Ambit Speciality Chemical

AMBIT INSIGHTS DAILY UPDATES Specialty Chemicals (POSITIVE) Advantage Advantage India as as China goes green green

RESULTS UPDATE Federal Bank (SELL) Little visibility on RoE expansion e xpansion

ANALYST NOTES: Power Grid: Challenges as investor money flies in transmission (Utsav Mehta, CFA, +91 22 3043 3209) Attractiveness of low-risk, annuity income provided by transmission assets is catching investor fancy. In the recent past, Sterlite Sterlite listed its InvIT, Adani made acquisitions and Greenko may be eyeing Essel’s assets. CRISIL’s recent report names power transmission as the most attractive infra segment. With (1) larger availability of investable vehicles (public/private entities with sizeable asset pool), (2) a defined private ownership use-case, and (3) reasonable competitive intensity for new projects, transmission could witness an uptick in private low-cost capital. This could significantly hamper PGCIL’s ability to earn high RoE (currently regulated) as more projects move to competitive bidding. It faces challenges to maintain project pipeline as the pool for inter-state transmission projects becomes shallower and resorts to riskier state and international projects (like recent bid in Brazil). PGCIL’s (SELL) valuations of 1.6x FY19E P/B don’t seem punchy but may not re-rate materially as project, capital allocation and competitive risks increase that may restrict returns to single digits. Possible silver s ilver lining - easier monetisation of it s assets. Source: Ambit Capital Capital research

HAVE YOU SEEN THIS? CRISIL scores suggest Power Transmission is the best infra sector to invest; could this trigg t rigger er large global investments?

Please refer to our website for complete coverage universe http://research.ambitcapital.com

Source: CRISIL’ CRISIL s ’s Infra Yearbook Ambit Capital Capital and / or its affiliates do and seek to do business business including investment investment banking with with companies companies covered in its research reports. reports. As a result, investors should be aware aware that Ambit Capital [email protected] may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers Disclaimers at the end of t his Report.

AMBIT INSIGHTS

Specialty Chemicals Advantage India as China goes green The sector reported a big boost in capex announcements in the past 50 days led by NOCIL, Navin Fluorine, Nagarjuna Agrichem and Aarti. This trend has been helped by Chinese supply disruptions and should only accelerate. While fundamentals are bright for Indian chemicals players, valuations are possibly close to their peak. Hence, investors need to pay attention to sustainable earnings stories rather than those with one-time price jumps as we believe these sharp spikes caused by the Chinese shutdowns will fade. Capacities should come back sooner than later (in China or elsewhere) albeit with a more level playing field for Indian players. Valuations of chemicals microcaps have gone through the roof in the frenzy, but we urge investors to not take their eyes off the ability to build scale. We prefer players with management bandwidth, mastery over niche processes, global standard manufacturing assets, and ability to build new products/processes. We reiterate BUY on Aarti, PI Industries, Vinati Organics and SRF.

POSITIVE Quick Insight Analysis Meeting Note News Impact



Deflationary trends in chemicals are coming off Over last decade, China disrupted the global chemicals procurement supply chain by: (i) flooding the markets with large scale capacities which were backward integrated and (ii) not spending much on emission control and pollution treatment. This was helped by funding through capital subsidies and availability of cheap debt. Though China is focusing on putting its house in order, multiple disruptions have been rocking the boat, which will increase the landed price of chemicals across the globe and make Indian manufacturers more competitive. These disruptions in China include: 

Raw material availability has become limited. Mining/production of many toxic materials such as yellow phosphorus has been banned, which has impacted multiple forward products.



Many capacities are being asked to shift from provinces such as Jiangsu, Hebei and Shandong to provinces such as Inner Mongolia. This is creating a temporary disruption in production of 12-36 months. However, these shifts will materially increase logistics costs and these plants will need high capex and will involve high capital costs.



At multiple places, companies are being asked to shift plants from coal to natural gas (LNG), which have been substantially increasing power costs. Many have been asked to tighten their SHE (Safety, health, emission) standards, which are leading to an increase in invested capital by 20-25%.



Inefficient plants which don’t even make enough money to service their debt are being asked to shut down, eli minating excess capacity.

Priorities have changed at the top Chinese President Xi Jinping mentioned “environment” 89 times during his speech at the 19th Congress and “economy” just 70 times (that too to put focus on quality of economic growth). A few changes over the last one year are: 

District-level cadres are being incentivised/punished for meeting/missing their emission targets like they used to be for achieving their GDP growth targets.



Promotion of local government officials doesn’t really depend on economic growth targets but their ability to support the government on its green drive.



Xi Jinping’s speech at the 19th Congress suggests China’s focus has shifted to providing better quality of life rather than double-digit economic growth.



Introduction of an Environmental Protection Law that will levy new pollution taxes on manufacturers. It replaces a 38-year-old pollution discharge regulation which had loopholes and exemptions that made it easy for companies to avoid payments.

Research Analyst Ritesh Gupta, CFA [email protected] Tel: +91 22 3043 3242

[email protected] Ambit Capital Pvt Ltd

16 January 2018

AMBIT INSIGHTS 40% of Chinese manufacturing capacities were temporarily shut in 2017 as per ICIS while 12000 local government officials were disciplined for not discharging their duties properly during Jan-Nov 2017.



The capacity shutdowns will go all the way up to 2025 The Chinese government has clearly mentioned that toxic plants need to be relocated out of densely populated regions (source: ICIS) 

All small to mid-sized chemicals plants that fall in the toxic category must complete relocation by end-2020, and if they haven’t started work yet, this must begin next year.



All the larger plants classified as producing toxic chemicals must relocate by end2025, and the process must start no later than 2020.



Plants can also be re-engineered to produce non-toxic products or must be permanently closed if re-engineering or relocation is not possible.

Capex of Indian players has been rising to meet growing demand We see multiple opportunities for Indian chemicals players as the disruption discussed above plays out. The Indian chemicals market at US$180bn forms just 4% of the global chemicals market while China accounts for nearly half. We expect significant market share gains over next few years as Indian players’ ramp up capacity as well as product capabilities. Exhibit 1: Recent capex announcements by Indian chemical players

NOCIL

Navin

Aarti

Capex Amount Announcement Purpose & Other Details Date (Rs mn) For expansion of its production facilities for Rubber Chemicals (including intermediates captively consumed towards manufacture of rubber chemicals) at Dahej/Navi Mumbai. This is Phase - 2. The said investment is 1,680 20-Dec-17 expected to maintain the Asset turnover ratio of 2: 1. The said capex is expected to be completed during Q1 FY 2019-20. Significant portion of CAPEX will be financed through internal accruals. This capex is for creating additional cGMP capacity and associated infrastructure at its Dewas Facilities. The expanded capacity will be utilised to satify the increasing demands for company's Contract Manufacturing 1,150 21-Dec-17 business (for value added complex chemicals and fluoro intermediates manufactured for innovator pharm companies across the globe). Aarti has tied up with a global chemical major to supply specialty chemicals with annual revenues of Rs5/5.5bn for the next 20 years. Capex for this project, US$35-40mn (~Rs2.5bn, implying an asset turn of ~2x), will be funded by the client as interest-free advance that will be adjusted against revenues from annual 5,500 29-Dec-17 supplies. This project will build on existing technology with Aarti while using an add-on technology to be provided by Aarti’s global client. This model (cost of capital arbitrage and faster ramp-up) can be replicated meaningfully for multiple clients of Aarti.

Nagarjuna 3,000 02-Jan-18 Agrichem Source: Company, Ambit Capital

NACL will put up new capacities to manufacture agrochemicals

Exhibit 2: Vinati will treble its gross block over the next 5 years (Rs mn)

15,978 14,978 13,978 12,978 9,978

4,123 4,851

5 1 Y F

6 1 Y F

5,978

7 1 Y F

E 8 1 Y F

E 9 1 Y F

Source: Company, Ambit Capital

E 0 2 Y F

E 1 2 Y F

E 2 2 Y F

Exhibit 3: Aarti too will double its gross block over the next 5 years (Rs mn)

48,169 44,529 41,029 36,029 31,029 26,529 20,814 16,851

5 1 Y F

6 1 Y F

7 1 Y F

E 8 1 Y F

E 9 1 Y F

E 0 2 Y F


E 1 2 Y F

E 2 2 Y F

Exhibit 4: amlin Finesciences too will treble gross block in the next 5 years (Rs mn)

9,849 8,722 7,794 7,033 4,972 3,5973,952 2,951

5 1 Y F

6 1 Y F

7 1 Y F

E 8 1 Y F

E 9 1 Y F

E 0 2 Y F

E 1 2 Y F

E 2 2 Y F



16 January 2018

AMBIT INSIGHTS Opportunities in India 

Most chemicals are used as intermediates for final goods. Growth in consumption of chemicals can easily cross 1.5x GDP growth (source: Avalon Consulting) over the next few years. As consumption of final products increases, the chemicals sector will also post strong growth. India is short of chemicals capacities and hence has to import a lot.



Many MNCs present in China are considering shifting their manufacturing base to India or are considering setting up new capacities (expansion projects) In India. Many global chemical companies (especially Japanese, European and Korean) are at various stages of setting up business in India as PE investors, through buyouts or by setting up greenfield capacities. The local Indian companies will also have ample opportunity to grow in their niches/segments.



Most chemical companies were established in India in late 1970s or 1980s. The second generation is (i) more educated; (ii) has global exposure; (iii) is ready to engage with professionals; (iv) has right attitude and technical skills; and (v) is willing to invest in capacities and R&D. Many such companies are ready to expand operations or are in the process of launching new products (like Aarti Industries). In many cases, the second generation is not interested in continuing with the business. These companies represent good targets for PE players.



The Indian government is open to supporting the industry with anti-dumping duties. In cases where India has executed FTA, the government is also open to imposing non-tariff barriers like restrictions in quantum of imports and packaging.



In India too many companies are increasingly under pressure to comply with green regulations. For e.g. many companies in MIDC (Maharashtra Industrial Development Corporation) have been forced to shut down. India is also setting up big industrial parks for chemical companies with all facilities needed for efficient running of chemicals units.

Exhibit 5: Recent rupee appreciation headwinds are waning; rupee may depreciate on the back of rising government spends ahead of elections and expensive crude imports 10.4 10.2 10 9.8 9.6 9.4 9.2

4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 7 7 7 7 7 7 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 l l l r r r y l v y v y v y n r p n p n p n p u e o a a a J u e o a a a J u e o a a a J u e v a a J o a J M M S N J M M S N J M M S N J M M S N


Indian SHE compliance: perform or perish Our discussions across experts suggest that SHE (Safety, Health and Emission compliance) is now a key differentiator amongst different companies. India clearly has a lot of SME players in chemicals that are now exiting the business given it has become difficult to operate under tougher compliance for safety, health and emission parameters. Many such companies have also gone under transformation and upgraded themselves over the last few years. Growing exports focus too has clearly helped. Independent ratings such as ecoVadis and Responsible care have become key differentiators for global player to choose their suppliers i n India.


16 January 2018

AMBIT INSIGHTS Where do we go from here? We reiterate our Positive stance on the specialty chemicals sector. We believe exports will continue to clock faster growth than the domestic business. Given the pressure to outsource manufacturing is high, due to environmental reasons and cost compulsions, the growth runway for the Indian specialty chemicals industry may last another decade easily. By that time Indian consumption too would start dominating. The high share of China in the chemicals supply chain is also making global players look for alternative supply sources. The key criteria to screen chemicals names are management bandwidth, asset discipline, command over niche chemical processes, global standard manufacturing assets, and ability to innovate in terms of new products and processes. We have four BUYs in the space – PI Industries, SRF Limited, Vinati Organics and Aarti Industries. Exhibit 6: India Chemicals – our top picks Company

Stance

TP

Upside

FY19E target multiple

PI Inds

BUY

1,100

10

25.0

SRF

BUY

1,950

(0)

17.0

Aarti Inds.

BUY

1,300

14

22.0

Vinati Organics

BUY

1,070

10

26.0

Source: Company

Exhibit 7: Relative benchmarking – we continue to f ocus on top-tier companies within the c hemicals space Capital Efficiency

Margins

Product/Process Capabilities

Global orientation

Cash Conversion

Scalability

Total score

PI Industries SRF Ltd. Vinati Organics Ltd. Atul Ltd. Aarti Industries Ltd. Navin Fluorine International Ltd. Oriental Carbon & Chemicals Ltd. Camlin Fine Sciences Ltd. Fair Finechem Ltd. Omkar Speciality Chemicals Ltd. Gujarat Fluorochemicals Ltd. Source: Ambit Capital Note:

- Strong;

- Relatively Strong;

- Average;

- Relatively weak.


16 January 2018

AMBIT INSIGHTS Exhibit 8: Relative valuations – Vinati is now one of the most expensive names in the chemicals space EV/EBITDA (x) Name of the Company

Mcap ADTV 6M (US$ mn) (US$ mn)

P/E (x)

FY18 FY19E FY20E

P/B (x)

FY18 FY19E FY20E

ROE

FY18 FY19E FY20E

CAGR (FY18-20)

FY18 FY19E FY20E Sales EBITDA

PAT

UPL

6,279

18.6

12.2

10.7

9.5

19.4

16.0

13.5

4.4

3.6

3.0

25%

24%

24% 12.3%

13.4% 20.1%

Bayer CropScience

2,627

1.3

35.5

28.2

23.6

47.5

38.5

32.0

8.2

7.0

6.1

17%

20%

21% 15.6%

22.6% 21.8%

PI Industries

2,156

3.4

23.4

20.1

17.4

32.2

27.6

23.9

7.0

5.8

4.8

23%

22%

22% 14.1%

16.0% 16.0%

SRF

1,748

6.5

14.2

11.1

9.6

25.2

18.5

15.8

3.2

2.8

2.4

13%

16%

17% 12.1%

21.9% 26.4%

Solar Industries India

1,665

0.6

26.4

21.5

16.8

45.2

36.1

28.1

9.5

4.7

3.6

22%

23%

24% 24.8%

25.4% 26.8%

BASF India

1,527

1.3

25.7

19.3

18.0

83.4

42.9

27.5

7.9

6.7

5.9

10%

16%

19%

9.7%

19.5% 74.2%

Aarti Industries

1,455

1.0

16.0

12.8

10.6

28.6

21.3

17.5

6.9

5.6

5.0

22%

24%

23% 15.5%

22.9% 28. 0%

Atul

1,383

1.0

17.0

13.1

11.4

28.4

21.0

17.9

3.9

3.3

2.8

14%

17%

17% 10.2%

22.3% 26. 0%

1,267

5.4

24.9

18.1

14.5

41.0

29.9

20.5

6.6

5.4

4.2

18%

19%

22% 19.5%

30.8% 41.4%

824

2.3

17.2

14.7

12.4

27.4

22.5

19.1

4.2

3.7

3.3

16%

17%

18% 13.4%

17.7% 19.5%

Vinati Organics

771

0.4

20.2

15.7

11.0

31.2

23.4

18.8

6.0

4.9

3.6

19%

21%

24% 28.3%

35.7% 29. 0%

Monsanto India

706

0.4

24.2

20.1

18.9

27.1

22.4

19.1

7.7

6.6

NA

30%

30%

32% 11.2%

13.3% 19.3%

Navin Fluorine International

637

0.8

18.3

15.8

13.6

26.0

22.1

19.2

4.5

3.9

3.5

18%

18%

18% 13.5%

16.0% 16.6%

Sharda Cropchem

658

0.2

13.2

10.2

NA

22.0

17.5

NA

NA

NA

NA

19%

20%

Dhanuka Agritech

613

0.3

21.3

17.7

15.5

29.8

25.9

22.4

6.2

5.4

4. 6

23%

22%

NOCIL

546

4.6

15.6

14.3

NA

26.5

24.2

NA

4.1

3.3

NA

18%

17%

Meghmani Organics

482

7.1

9.7

8.2

7.7

22.8

18.6

16.9

3.6

3.0

2.7

17%

18%

17% 10.4%

12.1% 16.2%

Sudarshan Chemical

486

0.9

15.8

12.8

11.9

30.9

23.4

20.9

6.9

5.8

NA

23%

26%

24% 10.1%

15.0% 21.7%

Insecticides India

268

1.0

11.9

10.1

8.1

19.5

16.4

13.3

3.2

2.7

2.3

17%

19%

19% 14.5%

21.8% 21.2%

Himadri Specialty Chemical Rallis India

NA

NA

22% 13.7% NA

NA

NA

NA

17.2% 15.3% NA

NA

Source: Bloomberg, Ambit Capital research


16 January 2018

AMBIT INSIGHTS

Federal Bank Little visibility on RoE expansion The bank’s net profit grew by 26% YoY to Rs2.60bn, broadly in line with our/consensus estimates. Weakness in fee income (13% YoY) was offset by contained opex growth (4% YoY). NII growth of 20% YoY was in line with our expectation due to loan growth of 22% YoY (on a moderating trend) and stable NIM of 3.3%. While NPA slippage inched up in 3QFY18 due to education/corporate loans, credit costs (at 59bps) were low thanks to recovery/upgrades. CASA growth falling below loan growth and continued pressure on loan yields will challenge NIM. Along with little scope for improvement in fee income generation, the bank’s income profile remains challenged. With little room to improve cost-to-income and credit cost, scope for RoE expansion remains bleak (we expect 11% average RoE over FY1920E). This drives our SELL stance with an unchanged TP of Rs80 (Dec 2018), valuing the bank at 11x FY19E EPS and 1.1x FY19E BVPS.

SELL Result Update Stock Information Bloomberg Code:

FB IN

CMP (Rs):

114

TP (Rs):

80

Mcap (Rs bn/US$ bn):

223/3.5

3M ADV (Rs mn/US$ mn):

1,110/17

Stock Performance (%) 1M Absolute

5

3M 12M YTD (3)

57

5

Results overview: Federal Bank reported net profit of Rs2.60bn (3% below our 1 (11) 29 2 estimate and 1% above consensus estimate). Loan growth moderated somewhat to Rel. to Sensex 22% YoY. With NIM stable (QoQ and YoY), NII growth of 20% YoY was in line with Source: Bloomberg, Ambit Capital research our estimate. Fee income (up 13% YoY) disappointed. Opex grew by a meagre 4% YoY, thanks to no new addition of branches in the last 10 quarters and decline in Ambit Estimates (Rs bn) pension costs (easing yields). Asset quality deteriorated with fresh NPA addition FY18E FY19E FY20E increasing to 2.4% of loans. Marginal slowdown in loan growth – NIMs remain stable: In 3QFY18, loan book grew by 22% YoY, slowing from 29% YoY and 25% YoY in 1QFY18 and 2QFY18, respectively. The corporate segment (40% of loans; up 32% YoY) continued to drive growth. Retail loans (38% of loans) were up 18% YoY. CASA deposits grew by 4% QoQ, leading to CASA ratio being flat QoQ at 33%. NIM was stable YoY and QoQ at 3.3%. NII, thus, grew by 20% YoY, in line with our estimate.

NII

36.2

42.8

49.2

PAT

10.2

13.3

15.7

5.3

6.9

8.1

EPS (Rs)

Source: Bloomberg, Ambit Capital research

Subdued operating profitability: Fee income (up 13% YoY) was muted at 0.6% of average assets. Thanks to no branch expansion in last three years and decrease in pension cost (due to rising bond yields), the bank contained its opex growth at 4% YoY. Operating profits grew by 18% YoY (in line with our estimates). At ~1.8% of average assets, operating profitability of the bank stays subdued. Asset quality surprises negatively: Fresh additions to NPA increased to Rs4.1bn from Rs2.8bn in 2QFY18. Education loan NPAs (Rs710mn) in retail book, corporate slippages (Rs980mn) drove the increase. However, recovery/upgrades limited gross NPA growth to 11% QoQ. Credit costs were at ~58bps vs 71bps in 2QFY18. Where do we go from here? While the overall reported numbers were largely in line with our estimates, increase in NPA slippage surprised negatively. The management expects similar level of slippages in 4QFY18. Operating performance, in line with our expectation, was subdued. With the target of 20-25% loan growth, the underlying CASA growth are likely to stay slower with pressure on loan yields and little signs of improvement in fee income franchise. Our negative view on the bank has largely been predicated on weak income profile of the bank. The bank struggles on loan yields and fee income generation, despite the benefit of low cost of funds due to a respectable liability franchise. Thus, while the bank continues to maintain high loan growth, RoA appears to be capped below 1%, due to little scope for further improvement on credit c osts and opex front. We have cut our FY19-20E EPS estimates by 5-6% to reflect weakness in the income profile. We expect 20% loan CAGR over FY19-20E along with average RoA and RoE of 0.9% and 11%, respectively.

Research Analysts Ravi Singh Tel: +91 22 3043 3181 [email protected] Pankaj Agarwal, CFA Tel: +91 22 3043 3206 [email protected] Gaurav Kochar Tel: +91 22 3043 3246 [email protected]


16 January 2018

AMBIT INSIGHTS At Rs114/share, the stock trades at 16.5x FY19E EPS and 1.7x FY19E BV. Low comfort on RoE expansion and risk of dilutive EPS growth lead us to maintaining our SELL stance. Our unchanged target price of Rs80 values the standalone bank at 11x FY19E EPS and 1.1x FY19E BVPS. Exhibit 1: Change in estimates Federal Bank

New Estimates FY19E

Recommendation Target price (Rs)

Old Estimates FY20E

FY19E

Change FY20E

SELL

SELL

80

80

FY19E

FY20E 0%

Assumptions YoY assets growth

20.3%

20.4%

20.2%

19.8%

+12 bps

+56 bps

Net interest margins (calculated)

3.07%

2.95%

3.10%

2.99%

-3 bps

-4 bps

Cost to income

50.3%

50.1%

50.3%

50.1%

+1 bps

-4 bps

Credit cost

0.65%

0.60%

0.72%

0.68%

-7 bps

-8 bps

NII

42,844

49,241

44,552

51,358

-4%

-4%

Operating profit

27,690

32,107

29,243

34,022

-5%

-6%

Net Profit

13,330

15,710

14,098

16,625

-5%

-6%

6.9

8.1

7.3

8.6

-5%

-6%

ROA (%)

0.92%

0.91%

0.93%

0.92%

-1 bps

-2 bps

ROE (%)

10.5%

11.3%

10.9%

11.8%

-47 bps

-47 bps

Outputs (Rs mn)

EPS (Rs)

Source: Company, Ambit Capital research


16 January 2018

AMBIT INSIGHTS Exhibit 2: Quarterly results snapshot Earnings (Rs mn)

3QFY17

2QFY18

3QFY18

YoY (%)

QoQ (%)

3QFY18 Est.

A/E (%)

7,914

8,989

9,500

20%

6%

9,493

0%

P/L on Exchange Transactions

330

410

390

18%

-5%

Trading Profits

860

750

290

-66%

-61%

350

-17%

Misc Income

1,557

1,712

1,606

3%

-6%

Non-Interest income

2,747

2,872

2,286

-17%

-20%

2,438

-6%

Core Non-Interest income

1,707

1,952

1,926

13%

-1%

2,088

-8%

Total Income

10,661

11,861

11,786

11%

-1%

11,931

-1%

Employee Cost

3,197

3,127

3,005

-6%

-4%

3,284

-8%

Other Operating Expenses

2,714

2,902

3,168

17%

9%

3,045

4%

Total Operating Expenses

5,912

6,029

6,172

4%

2%

6,328

-2%

Operating Profit

4,749

5,832

5,614

18%

-4%

5,603

0%

Total Provisions

1,588

1,768

1,624

2%

-8%

1,582

3%

PBT

3,161

4,064

3,990

26%

-2%

4,020

-1%

Tax

1,104

1,427

1,390

26%

-3%

1,327

5%

Reported Profit

2,057

2,637

2,600

26%

-1%

2,694

-3%

Deposits

922.4

972.1

1,005.4

9%

3%

996.4

1%

Net Advances

696.3

806.5

849.5

22%

5%

838.7

1%

1,115.0

1,217.6

1,282.2

15%

5%

1,313.8

-2%

75.5%

83.0%

84.5%

9%

2%

0.0%

-2%

Gross NPAs (Rs mn)

19,516

19,490

21,612

11%

11%

19,715

10%

Net NPAs (Rs mn)

11,024

10,664

11,567

5%

8%

10,566

9%

Gross NPA (%)

2.77%

2.39%

2.51%

2.33%

Net NPA (%)

1.58%

1.32%

1.36%

1.26%

Loan Loss Provisions (%)

0.62%

0.71%

0.58%

Coverage Ratio (%)

43.5%

45.3%

46.5%

Tier I (%)

11.63%

14.09%

13.84%

CAR (%)

12.28%

14.63%

14.41%

NII / Assets (%)

2.99%

3.02%

3.04%

3.00%

Non-Interest Inc. / Assets (%)

1.04%

0.96%

0.73%

0.77%

Operating Cost / Assets (%)

2.23%

2.02%

1.98%

2.00%

Operating Profits / Assets (%)

1.79%

1.96%

1.80%

1.77%

Provisions / Assets (%)

0.60%

0.59%

0.52%

0.50%

ROA (%)

0.78%

0.89%

0.83%

0.85%

NII

Balance sheet (Rs bn)

Total Assets Loan-Deposit ratio (%)

Key Ratios Credit Quality

46.4%

Capital Adequacy

Du-pont Analysis



16 January 2018

AMBIT INSIGHTS Balance sheet Year to March (Rs mn)

FY16

FY17

FY18E

FY19E

FY20E

Networth

80,862

89,374

122,256

132,520

144,617

Deposits

791,717

976,646

1,065,692

1,278,831

1,534,597

Borrowings

51,146

58,973

109,100

136,376

170,470

Other Liabilities

22,039

24,727

28,436

32,701

37,606

945,764

1,149,719

1,325,484

1,580,427

1,887,289

54,198

74,522

78,354

92,886

110,107

251,555

281,961

289,578

343,209

406,725

580,901

733,363

900,502

1,083,621

1,304,224

Other Assets

59,109

59,874

57,051

60,712

66,234

Total Assets

945,764

1,149,719

1,325,484

1,580,427

1,887,289

FY16

FY17

FY18E

FY19E

FY20E

Interest Income

77,482

86,774

97,860

113,890

134,138

Interest Expense

52,404

56,247

61,653

71,046

84,897

Net Interest Income

25,077

30,526

36,208

42,844

49,241

8,082

10,818

11,208

12,892

15,071

Total Income

33,159

41,344

47,416

55,736

64,312

Total Operating Expenses

18,921

22,095

24,536

28,046

32,205

Employees expenses

10,529

11,638

12,510

13,855

15,460

Other Operating Expenses

8,393

10,458

12,026

14,191

16,746

Pre Provisioning Profits

14,238

19,249

22,879

27,690

32,107

Provisions

7,041

6,184

7,130

7,182

7,937

PBT

7,197

13,065

15,749

20,508

24,169

Tax

2,440

4,757

5,512

7,178

8,459

PAT

4,757

8,308

10,237

13,330

15,710

FY16

FY17

FY18E

FY19E

FY20E

Credit-Deposit (%)

73.4%

75.1%

84.5%

84.7%

85.0%

CASA ratio (%)

32.9%

32.8%

33.4%

31.4%

29.6%

Cost/Income ratio (%)

57.1%

53.4%

51.7%

50.3%

50.1%

16,678

17,271

21,383

22,602

23,994

Gross NPA (%)

2.84%

2.33%

2.35%

2.06%

1.82%

Net NPA (Rs mn)

9,500

9,412

11,225

11,413

11,636

Net NPA (%)

1.64%

1.28%

1.25%

1.05%

0.89%

Provision coverage (%)

43.0%

45.5%

47.5%

49.5%

51.5%

NIMs (%)

3.03%

3.09%

3.07%

3.07%

2.95%

Tier-1 capital ratio (%)

13.4%

11.8%

14.1%

12.7%

11.6%

Total Liabilities Cash & Balances with RBI/Banks Investments Advances


Income statement Year to March (Rs mn)

Total Non-Interest Income


Ratio analysis Year to March (Rs mn)

Gross NPA (Rs mn)



16 January 2018

AMBIT INSIGHTS Du-pont analysis Year to March (Rs mn)

FY16

FY17

FY18E

FY19E

FY20E

NII / Assets (%)

2.8%

2.9%

2.9%

2.9%

2.8%

Other income / Assets (%)

0.9%

1.0%

0.9%

0.9%

0.9%

Total Income / Assets (%)

3.7%

3.9%

3.8%

3.8%

3.7%

Cost to Assets (%)

2.1%

2.1%

2.0%

1.9%

1.9%

PPP / Assets (%)

1.6%

1.8%

1.8%

1.9%

1.9%

Provisions / Assets (%)

0.8%

0.6%

0.6%

0.5%

0.5%

PBT / Assets (%)

0.8%

1.2%

1.3%

1.4%

1.4%

33.9%

36.4%

35.0%

35.0%

35.0%

ROA (%)

0.5%

0.8%

0.8%

0.9%

0.9%

Leverage

11.2

12.3

11.0

11.4

12.5

ROE (%)

6.0%

9.8%

9.1%

10.5%

11.3%

FY16

FY17

FY18E

FY19E

FY20E

2.8

4.8

5.3

6.9

8.1

EPS growth (%)

-53%

74%

10%

30%

18%

BVPS (Rs)

47.0

51.8

63.0

68.3

74.6

P/E (x)

41.1

23.6

21.5

16.5

14.0

P/BV (x)

2.41

2.19

1.80

1.66

1.52

Tax Rate (%)


Valuation parameters Year to March EPS (Rs)



16 January 2018

AMBIT INSIGHTS

Institutional Equities Team Saurabh Mukherjea, CFA Pramod Gubbi, CFA

CEO, Ambit Capital Private Limited Head of Equities

(022) 30433174 (022) 30433124

[email protected] [email protected]

Research Analysts Name Nitin Bhasin - Head of Research Aadesh Mehta, CFA Abhishek Ranganathan, CFA Aditi Singh Anuj Bansal Archit Varshney Ariha Doshi Basudeb Banerjee Bhargav Buddhadev Deep Shah Gaurav Khandelwal, CFA Gaurav Kochar Girisha Saraf Karan Khanna, CFA Kushagra Bhattar Nikhil Mathur Mayank Porwal Pankaj Agarwal, CFA Prateek Maheshwari Prashant Mittal, CFA Rahil Shah Ravi Singh Ritesh Gupta, CFA Ritika Mankar Mukherje e, CFA Sudheer Guntupalli Sumit Shekhar Utsav Mehta, CFA Vivekanand Subbaraman, CFA

Industry Sectors E&C / Infra / Cement / Home Building Banking / Financial Services Retail / Consumer Discretionary Economy / Strategy Consumer Consumer Consumer Automobiles / Auto Ancillaries Power Utilities / Capital Goods / Small Caps Media / Telecom Oil & Gas Banking / Financial Serv ices Home Building Strate gy / Small Caps Agri Inputs / Chemicals Small Caps Retail / Consumer Discretionary Banking / Financial Serv ices Cement / E&C / Infrastructure Strate gy / Derivatives Banking / Financial Serv ices Banking / Financial Serv ices Oil & Gas / Agri Inputs / Chemicals Economy / Strategy Technology / Staffing Economy / Strategy E&C / Infrastructure Media / Telecom

Desk-Phone (022) 30433241 (022) 30433239 (022) 30433085 (022) 30433284 (022) 30433122 (022) 30433275 (022) 30433228 (022) 30433141 (022) 30433252 (022) 30433064 (022) 30433132 (022) 30433246 (022) 30433211 (022) 30433251 (022) 30433062 (022) 30433220 (022) 30433214 (022) 30433206 (022) 30433234 (022) 30433218 (022) 30433217 (022) 30433181 (022) 30433242 (022) 30433175 (022) 30433203 (022) 30433229 (022) 30433209 (022) 30433261

E-mail [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Sales Name Sarojini Ramachandran - Head of Sales Anmol Arya Dharmen Shah Dipti Mehta Krishnan V Nityam Shah, CFA Punitraj Mehra, CFA Shaleen Silori

Regions UK India India / Asia India India / Asia Europe India / Asia India

Desk-Phone +44 (0) 20 7886 2740 (022) 30433079 (022) 30433289 (022) 30433053 (022) 30433295 (022) 30433259 (022) 30433198 (022) 30433256

E-mail [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Singapore Praveena Pattabir aman Shashank Abhisheik

Singapore Singapore

+65 6536 0481 +65 6536 1935


USA / Canada Hitakshi Mehra Achint Bhagat, CFA

Americas Americas

+1(646) 793 6751 +1(646) 793 6752


Production Sajid Merchant Sharoz G Hussain Jestin George Richard Mugutmal Nikhil Pillai

Production Production Editor Editor Database

(022) 30433247 (022) 30433183 (022) 30433272 (022) 30433273 (022) 30433265

[email protected] [email protected] [email protected] [email protected] [email protected]


16 January 2018

AMBIT INSIGHTS Aarti Industries Ltd (ARTO IN, BUY) 1,200 1,000 800 600 400 200 0

4 1 c e D

5 5 5 5 1 1 1 1 - b r n g e p J u u F A A

5 1 t c O

5 1 c e D

6 6 6 6 1 1 1 1 b r n g e p J u u F A A

6 1 t c O

6 1 c e D

7 7 7 7 1 1 1 1 - b r n g e p J u u F A A

7 1 t c O

Aarti Industries Ltd Source: Bloomberg, Ambit Capital research

PI Industries Ltd (PI IN, BUY) 1,200 1,000 800 600 400 200 0

4 1 c e D

5 5 5 5 1 - 1 - 1 - 1 b r n g e p u u F A J A

5 1 t c O

5 1 c e D

6 6 6 6 1 - 1 - 1 - 1 b r n g e p u u F A J A

6 1 t c O

6 1 c e D

7 7 7 7 1 - 1 - 1 - 1 b r n g e p u u F A J A

7 1 t c O

PI Industries Ltd Source: Bloomberg, Ambit Capital research

Vinati Organics Ltd (VO IN, BUY) 1,200 1,000 800 600 400 200 0

4 1 c e D

5 5 5 5 1 - 1 - 1 - 1 b r n g p e u u F A J A

5 1 t c O

5 1 c e D

6 6 6 6 1 - 1 - 1 - 1 b r n g p e u u F A J A

6 1 t c O

6 1 c e D

7 7 7 7 1 - 1 - 1 - 1 b r n g p e u u F A J A

7 1 t c O

Vinati Organics Ltd Source: Bloomberg, Ambit Capital research


16 January 2018

AMBIT INSIGHTS SRF Limited (SRF IN, BUY) 2,500 2,000 1,500 1,000 500 0

4 1 c e D

5 5 5 5 1 1 - 1 - 1 b r n g e p u u F A J A

5 1 t c O

5 1 c e D

6 6 6 6 1 1 - 1 - 1 b r n g e p u u F A J A

6 1 t c O

6 1 c e D

7 7 7 7 1 1 - 1 - 1 b r n g e p u u F A J A

7 1 t c O

SRF Ltd Source: Bloomberg, Ambit Capital research

Federal Bank Ltd (FB IN, SELL) 140 120 100 80 60 40 20 0

5 5 5 5 5 5 6 6 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 r y l v n r p n u e o a a a a J a J M M S N J M

6 1 y a M

6 6 6 7 7 1 - 1 - 1 - 1 - 1 l r v p n u e o a a J S N J M

7 1 y a M

7 7 7 1 - 1 - 1 l p u e v o J S N

Federal Bank Ltd Source: Bloomberg, Ambit Capital research


16 January 2018

AMBIT INSIGHTS Explanation of Investment Rating Investment Rating

Expected return (over 12-month)

BUY

>10%

SELL

<10%

NO STANCE

We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW NOT RATED

We will revisit our recommendation, valuation and estimates on the stock following recent events We do not have any forward looking estimates, valuation or recommendation for the stock

POSITIVE

We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE

We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like change in stance/estimates) to make the recommendation consistent with the rating legend.

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.

Additional information on recommended securities is available on request. Disclaimer 1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager, Merchant Banker and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI. 2. AMBIT Capital makes best endeavours to ensure that the research analyst(s ) use current, reliab le, comprehensive infor mation and obtain such information from sources which the analyst(s) believe s to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein. 3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatis fied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss howsoever directly or indirectly, from any use of this Research Report. 4. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client. 5. This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report such should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice. Recipients should consider th is Research Report as only a single factor in making any investment decisions. This Research Report is not a n offer to sell or the solicitation of an offer to p urchase or subscribe for any investment or as an official endorsement of any investment. 6. 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16 January 2018

AMBIT INSIGHTS 25. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors. 26. Ambit and its affiliat es and their resp ective officers directors and employees may hold positions in any securities mentioned in this Report (or in any r elated investment) and may from time to time add to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation for the same. 27. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provid er or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or in related investments) or may sell th em or buy them from clients on a principal to pr incipal basis or may be involved in proprietary trading and may also perform or seek t o perform investment banking or underwriting services for or relating to those companies. 28. Ambit and ACUK may sell or buy any securities or make any invest ment which may be contrary to or inconsistent with this Report and are not subject to any prohibit ion on dealing. By accept ing this report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.

Additional Disclaimer for U.S. Persons 29. The research report is solely a product of AMBIT Capital 30. 31. 32. 33.

AMBIT Capital is the employer of the research analyst(s ) who has prepared the research report Any subsequent transactions in securities discussed in the res earch reports should be effected through Enclave Capital LLC. (“Enclave”). Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports. The research analyst (s) preparing the email / Research Report/ attachment is resident outside the Unit ed States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are not subject to s upervision by a U.S. broker-dealer, and is/are not required to satisfy the r egulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. 34. This r eport is prepared, approved, published and distribu ted by the Ambit Capital located outside of the United States (a non-US Group Company”). Th is report is distributed in the U.S.by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19 West 44th Street, suite 1700, New York, NY 10036). In order to r eceive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please contact a registered representative of Enclave Capital LLC. 35. As of the publication of this report Enclave Capita l LLC, does not make a market in the subject securit ies. 36. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its aff iliates or any other company to any person, to buy or sell any security. The in formation contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Disclosures 37. The analyst (s) has/have not served as an officer, director or employee of the subject company. 38. There is no material disc iplinary action that has been taken by any regulatory authority impacting equity research analysis activit ies. 39. All market data included in this report are dated as at the previous stock market closing day from the date of this report. Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2017 AMBIT Capital Private Limited. All rights reserved.

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16 January 2018

Ambit Speciality Chemical

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