Buy Camlin Fine Sciences For 46% Upside Gain: Axis Securities

CAMLIN FINE SCIENCES – FINELY PRICED

We initiate coverage on Camlin Fine Sciences Ltd. (CFS) with a BUY recommendation and a Target Price of Rs. 155, which implies a 46% upside from current levels. We expect CFS to register Revenue/PAT CAGR of 20%/65% over FY20-23E driven by 1) Growth in the blends segment; 2) Increasing demand of vanillin worldwide; 3) Judicious expansion and focus on achieving worldwide presence; 4) Strategic vertical integration; 5) Step up in innovation/new launches; 6) Healthy margin profile and 7) Improving balance sheet. At CMP, the stock is trading at a fairly attractive valuation of 10x FY23E EPS and given a promising growth outlook from a medium to long term perspective, it offers an excellent upside potential. We value the stock at 14x its FY23E EPS to arrive at our target price of Rs.155/share.

INVESTMENT THESIS

Margin accretive blends segment to be a value creator

CFS has plans to evolve as a global food blender and has commissioned facilities in Mexico, Brazil, North America, Europe and India. Up until the Company was largely a commodity player selling antioxidants (within Shelf Life Extension Solutions) that formed a majority share of the revenue mix. Post FY16, however, the company successfully transitioned itself from being a commodity player to a reliable supplier of value-added blends selling antioxidants as a commodity to making blends a value added product. Bends margins in FY20 stood at 20% and the same is expected to improve further by 500 bps to 25% in the coming years. The top-line is expected to grow by ~22%-25% in the backdrop of new launches, expansion in new geographies, and growth in existing geographies.

Dahej plant commercialization – a key growth catalyst

CFS has announced for a greenfield plant expansion in Dahej at a total cost of Rs. 180 crore, with a capacity of 10,000 MTPA to manufacture key raw materials such as diphenols like Hydroquinone and Catechol its major raw materials and the downstream products The raw materials were erstwhile produced only in their Italy plant having a capacity of 10,000 MTPA. The said greenfield expansion will make CFS 2nd largest and lowest cost producers of Hydroquinone and Catechol as well as a leading vertically integrated player in the world. The backward integration in India is expected to provide the company with a significant cost advantage to the tune of $1-1.5/kg and reduce inventory days as well given that the bulk of raw material will be sourced from the India plant.

Continued focus on growth and expansion

CFS has announced to set up an additional multi-purpose plant entailing a capacity addition of 6,000 MTPA at a capital outlay of Rs. 185 crore. The plant will manufacture Guaiacol (raw material for Vanillin), Vanillin, Ethyl Vanillin, Methyl Vanillin and its derivatives and will make the facility entirely integrated. The planned capacity addition is expected to ramp up revenues of the Aromas segment significantly. Furthermore, the company plans to undertake de-bottlenecking at its Tarapur facility with an additional capacity of 2,500 MTPA to produce additional MEHQ, a perforamnce chemical, at an investment of Rs. 25 crore and will drive revenue growth of the performance chemical segment, moving forward.

Strategically Integrated Player

CFS is one of the world’s leading and integrated manufacturers of the most preferred traditional antioxidants and vanillin and manufacture various other shelf life solutions, aroma ingredients and performance chemicals. The company has integrated backward through its facility in Italy and with the recently commissioned facility at Dahej, it stands 2nd largest and lowest cost producers of Hydroquinone and Catechol and is the 3rd largest producer of Vanillin in the world. CFS has also commercialized a plant to produce di-phenols at Dahej, thus mitigating the single location risk.

FINELY PRICED – INITIATE WITH BUY

Initiate coverage with a BUY rating and TP of Rs. 155/Share, valuing the company at 14x P/E basis its FY23E EPS. We believe CFS’s aggressive growth strategy, improving margin profile and balance sheet, and new product launches are key winning features in the market place over the medium to long term.