Overview
Chemcon Specialty Chemicals Ltd is a manufacturer of specialised chemicals, such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry.
Chemcon was the only manufacturer of HMDS in India and was the third largest manufacturer of HMDS worldwide in terms of production in the calendar year 2019. The company was the largest manufacturer of CMIC in India and the second largest manufacturer of CMIC worldwide, in terms of production and capacity in calendar year 2019.
Further, Chemcon was the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in calendar year 2019.
The company’s products include:
Pharmaceutical Intermediates: The Pharmaceuticals Chemicals manufactured and supplied by Chemcon are primarily utilised for the manufacture of certain pharmaceuticals and related products.
Hexamethyl Disiloxane (HMDS) and Chloromethyl Isopropyl Carbonate (CMIC) are the primary pharmaceutical chemicals manufactured by Chemcon.
HMDS or hexamethyldisilazane (also known as bis(trimethylsilyl)amine) is an organosilicon compound with the molecular formula [(CH3)3Si]2NH. The molecule is a derivative of ammonia with trimethylsilyl groups in place of two hydrogen atoms. This colourless liquid is a silylating agent and a precursor to bases that are popular in organic synthesis and organometallic chemistry.
The CMIC (chloromethyl isopropyl carbonate), also known as chloromethyl (1-methylethyl) carbonate belongs to the product category of chemicals used as anti-viral drug intermediates.
Oil Field Chemicals (Completion fluids): Calcium, Sodium and Zinc Bromide
Completion fluids improve well productivity by reducing damage to the producing zone, and they can help prepare, repair, clean out, and complete the wellbore during the completion phase.
Silanes: Silanes such as Hexamethyl Disilazane (HMDS), Hexamethyl Disiloxane (HMDSO) & Trimethyl Chlorosilane (TMCS) have multiple applications in electronics & semiconductors, coatings, cosmetics, rubber and petroleum products.
Company not only serves the domestic market but also export its products in overseas market such as USA, China, Japan, UAE, Serbia, Russia, Malaysia, and Azerbaijan.
Specialty Chemicals Market Overview
Specialty chemicals accounts for 23% of the overall chemicals industry in India with a market size of $36 billion in FY 2017-18. Going forward, specialty chemicals segment is expected to register 12% CAGR over the next five years.
A report by CRISIL also points out that Capex of specialty chemicals makers in India will jump by 70% to almost Rs 13,000 crore ($1.77 billion) combined in the two fiscals through 2020, compared with Rs 7,500 crore ($1.02 billion) in fiscals 2017 and 2018 as they may find space vacated by the Chinese and due to healthy domestic demand, and improved operating rates.
The specialty chemicals industry has high entry barriers due to the involvement of complex chemistry in the manufacture of Products, which is difficult to commercialize on a large scale. The industry also has a long gestation period to be enlisted as a supplier with the customers.
Chemcon’s Promoters:
Kamal Kumar Rajendra Aggarwal, Navdeep Naresh Goyal, and Shubharangana Goyal are the promoters of the company.
Chemcon Promoter Holding
Chemcon’s Financials:
The above chart gives us a clear indication as to how the financials of the company took a quantum leap forward over the past few years.
Chemcon’s Segment-wise Revenue Breakdown
Chemcon Chemicals is a leading manufacturer of Pharmaceutical chemicals and generates maximum revenue from this particular segment.
Pharmaceuticals Chemicals business contributed 62.99%, 61.97% and 46.89% of the revenue from operations in Fiscals 2019, 2018 and 2017 respectively.
While, Oilwell Completion Chemicals business contributed 35.42%, 35.86% and 50.23% of the revenue from operations in Fiscals 2019, 2018 and 2017 respectively.
Pharmaceuticals Chemicals Segment:
Total revenue from the sale of the Pharmaceutical Chemicals in Fiscals 2019, 2018 and 2017 was ₹1,827.76 million, ₹934.02 million and ₹353.31 million respectively, representing 60.09%, 59.0% and 39.3% of the total revenue from operations respectively.
Further out of the total revenue from Pharmaceutical Chemicals in the Fiscals 2019, 2018 and 2017, domestic sales in India constituted ₹1,437.89 million, ₹687.14 million and ₹293.89 million respectively and export sales (including Deemed Exports) constituted ₹478.17 million, ₹293.84 million and ₹127.65 million respectively.
HMDS
Total revenue from HMDS (including ancillary products) in the Fiscals 2019, 2018 and 2017 was ₹1,304.67 million, ₹652.79 million and ₹307.72 million, comprising 42.89%, 41.24% and 34.23% of the total revenue from operations in the Fiscals 2019, 2018 and 2017 respectively.
Further, out of the total revenue from HMDS in the Fiscals 2019, 2018 and 2017, domestic sales in India constituted ₹1,077.02 million, ₹543.24 million and ₹244.46 million respectively and export sales (including Deemed Exports) constituted ₹227.65 million, ₹109.55 million and ₹63.26 million respectively.
The company’s key customers of HMDS in Fiscal 2019 were Hetero Labs Limited, Laurus Labs Limited, Aurobindo Pharma Limited, Ind-Swift Laboratories Limited, Sanjay Chemicals (India) Private Limited and Vivin Drugs & Pharmaceuticals Limited.
CMIC
Total revenue from sale of CMIC in the Fiscals 2019, 2018 and 2017 was ₹ 475.92 million, ₹326.96 million and ₹113.82 million, comprising 15.65%, 20.65% and 12.66% of the total revenue from operations in the Fiscals 2019, 2018 and 2017, respectively.
Further, out of the total revenue from CMIC in the Fiscals 2019, 2018 and 2017, domestic sales in India constituted ₹225.39 million, ₹142.66 million and ₹49.43 million respectively and export sales (including Deemed Exports) constituted ₹250.52 million, ₹184.30 million and ₹64.39 million respectively.
The company’s key customers of CMIC in Fiscal 2019 were, Hetero Labs Limited, Aurobindo Pharma Limited, Macleods Pharmaceuticals Limited and Sanjay Chemicals (India) Private Limited.
Oilwell Completion Chemicals Segment:
Total revenue from the sale of Oilwell Completion Chemicals in Fiscals 2019, 2018 and 2017 was ₹1,077.31 million, ₹567.64 million and ₹451.52 million, comprising 35.42%, 35.86% and 50.23% of the total revenue from operations in Fiscals 2019, 2018 and 2017, respectively.
Further out of the total revenue from Oilwell Completion Chemicals in the Fiscals 2019, 2018 and 2017, domestic sales in India constituted ₹579.74 million, ₹105.33 million and ₹0.07 million respectively and export sales (including deemed exports) constituted ₹497.57 million, ₹462.31 million and ₹451.45 million respectively.
The company’s key customers of Oilwell Completion Chemicals in Fiscal 2019 were Shree Radha Overseas, Water Systems Specialty Chemical DMCC, Universal Drilling Fluids and CC Gran Limited Liability Company.
Installed Production Capacity and Capacity Utilization
As on 2019, out of the 3600 MT/annum production capacity of pharmaceutical chemicals, HMDS and CMIC constitute 1800 MT/annum each. The capacity utilization of HMDS and CMIC are 93% and 96% respectively.
As on 2019, out of the 15,000 MT/annum total production capacity of oilfield chemicals, solution form of Calcium/Sodium/Zinc Bromide constitutes 14,400 MT/annum, while powder form of Calcium Bromide constitutes 600 MT/annum. The capacity utilization of solution is 57% while powder is at 70%.
Xinyaqiang Silicon has the largest capacity of HMDS in the world accounting for ~17% of the total global HMDS capacity. Momentive shut down its HMDS production in 2017, thereby reducing the total global capacity and increasing the global HMDS capacity utilization rate. Though Chemcon’s capacity remained the same during the period, it improved its capacity utilization.
HMDS India Market Production Growth (MT)
Chemcon is the only HMDS manufacturer in India. The company has grown at a CAGR of 2.2% during the period of 2013-18. The company is well positioned in substituting imports and catering to India’s HMDS market.
Shangai Twisun has the largest capacity of CMIC in the world accounting for ~32% of the total global CMIC capacity. Chemcon has the second largest capacity of CMIC with ~19% of the total global CMIC capacity as on 2019.
To cater to the increasing demand of CMIC, Chemcon expanded its capacity over the past 5 years. The encouraging growth in CMIC demand will create opportunities for new capacity / expansion. Large players are well positioned to capitalise on the increasing demand.
As a leading CMIC manufacturer in India, Chemcon has grown at a CAGR of 17.6% during the period of 2013-18. The company is well positioned in substituting imports and catering to India’s CMIC market.
Key Customers
The key customers of Pharmaceutical Chemicals include Hetero Labs Limited, Laurus Labs Limited, Aurobindo Pharma Limited, Sanjay Chemicals (India) Private Limited, Lantech Pharmaceuticals Limited, IndSwift Laboratories Limited, Vivin Drugs & Pharmaceuticals Limited, Macleods Pharmaceuticals Limited.
Chemcon’s key customers for Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC, Universal Drilling Fluids and CC Gran Limited Liability Company.
The company’s top 10 customers constituted 67.37% of the total sales in fiscal 2019.
Manufacturing Facility
It has a manufacturing plant at Manjusar near Vadodara in Gujarat, 5 operational plants, 3 warehouses, and 2 leased warehouses.
The company’s total volumetric reactor capacity at Manjusar plant is 236.65 KL.
The facilities are equipped with process technologies such as carbonation and ammoniation.
Company Strategies
Expansion of total installed production capacity
The company aims to expand its manufacturing operations and production capacity. As on the date, it has five operational individual plants for the production of Products, within the Manufacturing Facility.
The company intends to build three additional plants with a total volumetric reactor capacity of 376.20 KL from its existing 236.65 KL. These additional plants shall be utilised for the manufacturing of chemicals which are principally used pharmaceutical industry.
Further, the company is also in the process of rebuilding one plant, which was destroyed due to a fire accident on January 9, 2018. This plant with a volumetric reactor capacity of 13.00 KL, shall be used for the production of high purity HMDS, which finds application in the pharmaceuticals, semiconductors and rubber industries.
With the completion of such expansion, the total volumetric reactor capacity at the Manufacturing Facility shall increase from volumetric reactor capacity of 236.65 KL to 625.85KL and will enable the company to significantly benefit from economies of scale.
Increasing growth in the existing markets and expanding into new geographic markets
India is currently a net importer of HMDS, with about 52% of its current domestic demand being catered by imports majorly from China and Germany. India is expected to witness a demand growth for HMDS of 5.6% CAGR between 2018 and 2023.
Further, India and China are the only countries that produce CMIC. India is a net importer of CMIC, with about 50% of India’s current domestic demand being catered to by imports majorly from China. India, a major CMIC consumer market, is expected to witness a demand growth at a CAGR of 14.0% between 2018 and 2023.
Chemcon aims to capitalise on the potential growth of the HMDS and CMIC market in India by expanding its manufacturing and sales of HMDS and CMIC. India is a net importer of CMIC and HMDS and Chemcon aims to expand its manufacturing and sales operations of CMIC and HMDS to substitute such imports.
The company currently supply the Oil well Completion Chemicals largely to customers in India, the Middle East and Azerbaijan. Chemcon aims to expand the sales of the Oil well Completion Chemicals in existing and new geographies including Russia, Serbia, Nigeria, Malaysia and China and Ghana. In the recent past, the company has participated in trade exhibitions, including CPHI Worldwide 2019 (in Frankfurt, Germany), CPHI India 2018, Adipec 2018 (in Abu Dhabi, United Arab Emirates), CPHI Japan 2019 and CPHI & ICSE China 2019.
Exploring newer applications of existing products as well as focusing on new products
Chemcon aims to expand the sale of its products to other industries where such products have application. For instance, while the company currently supply HMDS largely to the pharmaceuticals industry, it also aims to market its products for end-use applications in other industries including the rubber and semiconductor manufacturing industry.
Chemcon aims to undertake the development and manufacture of newer products, largely focusing on chemicals used in the pharmaceuticals, semiconductors and rubber industries.
Continue to strive for cost efficiency
Chemcon intends to continue to be cost efficient in the production of its products. This efficiency is achieved through strategies like having a large single location manufacturing facility, dedicated plants for each product, process re-engineering for efficient raw material consumption and being a sizeable player in the industry in each of its products. Economies of scale will also enable it to continuously improve its operational efficiencies.
Details of the Objects of the Fresh Issue
The company recently went public to raise funds for its planned manufacturing facility to further increase its sales in domestic and export markets.
1. Capital expenditure towards expansion of Manufacturing Facility
As part of its strategy to expand the manufacturing operations and production capacity, Chemcon proposed to set up three new plants, one warehouse and one laboratory, at its existing Manufacturing Facility at Manjusar, Vadodara.
2. Working Capital Requirements
The Company requires additional working capital for funding its working capital requirements in the Financial Year 2020 and Financial Year 2021. The funding of the working capital requirements of the Company will lead to a consequent increase in its profitability.
Key Growth Drivers
- Increase in per capita income in India.
- Growing Capex in the domestic market and Make in India campaign.
- Growing demand from Pharmaceutical industry.
- Absolutely mature production technology.
- Consolidation in Chinese chemicals market; Impact of China and the recent regulatory changes in China and US-China trade disputes.
- China to India shift in specialty chemicals manufacturing and growing export opportunity.
Major Risks
- Specialty chemicals being global commodities, Chemcon is exposed to the constant risk of currency and commodity cycles.
- Trade conflicts also pose a risk to the company by affecting the supply chain. For instance, key raw materials from suppliers in China, may be hampered due to inter alia supply chain issues, change in government policies (including anti-dumping measures) and international geo-political situations.
- Any adverse change in regulations governing its products and the products of its customers, may adversely impact its business, prospectus and results of operations.
- The Covid-19 outbreak has led to massive disruptions in global economic activities, including chemical industry operations.
Sources: Company annual reports, CRISIL, Frost & Sullivan, Kemicalinfo Analysis