resuming coverage 17 may 2018 navin fluorine … fluorine - resuming coverag… · net sales (in rs...

RESUMING COVERAGE 17 MAY 2018

Navin Fluorine International BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Alive and kickingNavin Fluorine International Ltd’s (NFIL IN) four decade long experience in handling niche Fluorine chemistry, strategic tie ups with significant entities (viz Honeywell PLC and Piramal Enterprises), prudent allocation of carbon emission reduction credits (earned ~ Rs 4.0 bn from FY11-FY13 to invest in Specialty Chemicals and CRAMS) and faster than expected growth in CRAMS business (expected to grow at a CAGR of 65.8% from FY15-20E) are a testament to NFIL’s journey of being the strongest player in Fluorine chemistry. NFIL has a strong balance sheet with a likely improvement in return ratios (ROE/RoCE to go up from 13.5%/11.4% in FY16 to 18.3%/17.4% in FY20E respectively).

The capex of Rs 1.15bn announced in Dec-17 for the CRAMS business unit is expected to come on-stream by the end of 1QFY19 and will likely add Rs 2.3bn (2x asset turns) to its topline by FY23E.We believe the CRAMS BU is expected to grow at a faster pace due to strong enquires from innovator pharma companies.

While CRAMS business unit is expected to contribute 35% of NFIL’s topline by FY20E (from 6% in FY14), growth from the Refrigerants , Specialty Chemicals and Bulk Fluorides business is expected to be rather modest. NFIL’s astute management is expected to

catapult the much nascent CRAMS BU on the back of kilo to tonne level manufacturing facilities, synergies flowing in from Manchester Organics (MOL) acquisition & probable opportunities from post-commercialization stages. We have presented a comprehensive case study of a Chinese company (Yongtai Tech Ltd) to explore the likely opportunities in CRAMS.

The stock price has seen a significant run-up (~5x in 3 years) with limited scope for further re-rating in valuations, we expect the stock performance to mimic earnings growth (17.2% earnings CAGR from FY17-20E). We are valuing NFIL at 22x FY20E EPS of Rs 40.4 and resume coverage with a TP of Rs 890.

Financial Summary Rs mn FY16 FY17 FY18P FY19E FY20E

Net Sales (in Rs mn) 6,797 7,477 9,516 10,598 12,564

Growth (%) 14.9 10.0 27.3 11.4 18.6

EBIDTA (in Rs mn) 1,174 1,578 2,288 2,514 3,045

EBIDTA Margin (%) 17.3 21.1 24.0 23.7 24.2

APAT (in Rs mn) 835 1,110 1,635 1,874 2,307

EPS (Rs.) 17.1 22.7 33.4 38.3 47.1

P/E (x) 43.3 32.5 22.1 19.3 15.7

EV/EBITDA 30.8 22.5 15.3 13.8 11.3

RoE (%) 13.5 15.8 19.9 19.8 21.1 Source: Company,HDFC sec Inst Research

INDUSTRY CHEMICALS

CMP (as on 17 May 2018) Rs 737

Target Price Rs 890 Nifty 10,683

Sensex 35,149

KEY STOCK DATA

Bloomberg NFIL IN

No. of Shares (mn) 49

MCap (Rs bn) / ($ mn) 36/53

6m avg traded value (Rs mn) 54

STOCK PERFORMANCE (%)

52 Week high / low Rs 880/560

3M 6M 12M

Absolute (%) (6.5) 7.0 24.7

Relative (%) (10.2) (1.5) 7.5

SHAREHOLDING PATTERN (%)

Promoters 31.1

FIs & Local MFs 16.8

FIIs 17.6

Public & Others 34.5 Source : BSE Archit Joshi [email protected] +91-22-6171-7316 Nilesh Ghuge nilesh,[email protected] +91-22-6171-7342

NAVIN FLUORINE: RESUMING COVERAGE

Page | 2

Yongtai Technology Ltd: A CRAMS Case study

As the CRAMS BU of NFIL is opaque in terms of product profile, order book, nature of the intermediate (n-1 to n-10) and phase of the drug (phase 1 to phase 4). We would like to put into perspective the addressable opportunity NFIL may have in the CRAMS.

We found striking similarities between the business model of Navin Fluorine’s CRAMS business and that of Yongtai tech’s (a Chinese company) CRAMS business. Also, both companies have similar technical capabilities.

Yongtai Technology (Zhejiang Yongtai Technology Co., Ltd) founded in 1999, headquartered in Linhai (400 km south of Shanghai, China) is listed on the Shenzen Stock Exchange. Yongtaichem is engaged in the manufacturing and custom manufacturing services of fluoro molecules and serve the needs of customers in the Liquid Crystal Display (LCD), Pharma, and Agro industries.

Yongtaitech derives ~38% of its total revenues from the Pharmaceutical Industry within which the company is supporting the development of various drugs used in the forefront of medical treatment, such as Antidiabetic agent, Antiatheroscloresis agent, Antihypertensive agent, quinolone antibacterial agent for the treatment of infections and Antifungal agent.

The company provides fluoro intermediates to both generic and patented drugs with an established fluorination strength to serve drug makers from China and India and top pharmaceutical innovators around the world.

The company has grown its sales/operating profit/PAT at a 7 year CAGR of 27.3% to Rs 27.0bn (~Yuan 2.75bn).

The Pharmaceutical business has grown at a 7 year CAGR of 19.2% to Rs 10.0bn (Yuan 1.02mn).

Similar Technical Capabilities:

Yongtaitech Navin Fluorine Source: Company,HDFC sec Inst Research

Yongtai tech has more than 50 skilled and innovative Chemists and Researchers. The company has collaborated with Zhejiang University of Technology and Zhejiang University for new technology cooperation and setting up new Labs. Yongtaitech had 70 authorised patents, 110 patent applications filed has 4 manufacturing facilities and more than 1200 employees.


Page | 3

Pharma segment: A fast growing business for Yongtaitech. Yongtai Science and Technology's existing fluorine-

based pharmaceutical chemicals are mainly used in the fields of new diabetes drugs, antiviral drugs, cardiovascular drugs, quinolones antibiotics, central nervous system drugs, antifungal drugs, etc., and serve a number of global Pharmaceutical giant.

Yongtaitech’s superior R&D paved way for the company to register two blockbuster patented pharma intermediates SITAGLIPTIN and SOFABUVIR.

Sitagliptin is the first drug to treat type 2 diabetes with DDP-4 inhibitor as its mechanism of action. Its trade name is Jienuowei. The Sitagliptin intermediate produced by Zhejiang Yongtai Technology is a company's patented product and the largest supplier of this product which has an annual sales potential of USD 4.0bn.

Sofabuvir is a newly developed patent for anti-hepatitis C drugs developed by Gilead Sciences. This product was approved by the U.S. Food and Drug Administration (FDA) in December 2013 and was approved by the European Union in January 2014. . The batch of drugs that can be used for the entire oral hepatitis C treatment program is also the world's first major new drug that has exceeded USD 10.0bn in sales during the year.

Yongtai manufactures Active Pharmaceutical Ingredients (API’s), Pharmaceutical Intermediates and basic fluorine intermediates. The company also operates under the CRO/CMS business to cater to innovator pharmaceutical and agro-chemical companies.

Due to exposure in basic fluorine intermediates and pharmaceutical intermediates that are used in generic drugs, the gross margin profile of Yongtai is not comparable to that of NFIL’s CRAMS business (considering CRO/CMS activities which fetch high gross/operating margins, for innovator pharma companies are the only businesses in NFIL).

Yongtai has been much ahead in the value chain of Fluorine chemistry especially in the Custom synthesis business in comparison to NFIL. Yongtai derives bulk of its custom synthesis revenues from Pharma industry (~38%) and also has an exposure towards agro-chemicals (~13%) and liquid crystal technology (~13%).

NFIL, believed to be a supplier of novel fluorine molecules which are n-4 to n-10 intermediates, is still working with pre-commercialised molecules. We believe, NFIL is yet to explore the full potential of commercialization. Yongtai, on the contrary has made successful inroads in both the pre and post commercialization stages of developing a pharma drug. For example, Yongtai had set up a separate workshop to manufacture Sitagliptin on a trial basis with an initial output of 60 TPA in 2010.

To sum up, NFIL is yet to enjoy the benefits of moving up the ladder to supply n-1 intermediates, a dedicated tonne level facility for novel fluorine molecules. NFIL is also yet to exploit opportunities in agro-chemicals and other industries which require fluorine chemistry.

We remain believers in NFIL’s ability to scale up its CRAMS business owing to strong focus towards R&D and accelerated execution in CRAMS.

Yongtai had set up a separate workshop to manufacture Sitagliptin on a trial basis with an initial output of 60 TPA in 2010. NFIL is far behind in the value chain of intermediates used in Pharmaceutical drugs. Sitagliptin and Sofabuvir have an estimated sales potential of US$ 4.0bn and US$ 10.0bn respectively.


Page | 4

NFIL’S CRAMS BU expected to grow at a CAGR of 47.2% from FY17-2OE The CRAMS BU registered a growth of 65.6% YoY to

reach Rs 2.02bn in FY18 (excluding revenues from Dahej unit, which will now be part of JV with Piramal). The company started off with this BU in FY13 with a contribution of Rs 130mn. This business has grown 18 folds in just 5 years owing to a strong response from global pharma companies coupled with synergies flowing in from acquisition of Manchester Organics.

Contract research and manufacturing is a high margin business (~65% gross margins) with offerings and capabilities including basic research, library syntheses, process development, scale-up and small & large batch manufacturing for global innovator pharmaceutical companies.

Navin Fluorine has partnered with consequential entities with the help of its enhanced fluorination capabilities. NFIL entered into a supply agreement with Honeywell to produce Honeywell Solstice® yf (HFO-1234YF), an automobile refrigerant with a global warming potential of less than 1.

Navin Fluorine International Ltd formed a JV with Piramal enterprises to manufacture a molecule used by Piramal Healthcare (with an equity investment of Rs 343mn to hold 49% in the JV). The business transfer agreement has surfaced and the operations at Dahej unit are transferred to Convergence Chemicals (JV) from 1st Dec’17. 9MFY18 sales included Rs 550mn from Dahej operations in the standalone CRAMS business of NFIL, which will now cease to exist and be seen on the books of JV. The JV provides assured off-take of its molecule entailing into a constant revenue stream.

Sensing opportunities and higher enquires from pharma giants, NFIL has recently announced the next leg of expansion within CRAMS. The company is expected to invest Rs 1.15bn and the commission the new cGMP-2 plant by the end of 1HFY18.

The management expects to generate asset turnover of 2.0x (incremental Rs 2.3bn to the topline) at a full utilization, which as per their assessment will likely fructify by FY23E. However, basing upon their history CRAMS is expected to grow at a rate faster than expected.

Rs mn FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

CRAMS 140 260 310 870 1,220 2,020 2,908 3,889 Growth (%) 85.7 19.2 180.6 40.2 65.6 44.0 33.7 Domestic (%) 90.0 90.0 - - - - - - Exports (%) 10.0 10.0 100.0 100.0 100.0 100.0 100.0 100.0 % of Total Sales 3.0 5.8 5.7 13.7 18.0 23.1 30.6 35.1

Source: Company,HDFC sec Inst Research

Yongtai had set up a separate workshop to manufactureSitagliptin on a trial basis with an initial output of 60 TPA in 2010. NFIL is far behind in the value chain of intermediates used in Pharmaceutical drugs. Sitagliptin and Sofabuvir have an estimated sales potential of US$ 4.0bn and US$ 10.0bn respectively.


Page | 5

Customs Synthesis Workflow in Yongtaitech China Ltd

Source: http://www.yongtaichem.com,HDFC sec Inst Research


Page | 6

Financial Analysis of Yongtai Tech, China Sales and Sales growth of Yongtai Tech PAT growth of Yongtai Tech

Pharma Industry growth trajectory for Yongtai Tech Business Mix of Yongtai Tech

Source: Annual report -Yongtaitech,HDFC sec Inst Research

Sales/EBITDA/PAT 7 year CAGR for Yongtaitech has been 27.3%/20.9%/20.5% respectively. Pharma business of Yongtai has grown at a 7 year CAGR of 19.2% to Rs 10.1bn from Rs 2.06bn in FY10.

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Liquid chemicals Pharmaceutical Chemicals

Pesticide Chemicals Others


Page | 7

NFIL’s Refrigerants BU to grow at a steady pace

Refrigerants (CFCs and HCFCs) are characterized to have a high Global Warming Potential (GWP) and/or Ozone Depletion Potential (ODP). The refrigerant industry has seen shifts from Chloroforms to CFCs, CFCs to HCFCs and from HCFCs to HFCs. Currently HCFCs like R22 gas are under phase out in developing nations and production of emissive gases shall cease to exist by 2030 as per the phase-out mechanism

India has not only supported the Montreal protocol but also has ratified the Paris agreement which aims to strengthen the global response to the threat of climate change by keeping the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit it even further, to 1.5 degrees Celsius.

After the successful phase-out of Chlorofluorocarbons (CFC) for which the industry has been well compensated for the loss in profit streams by issuing carbon credits, NFIL forayed into the next best alternative Hydrochlorofluorocarbons (HCFC). NFIL has a capacity of ~10,000 MTPA of HCFC-22 gas which is used in domestic air-conditioning and as a feedstock in Pharmaceuticals. Currently, HCFC’s are undergoing phase-out and the target to phase-out will be achieved by 2030 (there is no compensation for phasing out of R22 gas).

Navin Fluorine manufacturers and sells HCFC-22 for emissive and non-emissive applications, while is into the trading business of R-134A. R-134A which is a Hydrofluorocarbon (HFC). HFC’s are scheduled to phase out by 2047 (SRF is the only manufacturer of HFC-134A in India).

The ban placed on imports of R-22 gas and of gas filled compressors in India has helped domestic HCFC manufacturers to fetch higher volumes and realizations. Sale of refrigerant gases is also a function of seasonality; we typically witness higher sales of refrigerants in the fourth quarter due to hot summers in India.

While, HCFC-22 is scheduled to phase-out by 2030 there is no restriction on the production and sales of HCFC-22 as a feedstock to be used in other industries. The management expects to continue sales of R-22 as a feedstock even after the phase-out.

NFIL has entered into an agreement with Honeywell to manufacture HFO-1234YF, which is a hydro-olefin, a next generation refrigerant. HFO-1234YF is considered to be an alternative for R-134A. HFO-1234YF has an ODP of zero and a very low GWP and its demand is increasing at a faster clip due to regulations aimed at reducing global warming by putting production caps on HCFC’S and HFC’s. NFIL is supplying HFO-1234YF to Honeywell on a small scale through a pilot plant set up in Gujarat.

Refrigerants BU is expected to grow on the back of improved realizations due to the imminent cuts in production and stable demand coupled with the existing ban of imports of R-22. The business grew by 14.7% YoY to Rs 2.42bn in FY18 owing to higher realizations. We expect Refrigerants BU to grow at a CAGR of 8.8% from FY17-20E.

HCFC-22 will be manufactured and sold as a feedstock for Pharmaceutical and agro-chemical companies, as production of non-emissive applications of HCFC’s is permitted. NFIL is into the trading business of R-134A (HFC-134A). HFO-1234YF is a next generation refrigerant with a ZERO Ozone Depleting Potential (ODP) and a low Global Warming Potential (GWP).


Page | 8

Refrigerants gases Sales and growth Global market for HCFC’s

Source: Industry, www.ozonecell.com, HDFC sec Inst Research

2013 • Production capped at an average production of 2009 and 2010.

2015 • Production cut by 10% of the capped average production.

2020 • Production cut by 25% of the capped average production.

2025 • Production cut by 32.5% of the capped average production.

2030 • Total phase out of HCFC's.

We expect Refrigerants BU to grow at a CAGR of 8.8% from FY17-20E Indian capacity of HCFC-22 is ~40,000 MTPA

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Middle East and Africa

76,000

China276,000

USA8,000

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12,000

Others28,000

http://www.ozonecell.com/


Page | 9

Inorganic Fluorides: An Exports booster Inorganic Fluorides currently contribute to 17% of

NFIL’s total sales. Products under this business unit find application in Steel, Aluminum, Oil & Gas, Pharma and Agricultural industries.

NFIL manufactures bulk fluorides using Anhydrous Hydrofluoric acid (HF) as its key raw material. Ammonium fluoride, Potassium fluoride, Sodium fluoride, Potassium fluorotitanate, Potassium fluoroborate, Hexafluorophosphoric acid etc are some of the key products in NFIL’s product kitty.

The management has been focusing towards taking advantage of the weak Chinese situation and add more customers in the international market. The company has increased its share of exports in the Inroganic Fluorides BU from 8% (Rs 96mn) to 13% (Rs 192mn) from FY17 to FY18.

The growth from Inorganic fluorides business is likely to be a proxy to the growth of the Steel and Aluminum industry.

We expect Inorganic Fluorides BU to grow at a 3 year CAGR of 12.9% from FY17-20E to Rs 1.72bn.

Sales and Sales growth of Inorganic Fluorides

Export and Domestic Contribution


Exports as a % of Sales have grown from 5% in FY12 to 13% in FY18 Inorganic Fluorides business has grown at a 5 year CAGR of 8.3% from FY13 to FY18.

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Page | 10

Specialty Chemicals: Agro-chemical intermediates to aid growth. The specialty chemicals BU had been a key growth

driver for NFIL till FY17 as it grew its revenues from Rs 1.17 bn in FY11 to Rs 2.26bn in FY17. FY18 has been a weak year for Specialty chemicals BU owing to headwinds in the global agro-chemicals industry coupled with loss of a customer in the domestic pharmaceutical industry.

FY18 revenues from this segment has been flat YoY to Rs 2.26bn and is expected to revive on the back of improving situation of the global agro-chemical industry. NFIL derives ~40% of revenues from Pharmaceuticals industry, ~40% from Agro-chemical industry and the balance of ~20% from the Chemicals industry.

NFIL manufactures specialty chemicals targeted towards Pharma and agro industry using its dedicated multi-purpose plant (MPP) to process multi step products and intermediates which are high in the value chain. NFIL is one of the leading high quality producers of Boron trifluoride gas and it’s adducts.

Lately, the share of exports from this BU has declined from 46% in FY16 to 38% in FY18 due to deferment of orders from global agro-chemical giants. We reckon this to be a temporary cycle and recovery within this BU is in the offing.

We expect Specialty chemicals BU to grow at a 3 year CAGR of 6.5% from FY17-20E to Rs 2.73bn.

Sales and Sales growth of Specialty Chemicals

Export and Domestic Contribution


Specialty Chemicals division is likely to show a recovery in FY19E owing to a recovery in global agro-chemical industry. Specialty Chemicals BU has grown at a 5 year CAGR of 4.8% from FY13-18.

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Page | 11

Key Risks Raw material prices and availability remain key

concerns for NFIL. Fluorspar, Chloroform, Sulphur and Bromine (Boric acid) are key raw materials for the company. In order to secure supply of Fluorspar (which is the starting point of manufacturing fluorine derivatives) NFIL has formed a JV with Gujarat fluorochemicals and GMDC. However, the JV has not commenced yet. NFIL has formed a subsidiary in China for procurement of good quality fluorspar. Fluorspar

prices have shown an uptrend in FY18, NFIL is exposed to the risk of movement in fluorspar prices.

NFIL derives ~44% of its revenues from exports and is exposed to the risk of the rupee/dollar movement. An appreciating rupee can hurt NFIL’s export realization.

The company has to adhere to the strict environmental standards and non-compliance in maintaining the stringent norms can lead to plant closures.

Increase in fluorspar prices could hurt margins

An appreciating rupee makes exports less lucrative

Source: Bloomberg,HDFC sec Inst Research

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Page | 12

Financial analysis Sales and Sales growth EBITDA and EBITDA growth

Gross Margin and EBITDA Margin

PAT and PAT growth

Source:Company,HDFC sec Inst Research

NFIL is expected to grow Sales at a 5 year CAGR of 15.1% from FY15-20E. EBITDA margins took a fillip as CRAMS BU started contributing more to the mix. Gross margins in CRAMS BU are largely protected, as passing on RM inflation is easier.

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Page | 13

Return ratios Product Mix


Assumptions Rs mn FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Refrigerants 1,950 1,760 1,549 1,940 2,150 2,110 2,420 2,541 2,719 Growth (%) (18.3) (9.7) (12.0) 25.3 10.8 (1.9) 9.7 5.0 7.0 Gross Margins - - - - - - - 48.0 48.0 Bulk Fluorides 980 990 1,129 1,050 940 1,200 1,480 1,598 1,726 Growth (%) 27.2 1.0 14.0 (7.0) (10.5) 27.7 23.3 8.0 8.0 Gross Margins - - - - - - - 44.5 40.0 Specialty Chemicals 1,590 1,780 1,560 2,150 2,390 2,260 2,260 2,441 2,734 Growth (%) 35.3 11.9 (12.4) 37.8 11.2 (5.4) - 8.0 12.0 Gross Margins - - - - - - - 54.0 54.0 CRAMS - 140 260 310 870 1,220 2,020 2,908 3,889 Growth (%) - - 85.7 19.2 180.6 40.2 65.6 44.0 33.7 Gross Margins - - - - - - - 70.0 70.0 Source:HDFC sec Inst Research

Higher return ratios in FY10-FY12 were due to windfall gains from CER’s for incinerating HFC-23 (a by-product of HCFC-22). CRAMS BU is expected to contribute to 35% of the total Sales by FY20E.

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RefrigerantsSpeciality ChemicalsBulk fluorides


Page | 14

Outlook and Valuation We remain believers of CRAMS led growth in NFIL as

the management has shifted gears from the age-old Refrigerants and Bulk fluorides business to niche fluorine molecules, with a strong focus on R&D.

NFIL is on a strong path of improving its return ratios, with prudent allocation of capital as CRAMS has started delivering (expect improvement of 440 bps in RoCE to 17.7% by FY20E).

The outlook for Refrigerants BU remains bleak, as HCFCs are undergoing production cuts and NFIL is yet

to introduce replacements and moderate growth is expected from the non-emissive applications of HCFC-22 .Inorganic Fluorides and Specialty Chemicals are expected to grow at a steady clip.

The stock price has seen a significant run-up (~5x in 3 years) with no expectation of a likely re-rating in valuations, we expect the stock performance to mimic earnings growth (17.2% earnings CAGR from FY17-20E). We are valuing NFIL at 22x FY20E EPS of Rs 40.4 and resume coverage with a target price of Rs 890 (upside of 21.9%).

1 year forward P/E Band

1 year Forward EV/EBITDA


We value NFIL at 21x FY20E EPS of Rs 40.4.

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20

24

28

Apr-

13

Aug-

13

Dec-

13

Apr -

14

Aug-

14

Dec-

14

Apr-

15

Aug-

15

Dec-

15

Apr-

16

Aug-

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16

Apr-

17

Aug-

17

Dec-

17

Apr-

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(x)

P/E (x) Avg(x)+1 Std -1 Std

9.3

15.8

2.4

02468

101214161820

Oct

-12

Mar

-13

Aug-

13

Jan-

14

Jun-

14

Nov

-14

Apr-

15

Sep-

15

Feb-

16

Jul-1

6

Dec-

16

May

-17

Oct

-17

Mar

-18

(x)

EV/EBITDA (x) Avg(x)+1 Std -1 Std


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Income Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E Revenues 6,797 7,415 9,127 10,256 11,989 Growth (%) 14.9 9.1 23.1 12.4 16.9 Material Expenses 3,111 3,272 4,023 4,511 5,241 Employee Expenses 806 918 1,105 1,198 1,385 Other Operating Expenses 1,706 1,637 1,849 2,249 2,615 EBIDTA 1,174 1,588 2,150 2,298 2,748 EBIDTA Margin (%) 17.3 21.4 23.6 22.4 22.9 Growth (%) 62.5 35.3 35.4 6.9 19.6 Depreciation 225 299 398 424 462 EBIT 949 1,289 1,752 1,873 2,285 Other Income 245 558 925 450 500 Interest 38 27 12 0 0 PBT 1,156 1,820 2,665 2,323 2,785 Tax 321 451 840 717 859 PAT 835 1,370 1,825 1,607 1,926 EO items (net of tax) - - 500 - - Share of Profits from JV/Associates - (27) 42 66 -

APAT 835 1,370 1,298 1,648 1,992 Growth (%) 53.1 63.6 (5.0) 27.0 20.9 AEPS 17.1 27.9 26.3 33.4 40.4 Growth (%) 53.1 63.6 (5.8) 27.0 20.9

Source: Company, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 98 98 99 99 99 Reserves 6,356 8,254 9,736 10,900 12,294 Total Shareholders Funds 6,453 8,352 9,835 10,998 12,393 Long-term Debt 475 111 42 42 42 Short-term Debt 341 74 84 99 99 Total Debt 816 185 127 141 141 Deferred Taxes 370 271 308 258 208 Other LT Liabilities 287 243 257 257 257 Minority Interest 0 - - - - TOTAL SOURCES OF FUNDS 7,926 9,051 10,526 11,654 12,999 APPLICATION OF FUNDS Net Block 2,869 4,153 2,826 3,481 3,740 CWIP 204 168 201 300 300 Good will 878 878 878 878 878 LT Investments 1,167 1,834 2,928 3,028 3,178 LT Loans & Advances 964 68 73 173 423 Inventories 755 1,127 1,138 1,279 1,495 Debtors 1,499 1,376 1,556 1,749 2,405 Cash & Equivalents 819 1,804 2,450 2,413 2,312 Other Current Assets 387 366 506 506 606 Total Current Assets 3,460 4,673 5,651 5,946 6,818 Creditors 956 778 984 1,105 1,292 Other Current Liabilities 660 1,945 1,046 1,046 1,046 Total Current Liabilities 1,616 2,723 2,030 2,151 2,338 Net Current Assets 1,844 1,951 3,621 3,795 4,480 TOTAL APPLICATION OF FUNDS 7,926 9,051 10,526 11,654 12,999



Page | 16

Cash Flow Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 1,156 1,567 2,665 2,323 2,785 Non-operating & EO items (57) (109) (925) (450) (500) Interest expenses 38 18 12 0 0 Depreciation 225 299 398 424 462 Working Capital Change (335) 832 (131) (312) (1,036) Tax Paid (268) (323) (840) (717) (859) OPERATING CASH FLOW ( a ) 760 2,283 1,178 1,269 853 Capex (179) (1,842) 544 (821) (722) Free cash flow (FCF) 581 441 1,723 448 131 Investments (7) (420) (1,193) - (100) Non-operating Income 245 558 425 450 500 Others (586) 42 (190) (0) (0) INVESTING CASH FLOW ( b ) (527) (1,661) (414) (371) (322) Debt Issuance/(Repaid) 204 36 (59) 15 - Interest Expenses (38) 21 (12) (0) (0) FCFE 746 498 1,652 462 131 Share Capital Issuance 0 0 1 - - Dividend (216) (343) (592) (485) (598) Others (123) (165) (1) - - FINANCING CASH FLOW ( c ) (173) (452) (663) (470) (598) NET CASH FLOW (a+b+c) 60 170 102 428 (67) EO Items, Others (75) 816 544 (465) (34) Closing Cash & Equivalents 819 1,804 2,450 2,413 2,312


Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY % Gross Margin 54.2 55.9 55.9 56.0 56.3 EBITDA Margin 17.3 21.4 23.6 22.4 22.9 EBIT Margin 14.0 17.4 19.2 18.3 19.1 APAT Margin 12.3 18.4 14.2 16.1 16.6 RoE 13.5 18.5 19.8 15.8 17.0 Core RoCE 13.2 17.2 19.2 23.8 24.1 RoCE 11.4 16.3 13.3 14.9 16.2 EFFICIENCY - - - - - Tax rate % 27.7 24.8 31.5 30.8 30.8 Fixed Asset Turnover (x) 2.6 2.1 2.6 3.3 3.3 Inventory (days) 40.6 55.5 45.5 45.5 45.5 Debtor (days) 80.5 67.7 62.2 62.2 73.2 Other Current Assets (days) 20.8 18.0 20.2 18.0 18.4 Payables (days) 51.3 38.3 39.3 39.3 39.3 Other Current Liab & Provns (days) 35.4 95.8 41.8 37.2 31.8 Cash Conversion Cycle (days) 55.1 7.2 46.8 49.2 66.0 Net Debt/EBITDA (x) 0.7 0.1 0.1 0.1 0.1 Net D/E (0.0) (0.2) (0.2) (0.2) (0.2) Interest Coverage 31.6 68.5 182.5 na Na PER SHARE DATA (Rs/sh) - - - - - EPS 17.1 27.9 26.3 33.4 40.4 CEPS 21.7 34.0 34.4 42.0 49.7 DPS 4.2 6.3 10.0 8.2 10.1 BV 131.8 170.6 199.3 222.9 251.2 VALUATION - - - - - P/E (x) 44.5 27.2 28.9 22.8 18.8 P/BV (x) 5.8 4.5 3.8 3.4 3.0 EV/EBITDA (x) 31.7 22.4 16.4 15.3 12.9 Dividend Yield (%) 0.6 0.8 1.3 1.1 1.3



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RECOMMENDATION HISTORY

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Navin Fluro TP

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 17-May-18 737 BUY 890


Page | 18

Disclosure: We, Archit Joshi, MBA & Nilesh Ghuge, MMS, 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. 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HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

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Page | 19

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