Slower pickup in demand coupled with higher input cost to impact near-term performance We recently interacted with the management of Fine Organic (FOIL) to get a sense of current demand trends in the Plastic and Food additive market, Covid-19 related challenges in manufacturing, and update on domestic and overseas business performance. Following are some of the key highlights of our discussion: Overall demand environment seems quite challenging as end-user industries struggling for recovery. Witnessing decline volume of high margin products and increasing volume of low margin products impacting business mix. Management highlighted that Europe (28% of export) is going back into the lockdown phase, which could lead to a slower pickup in demand. Moreover, there can be a possible deferment of orders in European markets due to lockdown across key regions. Raw material (RM) prices have witnessed a sharp increase with prices of edible oils going up 40–50% YoY. Historically, gross margin is less affected due to Short/Long term contracts (3m-1year) with customers which insulated against fluctuation in RM prices. However, the revision of most of the contracts at a higher price will start from Q4FY21. Management believes that the recent cut of basic customs duty on crude Palm oil (key RM) from 37.5% to 27.5% would increase the availability of the commodity in the domestic market. Thereby cooling-off rising edible oil (Palm oil constitutes over 40% of India's total edible oil consumption) prices in the domestic market. On 25th Nov 2020, Commissioned the first phase of the Patalganga facility (Part of the capacity of 10,000MT expected to complete by FY22), which is dedicated to food additives. At optimum capacity utilization (by FY24), Ambernath 3 and Patalganga collectively can add INR 5-5.5bn to overall revenue. Valuation and Outlook The global leadership position in slip additives and its proprietary technology to manufacture green additives provide a competitive edge to FOIL. Going forward, we expect the company to continue its growth strategy on the back of volume growth in the light of planned capacity expansion, growing demand for green additive from the food industry, changing customer preferences, and a better business mix. We expect its short-term performance would be muted as end-user industries witnessing slower recovery and a sharp surge in the RM prices. However, we expect demand to recover and grow as the situation normalizes in FY22/FY23. We estimate 9.5%/9%/9% CAGRs in revenue/EBITDA/PAT over FY20-23. We maintain our HOLD rating on the stock with a target price of INR 2,459 by valuing the stock at a P/E of 35x on Its FY23E.

Margin recovery continues, Multiple tailwinds to accelerate earnings growth going forward IG Petrochemicals Ltd (IGPL) reported strong margin performance on the back of favourable PAN/OX spread during the quarter. Revenue de-grew by 9.1% YoY to INR 2424mn (est INR 2621mn) mainly impacted by lower realization due to soft crude oil prices. However, demand is fully recovered in Paints and Plasticizers to pre-COVID levels. EBITDA surged by 191.5% YoY to INR 418mn (est INR 235mn) with 1186bps YoY expansion in margin from 5.4% in Q2FY20 to 17.2% in Q2FY21 (est. 9%). This was mainly due to 1134bps expansion in gross margin (33.4% vs 22.4% in Q2FY20) on account of improvement in PAN/OX spread. Currently, PAN/OX average (avg) spread is around $200 (vs avg $150 in Q1FY21) compared to 10-year avg of $200 vs $100 in FY20. We believe spreads can continue to remain favourable in the near term on the back of healthy demand in the Paint and Plasticizer industries. Net profit grew by 588% to INR234mn (est. INR86mn) driven by operationally strong performance and lower tax expense (23.9% vs 32.7%in Q2FY20) due to the adoption of the new tax regime. During July 2020, the Government imposed a Provisional Duty of 7.5% on PAN import from Korea (50% share in domestic import) to safeguard domestic PAN producers till 21st Jan 2021, which has then extended to two years as per DGTR fillings dated 28/09/2020. Moreover, the shutdown of LG Chem’s PAN capacity (50,000 TPA) in South Korea can be a good opportunity for Korean PAN manufacturers in the domestic market, which otherwise would have exported to countries like India. We believe duty on Korean players will help IGPL to remain competitive in the domestic market; therefore, it can lead to the fast absorption of fresh capacity(PA4). Since June, capacity utilization is at optimum levels. Foray into advanced plasticizer to provide scope for margin improvement IGPL also forays into the downstream product by introducing a new product in speciality plasticizer DEP (Di-Ethyl Phthalate). Since the compound is a suitable solvent for many organic molecules, it is often used to bind cosmetics and fragrances. DEP was reported as an ingredient in 67 cosmetic formulations, including bath preparations (oils, tablets, and salts), eye shadow, toilet waters, perfumes, and other fragrance preparations, hair sprays, wave sets, nail polish and enamel removers, nail extenders, bath soaps, detergents, aftershave lotions, incense sticks, and skin care preparations. Post commissioning on 21st Mar the company is planning to cross-sell this product to existing plasticizer clients since DEP carries a better margin (EBITDA ~20-25%) increase in contribution from this product to strengthen the overall margin of the company further. We modelled INR 350mn incremental revenue from DEP in FY22E. Valuation and Outlook IGPL continues to be a market leader in the domestic PAN industry with a strong clientele, healthy balance sheet, and expansion in value-added products (downstream speciality plasticizers). Moreover, we could see further margin enhancement going forward as PAN/OX spreads improve further. Considering superior growth visibility, we rise our earnings estimate for FY21 and FY22 by 62% and 46% respectively. At the current market price (of INR 350), the stock is available at 8.6x FY22E EPS of INR40.5. We keep our positive stance on future growth prospects of the company on the back of better visibility over PA4 commissioning with an expected sharp recovery in earnings. We value IGPL by assigning a P/E of 10x to its FY22E earnings and arrive at an upward revised target price of INR 405 (earlier INR 278). Key Risks: Slow ramp-up of PA4 and adverse movement in PAN/OX spread

On a Strong growth track : Maintain BUY Sequent Scientific (SSL) has posted revenue of INR 3,463mn with a 21.8% YoY increase, which was 5% above our estimate of INR 3,295mn. The revenue growth was driven by formulations (+21% YoY) as well as improvement in the price environment for API business (+23% YoY). The formulation business growth was led by strong performance in LATAM, Turkey, and Emerging Markets (mainly due to recovery in India). API sales growth aided by healthy volume along with favourable pricing environment. EBITDA margin expanded by 321bps to 16.3% level, which was 72bps higher than our estimate driven by positive operating leverage. During the quarter the company incurred one-time expenses of INR 90mn (onetime bonus and ESOPs of INR 52.1mn and INR 38.3mn related to discontinuation of Alivira France operations) under Exceptional item. SSL reported a PAT of INR 213mn compared to our estimate of INR 250mn. Adjusting onetime expenses, the Normalised PAT came in at INR297mn for the quarter (19% above our estimate) led by operationally strong performance. Management maintained its revenue growth guidance of mid-teen level with 200 bps YoY margin improvement in the medium term. The Vizag plant (API capacity) expansion project commissioning has been extended by 3 months to Mar 2021 from earlier Dec 2020. During the quarter, the company received the approval for generic version of Draxxin® (tulathromycin injection) in European markets (19 countries) within 11 months of filing. Along with SSL,12 other fillers also received approval for this world's largest injectable product. Management is confident on day one launch for this product post-patent expiry on Dec 2020. As per the Management the US approval for the same injectable will happen in FY22-23 (US patent for Draxxin® is expiring on 16 Feb 2021). Valuation and Outlook SSL’s strong business risk profile as a result of its large and diversified revenue streams across geographies and products. We believe the company is on the verge of reaping the full potential of its past investments, led by its ongoing R&D investments in first to market animal health generics and the creation of a strong injectable pipeline. Moreover, it has built a very large pipeline of VMF filings (3rd largest in animal health space) in the US, which permits SSL to boost its overall API business growth. We expect API segment has enough headroom left and can continue to grow at CAGR of 20.6% over FY20-23, driven by an improved product/geography mix and supportive pricing dynamics. On the formulations Segment front, we expect a CAGR of 15.3% over FY20-23e, on the back of approval of new registrations across geographies. The larger growth pie in the formulations segment to be driven by the commercialization of the injectable pipeline in the US and other regulated markets which should begin FY22 onwards.  In addition, Carlyle's entry as the promoter would leverage its global network that can help Sequent accelerate business growth, strengthen the operation, and product innovation skills. Considering the expected strong growth in profitability, healthy balance sheet with improving return ratios, we are optimistic about the long-term growth prospects of the company. We foresee 17.1% revenue CAGR, 391bps margin expansion, and 47.2% growth in earnings over FY20-23E. The balance of portfolio among high value/ low volume products with operating leverage kicking in to help it clock a faster growth in earnings. At the CMP (INR 153), the stock trades at 17x FY23e EPS and 10.4x EV/EBITDA. We believe the stock to witness gradual re-rating on the back of a stronger product pipeline and improved return ratios. We maintain our ‘BUY’ rating with a target price of INR 224 per share, valuing the company at 25x of its FY23e earnings.

Superior growth in Pharma lead to a decent performance in Q2: Maintain BUY Hikal posted revenue of INR3,719mn with 15.8% YoY growth which was above our estimate of INR3,368mn mainly driven by strong growth in the Pharmaceutical segment. On segmental performance: The crop protection segment de grew by 17.9% (YoY) to INR 926mn and 12.7% (YoY) due to deferment of orders worth INR400mn which is expected to be supplied largely in Q3FY21. Pharmaceutical segment revenue surged by 34.1% to INR 2,793mn led by strong volume off-take supported by new capacity at Bangalore unit which was commissioned late last year. Despite 554bps contraction in gross margin, EBITDA margin managed to improve by 58bps to18.8%, was 29bps above our estimate. EBITDA margin was supported by 11% (YoY) decline in employee cost and flat other expenses in the growing topline.  EBIT margin of the Crop protection segment declined by 1044bps (YoY) with only ~25% (vs 35% in Q2FY20) contribution to overall EBIT. The pharmaceutical segment EBIT margin improved by 581bps with ~75% contribution to overall EBIT. PAT came higher than our estimate at INR270mn (est INR193mn) driven by better operational performance and lower finance cost (INR 85mn vs INR 136mn). On RM Sourcing from China: Hikal currently imports 30% of RM from china, which they expect to reduce to 20% over the next couple of years with backward integration in a few products. Given the lag effect of the Capex, the management expects some benefit in H2FY22 and a meaningful impact in FY23. However, management provided 10% revenue guidance for FY21 on the back of better traction in the Pharmaceutical segment. Based on the earlier Capex guidance of INR3bn, of which ~INR2bn  already been invested till Q2FY21 remaining ~INR1bn to be done by Q1FY22.The company expects an asset turnover of 1.75x from the newly built capacities, translating into a blended asset turnover of 1.5x in coming years. Valuation & Outlook We foresee Hikal to post 11.2% revenue CAGR over FY20-23E led by the commercialization of new products and favourable demand in the existing product portfolio for both businesses. We expect 134bps EBITDA margin expansion over FY20-23E led by better product mix and operating efficiency on account of higher utilization levels and cost rationalization measures at the Pharma facility. We roll forward our target price to FY23e EPS of INR 12.7 to arrive at a revised target price of INR 202 (earlier INR 140), valuing the stock at 16x PER and maintain our BUY rating.

Stellar quarter; revise to Hold Neuland lab (NLL) has posted revenue of INR2,414mn with a 29.6% YoY increase, which was 12% below our estimate of INR 2,160mn. The revenue growth was mainly driven by strong traction in the CMS (54.6% YoY growth) segment, led by 33 molecules (Development + Commercialize) along with the Prime API segment, which grew by 45% in Q2FY21. EBITDA margin expanded by 359bps to 16.9% level, which was 221bps higher than our estimate driven by improved product mix. Despite higher sales contribution from Prime APIs (47% vs 42% in Q2FY20), strong EBITDA performance signifies that margins in Prime APIs are now stabilising. Management is confident to improve margin profile from the current level on the back of strong order book in CMS business, better traction in GDS business, and cost optimization measures. NLL reported a PAT of INR ~214mn (up 150% YoY) compared to our PAT estimate of INR 147mn led by operationally strong performance. During Sep end, NLL raised the first commercial invoice from Block 4 of its Unit III. It is a multi-product facility and has five production blocks for advance intermediates and API manufacturing. Management believes existing capacity sufficient to cater 2-3 years’ revenue growth with some capacity debottlenecking in existing plants.   CMS business to ramp up, with greater profitability The revenue from Custom Manufacturing Solutions (CMS) (margin-accretive) business clocked a CAGR of 24.8% over FY15-20 and contributed 24% of revenue in FY20. The CMS business involves manufacturing API to customer specifications, designing and developing manufacturing processes, process optimization for competitiveness, and filing of DMF/CMC for API, among others. The company added 20 products (11 APIs and 9 intermediates) to its basket during FY20. We expect the contribution from the high-volume segment to be gradually replaced with the CMS segment and to register healthy revenue growth of ~26.6% over FY20-23, fueled by the ramp-up in supplies of existing products and possible commercialization of 3-4 products from the advanced clinical phase.      Valuation & Outlook While generic API manufacturing remains the pillar of NLL’s overall business, the ramp-up in the CMS segment (API CRAMS); especially given the fertile product opportunities (like Bilastine and Peptide product) is expected to drive the next phase of growth going forward. Considering the expected strong growth in profitability, healthy balance sheet with improving return ratios, we continue to remain optimistic about the long-term growth prospects of the company. We foresee 15.4% revenue CAGR, 488bps margin expansion over FY20-23E. The balance of portfolio among high value and high volume products will help it clock a faster growth in earnings. Considering better growth visibility, we rise our earnings estimate for FY21 and FY22 by 25% and 15% respectively. Additionally, we roll forward our target price to FY23e EPS of INR 95.6 to arrive at a revised target price of INR 1,434 (earlier INR 973), valuing the stock at 15x P/E. As NLL stock price has run-up almost 2.2x in the last 5 months we have downgraded it to Hold rating (from Buy earlier).

Stellar performance; All-time high EBITDA margin: Maintain Buy Granules (GIL) posted revenues of INR 8581mn with 22.7% YoY growth, which was ~12% above our estimate of INR 7652mn. Revenue growth was mainly driven by new product launches,  increase in market share of existing products, and new customer additions in the API segment. During Q2, FDs grew by 22% (YoY), PFIs grew by 33% (YoY) and API sales were up by 17%(YoY). Gross margin improved (929bps YoY) due to favorable product mix (larger share of FDs and PFIs) and higher capacity utilization. Subsequently, the EBITDA margin expanded by 935bps to 29.9% level was 749bps higher than our estimate supported by improved operational efficiency. As per management EBITDA margin can be sustainable (~27% for FY21) as continued traction in the formulation business. GIL reported PAT of INR 1,636mn, was above our estimate of INR 1,024mn driven by strong operational performance. Management expects to achieve 45% PAT growth in FY21 (from earlier guidance of 30%) compared previous year and confident of maintaining a 30% earnings CAGR over the next 2– 3 years (FY21 as a base) given the strong traction in base business along with new product launches in the US generics business.  Formulation vertical to remain a mainstay of growth Formulation segment contribution remains the same at 50% (YoY), APIs and PFIs contributed 30% and 20% respectively vs 31% and 19% a year ago. Geography-wise the regulated market contributed 73% to the revenue. GIL has 32 ANDAs approved (6 yet to be launched) and 13 ANDAs awaiting approval. It has guided for 7 to 8 ANDA filings on an annual basis. The company’s focus on developing differentiated products such as controlled substances, modified & extended-release, and oral suspensions/solutions garner better profitability. The share of core molecules stood at 70% of overall revenue in Q2FY21(85% in FY20). Management indicated this would further reduce to 50% over the next 3–5 years. Going forward, noncore products and ex-US markets (EU & LATAM) to drive growth and margin expansion for the company. We believe FY21-23 to be much better on a revenue front, on the back of ramping up of fresh capacities and expected 7-8 (including limited competition products) US generic launches every year. GIL has guided for approval of one ANDA (MUPS) in H2FY21 which will be launched from the existing facility in Gagillapur, Hyderabad. The addressable market is $204Mn with only 3-4 active competitors. We modeled 26.6% revenue growth in the formulation segment with revenue share increase (60% in FY23E vs. 52% in FY20). Valuation & Outlook Over FY20-23E, GIL is expected to post 20.5%/34.1%/33.9% Revenue/EBITDA/PAT CAGR with +23% return ratios. Considering the expected strong growth in profitability, a healthy balance sheet, and improving return ratios, we remain optimistic about the long-term growth prospects of the company. In light of better growth visibility, we rise our earnings estimate for FY21 and FY22 by 17% and 19% respectively. Additionally, we roll forward our target price to FY23e EPS of INR 32.5 to arrive at a revised target price of INR 455 (earlier INR 312), valuing the stock at 14x P/E (in line with 10yr Avg P/E). We maintain a BUY recommendation on the stock.

Company Background Incorporated in 1985, Sequent Scientific Limited (SSL) has a presence in animal APIs and veterinary formulations and bioanalytical services. Until September 2017, SSL (standalone) was engaged in manufacturing human APIs but this segment was demerged following which SSL became a pure-play animal health company. At present, SSL (consolidated) manufactures veterinary APIs and formulations in its wholly-owned subsidiary, Alivira Animal Health Limited (AAHL), and offers analytical services to the pharmaceutical industry through another wholly-owned subsidiary - Sequent Research Limited (SRL). SSL‘s (consolidated) portfolio consists of about 27 commercial products in animal health API and over 1000 products across 12 dosage forms. Post demerger of the human API business, it has 8 manufacturing facilities across India, Spain, Turkey, Brazil and Germany. Investment Rationale Vertically Integrated animal healthcare player with a strong global footprint SSL through its wholly-owned subsidiary has emerged as India’s largest animal health company with a comprehensive portfolio covering animal feed, nutritional and therapeutic classes that address a multitude of species across therapy classes in key markets globally like Europe, LATAM, Turkey, India, Africa, SE Asia, France, US & Ukraine. Product-wise SSL has a range of dosage forms including injectables, powders, granules, solutions, suspensions, and topicals with over 1000+ Finished Dosage Formulations (FDFs) across 12 dosage forms & key therapies where SSL is a dominant player includes feed supplements, antibiotics, anthelmintics, antibacterial, skincare (dermatology) products and disinfectants. Active Pharmaceutical Ingredients (API) predominantly includes Anthelmintics and emerging Nonsteroidal Anti- Inflammatory Drug (NSAID) portfolio. Around 66% of SSL‘s revenues come from formulations while the balance 34% comes from APIs. 55% of SSL‘s revenues come from the global top 10 animal health companies. Geographically looked at, over 90% of its revenues coming from outside India. 47% of its formations were sold in Europe, Emerging markets accounted for 21%, Turkey 18% & 14% LATAM as of FY20. API segment continues to show traction on the back of capacity expansion   SSL is one of the world‘s leading producers of Active Pharmaceutical Ingredients (APIs) and claims to be the world‘s largest producer of Anthelmintic APIs and the largest producer of animal health APIs in India. SSL has 27 commercial API’s with a pipeline of 14+ products across therapeutic areas such as anthelmintic, NSAIDS, beta-agonists, anti-protozoal, and ectoparasiticides. The company’s products are sold to customers in multiple geographies including the United States, Europe, MENA, Latin America, and India. The revenue from the API segment clocked a CAGR of 21% over FY15-20 and contributed 34% of revenue in FY20. Superior growth in the API segment was driven by multiple product lunches coupled with increasing penetration among 10 animal health players. In FY20, Contribution from the top 10 products stood at 88% with the top 10 customers contributing 55% of total API revenue. Sequent claims the Mahad site as the world’s largest facility making Albendazole, a widely used antiparasitic agent. Albendazole API revenue grew at CAGR of 56% over FY17-20 on the back of strong volume growth of 35% during the same period. Given the strong demand outlook, the company is expanded Albendazole capacity by 33% which will provide strong headroom to tap growing demand for the product. The company has commercialized three APIs in the US market since its first product lunch in FY19.  In the last three years, Alivira has filed eighteen VMFs, with sole filing for six molecules other than the innovator. For further six filings, there are less than three competitors thereby establishing themself dominant position in API filings and making their products a moat as compared to competitors. SSL has a pipeline of 14+ prod

*Weak revenue neutralised by margin recovery: Maintain BUY* SH Kelkar & Co Ltd (SHK) posted revenues of INR1,925mn with 29.8% YoY decline, which was 24.6% below our estimate of INR2,555mn. Revenue growth was mainly impacted by ~28%/47% decline in the Fragrance and flavour segment respectively due to demand and production side disruption led by COVID 19 in both domestic as well as in the overseas market. However, as per management demand has started picking up with strong traction from end-May’20. EBITDA margin declined by 82bps was 136bps higher than our estimate mainly driven by softer raw material prices (Gross Margin was up 73bps YoY to 43.9%) and cost optimisation measures. Absolute EBITDA came 17.6% below our estimate due to weak revenue. PAT came in line with our estimate at INR149mn (est: profit of INR152mn) supported by higher Other income (196% YoY) and lower tax rate (21.7% vs 33.7% in Q1FY20). Management believes a healthy operating environment along with the several cost-optimisation measures undertaken by SHK can enable the company to deliver the double-digit growth in revenue in FY22. However, for FY21, growth is likely to remain flat (excl. CFF). During Jan to June 2020 CFF revenue stood at INR1.23bn with gross margin of 36.6%. *Management Guidance* The company acquired the balance equity stake (49%) in CFF for Euros 16mn (INR1.26bn) on 28th Jul’20 SHK financed CFF acquisition through local debt; debt levels have peaked and management targets end-FY2021E to be broadly similar to FY2020. Major capex cycle is over, and management does not envisage any significant capital outflow over the next couple of years. Maintenance capex is in the range of INR150-200m *Valuation & Outlook* We believe SHK would be a key beneficiary of increasing demand from FMCG companies specifically in Personal Care (body-washes, soaps and sanitisers) and Household Products (floor cleaners) due to higher focus on hygiene and cleanliness due to COVID-19. We expect the company to post 16% revenue CAGR over FY20-22E led by growth recovery in the end-user industry and CFF consolidation. We forecast 75bps of EBITDA margin expansion over FY20-22E driven by (a) shift in the composition of exports in favour of high value-added items (b) normalisation of Input cost increase and (c) cost optimisation measures. Considering the expected recovery in profitability, healthy balance sheet, improving return ratios and good corporate governance practices, we remain optimistic about the long-term growth prospects of the company. We maintain our BUY rating on the stock with a target price of INR 102 (P/E of 13x of Its FY22E earnings).

*Continuing strong growth momentum; Maintain BUY* Neuland lab (NLL) has posted revenue of INR 2,054mn with 13.5% YoY increase, which was 4% below our estimate of INR 2,149mn. The revenue growth was mainly driven by the CMS (25.4% YoY growth) segment, led by 32 molecules (Development + Commercialize) with speciality API segment, which grew by 33.2% in Q1FY21. EBITDA margin expanded by 622bps to 16.5% level, which was 219bps higher than our estimate driven by 580bps improvement in gross margin led by improved product mix. Management is confident to improve margin profile from current level on the back of strong order book in CMS business, better traction in GDS business and cost optimization measures. NLL reported a PAT of INR ~152mn compared to our PAT estimate of INR 127mn led by operationally strong performance. *Management Guidance* Þ Capex for FY21: INR700-INR 800mn Þ Unit 3: To fully commercialize from Aug 20, existing capacity sufficient to cater 2-3 years’ revenue growth Þ Awaiting more clarification from government on incentive scheme for API manufacturing Þ NLL has 4 APIs out of 53 critical APIs where India has a large dependence on China. *CMS business to ramp up, with greater profitability* The revenue from Custom Manufacturing Solutions (CMS) (margin-accretive) business clocked a CAGR of 24.8% over FY15-20 and contributed 24% of revenue in FY20. The CMS business involves manufacturing API to customer specifications, designing and developing manufacturing processes, process optimization for competitiveness and filing of DMF/CMC for API, among others. The company added 20 products (11 APIs and 9 intermediates) to its basket during FY20. We expect the contribution from the high-volume segment to be gradually replaced with the CMS segment and to register healthy revenue growth of ~26.6% over FY20-22, fueled by the ramp-up in supplies of existing products and possible commercialization of products in clinical trials. *Valuation & Outlook* While generic API manufacturing remains the pillar of NLL’s overall business, the ramp-up in the CMS segment (API CRAMS); especially given the fertile product opportunities (like Bilastine and Peptide product) is expected to drive the next phase of growth going forward. Considering the expected strong growth in profitability, healthy balance sheet with improving return ratios, we are optimistic about the long-term growth prospects of the company. We foresee 13.5% revenue CAGR, 327bps margin expansion over FY20-22E. The balance of portfolio among high value and high volume products will help it clock a faster growth in earnings. Despite the recent stock price upmove, NLL trades at 12.3x FY22e EPS (ten-year average is ~24x). We believe the stock will see a further re-rating on the back of stronger products pipeline and improved return ratios. We maintain our BUY recommendation on the stock, with an upward revised target price of INR 973(earlier INR584), based on 15x FY22e EPS.

Weak GL\ Proprietary performance hurt earnings; maintaining a Sell GMM Pfaudler Ltd (GMM), for Q1FY21, reported a weak set of numbers. Revenue marginally grew by 2.8% YoY to INR 1544mn (est INR 1721mn) mainly due to fewer production days (two months) led by the extended lockdown. However, Q1FY21 revenue includes execution of a deferred order of Q4FY20 worth INR 150mn-200mn.EBITDA remained flat at INR275mn (est INR342mn) with 55ps YoY decline in margin from 18.4% in Q1FY20 to 17.8% in Q1FY21, due to adverse product mix mainly impacted by proprietary business, where EBIT margin declined by 755bps on YoY basis with 23% contribution in consolidated revenue. However, the Heavy engineering business has reported a strong growth of 565% in revenue along with 21.3% EBIT margin (vs 2.8%YoY) in Q1FY21. This, we believe, was partly led by shipment of the order to their Middle East client, which was deferred during Q4FY20. As per the management, heavy engineering can add strong growth on the back of a healthy order book with better margin profile going forward. Current order book stands at INR 3,300mn (~56% of FY20 revenue), of which 50% pertains to Glass-lined and 50% Non –Glass-lined (25% each of Heavy engineering and Proprietary products). Net profit grew by 8.6% to INR 192mn (est. INR220mn) on account of higher other income (INR 27mn vs INR 13mn) and lower tax expense (16.8% vs 26.4%). GMM’s Swiss-based subsidiary Mavag AG posted revenue of INR235mn (est 224mn) with EBITDA of INR32mn (est INR38mn), and profit came at INR28mn (est 26mn). For FY21, Management has guided revenue of Swiss franc 12mn (INR985mn) with the margin improvement. DDPSI plant acquisition: The company has received approval to sign definitive documents with De Dietrich Process Systems India Pvt. Ltd. (“DDPSI”) for the acquisition of their Glass Lined Equipment manufacturing facility in Hyderabad, Telangana for consideration equivalent to EURO 6.25mn (INR~550mn). The facility is located at Nacharam Industrial Estate, 15 km away from Secunderabad, Telangana and spread across an area of 6 acres with the annual capacity of 400 EUs. Management expects this acquisition will help the company to strengthen its presence in the region further. Post completion of this acquisition, the company will not do any greenfield expansion for the next few years. Currently, GMM has 2400 EU capacity at Karamsad Gujarat. Valuation and Outlook GMM has a leadership position in GL reactors (~60% Market share) with strong pricing power in the domestic market. The company is well-positioned to witness steady revenue and profitability growth over the next two years on the back of growing domestic demand. We believe GMM is well placed to capture the opportunity from increasing demand through the recent acquisition of DDPSI plant with higher capacity utilization. GMM is likely to leverage its deep-rooted relationship with GL customers to cross-sell its non-GL equipment. We estimate consolidated Revenue/EBITDA/PAT to clock 21%/28%/29% CAGR during FY20-22E. However, with the stock now trading at P/E 51.8x(FY22E) multiples, we see risk-reward as less compelling from here as it is trading beyond its fundamental value. We suggest investors to avoid entering GMM at the current price as valuation seems stretched at this level. The thesis remains fully intact, with a rare combination of premium revenue growth and attractive margins. We maintain our SELL rating on the stock, with a price target of INR 2,657 by assigning P/E of 33x (in line with 5 yr avg P/E) on its FY22E earnings.

Extraordinary performance; Positive outlook: Maintain BUY Granules (GIL) posted revenues of INR 7,356mn with 23.6% YoY growth, which was ~6% above our estimate of INR 6929mn. Revenue growth was mainly driven by new product launches and an increase in market share of existing products. Gross margin improved (918bps YoY) due to higher formulation sales (52% of revenue vs 48% in Q1FY20). Subsequently, EBITDA margin expanded by 503bps to 25% level was 475bps higher than our estimate. EBITDA was partially impacted by one-off INR 280mn related to metformin recall (INR150mn) and COVID-19 related expenses (INR130mn). As per management EBITDA margin can be sustainable (~23% for FY21) as continued traction in the formulation business. GIL reported PAT of INR 1114mn, was above our estimate of INR 744mn driven by strong operational performance and lower tax rate (25.3% vs 32% in Q1FY20). Management expects to achieve 30% PAT growth in FY21 compared previous year and 25% for FY22 given the strong traction in base business along with new product launches in the US generics business. Post the buyback of shares, the promoter pledge comes down to 8.6% (vs. 37.6% earlier) and expect to be zero by FY21 end. Formulation vertical to remain a mainstay of growth Formulation segment contribution increased from 48% to 52% (YoY) in Q1FY21. APIs and PFIs contributed 29% and 19% respectively vs 36% and 16% a year ago. Geography-wise the regulated market contributed 71% to the revenue. Management expects approval of 4-5 high value and volume ANDAs in the next two years. Thus, guided for additional capex of Rs2.5bn to meet increasing demand. This facility will be ready by H2FY22 and will provide additional PFI & compression capacity with a payback period of 2-3 years. This project will be funded through internal accruals. For FY21, capex guidance stands at INR3.5bn and INR 3bn for FY22. We believe FY21-22 to be much better on a revenue front, on the back of ramping up of fresh capacities and expected 7-8 US generic launches in FY21 with addressable market size of ~USD2.5bn. During the quarter, GIL has filed 3 ANDAs/Dossiers in North America and European markets and received 6 ANDAs approval (including 1 tentative approval) from the USFDA. We modelled 19.6% top-line growth for GIL over FY20-22E as we believe most of the benefits from capacity addition and ANDA approval would be seen in FY21- 22E. The company plans to file 20-22 ANDA filings from India and Virginia's facilities put together over the next three years. Valuation & Outlook Over FY20-22E, GIL is expected to post 19.6%/27.3%/ 23.9% revenue /EBITDA/ PAT CAGR with +20% return ratios. Considering the expected strong growth in profitability, healthy balance sheet and improving return ratios, we are optimistic about the long-term growth prospects of the company. At the CMP (INR 264), the stock is trading at 13x its FY22E EPS of INR 20.8. We keep our estimate unchanged and maintain our BUY rating with an upward revised target price of INR312 (earlier INR227) by valuing the stock at P/E of 15x (20% disc to 5 yr avg P/E) on Its FY22E EPS.

Lower revenue compensated by better margin performance; Cloudy outlook in near-term: Maintain HOLD Fine Organic Industries (FOIL) posted revenues of INR 2,473mn with 13% YoY decline which was below our estimate of INR2,734mn mainly due to loss of sales during last two week of March led by COVID 19 outbreak and logistic challenges in domestic as well as in many other countries. In the near term revenue outlook remains cloudy as management expects regaining pre Covid operational level can be possible post Aug–Sep due to slow recovery in existing business and challenging environment in new business development. On the back of favourable product mix, Gross margin expanded by 505bps, which resulted in 226bps (YoY) improvement in EBITDA margin to 23.2%(est. 22.1%) in Q4FY20. Commissioning of new capacity (Ambernath 3) resulted in a sharp increase (178% YoY) in depreciation cost. However, higher other income (INR 46mn vs INR 6mn) coupled with lower tax rate (25.9% vs 50.3%) supported PAT growth of 29% to INR 344mn. Fresh capacity addition to drive next leg of growth As there is an increasing demand in Additive industry, the company is going for capacity expansions which could lead to volume growth, aided by higher realizations and a stable rupee. FOIL is expanding capacity by 42,000 MTPA of which 32,000 MTPA in Ambernath for plastic, rubber and cosmetic additives got commissioned in Q2FY20, which we believe open up a new avenue of revenue growth. Moreover, another 10,000TPA capacity dedicated to food additives at Patalganga near Karjat, expected to be operational by FY21E. The company has earmarked a capex of INR1.5-1.6bn for Ambernath while INR550-600mn for Patalganga with 3-4x of asset turnover. Hence, we expect incremental revenue of INR5-6bn at peak utilization level from these plants in the next three to four years. Given the continued uncertainty over COVID-19 situation, it is likely that the benefit of the expanded capacity will take time to ramp-up. We modelled 15%/40%/60% capacity utilization in FY21/FY22/FY23 from Ambernath 3 facility (32,000MTPA) and 50%/90% utilization from Patalganga facility in FY22/FY23 respectively. Valuation and Outlook With a global leadership position in slip additives and its proprietary technology to manufacture green additives provides a competitive edge to FOIL. Going forward, we expect the company to continue its growth strategy on the back of volume growth in the light of planned capacity expansion, growing demand for green additives from the food industry, changing customer preferences and better business mix. Over FY20-23E, FOIL is expected to post 14.7%/13.8%/ 14.6% revenue /EBITDA/ PAT CAGR with +25% return ratios. W0e believe FOIL will continue to strengthen its balance sheet with strong free cash flow generation of INR4.8bn over FY20-23E. Considering the expected steady growth in profitability, healthy balance sheet and complex nature of the business with high entry barriers, we remain optimistic about the long-term growth prospects of the company. At the CMP (INR 1,882), the stock is trading at 23.2x its FY23E EPS of INR 80.9. We maintain our HOLD rating on the stock with a target price of INR 2,022 (earlier: INR 2,141) by valuing the stock at P/E of 25x on Its FY23E.

Fluctuation in spreads continues, strong volume growth visibility in FY21-22 IG Petrochemicals Ltd (IGPL) reported weak Q4FY20 performance on all fronts due to sharp fluctuation in Raw material and finished product prices. Revenue de-grew by 14.2% YoY to INR 2,685mn (est INR 3,388mn). EBITDA declined by 56.3% YoY to INR 160mn (est INR 332mn) with 574bps YoY contraction in margin from 11.7% in Q4FY19 to 6.0% in Q4FY20 (est. 9.8%). This was mainly due to depressed gross margin (20.1% vs 23.9% in Q4FY19) led by a reduction in PAN/OX spread due to extreme volatility in raw material prices and nationwide lockdown due to COVID 19 impacted production volumes. Other expenses include one-time expense related to impairment in the value of the investment in subsidiary INR 2.95mn. During FY20, production of PAN volume has de-grew by ~3% on YoY basis. Net profit declined by 76.2% to INR43mn (est.INR142mn), due to operationally weak performance. From the time of plant shut down on March 24 (due to nationwide lockdown) till resumption of the plant in April raw material prices went down by 40-50% which led to an Inventory loss of ~35mn, which also impacted quarterly performance. Well-positioned to tap import substation opportunity in PA With 53,000 TPA expansion, IGPL became the largest PA manufacturer globally (followed by Nan Ya Plastics and UPC technologies) in terms of production volume for commercial sale. With over ~1,70,000 MT of import of PA in India (in FY20), we believe IGPL is well placed to capture import substitution opportunity. Three years post announcement of capacity expansion by IGPL, PA4 (new capacity) is expected to start commercial production in August 2020 (earlier guided for March 2020). During this period, due to production shortage PA import rose significantly with a pace of CAGR 22% compared to CAGR 12% over FY11-20. To meet growing demand and limited headroom for volume growth (capacity utilization 91%), IGPL has set up a new plant through Brownfield expansion (PA4) and taking its total capacity to 2,22,100 TPA. As per management, PA4 is expected to reach 70-75% utilization level in the first year of commissioning. With capacity coming on stream, management believes they will substitute PAN import by ~30%. Currently, Indian companies PAN import stands at ~15,000tn/ month, which is ~24% higher than FY19 import of ~12,100tn/month. However, we have noticed a sharp fall in average monthly import from ~18,500tn/month to ~14,600tn/month level. As we have better clarity over PA4 commissioning timeline, we revise our volume growth estimate for FY21 to 15.5% (assuming ~55% utilization in PA4 ) on the back of export substitution opportunity and steady demand growth at the end-user industries. Foray into advanced plasticizer to provide scope for margin improvement IGPL also forays into the downstream product by introducing a new product in speciality plasticizer DEP (Di-Ethyl Phthalate), since the compound is a suitable solvent for many organic molecules, it is often used to bind cosmetics and fragrances. DEP was reported as an ingredient in 67 cosmetic formulations, including bath preparations (oils, tablets, and salts), eye shadow, toilet waters, perfumes and other fragrance preparations, hair sprays, wave sets, nail polish and enamel removers, nail extenders, bath soaps, detergents, aftershave lotions, incense sticks, and skincare preparations. Post commissioning on January 21, the company is planning to cross-sell this product to existing plasticizer clients since DEP carries better margin (EBITDA ~25%) increase in contribution from this product to strengthen the overall margin of the company further. We modelled INR 350mn incremental revenue from DEP in FY22E. Valuation and Outlook IGPL continues to be a market leader in the domestic PA industry (~50% market share) with strong clientele, healthy return ratios, expansion in value-added products (downstream speciality plasticizers). However, we are concerned about co

Weak performance across segments; Benefit of capex to flow in FY 22-23: Maintain BUY Hikal posted revenues of INR3,790mn with 17.2% YoY decline which was below our estimate of INR4507mn mainly due to deferment of orders worth INR 540mn which is expected to be supplied largely in Q1FY21. On segmental performance: Crop protection segment de-grew by 23% (YoY) to INR 1526mn and 12.7% (YoY) decline in the Pharmaceutical segment to INR 2264mn. Despite 564bps improvement in gross margin, EBITDA margins remained flat at 18.6% level, in line with our estimate. EBITDA margin was largely affected by a 10.2% (YoY) increase in employee cost in declined revenues. EBIT margin of Crop protection segment improved by 302bps (YoY) with ~46% contribution to overall EBIT. Pharmaceutical segment EBIT margin contracted by 45bps with ~54% contribution to overall EBIT. PAT came below our estimate at INR245mn (est INR329mn) dragged by operationally weak performance and higher tax expenses (35.1% vs 30.8%). On RM Sourcing from China: Hikal currently imports 35-40% of RM from China, which they expect to reduce to 20% over the next two years with backward integration in a few products. Given the lag effect of the capex, the management expects some benefit in FY22 and meaningful contribution in FY23. However, management refrains from providing any revenue guidance due to lack of visibility led by ongoing Covid 19 related issues. Going by the earlier capex guidance (INR 3bn part of which ~INR1.6bn already done) things are looking encouraging in FY 22-23. Valuation & Outlook We expect the company to post 8.4% revenue CAGR over FY20-22E led by the commercialization of new products and favourable demand in the existing product portfolio for both businesses. We forecast 96bps EBITDA margin expansion over FY20-22E led by better product mix and operating efficiency on account of higher utilization levels and cost rationalization measures at the Pharma facility. We estimate 16.8% PAT CAGR on the back of better operational performance. At CMP of INR 117 stock trades at 15.9x FY21E and 12.5x FY22E EPS. We maintain our Buy rating with a revised target price of INR140 (earlier INR169) @15x FY22E EPS.

Disappointment continues, Cloudy outlook for revenue; Maintain buy DCAL Q4FY20 revenue came 22.8% below our estimate at INR 5,121mn (est. INR 6,637mn) decline by 21.2% YoY due to tapered growth in CRAMs business (-18.3% YoY), lower other operating income (INR 93mn vs INR 383mnin Q4FY19) and postponement of commercial supply (USD ~5mn) to Q1FY21. CRAMS India revenues de-grew by ~30% YoY and accounted for 18% of the revenue. Carbogen Amcis BV revenues declined by 11% YoY. EBITDA margins contracted from 26.1% to 25.8% (est.25.7%) on a YoY basis due to stable employee cost in falling revenues. PAT de-grew by 5% YoY to INR720mn, below our estimate of INR838mn due to higher finance cost. On a sequential basis, PAT grew by 119% aided by a negative tax rate (-20.3% vs 35.2%). For FY21, the overall tax rate will be at ~25% from 30-32% in previous years, mainly due to tax rate reduction in Switzerland (~55% of revenue). Management avoided providing any revenue growth guidance for FY21. On tax rate of India business, management has not taken any call yet on the adoption of the new tax regime of 25% tax rate. Net debt as on March 31, 2020, was USD100mn vs USD120mn as on Mar 31, 2019. Before lockdown, Bavla facility was operating at 65-70% utilization level and management also in a process to transfer a few more APIs to this facility for Carbogen Amcis subsidiaries, which expected to enhance utilization level and profitability going forward. Valuation & Outlook We expect a sluggish revenue and earnings growth over the next couple of years (CAGR of 4.7%/10.8% FY20-22E respectively) mainly due to uncertainty amid Covid situation and absence of Niraparib sales for next two years. However, regulatory approval for four NCEs to DCAL’s customers in the last 12 months provides the possibility of upside revision in revenue growth going forward. With the introduction of FY22 estimates, we revise our target price to INR113 (earlier INR 141) by assigning 8x P/E on FY22e earnings and maintain our BUY rating on the stock.