Specialty Chemicals : The Emerging Giants !
Specialty chemicals
(also called specialties or effect chemicals) are particular chemical products
which provide a wide variety of effects on which many other industry sectors
rely. Some of the categories of specialty chemicals are adhesives,
agrichemicals, cleaning materials, colors, cosmetic additives, construction
chemicals, elastomers, flavors, food additives, fragrances, industrial gases,
lubricants, paints, polymers, surfactants, and textile auxiliaries.
Aarti Industries
and DMCC operate in their specific domains and are leading producers of various
derivatives at competitive prices. This blog covers the value chain, economics
and management analysis of the leading specialty chemical companies.
A leading Specialty
Chemicals company in Benzene based derivatives with integrated
operations and high level of cost optimization.
Pharma operations
spanning APIs, intermediates and Xanthene derivatives
Established by
first generation technocrats in 1984
Strong R&D
capabilities – 4 R&D facilities; dedicated pool of about 400+ engineers &
scientists; IPRs for developing customized products.
Plants located in
western India with proximity to ports: 15 for Specialty chemicals; 5 for
Pharma (2 USFDA and 3 WHO/GMP)
Journey :
Mr Rajendra Gogri (Chairman and MD)- First generation entrepreneur and coming
up from technocrat background, Mr Gogri guides about vision “We remain focused
on addressing the large opportunity arising from import substitution and supply
chain diversification by global majors. Our established position as a partner
of choice across an ever-increasing number of engagements is driving scale. We
are also investing in product diversification, capacity expansion/upgradation
in both specialty chemicals and pharmaceuticals as well as building out internal
capabilities on quality, safety, health and environment and an expanded R&D
pipeline.”
On Specialty Chemical
India
occupies 4% of the global share of specialty chemicals and the per capita
consumption levels of specialty
chemicals
is far below the global average
Pharmaceuticals
Market
The
Indian pharma firms enjoy a solid reputation globally and supply over 20% of
the total global generics by value. Over 40% of the US drug market by volumes
is served by Indian pharmaceutical players. With the largest number of
USFDA-approved plants in the world, the Indian pharmaceutical industry is
expected to play a more significant role in the global trade.
The
Indian domestic pharmaceuticals market is valued at $42 billion in 2021 and is
likely to reach $65 billion by
2024
and to $120-130 billion by 2030.
India
is the largest provider of generic drugs globally. The country supplies over
50% of the global demand for various vaccines, 40% of generic demand in the US
and 25% of all medicine in the UK. Globally, India ranks 3rd in terms of
pharmaceutical production by volume and 14th by value
MOAT
Moat lies in the
process –Backward integration and cost efficient manufacturing with technical
knowhow
Among The Top 3
Nitro Chloro Benzenes (NCB) manufacturers globally
Top 3 Di-Chloro
Benzenes (DCB) manufacturer globally
Only in India for
Nitro Fluoro manufacturers Aromatics (via Halex chemistry)
Let us try to
understand value chain of various chemicals :
Benzene Value
Chain
Toluene Value Chain (7-8% revenue)
API
classification
Anti
–hypertensive
•
Ramipril
•
Quinapril
•
Benazepril
•
Perindopril
•
Tert-butylamine
•
Perindopril Arginine
• Ranolazine
Anti-asthmatic
•
Budesonide
•
Bambuterol
•
R-Salbutamol Sulphate
•
Levalbuterol
•
Salmeterol Xinafoate
•
Ipratropium Bromide
• Ciclesonide
Fluticasone
Propionate
•
Fluticasone Furoate
•
Mometasone Furoate
Monohydrate
•
Formoterol Fumarate
• Motelukast
Sodium
Anti-cancer
•
Bicalutamide
•
Ifosfamide
•
Ifosfamide Sterile
•
Cyclophosphamide
•
Cyclophosphamide Sterile
•
Mesna
•
Mercaptopurine
• Azathioprine
Anti-thalassaemic
•
Deferiprone
• Deferasirox
Central
Nervous System(CNS) Agents
•
Venlafaxine
•
Quetiapine Fumarate
• Bupropion
Skin
Care
•
Mometasone Furoate
•
Desonide
• Adapalene
Ophthalmologic
•
Loteprednol Etabonate
• Olopatadine
Decongestant
• Phenylephrine
What
are Intermediates?
A
pharmaceutical intermediate is a chemical compound that forms the building
block of the API. Every reaction in the production process of an API consists
of different pharmaceutical intermediates. They are used in the production of
bulk drugs and for research and development purpose by various pharma and
biopharma companies
APIs
of Intermediates Manufactured
•
Abemaciclib
•
Acalabrutinib
•
Afatinib
•
Apalutamide
•
Apixaban
•
Bazedoxifene
•
Bosutinib
•
Canagliflozin
•
Duloxetine
•
Eluxadoline
•
Enzalutamide
•
Epagliflozin
•
Ertugliflozin
•
Fluoxetine
•
Fumarate
•
Hydrochloride
•
Ibrutinib
•
Idelalisib
•
Ivabradine
•
Lacosamide
•
Lumacaftor
•
Montelukast
•
Moxifloxacin
•
Neratinib
•
Osimertinib
•
Palbociclik
•
Perindopril
•
Quetiapine
•
Quinapril
•
Ramipril
•
Ranolazine
•
Ribociclib
•
Rotigotine
•
Teneligliptin
•
Ter-Butylamine
•
Tofacitinib
•
Vardenafil
•
Venetoclax
• Venlafaxine
What
are Xanthine Derivatives?
Xanthine
derivatives are synthetic compounds that resemble natural occurring xanthines
such as caffeine, theobromine, etc. Xanthines are commonly used for their
effects as mild stimulants and as bronchodilates, notably in the treatment of
asthama or influenza symptoms. Xanthines also act to increase the alertness in
the central nervous system and stimulate responses. Hence, these are also
commonly used in various beverages and energy drinks.
APIs accounts for
61% of revenues of the segment and the Xanthine derivatives account for the
rest 39% of revenues
Way Forward
“We
are expecting to have 1.7x-2x growth in our profitability by FY 2023-24 and
3x-4x growth by FY 2026-27.”
India
is emerging as an alternative to China due to various factors :
1. India has
grown a critical mass and several Indian Companies are eager to Invest creating
global sized plants to cater to growing domestic and global demand.
2. Global
multinationals need alternate sourcing destinations from China to de-risk their
supply chain. India is a best fit in this case.
3. Govt. Thrust:
Improvement in EODB rank to 63 in 2020 vs 142 in 2014, Thrust to manufacturing
via Make in India, cut in Corporate Tax rates and Tax reforms, PLI Schemes.
4. Equalization
of Indian and Chinese Cost: Inherent CAPEX and labour cost advantage, CAPEX in
India being 40% - 60% of the West.
5. Additionally,
demand of consumer goods in India is growing, providing larger opportunities at
domestic market.
6. Indian
Currency Depreciated against USD and CNY strengthening Cost Position for Indian
Products in Exports Markets
Some insights and number crunching of
Aarti industries :
To
quote Rajendra Gogri about the situation “In the API intermediates market,
the trend is as you rightly said that – generic players do not want to
buy intermediates from China if they are able to get the same intermediates
from India. In API space, the Company caters to more of
the regulated markets and the customers cannot switch from these projects
overnight as they are also long-term projects. Regardless of COVID-19, the
Company would have achieved the numbers and operating efficiency. The local
sales are relatively lesser in the API category, in Pharma; it has seen some
improvement of late, but the base is lower.”
In
Pharma, we have the steroid range of products where our
dependency is there on China because steroids are manufactured only in China
and U.S. largely. Apart from these products, there are certain intermediates
that we buy, but will also have our own intermediate manufacturing block, which
supports our API manufacturing. The advanced intermediates of most of
our products are manufactured by us only.
I think chemical industry, one of the key factors for India to grow in this will be on focus on safety and environmental SSG. And our trunk focus by Aarti Industries in last few years, actually is one of the key reasons for getting these three contracts, long-term contracts which we could get. We could demonstrate that our infrastructure as well as our practices are meeting the customer's requirements. And that definitely gives you a higher volume share as well as in some places higher margins because of this sustainability of related automation or zero liquid discharge and effort to minimize the exposure.
Concall Snippets-
Production and capacity utilization
Production
for Nitrochlorobenzene was at 20,347 MT compared to 17,830 MT a year back. Similarly,
for hydrogenated products we have achieved production of 2,712 MT compared to
3,038 MT last year. On the Nitro Toluene front, the production for Q2 was 3,772
MT, compared to 4,119 MT in the same quarter last year. We operated at over
80-85% capacity utilization across our established locations and expect to
deliver steady performance improvements going forward as new facilities scale
up volumes.(Q2FY22)
We
have Nitro Chloro Benzene and Chloro Benzene and Nitro Toluene, this entire
chain will get ramped up in next 3-5 years. Some other various specialty
intermediates and also customer-related products will factor into that; it is
an import substitute (eg Chloro Toluene)
PNCB
and ONCB – 90-95% domestic consumption
Overall
chemical import = $45 billion. So, even $1 billion from that is definitely a
possibility which you can look at. And then, again, the Indian economy going to
grow, so left to itself is $45 billion, if nobody puts a plant then $45 billion
is going to become $65 billion, $70 billion by the time in 2030. So, overall,
the import substitution itself is like a $1 billion opportunity can be there in
next 10 years for sure. Because we are a very end-use agnostic product line, so
we can expand into various end use as a feeder to various sub segments.
Time
to expand - In
Pharma, the gestation period for any product to go commercial is almost 3- 5
years. We produce this product in smaller quantities, it becomes an existing
product which grows.
Total
CAPEX-2400Cr for 2021 and 2022 with 1x asset turns ie 2400Cr of topline added
to revenue by 2022 end.
“Do
not supply into Pharma, except for limited basic raw materials like – sulphuric
acid or DMS.” –No integration in spec chemicals and Pharma “Their manufacturing
sites are different. There is no overlapping manufacturing, in the same site.
Pharma sites are completely different. So that way administration is separate.”
Growth
prediction- Rs.
1,000 crore in the next 2-3 years in Specialty and 20% in Pharma.
Have
identified some Chloro intermediates which are more downstream as compared to
our current range of products; so those Chloro intermediate blocks, Chloro
Toluene and downstream products are in the design phase now. The construction
of those plants will start in the next financial year – FY22, will start
commercializing in FY23. Those are the broad and totally new range of products
that will factor in.
Expect
to register top-line and bottom-line growth of about 25% to 35% in FY 2022
Based
on these initiatives, the near-term horizon till FY 2024 we expect 1.7x to 2x
growth based on combined benefit of our initiative with stable margins and
profits. In the longer-term horizon, till FY 2027 we expect revenue to rise by
2.5x to 3.5x for FY 2021 with expansion in margins and strong leverage in
profit. With the exploration of our planned growth objectives, we look forward
to driving stronger value for all stakeholders associated with Aarti
Industries.
“I
think that the Chemicals’ industry is showing significant growth opportunities.
Because we are also totally backward integrated and have very wide end use
exposure i.e., from agro chemicals to engineering polymers, pigments and
pharmaceuticals, the opportunities that we see for us are tremendous. At least
we will be continuing to be in the CAPEX mode, and we are not looking at any
free cash flow situation for the next 5-7 years.”
Basically,
by FY 2024 we will be Rs. 9,000 crore to Rs. 10,000 crore on a sales
basis. And that will be compared to whatever has been capitalized in
the FY 2021, 2020 also, and in the future also, next two years, so that will be
reflecting the turnover of that. And from FY 2024 to FY 2027, that growth will
be from that newer expansion of Rs. 3,000 crore to Rs. 3,500 crore, and some
more capacity utilization of the earlier CAPEX, that's how it will be.
Tgt Revenue = 10000 Cr (2024)
Gross Block = 3500 (current)+ 1200Cr (WIP)
+1500Cr (CAPEX)
Asset turns = 1.7X-2X (2024)
Current Mcap = 33000 Cr
Sales = 6500 Cr
FCF = negative
CAPEX again
We
have planned for some of our regular current benzene chain also we are adding a
new downstream product. And entire Chloro Toluene chain is new one, that will
be the adding new products to the portfolio. So those will be our major Speciality
Chemicals CAPEX for next two to three years. The Chloro Toluene chain and
furthermore the downstream products and some debottlenecking of our existing
benzene and Toluene line.
Next segment –
Photo
chlorination, Oxidation and Chloro toluene “Like cholortoluene, there is no
cholortoluene in manufacturing in India itself, and even the first chemistry
like ammoxidation and photochlorination of the PCB is not done in India. And
similarly, a lot of other Speciality chemicals, we will be only one from India
to manufacture.”
Chlorotoluene,
then there are host of downstream chemistry going into that, that is
photochlorination, oxidation, hydrolysis, bromination, Balz-Schiemann Reaction,
HG Fluorination.
And
also, further downstream products on Nitrochlorobenzene, chloro benzene, we are
adding more value-added products. So, this jump of EBITDA as a percentage will
more happen in that 2024 to 2027 period.
Caution with optimism
Caffine Story
As
far as caffeine and the raw materials are concerned, yes, because in the last
quarter, there were issues in China. We had orders for large quantities in the
current quarter, which were catered to because the production was continued.
The raw material prices are slightly falling since mid of last quarter.
Correspondingly, the caffeine prices have also started to drop a little bit.
The raw material and caffeine prices are going to move in tandem and there may
not be a heavy impact on the margin.
Raw
material in caffine - Aceticacetic anhydride, cyanoacetic acid or sodium
nitrite. There are more than 10 raw materials, which are used.
Inventory loss – risk for commodity chemicals.
It is not a single product's inventory. There are multiple products on the
discretionary side which are helping. The Company was initially operating at
50%, at the start of the year and gradually ramped up to 80%. On the
discretionary side, the demand was significantly lower from the regular market
and there was an inventory which was piled up. In the Q1 numbers, the
inventories were to the extent of Rs. 46 crore which was higher as compared to
Q4 numbers. These are the kind of inventories which are being looked at to be
cleared out and for supplying to the non-regular markets.
API book - We are producing more than 40
APIs. R&D program - to have 5 products, which will get commercialized in
this year and another 10 are under development.
In Pharma, the products which are there in the
PLI scheme are older products and are more commoditized. The Company is more
into higher-value chemistry and higher-tech chemistry where it looks at
enzymatic reactions and anti-cancer steroids. Looking at the current list, the
Company would not be in that space.
SPECIALITY CHEMICALS and RAW MATERIAL COST
“If there is a change in the crude prices,
which increases benzene or toluene prices or decreases the prices, that will
impact the top-line. But basic business model is raw material costs pass
through model, so it doesn't inspect the absolute EBITDA.”
The oil prices decrease by half, revenue will
go down by half depending on benzene consumption and toluene consumption. So,
whatever will be the impact, that corresponding impact will come.
“Starting with benzene, which is less than $1,
then we make products which are $5, $10, $20, $30, and now we are looking at
$70, $80 also. So, that's how the value addition we count. So, when it becomes
$80, then you expect that your raw material cost will not be more than 30%, 40%
in that product.”
RAW MATERIAL COST TRANSFER-For the domestic market,
it is passed on in the same month. The exports tend to have a 2-3 months’ lag.
SCM -If the shipping freight comes down, the
price will come down. The additional prices that the Company is seeing is due
to the higher shipping costs directly related to the increase in shipping. If
it corrects, then the sales price will also correct.
Long term Contracts
The
contracts of a longer tenure, i.e., 10 years or so, were put in public domain,
but we have a lot of other contracts which have 4-year/5-year terms and some of
the contracts get rolled over; a 3-year contract rolled over 4-5 times. In
terms of percentages, the contracts in the public domain would be ~10-15% of
the top line.
Demerger
The Demerged Company would demerge its Pharma business and allied activities along with a part of Speciality Chemical Business, which is a backward integrated facility providing feeding material to the Pharma Business. The said part of Speciality Chemical segment being demerged accounts for less than 3% of the revenues of the Speciality Chemical Segment. As per the Scheme the shareholders of Aarti Industries Limited, as at the applicable date, we will get the proportionate stake in the resulting Company Aarti Pharmalabs Limited. "We expect the process for getting the necessary approvals for the same in 9-12 months as per the restructuring proposed in the Scheme, the Company has restated the Segment Financials by reclassifying the part of Speciality Chemical Business (which is being demerged) under the Pharmaceuticals Segment in this segment report and the corresponding figures related to the prior periods have also been rearranged in a similar manner."
To
reward shareholders for their continued support announced the issue of bonus
shares in the ratio of 1:1 and a final dividend of Rs. 3 per share on a
pre-bonus basis. While on ex-bonus basis would be about Rs. 1.5 per share.
Indirect benefit from PLI scheme
Para-aminophenol investment come up in India(PLI scheme). So, that will increase the PNCB demand substantially. And there are a lot of other downstream products like para anisidine also is not made in India, so that also capacity is going to come up. So, downstream import substitution also is going to take place, which will increase the demand of PNCB.
DMCC
Bulk Chemicals--Around 50%
of the production is sold off in the markets, and the rest is consumed
captively. The upcoming 350 TPD capacity shall be the last capacity expansion
in this segment for the foreseeable future. However, the bulk chemicals plant
will be set up first, which will result in a higher contribution from this
segment in FY 2021-22.
Vision--To expand our capacity of sulphuric acid and its downstream products, and manufacture benzene sulfonyl chloride and a range of thiol compounds. Further, while selecting new products, focusing products that have margins of greater than 30% and a payback period of less than three years.
Credits – DMCC investor presentation
Some number crunching
The Company recorded a
strong growth in revenues in Q2FY22 as the revenues increased by 61.00% to INR
72.53 crores as against INR 49.77 crores in Q4FY21. The growth revenues is
attributable to higher realizations and moderate increase in volumes.
In FY 2020-21, revenue from
operations increased to 200.15 crores, a growth of 6.65% from
187.66 crores in FY 2019-20. EBITDA came in at 43.27 crores; up by 27.09%
from 34.05 crores the previous financial year and PAT was at 32.58
crores; up by 3.55% from 31.46 crores in the last financial year.
The EBITDA margins and
profitability suffered on account of sharp increase in the prices of raw materials
and freight. The Company also incurred higher employee expenses with increase
in team size to support the expansion plans.
The taxation provisioning
increased during the half year ended, as the Company now falls under the normal
taxation instead of MAT.
Concall Snippets --.
"If you compare the consumption of raw material it’s up by Rs. 6 crores,
compared to the previous quarter and the top line is up by just about Rs. 1
crore. As you are all aware, the specialty chemical business of the company, which
is about two thirds of our business, we can compensate for increase in raw
material cost."
"We expect investments
worth 50 crores made in this segment to yield asset turns of more than
2x, and we hope to achieve optimum utilizations by the end of FY 2022-23."
"Sulfones is not
just one product, it's a multiple product. What we had planned was dedicated
plant for one of the sulfones. Thanks to full COVID slow down last year, we
decided not to progress with this, as the demand in the end applications, which
was mainly thermal paper, would not have materialized. We would be entering a
market there would be too much competition.—Sulphone, Amides and Thiols."
"Until Q4 of this year,
we don't expect to start any new projects. Just to inform you though that, the
process development on the sulfones, even the one which we have held up the
investment is complete and we have a viable production process, which we will
invest in at the right time."
DMCC - A mix of specialty
and bulk chemical clubbed with competent management and reasonable valuations.
Some antithesis pointers include small size of company, choppy raw material
cost and hazardous nature of sulphuric acid.
Disclaimer - Please do your
own research before investing.
