SUDARSHAN CHEMICALS

Sudarshan Chemicals is into manufacturing of Pigments, Effect Pigments & Agrochemicals. Pigment is a
substance that is added to impart color to any object. It is the largest pigment producer in India with a
market share of 35%. And also it is the 5th largest producer of Pigments in the world. It has dedicated
site for R&D with investments of USD 10 millions. This constitutes about 5 per cent of the total
revenues of FY18. Both Roha and Mahad site manufacture Effect Pigments and High Performance
Pigments (HPP). HPP’s are a more expensive form of Pigments that provide better resistance properties.

Muted past: Company’s earnings have been muted since the year FY15. There has not been substantial
growth in the profits of the company this is due to 1).the introduction of GST and Demonetization,
2).chinese imports has been a major threat as it has been setting up massive plants to meet its domestic
needs as well as to cater to global demand. 3).high cost of raw materials.

Aggressive growth ahead: Going forward we further state that the upcoming years for the Pigment
division will be better owing to strong overseas demand and tightening norms in China to further boost
the revenues. Overall consolidated sales for the company stood at RS 14,554 millions for FY18.
Tightening environmental norms in China has enabled Sudarshan to grab larger market share in global
markets resulting in EBIT margin expansion of 13.3% for FY18

Earnings trajectory to remain constant: Pigment sales for the year FY18 came in at 17% higher Y-o-Y .
Consolidated EBITDA and PAT stood at Rs 1,933 millions and Rs 847 millions respectively. We have
estimated our revenues at Rs 17,746 millions for FY 18-19 and Rs 22,182 millions respectively for FY 19-
20. Sudarshan’s earnings has increased at a CAGR of 8% over FY 14-18 led by increased contribution
from pigments space. Capacity expansion will also drive earnings for pigments.

Initiate ‘buy’ : At Current market price we believe the stock is well placed to capitalize on the growing
opportunities. It is currently trading at ~21x consol . FY20E of Rs 22/share . On the back of increased
capacities and increased margins , we expect the 23.45% earnings CAGR from FY 18-20. We initiate a
‘BUY’ coverage on the stock.
 Business Areas

Sudarshan started manufacturing pigments in 1952 with a handful of inorganic pigments and has since
flourished with a breadth of products. Active in over 85 countries, Sudarshan employs around 2000
employees and has two production facilities at Roha & Mahad in India. We have sales offices in India,
Netherlands, USA, and China and over 170 channel partners globally to achieve a consistently high level
of service. Pigments are used in coatings, plastics, inks and cosmetics. The pigments are used to add
color to the products. Majority of the revenue is generated from the Pigments division which is used in
coatings, plastics, inks and cosmetics markets. The company has an international presence through its
subsidiaries in North America, Europe and owns some well-regarded brands in the industry. The
company also is in process of setting up a wholly owned subsidiary in China for sourcing key raw
materials, servicing of customers in Asia pacific region and also to explore trading activity from China.

Coatings: It covers range of heavy metal free organic pigments offers exceptional choice to formulate
bright solid colors. Its transparent and semi-transparent colors are easily combined with Sudarshan’s
SumicaTMpearlescent pigments, or with metallic pigments, to produce durable special effect colors for
the automotive industry.

Plastics: Pigment ranges to provide a palette with a wide spectrum of colors and performance for plastic
applications. Sudarshan is the only pigment producer with the capability of offering this breadth of
options, with a leading range of heavy metal free organic pigments.

Inks: Sudarshan produces a high quality range of classical organic pigments for the coloration of
publication and commercial printing inks for magazines, direct mail and other commercial printing.
Sudarshan specializes in pigments for liquid ink with comprehensive color range offers high quality,
consistent, organic pigments at an affordable price, ideal for direct letterpress, gravure, flexo and screen
printing.

Cosmetics: Its range of pigments brings brilliancy and shimmer to distinguish products in the personal
care and color cosmetics space.
CAPEX PLAN
There is a proposed capex plan of RS 2.5 billion for the year FY19, this was part of the Rs 10 billions
expansion plan which they are going to be executing at the Roha and Mahad site. The major aim at
spending on the capex plan is that the company wants to increase the capacity utilization in order to
increase the volumes as it plans to to be among the Top 3 players worldwide. The capex plan is to be
funded through debt. In total Rs 700 millions capex was done which included things such as wind
turbine, green energy, capacity expansion projects etc. More capex is likely to be spent for new product
lines in the specialty pigments space.

Financials
The sales levels are expected to increase further in the coming FY19 & FY20 years respectively. This shall
be majorly contributed by the Pigments division which is expected to perform well and also increase
exports significantly. This along with increased global demands will boost revenues.

Sales (Rs m)

25,000
20,000
15,000
10,000
5,000
-
FY15 FY16 FY17 FY18 FY19E FY20E

Year FY15 FY16 FY17 FY18 FY19E FY20E

Sales (Rs m) 12,182 14,093 15,226 14,554 16,203 20,054
Sudarshan’s return ratios are likely to stay healthy due to improved operating performance and
improved margins.

35
30
25
20
ROE
15
ROCE
10
5
0
FY15 FY16 FY17 FY18 FY19 FY20

FY15 FY16 FY17 FY18

Revenue 1088 1207 1293 1346
Other Income 23 13 23 11
Total Income 1111 1220 1316 1358
Expenditure -979 -1052 -1144 -1173
Interest -33 -26 -25 -24
PBDT 99 142 172 185
Depreciation -40 -44 -50 -58
PBT 60 98 122 127
Tax -17 -27 -32 -41
Net Profit 42 72 89 88
Equity 13.85 13.85 13.85 13.85
EPS 6.13 10.35 12.92 12.72
OPM% 12.15% 13.97% 13.28% 13.73%
NPM% 3.90% 5.93% 6.92% 6.54%

REVENUE FROM OPERATIONS FY15 FY16 FY17 FY18 FY19E FY20E

Pigments 10,641 11,831 12560 13,519 14,870 18,588
Agro Chemical 1,155 1,163 1,446 1,270 NA NA
Others 386 1,099 1,198

PBIT 1,366 1,700 1,532 1,450 1,944 2,407

Pigments
Agro Chemical
Others

(%)
Pigments 13% 14% 12% 11% 12% 12%
Agro Chemical
Others

Capital employed
Pigments 9,239 10,836
Agro Chemical 677 225
Others 2,015 1,927

(ROCE) 720 7,938 8,447 9,270

Pigments 2,403 2,749
Agro Chemical 290 140
Others 791 829
EBITDA & Operating margins
EBITDA Margins have seen steady growth since FY15. This shows that there has been growth in the
business and it is expected that the EBITDA margins for the years FY19 & FY20 will be Rs 2,188 millions
and RS 2,774 million respectively. The above can be highlighted with the fact that the proposed capex
plan will start giving Asset turnover of 4 times i.e. Rs 30-40 billion additional revenue is expected
and the returns shall be seen in the upcoming quarters. Even the EBIT margins are expected to improve,
given lower debt cost.

3500 16%

3000 14%
12%
2500
10%
2000
8%
1500
6%
1000
4%
500 2%
0 0%
FY15 FY16 FY17 FY18 FY19E FY20E

EBIT(Margins)
12.00%

10.00%

8.00%

6.00% EBIT(Margins)
4.00%

2.00%

0.00%
FY15 FY16 FY17 FY18 FY19 FY20
Healthy EBITDA margins expected

EBITDA Margins are expected to be 13.5% & 13.8% and this is expected due increase in global sales and
the increase in capacity utilization which will increase the volume levels and lead to more sales.

14.0%

12.0%

10.0%

8.0%
EBITDA Margin (RHS)
6.0%
PAT Margin (RHS)
4.0%

2.0%

0.0%
FY15 FY16
FY17 FY18
FY19E FY20E

Year FY15 FY16 FY17 FY18 FY19E FY20E

EBITDA Margin (RHS) 10.7% 12.0% 13.2% 13.3% 13.5% 13.8%
PAT Margin (RHS) 4.5% 5.0% 6.8% 5.8% 5.6% 6.0%
Working Capital has improved

The company has reduced the working capital days and this shows that the company is converting
working capital to sales at a faster rate which is a very good sign for the company. This shall have a
positive outlook in the near future. The debtor days has and the creditor days has increased both are
positive signs for the company going forward.

Working Capital Days

100

80

60
Days

40

20

0
FY15 FY16 FY17 FY18

Lowering Working Capital Days

Year FY15 FY16 FY17 FY18 FY19E FY20E
Debtor Days 95 91 85 84 84 84
Inventory Days 75 66 64 68 68 68
Creditor Days 92 97 107 107 107 107
Working Capital Days 78 60 42 45 45 45
Valuation & View

The earnings are expected to grow at a CAGR of 23.45% for FY 19-20. It is valued at 1 PEGR at is
currently trading at ~21x consol. The EPS is Rs 24/share and we expect the stock to reach a level
of Rs 504/share in the near term and initiate a buy recommendation on the stock.

FY17 FY18 FY19E FY20E

Current Ratio 1.6 1.6 1.8 1.9
Debt/Equity 0.9 0.8 1 1.1
EV/EBITDA 20.9 20.1 14.7 11.4
Price/BV 9.3 8 6.9 5.8