Initiating coverage

(Wholly owned subsidiary of Bank of Baroda) BUY

Sector: Specialty Chemical

Vikas EcoTech Ltd. (VEL)
15th September, 2016
Road to a GREENER tomorrow; initiate with BUY
Price Price Target Up/Down (%)
VEL has an experience of over 15 years in the chemical industry and is an
Rs. 12.7 Rs. 31 145
emerging player in the global arena of the high end Specialty Polymer
Compounds and Additives. VEL is the only Indian company that manufactures
Organotins (Tin based heat stabilizer for PVC) which is lead free and non-toxic. Bloomberg Code Reuters Code
The company has evolved from trading company to a manufacturing VKEC IN VKGL.NS
organization. The increasing awareness about lead poisoning which has led the
companies and countries preferring eco-friendly and non-toxic substitutes, will Share Holding (%) As on 30th June, 2016
boost the topline for a company like VEL. We believe that such factors coupled Promoters 46.01
with the capacity expansion plans of VEL would further drive the stock upside. FII 0.0
Strengthening manufacturing business: With a focused strategy, VEL has DIIs 0.19
transformed from trading business to manufacturing business (trading contributed 64%
in FY13 to 20% in FY16). In FY16, specialty compounds/specialty additives/ trading Stock Data
contributed 59%22%/20% of total revenue. Going forward, VEL has planned capacity Nifty 8,743
expansion in its Specialty compounds and Organotins segment. We expect, revenue Sensex 28,413
contribution in specialty compounds/specialty additives/ trading at 48%/43%/10%
52 week high/low 25.4/10.85
respectively by FY18e. This change in contribution will also help in expanding EBITDA
margins which are expected to expand by ~207 bps over FY16-18e. Maket Cap (Rs. bn) 3.2
Face value 1
Only manufacturer of Organotins - An eco-friendly heat stabiliser: Organotins is
a US FDA approved eco- friendly heat stabilizer; a substitute for health hazardous lead Price performance (%) 1M 3M 6M 1Y
based stabilizer. This stabilizer is mainly used as a heat stabilizer in PVC pipes. Various Absolute -1.2 -6.6 -14.2 -9.3
studies across globe has proven that lead based stabilizer are toxic, therefore, many
Relative to Sensex -2.1 -12.9 -29.9 -19.8
developed countries like Europe and USA have banned them. By looking at the ill
effects on the human body, plastic/pvc processors are shifting to the eco-friendly Relative Performance
Organotins. Indian stabilizer market is of ~60,000MTPA where at present Organotins
markets stands for 6,000MTPA. This shows broader scope for Organotins market 170
growth in India. VEL is the only manufacturer of Organotins in India. Considering the 150
growth prospects, VEL has planned capacity expansion from current 1,800 MTPA to 130
3,000MTPA in FY17 and additional 6,000 MTPA in FY18. We expect, Organotins 110
revenue to grow at a CAGR of 105% over FY18e. 90
70
Growth in Specialty compounds: Polymer and Polymer Rubber compounds are 50
Sep-15

Feb-16
Feb-16

Sep-16
Jul-16
Jan-16

Aug-16
Oct-15
Oct-15

Mar-16
Dec-15

May-16
May-16
Jun-16
Apr-16
Nov-15

used in various industries like rubber (footwear industry) and plastic industry (pipe
industry), PVC, wire and cable industry. PVC / TPR-TPE/CPE compounds are
expected to grow at 15-20% CAGR for next 5years. VEL manufactures large range of Nifty Vikas EcoTech Ltd.
polymer and Polymer Rubber compounds. Polymer compounds require constant
Source:-Bloomberg
upgradation in the products and manufacturing technology, which is possible for VEL
with its in- house R&D facility. The company has a current capacity of 20,000MTPA
and achieved capacity utilization of 74% in FY16. VEL has planned to increase the
capacity to 31,000MTPA by FY18e. We expect the compounds business to grow at a
CAGR of 27% over FY16-18e.
Valuation: We believe that VEL is uniquely positioned in compound and additives
business with its integrated R&D. We further believe that, increasing demand for toxin
free stabilizers, growth in PVC industry, opportunities in export markets and capacity
expansion will create enormous opportunities for VELs revenue/ earning to grow at a
CAGR of 41%/49% over FY16-18e. Historically, VEL traded at an average one year
forward PE multiple of 14x. At the CMP of Rs.12.7, the stock is trading at 8.9x FY17e
and 5.7x FY18e earnings. We are initiating coverage on the stock with a BUY rating
and a target price of Rs.31 an upside of 145%.

Exhibit 1: Financial summary (Rs mn)

Year end: March FY14 F Y15 FY16 FY17e FY18e FY19e
Net sales 2500 2110 3072 3901 6102 7888
Growth (%) -0.9 -15.6 45.6 27.0 56.4 29.3
Operating margin (%) 5.3 7.9 15.9 17.7 18.0 18.4
PAT 37 38 255 363 566 779
Adjusted PAT 36 38 254 363 566 779
EPS (Rs) 0.4 0.1 1.0 1.4 2.2 3.1
Growth (%) -1.5 4.7 570.2 42.9 56.2 37.5
P/E(x) 35.6 85.0 12.7 8.9 5.7 4.1
ROE (%) 9.1 8.9 46.3 43.5 44.6 41.0
ROCE (%) 10.6 9.4 24.5 24.7 27.0 26.2
Source: Company, BOBCAPSe

Vaishali Parkar Kumar | vaishali.parkar@bobcaps.in | +91 22 6138 9382

 (Wholly owned subsidiary of Bank of Baroda)
The PVC industry in
India is estimated to
grow at 15% over next
few years
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
Industry Outlook
The Indian Poly Vinyl Chloride (PVC) industry
The PVC industry in India has historically been driven by agriculture till 2000. Thereafter, the main
driver for PVC consumption has been infrastructure (Ex: Pipes & Fittings) which now has a share
of to over 70% from 14% in 1975. Globally, Pipes & Fittings account for ~43% of the PVC
consumption. For the period between 2002 and 2015, the total demand for PVC in the country grew
at a CAGR of ~8.7%. During the same period domestic production capacity grew at a CAGR of
~4.6 % whereas imports grew at a CAGR of ~32.5%.
The PVC industry in India is valued at over Rs. 200bn. In spite of strong economic growth, India
still has a long way to go to realize its infrastructural needs nearly US$ 650 billion will be required
for urban infrastructure in the next twenty years. Also, the construction sector contributes to 10%
of the GDP. This provides great opportunity for investment and hence for PVC products that are
used in these sectors.
Exhibit 2: PVC value chain
Source: Company, BOBCAPS
The global demand for PVC Market was valued at USD 57.06 billion in 2015 and is expected to
reach USD 78.90 billion in 2021, growing at a CAGR of 5.6% between 2016 and 2021The global
consumption of PVC in 2014 was estimated at 40 million tons. India has huge growth prospects as
the per capita consumption in India of 2kg is low compared to 11.8kg per capita in the US and 10.3
kg per capita in China. With the increasing GDP growth and implementation of new age material
the PVC future is bright in India.
Exhibit 3: Per capita consumption of Suspension PVC
14.0
Quantity (kg per person)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
India Brazil Malaysia Thailand China USA
Source: Company, BOBCAPS
Going forward, the Indian PVC demand is expected to be driven primarily by the Agriculture,
Infrastructure, Housing and other sectors like FMCG, pharmaceutical and retail segments. The
2
 (Wholly owned subsidiary of Bank of Baroda)
PVC stabilizer market
is estimated to be
worth USD 3.8 billion
by 2020
Organotins is a better
substitute for lead
based stabilizer
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
estimated annual growth for PVC is expected to be at least 13% in the next five years, with demand
expected to cross 5 million tons in 2020.
PVC Stabilizer Industry:
Role of Stabilizers
Achieve an optimum balance of ecological and economical benefits
Enable custom properties in end products
Enable use in product engineering
Enhance the key properties of plastics
Ensure efficient processing without sacrificing physical properties
Provide higher performance in the intended function
Be thermodynamically constrained from free migration to the surface
Across the progressive nations of US, Europe and Asia use of lead-based stabilizers in PVC pipe
manufacturing has been voluntarily ceased or mandatorily banned by the end of 2015. The global
PVC pipe manufacturing industry has shown courage and acted responsibly in phasing out lead
based stabilizers and plasticisers in Europe, US and some nations like Australia and South Korea.
The harmful effects of lead have been medically proven. Hence, moving towards a lead-free world
is becoming an increasingly imperative need.
India currently does not have any industry volunteerism or government regulation to ban lead based
stabilizers in PVC pipes. This is especially critical in pipes used for carrying water for drinking,
irrigation or cooking. However, few Indian PVC pipe manufacturers have resolved to shift to toxin-
free stabilizers in their manufacturing.
Today, lead-based stabilizers are being phased out worldwide in a planned manner. In Europe, the
phase out is driven by the Comprehensive Chemicals Regulation (REACH). Globally, the PVC
stabilizer market is estimated to be worth USD 3.8 billion by 2020. With environment-friendly and
non-toxic stabilizer alternatives, it presents a huge opportunity to tap. The Asia-Pacific market is
the largest, registering 57.1% share in 2014. With the global manufacturing base moving to Asia
and a special focus on China and India, these markets are expected to register significant growth.
Organotins - A safe and eco-friendly alternative
Organotins stabilizers scientifically known as MTM (Methyl Tin Mercaptide) are tin (Sn) - based
stabilizers primarily used in rigid PVC applications for food and water contact. Stabilizers are added
to PVC compounds as critical ingredients to maintain the properties of the end product throughout
its life cycle.
Advantages of Organotins stabilizers
Lead-free, non-toxic, safe and eco-friendly
Sanctioned by most international legislations for potable water pipes and fittings
Extensive global approvals for food contact applications with equal or improved strength
(efficacy)
Approval in all European countries and USA for potable water pipes
3
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Industries switching to Organotins stabilizers

Organotins stabilizers are being increasingly adopted by industries such as medical devices,
agriculture & infrastructure pipes, medical components and the packaging industry. As most of the
end products have significant human contact, being lead-free is a key requirement that is driving
demand.

Indian manufacturers who are looking at exports or supplying to MNC clients have to adhere to
lead-free stabilizer norms of EU, America and other progressive nations. Thus, more and more
players especially in the organized and premium product offerings space are shifting to green and
environment-friendly stabilizers.

Organotins stabilizers are the only safe and eco-friendly heat stabilizers that can be used for
transparent and food-grade PVC applications. Organotins stabilizers are suitable for critical
applications. They are FDA-approved PVC additives and comply with the regulatory health
standards of the most advanced nations. While the Indian market size is 6 KTPA, the global market
is about 140 KTPA.

Opportunity in Indian PVC pipe manufacturing

Lead-based stabilizers in PVC pipes used for water, plumbing and sanitation are being banned or
voluntarily discontinued. Consumer awareness for greener and safer products is creating demand
for Organotins stabilizers in food-grade applications. With the National Green Tribunal giving a
notice to major PVC pipe manufacturers and the Government of India, eco-friendly stabilizers like
tin-based stabilizers will become the industrys preferred choice.

Exhibit 4: PVC Stabilizer market

Current stabilizer
market in India
~60,000MTPA. Out of Asia-Pacific market
which Organotins share (2014)
market is 57%
~6,000MTPA

Rest of the
world
43%

Source: Company, BOBCAPS

| Equity research | 4
 (Wholly owned subsidiary of Bank of Baroda)
VEL is the only Indian
company that
manufactures
Organotins which are
lead free and non-
toxic
Trading reduced from
64% in FY13 to 20%
in FY16
~207bps expansion in
EBITDA margins over
FY16-18e
Huge scope for
growth in Organotins
as eco- friendly
stabilizer
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
Investment rationale
Vikas EcoTech Ltd. has an experience of over 15 years in the chemical industry and is an
emerging player in the global arena of high end specialty chemical players. VELs forte is in
the manufacturing of Specialty Polymer Compounds and Additives, and it is the only Indian
company that manufactures Methyl Tin Mercaptide (MTM) also known as Organotins (heat
stabilizer) which are lead free and non-toxic.
We believe, going forward, the companys revenue/earnings will grow at a CAGR of
~41%/49% over FY16-18e, led by 1) rising demand for PVC piping through various
Government initiatives, 2) Focus on increasing exports to provide higher realizations, 3)
increasing demand in the overall specialty chemical segment and 4) capacity expansions in
Specialty Compounds and Organotins Stabilizers for supporting volume growth due to
various triggers
Focus on manufacturing to drive operational efficiency
VEL is mainly into manufacturing of specialty compounds (TPR, PVC, EVA, SOE, PET, TPE,
and recycled compounds) and specialty additives (Organotins - MTM, Plasticizer- ESBO and
Flame Retardants - ATH which mainly goes into PVC manufacturing) along with trading. Over
a period of time, with focused strategy, the company has increased its capacity in specialty
compounds /additives and worked towards reducing share of trading business. In FY13 the
share of specialty compounds/ specialty additives/ trading was 25%/11%/64%, respectively,
which has changed to 58% /22% /20% respectively in FY16.
We expect, with the expansion plans in specialty compounds and specialty additives the
company will focus on manufacturing products in these two segments. We expect, the revenue
contribution from specialty compounds/additives/trading would be 48% /43% /10% by FY18e
which will be margin lucrative.
VEL has improved EBITDA margin from 4.2% to 15.9% over FY13 to FY16 led by increasing
manufacturing activity and increasing share of specialty compounds and additives. Going
forward, we expect VEL to improve EBITDA margin by ~207bps to 18% led by 1) new capacity
addition in additives segment, 2) breakthrough and streamlined production in few products with
the help of R&D, 3) achieving very low wastage, 4) capability to produce through recycling, 5)
increasing exports opportunities
Exhibit 5: Changing revenue contribution trend to ensure better margins
Revenue contribution trend EBITDA Margin trend
100%
80% 1,800 20%
1,500
60% 15%
1,200
Rs. Mn
40% 900 10%
20% 600
5%
300
0%
- 0%
FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY14 FY15 FY16 FY17e FY18e FY19e
Speciality Compounds Speciality Additives EBITDA EBITDA margin %
Trading & Other
Source: Company, BOBCAPs Source: Company, BOBCAPs
Growth prospects in specialty Additives (Organotins)
Organotins are lead free additive and a substitute for lead based additives which goes into the
manufacturing of PVC pipes. At present, the total additives market in India is ~60,000MTPA. This
includes Organotins and lead based stabilizers, out of which ~6,000MTPA is a market of
Organotins. With the increasing awareness one can expect, huge scope for Organotins in coming
years.
5
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

VEL is the only manufacturer of Organotins in India with an in house R&D facility. Out of
6,000MTPA Organotins market the company had ~10% market share in FY16 and sold ~600MTPA
of Organotins in India. The company sees huge growth opportunities in this segment as it has direct
competition only from Chinese and USA players (domestically no one has fully integrated
technology). Adding to this advantage is the clients shifting preference to VELs products from
Chinese products led by quality issues and USA products led by higher landing cost.

Capacity expansion of
9,000MTPA by FY18e
to meet the future
demand
VEL has current capacity of 1,800MTPA and with the growing awareness for lead free stabilizers
as well as increasing demand, the company has planned to increase the capacity to 9,000MTPA
by FY18e. We expect, Organotins sales to grow at a CAGR 105% by FY18e led by 1) Increasing
awareness about lead poisoning and thus higher demand for lead / heavy metal free stabilizers, 2)
lower base and increasing new capacity 3) Governments eco-friendly initiatives in many countries
banning lead based stabilizers which may be implemented in India too in the near future.

Exhibit 6: Organotins stabilizer to grow at a CAGR of 105% over FY16-18e

4,100 200%
3,300 150%
Rs. Mn

2,500 100%
1,700 50%
900 0%
100 -50%
FY14 FY15 FY16 FY17e FY18e FY19e

Organotins - TIN Growth (%)

Source: Company, BOBCAPS

Scope in Polymer Compounds

In-house R&D a key Polymer compounds are used in various industries like rubber (footwear industry) and plastic
catalyst in polymer industry (pipe industry), PVC, wire and cable industry. PVC compounds/ TPR-TPE/CPE market in
compounds
India is ~1,400KTPA/9KTPA/27KTPA, which is expected to grow at 15% CAGR for next 5years.

VEL manufactures large range of polymer compounds which go into different industries. This helps
the company to diversify its product concentration. Polymer compounds require continuous
developments in the products, which is possible for VEL with its in- house R&D. The company has
current capacity of 20,000MTPA and working at 74% capacity utilization. VEL has planned to
increase the capacity to 31,000MTPA by FY18e.

VEL has grown at a CAGR of 42% over FY13-FY16. We expect, with the increasing use of different
polymer compounds and increasing production capacity assisted with constant upgradation
through R&D, the company's polymer compound segment will be able to grow at 27%.

Exhibit 7: Specialty compounds to grow at a CAGR of 27% over FY16-18e

4,100 80%
3,300 60%
Rs. Mn

2,500
40%
1,700
900 20%

100 0%
FY14 FY15 FY16 FY17e FY18e FY19e

Speciality Compounds Growth %

Source: Company, BOBCAPs

| Equity research | 6
 (Wholly owned subsidiary of Bank of Baroda)
Specialized
machinery and strong
technical knowhow
has enabled VEL to
convert non-prime raw
materials to virgin
material standards
Recycling to enhance
margins on account of
reduction in material
cost
More than Rs. 450 mn
capex planned till
FY18e to give
revenue visibility
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
Transforming waste into profits through recycling
Vikas EcoTech Ltd. has been able to transform itself to make recycling its specialty through in-
house R&D. Its forte through access to appropriate supply chain for ample & consistent supplies,
the specialized machinery and strong technical knowhow has opened up new opportunities in
recycling business. With this initiative, the Company not only contributes towards environmental
preservation, but also helps other organizations to dispose their waste in a responsible manner
and in the process VEL is able to improve its margins.
The margin improvement is a direct result of recycling as the recycled or non-prime materials
generally cost less than the virgin materials. If the Company is able to use for example 15% to 25%
recycled raw material (replacing virgin materials) in making of a compound, they can save on raw
material costs and thereby add to the overall margins of the company.
VEL uses industrial and consumer wasted RPVC (Rigid PVC) pipes, RPET (PET Reclaimed Bottles
or Films) and off grades (batches which lack on meeting specs of virgin materials on any one of
the key parameters) and reprocesses the same achieving the targeted specifications on the final
product.
The company foresees recycling to be a very attractive business as there is an increase in
awareness on plastic and rubber recycling. The new directives pouring in on mandatory recycling
by all the plastic/pvc processors would contribute more to the same. In such conditions, VEL
already has a grip on the usage of such materials and should be in a better position than its
competitors in many ways (commercial & technical).
Going forward, we believe, VELs focus on recycling of non-prime materials and converting them
to a compound that is as good as virgin raw materials due to its specialized machinery and strong
technical expertise. This will not only create goodwill for the company, but also improve its EBITDA
margins by 207 bps over FY16-FY18e (on conservative basis).
Capacity expansion; a boost to topline and exports
In the last two years Vikas EcoTechs manufacturing volume has seen a growth rate of over 40%
YoY. Considering better volume growth, going forward, VEL has planned capacity expansions in
Organotins, specialty compounds and recycled compounds. The company has existing plants in
Rajasthan & J&K. VEL has capex plan of ~ 450mn till FY18e.
For expansion purpose, VEL has already acquired land in Dahej (Gujarat) and construction work
has started. The company expect to start trial production by January 2017 for Organotins and
specialty compounds in Dahej plant. Purpose of the Dahej plant is to predominantly cater the
markets in western and southern India. Apart from serving the domestic markets, this new plant
will also provide a significant boost to the Companys exports through a better and faster access to
ports.
VEL expects to increase its Organotins capacity from current 1,800MTPA to 9,000MTPA by FY18e
and specialty compounds capacity from current 20,000MTPA to 31,000MTPA by FY18e. (Looking
at continually increasing demand for its products). We believe, increasing capacity will add to the
growth in revenue/earning. We expect, revenue/earnings to grow at a CAGR of 41%/49% over
FY16-18e.
7
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Exhibit 8: Capacity Expansion Plan

MTPA FY16 FY17e FY18e
Organotins Stabilizers
Opening Capacity 1,200 1,800 3,000
Addition (North) 600 1,200 -
Closing Capacity (North) 1,800 3,000 3,000
Capacity Dahej - - 6,000
Total Capacity 1,800 3,000 9,000

Polymer Rubber Compounds

Opening Capacity 10,800 20,000 26,000
Addition (North) 9,200 6,000 -
Closing Capacity (North) 20,000 26,000 26,000
Capacity Dahej - - 5,000
Total Capacity 20,000 26,000 31,000

Recycled Compounds
Opening Capacity 5,400 10,000 10,000
Addition (North) 4,600 - -
Dahej plant to focus Closing Capacity (North) 10,000 10,000 10,000
on better serving
domestic and export Capacity Dahej - - -
clientele Total Capacity 10,000 10,000 10,000

Plasticizers
Opening Capacity 2,400 3,000 3,000
Addition (North) 600 - -
Closing Capacity (North) 3,000 3,000 3,000
Capacity Dahej - - -
Total Capacity 3,000 3,000 3,000

Flame Retardants
Opening Capacity 1,200 1,800 1,800
Addition (North) 600 - -
Closing Capacity (North) 1,800 1,800 1,800
Capacity Dahej - - -
Total Capacity 1,800 1,800 1,800
Source: Company, BOBCAPS

Lead it go

Lead poisoning have
an adverse long term
impact on the human
body
PVC is a volatile material and needs to be supported with a heat stabilizer which prevents it from
degradation when subjected to high temperatures while processing. Lead holds the longest history
as a stabilizer for PVC as 1) it is a cost effective form of stabilizer, 2) it has excellent stabilizing
effects, and 3) it is used for PVC products with long service life and is required to endure long
fabrication (heating) hours. Conversely, the use of lead can cause lead poisoning when in direct
human contact, the long term effects of which are tragic (adverse impact on multiple organs). In
India, this poison could be ubiquitous in modern day life and go unnoticed. It could even be coming
out of the tap water being carried by PVC pipes.

| Equity research | 8
 (Wholly owned subsidiary of Bank of Baroda)
Lead poisoning in the
spotlight due to the
recent Nestle Maggie
Noodle controversy
VELs eco-friendly
and non-toxic
Organotins Stabilizer
is a perfect substitute
of lead stabilizers
Plastic pipes demand
expected to increase
on account of various
Government
infrastructure
initiatives
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
Facts about Lead content in India
According to the investigations by the Quality Council of India, 33% of over 370 samples of water
from the top 26 cities in India have tested positive for harmful content of lead, while another 2% of
the samples failed to meet even the comparatively lenient Indian norms of 50 parts per billion (ppb).
Out of these, 31% of samples have failed to adhere to WHO standards of lead content of less than
10 ppb.
Nestles Maggie Downfall A Lead Story
In the year 2015, tests were ordered on a dozen samples of Nestles Maggie Noodles, where
high levels of lead (17.2 parts per million) were found. This discovery of lead presence in such
high levels has brought lead poisoning to the limelight.
Considering the adversity of lead poisoning on health and environment, companies are shifting
towards substitute stabilizers. Also, various nations are trying to eliminate the use of lead based
stabilizers.
Organotins Stabilizers are tin based stabilizers primarily used in rigid PVC application for food
and water contact. It is lead-free, non-toxic and eco-friendly, which is sanctioned by most
international regulatory authorities (including USFDA & EFSA) for portable pipes & fittings.
Today, the lead based stabilizers are being phased out worldwide in a planned manner. On
account of increased awareness of lead poisoning and the emergence of eco-friendly & non-
toxic stabilizer alternatives, a company like Vikas EcoTech Ltd. can generate huge opportunities
globally. Thus, this makes us believe that VELs Organotins Stabilizer, being a perfect substitute
of lead, will play a major role in its revenue growth. Going ahead, we expect Organotins revenue
to grow at ~96% CAGR over FY16-18e.
Rising polymer compound and Organotins demand; a key
contributor to revenue growth
The Indian piping industry (largely comprising of PVC) is on a growth path with increasing demand
in water distribution, wastewater management and plumbing, largely due to increasing
infrastructure development in tier-II and tier-III cities. In the agri space, the adaptation of modern
practices (like drip irrigation systems) have been a key contributor to the rising demand for PVC.
Also, there is a rapid shift seen in the preference of PVC over the conventional metal piping systems
to.
Various Government initiatives have been announced which would create huge opportunities for
the piping industry. A major impact on demand growth of pipes can be seen as a result of the
following initiatives:
A 100 Smart Cities over 5 years
The Govt. of India intends to develop 100 smart cites in five years (FY16- FY20) in the purview of
increasing urbanization (urban areas are expected to house 40% of Indias population and
contribute 75% of Indias GDP by 2030), improving the quality of life and attracting people and
investments to the City. The total no. of smart cities have been distributed among the states and
UT (United Territories) ~Rs 1000bn of Government/ULB funds will be available for Smart Cities
development.
Such a huge investment in next five years will provide growth opportunities for many industries
including piping as one of the core infrastructure elements in a Smart City is adequate water supply,
sanitation and waste water management.
Pradhan Mantri Awas Yojana Housing for All (Urban) by 2022
Under this scheme the Govt. of India in planning to construct 2 crore houses for the weaker sections
of the society. The Pradhan Mantri Awas Yojna (PMAY) is amongst the flagship programs of the
Government of India to tackle the problems of growing urbanization by providing Pucca house
with water connection, toilet facilities, 24x7 electricity supply and access.
9
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

We believe that this initiative of Housing for all, in order to curb the shortage of housing along with
the lack of water management systems, would create ample opportunity for the Indian piping
industry.

The Swachh Bharat Mission; a step towards clean and hygienic India
This initiative has two sub-missions, the Swachh Bharat Mission (Gramin) for rural areas and the
Swachh Bharat Mission (Urban) for cities. The mission aims to achieve Swachh India by 2019,
which in rural areas shall mean improving the levels of cleanliness through Solid and Liquid Waste
Management activities, making Gram Panchayats free of Open Defecation, safe handling of
drinking water. The overall project cost, for both rural and urban India, has been estimated at Rs
1.96 tn that will include construction of 12 crore toilets across the country.

We believe, Government of Indias thrust for creating a Swachh Bharat will generate huge
opportunities for the PVC piping industry.

Atal Mission for Rejuvenation and Urban Transformation

The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme was launched by
the Government of India on 25th June 2015, with the purpose of providing basic services to
household and build amenities in cities which will improve the quality of life for all, especially the
poor and the underprivileged.

Five hundred cities will be taken up under the AMRUT scheme to improve existing water supply
systems, develop underground sewerage system, septage management, construct storm water
drains, improve public transportation, etc. The total outlay for AMRUT is Rs. 500bn for five years
from FY16 to FY20.

It is our belief that the growth of plastic piping industry would in-turn propel sales for a company
like Vikas EcoTech Ltd., since, manufacturers of agriculture and infrastructure PVC pipes and
fittings are amongst VELs key customers. Above factors will lead to growth in the Companys
revenue at a CAGR of ~41% over FY16-18e.

Global presence
VEL exports to more than 20 countries which contributed to ~48% of VELs overall revenue (Rs.
1.49 bn in FY16 vs ~Rs. 760mn in FY15). VEL is also targeting to tap USA markets and is in the
process of getting regulatory approvals. We expect that going forward exports markets would
contribute significantly to the revenue along with the growing domestic markets.

| Equity research | 10
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Key risk
Delay in capacity expansion: As the company has planned to invest for huge capacity expansion,
any delay in the regulatory/environmental approvals may affect the sales growth of the company

Delay in government flagship programmes: Government programmes like Smart Cities,

Pradhan Mantri Awas Yojana, Swachh Bharat and AMRUT would be a strong boost to the plastic
piping industry in India, going forward. However, any delay in execution of such projects could hurt
the demand in India.

Volatility in commodity prices: VEL mainly works in polymer (linked to crude prices) for its
compound business and in Tin for its Organotins business. Any volatility in these raw material may
hurt the EBITDA margins of the company for short term as the volatility in commodity prices get
passed on with a lag period

Currency Risk: VEL derives ~48% of the total revenue from exports. Also the company imports
~70-80% of raw material which is billed in USD. Therefore, VEL enjoys natural hedge on currency.
However, any sudden fluctuations in the currency, may impact the companys margins temporarily.

Country Risk: VEL exports to ~20 countries. In FY16, exports revenue accounted to ~48% of the
total revenue. Any changes in the exports policy or economic/ geopolitical tension arising in any
country may impact the sales for VEL. However, the company is well diversified in terms of country
concentration.

| Equity research | 11
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Valuation:
Vikas EcoTech Ltd. is engaged in the business of manufacturing and distribution of eco-friendly
Specialty Polymer Compounds and Additives. It is the only Indian manufacturer of Methyl Tin
Mercaptide (Organotins Stabilizer), a lead free heat stabilizer used in the production of PVC. The
company manufactures high end products used in Agriculture/Infrastructure Components, Wires &
Cables, Auto Parts, Textiles, Electrical Goods, Medical Goods, Writing instruments, Organic &
Inorganic chemicals, Footwear, Packaging, among others.

VEL has emerged as a manufacturing company from trading company where its trading has
reduced from 64% in FY13 to ~20%in FY16. We reckon that growth in plastic piping industry
(majorly PVC) is on cards due to the potential Government initiatives (like 100 Smart Cities,
Pradhan Mantri Awas Yojana, etc.) which is a strong push towards infrastructure
development. Moreover, the increasing awareness about lead poisoning which has led the
companies and countries preferring eco-friendly and non-toxic substitutes, will boost the
topline for a company like VEL. We expect, revenue/earnings to grow at a CAGR of 41%/49%
over FY16-18e. We further believe, such factors coupled with the capacity expansion plans
of Vikas EcoTech Ltd. would further drive the stock upside.

Historically, the stock as traded at an average one year forward PE multiple of 14x. At the
CMP of Rs. 12.7, the stock is trading at 8.9x FY17e and 5.7x FY18e earnings. We are initiating
coverage on the stock with a BUY rating and assign 14x PE to FY18e EPS of Rs 2.2, arriving
at a target price of Rs. 31 with a potential upside of 145%.

Exhibit 9: Vikas EcoTech ltd. 1 year forward PE

80
60
Current PE = 6x
(x)

40
5 yr mean = 14x
20
0
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16
Sep-11

May-12

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16
May-13

May-14

May-15

May-16
PE(x) Avg
Source: Company, BOBCAPSe

| Equity research | 12
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Financial Summary
Top line to grow at ~41%CAGR over FY16-18e
VELs revenue grew at a CAGR of 17% over FY12-FY16. In these years, the company has forayed
into manufacturing from trading. VEL is currently focusing on Organotins and polymer compounds.
We expect that with the awareness in the society for non-toxic products and VELs expansion plans
would be able to grow at a CAGR of 41% over FY16-18e. Also, other factors like various
Government infrastructure push (Smart Cities, Housing for all, AMRUT, etc.) and better realization
due to focus on increasing exports would augur well for the company.

Exhibit 10: VEL likely to post ~41% revenue CAGR over FY16-18e
8,000 80%

6,000 60%
Rs. Mn

40%
4,000
20%
2,000 0%
- -20%
FY14 FY15 FY16 FY17e FY18e FY19e

Net sales Growth (%)

Source: Company, BOBCAPSe

EBITDA margin to grow by ~207 bps over FY16-FY18e

EBITDA margins of the company have improved from 7.3% in FY12 to 15.9% in FY16 mainly due
to focus on manufacturing. VEL has taken various initiatives in these years to expand its EBITDA
margins like 1) Shutting down two plants viz., Sitarganj (Uttarakhand) and Bawana (Delhi) which
helped to consolidate its manufacturing activity at its main plant in Shahjahanpur (Rajasthan), 2)
Automation in existing plant, 3) Capacity expansion in FY16 which helped in expanding EBITDA
margins.

We expect, VELs EBITDA margins to expand by ~207 bps over FY16-FY18e to 18% mainly due
to 1) increasing demand for Organotins and supporting technical expertise of VEL for the same 2)
VEL being the only manufacturer of Organotins in India, 3) increasing use of non-prime raw
materials, which are cheaper than virgin materials, and recycling them, 4) focus on exports (higher
margin contribution). Also, going forward VEL has planned to keep its trading revenue at current
levels (with efficient raw material hedging policy) while focusing more on manufacturing.

Exhibit 11: EBITDA margin expansion by ~207 bps over FY16-18e

1,800 20%
1,500
15%
1,200
Rs. Mn

900 10%
600
5%
300
- 0%
FY14 FY15 FY16 FY17e FY18e FY19e

EBITDA EBITDA margin %

Source: Company, BOBCAPSe

| Equity research | 13
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Exhibit 12: PAT to grow at ~49% CAGR over FY16-18e

1000 12%
800 10%
8%

Rs. Mn
600
6%
400
4%
200 2%
0 0%
FY14 FY15 FY16 FY17e FY18e FY19e

PAT PAT margin%

Source: Company, BOBCAPSe

Optimal returns despite the multifold capacity expansion

With the increasing operational efficiency (revenue/earnings to grow at a CAGR of 41%/49% over
FY16-18e) VEL would able to finance its expansion mainly through internal accruals. This will help
the company to improve its return ratios in future. However, in short term perspective, we expect
ROE and ROCE to the tune of ~43.5%/44.6% and ~24.7%/27% over FY17/18e, respectively.

Exhibit 13: Marginal reduction in ROE & ROCE

50
40
30
%

20
10
0
FY14 FY15 FY16 FY17e FY18e FY19e

ROE ROCE

Source: Company, BOBCAPSe

Exhibit 14: High growth in EPS over FY16-18e

3.0
2.5
2.0
Rs.

1.5
1.0
0.5
0.0
FY14 FY15 FY16 FY17e FY18e FY19e

Source: Company, BOBCAPSe

| Equity research | 14
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Exhibit 15: Income statement

Y/E Mar (Rsmn) FY14 FY15 FY16 FY17e FY18e FY19e
Net sales 2,500 2,110 3,072 3,901 6,102 7,888
growth (%) (0.9) (15.6) 45.6 27.0 56.4 29.3
COGS 2,199 1,760 2,372 2,935 4,542 5,808
Staff Cost 38 37 33 46 79 102
R&D Cost - - - - - -
SG&A Cost 130 146 177 229 382 526
EBITDA 133 166 490 691 1,099 1,451
growth (%) 27 25 194 41 59 32
Depreciation 22 34 34 45 79 108
EBIT 111 132 456 646 1,020 1,343
Other income 28 37 48 41 44 48
Interest paid 92 107 113 128 192 191
Extraordinary/Exceptional
- - 2 - - -
items
PBT 48 62 391 559 873 1,200
Tax 11 24 137 196 306 421
Minority interest 1 - - - - -
PAT 37 38 255 363 566 779
Non-recurring items - - (2) - - -
Adjusted PAT 36 38 254 363 566 779
growth (%) (1.5) 4.7 570.2 42.9 56.2 37.5
Source: Company, BOBCAPSe

Exhibit 16: Balance sheet

Y/E Mar (Rsmn) FY14 F Y15 FY16 FY17e FY18e FY19e
Cash & Bank balances 5 8 44 168 246 393
Other Current assets 1,304 1,251 1,950 1,951 2,958 3,774
Investments 0 0 0 0 0 0
Net fixed assets 229 210 279 644 875 857
Goodwill - - - - - -
Other non-current assets 3 3 4 2 2 2
Total assets 1,541 1,473 2,277 2,765 4,081 5,026

Current liabilities 447 378 703 732 1,003 1,220

Borrowings 669 662 912 1,029 1,542 1,539
Other non-current liabilities 3 0 - - - -
Total liabilities 1,120 1,040 1,615 1,761 2,545 2,759

Share capital 102 254 254 254 254 254

Reserves & surplus 319 179 408 749 1,281 2,014
Shareholders' funds 420 433 662 1,003 1,536 2,268
Total liabilities 1,541 1,473 2,277 2,765 4,081 5,026
Source: Company, BOBCAPSe

| Equity research | 15
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Exhibit 17: Ratios

Y/E Mar FY14 F Y15 FY16 FY17e FY18e FY19e
Per share data (Rs)
EPS 0.4 0.1 1.0 1.4 2.2 3.1
CEPS 0.6 0.3 1.1 1.6 2.5 3.5
DPS 0.1 0.1 0.1 0.1 0.1 0.2
BV 4.1 1.7 2.6 3.9 6.0 8.9
Profitability ratios (%)
Gross margins 10.5 14.8 21.7 23.6 24.3 25.1
EBITDA margins 5.3 7.9 15.9 17.7 18.0 18.4
Net margins 1.4 1.8 8.3 9.3 9.3 9.9
Valuation ratios (x)
PE 35.6 85.0 12.7 8.9 5.7 4.1
P/BV 3.1 7.4 4.9 3.2 2.1 1.4
EV/EBITDA 14.7 23.2 8.3 5.9 4.1 3.0
EV/Sales 0.8 1.8 1.3 1.0 0.7 0.6
RoE 9.1 8.9 46.3 43.5 44.6 41.0
RoCE 10.6 9.4 24.5 24.7 27.0 26.2
RoIC 3.3 2.5 19.2 21.2 24.0 24.9
Source: Company, BOBCAPSe

Exhibit 18: Cash flow statement

Y/E Mar (Rsmn) FY14 FY15 FY16 FY17e FY18e FY19e
Profit after tax 36 38 255 363 566 779
Depreciation 22 27 29 45 79 108
Chg in working capital (140) (17) (373) 28 (736) (600)
Deferred tax paid 0 (4) (2) - - -
Cash flow from
(82) 44 (90) 436 (91) 287
operations

Capital expenditure (53) (8) (98) (410) (310) (90)

Change in investments (0) (0) (0) - - -
Cash flow from
(54) (8) (98) (410) (310) (90)
investments

Free cash flow (135) 36 (188) 26 (401) 197

Issue of shares 1 153 - - - -
Net inc/dec in debt 130 (8) 250 117 513 (3)
Dividend (incl. tax) (6) (15) (15) (22) (34) (47)
Other financing activities 10 (163) (11) 2 (0) 0
Cash flow from financing 135 (34) 224 97 479 (49)
Inc/(Dec) in Cash & Bank
(0) 3 36 124 78 147
bal.
Source: Company, BOBCAPSe

| Equity research | 16
 (Wholly owned subsidiary of Bank of Baroda)
Manufactures eco-
friendly specialty
polymer compounds &
additives and the only
producer of
Organotins in India
Manufacturing units at
Rajasthan and
Jammu & Kashmir,
along with an
upcoming Dahej plant
| Equity research |
Vikas EcoTech Ltd. | 15 September 2016
Company Profile
Vikas EcoTech Ltd. was incorporated in 1984. It is engaged in the business of manufacturing and
distribution of Specialty Polymer Compounds and Additives since 1998. The company
manufactures high end products used in Agriculture/Infrastructure Components, Wires & Cables,
Auto Parts, Textiles, Electrical Goods, Medical Goods, Writing instruments, Organic & inorganic
chemicals, Footwear, Packaging, among others.
VEL is a company focused on manufacturing eco-friendly specialty chemicals and polymers. It is
the only Indian manufacturer of Methyl Tin Mercaptide (Organotins Stabilizer), a lead free heat
stabilizer used in the production of PVC.
Currently, the Company has two manufacturing sites, one at Shahjahanpur, Rajasthan and the
other at Samba, Jammu and Kashmir. Along with its manufacturing units, Vikas EcoTech Ltd. has
an in-house R&D Centre located in Delhi, comprising of dedicated chemical engineers and
technologists.
Apart from the above mentioned manufacturing sites, the Company has planned to setup a
manufacturing unit in Dahej, Gujarat to manufacture Organotins Stabilizer and specialty
compounds for domestic and export markets. A research and development centre will also be
housed in this facility. The construction of Phase I of this plant has commenced and full-fledged
production should commence from FY18.
Exhibit 19: Management details
A commerce graduate with more than 18 years of
Promoter & Managing experience in the line of polymer compound and chemicals.
Vikas Garg
Director Lead the groups diversification into polymer compounds
and chemicals.
16 years of experience with an in-depth knowledge of the
business.
Promoter & Whole-time
Vivek Garg Supervises the operations of the company pertaining to the
Director
Real Estate, Logistics, Administration and Purchase
Segments
Experience spanning over 34 years in field of Plastics Raw
Material and Polymer Compounds.
Responsible for Business Development and Technical
Ashutosh CEO & Whole-time
Verma Director support to the customers of VEL.
Experience and expertise in the field of sales, marketing,
business development, technical
services, sourcing of raw material, machinery and R&D
An industry stalwart, he has a vast experience of over 45
years.
A former Deputy Governor of the Reserve Bank of India
Jagdish Independent & Non- (RBI), he has served on the boards of several banks, i.e.
Capoor Executive Director Bank of Baroda, State Bank of India, National Housing
Bank, NABARD, Exim Bank, and HDFC Bank (as
Chairman). He has also served on the board of the Bombay
Stock Exchange (BSE).
Source: Company, BOBCAPS
17
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Exhibit 20: Serving a diverse range of industries

Products Used
Organotins Stabilizers Plasticizers Plasticizers
Plasticizers Flame Retardants Flame Retardants
PVC Compounds TPR Compounds EVA & PVC Compounds

Products Used
Chlorinated Paraffin Organotins Stabilizers Organotins Stabilizers
DMTDC Plasticizers Plasticizers
Chlorinated Polyethylene PVC Compounds

Products Used
Organotins Stabilizers Plasticizers Plasticizers
Plasticizers Flame Retardants TPR Compounds
Recycled PET TPR Compounds PVC Compounds
Source: Company, BOBCAPS

Exhibit 21: Supplying to a Diverse Range of Industries & Customers

Industries
Footwear
End Users Premium
Footwear Brands
Automotive Components
Electricals
Plastic Polymer (Pvc)
Hygiene & Healthcare
Chemical Companies
Stationery
Textiles
Source: Company, BOBCAPS
Customerss
Liberty, Super Tannery Ltd., Action, Relaxo
Omega Polymicrons, Euro Shoes, Capstan Rubber, Royal
Polymers, Indcoat Footwear, DSM Soles, Suolificio Linea Italia,
Alvin Leather Craft, Unisal India, Apex Footwear Limited, F.B.
Footwear
Horizon Global Ltd., OEM Supplier of Maruti Suzuki Ltd., Avlight
Automotive Ltd., OEM Supplier of Yamaha Motors, Pioneer
Tooling Services Pvt. Ltd., OEM Supplier of Maruti & Ford India
Ltd.
Polycab Wires & Cables, Shilpi, RR Kabel, KEI, Havells
Apar Industries Ltd., Prakash, Prince Piping Systems, SRF,
Premier Polyfilm Ltd., Vectus, APL Apollo, Kriti Industries (India)
Ltd., Aeroflex, Supreme, Ilpea Paramount Ltd., Shriram Axiall
Biotique, Disposafe, Medibank, Polymed, JHS Svendgaard
Laboratories Ltd., Escorts, SRS
Navratan Specialty Chemicals LLP, HIM-CHEM Ltd.
Flair
Jinflex, SBM Yarn Dyeing, Jindal Specialty

| Equity research | 18
 (Wholly owned subsidiary of Bank of Baroda) Vikas EcoTech Ltd. | 15 September 2016

Sales and Dealing Team

Anil Pawar Senior Manager Dealing +91-22-6138 9325 anil@bobcaps.in
Sachin Sambare Manager Dealing +91-22-61389331/33 sachin.sambare@bobcaps.in
Ashwin Patil Executive Dealing +91-22-6138 9326 ashwin@bobcaps.in

Research Team Sectors

Vaishali Parkar Kumar Analyst Agri, Auto, Defence +91-22-6138 9382 vaishali.parkar@bobcaps.in
Padmaja Ambekar Analyst Auto Ancillary, Infra, Midcap +91-22-6138 9381 padmaja.ambekar@bobcaps.in
Akanksha Tripathi Analyst Footwear, FMCG +91-22-6138 9383 akanksha.tripathi@bobcaps.in
Rishabh Mehta Analyst Textile, FMCG, Infra +91-22-6138 9384 rishabh.mehta@bobcaps.in
Bio Technology,
Hareesha Kakkera - Associate +91-22-6138 9351 hareesha@bobcaps.in
Pharmaceuticals
Retail Dealing Team
Kshitij Kelkar +91-22-61389386 kshitij@bobcaps.in
Kiran Sawardekar +91-22-61389385 kiran@bobcaps.in
Nisha Rasal +91-22-61389385 nisha@bobcaps.in
Debt Dealing Team
Minaxi Tiwari +91-22-61389336 minaxi.tiwari@bobcaps.in

UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051. India.
Ph.: +91.22.6138.9300 || Fax: +91.22.6671.8535 ||
Email: research@bobcaps.in || Web: www.bobcaps.in

NSE SEBI No. (CASH): INB231304537

NSE SEBI No. (DERIVATIVES): INF231304537
BSE SEBI No. : INB011304533
SEBI Registered Research Analysts: INH000000040 valid till 03rd February, 2020

Disclaimer
BUY. We expect the stock to deliver >15% absolute returns.
HOLD. We expect the stock to deliver 5-15% absolute returns.
SELL. We expect the stock to deliver <5% absolute returns.
Not Rated (NR). We have no investment opinion on the stock.

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| Equity research | 19