Manali Petrochemicals
About the Company:
Manali Petrochemicals specializes in manufacture of Polyurethane, Propylene Glycol, Polyether Polyol and related substances. It is the only domestic manufacturer of Propylene Glycol (PG). Also, it is the largest Indian manufacturer of Propylene Oxide, the input material for the aforesaid Propylene Glycol. This company is the part of SPIC group which was established in 1969 and has emerged from the CDR. SPIC group sold off MANALI through block deal in 2011
The promoter of SPIC bought back Manali via Sidd Life Sciences Private Limited. Since then, the company has been majorly owned by Sidd Life Sciences Private Limited
Applications of product and Industry Scenario:
PG is widely utilized in
- Pharmaceuticals
- Food & flavor and
- Fragrance industries
Some of the major applications of PG include medicines, canned food, body sprays, perfumes, cosmetics, soaps and detergents. The off take of PG for industrial purposes is generally low due to availability of alternate cheaper materials.
MPL supplies more of food and pharmaceutical grade PG to the Indian market. In addition to PG, the byproducts of PG are also bought by smaller players from Manali. These by products include DPG (used mainly as preservatives in food) and PGMME (an eco friendly paint coating material. Also used in electronic industries)
The industry is concentrated globally with top manufacturers accounting for 60% of the supplies. Even with the introduction of ADD (anti dumping duties) imposed by the government, these players take the hit on their margins to supply in domestic markets. On the top of that, these players also partner with local players in countries with ADD to create enormous supply and hence putting pressure on margins.
Manufacturing Process of PG:
Raw materials used for the production are majorly Isocyanate and Polyols.
- These raw materials are mixed in the ratio 1:2 in the stainless steel tank. The ratio is highly controlled and the steel tank is under a controlled pressure
- The reacting materials are then passed through heat exchangers to initiate the reaction
- Once the reaction starts, the mixture is dispensed through pipes to the conveyor belts. Baking Paper is attached on the conveyor belt
- As the mixture rolls, Carbon Dioxide in mixed to give it a larger shape
- Then a second layer of baking paper is attached on the top to give it a shape
- Finally it is cut, packed and shipped to the customers in the required form and size
Management Details & Salaries:
The company is led by Mr Ashwin Muthiah who also happens to be the chairman of SPIC group. He is credited with restructuring and turnaround of SPIC. He sold MPL in 2011 to his own privately held firm Sidd Life Sciences Private Limited. Since then, he is actively involved in the day to day decision making of the company. The CEO of the company is Mr Muthukrishna Ravi with Anis Hyderi as CFO.
The details of Mr Ashwin can be found here. Here is what the margin profiles look like from the year 2016 to the year 2022
We can clearly see that the space is commoditized and the margins vary with the price of petrochemicals. Also there were 3 factors into play as mentioned in the concall:
- Due to supply disruptions, the company stocked in the raw materials which helped them cater to the demand of domestic industries
- The company set up the Propylene Oxide facility which is the key intermediate raw material for manufacturing PU
- The company set up its base from commodity PU to speciality PU. Think of commodity PU as the one which gets supplied for making polythene. On the other hand, think of speciality PU as the one which gets supplied into making Scotchbrite
In terms of commodity speciality mix, currently the ratio is 80:20. The company wants to stretch it to 70:30 and no further. This is because the company believes the bread and butter to be commodity and is in a good position to increase the market share in commodities.
Due to one time covid event and supply disruptions due to the Ukraine war, the import pressure was subsided. But the management has now given the guidance that the margins would be under the pressure owing to increase in imports.
Now the working capital and FCFE profile of the firm looks as follows:
The company has managed to amass FCFE of ~700 cr in the past 7 years, not bad for a company with the current market capitalization of ~1600 cr. Even in the import regime, the company has managed to amass FCFE worth 50 crores. The 2019 number is negative for FCFE due to huge capex undertaken by the company for capacity expansion
Regarding the current capacity expansion, the company had undertaken it in 2020 in 2 phases. In the first phase, the company is undergoing a brownfield expansion worth 65 cr which would give 20000 tons of PG manufacturing. The second phase of the expansion would be a greenfield project which would additionally give another 20000 tons of PG manufacturing capability. The current capacity is around 100000 tons of PG manufacturing
Competitive Advantages: Moats
- The current capacity expansion is expected to bring economies of scale which would allow the company to compete locally in terms of pricing
- The company’s move towards specialities allow them to tweak their product mix and manufacturing lines as per the customer’s demand. This is something that the international players would find hard to accomplish since they look for dumping commodity mix in large volumes
- The increasing use cases of the PG in pharmaceuticals, food industries and paint would majorly benefit MANALI rather than importers. This is because these industries look for the reliable supplies for their speciality use case. Without the local knowledge of industries, companies like DU PONT find it hard to compete in local speciality use cases
- The company also has a competitive edge on the freight cost front as the plants of suppliers of major raw materials (propylene, PO and chlorine) are contiguous to MPL’s plant. The primary supplier of propylene (major raw material) for MPL is Chennai Petroleum Corporation Limited (CPCL).
Threats:
Removal of Anti dumping duty from various countries can lead to cheaper imports thus pressuring margins in the long run. On the top of that, global MNC’s can partner with local players to create oversupply in India further eroding the margins.
Another area of the concerns is the lobbying from environmentalists which prope ZLD processes to manufacture PG. This is untenable since this involves huge capex and greenfield expansion. To overcome this, the Company has been exploring possibilities to make Polyols without PO for which it is taking up a polyester polyol project and also signed up with Econic, UK to explore the possibility of switching over to CO2 for polyol production.
Related Party Transactions & Subsidiaries:
The company has one wholly owned subsidiary and 2 step down subsidiaries. AMCHEM Speciality Chemicals Private Limited, Singapore, set-up by the Company in 2015-16, to expand its global footprint, holds the foreign assets of the Company. The Company invested US$ 16.32 million in the company to part fund the acquisition of Notedome Limited, UK and also for further exploratory work. During the year 2016-17 the WOS set up AMCHEM Speciality Chemicals UK Limited as its WOS which acquired Notedome Limited. Thus, AMCHEM, UK and Notedome are the SDS of MPL.
Notedome, established in 1979, is a System House with more than 30 years’ experience, manufacturing Neuthane Polyurethane Cast Elastomers catering to customers across 45 countries.
The major RPT includes the transactions with Tamilnadu petro products ltd. (since it shares JV with MPL) for the sale and purchase of goods. MPL majorly procures propylene oxide from Tamilnadu petro products ltd and also supplies PG to the company.
Also the remuneration paid to directors amount to 1 crores only which is a positive sign that management interest lies in the company since a lot of them hold an equity in the company.
With the current earnings multiple of ~4.8 and given the situation for crude oil prices currently, the downside risk is minimal. Further the company has accumulated the FCF of ~700 cr in the last 7 years. With minimal debt and market capitalization of 1600 cr.,the downside risk for this investment is minimal. Furthermore, if the company manages to achieve speciality foray and able to utilize the capacity expansion, the market cap of 1600 cr can go all the way up.
A concise version can be found here
