Asahi Songwon Colors Ltd. CMP: Rs.

43

Management Interaction Note February 17, 2010

Company Background

Asahi Songwon Colors Limited (ASCL) is a Gujarat based company promoted by Ms Paru Jayakrishna. ASCL is involved in the
manufacturing of pigments and dyes. The primary products include Pigment CPC Green, Pigment CPC Blue, Pigment Beta Blue, and
Pigment Alfa Blue. Pigments Alfa Blue and beta Blue are the derivatives of pigment CPC Blue. The company also has windmills having
capacity of 0.6 MW.

Asahi Songwon Colors Limited (ASCL) was formed and incorporated in the name of Lucky Laminates Private Limited (LLPL) on
December 19, 1990. The name of LLPL was ultimately changed to Asahi Songwon Colors Limited. In 1995-96, ASCL entered into a
joint venture agreement with Songwon Color Company Limited (SCCL), South Korea with financial investment and supply of technology
for manufacture of Green Crude. The company entered the capital markets with an IPO amounting to Rs.335 mn issuing 37.22 mn
shares at Rs.90 to fund its capex plans for the CPC Blue and Beta Blue products.

Share holding Pattern:

As of December 2009 the promoters’ stake stands at 61.48% up from 56.67% as of Dec 08. The promoters have been gradually
increasing their stake since Dec 2008. ASCL’s two major customers, DIC (Dianippon Ink and Chemicals Limited) Japan and Clariant
Limited Korea hold strategic stake of 7.05% and 5.86% respectively in the company (acquired at Rs.122 and Rs.107 respectively). The
balance 38.52% stake is with the non-institutional (non promoters) shareholders. Of this NRI / Foreign Individuals hold 13.74% stake
while corporate bodies hold 2.90% stake. Individuals with nominal share capital up to Rs 1 Lac hold 14.29% stake.

Business and Operations:

ASCL is involved in the manufacturing of pigments. Pigments can be classified in to two broad categories: Pthalo and Azzo. The Thalo
pigments encompass the Green and Blue color pigments while the Azzo includes the Yellow and Red pigments. Phthalocyanine
pigments are one of the largest categories of pigments manufactured in India. ASCL manufacturers Pthalo pigments, of which Blue
accounts for the largest share. On a global level, India and China are the major countries manufacturing both the types of pigments.
However, in the recent past the Indian companies have emerged as preferred manufacturers (for Pthalo grade of pigments) over the
Chinese companies due to the backing from the global players. Hence this could, to a certain extent minimize the competition from the
Chinese players in the Pthalo pigments. Apart from the Chinese players, ASCL competes with local players like Heubach Colors,
Sudarshan Chemicals, Meghmani Organics in the Pthalo pigments.

1200 95%

1000 90%
800
85%
Rs mn

600
80%
400

200 75%

0 70%
FY 06 FY 07 FY 08 FY 09

Net Sales (LHS) Exports (LHS) Exports to sales-% (RHS)

(Source: Company, HDFC Sec Research)

ASCL has two manufacturing facilities located at Mehsana and Vadodara, both in Gujarat. The Mehsana plant manufactures Green
pigments while the Vadodara plant is involved in CPC Blue Crude Pigment. ASCL currently manufactures the following products:
• Copper Pthalocyanine (CPC) Green
• CPC Blue Crude
• Beta Blue (production commenced in FY08)
• Traded Goods (CPC Pigments)

The company has an installed capacity of 10,200 MT for CPC Blue crude which provides ample head room for ramp up in production.
This is among the largest capacity in the world for the product. Further more ASCL also plans to double Beta Blue capacity from the
existing levels of 1,200 MT and aims to be amongst the top 5 companies in the world manufacturing Beta Blue in the next 2-3 years.
ASCL has an installed capacity of 1,080 MT for CPC Green. CPC pigments can be used in Solid, reduced and metallic automotive
coatings, inks, plastic, leather etc. In 2005, the company commenced manufacturing CPC Blue Crude 5N with the technology from
Clariant Songwon Colors of South Korea.
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Most of the company’s products are an input for manufacturing other chemicals. CPC Blue Crude (Copper Phthalocyanine Blue Crude)
is the key raw material used for manufacture of Blue and other Colors / Pigments (alpha / Beta Blue and Green) which is in turn used by
dyes, rubber chemicals, and plastic, ceramic & vitrified tiles industries.

Pigment Beta Blue (15:3) is used in the manufacturing of printing inks, paints, plastics, textiles, etc. Printing ink is required for number
of applications like newspaper printing, film printing, ceramic / metal printing etc. DIC Japan is a market leader in the industry with a
largest global market share of 36% followed by Flint Inc, USA with a market share of 19% and Huber Germany with a market share of
6%. Also DIC along with its fully owned subsidiary Sun Chemicals (US) is the largest customer for ASCL. The company supplies value
added (customized) products to DIC and is the No 1 supplier for the company. Top three customers account for 75% of sales in FY09.
These customers include DIC, Clariant and Sun Chem. ASCL also supplies to Ciba and other companies in the export markets.

Investment Rationale:

Well poise to take advantage of the robust demand from the international markets for CPC Blue crude and its derivatives

CPC Blue crude accounts for around 75% of the company’s FY09 revenues. CPC Blue Crude is a basic raw material for derivatives
such as Alpha & Beta Blue pigments. India and China are the largest players for manufacturing of CPC Blue Crude in the international
market. Most of the advanced countries have stopped production of CPC Blue Crude or are on the way to phase out the production of
CPC Blue Crude due to stringent environmental norms and high labor costs prevalent in these countries. Hence such a gap is being
filled in by manufacturers from India and China.

Particulars 2006 2007 2008 2009 2010 2011

Total Global Demand (MT) 33,110 38,420 41,458 44,785 48,438 52,452
Total Global Supply (MT) 33,000 33,000 33,000 33,000 33,000 33,000
Gap (MT) -110 -5,400 -8,400 -11,700 -15,400 -19,400
(Source: IPO Doc, HDFC Sec)

The demand for CPC Blue crude is likely to grow at CAGR of 10% between FY 06 and FY11. This would result in a demand of 52,452
MT by FY11, which translates in to a huge demand supply gap of 19,400 MT. This signifies the potential demand for the product. Hence
companies like ASCL are set to benefit from this situation as they have ample headroom to ramp up the production and hence cater to
a wide base of customers. In addition to this the strong relationship that the company shares with global giants like DIC, Clariant and
Ciba (ASCL is a no 1 supplier to DIC Japan and is among the top two suppliers to Clariant) is likely to boost the revenues for the
company. Going ahead the company also has plans to expand the capacity of Beta Blue from the existing 1200 MT to 2400 MT with an
investment of Rs ~150 mn. However, the company is likely to finalize the plan by the end of Q4 FY10 and the commercial production is
likely by end of FY11. Cumulatively, we expect the above to boost the top line for the company. We expect the revenues to grow at a
CAGR of 16.5% (FY09-FY11)

Technology collaboration to boost productivity and performance

ASCL entered in to a technology tie up with Songwon Colors Korea in 1995-96 for the manufacturing of Green crude. As per the terms
of the tie up Songwon Colors Korea, would provide the technology know how and also bring in the financial investments required. This
has given ASCL the access to advanced technology for manufacturing its products.

Currently CPC Blue crude is manufactured in developed countries using Glass-lined reactors (an advanced technology also known as
high-pressure technology). Most old plants in India and China manufacture CPC Blue crude by the conventional method using ONT and
Nitro Benzene solvents. On the other hand ASCL manufactures CPC Blue crude using Glass lined reactor technology, sourced from
Clariant. This has resulted in lower cost and better quality of the products. Since the company is a No 1 supplier to the global giants like
DIC Japan, Clariant etc, this is likely to boost the off-take and thereby augment ASCL’s global market share in the segment.

Good dividend yield possible

On account of a global melt down, FY09 was one of the toughest years for most of the industries. ASCL also had to bear the brunt of
the slow down, which resulted in the bottom line for the company dropping by 74% YoY. In spite of the sharp decline in profits the
company paid dividends for FY09. Prior to this year the company has regularly paid dividends as under:

Year Div Per Share EPS Pay-Out Ratio

2009 1.00 2.40 41.66
2008 1.20 9.30 12.90
2007 1.00 8.20 12.19
2006 1.00 2.20 45.45
(Source: Capitaline)

Dividend payout in FY07 and FY08 were low in order to fund the on going capex plans. With the huge demand potential for the
company’s products we expect buoyancy in the revenues and expect the bottom line to se to Rs.107.30 mn in FY11 from Rs.29.6 mn in
FY09. We expect the company to pay a dividend of 15% for the next year, which translates, into yield of ~3.5%. Incidentally for FY10,
ASCL has declared an interim dividend of 7% (Rs 0.70 per share) for the first time in its history. (Record date Jan 30, 2010).
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Low leverage to provide room for further borrowings if required

ASCL has a low debt equity ratio of 0.47:1 as of FY09. This has been on an improving trend since FY06. The D/E ratio has improved
from 2.43 as of FY06 to 0.47 as of FY09 and is expected to improve further to 0.41 as of FY11. Hence this leaves some headroom for
the company to borrow further, if required. Since the company operates in a space with capacity as a major constraint, it is likely that
the company may undertake an expansion program in the near future. Therefore a low Debt-Equity ratio would help the company to
borrow in future and meet its expansion plans.

Planned capacity expansion for Beta Blue and ample headroom to ramp up production for CPC Blue could bring in more revenue
visibility

Since FY08, ASCL has commenced the commercial production of Beta Blue, which is a derivative of CPC blue. Beta Blue is a value
added product and hence enjoys better margins. The company had set up an initial capacity of 1,200 MT for Beta Blue. Currently the
company is operating close to its full capacities for Beta Blue and considering the upside in demand of Beta Blue, it has planned to
double the capacity to 2,400 MT with the total outlay of ~ Rs 150 mn. The company is likely to firm up on the expansion plan by the
end of Q4 FY10 and the commercial production is expected by FY11.

CPC Blue Beta Blue CPC Green

Particulars FY 07 FY 08 FY 09 FY 07 FY 08 FY 09 FY 07 FY 08 FY 09
Installed Capacity (MT) 3,600 10,200 10,200 - 1,200 1,200 1,080 1,080 1,080
Production (MT) 3,146 3,491 5,722 - 1 256 778 1,066 900
Cap utilisation (%) 87.40 34.23 56.09 - 0.11 21.30 72.05 98.73 83.33
Realisations (Per Ton) 158,734 160,035 185,809 - - 286,876 266,254 252,610 287,314
Sales (Rs.Mn) 523 553 899 - - 36 226 265 255
(Source: Company, HDFC Sec Research)

While the capacity utilisation for FY09 looks weak (due to global slowdown), in FY10, the plants are running at much better capacity
utilisation.

CPC Blue crude is a key constituent of the raw material for manufacturing Beta Blue. With the company set to expand the capacity for
Beta Blue, the demand for CPC Blue crude would also rise proportionately. Currently ASCL has ample headroom to ramp up the
production for CPC Blue Crude, but in the future it is likely that the company may face capacity constraints for CPC Blue Crude due to
the buoyant demand. Hence the company may consider at a later stage the expansion of the CPC Blue Crude capacity. Hence both the
above capacity expansions could augment revenues for the company going ahead and currently offer a decent a revenue visibility for
ASCL.

It is also in talks with DIC to manufacture value added products for them, technology for which will be provided by DIC.

Risks & Concerns:

Vulnerable to volatility in the prices of RM

The primary raw materials used in the manufacture of the Pigment products are Phthalic Anhydride, and Cuprous Chloride. Pthalic
Anhydride one of the major constituent of the raw material is a petroleum-based product and hence its prices behave in line with the
crude prices. This is likely to be an area of concern for the company if the crude prices fluctuate in a wide range, as they would push up
the operating cost for the company. Apart from this, the prices of other raw materials may also fluctuate due to changes in demand and
supply conditions. Although, ASCL enters into contracts with its suppliers, which partly mitigate the risk of raw material price
fluctuations, we feel there is an inherent risk of raw material price fluctuation, which could hamper the operational performance of the
company.

Raw Material Profile For CPC Blue For Beta Blue For CPC Green
Particulars FY 07 FY 08 FY 09 FY 07 FY 08 FY 09 FY 07 FY 08 FY 09
Qty consumed (MT) 4,163 4,613 7,593 - 6 341 2,703 3,966 3,247
Cost (Rs Mn) 326 375 615 - 1 49 134 195 167
Cost per Ton 78,368 81,351 80,993 - 148,448 142,999 49,471 49,202 51,568
(Source: Company, HDFC Sec Research)

Dependence on state grid for power:

The production processes at both the manufacturing plants require a continuous and adequate supply of electricity. The company relies
on the state grid for the supply of electricity to its Padra, Vadodara and Kadi, Mehsana units. Though ASCL has DG sets at both
facilities, the cost of electricity from this source is higher. Any shortage or interruption in the supply of electricity for extended periods of
time would disrupt the operations or increase the production costs for the company. However, ASCL is in the process of setting up a
captive power plant of 2 MW capacity based on lignite as fuel. This would bring down the dependence on the state electricity boards
and also reduce the cost of power.

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Termination of Tax incentives available for Padra, Vadodara Plant which has qualified as an 100% EOU

Under section 10B of the Indian Income Tax Act, export profits of an approved 100% export-oriented undertaking (“EOU”) are exempt
from income tax for a period of 10 consecutive years commencing from the assessment year in which the EOU commenced its
manufacturing of qualifying products for exports, or up to financial year ended March 31, 2011, whichever is earlier. ASCL (comprising
its Padra, Vadodara unit) qualifies as approved 100% EOU under Section 10B of the Indian Income Tax At with effect from March 2005.
In the case of Padra, Vadodara unit that commenced commercial production in financial year 2004-05 the tax incentives will be valid up
to financial year ending March 31, 2011. The loss of such tax incentives will adversely impact the company’s profitability.

Increased Competition

ASCL is involved in the manufacturing of Pthalo pigments, primarily CPC Blue. The company competes in the local market with players
like Sudarshan Chemicals, Meghmani Organics and Clariant Limited and with international players including Chinese in the
international market.

Increased regulatory norms

ASCL manufacturers Pthalo pigments like CPC blue and its derivatives. The key raw materials required for these are pthalic anhydrite
and cuprous chloride. Both the raw materials are hazardous for the environment and hence they have been banned in most of the
developed nations. Currently the regulatory norms in India are comparatively benign (though stricter than earlier) and hence the ETP
(Effluent Treatment Plant) cost is low. Going ahead in the event of the regulatory norms getting tighter, higher degree of effluent
treatment process would be required, which could push up the ETP cost for the company.

Global Slow down

FY 09 was amongst the toughest years for most of the companies world over on account of a global slow down. ASCL was also
impacted to a certain extent by the global slow down. This was reflected in the top line of Q4 FY09 and Q1 FY10, which registered
sequential fall of 10% and 32% respectively. The Q2 FY10 and the Q3 FY10 results have bucked the trend by posting positive growth
numbers at the top line there by showing signs of revival. Since the company derives major chunk of its revenues from exports, if the
revival at the global level is short lived, there is a risk of slow down in its revenue growth.

Foreign Currency Exposure

ASCL is exposed to the risk of foreign currency fluctuations as it derives most of its revenues from the exports. The company is a major
exporter of pigments to global giants like DIC Japan, Clariant Korea etc. Hence the impact of foreign currency movements is substantial
on the company’s revenues. Simultaneously, the company imports raw material from the overseas markets, which provide a natural
hedge to the company. This is to the tune of ~30% of exports. For the balance foreign currency exposure the company enters in to
forward hedging contracts. In spite of all the precautions taken by the company to minimise the risk of foreign currency movements, we
feel that ASCL could be hit adversely if the rupee appreciates against the USD.

Client concentration risk

Almost 75% of the sales of ASCL comes from three customers i.e. DIC, Clariant and Sun Chem. While this is a potent risk for the
company, it also reflects the confidence of these global players in ASCL and could also lead to further orders due to the comfort level
between ASCL and the customers. However in the event any of the customers cut their orders on ASCL, it could affect the revenues of
ASCL till alternative customers are found with similar potential.

Conclusion:

ASCL is one of the leading manufacturers of the CPC grade pigments used for manufacturing paints, inks etc. The company makes
CPC Blue crude and CPC Green-7 pigments and has forayed into Beta Blue, which is a derivative of Blue crude. The demand for Beta
Blue and CPC Blue crude is buoyant primarily in the international markets. This is on the back of developed countries restricting the
production of blue crude due to environmental hazards caused by the pigment. Hence companies like ASCL would stand to benefit in
the form of enhanced demand for their products. Further more ASCL has attained the No 1 supplier status for global majors like DIC
(Japan), Clariant etc on the back of better quality of the products offered by the company. Also the company has ample headroom to
ramp up the production to meet the increasing requirements for these customers.
ASCL has a technical tie up with Clariant Korea. Hence this provides the company, access to advanced technologies like glass-lined
reactors technology for manufacturing CPC Blue crude. The use of advanced technology would augment the operating margins, which
in turn boost the profitability of the company. Apart from the above, ASCL has a low leverage, which provides further room for
borrowing, if required for expansion of the capacities.
Cumulatively, buoyant demand scenario in the international market coupled with the company’s ability to cash-in on the same would
drive the top line going further. At CMP of Rs 43 the stock is trading at 6.6x its FY10E EPS and 4.9x its FY11E EPS. On the back of the

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above-mentioned positives we think that ASCL is a good buy at the CMP of Rs.43 and can be added on dips to Rs.36-38 band for a
target of Rs 56.50 in 3-6 months.

Quarterly Financials:
Particulars (Rs mn) Q3 FY10 Q3 FY09 % YoY Q2 FY10 % QoQ 9M FY10 9M FY09 % YoY
Net Sales 361.7 280.7 28.86 310.1 116.64 844.6 882.10 -4.25
Total Income 362.5 281 29.00 310.3 116.82 846 883.00 -4.19
Operating Expense 301.6 252.1 19.64 270.1 111.66 726.2 781.40 -7.06
EBITDA (Inc OI) 60.9 28.9 110.73 40.2 151.49 119.8 101.6 17.91
Depreciation 10.9 8.4 29.76 11.9 91.60 32.3 25.30 27.67
Interest 7.1 10 -29.00 8.9 79.78 24.3 29.20 -16.78
PBT 42.9 10.5 308.57 19.4 221.13 63.2 47.1 34.18
Tax 14.4 0.2 7100.00 0 - 14.4 0.90 1500.00
PAT 28.5 10.3 176.70 19.4 146.91 48.8 46.2 5.63
EPS 2.3 0.8 14.4 1.6 146.91 4.0 3.8 5.63
EBITDA (%) 16.8 10.25 - 12.96 - 14.18 11.5 -
PAT (%) 7.88 3.67 - 6.26 - 5.78 5.24 -
(Source: Company, HDFC Sec Estimates)

Annual Financials:

Profit & Loss Account:

Particulars FY08 FY09 FY10E FY11E
Net Sales 830.7 1,126.2 1,254.6 1,530.6
Other Income 27.3 9.4 8.0 8.0
Total Income 858.0 1,135.6 1,262.6 1,538.6
Operating Expense 706.9 999.0 1,076.5 1,296.1
EBITDA (EX OI) 123.8 127.2 178.1 234.5
EBITDA (Inc OI) 151.1 136.6 186.1 242.5
Depreciation 13.7 38.2 43.3 51.2
Interest 18.9 43.7 31.2 36.5
PBT 118.5 54.7 111.7 154.8
Tax 3.2 30.1 31.3 47.5
PAT 115.3 24.6 80.4 107.3
Extra Ordinary Item 0.7 (5.0) - -
Adjusted PAT 114.6 29.6 80.4 107.3
EPS 9.3 2.4 6.6 8.7
(Source: Company, HDFC Sec Estimates)

Balance Sheet:
Particulars FY08 FY09 FY10E FY11E
Equity Capital 122.7 122.7 122.7 122.7
Reserves &Surplus 613.2 623.4 686.6 772.3
Share Holders Funds 735.9 746.1 809.3 895.0
Secured Loans 251.4 348.1 325.0 365.0
Total Debt 251.4 348.1 325.0 365.0
Net Def Tax 9.7 39.4 40.0 42.0
Minority Interest - - - -
Total Liabilities 997.0 1,133.6 1,174.3 1,302.0

Net Block 618.2 675.1 682.3 791.2

CWIP 17.7 5.0 120.0 60.0
Investments 17.6 4.2 4.2 0.1
Net Current Assets 295.2 410.3 352.7 430.8
Miscellaneous Expense Not W/O 48.3 39.0 15.0 20.0
Total Assets 997.0 1,133.6 1,174.3 1,302.1
(Source: Company, HDFC Sec Estimates)

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Key Ratios:
Particulars FY08 FY09 FY10E FY11E
EPS (Rs) 9.34 2.41 6.55 8.74
PE (X) 4.50 17.40 6.41 4.80
Book Value (Rs) 59.98 60.81 65.96 72.94
P/BV (X) 0.70 0.69 0.64 0.58
Market cap (Rs mn) 515.34 515.34 515.34 515.34
Market cap / Sales (X) 0.62 0.46 0.41 0.34
EV/EBITDA (X) 4.95 6.29 4.47 3.56
EBITDA (%) 14.90 11.29 14.20 15.32
PBT (%) 14.27 4.86 8.90 10.11
Adjusted PAT (%) 13.80 2.63 6.41 7.01
ROCE (%) 17.89 4.15 8.91 10.71
RONW (%) 15.57 3.97 9.94 11.99
Debt / Equity (X) 0.34 0.47 0.40 0.41
(Source: Company, HDFC Sec Estimates)

Analyst: Harshal Patil (harshal.patil@hdfcsec.com)

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