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Sensex Asahi

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Asahi Songwon Colors Ltd (ASCL) is a Gujarat based manufacturer of pigments

and dyes. The company manufactures CPC Green, CPC Blue pigments and has

introduced Beta Blue pigment in FY09, which is a derivative of CPC Blue. The

company has its manufacturing plants based at Mehsana and Vadodara in the

state of Gujarat. ASCL is mainly export oriented company, deriving nearly 80%

from offshore. During 2007, it raised `335 million for expanding its capacity of

CPC Blue from 3,600 TPA to 10,800 TPA and installed a capacity of 1,200 TPA of

Beta Blue in 2008 which was then expanded to the present 2,040 TPA in 2010.

The Promoters – Jaykrishna Family hold 61%, DIC of Japan holds 7% and Clariant

has 6% stake and the remaining 26% Public shareholding.

Investor’s Rationale

During the first quarter ended June 2011, the net profits of ASCL stood at

`61.6 million, registering an impressive growth of 47.4% on y-o-y basis, fuelled by

significant growth of 24.5% (y-o-y) and 17.2% (q-o-q) in the net sales of ASCL at

`556.1 million. Going further, ASCL’s net profits are expected to grow at a CAGR

of 27% over FY12-13 which would be driven by a 27% CAGR growth in revenues

over the same period.

ASCL has leveraged Dainippon Ink & Chemicals, Inc (DIC)’s technological

strength from its joint venture to manufacture high-quality Phthalocyanine

pigments. Technological edge over peers will assist the company to compete with

market leaders in domestic as well as in global front.

The company is doubling its Beta Blue pigment capacity to 4,000 TPA from

the existing 2,040 TPA by FY13 with capex of `250 million over the next 2-yrs.

Funded through internal accruals with a comfortable debt equity position of 0.6:1.

It has 13,500 TPA facility of Pigment Blue operated at 75% capacity

utilization during FY11 and the 2,040 TPA facility of Beta Blue too operated at 75%

capacity utilization. It is planning to improve its capacity utilization near to 90% by

FY12 and FY13 driving its volume, resulting in higher sales.

ASCL derives 80% of its revenues from exports with DIC, Sun Chemicals,

Clariant and BASF being its most important marquee customers. Technology in

our view is the key entry barrier in the business and with technology and financial

support of DIC & Clariant (both hold 7% and 6% equity in ASCL) its products reach

out to customers in US, Europe, Middle East & Asian countries.

Rating BUY

CMP (`) 94

Target (`) 132

Potential Upside 40%

Duration Long Term

52 week H/L (`) 129.7/61

All time High (`) 129.7

Decline from 52WH (%) 35.7

Rise from 52WL (%) 33

Beta 1.9

Mkt. Cap (` mn) 1,153.6

Enterprise Val (` mn) 1,479.9

Promoters 61.5% 61.5% -

Institutional - 0.2% (0.2)

General Public 20.0% 21.3% (1.4)

Others 18.6% 17.0% 1.6

Shareholding Pattern

Jun’11 Mar’11 Diff.

Market Data

ASAHI SONGWON COLORS LTD

BSE Code: 532853 NSE Code: ASAHISONG Reuters Code: ASSC.BO Bloomberg Code: ASAH:IN

FY10A FY11A FY12E FY13E

Revenue (`mn) 1,266.7 1,841.0 2,334.4 2,976.4

Net Profit 95.4 200.4 260.0 370.9

Share Capital 122.7 122.7 122.7 122.7

EPS (`) 7.8 16.3 21.2 30.2

PE (x) 12.1 5.8 4.4 3.1

P/BV (x) 1.4 1.2 1.0 0.8

EV/EBITDA (x) 7.1 4.9 4.4 3.3

ROE (%) 11.7 20.5 21.9 25.0

ROA (%) 7.6 12.0 12.2 14.9

Fiscal Year Ended

September 02, 2011

Doubling Beta Blue production to 4,000 TPA will

results in better realization

During FY11, ASCL has completed a major capacity expansion

program for the Beta Blue pigment. The Beta Blue pigment is a

value added product that yields higher margins as compared to the

other pigments. From a capacity of 1,200 TPA it extended the

capacity to 2,040 TPA during Q3FY11 and started production

during the last quarter of FY11. The company is looking at further

expansion in the beta blue pigments line to double the capacity to

4,000 TPA by FY13. The capex for the recent expansion is `350

million, which will be funded through internal accruals and long-

term debt. Capex of `250 million is allocated for FY12 and the

remaining `100 million for FY13. The current expansion will help

the company to cater the growing demand for Beta Blue pigment

to a wider customer base. This will lead to higher revenues and

increasing margins in the years to come and take the company on

its way to compete against the global leaders in the field of

pigments.

FY12-13 revenues to grow at a CAGR of 27%

During the first quarter ended June 2011, the net profits of

ASCL stood at `61.6 million, registering an impressive growth

of 47.4% on y-o-y basis. The robust bottom-line of the

company is mainly fuelled by the significant growth of 24.5%

(y-o-y) and 17.2% (q-o-q) in the net sales of ASCL at `556.1

million. However, a modest rise in operating expenses, which

recorded a huge 17.2% (y-o-y) and 16.8% (q-o-q) growth at

`445.1 million, helped the company to register a operating

profit growth of 65.6%(y-o-y) and 18.3% (q-o-q) at `111.2

million, resulting in 500 basis points rise in operating margins

at 20%. Of the total operating expenses, raw material cost

alone grew by 36% (y-o-y) to `334.1 million during the

period. Further though interest expenses grew by 45.5% to

`13.1 million and depreciation by 22.1% to `13.03 million,

the PBT of SGL increased by 79.2% to `85 million. Going

further, ASCL’s net profits are expected to grow at a CAGR of

27% over FY12-13 which would be driven by a 27% CAGR

growth in revenues over the same period.

ASCL enjoys technological synergies from DIC collaboration

During 2007, Gujarat-based ASCL has signed a purchase agreement with Dainippon Ink & Chemicals, Inc (DIC), a Tokyo-based ink

manufacturing company. Presently, DIC has approximately 7% stake in the company and it is one of the most esteem client. Further,

the ASCL has technological support from DIC that assist in providing the highest quality of latest eco-friendly technology. DIC is a

diversified chemical conglomerate and the largest ink manufacturer in the world with a 35% global market share and presence in more

than 28 countries. It employs the best know-how and technology available for manufacturing ink in the world. ASCL has leveraged

DIC’s technological strength from its joint venture to manufacture high-quality Phthalocyanine pigments. Broadly, the company derives

nearly 26% of sales from DIC. The relation between DIC and ASCL has turned out to be a win-win situation for both the entities.

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FY08 FY11 FY12E FY13E

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Revenue Capex yoy growth(%)

Continuous capex infusion for capacity expansion to boost revenues, resulting in higher margins and stronger earnings

Source: Company

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EBITDA Net Profit

EBITDA Margins (%) NPM(%)

ASCL aiming to reach 90% capacity utilization

Pigments are colouring agents that impart colour and can be

classified into two broad categories namely Pthalo and Azzo.

Phthalocyanine pigments are one of the largest categories of

pigments manufactured in India. ASCL is engaged in

manufacturing of Pthalo pigments which includes CPC Green,

CPC Blue Crude and a range of Beta Blue Pigments. The

company has two manufacturing facilities located at Kadi and

Vadodara both in the State of Gujarat. The Kadi plant

manufactures Green pigments, while Vadodara plant is

involved in CPC Blue Crude & Beta Blue Pigment. ASCL is

planning to double its capacity of Beta Blue pigments from

2,000 TPA to 4,000 TPA at a cost of `250 million and is

expanding its range of value added pigment blue at a cost of

`100 million which together with its existing capacity of 13,500

TPA of Pigment Blue would enable it to become a `3 billion

company by FY13. The 13,500 TPA facility of Pigment Blue

operated at 75% capacity utilization during FY11 and the 2,040

TPA facility of Beta Blue too operated at 75% capacity

utilization during FY11 and ASCL is planning to improve its

capacity utilisation near to 90% by FY12 and FY13.

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FY06 FY07 FY08 FY09 FY10 FY11

`m

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Exports % of Sales

Phthalic Anhydride Cuprous Chloride

CPC Blue Crude

Green 36

Torquise

Blue

Green 36

Torquise

Blue

CPC Green CPC Alpha Blue 15:0

CPC Beta Blue 15:3

CPC Beta Blue 15:4

Ink Ink

CPC Alpha Blue 15:1 & 2

Pigments used in Ink, Paint, Plastic and Textile Industries

Highly export oriented company

ASCL enjoys strong offshore client base

ASCL derives nearly 80% of its revenues from exports with

DIC, Sun Chemicals, Clariant and BASF being its most

important customers. The company has been able to

maintain strong relation with its client by supplying products

of highest qualities. It is thus poised to take a leap onto the

global platform as a force to reckon with in the

Phthalocyanine pigment segment. Sun Chemical, a member

group of DIC itself, is a leading provider of materials to

packaging, publication, coatings, plastics, cosmetics, and

other industrial markets including electronic materials,

functional and specialty coatings, brand protection and

product authentication technologies. Moreover, Clariant,

another offshore client that provides chemical solutions to

various industries like, textile, packaging, personal care and

oil & gas. Apart from DIC, Clariant also possess 6% stake of

ASCL and provide technological support to the company.

Finally, BASF is the world’s leading chemical company with

close to 385 production sites worldwide. With such strong

customer base, the reputation and stature of being a

pigment supplier has grown over the years that will assist in

deriving more crème level clientele.

End-user industry to boost the demand for ASCL products in coming years

ASCL products mainly cater to the paint, inks and cosmetics, plastics and textile industry. The domestic paints industry registered a

CAGR growth of 15% over FY05 to FY10. The industry is expected to grow at a similar rate in coming 3-4 years owing to growth in

housing, automobiles, consumer durables sectors, and heightened activity in the construction sector. Further, the plastics and plastic

products industry is estimated to grow at 10-11%, driven by demand from packaged foods and FMCG industries. The rise in disposable

income is expected to increase the spending on food, expanding the domestic food market from $181 billion to $258 billion by FY15.

Moving on, inks and cosmetics industry has been growing at a rate of 12% over the past 4-5 years. Moreover, the growth of the retail

sector also led to an increase in consumer packaging and printing which has resulted in higher consumption of inks. The cosmetics

industry is expected to grow at 12% annually over the next 2-3 years. The Indian textile industry accounts for about 14% of India's total

industrial production and contributes to nearly 15% of total exports, which amounted to $50 billion in FY10.

Risk Factors

The main raw materials like Phthalic Anhydride and Cuprous Chloride (petroleum derivatives) prices will fluctuate along with the

global crude prices.

ASCL is exposed to the risk of foreign currency fluctuations as major chunk of the revenue comes from the foreign countries. The

manufacturing inputs are also sourced from outside India. However the company has a natural hedge that mitigates the currency

variation risk.

Also, there is a risk of customer concentration as it is highly dependent on the top 4 clients (DIC, Sun Chemicals, Clariant and BASF).

ASCL……the journey so far

1996 2001 2003 2007 2008 2010

Asahi Songwon Colors name formed after technology supply for Green crude with Songwon Colors of Korea.

Songwon Colors taken over by Clariant of Switzerland

Technical collaboration with Clariant for CPC Blue Crude

Expanded CPC Blue capacity from

3,600tpa to 10,800 TPA and

forward integrated into

production of Beta Blue with a

capacity of 1,200 TPA

Expanded Beta Blue

capacity from 1,200 TPA

to 2,040 TPA

Supply agreement with DIC of Japan

for CPC Blue and DIC infused `105mn

as equity in ASCL by subscribing to

0.9mn shares at `122 per share. ASCL

went public and raised `335mn via

IPO

India, the ultimate destination for pigments under

emerging nations

The textile industry is the largest consumer of dyestuff sector

accounting nearly 70% of total consumption. India has emerged

as the global supplier of the dyestuff and dye intermediates. India

accounts for approximately 7% of the world production.

Due to low cost infrastructure, India has poised for a strong

expansion in exports for the pigments segment. India has the

potential to rise to $300 billion in its exports by 2015, indicating

an investment opportunity of $50 billion in the chemical industry.

Also the pigments segments has the scope for the massive

expansion opportunity being close to Middle East for cheaper and

abundant source of petrochemical feedstock, one of the major

raw material for the manufacture of pigments.

Further, India has a strategic advantage for exports through

alliances with countries like Russia and CIS countries.

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Growth% FY09-FY10 CAGR% FY06-FY10

Production of major chemicals on FY11 (till Sept’11) in ‘000MT

The Indian Chemicals-Pigment Industry

The chemical industry is estimated at around $35 billion approx, contributes 3% to India’s GDP and 14% of total exports, employs around 1

million and is the largest in Asia and 12th in the World. The dyestuff sector is one of the important segments of the chemicals industry in

India. Dyestuff industry comprises three forms namely, dyestuff, pigments and intermediates. Further, India has emerged as a leading

player in the global colour industry, which comprises pigments and intermediates. The shift of manufacturing activities from the developed

counties to the Asian region has also tilted the balance in favour of India and China. Moreover, due to India’s larger manpower resources,

more cost-effective operations and higher product quality standards, Indian companies have become preferred suppliers compared to their

Chinese counterparts. India’s ability to provide high quality manufacturing is also attracting a high level of outsourcing from developed

countries. The domestic pigment industry in India is expected to grow at a healthy 15% annually driven by end user industries like Inks,

Paints, Textiles and Plastics. The Pigment market in the world is in excess of $4 billion and ASCL has a 5% share in the world’s Phthalo

Pigment market.

Dyes and Dyestuffs: Most growth potential

sector

As per the Ministry of Chemicals and Fertilisers, Dyes and

Dyestuffs grew at a CAGR of 31.25% from FY09 – FY10 and

8.8% from FY06 – FY10. Among the major segments, Dyes

and Dyestuffs and Alkali are only sectors reporting positive

CAGR. Till Sept’11, total production under Dyes and

Dyestuffs 24,000 metric tonnes (MT) as compare to FY10’s

42,000 MT. However, the segment forms less than 1% of

the total chemical industry output, but indicates strong

growth trajectory.

.

2890

281

649

4424 Alkali

Inorganic

Organic

Pesticides

Dyes&Dyestuffs

Growth rates of major chemical sectors

(`million) FY10A FY11A FY12E FY13E

Share Capital 122.7 122.7 122.7 122.7

Reserve and surplus 694.4 854.8 1,062.8 1,359.5

Net Worth 817.2 977.5 1,185.5 1,482.2

Loan funds 377.7 627.7 877.7 927.7

Deferred Tax Liability 59.4 62.5 65.5 71.2

Capital Employed 1,254.3 1,667.7 2,128.7 2,481.1

Gross fixed assets 788.4 983.4 1,255.2 1,363.0

Less: accumulated depreciation

141.3 186.1 236.9 295.3

Capital Work in Progress

36.8 57.2 73.0 79.3

Net Fixed assets 683.8 854.4 1,091.3 1,146.9

Investment 2.0 2.2 2.4 2.5

Net Current Assets 538.7 765.5 980.1 1,272.2

Misc Exp 29.7 45.6 55.0 59.5

Capital Deployed 1,254.3 1,667.7 2,128.8 2,481.1

(`million) FY10A FY11A FY12E FY13E

Net Sales 1,266.7 1,841.0 2,334.4 2,976.4

Other income 11.7 45.3 26.8 27.5

Total Income 1,272.9 1,842.4 2,336.4 2,978.5

Expenses 1,075.7 1,538.5 1,949.2 2,461.4

EBITDA 197.2 303.9 387.2 517.1

EBITDA Margin % 15.5 16.5 16.6 17.4

Depreciation 43.0 44.8 50.8 58.4

EBIT 154.2 259.1 336.4 458.7

Interest 38.8 33.6 42.7 49.4

Profit Before Tax 115.4 225.4 293.7 409.3

Tax 20.0 25.0 33.7 38.4

Profit after Tax 95.4 200.4 260.0 370.9

NPM % 7.5 10.9 11.1 12.5

FY10A FY11A FY12E FY13E

EBITDA Margin (%) 15.5 16.5 16.6 17.4

NPM (%) 7.5 10.9 11.1 12.5

ROCE (%) 12.3 15.5 15.8 18.5

ROE (%) 11.7 20.5 21.9 25.0

EPS (`) 7.8 16.3 21.2 30.2

P/E (x) 12.1 5.8 4.4 3.1

BVPS 66.6 79.7 96.6 120.8

P/BVPS (x) 1.4 1.2 1.0 0.8

EV/Operating Income(x) 1.1 0.8 0.7 0.6

EV/EBITDA (x) 7.1 4.9 4.4 3.3

EV/EBIT (x) 9.0 5.7 5.0 3.7

Key Ratios

Balance Sheet (Consolidated) Profit & Loss Account (Consolidated)

Valuation

ASCL has reported strong financial performance in recent

years and would continue to grow at CAGR of 27% over the

next 2-yrs (FY12 and FY13) along with a CAGR of 35% in the

net profits. The higher growth trajectory of the company will

be supported by production boost from the latest capacity

expansion of Beta Blue pigment from 1,200 TPA to 2,400 TPA,

along with a further expansion to 4,000 TPA by FY13.

Additionally, the better technological assistance from DIC and

Clariant along with robust growth in end-user industries will

lift its future revenues. At the current market price of `94, we

rate the stock as ‘BUYs’, with a 1 year target price of `132. At

the current market price the stock is trading at a PE of 4.4x on

FY12E EPS of `21.2 and 3.1x on FY13E EPS of `30.2.

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