Result Update

November 5, 2018
Rating matrix
Rating : Buy Apcotex Industries (APCLAT) | 558
Target : | 650
Target Period : 12 months
Potential Upside : 16% Product mix offsets increase in RM costs…
What’s changed?  Apcotex Industries (AIL) reported strong Q2FY19 results but
Target Unchanged witnessed deterioration on the balance sheet front
EPS FY19E Changed from | 22.7 to | 22.8
 Revenues came in at | 160.1 crore, up 24.1% YoY. Gross margins
EPS FY20E Changed from 25.9 | to | 26.2
declined 140 bps YoY. However, employee expenses remained flat
Rating Unchanged
during the quarter. Accordingly, EBITDA margins came in at 12.3%
Quarterly performance vs. 11.7% YoY. Absolute EBITDA came at | 19.6 crore, up 29.9% YoY
Q2FY19 Q2FY18 YoY (%) Q1FY19 QoQ (%)  AIL reported other expenses of | 0.37 crore during the quarter. Thus,
Revenue 160.1 129.0 24.1 150.1 6.7 PAT grew 19.1% YoY to | 10.1 crore
EBITDA 19.6 15.1 29.9 17.9 9.8
Strong performance despite spike in raw material prices
EBITDA (%) 12.3 11.7 (590) bps 11.9 (470) bps
PAT 10.1 8.5 19.1 11.2 -10.1 AIL’s raw materials are crude linked derivates that have significantly
spiked over the last three to four months. However, a combination of
Key financials product mix and productivity led initiatives helped the company offset
S

| Crore FY17 FY18 FY19E FY20E

this hike in RM costs. AIL also continued to witness a demand revival
Revenues 390.1 526.2 626.7 721.6 (mostly value driven) across all industries in the domestic market (except
EBITDA 28.9 63.8 77.7 90.2 carpet) like paper/paper board, construction, tyre cord, speciality,
Net Profit 19.1 38.6 47.4 54.3 automobile, footwear, rice rolls, etc. Continued efforts to address quality
EPS (|) 9.2 18.6 22.8 26.2 related issues have helped maintain margins. For Q2FY19, AIL witnessed
a continued uptick in exports (except for one client where sales were
Valuation summary impacted due to fire). For the full year FY19E, the management expects a
FY17 FY18 FY19E FY20E
strong performance in this segment. For FY18, exports formed 14.2% of
P/E 60.7 30.0 24.4 21.3
topline, up from 9.3% in FY17. Continued traction in exports is expected
Target P/E 70.7 34.9 28.5 24.8
on the back of new product introductions and higher sales to existing
EV / EBITDA 40.5 17.9 15.0 12.8
geographies (Middle East and South East Asia).
P/BV 5.2 4.7 4.6 4.1
RoNW (%) 8.6 16.1 18.8 19.2 Higher utilisation, newer capacity, increased market share
RoCE (%) 10.0 20.8 22.2 22.2 AIL’s current capacity is at 55,000 MTPA in synthetic latex (SL), 7,000
MTPA in high styrene rubber (HSR) and 16,000 MTPA in nitrile rubber
Stock data (NR) and allied products. Due to strong demand across segments, AIL is
Particular Amount
witnessing utilisation levels of over 80-85% in the SL & HSR segment and
Market Capitalization (| Crore) 1,157
~100% in the NR segment. To meet increasing demand in the NR
Total Debt (FY18) (| Crore) 17.0
Cash and Investments (FY18) (| Crore) 32.7
segment and increasing capacity in the NBR segment, AIL is executing a
EV (FY18) (| Crore) 1,142 capex of | 70 crore (| 24 crore already spent till H1FY19) at its Valia
52 week H/L 668 / 440 facility, Gujarat. This is likely to increase NBR capacity by over 40%. This
Equity capital (| Crore) 10.4 will also help AIL gain over 40% market share in the NR segment (to be
Face value (|) 5.0 completed by March 2019).
Receivables & debt increase, accelerated earnings, strong vision
Price performance (%)
1M 3M 6M 12M
The H1FY19 balance sheet witnessed some deterioration in working
capital as receivables plus inventories have increased by ~| 27 crore.
Apcotex Industries (4.4) (4.2) (9.7) 12.6
Short-term debt has also increased by ~| 13 crore to | 30.3 crore. Going
forward, we expect AIL to deliver accelerated earnings of 17.1%, 18.9%
Research Analyst
and 18.5% in sales, EBITDA and PAT, respectively, in FY18-20E. AIL may
Chirag J Shah face some margin headwinds due to higher prices of its key raw materials
shah.chirag @icicisecurities.com like Styrene, Butadiene and Acrylonitrile rubber. The company intends to
partly offset this impact via efficient raw material purchase and increase
Sagar K Gandhi the contribution of high margins exports. From a longer term perspective,
[email protected] AIL plans to spend | 200-250 crore in FY20-23 to significantly expand its
nitrile rubber (~15000 T) and synthetic latex (~40000 T) capacity.
Accordingly, we remain positive on AIL. We continue to value the
company at 25x FY20E earnings to arrive at a fair value of | 650/share. We
maintain BUY recommendation on the stock.

ICICI Securities Ltd | Retail Equity Research

Variance analysis
Q2FY19 Q2FY19E Q2FY18 YoY (%) Q1FY19 QoQ (%) Comments
Total Revenue 160.1 129.0 24.1 150.1 6.7 AIL reported highest ever quarterly sales
Raw materials costs 113.0 89.2 26.6 104.8 7.8
Employees Cost 9.4 9.3 0.6 9.2 2.2
Other Expenses 18.1 15.3 18.2 18.2 -0.3
Total Expenditure 140.4 113.9 23.3 132.2 6.3
EBITDA 19.6 15.1 29.9 17.9 9.8
Growth in EBITDA margins was due to a combination of product mix and
EBITDA margins (%) 12.3 11.7 55 bps 11.9 35 bps productivity increase initiatives
Depreciation 3.0 3.1 -5.3 2.9 3.2
Interest 0.4 0.5 -2.6 0.4 2.1
Other Income -0.4 1.6 -122.9 1.8 -120.3 Loss due to MTM on equity book
PBT after Exceptional Items 15.9 13.2 20.5 16.4 -3.4
Total Tax 5.8 4.7 23.0 5.2 NA
PAT 10.1 8.5 19.1 11.2 -10.1
Source: Company, ICICI Direct Research

Change in estimates
FY17 FY18 FY19E FY20E
(| Crore) Actual Actual Old New % Change Old New % Change
Revenue 390.1 526.2 589.1 626.7 6.4 668.3 721.6 8.0
EBITDA 28.9 63.8 71.9 77.7 8.1 81.5 90.2 10.6
EBITDA Margin (%) 7.4 12.1 12.2 12.4 20 bps 12.2 12.5 30 bps
PAT 19.1 38.6 47.0 47.4 0.7 53.7 54.3 1.0
EPS (|) 9.2 18.6 22.7 22.8 0.7 25.9 26.2 1.0
Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 2

 Company Analysis
Leading producer of emulsion polymers
Apcotex Industries (Apcotex) is a leading producer of synthetic rubber
(nitrile rubber, high styrene rubber, nitrile polyblends and nitrile powder)
and synthetic latex (XSB latex, VP latex, styrene acrylics and nitrile latex)
in India. The company has one of the broadest ranges of emulsion
polymers. The various grades of synthetic rubber find application in
products like automotive components, hoses, gaskets, rice de-husking
rollers, printing and industrial rollers, friction materials, belting and
footwear.
Capacity expansion to help drive topline growth
In the past two years (FY16-18), AIL witnessed capex growth of 12.2%
CAGR, though mostly driven by capacity additions in the nitrile rubber
segments. Over the past two years, demand for the both categories of
emulsion polymers - synthetic latex and synthetic rubber has grown
driven by steady growth rates in consuming industries like paper (15-20%
of revenue), construction (~15% of revenue) and carpet segment (8-12%
revenue). With the acquisition of OSIPL, the company has added capacity
of 16000 MTPA in nitrile rubber segment. Going forward, the company
intends to scale up the production of nitrile rubber to 21000 MT with a
capex of | 60 crore). The current production of nitrile rubber is at ~16000
MTPA.

Exhibit 1: Total capacity & sales volume trend

112000
96000

92000
80000

88000
tonnes

83000
83000
78000

78000
78000

64000
62000

59000

48000
47000

32000
16000
0
FY16 FY17 FY18 FY19E FY20E

Capacity Sales Volume

Source: Company, ICICI Direct Research

Revenue to grow at 17.1% CAGR over FY18-20E

The company is witnessing strong demand for all its products - synthetic
latex (Taloja), synthetic rubber (HSR) (Taloja) and nitrile rubber (NRB)
(Valia) across most of its user industries. Accordingly, AIL has planned a
capex of | 60 crore towards de-bottlenecking of its capacity, and adding
new capacity. Our interaction with the management suggests this
increased capacity is likely to see significant utilisation of over 90% in
FY19E-20E. This coupled with new product introductions in the domestic
markets is likely to help the company deliver consistent growth in topline
in FY18-20E. Even on the export front, AIL is seeing strong demand for its
products from geographies like Middle East, South East Asia, etc. For
FY18, AIL clocked exports revenue of | 76 crore (against | 40 crore in
FY17). Going forward, exports growth is likely to continue, albeit at a
slower rate due to new product introductions, higher sales to existing
geographies and sales to newer geographies.

ICICI Securities Ltd | Retail Equity Research Page 3

 Exhibit 2: Revenue trend

800 721.6
700 626.7
600 526.2
500 390.1

| crore
400 296.5
300
200
100
0
FY16 FY17 FY18 FY19E FY20E

Revenues

Source: Company, ICICI Direct Research

New products, client stickiness to help maintain margins

AIL keeps introducing newer products in the emulsion polymer segments,
which helps it to command better margins. The company also offers
customisation in new and existing products to its existing clients leading
to higher client stickiness. Given the consistent product quality and higher
client stickiness, AIL has been able to manage the volatility of raw
material prices well. The same is evident from the fact that from quarterly
pricing of input and final product, the company has been successful in
getting a monthly revision of inputs and final products. Accordingly, we
expect consolidated EBITDA margins to be stable at 12-12.5% in FY18-
20E. We expect absolute EBITDA to grow at 18.9% CAGR in FY18-20E.
We estimate absolute EBITDA of | 90.2 crore by FY20E.
Exhibit 3: EBITDA & EBITDA margin

13.3 12.5
100 12.1 12.4 14
90
12
80 90.2
70 77.7 10
7.4
60 8
63.8
| crore

50

%
40 6
30 39.4 4
20 28.9
2
10
0 0
FY16 FY17 FY18 FY19E FY20E

EBITDA EBITDA margin (%)

Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 4

 PAT expected to grow at 18.5% CAGR over FY18-20E
We expect PAT to grow at 18.5% CAGR over FY18-20E.
Exhibit 4: PAT trend

60 54.3
47.4
50
38.5 38.6
40

| crore
30
19.1
20
10
0
FY16 FY17 FY18 FY19E FY20E

Net Proft

Source: Company, ICICI Direct Research

We expect RoEs and RoCEs to improve to 19.2% and 22.7%, respectively,

in FY20E.

Exhibit 5: Return ratios trend

35 22.2 22.2 25
30 17.0 20
25 20.8
20 15
10.0
(%)

20.6

(%)
15 18.8 19.2
16.1 10
10
8.6 5
5
0 0
FY16 FY17 FY18 FY19E FY20E

ROE ROCE

Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 5

 Outlook and Valuation
Apcotex Industries is one of the leading producers of emulsion polymer
products viz. synthetic latexes (Vinyl Pyridine Latex, Carboxylated Styrene
Butadiene Latex, Styrene Acrylic Latex, Nitrile Latex, etc) and synthetic
rubber (High Styrene Rubber, Nitrile Butadiene Rubber, NBR Powder and
Nitrile Polyblends) in India. The company has one of the broadest ranges
of products in the industrial segment and caters to a wide range of
industries.

The company’s synthetic latex products are used, among other

applications, for tyre cord dipping, paper and paperboard coating, carpet
backing, concrete modification/water proofing, non-wovens, textile
finishing, paints, etc. Various grades of synthetic rubber find application in
products like footwear, automotive components, rice rolls, moulded
items, v-belts, conveyor belts, hoses, etc. The company’s major raw
materials are petrochemical products while its business could be
vulnerable to high volatility in prices of crude oil and its downstream
products. Over the years, a number of steps have been taken by the
management to improve the operational efficiency of the company, which
is visible in the past 10 year’s financial history of the company.

For augmenting growth, the company has taken several organic and
inorganic steps over the past several years. AIL’s net debt free status,
sound operating cash flow generation from the business of ~| 30 crore
over the next two years (FY19E & FY20E) and its modernisation &
efficiency plans give us reasonable confidence about the prospects of the
company.

The H1FY19 balance sheet has witnessed some deterioration in working

capital as receivables plus inventories have increased by ~| 27 crore.
Short term debt has also increased by ~| 13 crore to | 30.3 crore. Going
forward, we expect AIL to deliver accelerated earnings of 17.1%, 18.9%
and 18.5% in sales, EBITDA and PAT, respectively, in FY18-20E. AIL may
face some margin headwinds due to higher prices of its key raw materials
like Styrene, Butadiene and Acrylonitrile rubber. The company intends to
partly offset this impact via efficient raw material purchase and increase
the contribution of high margins exports. From a longer term perspective,
AIL plans to spend | 200-250 crore in FY20-23 to significantly expand its
nitrile rubber (~15000 T) and synthetic latex (~40000 T) capacity.
Accordingly, we remain positive on AIL. We continue to value the
company at 25x FY20E earnings to arrive at a fair value of | 650/share. We
maintain BUY recommendation on the stock.

ICICI Securities Ltd | Retail Equity Research Page 6

Recommendation history vs. consensus
800
700
600
500
(|)

400
300
200
100
0
Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Oct-16 Jan-17 Mar-17 Jun-17 Aug-17 Oct-17 Jan-18 Mar-18 Jun-18 Aug-18 Nov-18

Series1 Idirect target Consensus Target Mean

Source: Bloomberg, Company, ICICI Direct Research, Initiated coverage on July 18, 2014

Key events
Month-Year Event
May-16 Increases synthetic latex capacity from 30,000 tonnes to 40,000 tonnes
May-16 Stock split in 1:1 ratio
May-16 Increases synthetic latex capacity from 40,000 tonnes to 55,000 tonnes
Apr-16 Strong FY15 performance with 20% YoY growth in revenues and 88% YoY growth in PAT led by expansion in EBIDTA margins by 320 bps primarily due to a decline in
raw material prices & better inventory management. Increase in capacity utilisations & good volume growth also contributed to the strong performance
Jul-16 Apcotex board approves bonus in 1:1 ratio
Feb-16 Acquires 100% stake of Omnova Solutions India Pvt Ltd (OSIPL) at EV of | 36 crore. The acquisition gives Apcotex an opportunity to grow in new adjacencies in
emulsion polymers. The company plans to invest around additional | 40 crore in the acquired business
Source: Company, ICICI Direct Research

Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position Change (in %) Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
1 Choksey (Atul Champaklal) 30-09-2018 15.00% 3.11M 0 Promoter 57.9 57.9 57.9 57.9 57.9
2 Choksey (Parul Atul) 30-09-2018 14.04% 2.91M 0 FII 0.0 0.0 0.0 0.0 0.0
3 Choksey (Abhiraj Atul) 30-09-2018 13.00% 2.70M 0 DII 0.0 0.0 0.0 0.0 0.5
4 Jalan (Devanshi Anant Veer) 30-09-2018 11.00% 2.28M 0
Others 42.1 42.1 42.1 42.1 41.6
5 Kedia (Vijay Kishanlal) 30-09-2018 1.12% 0.23M 0
6 Shah (Mita Dipak) 30-09-2018 1.01% 0.21M +0.00M
7 Abhiraj Trading & Investment Pvt. Ltd. 30-09-2018 0.56% 0.12M 0
8 Apco Enterprises, Ltd. 30-09-2018 0.54% 0.11M 0
9 L&T Investment Management Limited 31-08-2018 0.13% 0.03M +0.03M
10 Choksey (Abhiraj Atul) HUF 30-09-2018 0.07% 0.02M 0
Source: Reuters, ICICI Direct Research

Recent Activity
Buys Sells
Investor Name Value Shares
L&T Investment Management Limited +0.23M +0.03M
Shah (Mita Dipak) +0.01M +0.00M

Source: Reuters, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 7

Financial summary
Profit and loss statement | Crore Cash flow statement | Crore
| crore FY17 FY18 FY19E FY20E | crore FY17 FY18 FY19E FY20E
Net Sales 388.7 526.2 626.7 721.6 Profit/(Loss) after taxation 19.1 38.6 47.4 54.3
Other Operating Income 1.5 - - - Add: Depreciation & Amortization 12.1 12.1 14.5 16.7
Total Revenue 390.1 526.2 626.7 721.6 Add: Interest Paid 2.9 1.6 3.0 5.1
Growth YoY (%) 34.9% 19.1% 15.2% Cash Flow before WC changes 34.1 52.3 64.9 76.1
Raw Material Expenses 269.2 360.6 428.0 492.1 (Increase)/Decrease in inventory (1.2) (4.8) (10.8) (11.1)
Employee Expenses 29.3 33.8 40.1 46.2 (Increase)/Decrease in debtors 5.7 (20.1) (25.4) (18.7)
Other Expenses 62.6 68.0 80.8 93.1 Change in loans and advances 11.4 6.6 - -
Total Operating Expenditure 361.2 462.4 548.9 631.4 Net cash flow from operations 13.3 62.6 36.0 58.0
EBITDA 28.9 63.8 77.7 90.2 (Purchase)/Sale of Fixed Assets (11.9) (15.0) (45.0) (30.0)
Growth YoY (%) 120.5% 21.8% 16.1% Net CF from Investing Activities (42.7) (17.2) (20.0) (20.0)
Interest 2.9 1.6 3.0 5.1 Proceeds/(Repayment) Loans - - - -
Other Income 8.3 7.1 7.5 9.2 Dividend and Dividend Tax - (15.0) (17.4) (19.9)
PBDT 34.3 69.4 82.2 94.3 Interest Paid (2.9) (1.6) (3.0) (5.1)
Depreciation 12.1 12.1 14.5 16.7 Net CF from Financing Activities 19.0 (21.6) (27.3) (10.1)
Total Tax 3.1 17.1 20.3 23.3 Net Cash flow (10.4) 23.8 (11.2) 28.0
PAT 19.1 38.6 47.4 54.3 Cash at the beginning 25.1 14.7 38.5 27.3
Growth YoY (%) 102.6% 22.6% 14.6% Cash at the end 14.7 38.5 27.3 55.2
EPS 9.2 18.6 22.8 26.2 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

Balance sheet | Crore Key ratios

| crore FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E
Equity Capital 10.4 10.4 10.4 10.4 Per Share Data
Reserve and Surplus 212.5 236.0 241.4 271.8 Reported EPS 9.2 18.6 22.8 26.2
Total Shareholders funds 222.9 246.4 251.9 282.2 Cash EPS 15.0 24.5 29.8 34.2
Secured Loan - - - - BV per share 107.5 118.8 121.5 136.1
Unsecured Loan 22.2 17.4 35.0 54.0 Dividend per share - 6.0 7.0 8.0
Others 4.9 9.9 9.9 9.9 Operating Ratios
Total Liabilities 250 274 297 346 EBITDA / Net Sales 7.4 12.1 12.4 12.5
PAT / Net Sales 4.9 7.5 7.6 7.5
Gross Block 198.4 198.4 240.0 270.0 Return Ratios
Accumulated Depreciation 110.6 110.6 125.2 141.9 RoE 8.6 16.1 18.8 19.2
Net Block 87.8 78.2 114.9 128.1 RoCE 10.0 20.8 22.2 22.2
Capital WIP 6.7 9.6 15.0 15.0 RoIC 7.1 21.5 22.9 24.4
Total Fixed Assets 94.5 87.8 129.9 143.1 Valuation Ratios
Non-current Investments 39.8 49.9 24.9 14.9 EV / EBITDA 40.5 17.9 15.0 12.8
Inventory 44.5 49.3 60.1 71.2 P/E (Adjusted) 60.7 29.2 24.4 21.3
Debtors 78.1 98.2 123.6 142.3 EV / Net Sales 3.0 2.2 1.9 1.6
Loans and Advances - - - - Market Cap / Sales 3.0 2.2 1.8 1.6
Cash 6.6 32.7 27.3 55.2 Price to Book Value 5.2 4.7 4.6 4.1
Total Current Assets 139.5 190.5 222.2 281.0 Turnover Ratios
Creditors 22.2 48.1 51.5 59.3 Asset turnover 1.5 2.0 2.1 2.1
Provisions 2.1 2.5 2.7 3.1 Solvency Ratios
Total Current Liabilities 47.0 75.5 83.8 96.5 Debt / Equity 0.1 0.1 0.1 0.2
Net Current Assets 92.5 115.0 138.4 184.5 Current Ratio 5.5 3.0 3.5 3.5
Total Assets 250 274 297 346 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research Page 8

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong
Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price
is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]

ICICI Securities Ltd | Retail Equity Research Page 9

Disclaimer
ANALYST CERTIFICATION
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issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication,
availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may
or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

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