Archean Chemical Industries

Largest exporter of bromine and industrial salt

Setting up facility to make bromine performance derivatives products and to expand capacity of industrial salt

Incorporated on November 20, 2003, Archean Chemical Industries 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.

The promoters of the company are Chemikas Speciality LLP (CS LLP), Ravi Pendurthi and Ranjit Pendurthi. Ravi Pendurthi and Ranjit Pendurthi are partners and of CS LLP having 2% and 98%, respectively, in the capital of CS LLP.

Ranjit Pendurthi is the managing director of the company. He has been a part of the company since its inception. Pendurthi holds a masters degree of business administration from the University of Chicago, Illinois, USA. He has 21 years of experience in the chemical business.

The company is the largest exporter of bromine and industrial salt by volume in India in FY 2021 and have amongst the lowest cost of production globally in both bromine and industrial salt. It produces its products from its brine reserves in the Rann of Kutch, located on the coast of Gujarat, and manufacture products at facility near Hajipir in Gujarat. As of June 30, 2022, it marketed products to 18 global customers in 13 countries and to 24 domestic customers.

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, also known as potassium sulphate, is a high-end, specialty fertilizer for chlorine-sensitive crops and has medical uses to reduce the plasma concentration of potassium when hypokalemia occurs.

Sales of bromine constituted 50.94%, 53.54%, 46.49% and 35.43%, respectively, of revenue from operations in the three months ended June 30, 2022, and in FYs 2022, 2021. Sales of industrial salt constituted 48.98%, 45.37%, 49.10% and 57.88%, respectively, and sales of sulphate of potash constituted 0.06%, 1.01%, 4.39% and 6.55%, respectively, over the same period.

The company has an integrated production facility for 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 manufacturing facility is located in close proximity to the captive Jakhau Jetty and Mundra Port, where it transports products to customers internationally. As of June 30, 2022, its manufacturing facility had an installed capacity of 28,500 tonnes per annum of bromine, 3,000,000 tonne per annum of industrial salt and 130,000 tonne per annum of sulphate of potash.

The company 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 FYs 2022, 2021, and 2020, 66.74%, 70.32%, 74.41% and 78.41%, respectively, of 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 major customers include Sojitz Corporation, which is also a shareholder in company, Shandong Tianyi Chemical Corporation, Unibrom Corporation, Wanhau Chemicals and Qatar Vinyl Company Limited.

In the three months ended June 30, 2022, and in FY 2022, 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. The company has one of the largest salt works at one single location in the world. Its industrial salt washing facility has three washeries, each having a capacity of 200 tonne per hour. Its facility is equipped with its own quality department, effluent treatment plant, sewage treatment plant and stockyard.

In 2011, the company established its relationship with Sojitz Corporation, a Japanese trading conglomerate and a major customer, which allowed it to develop new solar evaporation ponds in India based on the growing demand in Asia and offtake by Sojitz. In 2018, India Resurgence Fund, a joint venture between Piramal Enterprises Limited and Bain Capital Credit, invested US $156 million in the company in year 2018, which allowed it to refinance its debt, offer capital investment to optimize output across product lines, and provided working capital.

The company plans to expand its product line into bromine derivative performance products in the next two-to-three years, in particular brominated flame retardants, clear brine fluids and bromine catalysts used for the synthesis of pure terephthalic acid (PTA). It is setting up a new facility to manufacture bromine performance derivatives products through its subsidiary, Acume Chemicals Private Limited. The proposed facility will be constructed on 34,983 square meters parcel of land which has been allotted to it from the GIDC, Ankleshwar. The installed capacity of the facility is proposed to be an aggregate of 10000 tpa of high end flame retardant which is expected to commence commercial operations by second quarter of fiscal 2024, 13000 tpa of clear brine fluids which is expected to commence commercial operations by second quarter of fiscal 2024 and 5000 tpa of PTA which is expected to commence commerical operations by second quarter of FY2024. The total estimated cost for setting up the bromine performance derivatives products is approximately Rs 251.7 crore, which it intends to fund through internal accruals. In addition, it intends to expand manufacturing capacities for industrial salt production by adding an additional washery of 250 tonnes per hour. It is expected that this additional washery will be operational in FY 2023.

The major raw materials for process plant come from its brine field, which include industrial salt, kainite, and end bittern, which has high grams per litre of bromine content. Other raw materials it uses in manufacturing process are primarily sourced from third party suppliers in India. Most of the other raw materials are sourced from domestic suppliers who are located within 500 km from manufacturing facility. Its raw materials include brine, chlorine, sulfuric acid, sulphur, lime, caustic soda, coal, water, and castor oil. Prices of raw materials are based on, or linked to, the international prices of such raw material and the variations are typically passed on to the customer. It usually does not enter into long-term supply contracts with any of raw material suppliers and typically source raw materials from third-party suppliers under contracts of shorter periods or the open market.

The Offer and the Objects 

The offer comprises fresh issue of 19778870 equity shares at upper price band of Rs 407 and 20854922 equity shares at lower price band of Rs 386 aggregating up to Rs 805 crore by the company and an offer for sale of up to 16150000 equity shares aggregating to Rs 657 crore at the upper price band of Rs 407 and Rs 623 crore at lower price band of Rs 386.

Promoter Chemikas Speciality LLP has offered sale of up to 2000000 equity shares which shall led post-issue shareholding shall decrease to 30.44% from 38.21% pre issue shareholding.

Investor India Resurgence Fund, Scheme I, has offered sale of up to 3835562 equity shares which shall led post-issue shareholding shall decrease to 4.16% from 8.67% pre issue shareholding. Investor India Resurgence Fund, Scheme II has offered sale of up to 6478876 equity shares which shall led post-issue shareholding shall decrease to 7.03% from 14.65% pre issue shareholding. Investor Piramal Natural Resources Private Limited has offered sale of up to 3835562 equity shares which shall led post-issue shareholding shall decrease to 4.16% from 8.67% pre issue shareholding.

The company proposes to utilize the net proceeds of the fresh issue towards redemption or earlier redemption in part or full of NCDs (non-convertible debentures) issued by the company amounting Rs 644 crore and general corporate purposes prepayment.

Strengths 

The company commands a leadership position in Indian bromine merchant sales (traded bromine in the market) by volume in FY 2021 and is the largest exporter of bromine from India by volume in FY 2021. In the three months ended June 30, 2022, and in FYs 2022, 2021 and 2020, it exported 34.88%, 44.88%, 46.10% and 39.79%, respectively, of its bromine production abroad, mainly to China.

According to Frost & Sullivan the bromine global market size was US$3.13 billion in CY2021, and the market is expected to grow at a CAGR (compounded annual growth rate) of 5.8% between CY2020 and CY2025. In addition, it anticipates a growing demand for bromine and bromine performance derivatives driven by a host of factors including an increasing demand for flame retardants, increasing consumption of oil well chemicals and increasing use of hydrogen and zinc bromide in flow batteries.

The company is the largest exporter of industrial salt in India with exports of 2.7 million tonne in FY 2021. Frost & Sullivan anticipates a growing demand for industrial salt will be driven primarily by increasing industrialization owing to its wide range of industrial applications. In particular, demand is expected to increase from the food and beverage industry, the chlor-alkali sector in the chemical industry as well as chemical processing, water treatment, agriculture, and de-icing.

The company is the only manufacturer of sulphate of potash from natural sea brine in India. The sulphate of potash market is being driven by the advantages of sulphate of potash over muriate of potash and growing demand from a growing middle-class population driving the use of fertilizers primarily for growing fruit and vegetables.

The specialty marine chemicals industry in which it operate 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.

The company manufacturing facility is near the Jakhau Jetty and Mundra Port, where it transports its products to customers internationally.

ACIPL has an integrated manufacturing plant at Hajipir near Rann of Kutch (Gujarat). The company uses the abundant and unique Rann brine as raw material, which provides it with a cost advantage over other producers. This advantage also creates entry barriers for new market entrants.

The cost of production for industrial salt from sea water brine is about US$12 to 15 per tonne, while its costs are in the range of US$5.5-6 per tonne. Further quality of salt is on par with Grade 1 salt required by chlor-alkali producers.

The company enjoys relationships of more than five years with seven out of its top ten customers. Long-term relationships and ongoing active engagements with customers also allow it to plan capital expenditure, enhance ability to benefit from increasing economies of scale with stronger purchasing power for raw materials and a lower cost base.

Weaknesses 

The company manufacturing processes involve manufacturing, storage and transportation of various hazardous substances including bromine and certain raw materials that it uses in production that are highly corrosive, hazardous, and toxic chemicals. It handles and use hazardous materials in its manufacturing activities and the improper handling or storage of these materials could result in accidents, injure personnel, property and damage the environment.

The company operations at its manufacturing facility at Hajipir, Gujarat, are subject to stringent scrutiny, inspection, and audit from third party environmental agencies, including governmental authorities.

The company requires various licenses and approvals for undertaking businesses and the failure to obtain or retain such licenses or approvals in a timely manner, or at all, may adversely affect its operations.

As of June 30, 2022, the company marketed its products to 18 global customers in 13 countries and to 24 domestic customers. In the three months ended June 30, 2022, and in FYs 2022, 2021 and 2020, its largest customer and its shareholder, Sojitz Corporation, contributed 19.29%, 20.56%, 30.51% and 31.94%, respectively, of its revenue from operations. Top 10 customers contributed 60.69%, 61.99%, 75.70% and 77.14%, respectively, to revenue from operations; and top 20 customers contributed 81.75%, 80.94%, 88.66% and 92.05%, respectively, to revenue from operations.

The company debt was restructured as on March 18, 2017, with overdue principal and interest aggregating to Rs 17.741 crore with certain banks as on March 18, 2017

The companys operations are exposed to the risk of excessive rainfall, which can adversely impact the quality of key raw materials as well as lead to an operational stoppage, impacting the scale of production. However, the availability of healthy salt reserves, introduction of feed enrichment section under the new bromine facility and investment in additional brine fields mitigate the risk to a large extent.

The margins of the company are vulnerable to the volatility in global product prices and forex rate movement.

The companys promoters have, among others, agreed to pledge certain equity Shares in favor of IDBI Trusteeship Services Limited, as specified under the promoter undertaking to secure certain debentures. Any default or breach of terms and conditions of such debentures may trigger invocation of pledge and in turn affect the companys reputation, business, operations, and growth prospects.

Valuation 

For FY 2022, consolidated sales were up by 53% to Rs 1130.44 crore. OPM rose 590 bps to 41.3% which led to 78% increase in operating profit to Rs 467.15 crore. Other income decreased 12% to Rs 12.39 crore while interest cost rose 24% to Rs 161.67 crore and depreciation increased 21% to Rs 66.88 crore. PBT increased 177% to Rs 251 crore. Tax expenses were 162% higher at Rs 62.41 crore. Net profit increased 183% to Rs 188.58 crore.

For 3M FY2023, consolidated sales were up by 99% to Rs 400.27 crore compared to 3M FY2021. OPM increased by 30 bps to 40.2% which led to 101% increase in operating profit to Rs 161.06 crore. Other income increased 750% to Rs 8.55 crore, while interest cost fell 2% to Rs 39.15 crore and depreciation increased 9% to Rs 17.61 crore. PBT increased 355% to Rs 112.85 crore. Tax expenses for 3MFY2022 rose 364% to Rs 28.44 crore. Net profit rose 352% to Rs 84.41 crore.

The TTM EPS on post-issue equity works out to Rs 20.7. At the upper price band of Rs 407, P/E works out to 20.

As of 07 November 2022, its listed peers such as Tata Chemicals trades at TTM P/E of 14.5, Deepak Nitrite trades at TTM P/E of 31.6, Aarti Industries trades at TTM P/E of 20, and Neogen Chemcials trades at TTM P/E of 77.5.

For FY2022, Archean Chemical Industries OPM and ROE stood at 41.3% and 72.2% respectively, compared to 21.7% and 8.7% for Tata Chemicals, 24.2% and 37.5% for Deepak Nitrite, 24.4% and 27.8% for Aarti Industries and 15.6% and 14.3% for Neogen Chemicals, respectively.