Archean Chemical Industries
Archean Chemical Industries is coming out with a 100% book building; initial public offering (IPO) of 3,70,04,922 Equity Shares of face value of Rs 2 each in a price band Rs 386-407 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on November 09, 2022 and will close on November 11, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 2 and is priced 193 times of its face value on the lower side and 203.5 times on the higher side.
Book running lead managers to the issue are IIFL Securities, ICICI Securities and JM Financial.
Compliance Officer for the issue is Gnanavelu Arunmozhi.
Profile of the company
The company is a leading specialty marine chemical manufacturer in India and focused on producing and exporting bromine, industrial salt, and sulphate of potash to customers around the world. It produces its products from its brine reserves in the Rann of Kutch, located on the coast of Gujarat, and it manufactures its products at its facility near Hajipir in Gujarat. As of June 30, 2022, it marketed its products to 18 global customers in 13 countries and to 24 domestic customers. Its bromine is used as key initial level materials, which have applications in the pharmaceuticals, agrochemicals, water treatment, flame retardant, additives, oil & gas and energy storage batteries. Industrial salt is an important raw material used in chemical industry for production of sodium carbonate (soda ash), caustic soda, hydrochloric acid, chlorine, bleaching powders, chlorates, sodium sulphate (salt cake) and sodium metal. Sulphate of potash is used as a fertilizer and also has medical uses.
The company’s marine chemicals business is predominately conducted on a business-to-business basis both in India and internationally. It is an export-oriented business, and, in the three months ended June 30, 2022 and in Fiscal 2022, Fiscal 2021 and Fiscal 2020, 66.74%, 70.32%, 74.41% and 78.41%, respectively, of its revenue from operations were attributed to export sales. The key geographies to which it exports its products include China, Japan, South Korea, Qatar, Belgium and the Netherlands. Some of its major customers include Sojitz Corporation, which is also a shareholder in the Company, Shandong Tianyi Chemical Corporation, Unibrom Corporation, Wanhau Chemicals and Qatar Vinyl Company. It has an integrated production facility for its bromine, industrial salt, and sulphate of potash operations, located at Hajipir, Gujarat, which is located on the northern edge of the Rann of Kutch brine fields. The company’s manufacturing facility is located in close proximity to the captive Jakhau Jetty and Mundra Port, where it transport its products to its customers internationally. Its facility and its surrounding salt fields and brine reservoirs span approximately 240 sq.km.
Proceed is being used for:
Redemption or earlier redemption, in part or full, of NCDs issued by the company,
General corporate purposes.
Industry overview
The Indian chemicals industry was valued at $178 billion, representing approximately 3-4% of the value of the global chemicals industry. According to the Company Commissioned F&S Report, the value of the Indian chemicals industry is expected to grow at a CAGR of 9.3% from $178 billion in 2021 to $300 billion in 2025. In fiscal 2020, the Indian chemical industry contributed approximately 6.6% of the national gross domestic product and accounted for 15-17% of value of the India’s manufacturing sector. The value of the commodity chemicals segment and the specialty chemicals segment accounted for approximately 50% and 41% of the Indian chemicals industry, respectively. The growth rate of the Indian specialty chemicals segment in 2015-2020 was higher than the growth rate of the Indian commodity chemicals (10.4% vs. 8.7%). From 2021 to 2025, the Indian specialty chemicals segment is expected to grow at a CAGR of 12%.
According to the Company Commissioned F&S Report, India’s chemical exports recorded a CAGR of approximately 11% between Fiscal 2015 and Fiscal 2021, compared to approximately 5% for China. According to the Company Commissioned F&S Report, the top partner countries and regions to which India exported chemicals were United States, China, Brazil, United Arab Emirates and Germany. While India exported chemicals worth $30 billion in calendar year 2021, over 35% of which were exported the abovementioned five countries. The key sub-segments likely to benefit from higher exports were dyes and agrochemicals, with export shares of 45-50% and 50-55%, respectively, for the period from 2015 to 2021. The top partner countries and regions from which India imported chemicals included China, the United States, Singapore, Saudi Arabia and Korea Republic. Indian imports were valued at $53 billion in calendar year 2021, with China contributing to almost 25% of India’s total imports.
Pros and strengths
Leading market position, expansion and growth in bromine and industrial salt: The company is a leading specialty marine chemical manufacturer in India since 2013. It is the largest exporter of bromine and industrial salt by volume in India in Fiscal 2021 and has amongst the lowest cost of production globally in both bromine and industrial salt. It attributes its strong market position to factors such as its long-standing relationship with global customers, its established infrastructure and access to brine reserves at the Rann of Kutch, its manufacturing facility close proximity to the captive Jakhau Jetty and Mundra Port and its consistent delivery of high-quality products. Its leadership position and low cost-production offers it competitive advantages such as product pricing, economies of scale, and the ability to scale its business, increase customer loyalty and expand its client base, all of which have in turn resulted in the growth of revenues and EBITDA in the last three fiscal years.
High entry barriers in the specialty marine chemicals industry: The specialty marine chemicals industry in which the company operates has high entry barriers, which include the high cost and intricacy of product development, manufacture, and investment in salt beds, the limited availability of raw materials necessary for production, the limited number of locations with a suitable climate and access to reserves, and the lead time and expenditure required for research and development and building customer confidence and relationships, which can only be achieved through a long gestation period. Given the nature of the application of its products and the processes involved, its products are subject to, and measured against, high quality standards and sensitive and rigorous product approval systems with stringent impurity specifications. Further, because end products manufactured by its customers are typically subject to stringent regulatory and industry standards, any change in the vendor of the products may require significant time and expense for customers, which acts an entry barrier and disincentives any such change.
Established infrastructure and integrated production with cost efficiencies: The company has an integrated production facility for its bromine, industrial salt, and sulphate of potash operations, located at Hajipir, Gujarat, which is located on the northern edge of the Rann of Kutch brine fields. Its facility and its surrounding salt fields and brine reservoirs span approximately 240 sq.km. As of June 30, 2022, its manufacturing facility had an installed capacity of 28,500 MT per annum of bromine, 3,000,000 MT per annum of industrial salt and 130,000 MT per annum of sulphate of potash. In the three months ended June 30, 2022 and in Fiscal 2022, its capacity utilization was 23.72% and 71.20% of bromine, respectively; 38.54% and 119.54% of industrial salt, respectively; and 0.00% and 1.91% of sulphate of potash, respectively. Its industrial salt washing facility has three washeries, each having a capacity of 200 tons/hour. Its facility is equipped with its own quality department, effluent treatment plant, sewage treatment plant and stockyard. Its operations have an ISO 9001:2015 certification.
Largest Indian exporter of bromine and industrial salt with global customer base: As of June 30, 2022, the company had 18 global customers and 24 domestic customers. Its major customers include, for industrial salt, Sojitz Corporation (which is also a shareholder in the Company), Wanhau Chemicals and Qatar Vinyl Company; and for bromine, Shandong Tianyi Chemical Corporation and Unibrom Corporation. In the three months ended June 30, 2022 and in Fiscal 2022, Fiscal 2021 and Fiscal 2020, its largest customer, Sojitz Corporation, contributed 19.29%, 20.56%, 30.51% and 31.94%, respectively, of its revenue from operations; its top 10 customers contributed 60.69% , 61.99%, 75.70% and 77.14%, respectively, of its revenue from operations; and its top 20 customers contributed 81.75%, 80.94%, 88.66% and 92.05%, respectively, of its revenue from operations. Some of the key geographies to which it exports its products include China, Japan, South Korea, Qatar, Belgium and the Netherlands. It enjoy relationships in excess of five years with seven out of its top ten customers.
Risks and concerns
No long-term agreements with suppliers: The primary raw materials for company’s three products, bromine, industrial salt and sulphate of potash, include industrial salt, kainite and end bittern, which are produced from its brine reserves in the Rann of Kutch, located on the coast of Gujarat. Its brine reserves are sufficient to meet its current and expected product demands. Other raw materials it uses in its manufacturing process are primarily sourced from third party suppliers in India. It usually do not enter into long-term supply contracts with any of its raw material suppliers and typically source raw materials from third-party suppliers under contracts of shorter period or the open market. The absence of long-term contracts at fixed prices exposes it to volatility in the prices of raw materials that it require and it may be unable to pass these costs onto its customers, which may reduce its profit margins. It face a risk that one or more of its existing suppliers may discontinue their supplies to it, and any inability on its part to procure raw materials from alternate suppliers in a timely fashion, or on commercially acceptable terms, may adversely affect its business, financial condition and results of operations.
May face challenges in penetrating new export markets: Expansion into new export markets subjects it to various challenges, including those relating to its lack of familiarity with the culture and economic conditions of these new regions, language barriers, difficulties in staffing and managing such operations, and the lack of brand recognition and reputation in such regions. As part of its strategy, it is planning to expand into Europe and the United States for bromine derivative performance products and into the United States for industrial salt and sulphate of potash. In addition, the risks involved in entering new geographic markets and expanding operations, may be higher than expected, and it may face significant competition in such markets. By expanding into new geographical regions, it could be subject to additional risks associated with establishing and conducting operations, including compliance with a wide range of laws, regulations and practices; exposure to expropriation or other government actions; and political, economic and social instability.
Rely on combination of trade secret, copyright law and contractual restrictions: The protection of the company’s intellectual property is crucial to the success of its business. It relies on a combination of trade secret, copyright law and contractual restrictions to protect its intellectual property. It do not own any patents. While its agreements with its employees and consultants and its technology collaboration agreement with Sojitz Corporation include confidentiality provisions and provisions on ownership of intellectual property, these agreements may not effectively prevent unauthorized use or disclosure of its confidential information, its intellectual property including its proprietary products, technology, systems and processes and may not provide an adequate remedy in the event of unauthorized use or disclosure of its confidential information or infringement of its intellectual property. Despite its efforts to protect its proprietary rights, unauthorized parties may copy aspects of its proprietary products, technology, systems and processes and use information that it consider proprietary.
Stiff competition: Although the specialty marine chemicals industry provides for significant entry barriers, competition in its business is based on pricing, relationships with customers, product quality, customisation and innovation. Its competitors may have greater financial, manufacturing, marketing and other resources, more experience in obtaining regulatory approvals, greater geographic reach, broader product ranges or a stronger sales force. Its competitors may succeed in developing products that are more effective, popular or cheaper than its, which may render its products uncompetitive and adversely affect its business, results of operations and financial condition. Further, some of its competitors, which include major multinational corporations, may consolidate and integrate their operations, and the strength of combined companies could affect its competitive position. Consolidated corporations may have greater financial, manufacturing, marketing and other resources, broader product ranges and larger, stronger sales forces, which may make them more competitive than it.
Outlook
Archean Chemical Industries is a leading specialty chemicals manufacturing company based in India with a wide presence in the global markets. It is the first of its kind integrated plant in India to produce Industrial Salt, Bromine and Sulfate of Potash. Reliably delivering quality products has been its mission since its inception. It is trusted partners of numerous global customers. Its continuous commitment to excellence has helped build its reputation as one of the best in the industry. The company markets the products to 18 global customers in 13 countries and to 24 domestic customers. The company was the largest exporter of industrial salt in India with exports of 2.7 million MT in Fiscal 2021. The company's marine chemicals business is predominately conducted on a business-to-business basis both in India and internationally. The company has an integrated production facility for the bromine, industrial salt, and sulphate of potash operations, located at Hajipir, Gujarat, located on the northern edge of the Rann of Kutch brine fields. On the concern side, the company’s business operations are subject to various laws, the compliance of which is supervised by multiple regulatory authorities and government bodies. Besides, it does not have long-term contractual arrangements with third-party transportation and logistics providers. Disruptions of logistics could impair its ability to procure raw materials and/or deliver its products on time, which could materially and adversely affect its business, financial condition and results of operations.
The issue has been offered in a price band of Rs 386-407 per equity share. The aggregate size of the offer is Rs 1428.38 crore to Rs 1506.10 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 51.42% to Rs 1142.82 crore in Fiscal 2022 from Rs 754.79 crore for Fiscal 2021. Its profit for the year increased by 183.13% in Fiscal 2022 to Rs 188.58 crore from Rs 66.60 crore in Fiscal 2021. Meanwhile, the company intends to focus on increasing its wallet share with existing customers. It has built long-standing relationships with its customers through various strategic endeavours, which it intends to leverage by entering into long-term marketing arrangements. It is expanding globally to serve its existing direct end-use customers as well as to secure new direct end-use customers and expand the reach of its products in new markets. It intends to achieve this by having dedicated sales and marketing teams whose primary focus will be on business development in international markets and in certain focus geographies like Asia and Europe.
