Camlin Fine Sciences Ltd.

Transcription

1 Initiating Coverage March 2016 Sector: Chemical Camlin Fine Sciences Ltd.

2 Company Background Camlin Fine Sciences Ltd. (CFSL) is one of India's leading manufacturers and exporters of Bulk Drugs, Fine Chemicals and Food Grade products. CFSL presence can be divided in three segments : Anti- oxidants CFSL Performance Chemicals Aroma CFSL is the market leader with 45% share in the global anti-oxidant industry. CFSL is one of the major global producers of Vanillin based on Catechol/ Guaiacol route. Camlin Fine Sciences Ltd. 1

3 Camlin Fine Sciences Ltd. (CFSL) CMP INR 77 Target Price (TP) INR 116 Recommendation Buy CFSL NSE Code CAMLINFINE BSE Code Equity Shares (mn) 95.9mn Rs. in mn E 2017E 52-Week Range (INR) Revenue 5,554 5,013 6,463 Market Cap (INR bn) Avg. Value traded (INR mn)/vol 000 INR 7.44bn (INR 31.5mn) / 315 shares EBIDTA ,311 PBT PAT Free Float (%) 60% EPS Camlin Fine Sciences Ltd. 2

4 Camlin Fine Sciences Ltd (CFSL) is one of India's leading manufacturers and exporters of Bulk Drugs, Fine Chemicals and Food Grade products. Today, CFSL is the world's second largest manufacturer and marketer of food grade antioxidants TBHQ and BHA. Its facilities are HACCP and ISO 9001: 2000 certified. In 2006, Fine Chemical Division of Camlin Limited was de-merged into a separate company - Camlin Fine Sciences Limited. Total promoter share shareholding was 40.1% at 30th September 2015 and was 52.5% at 30th September (None of the shares have been pledged). CFSL has manufacturing facilities in Tarapur (owned), Mahad and Khopoli (outsourced), Ravenna (Italy) and Indaiatuba (Brazil). Key Managerial Personnel Chairman Mr. Dilip D. Dandekar Managing Director Mr. Ashish D. Dandekar Executive Director & CFO Mr. Dattatraya R. Puranik Camlin Fine Sciences Ltd. 3

5 Investment Summary Global leader in anti-oxidants EBITDA CAGR of 31% over FY New Capacity additions drive revenue growth from FY16; New plant at Dahej to start in 2H FY18. YoY EPS growth of 70% in FY17; expected to rise further in FY18 because of the low base effect in FY16. Our target price over the next 12 months is Rs.116/-(20x next 4 quarters EPS of Rs.6) Camlin Fine Sciences Ltd. 4

6 Camlin Fine Science Ltd. March 2016 Global Leader in Anti-Oxidants, Adding Capacity in Performance Chemicals Antioxidants TERT-BUTYL HYDROQUINONE (TBHQ) BUTYLATED HYDROXYANISOLE (BHA) As an antioxidant As an antioxidant Aroma Vanillin Ethyl Vanillin As a food flavouring agent As a food flavouring Agent Performance Chemicals Guaiacol Veratrole Tertiary Butyl Catechol (TBC) As an intermediate for manufacturing Vanillin As an Intermediate for the pharmaceutical and agrochemical industry An important polymerization inhibitor for the petrochemical industry. Hydroquinone Mono Methyl Ether (MEHQ) a polymerisation inhibitor in the petrochemical industry Camlin Fine Sciences Ltd. 5

7 Segment Application of Vanillin & Ethyl Vanillin Food Segment Bakery products, Confectionery, Nutritional Supplements Powder, Drinking Chocolate, Puddings, Custard Powder, Flavoured Milk, Vanilla Sugar Flavour & Fragrance Flavours, Fragrance, Perfumes, Attar. Incense Sticks Segment Incense Sticks Pharma Pharma Syrups, Compressed Tablets & biscuits, Pharma API. Cattle Feed Segment Cattle Feed Camlin Fine Sciences Ltd. 6

8 Antioxidants The applications in food are primarily to increase the shelf life for the processed food manufacturers. Aroma Purpose of using Vanillin & Ethyl Vanillin These products are used to give food and beverages a flavour of vanilla, to enhance other flavours or to mask or smoothen unwanted off-flavours. Performance Chemicals Performance Chemicals have a wide range of applications in the field of paints & inks manufacturing, resins, for rubber stabilization, as petroleum additives & stabilizers for biodiesel, acrylic acid, butadiene & for polymers such as polystyrene, polyvinyl chloride etc. Veratrole is an important intermediate for the pharmaceutical and agrochemical industry. Camlin Fine Sciences Ltd. 7

9 CFSL expands in Brazil and North America CFCL Mauritius Pvt. Ltd. CFS Europe S.p.A. Engaged in manufacture and sale of key raw materials required by CFCL CFS do Brasil Indústria, Comércio, Importação e Exportação de Aditivos Alimentícios Ltda. Manufactures and markets customized blends to cater to the Latin American market. Handles distribution of bulk antioxidants and vanillin. Solentus North America Inc. Engaged in sales, marketing and distribution of antioxidants, food ingredients, blends, formulations etc. in USA and Canada Camlin Fine Sciences Ltd. 8

10 EBITDA CAGR of 31% over 4 years Amount in Rs mn FY12 FY13 FY14 FY15 Sales Rs. 3,394 3,829 5,172 5,706 EBITDA Rs EPS Rs ROIC 31% 41% 47% 46% ROE 7% 23% 31% 41% CAGR (FY12-15) Sales 19% EBITDA 31% EPS 141% Camlin Fine Sciences Ltd. 9

11 Dahej Plant to start in FY18 A Game Changer New facility is being set up at Dahej SEZ for manufacture of 9000 MT p.a. of Hydroquinone and 6000 MT p.a. of Vanillin - Expected date of commissioning is September, Green process for production of Guaiacol manufacturing commissioned - March, (patent applied) CFSL is setting up new subsidiary Companies in China and Mexico to service these markets. CFSL has started developing natural shelf life extension products, which will also be launched to complete the basket of antioxidants. Capex plans in the performance chemicals division are expected to be completed in FY16. This Division had already shown a growth of over 40% in FY15. The capex will boost the coming quarters as well. Camlin Fine Sciences Ltd. 10

12 Management led by Dandekar family Mr. Ashish S. Dandekar (Managing Director) B. A. in Economics and Management Studies from Temple University, USA He has wide experience of 30 years in the field of Pharmaceuticals and Fine Chemical Products including Business Planning, Information Systems, Research & Development, Product Development and Marketing. The CFSL Senior Management Team also includes: Chairman : Mr. Dilip D. Dandekar Executive Director & CFO : Mr. Dattatraya R. Puranik Executive Director : Mrs. Leena A. Dandekar Camlin Fine Sciences Ltd. 11

13 Corporate Governance No Red Flags to Worry About A practicing company secretary has confirmed compliance with the conditions of Corporate Governance as stipulated in the Listing Agreements. Camlin voluntarily complies with the following non-mandatory matters relating to corporate governance Non-executive Chairman to the Board, Reporting of internal auditor to the Audit Committee and Separate posts for Chairman and Managing Director. Annual Report mentions that CFSL did not enter into any materially significant related party transactions, which had potential conflict with the interest of CFSL at large. The biggest transaction appears to be services rendered to CFSL by key management personnel and their relatives amounting to Rs mn Camlin Fine Sciences Ltd. 12

14 Remuneration is Within Limits Remuneration to KMP: Remuneration to Managing Director, Whole-time Directors and/or Manager was Rs 30.10mn against ceiling as per the Companies Act of Rs mn. All other directors were paid remuneration of Rs 7.51mn. Total managerial remuneration was Rs 37.61mn against overall ceiling as per the Companies Act of Rs mn Remuneration to KMPs (Rs in Mn) FY15 FY14 % change YoY Mr. Ashish S. Dandekar % Mr. Dilip D. Dandekar % Mrs. Leena A. Dandekar Mr. Dattatraya R. Puranik % TOTAL % Total as % of Consolidated PAT 6% 8% Total Employee Cost % Total Remuneration to KMP as % of Total Employee Cost 8% 7% Information sharing with investors: Company website shows one presentation made to investors after FY15 results announcement. Company does not appear to be conducting any conference calls with investors/analysts after announcement of quarterly results as there are no transcripts available of the website. Camlin Fine Sciences Ltd. 13

15 Global Leader in Antioxidants For FY 2015; 82% of the CFSL s revenue constitutes of International revenue and balance 18% of India revenue. CFSL was successful in holding on to its share in major markets and registered a growth in the emerging markets of South America and Asia by extensive customer reach. With more than 45% of the global market share, CFSL is the World s largest producer and exporter of Food Grade antioxidants TBHQ and BHA. CFSL has a secure raw material supply and has become 100% backward integrated in procuring Hydroquinone (HQ), which forms around 55% of its raw material cost. CFSL is creating distribution hubs in key markets like North America, Asia and Latin America. Camlin Fine Sciences Ltd. 14

16 Aggressive Expansion in Performance Chemicals PRODUCT MARKET DEMAND COMMENTS Guaiacol Tertiary Butyl Catechol (TBC) 5000 MT/p.a. worldwide Enhanced capacity by 100%. Its further downstream use for Vanillin will be visible by FY17. CFSL is expected to achieve 16% market share. Veratrole 2000 MT/p.a. CFSL aims to capture 70% market share in FY16. HQMME 6000 MT/p.a. CFSL will commence manufacturing with a capacity of 1200 MT/p.a. by FY16. 4-Methoxy Acetophenone There are very few manufacturers of this product in the world. The production is expected to be commenced by FY16. MDB-Methylene Dioxybenzene 5000 MT/p.a. worldwide CFSL has started the pilot plant trials of the products and expect the production to be commenced by FY16 1-Chloro-2,5-Dimethoxy Benzene 2000 MT/p.a. CFSL has started the pilot plant trials of the products and expect the production to be commenced by FY16 Camlin Fine Sciences Ltd. 15

17 Risks are well mitigated Business Risk The risk of over dependence on few overseas suppliers for key raw material and its price sensitivity. This has been taken care by acquisition of Borregaard Italia S.p.A. (i.e. CFS Europe S.p.A.) making it in-house supplier of raw materials Financial Risk Currency fluctuation risk due to export sales and corresponding key raw materials imports;. This has been mitigated by effective forex management policy and the natural hedge provided by exports as CFSL is a net exporter. Regulatory Risk Regulatory risk refers to CFSL s exposure to changes in legislation and regulations. This could include events like governmental price regulations, taxation, tariff policies, or new regulations banning a product or imposing manufacturing, marketing and use restrictions making it unjustifiable to produce. Camlin Fine Sciences Ltd. 16

18 Quarterly Update Consolidated P&L Account (Rs. In mn) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Net sales 1,110 1,696 1,216 1,137 1,187 Other Operating Income Total Earnings 1,101 1,703 1,233 1,151 1,206 Less: Operating Expenses 952 1, ,057 EBITDA Depreciation PBIT from Operations Other Income PBIT Interest PBT before Exceptional Items (Contd.) Camlin Fine Sciences Ltd. 17

19 Quarterly Update Consolidated P&L Account (Rs. In mn) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 PBT before Exceptional Items Exceptional Income/ (Expense) PBT after Exceptional Items Tax expenses PAT Share of Associates / Minority Interest PAT after Minority Interest Camlin Fine Sciences Ltd. 18

20 Quarterly Update The other expenses rose to 34% of sales in 3QFY16 as compared to the annual cost of 27% in FY2015. The company has not issued any explanation for such a steep increase in expenses. EBITDA margins increased from 11.8% in 3QFY15 to 12.3% in 3QFY16. According to media reports, the plant in Italy was shut for 7 weeks in December quarter. In FY15 it was closed for 4 weeks in September quarter. This has resulted in lower international earnings. According to media reports, CFSL incurred operational expenses of Rs85mn spent on Blends business for process refinement and yield improvement. This will reduce power cost and result in better production output leading to improving profitability in the future. There was a tax credit entitlement in FY15 which resulted in negative tax outflow. Where as in FY16, normal tax rates are applicable. Hence, the performance should be compared at PBT levels instead of PAT levels. In FY15 CFSL reported bad debt provisions of Rs83m and losses due to exchange fluctuations of Rs41mn. Quarterly break up of these expenses is not available. These expenses may have recurred in FY16 and make QOQ and YOY comparisons meaningless. During the 9MFY16, Tax impact on consolidated accounts include charge of tax in Italian books to the extent of Rs mn, which also includes Rs mn which is not payable due to the possibility to offset against existing tax credit; thereby giving positive cash accruals during the current financial year. However, the charge of Rs mn in the Italian books is impacting the PAT during the current period of 9MFY16. This may have to be reversed if the offset is granted. Camlin Fine Sciences Ltd. 19

21 Plans for FY16E and beyond CFSL has started Green process for production of Guaiacol manufacturing commissioned - March, For which patent application has been made. CFSL is setting up new subsidiary Companies in China and Mexico to service these markets. CFSL s new plant at Dahej SEZ in Gujarat for manufacturing catechol, hydroquinone and vanillin is expected to be commissioned in September It has the capacity to manufacture 9,000 tonnes per annum of hydroquinone and 6,000 tonnes per annum of vanillin. CFSL has enhanced capacities for the existing and new products and brought about cost efficiencies during FY15. Full benefit of these actions will be seen from FY16E. CFS ANTIOXIDANTES DE MEXICO S.A. DE C.V., Mexico (CFS Mexico) has entered into an agreement to buy 65% stake in DRESEN QUIMICA S.A.P.l.de C.V., Mexico (Dresen) along with its group companies for a consideration of USD 7.8 Mn. Dresen is engaged in manufacturing and distributing specialty intermediate chemical solutions used by the feed, food and other industrial products. The acquisition is set to be completed by 2nd May The prospects and costs of this acquisition have not been factored in our estimates. Camlin Fine Sciences Ltd. 20

22 Financial Analysis Profit & Loss A/c FY14 FY15 FY16E FY17E FY18E Comments Ratios EBITDA margin 14% 15% 19% 20% 21% EBITDA margin is steadily increasing. PBT margin 7% 10% 10% 14% 15% PAT margin 6% 10% 7% 19% 10% Tax rates to normalize FY 16 onwards EPS Rs RoCE 47% 46% 38% 46% 43% Balance Sheet Ratios RoE 31% 41% 20% 26% 34% Return on Equity displays a steady increase. Debt Equity Ratio Five Stage Du Pont Analysis PAT /PBT 82% 104% 65% 65% 65% Negative tax outflow led to high ratio in FY 2015 PBT /PBIT 59% 69% 69% 78% 79% PBIT /Sales 12% 14% 15% 18% 19% Sales / Capital Employed Capital Employed / Net Worth 408% 330% 252% 256% 229% 136% 125% 119% 115% 148% RoE 31% 41% 20% 26% 34% Camlin Fine Sciences Ltd. 21

23 Assumptions for Forecasts of FY16-18 Due to the acquisition of CFS Europe S.P.A, there was an entitlement to tax benefit in FY2015. Hence there was no tax outflow during the year. FY2016 onwards, CFSL will pay tax at normal rates. The other expenses have risen to 31-37% of sales in FY16 as compared to adjusted cost of 27% for FY2015. The company has not issued any explanation for such a steep increase in expenses. We build in other expenses at 34% of sales for remaining part of FY16 and for FY17, based on our assumption of increased costs of operation due to new business acquisitions. The cost of raw materials has come down in FY16 largely due to lower crude oil prices. We have assumed the material cost to remain at the current levels. Our forecast is based on starting Dahej plant by end September 2017 adding to revenues from 2H FY18 Camlin Fine Sciences Ltd. 22

24 Profit & Loss Account Particulars (Amt In Rs. Mn) E 2017E 2018E Net Sales 5,085 5,554 5,013 6,463 10,660 Direct Costs Cost Of Material Consumed 2,757 2,705 2,010 2,405 3,851 Employee Benefit Costs Gross Profit 1,973 2,436 2,592 3,457 5,818 SG&A 1,336 1,581 1,706 2,198 3,624 EBITDA ,260 2,193 Depreciation & Amortisation EBIT & Other Income ,073 1,940 Other Income(net) EBIT Before Exceptional Item ,168 2,040 Interest Profit Before Exceptional Item ,620 (contd ) Camlin Fine Sciences Ltd. 23

25 Profit & Loss Account Particulars (Amt In Rs. Mn) E 2017E 2018E Profit Before Exceptional Item Exceptional Item - 4 Foreign Exchange Gain/(Loss) PBT Tax Expense PAT Minority Shareholders (Gain)/Loss Net Profit EPS , , , , Camlin Fine Sciences Ltd. 24

26 Balance Sheet - Liabilities Particulars (Amount In Rs. Mn) Mar-14 Mar-15 Mar-16E Mar-17E Mar-18E Shareholders Funds 933 1,349 1,704 2,235 3,183 Non-Current Liabilities Long Term Borrowings ,469 Other Long Term Liabilities Long Term Provisions Total ,525 Current Liabilities Short Term Borrowings 1,040 1,210 1,431 2,084 1,719 Trade Payables 1,000 1, ,240 2,044 Other Current Liabilities Total Current Liabilities 2,459 2,615 2,750 3,681 4,121 Total Liabilities 3,726 4,297 4,779 6,241 8,829 Camlin Fine Sciences Ltd. 25

27 Balance Sheet - Assets Particulars (Amount In Rs. Mn) Mar-14 Mar-15 Mar-16E Mar-17E Mar-18E Non-current Assets Fixed Assets 1,052 1,092 1,937 2,650 3,397 Non-Current Investment Long Term Loans &Advances Other Non-current Assets Total 1,159 1,310 2,150 2,863 3,610 Current Assets Inventories 1,092 1,364 1,236 1,594 2,628 Trade Receivables 1,013 1,134 1,030 1,328 2,190 Cash & Bank Balance Other Current Assets Total 2,568 2,987 2,629 3,378 5,220 Total Assets 3,726 4,297 4,779 6,241 8,829 Camlin Fine Sciences Ltd. 26

28 Cash Flow Statement Particulars (Amount In Rs. Mn) E 2017E 2018E Cash Flows from Operating Activities , Cash Flows from Investing Activities , ,000 Cash Flows from Financing Activities Net increase in cash and cash Equivalents Cash And Cash Equivalents as at the beginning of the year Closing Cash Margin Money Cash And Cash Equivalents as at the end of the year Free Cash Flow Camlin Fine Sciences Ltd. 27

29 Target Price is 51% Higher than Current Price Particulars Rs. per share EPS of next 4 quarters 6 PE Multiple 20 Target Price by end December Current Market Price 77 Price to Earnings Chart CMP PE Average 23 Min 14 Median 24 Max Camlin Fine Sciences Ltd. 28

30 Valuation EPS Of FY16 Hurt By Increase In Tax Rate PAT estimates for FY16 are not comparable to FY15 due to the negative tax rate in FY15. Tax credit entitlement of Italian subsidiary acquired led to this situation. Risks to Valuation Mark to Market Gains / Losses and Bad Debt provisions are reported only on an annual basis by the company. The valuation will be impacted due to lower EPS. Relative Valuation : Compared To Peers There are no listed comparable peers for CFSL. Globally Solvay operates in this segment but has many other businesses as well. Relative Valuation - Self At Different Time Acquisition in Europe has changed nature of business materially in FY15. The company has started giving consolidated financials for the first time in FY Camlin Fine Sciences Ltd. 29

31 Disclaimer I, Prashant Vaishampayan, Research Analyst Registration no INH ( valid till 2 Feb 2021) comply with the qualification and certification requirements under SEBI (Research Analyst) Regulations, All of the views expressed in research reports issued by me reflect my personal views about the Subject Company or companies at the given point of time and I do not receive/accept any kind of compensation, directly or indirectly related to specific recommendations or views expressed in reports issued by me. I/my relatives does not at any point of time of issuing the reports have any material conflict of interest in the subject company neither I was/am/will be engaged in market making activity for the subject company. The investment discussed or views expressed in reports issued by me may not be suitable for all investors. The user assumes the entire risk of any use made of this information. I/any person connected with my report, accept no liability arising from the use of research document. The recipients of research document should rely on their own investigations and should consult their own advisors to determine merit and risks of such investments. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed in research reports will be based on the current opinions as of the date appearing in research report. While I endeavor to update on a reasonable basis the information discussed in research reports, there may be regulatory, compliance, or other reasons that prevent me from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. In so far as reports include current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Camlin Fine Sciences Ltd. 30