OMKAR SPECIALITY CHEMICALS LTD

Transcription

1 S t o c k I d e a OMKAR SPECIALITY CHEMICALS LTD BUY Date: 18-Oct-13 CMP: Rs TARGET: Rs.110 Upside: 32% SENSEX 20,883 NIFTY 6,189 Eq. Cap. (Rs. Crs) Face Value (Rs.) 10.0 M. Cap (Rs. Crs) 164 BSE Code NSE Code Financial Year OMKARCHEM Apr-Mar 52-w H/L 150/69 Avg. Daily Vol. 257,587 TTM EPS (Rs.) 9.63 P/E (x) 8.57x BVPS (Rs.) P/BVPS (x) 1.28x M.Cap/Sales 0.77x Dividend Yield 1.83 Stock vs. Sensex Incorporated in 2005, Omkar Speciality Chemicals Ltd (OSCL) is primarily involved in the production of speciality chemicals and pharma intermediates. The company manufactures a range of organic, inorganic and organo inorganic intermediates. Many blockbuster drugs coming off patent by 2015: Augur well With availability of a wide range of products and raw materials, several multinational pharma companies are eyeing Indian specialty chemical companies such as OSCL in a big way. Hence, specialty/fine chemicals segment catering to the pharma industry has humungous growth potential, which is poised on the cusp of an exciting period of growth, driven by a enormous demand post-global drug off-patent regime (by 2015). Produces niche high value-added Organic and Inorganic molecules OSCL predominantly produces niche high value added organic and inorganic molecules, which emancipates it from every Chinese competition. Moreover, Niche products have higher and more stable margins & create less susceptibility from any competitors. Proposed to triple the manufacturing capacity by FY2015E OSCL has already expanded capacity from 1,700 MTPA in FY12 to 4,620 MTPA in FY13 and further drawn up an audacious capacity expansion program which would triple its existing capacity from 4,620 MTPA to MTPA by the end of FY15E in phased manner. The additional capacity would be coming up through expansion at existing units and a Greenfield facility and unit 5 in Badlapur. Lasa Laboratory: witnessed substantial growth The manufacturing facility of Lasa Laboratory Private Ltd (Lasa Lab) is the 100% subsidiary of OSCL. Lasa Lab is one of the established players in the anthelmintic/veterinary API segment with state-of-the-art good manufacturing practices (GMP) and FDA approved API manufacturing facility. Its turnover has witnessed substantial growth during FY2013 and the management has taken necessary steps to mark its presence globally in the veterinary API segment. Lasa Lab has also commenced its exports of veterinary API s to non regulated markets in 1QFY2014. Other Key Positives The company expects to maintain top-line growth of 30% y-o-y for next 3 years. The company expects to increase export pie in total sales to 35% in FY14E from 28% in FY13. Capacity at Lasa Labs (100% subsidiary) to be scaled up from 120 MTs to 600 MTs by March 2014E with an investment of Rs.30 Crs. Capacity utilization at Urdhwa plant to be gradually scaled up to 80% by Q3FY14E. The company has earmarked capex of Rs 112 Crs for next 2 years to augment manufacturing capacity from 4620 MTPA to MTPA by FY2015E. The company expects to launch 10 new products for export market in FY14E which shall improve margins by about 1.5%. The Company plans to bring down its working capital days from ~120 days in FY13 to ~90 days in FY14E.. At the CMP of Rs.83.50, the stock is trading at 7.8x FY2014E and 6.1x FY2015E consolidated EPS of Rs and Rs respectively. We recommend BUY on the stock with months Target price of Rs.110, providing an upside of 32% from the current level. Please Refer DISCLAIMER on the Last Page

2 Company Profile Incorporated in 2005, Omkar Speciality Chemicals Ltd (OSCL) is primarily involved in the production of speciality chemicals and pharma intermediates. The company manufactures a range of organic, inorganic and organo inorganic intermediates. The inorganic intermediates include Molybdenum derivatives, Selenium derivatives, Iodine derivatives, Cobalt derivatives, Bismuth & Tungsten derivatives and the organic intermediates include Tartaric acid derivatives and other intermediates. These products find applications in various industries like pharmaceutical industry, chemical industry, glass industry, cosmetics, ceramic pigments and cattle & poultry feeds. The company is having their manufacturing units located at MIDC, Badlapur (E) in Maharashtra. It has also a research & development department at Badlapur. The company exports its products to Europe, Canada, Asia, South America & Australia ey supply their products domestically as well as to ~21 countries, including regulated markets. Their products are exported to Europe, North America, Asia, South America and Australia. Business Segments 4% 5% Revenue Break-up FY % 54% Organic intermediates Inorganic intermediates Organo Inorganic APIs OSCL has an assorted product portfolio consisting a mix of organic, inorganic and organo inorganic intermediates, with over 90 products in these segments which can be broadly classified into iodine, selenium, molybdenum derivatives and others. It is a major player in iodine and selenium derivatives. It is deriving majority of sales growth through manufacturing niche value-added organic and inorganic chemicals like selenium anhydride that finds its usage in the steroid manufacturing, 5- Iodo-2-Methyl Benzoic Acid which has application in anti-diabetic drug where it doesn t have competition. Omkar Speciality Chemicals Ltd Oct-2013

3 INVESTMENT POSITIVES Research Desk Many blockbuster drugs coming off patent by 2015: Augur well With availability of a wide range of products and raw materials, several multinational pharma companies are eyeing Indian specialty chemical companies such as OSCL in a big way. Hence, specialty/fine chemicals segment catering to the pharma industry has humungous growth potential, which is poised on the cusp of an exciting period of growth, driven by a enormous demand post-global drug off-patent regime (by 2015). The demand for specialty chemicals is linked to the growth from the end-user industries, such as agrochemicals, dyes and flavours & fragrances, each representing 8-10 % of the overall market. The Pharma industry, however, remains the largest consumer of specialty chemicals for a long time now. Roughly 15 years ago, the Pharma industry consumed barely about half of the specialty chemicals market-share. However, pharmaceuticals enjoyed significantly higher annual growth rates than other consumers of specialty chemicals over several years, and its share of the overall intake touched ~65% during FY2011. It is imperative to note that substantial market share of pharmaceuticals indicates that trends and developments in the pharma market largely determine what is happening in the specialty chemicals industry. Therefore, continuing growth in the pharma market will provide further growth impetus for the specialty chemicals industry. Indian specialty chemical industry: Expected to grow at a CAGR of 13-14% The specialty chemicals industry is an indispensable and integral constituent in the Indian subcontinent. It occupies a pivotal position in meeting basic needs and improving quality of life, besides being one of the most diversified sectors covering thousands of commercial products. It is also the mainstay of the industrial and agricultural development of the country and provides building blocks for several downstream industries, such as textile, paper, paint, soap, detergent, pharmaceutical, varnish, etc. Global specialty chemicals industry is estimated to be about $ 740 billion accounting for about 22% of the global chemical industry. Indian specialty chemical industry, excluding agrochemicals and dyes & pigments, is currently pegged at US$17.7 bn and is an important growth driver for the economy. The segment has the potential to reach $ 38 billion by the end of 2017 with a growth rate of % every year. India is a preferred manufacturing location for MNC drug manufacturers India is a preferred manufacturing location for multinational drug manufacturers and this is quickly spreading into other areas of outsourcing activities. Soaring costs of R&D and administration are persuading drug manufacturers to move more of their discovery research and clinical trial Omkar Speciality Chemicals Ltd Oct-2013

4 activities to the Indian subcontinent or to establish administrative centres there, capitalising on India s high levels of scientific expertise as well as low wages. Both multinational and local drug manufacturers could eventually benefit from the market potential of India s population of over one billion. A large market is likely to open up as the result of a projected boom in health insurance, an area in which the country is currently woefully underdeveloped. Produces niche high value-added Organic and Inorganic molecules Specialty chemicals industry has diverse categories, such as commodity and niche chemicals. Niche products have higher and more stable margins & create less susceptibility from any competitors. However, commodity products are vulnerable to global competition. OSCL predominantly produces niche high value added organic and inorganic molecules, which emancipates it from every Chinese competition. China perennially specializes in commodity-based chemicals as it does not have the core competence to produce niche specialty chemicals, which OSCL is capable of. It is this inherent business module of OSCL s that has created an edge over its Chinese competitors. It is also because R&D and innovation are OSCL hallmark and its niche product portfolio remains the biggest growth driver. Proposed to triple the capacity by FY2015E OSCL has already expanded capacity from 1,700 MTPA in FY12 to 4,620 MTPA in FY13 and further drawn up an audacious capacity expansion program which would triple its existing capacity from 4,620 MTPA to MTPA by the end of FY15E in phased manner. The additional capacity would be coming up through expansion at existing units and a Greenfield facility and unit 5 in Badlapur. The total outlay for the said expansion would be to the tune of ~Rs.110 Crs, which would be funded through a mix of balance IPO proceeds (Rs.15 Crs), promoter warrants (Rs.15 Crs), ECB (Rs.63 Crs) and balance from internal accruals & debt (if needed). Thus, the expansion of capacities would not only enable the company to ward off any capacity constrains but at the same time target different segments/clients without slowing down the existing segments/clients. Omkar Speciality Chemicals Ltd Oct-2013

5 Diversified Product Offerings Lasa Laboratory: witnessed substantial growth The manufacturing facility of Lasa Laboratory Private Ltd (Lasa Lab) is the 100% subsidiary of OSCL. Lasa Lab is one of the established players in the anthelmintic/veterinary API segment with state-of-the-art good manufacturing practices (GMP) and FDA approved API manufacturing facility. Its turnover has witnessed substantial growth during FY2013 and the management has taken necessary steps to mark its presence globally in the veterinary API segment. Lasa Lab has also commenced its exports of veterinary API s to non regulated markets in 1QFY2014. Further, there are plans to begin production of veterinary API s in the regulated markets beginning 1QFY2015E. Veterinary API is likely to be game changer for OSCL in the future, as the sector has healthy growth potential. The growth will be mainly driven by the growing animal husbandry business across Australia, New Zealand, Africa and Europe, which is estimated to be above Rs 2,500 Crs market by FY2014E. Omkar Speciality Chemicals Ltd Oct-2013

6 Research & Development: Remains the USP OSCL R & D is recognized by Department of Scientific & Industrial Research (DSIR), Ministry of Science & Technology, Govt. of India. The company is among very few research oriented companies in India carrying out extensive research on intermediates and bulk drugs and ensures future growth. OSCL foundation lies in Organic synthesis; it has demonstrated expertise in Route selection, Process chemistry, Custom synthesis and Manufacturing. OSCL has served various customers across the globe with custom synthesized organic entities. As a result of the extensive research of OSCL it is increasing its intellectual bank day by day. The company has adequate facilities and qualified scientific manpower to carry out the R&D work. Improving exports contribution FY2012 FY2013 Exports 16% Exports 28% Domestic 84% Domestic 72% Other Key Positives The company expects to maintain top-line growth of 30% y-o-y for next 3 years. The company expects to increase export pie in total sales to 35% in FY14E from 28% in FY13. Capacity at Lasa Labs (100% subsidiary) to be scaled up from 120 MTs to 600 MTs by March 2014E with an investment of Rs.30 Crs. Capacity utilization at Urdhwa plant to be gradually scaled up to 80% by Q3FY14E. The company has earmarked capex of Rs 112 Crs for next 2 years to augment manufacturing capacity from 4620 MTPA to MTPA by FY2015E. The company expects to launch 10 new products for export market in FY14E which shall improve margins by about 1.5%. The Company plans to bring down its working capital days from ~120 days in FY13 to ~90 days in FY14E. Omkar Speciality Chemicals Ltd Oct-2013

7 VALUATIONS At the CMP of Rs.83.50, the stock is trading at 7.8x FY2014E and 6.1x FY2015E consolidated EPS of Rs and Rs respectively. We recommend BUY on the stock with months Target price of Rs.110, providing an upside of 32% from the current level. FINANCIAL STATEMENT Source: Company, Capitaline Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. Omkar Speciality Chemicals Ltd Oct-2013