INSTITUTIONAL EQUITY RESEARCH

Apcotex Industries Ltd. (APCO IN)

Omnova acquisition to provide fillip to growth
26 April 2016
INDIA | FMCG | Company Update

In February 2016, Apcotex acquired 100% stake in Omnova Solutions for Rs 360mn in an BUY (Maintain)
all-cash deal, funded through internal accruals with no major impact on Apcotex’s capital CMP RS 270
structure. The acquisition helps Apcotex strengthen its position in India’s emulsion TARGET Rs 340 (22%)
polymers segment. Omnova had revenues of Rs 1.9bn with a cash profit of Rs 20mn in the
year ended November 2015. The deal should be EPS accretive from FY17 itself and will add COMPANY DATA
6% to earnings; the management is confident of improving Omnova’s margins to Apcotex’s O/S SHARES (MN) : 21
levels. MARKET CAP (RSBN) : 6
MARKET CAP (USDBN) : 0.1
52 - WK HI/LO (RS) : 361 / 182
Key takeaways from the conference call regarding the acquisition are:
LIQUIDITY 3M (USDMN) : 5
PAR VALUE (RS) : 0.045
Acquisition to help Apcotex grow in adjacencies in emulsion polymers: Omnova Solutions
is a manufacturer emulsion polymers such as nitrile rubber (NRB), nitrile powder, nitrile/PVC SHARE HOLDING PATTERN, %
blends, and high-styrne rubber. Apcotex already has presence and market leadership in Dec 15 Sep 15 Jun 15
emulsion polymer categories such as VP latex, CB latex, nitrile latex, and synthetic rubber. PROMOTERS : 57.6 57.6 57.6
FII / NRI : 0.0 0.0 0.0
Omnova has a reasonable market share of ~20% in nitrile products – its acquisition will help FI / MF : 0.1 0.0 0.0
Apcotex expand its product range and grow in adjacencies like NRB, nitrile powder, and NON PRO : 11.5 9.8 6.8
nitrile/PVC blends. In styrene rubber, the acquisition will provide Apcotex with a near PUBLIC & OTHERS : 30.8 32.6 35.6
monopoly position in the Indian market.
PRICE PERFORMANCE, %
1MTH 3MTH 1YR
Product range expansion will help in end-user market and customer-base expansion: ABS 18.8 38.2 17.1
Omnova’s products cater mainly to industries such as automotive components, rice roll REL TO BSE 17.4 33.3 23.5
manufacturers, and rubber component manufacturers. Its acquisition broadens the
technological expertise (which provides long-term advantages to scale the business) apart PRICE VS. SENSEX
from significant improvement in product range and expansion of client base. 600

Acquisition synergies abundant with quality assets: Apcotex and Omnova have similar lines 450
of business with some overlapping product range – thus, operational synergies are
significant. These include synergies from manufacturing, process, raw material procurement 300
benefits, distribution optimisation, and improving efficiency of working capital – thereby
enabling margin expansion. Omnova’s plant’s capacity is 20,000 tonnes and it is based in 150
Valia, Gujarat. With the acquisition, Apcotex gets 115 acres of land, which provides
significant opportunities for future brownfield expansions. Apcotex will also be able to avail 0
tax benefits of Rs 100-140mn on the unabsorbed depreciation in Omnova’s books. Apr-14 Oct-14 Apr-15 Oct-15 Apr-16
Apcotex BSE Sensex

Margin expansion on synergistic benefits to drive earnings accretion: Omnova had Source: Phillip Capital India Research
revenues of Rs 1.9bn in 2015 (financial year ending November) with a minor cash profit of Rs
KEY FINANCIALS
20mn. Its PBT was negative, indicating significantly lower EBIDTA margins compared to
Rs mn FY16E FY17E FY18E
Apcotex’s 14%, whose management sounded reasonably confident (in the conference call) 2,765 5,382 6,195
Net Sales
of improving the acquisition’s margins to 12-14% in the next few years by recalibrating EBIDTA 406 531 668
pricing strategy and bringing down overheads. Better working capital efficiency will release Net Profit 226 299 390
an additional Rs 120-150mn. We estimate earnings accretion of 6% in FY17 itself (excluding EPS, Rs 10.8 14.3 18.7
one-off unabsorbed depreciation tax benefit of ~Rs 70mn) and 31% in FY18 if the EBITDA PER, x 25.8 19.5 14.9
margins of the acquired company expand to 5%/8% in FY17/18. EV/EBIDTA, x 14.1 10.7 8.3
P/BV, x 5.3 4.7 4.2
Outlook and valuation: We have introduced our estimates for FY18 and incorporated the ROE, % 20.5 24.3 27.8

impact of Omnova’s acquisition for FY17/18. A successful integration will significantly aid Source: PhillipCapital India Research Est.
Apcotex’s topline and bottomline in the medium term. We see earnings CAGR of 31% over
Jubil Jain (+9122 6667 9766)
FY16-18. Due to the company’s strong leadership in its target categories, long-term growth jjain@phillipcapital.in
potential, and steady focus on R&D, it should deliver superior growth in the medium to long
term. We value the company at 18x our FY18 earnings – at Rs 340 (unchanged) and maintain Naveen Kulkarni (+ 9122 6667 9947)
nkulkarni@phillipcapital.in
‘Buy’.

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 APCOTEX INDUSTRIES COMPANY UPDATE

Financials

Income Statement Cash Flow

Y/E Mar, Rs mn FY15e FY16e FY17e FY18e FY15e FY16e FY17e FY18e
Net sales 3,534 2,765 5,382 6,195 Pre-tax profit 348 319 413 558
Growth, % 20 -22 95 15 Depreciation 90 90 92 96
Total income 3,551 2,780 5,406 6,229 Chg in working capital -129 -198 -5 -77
Raw material expenses -2,502 -1,808 -3,861 -4,349 Total tax paid -109 -92 -114 -167
Employee expenses -141 -151 -174 -200 Cash flow from operating activities 200 119 387 409
Other Operating expenses -493 -415 -841 -1,012 Capital expenditure -52 -50 -50 -50
EBITDA (Core) 415 406 531 668 Chg in investments -63 100 -110 0
Growth, % 69.9 (2.2) 30.8 25.9 Other investing activities 0 0 0 0
Margin, % 11.7 14.7 9.9 10.8 Cash flow from investing activities -115 50 -160 -50
Depreciation -90 -90 -92 -96 Free cash flow 85 169 227 359
EBIT 325 316 438 572 Equity raised/(repaid) 65 0 0 0
Growth, % 84.2 (2.8) 38.8 30.5 Debt raised/(repaid) -87 -121 -170 -219
Margin, % 9.2 11.4 8.1 9.2 Cash flow from financing activities -22 -121 -170 -219
Interest paid -32 -25 -25 -25 Net chg in cash 63 47 57 141
Pre-tax profit 348 319 413 558
Tax provided -101 -92 -114 -167
Profit after tax 247 226 299 390 Valuation Ratios
Others (Minorities, Associates) 0 0 0 0
FY15e FY16e FY17e FY18e
Net Profit 247 226 299 390
Per Share data
Growth, % 98.7 (8.3) 32.3 30.4
EPS (INR) 11.8 10.8 14.3 18.7
Net Profit (adjusted) 247 226 299 390
Growth, % 98.7 (8.3) 32.3 30.4
Unadj. shares (m) 21 21 21 21
Book NAV/share (INR) 47.7 52.8 59.0 67.2
Wtd avg shares (m) 21 21 21 21
FDEPS (INR) 11.8 10.8 14.3 18.7
CEPS (INR) 16.1 15.1 18.7 23.3
CFPS (INR) 6.6 4.3 18.5 19.1
Balance Sheet Return ratios
Y/E Mar, Rs mn FY15e FY16e FY17e FY18e Return on assets (%) 14.7 13.9 15.4 15.5
Cash & bank 44 92 149 289 Return on equity (%) 24.7 20.5 24.3 27.8
Debtors 487 503 963 1,256 Return on capital employed (%) 23.8 20.1 23.9 27.6
Inventory 152 105 254 270 Turnover ratios
Loans & advances 118 118 118 118 Asset turnover (x) 5.4 3.6 6.4 7.4
Other current assets 44 44 44 44 Sales/Total assets (x) 1.9 1.6 2.6 2.4
Total current assets 845 861 1,527 1,977 Sales/Net FA (x) 5.3 4.4 9.1 11.3
Investments 308 208 318 318 Working capital/Sales (x) 0.2 0.5 0.3 -
Gross fixed assets 1,217 1,267 1,317 1,367 Working capital days 72 169 115 -
Less: Depreciation -585 -674 -767 -862 Liquidity ratios
Add: Capital WIP 19 19 19 19 Current ratio (x) 1.3 2.0 1.5 1.6
Net fixed assets 651 611 569 523 Quick ratio (x) 1.1 1.8 1.2 1.4
Total assets 1,807 1,683 2,416 2,821 Interest cover (x) 10.0 12.6 17.5 22.9
Total debt/Equity (%) - - - -
Current liabilities 656 428 1,031 1,264 Net debt/Equity (%) (4.4) (8.3) (12.1) (20.6)
Provisions 0 0 0 0 Valuation
Total current liabilities 656 428 1,031 1,264 PER (x) 23.6 25.8 19.5 14.9
Non-current liabilities 153 153 153 153 PEG (x) - y-o-y growth 0.2 (3.1) 0.6 0.5
Total liabilities 809 581 1,184 1,417 Price/Book (x) 5.8 5.3 4.7 4.2
Paid-up capital 52 52 52 52 EV/Net sales (x) 1.6 2.1 1.1 0.9
Reserves & surplus 945 1,050 1,180 1,351 EV/EBITDA (x) 13.9 14.1 10.7 8.3
Shareholders’ equity 998 1,102 1,232 1,404 EV/EBIT (x) 17.8 18.2 13.0 9.7
Total equity & liabilities 1,807 1,683 2,416 2,821

Source: Company, PhillipCapital India Research Estimates

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 APCOTEX INDUSTRIES COMPANY UPDATE

Stock Price, Price Target and Rating History

400

350

300

250
B (TP 340)
B (TP 360)
200

150

100
S-14 O-14 D-14 J-15 F-15 A-15 M-15 J-15 A-15 O-15 N-15 J-16 F-16 A-16

Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one
year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.

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 APCOTEX INDUSTRIES COMPANY UPDATE

Management
Vineet Bhatnagar (Managing Director) (91 22) 2483 1919
Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946
Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735
Research
Automobiles IT Services Pharma & Speciality Chem
Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Surya Patra (9122) 6667 9768
Nitesh Sharma, CFA (9122) 6667 9965 Shyamal Dhruve (9122) 6667 9992 Mehul Sheth (9122) 6667 9996
Banking, NBFCs Infrastructure Strategy
Manish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947
Pradeep Agrawal (9122) 6667 9953 Deepak Agarwal (9122) 6667 9944 Anindya Bhowmik (9122) 6667 9764
Paresh Jain (9122) 6667 9948 Logistics, Transportation & Midcap Telecom
Consumer & Retail Vikram Suryavanshi (9122) 6667 9951 Naveen Kulkarni, CFA, FRM (9122) 6667 9947
Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Media Manoj Behera (9122) 6667 9973
Jubil Jain (9122) 6667 9766 Manoj Behera (9122) 6667 9973 Technicals
Preeyam Tolia (9122) 6667 9950 Metals Subodh Gupta, CMT (9122) 6667 9762
Cement Dhawal Doshi (9122) 6667 9769 Production Manager
Vaibhav Agarwal (9122) 6667 9967 Yash Doshi (9122) 6667 9987 Ganesh Deorukhkar (9122) 6667 9966
Economics Midcap Editor
Anjali Verma (9122) 6667 9969 Amol Rao (9122) 6667 9952 Roshan Sony 98199 72726
Engineering, Capital Goods Mid-Caps & Database Manager Sr. Manager – Equities Support
Jonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944 Rosie Ferns (9122) 6667 9971
Hrishikesh Bhagat (9122) 6667 9986 Oil & Gas
Sabri Hazarika (9122) 6667 9756
Sales & Distribution Corporate Communications
Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976
Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747
Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745
Bhavin Shah (9122) 6667 9974
Ashka Mehta Gulati (9122) 6667 9934 Execution
Archan Vyas (9122) 6667 9785 Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

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Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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 APCOTEX INDUSTRIES COMPANY UPDATE

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 APCOTEX INDUSTRIES COMPANY UPDATE

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PhillipCapital (India) Pvt. Ltd.

Registered office: No. 1, 18th Floor, Urmi Estate, 95 GanpatraoKadamMarg, Lower Parel West, Mumbai 400013

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