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SYNOPSIS

We initiated coverage of FOSECO

India Ltd and set a target price of

Rs.785.00 for Medium term

Investment.

Foseco India manufactures additives

& chemicals used in the metallurgical

industry for foundry and steel.

During the quarter, the robust

growth of Net Profit is increased by

24.08% to Rs. 66.31 million.

Foseco India Ltd has recommended a

final dividend for the year 2011 of Rs.

7/- per equity share of Rs. 10/- for

the year 2011.

FOSECO is accredited to ISO 9001:

2008, ISO 14001:2004 and OHSAS

18001-2007.

Net Sales & PAT of the company are

expected to grow at a CAGR of 17% &

21% over 2010 to 2013E respectively.

Years Net sales EBITDA Net Profit EPS P/E

CY 11 2328.94 418.90 252.83 39.59 17.71

CY 12E 2654.99 488.41 298.22 46.69 15.01

CY 13E 2973.59 552.60 338.53 53.00 13.23

Stock Data:

Sector: Commodity Chemical

Face Value Rs. 10.00

52 wk. High/Low (Rs.) 752.00/492.30

Volume (2 wk. Avg.) 451.00

BSE Code 500150

Market Cap(Rs in mn) 4477.29

Share Holding Pattern

1 Year Comparative Graph

FOSECO India BSE SENSEX

C.M.P: Rs. 701.00 Target Price: Rs. 785.00 Date: April 11th 2012 BUY

FOSECO India Ltd Result Update: Q4 CY 11

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Peer Group Comparison

Name of the company CMP(Rs.) Market Cap. (Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

FOSECO India 701.00 4477.29 39.59 17.71 5.38 170.00

Guj. Fluorochemicals 495.00 54463.60 64.22 7.72 3.12 350.00

BOC India 502.50 43025.90 14.26 35.38 3.48 15.00

Bombay Oxygen Corp. 6157.50 923.60 151.58 40.62 0.46 20.00

Investment Highlights

Q4 CY11 Results Update

FOSECO India Ltd has reported net profit of Rs 66.31 million for the quarter ended

on December 31, 2011 as against Rs. 53.44 million in the same quarter last year,

an increase of 24.08%. It has reported net sales of Rs 602.55 million for the

quarter ended on December 31, 2011 as against Rs 547.18 million in the same

quarter last year, a rise of 10.12%. Total income grew by 9.47% to Rs 606.48

million from Rs. 554.02 million in the same quarter last year. During the quarter,

it reported earnings of Rs 10.38 a share.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec-10 %change

Net sales 602.55 547.18 10.12%

PAT 66.31 53.44 24.08%

Basic EPS 10.38 8.37 24.08%

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Break up of Expenditure

• Recommends Final Dividend

Foseco India Ltd has recommended a final dividend for the year 2011 of Rs. 7/- per

equity share of Rs. 10/- for the year 2011.

Company Profile

Foseco, has been associated with the metals Industry for over 75 years and today is

acknowledged as a world leader in the supply of consumable products for use in the

foundry industry with a presence in 32 countries and major facilities in Germany,

USA, UK, Brazil, China, India, South Korea and Japan. The Company was founded by

Eric Weiss in 1932 and quickly became established as a supplier to the Foundry

Industry, from where the name FOundry SErvice COmpany was derived. In April

2008, Foseco was acquired by Cookson Group Plc., with interests in metals,

electronics and ceramics. Foseco is a part of the Ceramics (Vesuvius) division of the

group. Foundries form the heart of any manufacturing based economy. There are

approx. 4700 ferrous and 1000 nonferrous foundries out of which 80% can be

classified as small-scale units and 10% each as medium and large-scale units.

Foundries typically produce castings that go into different user segments. These

segments can be broadly classified into automotive, construction, heavy machinery,

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general engineering and mining. The processes in each foundry have unique

characteristics, so customers need to be provided specific customized solutions.

Foseco India Limited is acknowledged as the only company in the country that

possesses the capability of offering the widest range of solutions for producing casting

of the highest standards in terms of quality, surface finish, soundness, integrity and

dimensional tolerance. Its focus is on adding economic value through improved

process capability, casting yield, resource utilization and efficiency and development of

new business opportunities. Consequently, Foseco has adopted a “partnership” model

with customers, which is founded on its three core areas of strength:

• N Product Technology: Its global proprietary consumable product technology.

• N Application Expertise: Its in-depth knowledge of its customer’s operations and

the application of its products across a wide range of foundry processes.

• N Customer Relationships: Its conviction that customer partnership, where

expertise and knowledge are shared, result in the greatest performance

improvements for its customers.

Operations

Foseco has two manufacturing plants located in Sanaswadi near Pune, and

Pondicherry. The Company’s manufacturing product portfolio of over 400 complex

products comprises resins, coatings, feeding systems, ferrous and non-ferrous metal

treatment products and greensand additives.

The Company operates through well-established cellular manufacturing facilities.

Each cell team has end - to – end responsibility for the entire manufacturing process -

from purchase of raw materials, manufacturing, and quality assurance to final

distribution. The benefits of the cellular manufacturing approach are that the entire

cell team takes responsibility for quality and customer service.

The company has an integrated quality, health, safety and environmental management

system accredited to ISO 9001:2008, ISO 14001:2004 and OHSAS 18001-2007. The

Company’s IT processes are also accredited to the ISO9001:2008 standard.

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Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value (Rs.in.mn) CY10 CY11 CY12E CY13E

Description 12m 12m 12m 12m

Net Sales 1880.45 2328.94 2654.99 2973.59

Other Income 20.41 16.80 18.48 20.33

Total Income 1900.86 2345.74 2673.47 2993.92

Expenditure -1572.15 -1926.84 -2185.06 -2441.32

Operating Profit 328.71 418.90 488.41 552.60

Interest -2.10 -1.67 -1.75 -1.84

Gross profit 326.61 417.23 486.66 550.76

Depreciation -36.77 -42.95 -48.10 -52.91

Profit Before Tax 289.84 374.28 438.56 497.85

Tax -96.86 -121.45 -140.34 -159.31

Profit After Tax 192.98 252.83 298.22 338.53

Equity capital 63.87 63.87 63.87 63.87

Reserves 649.76 768.80 1067.02 1405.55

Face value 10.00 10.00 10.00 10.00

EPS 30.21 39.59 46.69 53.00

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12E

Description 3m 3m 3m 3m

Net sales 563.63 605.85 602.55 620.63

Other income 5.88 3.22 3.93 4.17

Total Income 569.51 609.07 606.48 624.79

Expenditure -472.99 -490.07 -498.13 -512.02

Operating profit 96.52 119.00 108.35 112.78

Interest -0.31 -0.39 -0.18 -0.20

Gross profit 96.21 118.61 108.17 112.58

Depreciation -10.35 -10.66 -12.19 -11.95

Profit Before Tax 85.86 107.95 95.98 100.63

Tax -28.60 -34.95 -29.67 -32.40

Profit After Tax 57.26 73.00 66.31 68.23

Equity capital 63.87 63.87 63.87 63.87

Face value 10.00 10.00 10.00 10.00

EPS 8.97 11.43 10.38 10.68

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Key Ratios

Particulars CY10 CY11 CY12E CY13E

No. of shares (in mn) 6.39 6.39 6.39 6.39

EBITDA Margin (%) 17.48% 17.99% 18.40% 18.58%

PBT Margin (%) 15.41% 16.07% 16.52% 16.74%

PAT Margin (%) 10.26% 10.86% 11.23% 11.38%

P/E Ratio (x) 23.20 17.71 15.01 13.23

ROE (%) 27.04% 30.36% 26.37% 23.04%

ROCE (%) 44.36% 49.18% 43.17% 38.16%

Debt Equity Ratio 0.15 0.13 0.10 0.08

EV/EBITDA (x) 13.62 10.69 9.17 8.10

Book Value (Rs.) 111.73 130.37 177.06 230.06

P/BV 6.27 5.38 3.96 3.05

Charts:

Net sales & PAT

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P/E Ratio (x)

Debt Equity Ratio

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EV/EBITDA(x)

P/BV

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Outlook and Conclusion

At the current market price of Rs.701.00, the stock is trading at 15.01 x CY12E

and 13.23 x CY13E respectively.

Earning per share (EPS) of the company for the earnings for CY12E and CY13E

is seen at Rs.46.69 and Rs.53.00 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 17% and

21% over 2010 to 2013E respectively.

On the basis of EV/EBITDA, the stock trades at 9.17 x for CY12E and 8.10 x

for CY13E.

Price to Book Value of the stock is expected to be at 3.96 x and 3.05 x

respectively for CY12E and CY13E.

We expect that the company will keep its growth story in the coming quarters

also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.785.00 for Medium to Long term investment.

Industry Overview

India's growing population and dependency on agriculture drives chemical sector

demand. From April 2000-April 2011, total FDI inflows into the Indian chemicals

industry was US$ 2.9 billion.100 per cent FDI is permissible in the Indian chemicals

sector; manufacturing of most chemical products are de-licensed.

Total production in the Indian Chemical industry has grown at an annual pace of 10

per cent since FY09. External demand has also contributed strongly to the growth in

the industry. Base chemicals cover more than half (52.3 per cent) of the Indian

chemical industry; the segment was valued at US$ 43.3 billion in FY10 followed by

pharmaceuticals (24.2 per cent).

Agrichemicals and Biotechnology are the minor components of the sector accounting

for 2.4 per cent and 3.0 per cent of production in FY10. Specialty chemicals are

relatively high valued; the sector is rapidly growing and has a diverse end-product

market.

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Chemicals constitute more than 14 per cent of India’s total exports. Total exports of

chemicals grew from US$ 2.6 billion in FY02 to US$ 11.4 billion in FY10, a compound

annual growth rate (CAGR) of 20.1 per cent.

The Indian chemical industry is among the fastest growing Indian industries. Majority

of the chemicals produced in India comprise either upstream products or

intermediates, which go into a variety of manufacturing applications including

fertilisers, pharmaceuticals, textiles and plastics, agrochemicals, paints and dyes.

Over the last one and a half decade, the Indian chemical industry has transformed

from manufacturing principle chemicals in a highly regulated market to being a

mature industry in a liberalised economy.

Indian Chemical Industry – Segments

The Indian chemical industry comprises a wide and varied spectrum of products that

can be sub-categorised into inorganic and organic chemicals, drugs and

pharmaceuticals, plastics and petrochemicals, dyes and pigments, fine and speciality

chemicals, pesticides and agro chemicals, and fertilisers.

Indian Chemical Industry – Market Size

Post independence era has witnessed a significant contribution of Indian chemical

industry to both industrial and economic growth. Accounting for 18 per cent of the

output of manufacturing sector, the chemical industry forms 14-15 per cent of total

exports and 8-9 per cent of the total imports in India. Chemicals including

petrochemicals sector contributes 3 per cent to India’s GDP.

The Indian chemical industry, an important constituent of the Indian economy, is

valued at around US$ 35 billion. The industry, the 12th largest in production globally,

and third largest in Asia, is growing at an average rate of 12.5 per cent. Modernisation

of existing technology through foreign collaborations could further enhance growth.

India is a promising economy that holds potential to produce quality chemicals for

world consumers because of its diversified manufacturing base.

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A network of 200 national laboratories and 1,300 Research and Development (R&D)

centers provide a strong base to the Indian chemical industry to become innovation-

oriented. Shifting focus towards R&D would also facilitate growing opportunities for

R&D hubs and industry-specific institutes.

In India a number of recent developments, such as establishment of intellectual

property rights (IPR), a rapidly growing middle-class population, emerging rural

markets and improvements in medical infrastructure have benefitted foreign

manufacturers.

Indian Chemical Industry - Market Dynamics

Base Chemicals form the largest segment of the Indian Chemicals Industry (53 per

cent), followed by pharmaceuticals (24 per cent). While base chemicals are raw

material oriented and involve bulk manufacturing through standardised reactions,

pharmaceuticals and specialty chemicals are more R&D intensive, high value and low-

volume. Petrochemicals (Olefins and aromatics) are the major sub-segment of the base

chemical industry. Olefins demand in India is anticipated to grow at 10 per cent per

annum while aromatics demand is expected to grow at 12 per cent per annum over

2010-2015.

Pharmaceuticals industry, forming the second largest segment with 24 per cent share,

has evolved over past 30 years from a marginal global player to becoming a world

leader in the production of high quality generic drugs. India exports pharmaceutical

products to over 200 countries. Spurred by a strong domestic market and enhancing

exports, the Indian formulations market is expected to reach US$25.6 billion in 2013-

14 from about US$ 12.6 billion in 2008-09.

End-use industries like automotives, electronics, packaged food, textiles et all are

driving Indian specialty chemicals industry. Strong domestic demand coupled with

huge investments by domestic and foreign players, is making the industry scale new

heights. Many international companies have pledged substantial investments in

potential Indian markets because of availability of vast pool of skilled and cheap labor

and resources.

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Biotechnology, accounting for 3 per cent of the total chemicals industry, is currently

pegged at US$ 4 billion. It is estimated to be worth around US$ 10 billion by 2015.

New opportunities across various sectors including bio-pharma, agri-biotechnology

and industrial biotechnology are expected to help the industry grow rapidly in the near

future.

India is the fourth largest producer of agrochemicals in the world. The Indian

Agrochemicals Industry is expected to grow at 7.5 per cent, to reach over US$ 1.7

billion by 2012, driven by various factors including need for food grain self-sufficiency

and the momentum in floriculture and horticulture sectors. India’s 60 per cent of

agrochemicals’ production is exported to countries like USA, UK, Russia, Europe,

South Africa, Bangladesh, Malaysia etc.

Industry experts expect per capita consumption of plastics in India at 27 kilograms

(kg) by 2020 from 8 kg in 2010; thereby aligning the consumption with global

standards.

Indian Chemical Industry - Major Investments

India saw around 48 mergers and acquisitions (M&A) deals in 2010 worth US$ 4.9

billion in its pharma and biotech sector.

• Around US$ 33 billion of investment is planned in the upstream industry to set

up 11 petrochemical complexes across the country, which will enable setting up

new plastic clusters around these complexes, R K Lohia, chairman, national

executive committee, Plastindia 2012 pointed out. He added that this will, in

turn, provide impetus for growth of polymer consumption to over 15 million

tonnes (MT) by 2015.

• Standard Chartered Bank’s private equity segment has invested US$ 19 million

in Mumbai-based Privi Organics. Privi is an aroma chemical manufacturer,

whose products is used by fragrances and flavors companies and is also

exported to over 25 countries.

• Aditya Birla Group has bought US-based Columbian Chemicals for about US$

875 million. The Indian conglomerate has also placed simultaneous bids for two

of the world's three largest carbon black assets.

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• The group has also acquired the chloro-chemicals unit of Kanoria Chemicals &

Industries for US$ 185 million in an all-cash deal. The deal will make Aditya

Birla Group India's largest producer of chloral-alkali, a critical input in the

aluminium sector, the group's chairman Kumar Mangalam Birla said.

• Reliance Industries is drawing plans to be a world leader in rubber, and is

investing up to US$ 12 billion in the chemicals business to tap the rapidly-

growing market for hygiene and healthcare products, Chairman Mukesh

Ambani revealed.

• Over-the-Counter (OTC) Russian brands of Mumbai-based JB Chemicals &

Pharmaceuticals (JBCPL) are to be acquired by Johnson & Johnson (J&J) for

about US$ 260 million. The deal is made by J&J’s wholly owned Cilag gmbH

International and is expected to get closed by mid-2011.

Indian Chemical Industry - Exports

During April-February 2011, exports of chemicals increased 22 per cent to US$ 7.5

billion.

India has emerged as an exporter of dyes, exporting dyes to Germany, U.K., U.S.,

Switzerland, Spain, Turkey, Singapore and Japan. The export of dyes is expected to

increase from US$ 1.5 billion in 2005–06 to US$ 2.6 billion in 2020.

Indian Chemical Industry - Government Initiatives

• The government has removed licencing requirements, except for hazardous

chemicals and a few special drugs

• Entrepreneurs are allowed to set up chemicals industries following the

Industrial Entrepreneurs’ Memorandum (IEM) route

• Under the automatic route, 100 per cent FDI is allowed for all chemicals except

hazardous ones. Customs duty

• The peak rate of customs duty on most chemicals is 7.5 per cent.

• The Petroleum Chemical Petrochemical Investment Regions (PCPIR) Policy has

been introduced to boost the development of chemicals and petrochemicals

investment regions

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• Plans are underway to set up port-based chemicals parks in SEZs to encourage

clustering, provide infrastructure and enable tax concessions

• Downstream SEZs have been planned to use the output of chemicals parks

The newly approved PCPIR for Tamil Nadu, set up at Cuddalore and Nagapattinam,

has received government support of US$ 1.1 billion.

PCPIR is a scheme launched by the Ministry of Chemicals and Fertilizers wherein the

authority approved investments of about US$ 34 billion in three states- Gujarat,

Andhra Pradesh and West Bengal

The Government of India also plans to establish port-based chemical parks in special

economic zones (SEZs).

Indian Chemical Industry – Road Ahead

Overall, the Indian chemical industry has attained a critical size and has the potential

to build a US$ 80 - 100 billion specialty chemical industry by 2020. Asia Pacific region

now forms nearly 42 per cent of the global market for chemicals, clearly making it the

largest contributor.

India has great opportunity to leverage on its talent pool and resources to attain a

successful position in specialty chemical landscape. In addition, India has been

increasing its export of chemical products in the recent years, so growth will also be a

factor of buoyant exports.

______________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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