Professional Documents
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16 January 2018
DAILY
UPDATES
Specialty Chemicals (POSITIVE)
Advantage India as China goes green
RESULTS UPDATE
Federal Bank (SELL)
Little visibility on RoE expansion
HAVE YOU SEEN THIS? CRISIL scores suggest Power Transmission is the best
infra sector to invest; could this trigger large global investments?
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
Ajay.Rao@ambit.co
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 at the end of this Report.
AMBIT INSIGHTS
Exhibit 2: Vinati will treble its gross Exhibit 3: Aarti too will double its gross Exhibit 4: amlin Finesciences too will
block over the next 5 years (Rs mn) block over the next 5 years (Rs mn) treble gross block in the next 5 years
(Rs mn)
15,978 48,169
14,978 44,529 9,849
13,978 41,029
12,978 8,722
36,029 7,794
9,978 31,029 7,033
26,529
20,814 4,972
5,978 16,851 3,5973,952
4,123 4,851 2,951
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY21E
FY22E
FY18E
FY19E
FY20E
FY21E
FY22E
FY15
FY16
FY17
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY21E
FY22E
Source: Company, Ambit Capital Source: Company, Ambit Capital Source: Company, Ambit Capital
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 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
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
Exhibit 7: Relative benchmarking – we continue to focus on top-tier companies within the chemicals space
Capital Product/Process Global Cash Total
Margins Scalability
Efficiency Capabilities orientation Conversion 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.
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 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) P/E (x) P/B (x) ROE CAGR (FY18-20)
Name of the Company Mcap ADTV 6M
FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E Sales EBITDA PAT
(US$ mn) (US$ mn)
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%
Himadri Specialty Chemical 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%
Rallis India 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% NA NA NA NA
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% 22% 13.7% 17.2% 15.3%
NOCIL 546 4.6 15.6 14.3 NA 26.5 24.2 NA 4.1 3.3 NA 18% 17% NA NA NA NA
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%
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
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
increasing to 2.4% of loans. FY18E FY19E FY20E
NII 36.2 42.8 49.2
Marginal slowdown in loan growth – NIMs remain stable: In 3QFY18, loan book
PAT 10.2 13.3 15.7
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 EPS (Rs) 5.3 6.9 8.1
growth. Retail loans (38% of loans) were up 18% YoY. CASA deposits grew by 4% Source: Bloomberg, Ambit Capital research
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.
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.
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 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
New Estimates Old Estimates Change
Federal Bank
FY19E FY20E FY19E FY20E FY19E FY20E
Recommendation SELL SELL
Target price (Rs) 80 80 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
Outputs (Rs mn)
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%
EPS (Rs) 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
Source: Company, Ambit Capital research
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 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
Total Liabilities 945,764 1,149,719 1,325,484 1,580,427 1,887,289
Cash & Balances with RBI/Banks 54,198 74,522 78,354 92,886 110,107
Investments 251,555 281,961 289,578 343,209 406,725
Advances 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
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) 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
Total Non-Interest Income 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
Source: Company, Ambit Capital research
Ratio analysis
Year to March (Rs mn) 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%
Gross NPA (Rs mn) 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%
Source: Company, Ambit Capital research
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 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%
Tax Rate (%) 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%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY16 FY17 FY18E FY19E FY20E
EPS (Rs) 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
Source: Company, Ambit Capital research
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
1,200
1,000
800
600
400
200
0
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Aarti Industries Ltd
1,200
1,000
800
600
400
200
0
Dec-14
Feb-15
Dec-15
Feb-16
Dec-16
Feb-17
Apr-15
Jun-15
Aug-15
Oct-15
Apr-16
Jun-16
Aug-16
Oct-16
Apr-17
Jun-17
Aug-17
Oct-17
PI Industries Ltd
1,200
1,000
800
600
400
200
0
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
2,500
2,000
1,500
1,000
500
0
Dec-14
Feb-15
Apr-15
Dec-15
Feb-16
Apr-16
Dec-16
Feb-17
Apr-17
Jun-15
Aug-15
Oct-15
Jun-16
Aug-16
Oct-16
Jun-17
Aug-17
Oct-17
SRF Ltd
140
120
100
80
60
40
20
0
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018
AMBIT INSIGHTS
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Ajay.Rao@ambit.co
Ambit Capital Pvt Ltd 16 January 2018