IGPL’s business – Oligopoly market, High entry barriers and Commodity in nature
I G Petrochemicals Ltd (IGPL) is one of the world’s leading manufacturer and lowest cost producer of Pthalic Anhydride (PA), a downstream product of Orthoxylene (OX). Company was incorporated in the year 1988 and it is promoted by Dhanuka Group. Company has three manufacturing facilities with a capacities of 169110 TPA in technical collaboration with Lurgi of Germany. Recently company has added another product Maleic Anhydride (MA) to its basket by acquiring Mysore Petrochemicals Ltd.
80% of IGPL’s sales are in domestic market and the rest 20% in export markets. Most of domestic sales are in West India. Middle East countries are export markets for IGPL. IGPL has 50 clients and no client contributes more than 8%-10% to its total sales. 30% of the contracts are on cost-plus basis while the balance 70% contracts are priced on spot basis. PA and MA fall under the hazardous chemicals category. Setting up a plant requires approval from the environment ministry which takes around one year. Total time required to set up a new facility can take around two years.
Phthalic Anhydride (PA):
The Company’s principal business revolves around the production of PA. It is a white crystalline solid at room temperature and transforms to colorless liquid upon heating. It is an important industrial chemical, especially to produce plasticizers for plastics, Alkyd Resins, Unsaturated Polyester Resins & Copper Pthalocyanine. PA finds its usage by a variety of end users and applications.
Global PAN consumption stands at 5mn tons with Asia Pacific consumption accounting for over 60% of the world consumption. The domestic PA market stands at 0.35mn MT and is catered by IGPL (0.17mn tons) and Thirumalai Chemicals (0.14mn tons), while the balance is met by imports.
Anti-dumping duty on PA from Taiwan, Korea, Russia, Japan and Israel stands at ~7.5%. Domestic PA market is growing at a healthy rate of 7%-8%per annum. PA is used in plasticisers (34%), CPC pigment (24%), alkyd resin (17%), unsaturated polyester resin (6%) and others (19%). Imports have been on the rise and are expected to rise to ~0.15mn MT by FY19E on the back of limited capacity addition by domestic players along with strong demand trend.
IGPL over a period has gradually ramped-up its capacity to be the third largest PAN player globally. IGPL has a huge operating leverage as it has three plants at Taloja, Maharashtra. Also, the company sources bulk of its raw material, OX, from RIL’s Jamnagar refinery. That, coupled with easy access to user industries, ensures low working capital cycle of 45 days. Besides, IGPL’s cost operation is also supported by self-sufficiency in steam/power which has reduced use of expensive furnace oil for operation. The company has also developed deep relationship with key customers like Berger Paints, Aarti Industries and AkzoNobel over the years which ensure steady demand off take.
New Capacity addition to boost sales growth:
India is one of the fastest growing PAN markets. With demand growing at around 8% and with limited capacity addition, imports are set to increase to 150,000MT in FY19E against ~39,000MT in FY12. To capitalise on increased demand opportunities, IGPL has lined up aggressive growth plans; IGPL plans to increase PAN capacity by 50,000MT at a capex of Rs3bn which will come on stream by Q1FY20. They also plan to add ~6,000MT PAN capacity by debottlenecking in FY18. IGPL also plans to set up value-added downstream plasticiser capacity of 40,000MT at a capex of Rs1bn to be commissioned in FY19E.
Sharp surge in margins to sustain over the medium term:
To optimize on strong demand trend, IGPL has operated its plant at around 90%. However, operating margins for the company has fluctuated, given volatile raw material prices and high imports in the absence of duty protection. During the year, the Company witnessed a strong demand for Phthalic Anhydride (PA) which led to the prices of PA firming up. The continued surge in the demand for PA resulted in the operating margins increasing substantially.
Margin profile has steadily improved to 23.5% for Q1FY18 from 5.2% in FY15 led by stable raw material prices, cost optimization from expansion and high end user prices, given strong demand trends. Supported by demand traction and stable raw material prices, margins are expected to sustain at 20% for FY18-20E.
Sole manufacturer of maleic anhydride or MA in India:
IGPL has recently acquired the Maleic Anhydride (MAN) business of Mysore Petrochemicals (MPCL) for Rs744.8mn to be paid equally over the next five years. MAN is used in manufacture of resins, paints, food items and personal care products. With the acquisition of MA business from MPL, IGPL has become the sole manufacturer of MA in India. IGPL uses wash water created from the manufacturing process of PA to recover MA and benzonic acid. Current capacity of MA is 4,500tpa. With less than 10% of market share in domestic market and being a sole manufacturer in India, IGPL believes there is enough opportunity to grow in MA business. Current MA capacity generates Rs350mn- Rs450mn of annual sales with EBITDA/PAT of Rs200mn/Rs120mn, respectively. The company intends to increase its MA capacity from 4,500tpa to 6,300tpa by 2019.
The management is also contemplating the manufacture of a few new products, mainly DOP, DEP and DMP. Supply of these new products is expected to start in 2019-20. With incremental growth from PA, MA and new products, the management expects the company’s sales to touch Rs2000Cr by 2020.
Supported by healthy demand trend and cost optimization, IGPL’s earnings were at Rs1.01bn for FY17 against Rs600mn for FY16. Supported by healthy operating leverage, along with new capacities coming on stream, we expect IGPL’s earnings to increase 26% over FY17-20E.