The Company is emerging as a contrarian play: Performing better even in
a sectorial downtrend
Overview
In this strategic and tactical overview, I would like to present an
overview of how we performed in the last financial year, the initiatives we embarked upon
to address prospects in the medium-term and how we are seeding our business with longterm
initiatives.
This overview summarises where we are, where we are headed and how our
Company is likely to evolve in the long-term.
Performance overview
Every performance needs to be appraised against its context.
There were two overarching contexts for our performance during the last
financial year.
The first was that the global chemicals market continued to be in an
extended downtrend. This downtrend was marked by a sustained dumping of chemical products
by Chinese manufacturers, a need for manufacturers to liquidate inventory and the absence
of positive triggers that could reverse this sectorial sentiment.
The second was the performance of the Indian economy. India's GDP
grew at 6.5% in FY 2024-25, compared to a revised 9.2% in FY 2023-24. This growth decline
was the result of weaker consumer spending that manifested most visibly in the second
quarter of the financial year under review. During this quarter, India's GDP growth
was 5.6% compared with 8.1% in the corresponding quarter of the previous year.
Against these twin challenges, Epigral reported a 33% growth in
revenues, reaching H2,565 Cr — the highest ever in its history. This milestone was
accompanied by the Company's highest-ever EBITDA of H711 Cr. Epigral also recorded a
peak cash profit of H489 Cr, marking a 53% increase over the previous financial year.
While this growth was lower than the Company's previous peaks of
87% in FY 2021-22 and 41% in FY 2022-23, it outpaced the broader specialty chemicals
sector, which grew at a more moderate pace during the year. This relative outperformance
highlights Epigral's enduring competitive edge, strong execution capabilities, and
robust business model in a challenging macro environment.
Rationale for outperformance
The big question that most analysts ask is the rationale for the
outperformance and whether the Company is likely to sustain this across the foreseeable
future.
My answer was and will always be this: this outperformance by the
Company is not something that manifested circumstantially and fleetingly during the last
financial year and likely to disappear across the foreseeable future.
My optimism is derived from the optimism that the roots of the
Company's outperformance go deep: they have been drawn from a differentiated business
model, prudent investments, a frugal mindset and a commitment to generate superior capital
efficiency. As long as these factors remain relevant within the chemicals sector - as I am
confident they will - your Company is likely to retain its competitive advantage.
The roots of our competitive advantage are derived from an
understanding of what kind of company we are and would like to remain. At Epigral, we
desire to be a company that is respected by all stakeholders as a model organisation to
engage with.
Our customers must experience enhanced competitiveness arising out of
our business offerings; our employees must derive pride, remuneration, career advancement
and engagement stability; our investors must generate a superior return on employed
capital over alternative investment opportunities; our community must benefit from our
presence; our government must benefit through taxes and livelihood creation; our vendors
must benefit through the sustained outsourcing of products and services. The ability to
mean something distinctive for all stakeholders continues to be - and likely to remain -
our desired objective.
To be able to enhance stakeholder value in a sustainable manner, we
recognize the need to generate consistently superior financials.
In turn, this is derived from a strategic differentiation: the desire
to be the best over being the biggest (at any cost). We believe that this competence will
be progressively measured by capital efficiency, or in other words, a superior EBITDA
margin over the prevailing sectorial average and a Return on Capital Employed considerably
higher than the cost of capital within the Indian economy or higher than returns otherwise
available to Indian investors.
Strategic pedigree
Years ago, when we embarked on charting out a differentiated journey
for ourselves, we recognized the need to be a unique value-added player. This sounded more
difficult than usual: we were at that time largely known by our Chloralkali product
portfolio. This represented the commodity end of the chemicals sector; the realisations
that one enjoyed within the space were often influenced by sharp price swings. In some
years, one reported a surplus; in other years, one barely scraped a profit (if at all).
The first point that we sought to resolve was that of predictability.
If we desired to emerge as a model corporate citizen, we would need to
be predictable and sustainable; we would need to moderate our profit swings; we need to
present a stable face to our stakeholder community. That desire for sustainability
influences everything else within our Company - the selection of space or niche, the
selection of products, the cost at which we commissioned manufacturing facilities, the
sizing of manufacturing capacities, the customer we would sell to (if at all), the
integrated nature of our business model and the location of our manufacturing units. This
is a critical point: these disparate factors did not influence the kind of company that we
became; the nature of the Company that we desired to become influenced our business
decisions instead.
The result of this strategic differentiation is that Epigral emerged as
a company that selected to do business differently from peers in the chemical industry.
The Company was driven by responsible thrift - not thrift as a means to cut corners and
generate a lower cost of capacity creation, but thrift as a means of commissioning quality
assets through an innovative approach that made it possible to enter the business and
manufacture thereafter at a cost lower than the sector.
This competitive head start was thereafter supplemented by the
manufacture of products that were import substitutes, ability to market products with
speed, enhance capacity utilisation and generate superior economies, in-sell within the
Company (end product becoming the raw material for another business), manufacturing all
products within an integrated manufacturing facility that made it possible to moderate
logistics and carbon footprint costs and commission shared facilities that could feed a
range of downstream units.
The overarching point is that our outperformance during the last
financial year was not just about what we achieved in the last financial year; it was
about what we did in the decade leading to the present. The outcome was the result not of
a short-term price arbitrage; it was about an enduring discipline to build a holistically
efficient company.
This investment discipline is likely to be sustained. Epigral has
earmarked an annual capex of H4 Bn over FY 25-27E. The Company's operational capacity
is set to increase from 611 KTPA in FY 2023-24 to ~800 KTPA by FY 2026-27; production is
projected to grow at a CAGR of ~8% to 12% from FY 2023-24 to FY 2026-27. The capacity
expansion is likely to be driven by ECH (50 KTPA capacity), CPVC Resin (75 KTPA capacity),
CPVC Compounds (35 KTPA capacity) and the Chlorotoluenes value chain. The complement of
these capacity expansions is expected to widen Epigral's agrochemical and
pharmaceutical value chain.
This sustained capacity expansion will correspondingly enhance
Epigral's in-house Chlorine consumption and improve Caustic Soda sales. During the
last financial year, the Company utilized 72% of its Chlorine captively, a majority of
which went to manufacture Derivatives & Specialty chemicals; once ECH, CPVC and
Chlorotoluene expansions achieve their desired capacity utilisation, the Company's
captive Chlorine consumption is projected to reach around 95%.
Taking the business ahead
The one consistent attribute of our business is capital allocation
prudence. We have not only demonstrated a competence in how we will mobilise the right
quantum of resources at the lowest possible cost; we will also allocate that capital into
products and capacities likely to generate an EBITDA margin in the high twenties
percentage.
This is reflected in our capital spending consistency: we invested in
capital expenditure in excess of H50 Cr in each financial year since 2015-16; we invested
H889 Cr in the five years ending FY 2019-20; we invested
H1,670 Cr in the five years ending FY 2024-25. We intend to invest H800
Cr in the next two years ending FY 2026-27. Each capital spending round has been
accompanied by guardrails: raw material availability from within, import substitution
product and a readily available market leading to a high EBITDA margin and a consolidated
RoCE band of 23-25% as the Company moves strategically towards consuming Chlorine
manufactured inhouse to produce value-added derivatives.
Looking ahead
At Epigral, we recognize that we are playing on the India consumption
story. The larger the population of mid-income consumers, the larger the consumption
market of the country. Within this reality, there are a number of products that will
encounter increased consumption; within these there is another larger proportion of
products that are being imported. At Epigral, our objective is not just to manufacture
these products from a limited perspective; the objective is to enter these product niches,
create customer engagements, scale manufacturing capacities and emerge as the undisputed
market leader.
This strategy has been showcased in the manufacture of CPVC Resin, a
specialized specialty chemical used in the manufacture of temperature-resistant
residential pipes. The Company entered this segment with a manufacturing capacity of
30,000 TPA, added 45,000 TPA in the next expansion phase (commissioned in April 2024
within 15 months of entering the segment) and has now proposed to double the expanded
capacity to 150,000 TPA. When commissioned by the first half of FY 2026-27, Epigral would
have emerged as the world's largest CPVC Resin manufacturer, servicing a domestic
market growing at ~12% per annum.
At Epigral, we could have been content - or even preoccupied - with
this resin product expansion. However the Company pushed the multi-products frontier; it
ventured into the manufacture of CPVC Compound (utilising resin as raw material). This
product manufacture commenced during the last financial year (June 2024 with a 35,000 TPA
capacity) and moved the Company one step closer to CPVC pipe manufacturers, liberating
them of the investment to commission a CPVC Compound capacity as a preparatory step
leading to pipes manufacturing. We believe that this forward integration - resin to
compound - will deepen our recall as a value- added solution provider among customers.
Besides, the Company commissioned a pilot plant of pipes & fittings manufacture - not
as much to market pipes as much to validate resin and compound quality and provide
customers with quality assurance.
At Epigral, the ECH manufacturing capacity that had been commissioned
in 2022-23 was scaled during the last financial year. The capacity utilisation of this
product's manufacture increased from 50% to ~85%. This product is emerging as a
faithful proxy of India's wind energy revolution (manufacture windmill blades) among
other sectors like automotive and construction. The Company is banking on the
disproportionate growth coming out of this category; it has proposed to double its ECH
capacity to 100,000 TPA by the first half of FY 2026-27.
Restructuring the Balance Sheet
At Epigral, we implemented a decisive initiative during the last
financial year. The Company mobilized H333 Cr through a qualified institutional placement
of its equity shares. This translated into a dilution of 264 bps of the promoter's
stake to 68.9%. This inflow helped the Company repay debt on the one hand even as it
generated a reasonable surplus during the year that enhanced net worth. The result is that
the gearing of the Company at the close of the last financial year stood an improved 0.3x
compared with 0.8x at year-start. Besides, the net debt-EBITDA ratio of the Company
improved from 2.0x to 0.7x during the course of the last financial year. This
restructuring - net worth of H1,904 Cr and a long term debt of H535 Cr as on March 31,
2025 - provides the Company with a platform from which to plan disproportionate growth
across the coming years. The Company's credit rating was upgraded to AA from AA-,
reflecting Epigral's strong business profile, driven by its continued focus on the
Specialty and Derivative business.
Concurrently with the restructuring of the Balance Sheet, the Company
seeded its growth journey with the acquisition of 100 acres of land proximate to its
existing 165 acre integrated manufacturing complex. We believe that in a rapidly
transforming India, this new land facility will empower the Company to commence the
manufacture of products of different chemistries, empowering it to create new revenue
platforms.
Optimism
At Epigral, we are optimistic of our future, based on some realities.
One, based on the proposed manufacture of a range of products
across the foreseeable future, we expect to increase the captive consumption of Chlorine
to ~95% by 2028. This will help the Company widen its value chain and maintain margins.
During the year under review, the Company remained the largest integrated Chlorine
consumer in the country. The in-house consumption of Chlorine increased 26% and the
captive consumption of Chlorine increased to 72% during the year under review. We have
observed that the increase in the captive consumption of Chlorine strengthens operational
flexibility, enhances business stability, and supports smoother plant operations. This
integration enables consistent production planning and the Company's growth
trajectory.
Two, the Company is competitive in all its product segments.
During the year under review, the Company generated 93% of its revenues
from within India.
This makes the Company less dependent on the prospects of the
international market. The fact that the Company has been generating attractive margins
even while focusing only on one market and during a downtrend in the chemicals sector
represents a validation of its strategic discipline, product selection and operational
efficiency.
Three, the Company's focus on value-addition is paying off.
Epigral is emerging as the largest producer of ECH and CPVC in India; it is a first-mover
in the Chlorotoluene Value Chain.
During the year under review, the Company's volume growth of 11%
corresponded to a revenue growth of 33%. It would be pertinent to communicate that the
Company's attractive margins and capital efficiency were derived from holistic
efficiency and enhanced capacity utilisation as opposed to increased realisations.
Four, the Company entered the Chlorotoluene value chain during the
last financial year.
This business is expected to scale during the current financial year.
As this business grows, there will be product linkages and shared manufacturing
competencies within the large family of Chloro- Toluene products. This is expected to
enhance synergies and margins.
Five, the Company acquired a 100-acre freehold industrial plot in
Dahej to drive greenfield capacity expansion.
Outlook
If there is a conclusion one would like to leave with shareholders, it
is this: the Company is emerging as a contrarian play, performing better even in a
sectorial downtrend. The Company has formulated a strategic direction in the pursuit of
stakeholder value- creation. This strategic discipline will progressively unfold. This
will warrant periodic investments for which the Company has created an under-borrowed
Balance Sheet. The Company will manufacture import substitution specialty chemicals with a
growing consumption appetite and enjoying attractive margins.
The complement of these realities indicates that we will enhance
volumes and value in a sustainable manner, marked by profitable growth, enriching our
stakeholders.
Maulik Patel
Chairman and Managing Director