Camlin Fine Science Ltd

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1 BUY CMP 85 Price Target 110 Upside (%) 30 Sensex Nifty Stock Details Industry Chemical Market Cap (` Cr) 1046 O/S Shares (Cr) Week H/L 154/72 Avg 1 wk daily Vol Face Value (`) 1 Bloomberg CAMLN IN Reuters CAMF.BO BSE Code NSE Code CAMLINFINE Shareholding Pattern (%) Mar'18 Dec'18 Sep'17 Promoters FII DII Retail Note: As on 30 st June 2017 no shares of promoter s holding pledged. Source: BSE Camlin Fine Science Ltd Expansion Continues Camlin Fine Sciences Ltd (CFSL) is a leading producer of fine chemicals, particularly food antioxidants, ingredients and industry chemicals. CFSL s products are used as a stabilizer and a key ingredient in flavor/fragrance in industries like FMCG (edible Oil, pack foods, dairy product) and Pharmaceutical Camlin Fine Sciences Ltd (CFSL) is a leading producer of fine chemicals, particularly food antioxidants, ingredients and industry chemicals. CFSL s products are used as a stabilizer and a key ingredient in flavor/fragrance in industries like FMCG (edible Oil, pack foods, dairy product) and Pharmaceutical Aiming as a Global Food Blender In order to gain global scale in food blends industry, CFIN has commissioned blending facilities across Mexico, Brazil, US, Europe and India. In order to improve its service, shorten supply time and grow the blends business, CFIN established a manufacturing facility in Mexico in The plant capacity is at 310 MT/p.m. of antioxidant blend. The facility is spread across 11,000 sq. ft. (Kosher facility), and is equipped with cutting-edge technology 2 CFIN s Brazil subsidiary was created in May 06, 2013, with its business operations in feed additives, flavors, post harvesting preservatives and other feed stocks. With the mission of bringing innovation to the market, it developed and patented products such as TBHQ and BHA. CFIN has expanded its operations in US and Europe also with its Blends portfolio. CFIN also appointed experienced marketing professionals in Europe to expand its Food Antioxidant Blends business. It has appointed a Global Technical Head as part of its initiative to develop Food Anti-oxidant Blends and other products. The Company launched the Blends business in India very recently. As a result, the revenue base is significantly low. However, going forward, we could see a decent revenue run rate for Blends in this region. Stock Idea Lockheed Martin Advanced Energy Contract The company announced that has signed a preferred supplier agreement with the American company, Lockheed Martin Advanced Energy Storage. The agreement is for the supply of speciality chemicals. Lockheed Martin Advanced Energy is an energy storage technology and renewable fuels company that develops flow battery systems. In our view, the opportunity size for CFIN from the Lockheed Martin Advanced Energy contract could be significant in the next 7 years. However, since the innovative technology is still in its nascent stage, it will take some more time to gain critical mass scale. Minit Jhaveri Minitjhaveri@chamatcar.com For Private Circulation Only 1

2 Investment Rationale Hold dominant market share Food antioxidants help to extend the shelf life of products and are used in wide range of products including fried snack food, confectionery and dairy products. CFS is a leading producer and exporter of antioxidants TBHQ and BHA, having more than 45% of the market share in the ~USD3.2bn global antioxidants market. In the antioxidants business, CFS is uniquely positioned with both backward & forward linkages. While backward integration has provided captive access to raw materials, forward integration would help in expanding product pipeline. Forward and backward integration The company s strategy to continuously enhance its share of the addressable market with the launch of more and more downstream products improves revenue visibility and de-risks its revenue portfolio. Additionally, the management s thought process to reduce dependence on key RMs from open market through Borregaard acquisition turnout will be a game changer. In order to further gain control over availability of key RMs, and to enhance its cost advantage and reduce single location risk, the company is expanding its manufacturing base in India. In our view, CFIN has positioned itself well through its forward and backward integration strategy for the next level of revenue growth and margin performance. International business CFS generated 81% of the sales in the international market. In addition to acquisition, global foot print also expanded through internal initiative, setting up of blend manufacturing/ Sales facilities in Brazil/US. Given the high overlap in end market for various product cross selling potential is fairly high across both geographies and product line. Further, we believe that wide global feet print increases visibility. Major acquisition Year Company Location 2011 Borregaard Italy 2016 Dresen Quimica Mexico 2017 Chemolution India 2017 CFS Wanglong China CFS has been able to set up a global operational setup, entailing presence in multiple geographies and a wide consumer base. For Private Circulation Only 2

3 Global acquisition to boost sales As official advisors to CFIN s recently concluded qualified institutional placement (QIP) for raising Rs 1.5 billion. The QIP and the promoter s equity infusion of Rs 840 million is the true financial closure of its Greenfield capacity expansion at Dahej, which offers strategic backward integration to its front-end business of food additives (blends) and vanillin. CFIN made two strategic initiatives, including: (1) majority stake acquisition in a Chinese vanillin plant that positions itself as one of the top-3 manufacturer in the world, and (2) signing a long-term supply pact for a specialty chemical product with US-based Lockheed Martin for the latter s innovative storage battery application. We expect CFIN s turnaround in H2FY18 and a robust five-fold EBITDA jump over FY18-20 After achieving global leadership in antioxidants ingredients, CFIN moved into food additives (blends) in FY15 in a small way, which grew vastly with the acquisition of 65% stake in Mexican blender Dresen Quimica in early Q1FY17. The acquisition opened up the large opportunity of animal feeds and profitable opportunity of pet food. Leveraging Dresen s product portfolio and technical capability, CFIN increased its blends business presence into the US and the EU. We see 37% CAGR in its blends sales over FY17-20 (2.5x jump) to Rs 3.92 billion. Optimistic view of management CFIN Guides for 30% growth in its self life business (including blends) for the next 3-4 years. The blend business will see much faster growth than the antioxidant ingredient business. Currently, CFIN has presence in 4 applications: 1) Animal Food(70% of self-life business), 2) Human Food 3) Pet feed 4) Biodiesel For FY19, CFIN expects in the blend business: 5) Brazil to have a margin of 12-13%, 6) EU margin in range of 10%, 7) US will break-even, and 8) Mexico will see strong double digit sales growth and margin in the range of 20%. CFIN s vanilla plant in China achieved capacity utilisation of 60% in FY18 with EBITDA margin of 3%. Expect to achieve optimal utilisation in next couple of year with significant margin expansion. The global demand for vanilla is ~20,000TPA. The global vanilla market is growing at rate of 2.3% of which Asia, China, India, Indonesia (countries with high population) are growing at a much faster rate compared to developed markets like EU and US. Also, CFIN does not see any risk of environmental policy in China for its plant, as it is in the industrial area. CFIN expects Dahej plant for manufacturing of Hydroquinone (HQ) and catechol (CH) to be commissioned by Q4FY19; FY20 will see a fully commercialised operation. The Dahej plant will help CFIN to reduce its procurement costs by at least US$ per kg (from US$ 3.5/kg) which will help it to expand CFIN s margin profile from FY20. The estimated capex for Dahej is ~Rs 1.5bn; expects asset turnover of 2x. For Private Circulation Only 3

4 CFIN guides for revenue of Rs 9 9.5bn with EBIDTA margin of +12% in FY19. Also indicates that EURO softening against USD will help the company to expand margins further. In FY20, CFIN expects revenue of Rs 14bn with EBITDA margin in the range of 17 18% (considering Dahej commercialization. Entry in Vanillin manufacturing a strategic move In line with its product portfolio expansion plan, CFIN launched aroma and flavoring compound Vanillin in The basic RM to manufacture Vanillin is Guaiacol, which is a derivative of Catechol. Having captive access to Catechol, CFIN s entry into the Vanillin market was a no brainer (natural forward integration move). Additionally, CFIN s recent acquisition of Ningbo Wanglong, China favorably places it to capitalize on the high-growth Vanillin market. This gives CFIN an entry into the Fragrance business, given that Vanillin is a base chemical for all flavors and fragrances. The company s marketing presence across US, Europe, Mexico, Central America and China also looks positive for expansion in this space. CFIN acquired a 51% stake in Ningbo Wanglong, China for a total consideration of Rs600mn. Ningbo is engaged in R&D and manufacture of flavors & fragrance products (Vanillin). Ningbo sells its products directly to the food manufacturers, distributors and industrial customers globally. The total capacity of the plant is 4,800MTPA, which is currently operating at 56% capacity utilisation (2,700MTPA). The acquisition was largely funded through debt (yet to reflect in balance sheet) Change in product mix coupled with capacity addition Camlin Fine Sciences has expanded its production capacity from ~4500 tonnes in FY14 to tonnes of antioxidants (9MFY2016). Moreover, the company is setting up new facility. This will provide volume/sales growth in coming years. Camlin s move to add capacity, revenue mix in favor of high margin products and backward integration provides healthy earnings growth visibility (CAGR of 22% over FY16-18E). Further the company s strategy to forward integrate itself in blend business and introduction of new product in Aroma vertical will scale up its size of business. Given the shift in revenue share in favour of high margin products HQ and introduction of new value added products, we expect ~386 bps expansion in EBITDA margin of CFSL over FY15-18E. We expect CFSL to deliver healthy earning CAGR of ~22% over FY16-18E. We expect CFSL to generate Operating cash flow with healthy earnings growth visibility, RoE to sustain above 20% in coming 2-3 yrs. For Private Circulation Only 4

5 New project at Dahej SEZ, gujarat for hydroquinone and catechol manufacturing within the SEZ set up The main driver for Dahej expansion project is to become a leading Diphenol supplier in the world, with product portfolio having a growing demand globally for HQ, Catechol and Vanillin as well as its derivative/ down-stream products for expanding its Performance Chemicals portfolio. With regards to its progress, the Company has received environment clearance on the project. It has appointed the Project management Consultant of international repute and the project is expected to be in commercial production from FY and is progressing as per schedule. Update on Dahej CFIN had announced the Dahej project in FY16 to manufacture HQ and CT. However, the project got stuck due to lack of funds. Since adequate funds are available with CFIN now, the Dahej facility should be ready in 12 months. We expect the full Dahej capacity to come on-stream by the end of FY19. Payback period The payback period should not be more than 3-4 years. The 10K MTPA plant will strengthen HQ/ CAT sourcing and materially lower production cost. Reliance on import will decrease, lowering working capital. This along with tapering capex will higher scales for the company. Performance chemical The Performance Chemicals Division focused on deeper market penetration, by adding distribution channels in newer geographies. The Company has a distribution hub in China and has started catering to customers from this hub. Next focus is the entry into other key markets like US and Latin America for which setting-up of distribution hubs are in progress. For Tertiary Butyl Catechol (TBC), newer markets like Japan have been added with arrangements for a local facility for making solutions. In addition, there is an increased demand from customers in China. New customers have been added in Iran, Malaysia, Korea and some other key markets. Product approvals for Hydroquinone Monomethyl Ether have been received from customers in China, US and Europe. Supplies have started to customers in these geographies. ODEB has been approved by two major customers in India and commercial supplies have started. The Company has tapped market in other geographies where approvals processes are at advanced stage. For Private Circulation Only 5

6 Key Risk Availability of Raw material The availability of key raw materials from international sources at the right quantity and at right price is also a risk factor associated with the business of the Company. However, the Company has mitigated this risk with CFS Europe S.p.A., which facilitates backward integration. The main raw material supplies are thus available at the right quantity and at right price through proper planning and with due diligence for the compliance of all aspect of transfer pricing Currency Risk On the international currencies front, volatility of exchange rate is a matter of concern for a Company because major sales are in the form of exports worldwide besides corresponding imports in foreign currency for key raw materials. Government Policies Lack of clarity on future Government policies continues to be an area of major concern for the industry. The exact impact of this cannot be assessed until the proposed changes are actually introduced and implemented. For Private Circulation Only 6

7 Growth Opportunities HQ and CT are downstream products Globally, there are ~6 players that manufacture HQ.. The market size for HQ is 60,000MTPA and is expected to increase to 78,000-80,000MTPA in the next 3 years. For Catechol, the market size is 40,000MTPA and is expected to increase to 44,000-45,000MTPA over the next 3-4 years. CFIN faces tough competition from Rhodia (25,000-26,000MTPA capacity) in manufacturing HQ and CT. However, post the Dahej expansion (10,000MTPA) and taking into consideration the existing CFIN Europe capacity (12,000MTPA), CFIN would be at par with Rhodia in terms of size. Rhodia sells HQ after using it partly for manufacturing MEHQ (leader in this product). CFIN majorly consumes HQ for captive purpose and sells the residual output in the market. Moreover, Rhodia is not present in HQbased downstream products, giving CFIN a leeway to exploit this market. Earlier, Rhodia was into BHA market but was out priced by CFIN. Our positive stance on CFSL is supported by company s move to add capacity, shift revenue mix in favor of high margin products and backward integration. This provides healthy earnings growth visibility (CAGR of 22% over FY18-20-E). Further, the company s strategy to forward integrate itself in blend business and introduction of new product in Aroma vertical will scale up its size of business Recent Update International Finance Corporation (IFC) plans to invest up to $30 million (Rs 205 crore) in chemicals firm Camlin Fine Sciences Ltd to finance the development of a new unit, as well as for other purposes. The capital infusion in the listed firm will be through debt and quasi-equity instruments The company would use the funds from IFC for development of a new facility at Dahej in Gujarat to produce diphenols. Besides that, the funds would be deployed for working capital requirements for growth in sales of new products and refinancing of a term loan. For Private Circulation Only 7

8 Stock Rating Scale Particulars Price Appreciation (%) Strong Buy : >25% Accumulate : 12-25% Hold : 7-12% Reduce : 0-7% Sell : < 0 Disclaimer: CNI Research Limited A/120, Gokul Arcade, Sahar Road, Vile Parle (East) Mumbai Tele Fax This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document is solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. We have vested interest in the stock. Copyright in this document vests exclusively with CNI Research Ltd. For Private Circulation Only 8