Omkar Speciality Chemicals Ltd.

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1 Result Update Speciality Chemicals This report is for internal circulation only NVS Brokerage Research Omkar Speciality Chemicals Ltd. Date : 17 th March 2015 CMP: 151 Medium Risk Not Rated Target Price: NA Nifty 8,647 Sensex 28,503 Sensex PE(x) 19.5 Nifty PE(x) 23.2 Stock Data Sector Speciality Chemicals BSE Code NSE Code OMKARCHEM FV Market Cap (INR cr) 312 Market Cap (US$ mn) 52.0 Equity Share Cap Stock Performance (%) 52-week high/low INR 184/103 Shareholding Pattern (%) Promoter FII DII Others Omkar Speciality Chemicals Ltd. (Omkar) promoted by Mr. Pravin Herlekar, CMD and a Chemical Engineer from IIT Bombay with a vast experience of over 40 years, is one of the leading producers of speciality chemicals, inorganic and organic intermediates and Active Pharmaceuticals Ingredients (API). Omkar has posted an excellent Q3FY15 performance with topline increasing by 32% Y-o-Y at Rs. 71 Crs vs Rs.54 Crs, EBITDA grew by 52% at Rs. 16 Crs. (Rs. 11 Crs) and PAT saw a jump of 125% at Rs. 8 Crs (Rs 3 Crs.). Omkar s excellent financial performance is aided by contribution of new plant becoming operative at Chiplun, better product mix, increase in share of higher value added products, resulting in sharp increase in EBITDA margin from 20% to 23% and robust jump of PAT margin from 6% vs 11% on Y-o-Y basis. Omkar has 9 manufacturing units in state of Maharashtra, at Badlapur, Chiplun and Mahad in Raigadh district, has a cumulative volumetric capacity of 4,920 MTPA, which has almost doubled at a CAPEX of Rs. 200 Crs during last 3 years. New capacities will be on stream in the current financial year and will be completed by August September Omkar s product profile includes Iodine Compounds, Selenium Compounds, Intermidiates, Resolving Agents and others and APIs which comprises of more than 200 products having applications in Pharmaceutical, Poultry, Veterinary, Perfumary, Glass & Ceramics, Speciality Coatings and Electronics & Digital Technology. Omkars s products find extensive application in the pharma industries, Veterinary API s and others, servicing blue chip clientele like Pfizer, DUPONT, Ranbaxy, BASF, Dr Reddy, Cipla, Wockhardt, Lupin, Novartis, Merck, and many more. Omkar at a CMP of Rs. 151 and projected EPS for the current year at Rs is valued at a modest valuation of 12.x. The result of substantial expansion should start reflecting in its performance during the next 3 years and based on the 1 and 2nd year s forward projection, the share is available at a very attractive valuation at a P/E multiple of 7.8x and 5x respectively, making it an attractive investment Relative Price Return BSE_SENSEX NVS Research research@nvsbrokerage.com Omkar Financials INR crs Q3FY15 Q2FY15 Q3FY14 QoQ(%) YoY (%) 9MFY15* 9MFY14 YoY (%) FY14 Revenue % 32% % EBITDA % 53% % 42.9 PAT % 125% % 13.6 EBITDA Margin 23% 20% 20% 20% 19% 18% PAT Margin 11% 10% 6% 10% 6% 6% EPS Share Capital 20.6 Reserves 114 Source: Company Research Note : * For the current year ending March 2015, we estimate the topline at Rs. 270 Crs and PAT at Rs. 26 Crs, giving an EPS of Rs

2 Omkar s Financial Performance INR crs FY11 FY12 FY13 FY14 FY15P FY16E FY17E FY18E Revenue EBITDA PAT Share Capital Reserves Per Share Data A) EPS B) EBITDA/Per Share CMP MCAP P/E Book Value P/BV MCAP/ Revenue Omkar s Revenue in the past 3 years have grown at a CAGR of 31% to Rs. 243 Crs in FY14 compared to Rs. 107 Crs in FY11. Omkar has already crossed the topline of Rs. 191 Crs in 9MFY15. Omkar s topline, to the tune of 70%, is contributed from its product portfolio servicing the pharma sector with blue chip clientele, Veternary APIs contribute about 25% and balance comes from feed nutruients, intermidiaries, tinted glasses and ceramics etc. with 30% coming from exports. Omkar s Composition of topline is divided into 3 categories: 1) High Volume Business contributing around 60% to the topline with Gross profit margins of 25%. 2) High Value API Business contributing around 25% to the topline with Gross profit margins of 35% - 40% 3) Niche Products Market contributing almost 15% to the topline with Gross profit margins of 65% - 100% Omkar is planning to shift its segment production towards higher profit margin business in next 3 years with targeting High Volume business to be 40% - 45% of the total revenue, High Value API contributing 35% - 40% and Niche Products Market to 20% - 25% Omkar with large capacity, econoimies of scale, better product mix tilted towards higher margin business, will help EBITDA margins of Omkar to gradually move towards 25% and PAT margins towards 14% over a period of next 3 years. 2

3 Omkar import s iodine, one of the major raw materials from Chile, had a transit time of almost 2 months, which caused company s working capital cycle on the high side. Now with suppliers opening up warehouses at JNPT, Navi Mumbai, India, iodine is easily available to the company on shorter notice, bringing inventory ratio down which will result in lower working capital cycle. Omkar has export foothold across 40 coutries like North America, South America, China, European and other Asian countries, contributing 30% of the total revenue. Management expects the export segment to grow to 40% in the next 2 years. Omkar has good Research & Development and Innovation matrix, such as strong in house R&D with state of the art technology, which has a Department of Scientific and Industrial Research (DSIR) recognition. Omkar has a team of 30 experienced scientist and has staked its claim for 14 patents of which 2 have already been granted. Valuation Omkar going forward to increase its manufacturing capacity by more than 100% with all the major capex already incurred and is expected to be fully operational by September 2015 and thereon. This should add to the revenue of the company, and on the back of strong research team and technical know-how, the management plans to shift its focus on more high profit margin business segment. These factors should auger well for the company and the ROE should increase upto 25%. We expect the multiple of the company to be rerated in the coming years. Sr. No. Top 10 Shareholders in Omkar Name of Shareholders % of Total shares held 1 SBI Magmum Midcap Fund SBI Magmum Comma Fund Birla Sun Life Trustee Company Pvt Ltd A/C Birla Sun Life Pur Value Fund Finquest Financial Solutions Pvt Ltd Axis Bank Ltd A Securities Ltd Premier Investment Fund Ltd Avtar Instalments Pvt Ltd 1.00 Total Omkar came with an IPO in the year 2011 issuing 81,00,000 shares at a premium of Rs. 88 per share with a total issue size of Rs Crs. In December 2014, the company has proposed to bring a QIP of amount not exceeding Rs. 125 Crs. 3

4 Omkar s Diversified Clientele Profile Omkar has diversified customer base from different industry segments. Omkar also has a strong existing client relationship with top 30 customers over the past 2 years, in which more than 40% have been repeat customers. 4

5 Particulars Omkar 9MFY15 Omkar FY15 Peer Comparision Vivimed Labs Ltd. 9MFY15 Vivimed Labs Ltd. FY15 Pidilite Ind. 9MFY15 Pidilite Ind. FY15 Camlin Fine Science 9MFY15 Camlin Fine Science FY15 Revenue , , , , EBITDA EBITDA Margin 20% 22% 17% 17% 18% 16% 15% 14% PBT PBT Margin 13% 7% 6% 6% 15% 14% 8% 7% PAT PAT Margin 10% 10% 5% 5% 11% 10% 5% 6% Eq. Sh. Capital Reserves ,901 2, Networth ,953 2, ROE 14% 16% 11% 12% 22% 21% 29% 31% EPS CMP MCAP , , MCAP/Revenue P/E BV P/BV The above table indicates Omkar has the best EBITDA margin of 20% for 9MFY15 compared to its peers on a Topline of Rs. 191 Crs and Equity Capital of Rs Crs. MCAP/Revenue ratio for FY15E of Omkar is 1.2x which is the second lowest after Vivimed Labs Ltd. (0.4x), compared to Pidilite (6.4x) and Camlin Fine Science (1.5x). This indicates that Omkar is undervalued compared to its peers. Omkar is currently trading at P/BV of 1.94x for FY15E, which is the second most undervalued stock among the peer group, after Vivimed Labs Ltd. (1.09), whereas Pidilite Industries Ltd. and Camlin Fine Science Ltd. are trading at 13.0x abd 8.0x respectively. P/E ratio of Omkar is 11.9x on FY15E basis, whereas the average peer industry P/E is almost 27x. This shows that Omkar is currently trading at a discounted price compared to its peers. We believe that as the company starts performing better with full operations of its Chiplun plant and start to contribute to its revenue, the Return on Equity should increase to 25% in line with its peers, indicating that Omkar is poised to get the similar valuations making it an attractive investment. 5

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8 Rating Scale : This is a guide to the rating system used by our Research team. Our rating system comprises six rating categories, with a corresponding risk rating. Risk Rating Risk Description Low risk Medium risk High risk Predictability of earnings/ Dividends; P volatility High predictability / low volatility Moderate predictability / volatility Low predictability / High volatility Total expected return matrix Rating Low Risk Medium Risk High Risk Buy Over 15% Over 20% Over 25% Accumulate 10% - 15% 15% - 20% 20% - 25% HOLD 0% - 10% 0% - 15% 0% - 20% Sell Negative returns Negative returns Negative returns Neutral NA NA NA Not Rated NA NA NA Please Note: Our recommendations are for a minimum period for one year. 8