail Equity Research

4 Description Bodal Chemicals (Bodal) is the largest fully integrated manufacturer of dye intermediates and dyestuff in India (Gujarat) catering to the textile, leather and paper industry. In FY17, the company clocked sales of 1236 crore, EBITDA of 226 crore with corresponding EBITDA margins of 18.3%. In FY17, PAT was at 129 crore (EPS of 11.8/share). As of FY17, Bodal has a capacity to manufacture 190,000 tonne of basic chemicals, 30,000 tonne of dye-intermediates and 17,000 tonne of dye-stuff. As of FY17, basic chemicals constituted ~11% of sales, dye intermediates constituted ~60%, dye stuff ~25% & others ~4%. The company is a pollution control norms compliant one with its own ETP plant, has a strong export presence (29% of sales in FY17) and has an in house dyestuff brand Bodactive. History and track record Bodal was established in 1989 in the name JK Pharma to produce intermediates used in manufacturing dyestuff Thereafter, in 1994, it was renamed Bodal Chemicals and expanded its dye intermediates basket by setting up additional facilities In 2004, Bodal forward integrated by setting up a 5,000 tonne dyestuff facility. In 2006, Bodal successfully got listed on the BSE stock exchange by way of a reverse merger with Dintex Dye Chem Bodal undertook a mega expansion in FY10 through successful commissioning of 12,000 tonne dyes plant & 450 TPD sulphuric acid Post expansion, due to subdued product realisations in 2012, Bodal had to undergo corporate debt restructuring (CDR) after sustaining huge losses. However, subsequent revival of product realisations helped the company recoup past losses and exit the CDR by repaying all its debts in full by 2015 In 2017, Bodal made a strategic investment in Trion Chemicals & acquired controlling stake in SPS Processors (dye int manufacturer) The company is raising equity amounting to ~ 225 crore (~12% dilution) for capex spends over FY18-20E through the QIP route Earnings estimates crore FY17 FY18E FY19E FY20E Total Operating Income EBITDA Net Profit EPS ( /share) Technical Chart (Weekly Bar chart) Price in secular up trend and is rebounding from support area thus provides fresh entry opportunity 154 Price Stock data Market Capitalization ( crore) Week High / Low ( ) 194 / 100 Promoter Holding (%) 64.0 FII Holding (%) 3.7 DII Holding (%) 0.3 Dividend Yield (%) M / 6M stock return (%) 17 / 30 Debt ( crore) Cash and Cash Equivalent ( crore) 17.0 Enterprise Value ( crore) Year Revenue CAGR (%) (FY12-17) Year EBITDA CAGR (%) (FY12-17) Year PAT CAGR (%) (FY11-17) LP Valuation FY17 FY18E FY19E FY20E P/E Target P/E EV / EBITDA P/BV RoNW RoCE ROIC Source: ICICIdirect.com Research 28.3 Quarterly performance ( crore) Q2FY17 Q3FY17 Q4FY17 Q1FY18 Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income PAT EPS ( ) Source: ICICIdirect.com Research Shareholding trend (%) Key Shareholders Q2FY17 Q3FY17 Q4FY17 Q1FY18 Promoter group FII DII Non-institutional Source: ICICIdirect.com Research 32.0 Technical View The share price of Bodal Chemicals remains in a structural uptrend consistently forming rising peaks and rising troughs on the weekly chart. The entire up move since 2016 is well channelled indicating persistent demand at higher levels. 100 Price sustaining above 52 weeks EMA indicating structural up trend The recent sideways corrective decline of the last three months from the all-time high of 193 got anchored near key value area of being confluence of the lower band of the rising channel and the previous breakout area. The 52 weeks EMA has acted as a strong support for the stock during the entire up move since CY16 signalling a structural up trend and continuation of the positive trend. Source: Bloomberg, ICICIdirect.com Research We believe the stock is likely to continue its current uptrend and is set for its next up move towards 235 levels being the price parity with previous rally from 117 to 193 as projected from the recent trough of 159, which also coincides with the upper band of the rising channel. ICICI Securities Ltd Retail Equity Research Page 2

5 What s the story? Chinese low cost competitiveness steadily eroding; India emerging as strategic alternative! Inexpensive availability of capital, labour and power, attractive export subsidies and lax environmental regulations resulted in untenable expansion in the chemical space in China. This resulted in China controlling a majority of supply the world over. As per industry estimates, the total dye intermediate and dyestuff market size is pegged at ~600,000 tonne per annum (TPA) and ~800,000 TPA, respectively. The global dyestuff industry is largely saturated and growing at a CAGR of 2-3% annually. China is the industry leader with a market share of ~80% followed by India (market share 15%+). This leads to widespread environmental pollution in China thereby leading to imposition of stringent pollution control norms and closure of hazardous facilities amid rising input costs and tapering down of export benefits. This is steadily eroding the low cost competitiveness of Chinese manufactures. In turn, this resulted in a huge opportunity for Indian manufacturers. Major Indian dyestuff manufacturers, including Bodal, have seized this opportunity by expanding aggressively well within the fairly stringent ambit of domestic pollution control norms. Moreover, India is rapidly gaining market share as customers are turning to India as a credible alternate source to diversify their procurement base. Therefore, domestic dye-stuff & dyeintermediate industry is on a strong footing and robust prospects, going forward. Expanding across value chain; including new product basket! As of FY17, Bodal has the capacity to manufacture 190,000 tonne of basic chemicals, 30,000 tonne of dye-intermediates and 17,000 tonne of dye stuff. The entire current capacity is running optimally with utilisation rates in excess of 75%. Sensing the constraints, Bodal is expanding across the value chain ranging from dye-stuff (12,000 tonne capacity) to Thionil Chloride (TCL). Dye-stuff capacity is expected to be commissioned phase wise with first phase due to be commissioned in March 2018 (Q4FY18). TCL capacity (36,000), which is basically a raw material for manufacturing dye intermediate i.e. Vinyl Sulphone (VAS) is due for commissioning in H2FY19. Also, the company has also put up a manufacturing line for liquid dyestuff (10,800 tonne), LABSA and co-generation power plant (annual power savings worth ~ 10 crore). Bodal follows a capital efficient approach, due to which all its expansion has low payback period and are intended to generate healthy 20%+ return ratios. Also, aiding in the low capex spend and operational efficiencies is the brownfield nature of these expansions. Bodal has also made an investment of ~ 15 crore in Trion Chemicals for a 42% stake. Being a high margin business (EBITDA margin of 20-22%) with revenue potential of ~ 200 crore at peak capacity, it is expected to boost profitability with annual PAT accruals of ~ 10 crore and consequent RoCE in excess of 50%. Reducing share of volatile (dye-intermediates) business to provide stable earnings profile! Currently out of the total revenue pie of 1223 crore, Bodal realises ~60% of its sales from dyeintermediates (~ 700 crore), the prices and profitability of which are quite volatile in nature. Prominently traded dye-intermediates are H-acid (present realisation at ~ 325/kg) & Vinyl Sulphone (present realisations at ~ 250/kg). It is largely driven by supply dynamics from China i.e. prices tend to go up whenever there is a capacity shutdown/curtailment in China and vice versa. It results in a volatile earnings profile with variations in EBITDA margins to the tune of ~500 bps. Therefore, with the aim of reducing this volatile nature of earnings, the company is steadily widening its product basket and is forward integrating into various end products. Going forward, we expect the share of dye-intermediates in the overall sales to reduce from ~60% in FY17 to ~42% in FY20E (absolute sales at ~ 634 crore). Corresponding share of dye-stuff, which has a more stable earnings profile is expected to increase from ~24% (~ 300 crore) to ~34% (~ 510 crore) by FY20E. Strong balance sheet; healthy return ratios; industry leader, warrants re-rating! Bodal has a healthy balance sheet with absolute debt at 149 crore with corresponding debt: equity at 0.4x as of FY17. The company has a capital efficient business model wherein it realises ~2.2x as asset turnover and records ~15%+ EBITDA margins amid controlled working capital cycle (60 days) thereby resulting in core return ratios in excess of 30%. The company generates healthy cash flow from operations (CFO) and is currently offering an attractive CFO yield of ~5% (FY17). With impressive capex under way and healthy product demand, we expect Bodal to clock sales & PAT CAGR of 9.6% & 12.6%, respectively, in FY18-20E. We value Bodal at i.e. 17.5x-18.5x P/E on FY19E & FY20E average EPS of 12.6/share (incorporating equity dilution post QIP issue, ~12% dilution). The company is raising capital (equity) to the tune of ~ 225 crore through a QIP issue to take care of its capital expenditure requirement over FY18-20E. This involves purchasing an acre plot in the chemical zone (Dahej, Gujarat) and building a speciality chemical complex over it. Though currently a QIP will dent the return ratios and be EPS decretive, we believe that being a conservative management, it will provide the requisite growth equity, which will take care of all capex needs for the next three to five years. ICICI Securities Ltd Retail Equity Research Page 3

6 Financial summary Profit and loss statement Crore (Year-end March) FY17 FY18E FY19E FY20E Total Operating Income Growth (%) Raw Material Expenses Employee Expenses Other Operating Expense Total Operating Expenditure 1, , , ,239.6 EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item Total Tax PAT Minority Interest Profit from associates PAT att to Bodal Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY17 FY18E FY19E FY20E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Interest & Dividend paid Inc/(dec) in Share Cap Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY17 FY18E FY19E FY20E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities ,054.6 Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Current Liabilities Provisions Current Liabilities & Prov Net Current Assets Others Assets Application of Funds ,054.6 Key ratios (Year-end March) FY17 FY18E FY19E FY20E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 4

7 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 5

8 ANALYST CERTIFICATION We /I, Chirag Shah PGDBM; Shashank Kanodia CFA MBA (Capital Markets), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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