Defying Odds 2.

0: Techno Funda Thematic - Chemicals

May 2020

Research Analysts

Dharmesh Shah Nitin Kunte, CMT Ninad Tamhanekar, CMT

[email protected] [email protected] [email protected]

Pabitro Mukherjee Vinayak Parmar

[email protected] [email protected]

May 29, 2020

Defying Odds 2.0: Techno Funda Thematic - Chemicals

According to market wisdom, there are always opportunities in every adversity which exhibit bull moves even in a rough environment. Our report Defying odds:
Spotting change in market leadership, was centred to find such themes.

MOMENTUM PICK
One of the sector, which emerged as a winner from our rigorous technical screening across time frames and displayed exemplary outperformance during ongoing
basing process for Nifty, is chemicals sector.
In this report we have zeroed down on Chemical sector to spot outperformers within the segment by ranking them based on our in house technical model, (and
supported by reasonable business model with decent management pedigree) that are being favoured by market in current environment and likely to generate above
normal returns for investors in years to come. Our model is built on following technical parameters:
a) Price structure analysis – Stocks that have witnessed faster retracement of entire January–March 2020 decline, in April 2020, thereby signalling a change of guard
and robust price structure. Classic price patterns also form integral part of price structure analysis
b) Relative strength rankings – Set of stocks that have remained resilient during the sharp decline in February, March 2020 and relatively outperformed against
benchmarks
c) Dow Theory bullish signals – Following classic Dow Theory principle of identifying trend, companies exhibiting a combination of higher high-low on a yearly time
frame (long term degree) and supported by similar signal on monthlies (medium term degree). According to the basic tenet of Dow Theory, trends persist.
Therefore, staying invested in these companies may be rewarding

Fundamental Outlook: Chemicals Top Picks Time frame: Six months

ICICI Securities – Retail Equity Research

• The size of the Indian chemical industry is estimated to be around $165 billion,
Idirect Bu yin g Upside Market
representing a market share of 3.4% in the global chemical market. The chemical S crip N ame Target
industry is segregated among different segments such as bulk chemical, speciality C ode Ran ge (%) C ap (C r)
chemicals, petrochemicals, fertilisers, pharmaceuticals API and agrochemicals Aarti Industries AARIND 900-1000 1180 22 17135
• Bulk chemicals lead the share with 25% in domestic chemical market followed by Atul Ltd ATUL 4250-4500 5320 20 13162
specialty chemical (22%), petrochemicals (19%), fertilisers (14%), pharmaceuticals API Vinati Organics VINORG 900-990 1140 21 9940
(9%), agrochemicals around 3% and rest from others
Alkyl Amines ALKAMI 1950-2060 2430 20 4203
• India’s imports of chemical remained at | 395,000 crore in FY19 while exports were at Astec Life Sciences ASTLIF 670-730 845 23 1383
| 283,300 crore, representing a trade deficit of | 111,000 crore
• Going ahead, increasing environmental concern in China along with other factors
compounding the supply side challenges, should result in global players finding a
second manufacturing source. We expect this to translate to India’s (being cost efficient
along with government efforts to provide several incentives to foreign players setting up
a plant in India) share improving in the global chemical sector. This would also lead to
narrowing of the trade deficit for the entire sector in the years to come

Source: Bloomberg, Spidersoftware, ICICI Direct Research

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 2
Aarti Industries (AARIND): Rectangle pattern breakout offers fresh
entry opportunity….
Rec. Price 900.00-1000.00 Target 1180.00 Upside 22% Technical Outlook
• The share price is seen retesting the
Monthly Bar Chart Stock entirely retraced preceding 17 months consolidation (|660 – 1070) in Target @1180

MOMENTUM PICK
rectangle pattern breakout witnessed
just single month, faster pace of retracement signifies structural turnaround 1070 during April 2020. in the process, over past
three weeks it has retraced 80% of
preceding two weeks sharp up move 930 –
660 668 1192), at 982, working out of overbought
conditions. Slower pace of retracement
signifies healthy consolidation. We believe,
ongoing higher base formation will help to
resolve higher in coming months
• Structurally, the stock witnessed a faster
retracement as stock entirely retraced past
Rectangle pattern breakout on the back of rising volumes 17 months consolidation in just a single
month, indicating robust price structure in
Weekly MACD sustaining well above its average, indicating positive bias turn suggesting structural improvement
• We expect the stock to form a higher base

ICICI Securities – Retail Equity Research

and eventually accelerate upward
momentum towards | 1180 levels as it is
123.6% external retracement of last
correction (| 1071- 668), placed at | 1166
Fundamental Outlook
• Aarti Industries Ltd, incorporated in 1975, is a leading manufacturer of Speciality Chemicals and Pharmaceuticals with a global footprint. The company’s 83% of the revenues come from
Speciality Chemicals and remaining from pharma API and Intermediates
• It is a leading Speciality Chemicals company in Benzene based derivatives; with 30-35% of global market share
• The company’s products are used in the downstream manufacture of pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments, dyes etc
• The company has commissioned the first phase of its new agro-intermediate plant (under its first multiyear supply deal). However, owing to Covid-19, It guides for staggered ramp up in the first
year with a potential sales of Rs 80 crore (vs Rs 200 crore estimated). Simultaneously, It expects to commission the second multiyear supply pact in H2FY21 (vs. earlier guidance of H1) and
subsequent commissioning of the 3rd supply deal
• The management has guided flat FY 21 earnings amid Covid-19, however, expects to achieve 15-20% earnings CAGR over 3-4 year on the base of FY20 Sanofi.

Source: Bloomberg, Spider Software, ICICI Direct Research

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 3
Atul Ltd (ATUL): Base formation at lower band of rising channel
signifies secular uptrend intact…
Rec. Price 4250.00-4500.00 Target 5320.00 Upside 20% Technical Outlook
• The share price has been in secular up
Monthly Bar Chart 5445 Target @

MOMENTUM PICK
| 5320 trend and confined within upward sloping
channel since March 2015 highlighting
sustained demand at elevated levels
• Currently, the stock has been forming a
higher base after anchoring secondary
2492 2923
corrective phase at lower band of the
rising channel (on a closing basis).
Thereby offering fresh entry opportunity
Stock has been sustaining with favourable risk reward
well above its lower band
• The monthly MACD is converging towards
of rising channel
1300 its average, indicating breather that would
set the stage for next up move
1035 Monthly MACD converging towards its average, indicating breather that would set the stage for next up move
• Going ahead, we expect stock to resume
its up trend and head towards | 5320 as

ICICI Securities – Retail Equity Research

it is near upper band of rising channel
coincided with life highs of | 5445

Fundamental Outlook
• Atul Ltd is one of the biggest integrated chemical complexes in Asia with a diversified portfolio of +800 products divided into Life Science Chemicals and Performance & Other Chemicals
catering to a wide range of industries. It has manufacturing facilities at Ankaleshwar and Valsad in Gujarat and Tarapur in Maharashtra
• The life science segment caters to agrochem and pharma sector, while performance chemical has presence into aromatics, dyes, bulk chemical, polymers etc. The life science segment
constitutes ~30% to the revenue while rest comes from performance and other chemicals
• Going ahead, we expect with import replacement opportunities likely to pan out in India, Atul is one of the prominent company to gain meaningful market share given that it has presence into
different chemical business verticals
• Further, the company has been expanding into aromatics portfolio which we expect to gain traction in the years to come. Apart from this, lower crude prices can benefit company to improve its
gross margins to some extent
• Strong balance sheet along with better FCF generation and decent return ratios should assist company to get better valuations ahead

Source: Bloomberg, Spider Software, ICICI Direct Research

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 4
Vinati Organics (VINORG): Price in strong uptrend rebounding
from major support area….
Rec. Price 900.00-990.00 Target 1140.00 Upside 21% Technical Outlook
• The stock has been in secular up trend
Monthly Bar Chart 1196 Target @
1170

MOMENTUM PICK
forming higher peak and higher in long term
| 1140
The stock is in secular up trend and has recently rebounded chart. It has recently rebounded taking
from major support area thus offers fresh entry opportunity support at the trend line joining lows since
CY16, which also confluence with the 50
months EMA currently at | 683 thus
provides fresh entry opportunity with a
favourable risk reward set up
651 • Among the oscillators the monthly
Sharp rebound from the major support area stochastic has generated a buy signal
of | 650-700 as it is moving above its three periods average
378 - 50 months EMA currently at | 683 thus validates the positive bias in the stock
- Long term trendline support • We expect the stock to maintain positive
181
bias and head towards | 1140 levels being
Monthly stochastic generated a buy signal thus validates positive bias the trend line resistance joining highs of

ICICI Securities – Retail Equity Research

September 2019 (| 1196) and February
2020 (| 1170) placed at | 1140 levels

Fundamental Outlook
• Established in 1989, Vinati Organics Limited (Vinati) is a specialty chemical company, focusing on manufacturing specialty chemicals and organic intermediaries
• The company is world leaders in two of its main products, Isobutyl Benzene (IBB) and 2-Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) with 65% global market share in both the products.
These two products contribute ~70% in the company’s revenues. The company is also India’s largest manufacturer of Isobutylene (IB) and High Purity- Methyl Tertiary Butyl Ether (HP MTBE) in
India
• Total ~70 % of the revenue comes from exports. The company has present in over 22 countries worldwide, and export products to customers across the US, Europe and Asia
• Vinati has been working on capacity addition for ATBS, increasing it from 26000 tonnes to 40000 tonnes; the plant was expected to be completed by November 2019, but owing to subdued
demand in the global market not least due to strained crude oil prices it is expected to start commercial production in Q4FY20
• The company faces huge product concentration risk (more than 70% of revenues come from sales of ATBS and IBB). Overcome this challenge, company is coming up with Butyl Phenol (revenue
potential at full capacity of over | 400 crore portfolio
• The company expects 15-20% annual revenue growth over the next 4 years, however, post COVID 19 and fall in crude price this target looks difficult

Source: Bloomberg, Spider Software, ICICI Direct Research

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 5
Alkyl Amines Chemicals (ALKAMI): Running breakout from rising
channel signifies acceleration of upward momentum
Rec. Price 1950.00-2060.00 Target 2430.00 Upside 20% Technical Outlook
Target @ • The stock has been one of the major out
Monthly Bar Chart The upward sloping channel breakout indicates elevated buying demand

MOMENTUM PICK
| 2430 performer within Chemical space.
1810 Currently, stock has resolved out of long
term rising channel on the back of rising
volumes (as shown in adjoining chart),
790 indicating acceleration of upward
momentum, thereby offering fresh entry
653 opportunity to ride next leg of up move

• On the oscillator front, monthly RSI

360 bounced from bullish support zone of 60
1387 280 and logged a bullish crossover, indicating
Price breakout backed by rising volumes strength thereby validating our positive
stance

Monthly RSI bounced from bullish support zone of 60 and logged a bullish crossover, indicating strength thereby validating our positive stance • We expect the stock to resolve higher

ICICI Securities – Retail Equity Research

towards | 2430 levels as it is Implicated
target of rising channel (|1610 – 810)
placed at | 2410

Fundamental Outlook
• Incorporated in 1979, Alkyl Amines Chemicals Ltd (AACL) is in the business of manufacturing and marketing various aliphatic amines, amine derivatives and other speciality chemicals. It has
three manufacturing sites with 12 production plants and related utilities at Patalganga and Kurkumbh in Maharashtra and Dahej in Gujarat

• The company‘s amines and amine derivatives are currently being manufactured in 9 production plants with a capacity exceeding 70000 MTPA. In 2018, it started on its Dahej site where amines
are currently being manufactured in 1 production plant with a capacity exceeding 35000 MTPA

• Aliphatic amines industry is oligopolistic in nature with Alkyl holding 50% market share followed by Balaji amines (45%) and rest by RCF

• Going ahead, increasing capacity by more than 35% to 150,000 MTPA should aid financial outlook of the company given that Pharma and Agrochem both constitute around 75% to the overall
revenue presently. We expect both pharma and agrochem segments should perform well in the years to come and thereby provides decent visibility to Alkyl amines

• With Technocrat management along with strong balance sheet and business outlook in placed, we expect Alkyl is best placed among the other competitors in the amine industry
Source: Bloomberg, Spider Software, ICICI Direct Research
May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 6
Astec Life Sciences (ASTLIF): Falling trend line breakout confirms
conclusion of corrective bias…
Rec. Price 670.00-730.00 Target 845.00 Upside 23% Technical Outlook
7 Quarters Target @ • The stock has logged a resolute breakout
Quarterly Bar Chart Falling trend line breakout supported by potential faster pace of from past seven quarters falling trend line

MOMENTUM PICK
783 | 2430
retracement signifies structural turnaround indicating conclusion of secondary
corrective phase. Thereby offering fresh
entry opportunity from long term
305 prospective
• Structurally, it retraced more than 80% of
1 Quarter preceding 7 quarters decline (|783 – 305),
at |690 in just a single quarter. Falling
trend line breakout supported by potential
faster pace of retracement signifies
structural turnaround
• We expect the stock to undergo a higher
14 base formation after a sharp up move seen
Quarterly RSI logged a bullish crossover, indicating strength thereby validating our positive stance during May 2020. Thus any dip from hereon
should be capitalised as an incremental

ICICI Securities – Retail Equity Research

buying opportunity for next leg of up move
towards | 845 as it is 123.6% external
retracement of last decline (| 783 – 305),
at | 895
Fundamental Outlook
• Established in 1994, Astec Lifesciences Ltd manufactures a wide range of agrochemicals and pharmaceutical intermediates

• The company is mainly into fungicide portfolio and has export revenue contribution of around 60% while the rest comes from domestic market

• The company had commissioned new plant to manufacture few technicals last year, which we believe has assisted company to gain some advantage in terms of overall COGS. Going ahead, we
expect with increase in the backward integration, the company can able to achieve better gross margins and thereby OPM

• Further, it is also expanding its CRAMS portfolio which we expect it to constitute meaningful portion in the years to come. Given that, CRAMS portfolio has better margins than present business
portfolio, OPM improvement story can’t be ruled out in the years to come

Source: Bloomberg, Spider Software, ICICI Direct Research

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 7
Techno Funda Picks: Strategy Follow Up

Summary Performance - Recommendations till date

MOMENTUM PICK
Total Recommendations 38 Open 13
Closed Recommendations 25 Yield on Positive recommendations 13.0%
Positive Recommendations 23 Yield on Negative recommendations -5.0%
Closed at cost 1
Strike Rate 96%

ICICI Securities – Retail Equity Research

Source: Bloomberg, Spider Software, ICICI Direct Research
May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 8
 MOMENTUM PICK
Pankaj Pandey

ICICI Securities – Retail Equity Research

Head – Research [email protected]
ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 9

Disclaimer
We /I, Dharmesh Shah, Nitin Kunte, Ninad Tamhanekar, Pabitro Mukherjee, Vinayak Parmar Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated
persons of the ICICI Securities Inc. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee
of the companies mentioned in the report.

MOMENTUM PICK
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May 29, 2020 ICICI Securities Ltd. | Retail Equity Research 10