Chemplast Sanmar

A specialty chemicals manufacturer

Major manufacturer of high margin paste PVC resins, caustic soda, chlorochemicals, refrigerant gas and industrial salt business

Incorporated in 1962, Chemplast Sanmar Limited (CSL), the flagship company of Sanmar Group, is a specialty chemicals manufacturer in India with focus on specialty paste PVC (poly vinyl chloride) resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors. CSL is one of India's leading manufacturers of specialty paste PVC resin on installed production capacity, as of December 31, 2020. In addition, CSL is the third largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide in the South India region, on installed production capacity as of December 31, 2020, and one of the oldest manufacturers in the chloromethanes market in India.

As of March 31, 2021, Sanmar Holdings Limited owns majority of Chemplast Sanmar Limited's equity share capital. As approved by the Board of Directors, the holding company has acquired on March 31, 2021, 100% of equity share capital in Chemplast Cuddalore Vinyls (subsidiary Company CCVL), a company engaged in the business of manufacture and sale of Suspension PVC from Sanmar Engineering Services.

Pursuant to approval by the Board of directors and shareholders of the holding company and that of Chemplast Cuddalore Vinyls (CCVL), the holding company as on March 31, 2021 acquired 100% of the equity share capital of CCVL amounting to Rs. 303.0.3 crore from Sanmar Engineering Services Limited. The holding company also invested in zero coupon compulsorily convertible debentures aggregating to Rs 1255.34 crore in CCVL.

CSL is a part of the SHL (Sanmar Holdings) chemicals group, which in turn is a constituent of the Sanmar Group, one among the oldest and most prominent corporate groups in the South India region. Fairfax India Holdings Corporation (Fairfax), a well-known international investor led by Prem Watsa, based in Canada, has invested, through FIH Mauritius Investments Limited, in the SHL Chemicals Group since 2016.

The company has four manufacturing facilities, of which three are in Tamil Nadu at Mettur (Mettur facility), Berigai (Berigai facility) and Cuddalore (Cuddalore facility), and one is located in Puducherry at Karaikal (Karaikal facility).

The company has a coal-based captive power plant of 48.5 MW at Mettur Facility and two natural gas-based captive power plants of 8.5 MW and 3.5 MW respectively, at its Karaikal Facility. The company also leased a salt field from the Government of Tamil Nadu at Vedaranyam, Tamil Nadu. It has approval from the TNPCB (Tamil Nadu Pollution Control Board) to extract up to 400 thousand tonnes of salt per annum. The lease has expired, and the company is in the process of renewing the lease deed.

The Mettur Facility has a 66000 tonnes specialty paste PVC resin plant, 67000 tonnes of caustic soda plant, 35000 tonnes of chloromethanes plant, 34000 tonnes of hydrogen peroxide plant and 1700 tonnes of refrigerant gas plant. It manufactures specialty paste PVC resin, caustic soda, chlorine, hydrogen, chloromethanes, hydrogen peroxide and refrigerant gas at this facility. This facility sources power from a coal-based captive power plant of 48.5 MW and, if needed, from the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO). The Mettur facility depends on the water drawn from the Stanley reservoir for supply of water.

The Berigai facility is involved in the custom manufacturing of starting materials and intermediates with installed production capacity of 1068 tonnes. It is a batch operated multi-purpose plant with a range of glass lined and stainless-steel reactors and other allied equipment. It can manufacture various products depending on the customer requirements. As of March 31, 2021, the Berigai facility also has capabilities to support development work in various chemistries such as cyanation, hydrogenation and distillation at the laboratory scale and pilot scale (less than 5 kg per batch). The Berigai facility sources power from TANGEDCO. The Berigai facility also have three diesel generators to meet emergency power requirements. Further, the Berigai facility has an uninterrupted power supply source as an additional safety purpose for the critical process equipment. The Berigai facility sources water from the bore well.

The Karaikal facility has a 52000 tonne caustic soda plant and an EDC (ethylene dichloride) plant. The Karaikal facility is equipped with automated distribution control systems. The Karaikalacility sources power from the Puducherry electricity department and it also has two natural gas-based captive power plants of 8.5 MW and 3.5 MW respectively. The Karaikal facility primarily depends on the two desalination plants for supply of water and, if needed, it depends on the bore well water supplied by the Pondicherry Agro Service and Industries Corporation Limited. The Karaikal facility also has a low sulphur heavy stock oil fired boiler and two waste heat recovery boilers.

The Cuddalore facility has a suspension PVC resin plant with an installed production capacity of 300000 tonne per annum. The Cuddalore facility sources power from the State Electricity Board and certain third-party sources. The Cuddalore facility primarily depends on the desalination plant for supply of water. It also has a rainwater harvesting mechanism. The Cuddalore facility also has a coal-fired boiler for generating steam.

The company manufacturing facilities are certified ISO 9001:2015 for quality management systems and ISO 45001:2018 for occupational health and safety management systems, to the extent required. In addition, it has received the Indian Chemical Council certification 'Responsible Care' for maintaining best practices in its operations. The Cuddalore facility was awarded a 5-star grading in an Occupational Health and Safety Audit from the British Safety Council for Financial Year 2020. The company has established desalination units at its Karaikal and Cuddalore facilities, and adopted “zero” liquid discharge at all of its manufacturing facilities, and no treated liquid effluent from manufacturing operations at its manufacturing facilities is discharged onto the land or into any water body.

The company plans to expand its operations by increasing the installed production capacity of specialty paste PVC resin by 35000 tonnes, setting up a multipurpose facility with two blocks for its custom manufacturing operations and increasing the installed production capacity of suspension PVC resin by 31000 tonnes by de-bottlenecking the suspension PVC resin plant. It also intends to improve its operational efficiencies in manufacturing process at the Karaikal facility by de-bottlenecking the caustic soda plant. These expansions will be rolled out gradually according to strategic business plan between FY2022-2025. It has committed capital expenditure outlay of Rs 619.5 crore for these expansion activities.

The company primary raw materials include VCM (vinyl chloride monomer), EDC, ethylene and chlorine in respect of specialty paste PVC resin; salt and power in respect of caustic soda; methanol and chlorine in respect of chloromethanes; hydrogen in respect of hydrogen peroxide; and VCM in respect of suspension PVC resin. CSL has backward integrated part of its manufacturing process by producing key raw materials- EDC, VCM and chlorine. It has an EDC plant at its Karaikal facility with an installed production capacity of 84000 tonnes. In addition, for its custom manufacturing operations, it has access to various basic chemicals at its manufacturing facilities such as hydrogen, chlorine and caustic soda.

The company purchase EDC from third parties to fill the gaps in the requirements based on production needs for quantity or if the pricing is more favorable. It sources EDC from Saudi Arabia and Qatar; ethylene from Saudi Arabia, Qatar, Singapore, Malaysia and Indonesia; coal from Indonesia; methanol from Saudi Arabia; and VCM for suspension PVC resin from Qatar, Japan, China, Indonesia, Germany and France. SCL typically enters supply contracts with its vendors for a period of one to two years for the supply of EDC, ethylene, methanol, and coal. It has been procuring EDC, ethylene, methanol, and coal from suppliers, through relevant sourcing partners, for over 7, 12, 10 and 10 years, respectively. The purchase price of raw materials generally is in line with the market prices.

The Offer and the Objects

The offer comprises a fresh issue of 24029575 equity shares at upper price band of Rs 541 and 24528302 equity shares at lower price band of Rs 530 aggregating up to Rs 1300 crore by the company and an offer for sale by Sanmar Holdings (Rs 2463.44 crore) and  Sanmar Engineering Services (Rs 86.56 crore) together of up to 47134935 equity shares at the upper price band of Rs 541 and 48113208 equity shares at the lower price band of Rs 530 aggregating to Rs 2550 crore. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by the respective selling shareholders as part of the offer.

Promoter Sanmar Holdings post-issue shareholding shall decrease to 55% from 98.81% pre issue shareholding at the upper price band of Rs 541 while Sanmar Engineering Services shall decrease to nil from 1.19%.

The company proposes to utilize the net proceeds of the fresh issue towards early redemption of NCDs issued by the company amounting Rs 1238.25 crore and balance towards general corporate purposes. The company had issued non-convertible debentures aggregating to Rs 1270 crore. The tenure of the NCDs is for seven years from the date of first allotment,i.e, December 20, 2019, with an interest rate of 17.5% p.a. As on May 31, 2021, the outstanding NCDs aggregated to Rs 1238.25 crore.

Strengths

The demand for specialty paste PVC resin is expected to grow at a CAGR of 6-8% between FY2022-25 led by low per capita consumption of specialty paste PVC resin in India compared to other countries, lack of substitutes for specialty paste PVC resin, expected growth in the end-user industries such as leather footwear and automotive upholstery, expected increase in demand for vinyl gloves and government initiatives such as 'Make in India' to boost investment in production of artificial leather and reduce dependence on imports. Approximately 45% of demand in India for specialty paste PVC resin is being met by imports.

No new manufacturers have entered the specialty paste PVC resin market in several years largely on account of lack of availability of raw material and technology. Accordingly, high barriers to entry and limited competition is expected to benefit existing manufacturers of specialty paste PVC resin in India in the medium term

The demand for custom manufacturing catered by Indian manufacturers is likely to grow at a CAGR of 12% between FY2020-25 due to factors such as availability of skilled workers at lower rates compared to developed economies, surge in global demand for food grains, growth in demand for drugs and hygiene products, the revised strategy of major economies to reduce their dependence on a single country and government initiatives to support growth of pharmaceutical sector such as introduction of production linked incentive scheme (PLI Scheme) for bulk drug parks; higher penetration of pharmaceutical, molecule, compound, or API manufacturing and India becoming a key supplier of non-commercially available molecules or monomers or polymers

The demand for chloromethanes in India is expected to grow at a CAGR of 8-9% between FY2020-25 due to rapid growth in the pharmaceutical industry, rising demand for agrochemicals and increase usage of hydroflurocarbons that use methylene chloride (MDC) as raw material.

Demand for caustic soda is also expected to grow at a CAGR of 4-5% between FY2020-25 led by increasing demand from the alumina and chemical industries. The Government of India has also announced the setting up of seven mega-textile parks over the next three years to grow the textile industry, one of the end-user industries.

The demand of hydrogen peroxide is expected to grow at a CAGR of 6-7% between FY2020-25 due to growth in paper and pulp and textile industries, increase in the volume of crude oil being processed by existing and upcoming refineries in India and growth in the demand for disinfectants post COVID-19.

The demand for suspension PVC resin is expected to grow at a CAGR of 7.5-8.5% between FY2020-25 due to lack of viable substitutes for suspension PVC resin, low per capita consumption of suspension PVC resin in India compared to other countries, increased investments in the end-user industries such as irrigation, urban infrastructure, and real estate.

In suspension PVC resin market, there is significant gap between demand and supply with less than 50% of the demand in India being met by domestic production. Further, the lack of new supply sources due to a rebalancing in the global market has created additional supply constraints.

The company has established a broad customer base with long-standing relationships. During FY21, FY20 and FY19, it derived approximately 82%, 80% and 84% of its revenue from operations, respectively, from sale of products to its longstanding customers (relationship of more than 10 years).

Weaknesses

The company is dependent on a limited number of customers for a significant portion of its revenues. Revenue from the company's top 10 customers constituted 38%, 30% and 31% of company's total revenue from operations for FY 2021, 2020 and 2019, respectively.

The import, manufacture, storage, marketing, and sale of products require several regulatory approvals, including but not limited to, the authorizations under PESO (petroleum and explosives safety organization), Factories Act, authorization by Tamil Nadu Pollution Control Board, Industrial Entrepreneur's Memorandum and licenses issued under the Drugs and Cosmetics Act, 1940. Any adverse change in the laws governing the manufacturing and storage of products and their usage by customers, including the development of licensing requirements and technical standards and specifications or the imposition of onerous requirements, may have an adverse impact on operations

The company's operations generate pollutants and waste, some of which may be hazardous and therefore, it is subject to various laws and government regulations, including in relation to safety, health, environmental protection, and labour.

The company source its raw material namely, EDC, VCM, ethylene, methanol, and coal, from a limited number of third-party suppliers within and outside India, through sourcing partners. Any delay, interruption, or reduction in the supply of raw materials to manufacture products may adversely affect the business.

Some of the raw materials that it uses as well as finished products are hazardous, corrosive, and flammable and require expert handling and storage. Any accidents may result in loss of property of the company and/or disruption in the manufacturing processes which may have an adverse effect on results of operations

Chemplast Sanmar was listed on BSE, NSE and MSE, and was subsequently delisted with effect from June 25, 2012, June 18, 2012, and June 25, 2012, respectively. The rationale for delisting was that Chemplast Sanmar was going through one of the most difficult times with its operations severely affected by wide fluctuations in petrochemical prices compounded by delay in accruing revenues from its large projects due to delays in their commissioning. The net worth had been significantly eroded and the debt-to-equity ratio was at 6:1.

Valuation

Revenues jumped 202% in FY21 to Rs 3798.73 crore while net profit was up 789% to Rs 410.24 crore mainly due to net EO income of Rs 465.28 crore related towards profit on sale/redemption of investments in Joint Venture and Associate of Rs 480.967 crore and EO expense of Rs 15.68 crore towards compensation payable to employees who have opted foran early separation scheme announced by the Group. Sales were up primarily due to the impact of the CCVL Acquisition. Notwithstanding the impact of the CCVL acquisition, increase in revenue from operations was also due to increases in the sales of custom manufacturing, specialty paste PVC and hydrogen peroxide. This was partially offset by a decrease in sales of caustic Mettron and Power.

The company had reported sales of Rs 2523.59 crore and Rs 2352.36 crore in FY13 and FY12, respectively, while it had reported profit of Rs 11.95 crore in FY13 after a consecutive four years of losses due to extremely difficult business conditions. The equity shares of the company were de-listed from BSE Limited, The National Stock Exchange of India Limited and The Madras Stock Exchange Limited effective June 25, 2012. The market capitalization at the time of delisting was Rs 1189 crore. The company is currently seeking a market capital of Rs 8553.72 crore at the higher price band of Rs 541.

At the higher price band of Rs 541, the offer is made at around 140.5 times its EPS of Rs 3.9 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 79.05 crore of face value of Rs 5 each. Listed industry peers of the company are Finolex Industries, SRF, Gujarat Alkalies and DCM Shriram.

In comparison Finolex Industries trades at 14.5 times its FY2021 EPS of Rs 11.9 at the current market price of Rs 172, SRF trades at 43.8 times its FY2021 EPS of Rs 205.5 at the current market price of Rs 9007, Gujarat Alkalies trades at 22.8 times its FY2021 EPS of Rs 22.6 at the current market price of Rs 514 and DCM Shriram strades at 22.1 times its FY2021 EPS of Rs 43.2 at the current market price of Rs 953.