Sector Update | 25 February 2022

Specialty Chemicals

Specialty Chemicals
Kindly refer our detailed report Companies high on Specialty retain pricing power…
on Specialty Chemicals …according to our analysis of the industry wide gross margins

 The escalating Brent prices to USD78.4/bbl in FY22’YTD (from USD44.4/bbl in

FY21) along with elevated key raw material prices contracted the gross
margins of the specialty chemical companies under our coverage by as much
as 14.4% during 1QFY21-3QFY22.
 Further, tightening of freight rates and utility costs due to soaring energy
prices resulted in an EBITDAM contraction of 5-17% for our coverage universe
during the same period.
 Our study confirms the hypothesis that the companies, which have higher
contribution from specialty chemicals, were able to manage their gross
margins much better than the ones that have higher contribution from
commodity chemicals. This also shows why the market ascribes higher
multiples to the first set of companies. Our top picks in the space remain:
Galaxy Surfactants (GALSURF), Vinati Organics (VO) & NOCIL.

Gross margins of specialty chemical companies

 In our coverage, Navin Fluorine (NFIL), Fine Organics (FINEORG), GALSURF and
Clean Science (CLEAN) are on the higher side of specialty chemicals with as
much as 99% of contribution from specialty chemicals in their revenue mix.
 Although fluorspar prices increased by 9% during 1QFY21-3QFY22, NFIL was able
to maintain its gross margin at 53-58%. However, only when the fluorspar prices
soared drastically in the short term, its gross margin in respective quarter
eroded but NFIL was able to cope up in the subsequent quarters.
 Similarly, while fatty alcohol prices moved up sharply by 150% during 1QFY21-
3QFY22, both FINEORG as well as GALSURF were able to maintain their gross
margins at 27-39%. Similarly, while phenol prices surged by 70% CLEAN was able
to retain its gross margin at 65-79%.

Margin erosion of commodity chemicals

 The dependence of Alkyl Amines, Atul, Deepak Nitrite, NOCIL and Vinati
Organics is significantly high on crude derivatives, with Benzene, Toluene, and
Acetic Acid being the key raw materials.
 Average increase in YTD raw material prices is 17% over FY21 for these
companies. Consequently, gross margins contracted to 37-51% in 3QFY22 from
49-63% in 1QFY21. Higher operating costs also led to an EBTIDAM contraction of
6-17% during 1QFY21-3QFY22.
 Although the companies were confident of passing on the costs to their
customers in 4QFY22, current spurt in oil prices may play spoilsport for a longer
period of time.

Reverse DCF suggests high terminal growth for most of the companies
 After holding the center stage for the past couple of quarters, amid high
margins, high growth and China+1 prospects – the multiples of most of the
chemical companies have started contracting along with the EBITDAM erosion
stated above.

Swarnendu Bhushan- Research Analyst (Swarnendu.Bhushan@MotilalOswal.com)

Sarfraz Bhimani, CFA – Research Analyst (Sarfraz.Bhimani@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
25 February
Motilal 2022
Oswal research 1
is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Specialty Chemicals

 Over the past six months, four stocks under our coverage have corrected by 5-
24% – with the highest erosion of 24% witnessed in Alkyl Amines, while
FINEORG and CLEAN have delivered returns of 51% and 21% with the remaining
stocks up 2-5% during the same period, respectively. We run a three-stage DCF
to analyze what revenue growth the stock prices imply in terms of terminal
growth. The parameters for growth, WACC and margin profile are the same
across all the companies.
 Our study infers that current market prices of most companies imply 5-8%
terminal growth even after 15 years of double-digit topline growth. We
recommend a BUY rating on NOCIL, Galaxy Surfactants and Vinati Organics
under our coverage universe.
 With the Indian tyre industry likely to grow by 15-17% in volume terms in FY22E,
tyre companies are planning to ramp up production with a planned capex of
INR200b over the next three years. The debottlenecking activity would be
carried out at NOCIL’s existing unit in the near term, even as it evaluates its
plans for the next three-to-five years. The stock is trading at 15x FY24E EPS of
INR13.6 and 9x FY24E EV/EBITDA, with an asset turnover of ~0.7x (which is set
to rise to 1.1x in FY24E). We maintain our BUY rating on the stock.
 GALSURF’s continued focus on R&D (with an expenditure of INR400-500m per
year) and increased wallet share from existing customers are likely to drive
volume growth and expand EBITDA margin. It has capex plans of INR4b over
FY22-24E. The stock is trading at 30x FY24E EPS and 19x FY24E EV/EBITDA. We
maintain our BUY rating on the stock.
 VO’s sales are expected to grow 50% YoY in FY22 and 25-30% YoY in FY23 and
FY24, as per management guidance. The growth will be led by recovery in IBB
demand, commissioning of an antioxidant plant, and foray into niche chemicals
through Veeral Organics. The stock is trading at 33x FY24E EPS and 24x FY24E
EV/EBITDA with a fixed asset turnover of 1.3x as of FY21. We maintain our BUY
rating on the stock.

Exhibit 1: Reverse DCF calculation for our coverage universe implied by current market price
Reverse DCF
Terminal growth implied by CMP (%)

8 6 6 5 4 3 3 3 0

FINEORG AACL GALSURF ATLP VO DN NFIL CLEAN NOCIL

Source: Company, MOFSL

25 February 2022 2
 Specialty Chemicals

Exhibit 2: Dependence of companies on crude derivative-based raw materials

Crude- Crude-
Company Key Raw Material Other Raw Materials
based based
Chlorine, Sulphur, Hydrofluoric acid, Chloroform and
SRF Fluorspar N N
Trichloroethylene
Navin Fluorine Fluorspar N Chloroform, Sulphur and Boric acid N
Gujarat
Fluorspar N Sodium Chloride, Methanol, Sulphuric acid Y
Fluorochemicals
Methanol, Ammonia and ethyl alcohol
Balaji Amines Y Ethylene oxide, hydrogen, Carbon disulphide, acetic acid Y
(ethanol)
Methanol, Ethanol, Ammonia and
Alkyl Amines Y
Acetic acid
Fine Organics Vegetable oil and palm oil N Fats and fatty acids, Fatty alcohols, Fatty amines, Polyols N
Camlin Fine Sciences Phenol, Methanol Y Hydroquinone (HQ) and Catechol (CT) Y
Clean Science Phenol, Acetone, Methanol Y
Lauryl alcohol, Ethylene oxide, Fatty Phenol, and linear alkyl benzene, DMAPA
Galaxy Surfactants N Y
acids (Dimethylaminopropylamine), PAA
Rossari Biotech Acrylic acid Y silicone oil N
NOCIL Benzene, aniline oil, toluene Y Carbon disulphide, hydrogen peroxide and Morpholine N
Aarti industries Benzene, Toluene Y Nitric acid, caustic soda N
Benzene, Toluene, Acetic Acid,
Atul Y Bisphenol-A, Epichlorohydrin, caustic soda Y
Acetone, Methanol
Benzene, Toluene, propylene,
Deepak Nitrite Y
Cumene, Caustic Soda Lye
Benzene, Toluene, propylene, MTBE,
Vinati Organics Y Nitric acid N
acrylonitrile
Methanol, Oxides, Sulphides, caustic soda lye, sodium
Sudarshan Chemicals Naphthols, mica N Y
nitrite
Gujarat Alkalies Rock phosphate, potassium chloride N Sulphuric acid, alumina powder N
Liquid ammonia, Hydrochloric acid, Methyl Chloroformate,
Chemcon Specialty trimethylsilyl chloride N N
Chlorine, HBR, Bromine and lime
Bromine Source (liquid bromine and
hydrobromic acid), Lithium Source
Neogen Chemicals N Inorganic acids, Organic acids, alcohols and aromatics N
(lithium carbonate and lithium
hydroxide)
Acetic anhydride, thionyl chloride, DMPAT, salts- cuprious
Meghmani Organics Phthalic anhydride (PAN) Y Y
chloride, aluminium chloride
Geraniol, terpene oil, essences, fruit
extracts, flowers and woods, as well as
SH Kelkar N
other plant substances, organic
materials and aroma ingredient
Source: Industry, MOFSL

Exhibit 3: Correlation between Fluorspar prices and NFIL’s Exhibit 4: Correlation between Fatty Alcohol prices and
gross margins gross margins of GALSURF and FINEORG
Fluorspar China (CNY/mt) NFIL gross margin (%) Fatty Alcohol prices (USD/mt)
4,300 GALSURF gross margin (%)
69%
FINEORG gross maegin (%)
3,300 44%
3,600 63%
2,600 38%
2,900 57%
1,900 32%
2,200 51% 1,200 26%
1,500 45% 500 20%
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

Source: Company, MOFSL Source: Company, MOFSL

25 February 2022 3
 Specialty Chemicals

Exhibit 5: Aggregate gross margin for our coverage universe declined 900bp during 1QFY21-3QFY22
Aggregate Gross margin (%)

51% 51%
49% 49%
48% 47%
46% 46% 46%
44%
42% 43% 43% 43%
41%
1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22
Source: Company, MOFSL
Exhibit 6: Aggregate EBTIDAM for our universe declined 700bp during 1QFY21-3QFY22
Aggregate EBITDA margin (%)
26% 25% 26%
25%
24% 24%
23% 23% 23%

19% 20% 19%

19% 18%
18%
1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22
Source: Company, MOFSL
Exhibit 7: One-year forward P/E for our sector was 42.5x as on our IC date, while currently the sector is trading at a
multiple of 38.9x on one-year forward basis

One-year forward P/E as on IC date Current one-year forward P/E

52.6 46.0 33.3 32.0 68.7 60.9 24.3 23.9 44.1 48.2 31.4 32.5 58.6 48.0 24.0 17.7 45.2 41.1

AACL ATLP CLEAN DN FINEORG GALSURF NFIL NOCIL VO

Source: Company, MOFSL

Exhibit 8: Peer comparison for our coverage universe

EPS (INR) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%)
Company TP (INR)
FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
Alkyl Amines 3,325 43.9 66.4 83.1 67.8 44.9 35.8 15.8 12.5 9.9 45.3 30.1 23.7 25.6 31.1 30.9
Atul 10,000 207.8 268.7 303.0 43.7 33.8 30.0 6.2 5.3 4.6 27.1 21.6 19.2 15.0 16.9 16.5
Clean Science 2,175 20.5 32.2 43.5 86.3 54.9 40.7 25.9 18.5 13.3 64.6 40.7 29.8 34.5 39.3 38.1
Deepak Nitrite 2,365 75.9 79.4 84.5 26.3 25.1 23.6 8.4 6.6 5.3 16.5 15.4 14.1 37.1 29.4 24.9
Fine Organic 3,835 64.5 80.5 95.9 66.2 53.1 44.6 14.9 12.5 10.4 41.7 33.5 28.2 24.5 25.6 25.5
Galaxy Surfact. 3,625 62.1 83.0 90.6 44.1 33.0 30.2 6.6 5.7 5.0 28.5 20.8 18.8 15.9 18.7 17.8
Navin Fluo.Intl. 4,270 54.6 85.3 106.8 69.3 44.4 35.4 10.0 8.5 7.1 48.7 30.7 24.3 15.4 20.7 21.9
NOCIL 300 8.3 11.1 13.6 24.8 18.5 15.1 2.5 2.3 2.1 14.5 10.9 8.8 10.5 13.1 14.8
Vinati Organics 2,230 32.4 42.3 55.7 57.6 44.1 33.4 10.6 8.9 7.3 42.2 29.8 22.9 19.8 21.9 24.0
Source: MOFSL

25 February 2022 4
 Specialty Chemicals

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BUY >=15%
SELL < - 10%
NEUTRAL < - 10 % to 15%
UNDER REVIEW Rating may undergo a change
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25 February 2022 5
 Specialty Chemicals

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INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company
Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management
Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of
Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a
group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory
services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee
of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj
Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench.

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