OVERVIEW: Industry: (a) Sugar and its Substitutes: Being an important source of energy, sugar is a naturally occurring mixture of carbohydrates along with some starch. A food additive which almost resembles the taste of sugar is known as sugar substitute which is divided into natural substitutes and artificial substitutes. Amongst these, sorbitol and xylitol are natural substitutes while artificial substitutes are artificial sweeteners. With the growing concerns related to heath among the age group above the age of 45; rising consumer awareness, rising importance of artificial sweeteners in the formulation of confectioneries, bakery, dairy and frozen foods and preference for low-calorie food will be a big driver for increase in demand for sugar substitutes. The market for sweeteners can be segmented into (a) Sugar, (b) High-Intensity Sweeteners (HIS) and (c) High-Fructose Corn Syrup (HFCS) where HIS is the fastest growing segment currently. As per some reports, the market for HIS is expected to reach USD2.2bn in 2020 with a CAGR of 5.1%. In terms of volume, high-fructose syrup is a widely used sugar substitute, while in terms of value, high intensity sweeteners leads the segment. The market for sugar substitutes is estimated to be valued at USD16bn by 2020 growing at a CAGR of 4.5%. At the same time, in terms of volume, the market is expected to reach around 17million tons by 2020, at a CAGR of 1.0%. Asia Pacific (APAC) is projected to grow at a CAGR of 5.5% in terms of value during this period. As per a new study by Grand View Research, Inc, the Global Sorbitol Market is expected to reach USD4bn by 2020. Sorbitol is affirmed as GRAS i.e. Generally Recognized As Safe by the USFDA and is approved for use as an artificial sweetener by European Union and other countries around the world including Japan, Australia and Canada. Apart from being a preferred substitute for sugar, Sorbitol has many applications in cosmetic and personal care segment. Crystal Sorbitol is slightly expensive as compared to liquid Sorbitol and thus liquid Sorbitol is the largest used product in this category. Diabetic food and beverages dominates the Sorbitol application market, whereas toothpaste has the second largest application followed by Vitamin C and later followed by uses as surfactants. Toothpaste applications are likely to grow with an estimated CAGR of 4% from 2016 to 2023. Some of the key manufacturers in the market include Roquette Freres, Cargill and Archer Daniels Midland which accounts for a major chunk of the market. Other companies include Sorini, SPI Pharma, Gulshan Polylols Ltd, Merck, Danisco, Sigma-Aldrich etc. (b) Pharmaceuticals Excipients The booming pharmaceutical industry which is related to the growing usage in manufacturing medicines has been one of the key drivers for the growth in the excipients market across the globe. Pharmaceutical excipients may be described as inactive substances in a particular drug which helps in modulating the bioavailability, consistency, physicochemical properties, solubility and stability of active substances for formulating the final drug dosage. These constitute a major part of any medicinal product. When compared to active pharmaceutical ingredient (API), the proportion of any excipients could be exceeding two or three folds in any pharmaceutical preparations. These excipients have varied applications in Pharma companies for binding, coating, acting as diluents, solvents and colorants for making capsules, tablets etc. Thus it is fair to say, the progress of the Pharma industry is directly proportional to the success of the excipients market. According to some industry experts, these excipients represent a very small market value which would be anywhere about 0.5% of the total Pharma market, however they (excipients) are used in critical products.

CMP: Rs. 390 TARGET PRICE: Rs. 550 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

490 / 275 3,612

Face value: 5

BSE Code NSE CODE

532457 GULPOLY

Annual Performance

(Rs mn) FY14 FY15 FY16 FY17E

Sales (Net) 3252.2 4021.6 4411.5 4780.2

EBITDA 466.1 540.3 608.6 662.2

EBITDA (%) 14.3 13.4 13.8 13.9

Other Income 14.5 29.8 46.3 50.2

Interest 35.5 26.4 38.5 48.9

Depreciation 135.4 225.4 237.3 255.1

PBT 309.6 318.2 379.0 408.4

PAT 271.2 254.8 305.8 318.6

Equity 42.2 44.4 46.3 46.3

EPS (INR) 32.1 28.7 33.0 34.4

Ratio Analysis

Parameters (Rs mn) FY14 FY15 FY16 FY17E

EV/EBITDA (x) 8.8 6.8 7.09 6.75

EV/Net Sales (x) 1.3 0.9 0.98 0.94

M Cap/Sales (x) 1.1 0.9 0.8 0.8

M Cap/EBITDA (x) 7.7 6.7 5.9 5.5

Debt/Equity (x) 0.5 0.4 0.5 0.5

ROCE (%) 12.1 9.4 9.5 8.9

Price/Book Value (x) 9.1 8.2 7.4 6.7

P/E (x) 12.1 13.6 11.8 11.3

Share Holding Pattern as on 30th Sept 2016

Parameters No of Shares %

Promoters 5,525,820 58.9

Institutions 1,052,401 11.22

Public 2,805,183 29.9

TOTAL 9,383,404 100

Quarterly Performance

Parameters (Rs mn) Dec-15 Mar-16 June-16 Sept-16

Sales (Net) 1,094.4 1,186.5 1,187.4 1,140.9

EBITDA 147.4 163.8 148.5 137.5

EBITDA ( %) 13.5 13.8 12.5 12.1

Other Income 7.9 5.5 8.3 6.3

Interest 5.8 11.0 12.3 12.5

Depreciation 56.5 65.4 58.6 71.7

PAT 76.2 75.5 74.3 57.6

Equity ( Rs mn) 45.8 46.3 46.9 46.9

TM

Note: All the data is calculated as per Market Price on 30th Nov 2016. Please Turn Over

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

Source: Annual Report

Pharmaceuticals Excipients (contd.) In the past, the regions of North America and Europe accounted for the largest share of global pharmaceutical excipients market (currently expected to experience a slow growth due to mature market); however, Asia-Pacific is now considered a potential candidate for highest growth opportunity and the fastest growing region in years to come. Emerging countries such as India, Brazil and China are expected to be the major players due to advantages such as low labour and raw materials cost, rising per capita income and increasing spending on health care, increased outsourcing of chemicals manufacturing etc. As per the reports by Research and Markets, the global pharmaceutical excipients market is projected to grow at a CAGR of around 6.1% during the period 2016- 2021 to reach a value of USD8.1bn. Some experts expect a healthy CAGR growth due to increasing utilization of parenteral products (parenteral drug administration means administration of drug elsewhere in the body than the mouth and alimentary canal and is generally interpreted as relating to injecting directly into the body, bypassing the skin and mucous membranes) (c) Calcium Carbonate- CaCo3 Industry As per Market Research Engine, the market for calcium carbonate is expected to be more than USD28.5bn thus growing at a CAGR of more than 7% by 2021. Some of the major driving factors for increased consumption of calcium carbonate include the revival in the rapid industrialization, paper industry, increasing construction activities, growing demand from plastic division and paint industries, uses in pharmaceutical and medical industry as a calcium supplement. Calcium carbonate is generally used as industrial filler owing to its particle size. Generally, finely ground and crushed calcium carbonate is used as filler in plastics, paints and paper. Calcium carbonate comprises of ground calcium carbonate (GCC) and precipitated calcium carbonate (PCC). These are meant to be the highest value-added products as far as the limestone value chain is concerned. If you look at the production of GCC, China, US, Europe and Japan are the largest producers of GCC. But if one compares the same with the production of PCC, the same is restricted to a few manufacturers and only in countries which consume PCC. Major requirement for the same comes from segments like paper, paints & coatings, plastics & adhesives, sealants etc. As per TMR analysts, the market for GCC is expected to rise at a CAGR of 3% while that of PCC market is expected to increase at a CAGR of 4%. A large number of minerals such as calcium carbonates, kaolin, talc, titanium dioxide, feldspar, aluminium trihydrate etc. are used in the production of plastics and rubbers which provide opacity, brightness, hardness, etc to the product as also act as a cost-effective substitute for production. However, the most widely used filler mineral is calcium carbonate whether in ground state or precipitated state. These are used in production of rigid PVC where the major market is construction, which is closely related to the paint sector. Another positive impact is the growing awareness and need for nano calcium carbonate in plastics and rubber sectors. According to a new report by Grand View Research, Inc, the market for global nano calcium carbonate is expected to reach USD9bn by 2024. Many also expect this kind of growth in the demand due to its applications in end use industries like inks and pharmaceuticals as well. The paint industry has benefitted a lot from the expansion of building and construction activities in India and China. This in turn has again led to an increase in the amount of calcium carbonate used in this sector. Production of paints in other countries is also growing constantly. As per MarketResearchEngine.com the global paints & coatings market is expected to reach USD153bn by 2020, at a compound annual growth rate (CAGR) of 3.9%. Calcium carbonate has successfully substituted Kaolin (which is a kind of clay) in the paper industry due to properties which provide better brightness and the ease of mining and processing as compared to kaolin. Paper coating materials include a variety of compounds including silicate of magnesia, calcium magnesium carbonate, alganic acid etc. which are used to provide a glossy appearance to paper. Needless to mention the demand for paper coating material market goes hand in hand with the growing consumption of paper used for stationery, packaging, office paper, corrugated paper boxes etc; thus one can easily visualize the growth in global demand for paper coating materials. The paper coating material market is divided into nine segments on the basis of product type viz, Ground Calcium Carbonate (GCC), Precipitated Calcium Carbonate (PCC), Kaolin Clay, SB Latex, Titanium Dioxide, Wax, Starch, Talc and others. Amongst all the categories, GCC may show a significant growth due has better properties like efficient fiber substitution property, low viscosity and low cost. The global paper industry will continue to remain the main market for GCC and PCC. Many researchers are anticipating a significant growth with a single digit CAGR in this industry. Countries of Asia Pacific (APAC) appear to be a sweet spot for an exponential growth followed by North America and Western Europe. Thus, it can be very easily said, the global demand for calcium carbonate is poised to grow. About the Company: Incorporated in 1981 as Gulshan Sugars & Chemicals Limited, Gulshan Polyols Limited (GPL) is a multi product, multi locational company and a market leader in many of its products. GPL is among one of the market leaders in manufacturing Sorbitol, precipitated calcium carbonate (PCC) and wet ground calcium carbonate (WGCC). The Company is promoted by Dr CK Jain, who is a technocrat with doctorate in Chemistry. Recently the company was recognized and awarded the Star export house in India by Government of India. The business portfolio covers a range of manufacturing activities in starch sugars, calcium carbonate; alcohol business; agro based animal feed and on-site PCC plants.

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

CMP: Rs.390 TARGET PRICE: Rs. 550 TIME : 12 months

TM

Please Turn Over

About the Company (contd.) The company is one of the largest producer of Calcium Carbonate with a capacity of around 1,35,000TPA. It is estimated that the market size for Calcium carbonate would be around 3Lakh TPA; here GPL enjoys nearly 30% market share. Besides this, the company is one of the largest producers of Sorbitol with a capacity of nearly 60,000TPA. The company has 9 state-of-the-art plants spread across different locations in the country - two in Gujarat and Madhya Pradesh and one each in Uttar Pradesh, Himachal Pradesh, Rajasthan, Punjab and West Bengal. Of these, three onsite PCC pants are stationed one each in the states of Punjab, West Bengal and Madhya Pradesh. The company has successfully set up 6 onsite PCC plants till now. Recently, the company has successfully commissioned an onsite PCC Plant for Orient Paper Mills, a Birla Group company for their Paper plant at Amlai, Madhya Pradesh. This is the sixth onsite PCC plant set up by the company in India for supply of specialty PCC suitable for Paper industry.

The business of the company is spread across nearly 35 countries in 3 continents. The company has a plethora of customers which are spread across various sectors including FMCG, food, paper, Pharma, footwear, IPB plastics & SCJ plastic etc. Some of the esteemed clients in these sectors include, Asian Paints, Colgate-Pamolive, Wipro, Dabur, Shalimar Paints, Pidilite, Berger Paints, Kansai Nerolac in the FMCG segment; Britannia, Henkel, Candico, times food etc in the food segment; ITC, TNPL, Century pulp & Paper Mills Ltd etc in the paper sector; Cadilla, IPCA, Pfizer, Torrent Pharma, Novartis, Merck, Glenmark, Cipla, Ranbaxy etc in the Pharma sector; Lakhani, Bata, Paragon, Relaxo, etc in the footwear sector; Supreme, Surya, Ashirwad Pipe, Prince Pipes, Apollo Pipes, Poly Pack, Polyplast in the Pipes segment and BASF in the printing sector. Thus, the vast customer base eliminates the risk of dependency on a single customer for revenue generation.

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

CMP: Rs.390 TARGET PRICE: Rs. 550 TIME : 12 months

TM

Please Turn Over

Source: Annual Report

Source: Annual Report

INVESTMENT RATIONALE (A) Diversified Business The company has its presence across a number of sectors and segments. These can be quantified into Oral care, Paper industry, Pharma excipients, Paint Industry, Animal Feed industry, Liquor industry etc. Due to the presence in multi faceted industry, GPL appears to be in a very sweet spot wherein large number of products manufactured by the company like Sorbitol, PCC, WGCC, HFRS, Brown Rice Syrup, Rice Syrup Solids etc are used (maybe directly or indirectly) in day to day life.

Oral Care: The Indian oral care industry has an approximate size of USD1bn. The industry was reported to have been growing at nearly 17.5% in 2015. As per estimates, the industry is expected to grow at a CAGR of approximately 14% by FY16-18. Some of the major growth drivers for the oral care industry include increase in spending power of people on the oral care products, barely 15% of the population of India brush twice a day, (research reports estimate) 55% penetration level of toothpaste in India and growing awareness about healthy lifestyle and oral hygiene. The per capita consumption is barely 0.5x of other emerging markets while that of US is 0.25x. Thus, the prospects for the industry look brighter in years to come.

Indian Paper Industry: Calcium carbonate has successfully substituted kaolin (which is a kind of clay) in the paper industry. The demand for paper coating material goes hand in hand with the growing consumption of paper. The global paper industry will continue to remain the main market for GCC and PCC where APAC will be in a sweet spot for an exponential growth followed by North America and Western Europe. The total production of paper in India which is nearly 13MT, is barely 3% of that of the world’s production. The per capita consumption which stands at approximately 11kg is also low in India when compared to a global average of 57kg. To boost the expected requirement and production of paper of nearly 22MT by 2025, many mills in India will require process modernisation, upgradation and build new capacities. All these factors taken into consideration will indirectly increase the demand for GPL products and services. Thus, it can be very easily said, the global demand for calcium carbonate is poised to grow. Indian Paint industry: The paint industry has benefitted a lot from the expansion of building and construction activities in India and China. This in turn has again led to an increase in the amount of calcium carbonate used in this sector. As per MarketResearchEngine.com the global paints and coatings market is expected to reach USD153bn by 2020, at a CAGR of 3.9%. If we look at the per capita consumption of paint, India’s consumption is nearly 4kg as compared to 10kg in China. The growing per capita spending and income levels, fiscal incentives provided by GOI to housing sector and influx in demand for industrial paint are major triggers here.

Indian Pharma Industry (excipients): The booming pharmaceutical industry has been one of the key drivers for the growth in the excipients market across the globe. Pharmaceutical excipients may be described as inactive substances in a particular drug which helps in modulating the bioavailability, consistency, physicochemical properties, solubility and stability of active substances for formulating the final drug dosage forms. These constitute a major part of any medicinal product. It is fair to say, the progress of the Pharma industry is directly proportional to the success of the excipients market. The global pharmaceutical excipients market is projected to grow at a CAGR of around 6.1% during the period 2016- 2021. When one looks at the Indian Pharma industry, the same has been growing at a CAGR rate of approximately 14.55% in the last 7-8 years. As per some estimations and research reports, the Pharma industry size is expected to reach USD55bn by the 2020 with a CAGR rate of around 16%, where the global excipients market is 0.4-0.5% of the global Pharma market and India, China and Brazil have recently become major single market. Animal Feed Industry: Commercial livestock farming is principally dependent on continuous supply of good and nutritious feeds. It is estimated; this is an industry of approximately USD15bn and is poised to double in next 5-6 years. In India, the focus is mainly on cattle and poultry farming; thus directly or indirectly the market for animal feeds in India is poised to grow. The livestock population in India would be would be anywhere closer to 320mn which makes India among the top five in the world. To cater to this large population of livestock, the feed requirement volumes are estimated to reach nearly 30MT by 2017-18. Some of the emerging growth drivers include increasing demand for milk, aqua and poultry products which indirectly results in higher feed requirement.

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

CMP: Rs.390 TARGET PRICE: Rs. 550 TIME : 12 months

TM

Please Turn Over

Source: Annual Report

Source: Annual Report

INVESTMENT RATIONALE (contd.) (B) Onsite- PCC Plant GPL has been serving the paper industry since last 25 years. The grade of calcium carbonate required for the paper industry is a special one with special molecular structure of the chalk, which helps enhancing many of paper’s optical properties like brightness, opacity, printability, paper quality etc. As mentioned earlier as well, GPL is the first in the country to introduce the concept of on-site PCC manufacturing plant for Value Added Paper (VAP) industries. As of now, the company has successfully installed its sixth on-site PCC plants for paper industry. On-site plant is nothing but a small plant which is established in a satellite facility. Since the name is onsite, the plant is close to a paper mill and the resultant slurry is pumped directly into the mill. So, the required utilities like power, water, steam and carbon dioxide (CO2) from the boiler stake are used to make PCC in slurry form for its further use in paper application. This not only reduces the energy consumption, time for drying, act as an economical source, but also utilizes CO2 emitted from the boilers so that paper mills can easily claim carbon credit for using clean technology. The required equipment is generally given on lease agreement. It is estimated, there can be an exponential in the segment for VAP in many of the developed and developing nations. APAC is expected to be an important contributor in this segment going forward since the requirements for VAP such as printing, photo copier, tissue paper, writing paper etc, are expected to increase in near term. Apart from this, another trigger is provided by the green shoots seen via rerating of paper industry as a whole in many countries including India. Needless to say, GPL is the only Indian company which is offering onsite PCC technology and providing plants to overseas customers as well as Indian companies related to VAP. (C) Business Going Forward: GPL has constantly been producing Sorbitol-70% solution, Liquid Glucose, Maltro-Dextrin Powder (MDP) and Dextrose Mono-Hydrate (DMH). Apart from these, the company is also working ahead of time and tries to introduce new products in the market. In pursuit of the same, the company is recently working towards sugar alternatives named High Fructose Rice Syrup (HFRS), Brown rice Syrup and Rice Syrup Solids. High Fructose Rice Syrup (HFRS) is naturally found in fruits, honey, corn syrup, molasses etc. HFRS has many applications as a sweetener in flavored and unflavored syrups, energy drinks, processed food, bakery products, cough syrups etc. Gulshan is the first company in India to manufacture rice fructose syrup. The company has a capacity of manufacturing 300MT per day at its grinding unit at Muzaffarnagar. The company’s plant has acquired the technology from China which is the world leader in this product. Brown Rice Syrup is commonly known as Liquid Glucose which is used as a sweetener for natural and healthy foods. Apart from this, brown rice sugar has many applications as a base sweetener in flavored as well as unflavored sweet syrups, dairy products, ice creams, canned fruits, health drinks, bakery food etc. Rice Syrup Solids is also known as dried glucose syrup or Glucose Powder. These can be easily dispersed into water and used in beverage mixes, in bakery preparations, confectionery, dairy products etc. The sugar alternatives mentioned above i.e. High Fructose Rice Syrup (HFRS), Brown rice Syrup and Rice Syrup Solids have the potential to be used as a source of absolute sugar alternative in the long run. Distilleries: Though a very small portion of the total revenue; GPL is also involved in the business for distilleries. The company has 60KLPD capacity plant at Chhindwara, Madhya Pradesh for grain based Extra Neutral Alcohol (ENA). This plant is also assisted with 3MW captive power plant. The Distillery has its own bottling facility with a capacity of 4,00,000 cases per month. Nearly 80% of ENA produced is used to in country liquor which will be sold directly to the government. In the long run, the company intends to use nearly 20% of ENA produced in bottling IMFL. Beneficial and cost saving operational efficiency can be achieved due to close proximity of raw material production belt (which ensures timely processes). Due to the location advantage, the company can save-up on the logistics cost. Some research reports indicate the industry has a good growth rate of around 12% per annum. In addition to this, another factor which sums-up for the growth prospects is the ban on issuing fresh licences for the next 20 years. Thus, this creates a barrier to entry. The company is in the process of setting up a grain based distillery for manufacturing potable alcohol in Borgaon industrial area in Chhindwara Madhya Pradesh. There was a delay in the commissioning of this plant, however, as per the recent updates, the progress of construction and erection of plant is on track and is expected to be operational by 4QFY17.

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

CMP: Rs.390 TARGET PRICE: Rs. 550 TIME : 12 months

TM

Please Turn Over

Source: Annual Report

Financials: Due to good rainfall this year, the production of maize and rice is expected to be better, and so shall the company be benefitted due to reduction in cost of materials consumed. If one carefully studies the paper industry, every mill can be an opportunity for the onsite PCC plant. The distillery plant which the company is working on is located at Borgaon industrial area, Chhindwara, is a rice belt, so the company will get the advantage of raw materials used. Moreover, it is estimated, the total Sorbitol production in India including the organized as well as un-organized sector would be around 4Lakh TPA, while that of GPL is around 1Lakh TPA; thus GPL enjoys nearly 25% of the market share. Also, the company enjoys nearly 30% of market share of CaCo3 with a capacity of 1,35,000TPA. Recently, the board of directors of the company announced a stock split from a face value of Rs5 to Rs1 per equity share, which is subject to approval.

Risks and concerns: The company operates in a market which is more or less a commodity market hence volatility is witnessed in the prices of corn and rice which also directly depends on rainfall. Volatility in the prices of sugar accompanied by supply-demand deficit influences the production of Sorbitol. Moreover, the prices are also influenced by corn produce. There are possibilities of diminishing limestone reserves and stringent regulations enforced by governments as well threat from unorganised players.

Outlook and valuations: GPL indulges itself in manufacturing ingredients for a good life. In the current scenario in India, high quality and value added products are the need of the hour. Consumer preferences are constantly changing which is a sign of awareness and prosperity of the consumers as well the country as a whole. At CMP of Rs390 the valuations appear to be attractive given the strong revenue visibility in distant future and this coupled with better operating margins could get reflected in the substantial improvement in bottom line from next financial year onwards. We recommend a BUY on the stock with a target price of Rs550 in next 12 months.

Dec 1, 2016 PICK OF THE MONTH VOL-2, NO-16

Gulshan Polyols Limited BUY

CMP: Rs.390 TARGET PRICE: Rs. 550 TIME : 12 months

TM

Source: Annual Report

TM

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