The company is comprised of four subsidiaries: Meghmani Finechem Limited (57%, 25% by IFC Washington, 18% by individual promoters), Meghmani Organics USA INC. (100%), PT Meghmani Organics Indonesia (100%) and Meghmani Overseas FZE (100%). The company is involved in the manufacture of pigments (51%), agrochemicals (46%) and basic chemicals (3%). The company began in 1986 with the production of Phthalocyanine Green 7 (Pigment Green 7) then later on expanded into the manufacture of agrochemicals and basic chemicals.
The pigment industry can be segmented into following:
By Product Type:
- Organic Pigments
- Azo Pigments
- Phthalocyanine Pigment
- Quinacridone Pigment
- Other Organic Pigments
- Inorganic Pigments
- Titanium Dioxide
- Iron Oxide
- Cadmium Pigment
- Carbon Black
- Chromium Oxide
- Complex Inorganic
- Other Inorganic Pigment
- Specialty Pigments
- Classic Organic Pigments
- Metallic Pigments
- High-Performance Pigments
- Light Interference Pigments
- Fluorescent Pigment
- Luminescent Pigments
- Thermo-chromic Pigments
- Paints and Coatings
- Printing Inks
- Construction Materials
By Color Index:
Meghmani is involved in the segments bolded above.
Pigment Segment: The global pigment industry is expected to rise to $32 billion by 2023 growing at a rate of 4% approximately with Asia Pacific region contributing to the majority of the global demand, approx. 50%. The Indian dyestuff and pigments industry is highly fragmented with a large number of small players in the unorganized sector. There are around 50 players in large-scale and organized sector, located mainly in Gujarat and Maharashtra. The highly fragmented Indian colorant industry, valued at $6.8 billion (FY17), exports nearly 75% of its production. Exports have grown in double-digits over the last few years.
In the pigments category, the company manufactures Phthalocyanine pigment with the use of raw material CPC Blue which results in pigment blue and green. The production is done at three locations with a total capacity of 31,140 MTPA. In a simplified way:
Pigment Blue: is a bright, crystalline, synthetic blue pigment from the group of phthalocyanine dyes. Its brilliant blue is frequently used in paints and dyes. It is highly valued for its superior properties such as light fastness, tinting strength, covering power and resistance to the effects of alkalis and acids. It has the appearance of a blue powder, insoluble in water and most solvents. It is used as a colorant Due to its stability, it is also used in inks, coatings, and many plastics.
Pigment Green: is a synthetic green pigment from the group of phthalocyanine dyes, a complex of copper with chlorinated phthalocyanine. It is a very soft green powder, insoluble in water. Due to its stability, phthalo green is used in inks, coatings, and many plastics. In application it is transparent. The pigment is insoluble and has no tendency to migrate in the material. It is a standard pigment used in printing ink and packaging industry. It is also allowed in all cosmetics except those used around the eyes and is used in some tattoos.
Due to the vertical integration of all the business segments the company uses the CPC Blue for its own use and it to other pigment manufacturers. The end product is sold to the industrial users. As per the latest information the company is having a global market share of 14% (Q2 FY18) up from 8% (FY2016-17) and is among the top 3 global pigment players (capacity wise). The company has got presence in 70 countries and derives 75% (Q2 FY18) up from 68% (FY 2016-17) of its revenues from exports. The clients’ retention ratio of the company is good with 90% repeat clients.
Capturing the market share: Any company in any segment has to have some strategy for capturing additional market share. The winning strategies followed by the global companies in this segment include product launch, joint venture, acquisition, partnership, expansion, and investment.
PIGMENTS MARKET: TOP WINNING STRATEGIES, 2012-2016 (%)
The company has decided to increase its business through a higher focus on domestic markets, focusing on untapped export markets and expanding value-added products which fall in the 46% category. Due to the increased demand, the utilization levels of the company have been increasing for the past few years. The pigments plants were running at capacity of 66% in FY17 and in Q2 FY18 the capacity levels are at 84% from 56% in Q2 FY17. Total sales of pigment for the FY17 was increased by 4543.75 lacs (9.69%) out of which exports grew by 997.94 lacs (2.87%) and domestic sales increased by 3545.79 lacs (29.40%). Last year the company’s Beta Blue plant was involved in fire and has now been revamped with full capacity in the current year.
2nd Quarter Update:
(Note: Q2FY17 Includes Exceptional item of Rs 24 mn wrt est. loss in Beta blue plant Fire)
Agrochemical Segment: The agrochemical business is quite an interesting one. The fact that the world population is 7.6 billion as of December 2017 (Wikipedia), will reach 8.5 billion by 2030, 9.7 billion in 2050 and 11.2 billion in 2100, according to a new UN DESA report, “World Population Prospects: The 2015 Revision” makes the case for increased future demand for agrochemicals. The biggest driver for this sector will be the limited land area getting more limited due to increasing population, driving the pressure to produce more in much less land than before. The global agrochemicals industry is expected to reach $266 billion out of which $188 billion will be for the fertilizers market, a CAGR of 4%. Similarly, the market for pesticides is expected to grow to $78 billion with CAGR of 6%.
India is the fourth largest producer of agrochemicals and growing at the rate of 10-12% will make it the 2nd or 3rd largest within few years. The growth of the Indian agrochemical segment is largely dependent on two things the monsoon and as a consequence of which farmers income. Last year was pretty good for the Indian agrochemical sector due to healthy monsoon after 2 years of drought and same is expected in 2018. As far as farmers income is considered, Niti Ayog in its report released in March 2017 ‘Doubling Farmers Income: Rationale, Strategy and Action Plan’ the government is focusing on increasing the sources of income through increase in agricultural productivity, improvement in total factor productivity, diversification towards high value crops, increase in crop intensity, improving terms of trade for farmers and shifting cultivators to non-farm and subsidiary activities. The important thing to understand here is that agrochemical business is highly dependent on monsoon. Around two-thirds of India still depends on monsoon for its irrigation needs. Last year has been good due to good monsoon after two years of drought. This in some way limits the company’s ability to expand the capacity.
Under this segment, the company manufactures insecticides, herbicides, fungicides and mixtures of insecticides, herbicides and fungicides. This is the fastest growing segment of the company with increase in revenue by 4679. 50 lacs (10.98%) in FY17 comprising domestic sales increment by 4541.80 lacs (33.75%) and export sales by 137.70 lacs (0.47%).
Q2 FY 18 Update:
Consolidated, figures in Rs mn
Net Sales increased significantly led by robust growth in Domestic and Exports market, up 42% and 26%, respectively. The domestic market now contributes 44% to Net Sales compared to 41% in Q2FY17. Dispatch/Sales up 10% coupled with robust growth in blended realizations on account of increased sale of higher margin products. EBITDA increased 64% on account of higher realization on products; EBITDA Margin up at 20%. Utilization at 78%, Production up 43% YoY.
Basic Chemical Segment:
In this segment, the company is involved in the manufacture of Caustic Soda, Caustic Potash, Hydrogen Peroxide and CMS with the total capacity of 187,600 MTPA up to the second quarter. Out of this, the caustic soda and hydrogen peroxide capacity are to be increased by 2,50,000 MTPA and 25,000 MTPA by June’2019. The product structure of the company is as shown in the figure below:
The company has already spent 6.5 billion rupees over the past 5 years and the company has now decided to invest 5.4 billion rupees over the next 2-3 years to expand the chemicals business which will add a total of 4 billion revenues to the company in their full year of operations. The expenditure will be done in three out of four products. Dichloro Chloromethane (CMS Project), hydrogen peroxide project and Caustic Soda. The expansion will be done through MFL (Meghmani Fertilizers Limited) in which MOL (Meghmani Organics Limited) holds through the following way:
Out of the four CMS related to product and service both. The company manufactures the chemicals and provides CMS (Chemical Management Services). Here’s a brief about the CMS:
CMS: Every time you reduce chemical use, you reduce cost, emissions, and exposure to liabilities. Beyond the tangible benefits of reduced costs and waste, there are not-so-quantifiable benefits to well-managed chemical programs: reducing accidents; maintaining a good reputation in the community; staying clear of environmental agencies’ spotlights, etc. These are all positive aspects of sound chemical management.
Chemical management services (CMS) involve a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer’s chemicals and related services. Under a chemical services contract, the provider’s compensation is tied primarily to quantity and quality of services delivered, not chemical volume. Chemical services go beyond invoicing and delivering product to optimizing processes, continuously reducing chemical lifecycle costs and risk, and reducing environmental impact. These chemical services are often performed more effectively and at a lower cost than companies can do by themselves.
The chemical services model delivers results by aligning the incentives of chemical suppliers and their customers. The supplier’s profitability is independent of the volume of chemicals sold. In other words, the suppliers no longer get paid based on how well they can sell, but how well they can manage. This model changes the traditional relationship between chemical suppliers and their customers. Here’s how this shift works. In traditional supplier-customer relationships, the chemical supplier’s profitability is a function of the volume sold. The more chemicals sold, the higher the revenue for the supplier. Meanwhile, the buyer has an opposite incentive – to reduce costs or the amount of chemicals purchased. In the chemical service model, suppliers become chemical management providers and are paid for successfully delivering and managing chemicals. Thus, the supplier’s profitability is based on better performance, not on selling more chemicals (see Figure 1).
This shift is accomplished by basing supplier compensation on performance-based metrics and fees, not chemical sales. The customer gains a partner in its efforts to manage chemicals more efficiently; the supplier becomes an integral part of the business by providing a differentiated, value-added service.
This area of management is new and not many companies are equipped to handle this. Generally, chemical service providers begin by offering a narrow range of chemical management services. That is, they don’t start out in client companies by taking over management of all chemical needs. For example, a chemical service provider might purchase and deliver chemicals, manage MSDSs, pick up waste, and provide data for some environmental reports. Later, they might expand their work scope to include such services as research for chemical substitutes and process efficiency improvements. Following is the type of CMS of services:
The global Chlori-Alkali (Chlorine based chemicals) market is expected to grow at a CAGR of 5% and 5.5% from 2016-2022. Chlori-Alkali value chain industry includes the following activities:
Indian Chlor-Alkali Industry (from Annual Report): According to the IMF, India’s FY18 GDP growth is projected to increase to 7.2%. Basic Chemicals – Chlor- Alkalis and PVC are basic building blocks that find application in products of everyday use, including aluminium, paper, textiles and plastic. These industries are expected to witness increase in volume consumption of chlor-alkali chemicals, which will boost the Indian chlor-alkali market in the coming years. Moreover, with growing aspirations of a rising middle class, higher disposable incomes and the current low level of penetration, demand for these products is bound to grow. There is a vast untapped market, especially in the rural areas, which will significantly drive demand. To illustrate, India has a low per capita consumption of 1.85 kg of caustic soda compared to 32 kg in the US and 12 kg in China. Similarly, the ‘Make in India’ programme of the Indian Government is expected to provide a fillip to domestic manufacturing and value addition, provided the right ecosystem is put in place to bring in investments and augment the domestic manufacturing capacity.
Source: Annual Report 2016-17
On an average power cost consumption accounts for 60% of the cost of manufacturing in Caustic Production, hence almost every company in this production has a captive power plant to reduce the costs and improve the margins. Last year the company has ramped up one of its plants Dahej with the capacity of 60 tons per day. The current expansion capacity which was expected to be commissioned by march 2018 is now postponed to June’19.
The chemical segment is growing steadily with not much higher rates y-o-y.
2nd Quarter Update: