Reseach Report on Camlin Fine sciences Ltd. REPORT ON CAMLIN FINE SCIENCES LTD Rating – HOLD Report dated on. 25.09.2018 Camlin fine Sciences, formerly known as Camlin fine chemicals ltd, is a provider of high-quality shelf life extension solutions including antioxidants, aroma ingredients and performance chemicals. Led by Mr Ashish Dandekar, CFS has emerged as the leading producers of food antioxidants like TBHQ tert-Butyl hydroquinone and is also leading producer of Vanillin in the world. CFS has offices and manufacturing facilities in several countries such as India, China, Italy, Brazil, Mexico and United States. Having established themselves in antioxidants, CFS forward integrated in blending and has widened its application to food and beverage industry, pet food, animal feed, fishmeal, aquaculture, biodiesel etc. PRINCIPAL BUSINESS ACTIVITY Shelf Life Solutions (Food additives ,Pet food, antioxidants, Biofuels , Aqua culture, Rendering) Aroma Ingredients(Vanillin) Performance Chemicals (Agrochemicals, Petrochemicals, Pharmaceutical, Dyes & Pigments) Global Presence (Manufacturing MARKET DATA SECTOR SPECIALITY CHEMICALS MARKET CAP(CRORE) 656.59 BETA 1.31 52 WEEKS HIGH 154.7 52 WEEKS LOW 59.5 BSE CODE 532824 REUTER ID CAMF.NS HEADQUARTERS MUMBAI CMP ON 25/9/2018 54.50 India North America, Italy, Brazil, Mexico China PRODUCTS MAJOR CONTRIBUTOR OF REVENUE PRODUCTS 2017(%) 2018(%) BHA 19.91 17.93 TBHQ 30.05 21.04 GUAIACOL BULK – 11.54 OTHERS 50.04 49.49 Foreign Exchange Earning and outgo PARTICULARS 2016 2017 2018 FOREIGN EXCHANGE OUTGO 22314.65 16026.4 22286.02 FOREIGBN EXCHANGE EARNED 32646.27 23133.18 30949.69 % OF THE TURNOVER 67.45 42.30 42.85 Figures in lacs Shareholding Pattern PARTICULARS 2016 2017 2018 PROMOTORS 39.84% 40.91% 22.34% BANK,MF ,FI 0.8% 4.69% 18.11% FPI, FII 3.67% 7.56% 2.71% OTHERS 55.69% 46.84% 56.84% MANUFACTURING FACILITIES WANG LONG FLAVORS AND FRAGRANCES VANILLIAN DIPHENOL MANUFACTURING PLANT ,DAHEJ,GUJRAT HYDROQUIONE & CATECHOL REVANNA PLANT ,ITALY HYDROQUIONE & CATECHOL CFS EUROPE SPA PLANT ,ITALY DIPHENOLS & ITS DERIVATIVES CFS INTERNATIONAL TRADING (SHANGHAI) LTD SPECIALITY CHEMICALS KEYS FINANCIAL HIGHLIGHTS (CONSOLIDATED) (LAKHS) PARTICULARS 2016 2017 2018 REVENUE IN LAKHS 48934.22 53393.05 72060.41 EBITDA% 19.46 7.79 3.32 COGS/TURNOVER 0.42 0.48 0.59 DEBT/EQUITY 0.14 0.26 0.28 CASH PROFIT(LAKHS) 6,336.03 1,285.80 (1172.55) BOOK VALUE PER SHARE 18.73 22.20 35.75 PRICE 88.5 89.4 54.5# CEPS 6.55 1.24 (3.07) P/E RATIO 23.85 (70.95) (18) CPE RATIO 13.50 72.11 (56.35) ROE (%) 19.78 (1.93) (5.53) ROCE (%) 46.51 14.89 4.45 Analysis 1 Revenue from Operations has been increasing at CAGR of 21.35% since the three consecutive years. 2-Ebidta of the company is shrinking from 19.46% in 2016 to 3.32% in the latest year. 3- Return on Capital Employed has declined from 46.51% in 2016 to 4.45% in 2018. 4- Directors and their relative’s stake in the company has reduced from 50% (51,607,912) in the 2017 to 30% (36,578143) shares in the 2018 . This development makes us little uncomfortable. 5- Interest coverage ratio of the company is low at 1.17 times. 6- Company has contingent liabilities of 578.04 lakhs rupees in the current year. 7- Share of bank and financial institutions has increased substantial to 18.44% in the latest year from 0.8% in the 2016, which indicate expectation of good quarterly results in the months to come. 8 – Company’s revenue from foreign subsidiaries is reducing from 67.45% in 2016 to 42.85% in 2018 List of Subsidiaries of CFS S NO. PARTICULARS % OF STAKE TOTAL ASSEST (LAKHS) TOTAL LIABILITES (LAKHS) PROFIT BEFORE TAX (LAKHS) 1 CFCL MAURITICUS PVT LTD 100 9.24 997.83 (14.46) 2 CFS EUROPE S.P.A 100 27410.70 24782.81 (1685.01) 3 CFS DO BRASIL INDUSTRIA 100 3764.27 4824.48 (655.74) 4 SOLENTUS NORTH AMERICA INCORPORATION 100 9.57 213.96 (9.87) 5 CFS NORTH AMERICA LLC 100 1952.52 4004.03 (1375.13) 6 CFS ANTIOXIDANTES DE MEXICO SA DE C.V. 100 14.94 4240.28 (140.03) 7 CFS INTERNATIONAL TRADING (SHAHGHAI) LTD 100 6.13 30.21 (47.84) 8 DRESEN QUIMICA S.A.P.I DE C.V. 100 7872.74 2540.81 2491.05 9 INDUSTRIAS PETROTEC DE MEXICO 65 290.94 151.05 39.71 10 CHEMOLUTIONS CHEMICALS LTD 94.08 397.48 97.73 124.08 11 CFS WANGLONG FLAVOURS (NINGBO) CO. LTD 51 13,538.88 5542.13 (372.79) 12 INOVEL,S.A.S 65 819.14 432.98 230.07 13 NUVEL,S.A.C 65 1473.15 515.87 190.39 14 BRITEC,S.A 65 614.42 157.12 67.78 15 GRINEL,S.R.L 65 1.47 – – #PRICE of share as on 25-9-2018 QUARTERLY UPDATES (CONSOLIDATED (LAKHS) PARTICULARS Q1 2018-19 Q1 2017-18 Q4 2017-18 TOTAL REVENUE (LAKHS) 18519.61 14144.23 23745.27 EBITDA % 9.55 -7.73 8.05 COGS/TURNOVER 0.47 0.65 0.55 PRICE 86.40 84.65 101.9 PAT -443.15 -1131.07 -425.88 EPS ANNUALISED -1.96 -4.64 -2.64 P/E RATIO -44.08 -18.24 -38.60 OVERVIEW OF INDIAN CHEMICAL INDUSTRY India is the sixth largest producer as well as sixth largest consumer of the chemical in the world. The Indian chemicals sector is a market worth about USD 160 billion, with specialty chemicals representing about 20 per cent of the value. It is expected that the specialty chemical sector will grow by about 10 per cent annually to almost double the market size by FY251. There is strong demand for the specialty chemicals owing to rapid growth of Indian economy, strong pool of technical manpower, lowest labour cost among competitors, low penetration ratio of chemicals, etc. OVERVIEW OF AROMA INDUSTRY IN INDIA The Indian domestic consumption market for flavours and fragrances was USD 0.81 billion in 2015. The domestic ingredients market is estimated at USD 0.45 billion in FY15. The 2015 exports of ingredients stood at USD 2.55 billion, taking the total ingredients production in India to USD 3 bn. This represents a 30% share of the global market for flavours and fragrances ingredients. The Flavours & Fragrances ingredients production value in India is expected to reach USD 5.37 billion by 2020, growing at 12% CAGR for the next 5 years, increasing its share to 40% of the global market.2 OVERVIEW OF AGROCHEMICALS & PETROCHEMICALS & DYES AND PIGMENTS In case of Agrochemicals, Global market size of USD 54.5 billion; to grow at 5.5% over 2014-19. Growth to be driven by decreasing arable land, increasing population and consequent need for improvement in crop yields. Indian market size (production) of USD 5.7 billion; to grow at 12% over 2014-19. Growth to be driven by increase in awareness level of farmers, improvement in rural income and the pressure for improving productivity3. In case of Dyes and Pigments, Global market size of USD 27.8 billion; to grow at 4.0% over 2014-19 driven by growth in end-user industries, increase in demand for high performance pigments and increase in environmental consciousness . Indian market size (production) of USD 4.9 billion; to grow at 11.4% over 2014-19. Growth to be driven by growth in textile industry, increase in exports particularly due to shift of supply from China to India as a result of shutdown of many Chinese plants due to implementation of stringent environmental laws.3 Surfactants are mostly manufactured from petrochemicals as their feedstock. Then this feedstock is converted into surfactants by sulphonation. These surfactants are used to manufacture soaps detergents, other cleansing agents. The global market for the surfactants is $ 30.4 billion and is projected to grow at a CAGR of 5% in 2014-19.3 MERGER & ACQUISTIONS and EVENTS ON SEP 14, 2018, CFS issue foreign currency convertible bonds (FCCB’S) to International financial Corporation, to the amount of $15 (205 crore) million at the rate of 4.5%, duration of 6 years. Funds will used for the development of new facility in Dahej and these funds would be used in working capital requirements for growth in sales of new products and refinancing of term loans. In March 2018, CFS do Brasil Indústria Ltd CFS’s wholly owned subsidiary in Brazil has set-up separate entity named CFS Argentina S.A (CFS Argentina) to cater to the customers in Argentinean market. In April 2018, CFS has signed a joint venture contract with Pahang Pharma (S) Pte. Ltd., Singapore (Pahang) for incorporating a holding company, shareholding in the proportion of 51:49, named CFS Pahang Asia Pte. Ltd. in Singapore. CFS has done joint venture with Pahang Pharma for the period of 30 years. On July 12, 2017, the Company along with CFS Europe S.p.A. acquired 51% stake in CFS (Ningbo) Wang long Flavours and Fragrances Company Limited (CFS Wang long) for its Vanillin manufacturing facility. Pursuant to the acquisition of CFS Wang long, the Group has acquired manufacturing and technological capabilities to produce high quality Vanillin and has also helped to increase production capacity of Vanillin. The amount of purchase consideration was Rs. 4065.73 lakhs. On March 22, 2017, the Company acquired 74.18% stake in Chemolutions Chemicals Limited (Chemolutions) pursuant to a preferential allotment of shares by Chemolutions to the Company. The stake of CFS has increased from 19.09% to 94.09%. Purchase consideration was amounted to Rs. 950 lakhs. On May 4, 2016, the Company’s subsidiary, CFS Antioxidants De Mexico S.A. De C.V., Mexico, acquired 65% stake in Dresen Quimica SAPI De C.V., Mexico (Dresen) along with its five wholly owned subsidiaries in Mexico, Peru, Guatemala, Columbia and Dominican Republic. Dresen is a leading antioxidant blend company located in Mexico. The amount of purchase consideration was Rs. 5192.07 lakhs. Future Growth Path Camlin Fine sciences, as stated by Ashish Dandekar (MD), is shifting in its portfolio is transitioning from competitive shelf life offerings towards high margin antioxidant blends, alongside increasing penetration in vanillin (the synthetic version of vanilla) and performance chemicals . The gross margin for antioxidant blends is in the range of 40-70% in comparison to the 30-35% level for the more commoditized tertiary Butylhudroquinone (TBHQ) Butylated hydroxyanisole (BHA) offerings both of which are food additives used for animals as well as human being consumption4. CFS is already a global leader in less-specialized antioxidants, such as TBHQ and BHA, commanding more than 50% market share. But the opportunity in these markets is limited from here on ($100 million) and there has also been a steady rise in competition. The moves towards antioxidants blends will not only extend its customer profile, but also enhance its potential for cross-selling. The shift has enhanced its exposure to four end markets – human food, animal feed, pet food, biodiesel. For instance, the addressable market for the firm will expand from the current $ 54 million to $500 million in food and beverage segment and to $200 million in animal feed segment4. ___________________________ OPPORTUNITIES 1 – The Shelf life business in India has shown a remarkable growth of 80% over the previous year. 2 – The shelf life business in India, rest of Asia, and Middle East showed more than 40% growth in volumes and value is expected to grow at a similar rate of 2018-19. 3– CFS acquisition of 51 % stake in Ningbo Wang long flavors & fragrances (CHINA). Company uses its patented process in its 3,500 to boast its Vanillin production (4500tpa capacity) from Catechol. It can be expected to have villain sales of Rs1.99 billion FY19 against Rs1.72 billion in FY17.With this acquisition above vanillin the capex of CFS has reduced in its Dehej project from Rs. 2.5 billion to only Rs 1.3 billion out of which, 70% will be debt funded. Now the company concerned has to build only diphenol and catechol, not vanillin plant separately .Total vanillin capacity for the CFS is now 5220 tpa5. 4 – CFS Argentina (100 % subsidiary) developed Xtendra antioxidant formulations for biodiesel producers with the goal to supply to all biodiesel markets. It has got certification for the above antioxidants and will tap substantial market in Brazil and Argentina. 5 – CFS America launched its Animal Nutrition portfolio in mid-2017-18. It has identified distributors for feed ingredient product lines in America. It will continue to build on this support system in many parts of the U.S in FY2018-19.With reduction in use of antibiotics and in some cases total elimination, allowed the market to explode with new products. The animal feed market is a potential area for CFS America in FY 2018-19. 6 – With acquisition of 65% stake in Dresen Quimica S.A.P.I de CV , Mexico , in May 2016 strengthened CFS’ Animal Nutrition portfolio, made CFS presence in food as well as feed. CFS Dresen further focuses on expanding its business in Guatemala, Peru, Colombia and the Caribbean islands. Leveraging its stronghold in antioxidants blends, Camlin has also expanded its Brazil blends operation (from only human foods to pet food, animal feed, bio diesel market) and started marketing its antioxidants in US. CFS is expecting 57% revenue CAGR in blends over FY17-19, which would take revenue share of blends from 2% in FY16 to 32% FY195. 7 – New project at SEZ Dahej, Gujarat for hydroquinone and catechol manufacturing, the diphenol. The project involves the construction of a chemical manufacturing plant with a production capacity of 9,000 tonnes per annum (TPA) of hydroquinone, 6,000TPA of catechol in 64,407m2 area6. International Financial Corporation has proposed to invest $15 million in this Dahej Project. This plant has the potential of adding further 100-150 crore rupees to sales6.This project to start operation from early FY19 and is expected to be profitable in FY195. 8 – CFS Europe (CFS Italy Subsidiary) is a large captive source of HQ/Catechol (15% of total sales) saw excess finished inventory in previous quarter due to termination of kemin’s contract and low demand/price in china. The management is expecting improvement in its operating performance with the smart recovery in HQ prices in following quarter and completion of its process improvement and cost reduction programs. 9- Shift of production to Asia: Many MNCs are focusing on Asia, particularly India and China, as their manufacturing hubs as a result of tighter environmental norms in the west. At the same time, lower cost of production and availability of skilled manpower in Asian countries have further aided this process. This has been particularly evident in relatively standardized products with low differentiation, such as textile chemicals and dyes and pigments, wherein IP protection hasn’t been a significant threat. Recently, tightened pollution control norms in China have led to multiple plant shutdowns in the country in chemicals and other manufacturing segments. As a result of this, Indian chemical manufacturers have gained from production shift to India, especially visible in segments such as Dyes and Pigments. 10-Lockheed Martin Deal- firm has also entered into a supply agreement with the US-based Lockheed Martin Advanced Energy Storage, a subsidiary of the global security and aerospace company. As per the contract, CFS will have the exclusive right to supply 80% of its requirement for energy storage solutions. CFS will be offering specialty chemicals, which are a key ingredient in the manufacture of flow battery systems. Flow battery is made of non-toxic materials and is more efficient and inexpensive compared to the currently used lithium ion battery. Commercial delivery for this is expected to begin by September 2018. This offers a revenue potential of $35 million, with an 18-20% EBITDA margin THREATS 1-Intense Competition – Kemin Industries Inc., USA was a leading antioxidants customers for Camlin fine sciences with an annual sales contribution of one billion in CFS (20% of sales). Kemin annulled its procurement contract since august 2017 as CFS forward integrated its antioxidant ingredient business into antioxidants blends and started competing with kemin in its home turf. So the company has lost Rs 20 crore of EBITDA approx. 2-Forex Risk- Further, forex currency conversion has impacted the costs & revenues adversely. So the company is substantially exposed to the inherent risk of currency fluctuations. 3-Regulatory Constraints – The regulation which has maximum impact on Indian exports is the European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals), which came into force on 1st June 2007 and addresses the production and use of chemicals and their potential impact on human health and the environment. Significant impact of REACH will be felt with the implementation of Phase 3, which is scheduled to come into force by 1st June 2018 and would regulate any chemical supplied to EU at quantities of 1 tonne p.a. or more7. REACH increases the safety, health and environmental compliance of chemicals manufacturers supplying to EU, and as a result affecting underlying process costs. 4-Commoditization: Several mature products in the sector have already been commoditized or are at risk of the same. Specialty chemical manufacturers need to strengthen their focus on niche applications and product innovation in order to protect their margins. Despite, very aggressive on expanding business, we are not comfortable with the fact that the promoters stake has come down substantially in last 1 year. We would advise to hold the share till more clarity on this is available. Source 1-https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/specialty-chemical-sector-may-double-market-size-by-fy25-report/articleshow/64065002.cms 2- https://www.chemarc.com/content/chemarc-article/599d6f81f607c744996eed3a 3https://www.google.co.in/search?source=hp&ei=ASqpW5qJDJj5rQGm_KmAAg&q=avendus+special+chemical+research+&oq=avendus+special+chemical+research+&gs_l=psy-ab.3..33i160k1.5031.25695.0.269188.8.131.52.184.108.40.2068.5648.2-3j5j1j1j1j1.12.0….0…1c.1.64.psy-ab..21.1 4-https://www.outlookbusiness.com/markets/feature/the-right-blend-4589 5-https://backoffice.phillipcapital.in/Backoffice/Researchfiles/Researchfilesmove/PC_-_Camlin_Fine_Co_Udpate_-_Feb_2017_20170306173905.pdf 6-https://www.jsbmarketresearch.com/construction/cfs-dahej-chemical-manufacturing-plant-gujarat-project-profile 7-http://www.bpf.co.uk/reach/About_REACH.aspx RESEARCH HEAD RESEARCH ASSISTANT ANUJ JAIN PANKAJ SINGH DISCLAIMER Green Portfolio Private Limited (“GPPL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of Portfolio Management Services. 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