Sigachi Industries Limited

Sigachi Industries Ltd. (SIL) is one of the largest manufacturers of chlorinated paraffin, hydrochloric acid Microcrystalline Cellulose worldwide and has three Multi locational Facilities in Telangana and Gujarat SIL is one of the leading manufacturers of the cellulose-based excipient industry in India with over 30 years of experience. The company has a comprehensive product portfolio that enables it to serve diverse end-use applications across diverse industry verticals. Sigachi sells its Cellulose-based products under the following brands - HiCelTM, AceCel, CoatCel, GloCel
The inert non-reactive, free flowing and versatile nature of MCC has varied applications in the pharmaceutical, food, nutraceuticals and the cosmetic industries. It manufactures MCC of various grades ranging from 15 microns to 250 microns. The major grades of MCC manufactured are HiCel and AceCel. These products are distinguished with the help of different drying techniques employed by the company during the manufacturing process. HiCel is a spray dried product and is considered premium in quality due to the physical properties of the product such as particle size, density, flow, tableting properties, etc. AceCel on the other hand is manufactured through bulk drying process. It also manufactures various grades of this product in combination with various chemicals like colloidal silicon dioxide, carboxy cellulose sodium, mannitol etc. to cater to the growing market of the co-processed excipients.

Manufacturing facilities
The company has three manufacturing facilities situated in Hyderabad and Gujarat. Presently, they manufacture 50 different grades of MCC with an aggregate installed capacity of 11,880 MTPY and premium grade microcrystalline cellulose 1,080 MTPY. Their facilities are EXCiPACT GMP, SGMP, HACCP, EDQM CEP, and ISO 9001:2015 certified.

International Footprints
Sigachi exports approximately 60% of its products to global regulated markets in 40+ countries worldwide.

High Dependence on Pharma Sector
Though the product of the company is used across several sectors, however, the company derives 75% f its revenue only from its Pharmaceutical clients. The food and nutraceuticals industry contributed 10% each and the remaining 5% from the Cosmetic Industry

Diversification Efforts
In the year 2000, with an aim to diversify its business activities, the Company started manufacturing premium grade microcrystalline cellulose by successfully commissioning a spray drier and a multi-fuel furnace and later increased its manufacturing capacity from 720 metric tonnes per annum to 1080 metric tonnes per annum.

Contract Manufacturing
The company also entered into operations and management agreements with Gujarat Alkalies and Chemicals Limited (“GACL”) for operating and managing the manufacturing units owned by GACL and for contract manufacturing of sodium chlorate, stable bleaching powder, and poly aluminum chloride in the said units.

Supplier Concentration
The major raw material of the manufacture of MCC is wood pulp sheet and the company imports the same from Canada, South Africa, Thailand, Indonesia, and America. Its top 5 suppliers accounted for 66% of the total purchase and the company hasn’t entered into any long-term agreement with any of its suppliers.

Sigachi announced today that it is venturing into the human nutritional segment, with a prime focus on B2B markets, in India and across the globe.
Alongside pharma, Sigachi will be now expanding its horizon by
exploring nutritional markets in India and across 45 countries, where it currently exports.
The product portfolio will widely incorporate spray-dried ingredients, micronutrient
premixes, encapsulated ingredients, granulated ingredients, and triturates. With these
ingredients, Sigachi is looking to deepen its relationship with its current customers in
Nutraceuticals, Bakery, Dairy, Infant and Medical Nutrition, Confectionery, Savoury and
Snacks, and Beverages sectors.

Update from CEO:

Commenting on the launch of the new segment, Mr. Amit Raj Sinha, MD & CEO,
Sigachi Industries Limited said, “We see this expansion as a natural step in accelerating
our growthtowards our vision of being a market leader in the manufacturing and supplying
of multi-facet ingredients and offering tailored solutions that meet customer requirements
across the Pharmaceutical, Nutraceutical, Food Ingredients & Nutrition industries.”
“With our strong manufacturing background and excellent technical capabilities,
coupledwith deep understanding in the nutrition segment, I am confident that we will
delight and serve top customers across the globe with our nutritional ingredients
henceforth,” furthersaid Mr. Sinha.
According to Market Study Report 2020, the worldwide human nutrition market was worth
USD 252 Billion and is expected to grow substantially. The markets can be broken
down into various application segments namely Dietary Supplements, Functional
Nutrient, Early life Nutrition, and Packaged food & beverages.

Industry Forecast
Microcrystalline Cellulose Market size is forecast to reach $1.4 billion by 2027, after growing at a CAGR of 6.8% during 2022-2027. The growth of the microcrystalline cellulose market is mainly driven by the rising demand for packaged food and the growing production of pharmaceutical and cosmetic and personal care products. It is used as a substitute for unhealthy fat and adds texture to baked food products. The product contains a significant amount of fibers that helps to enhance digestion, it also acts as an outstanding nutrient source to a variety of nutrients. A rapidly growing population, increasing obesity diseases and shifting consumer expectations of healthy food would drive product consumption.

Microcrystalline Cellulose Market Challenges

Availability of substitutes

Microcrystalline cellulose, as such, has no replacements available. But there are a variety of goods that are better than MCC and have very particular applications. Carboxymethyl cellulose (CMC), kappa-carrageenan, and croscarmellose sodium are only some of the products available (CCS). To stabilize emulsions in food products such as ice creams and baking products, CMC is used in food & beverages. CMC is also used as a disintegrant, stabilizer, binder, and suspension agent in pharmaceutical applications. Plant-based Guar gum can also be used in ice creams and other dairy products in the food & beverage industry. The current high market prices of guar gum, however may to some degree suppress its demand. In the long run, if the price of guar gum decreases, the growth of the microcrystalline cellulose market would have a negative effect. Therefore, the availability of a possible replacement for microcrystalline cellulose may have a significant effect on the market growth.

Market Landscape

Technology launches, acquisitions and R&D activities are key strategies adopted by players in the Microcrystalline Cellulose Market. In 2019, the market of Microcrystalline Cellulose Market has been consolidated by the top five players accounting for xx% of the share. Major players in the Microcrystalline Cellulose market includes DowDuPont, Asahi Kasei Chemicals Corporation, Rayonier Advanced Materials, Roquette, DFE Pharma GmbH & Co.KG, JRS Pharma GmbH & Co.KG, Avantor Performance Materials Inc., among others.

On the Quantitative front, below are the numbers.

Overall, this company looks good to me as of now because of its good numbers last few years and its competitive advantage on this space. I haven’t done detailed analysis on this yet. But still creating this thread to see different views from VP members. This is my first topic creation in VP and these are my early days in business analysis.

Disc: Tracking, Not invested.

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I could not understand how they are able to maintain such high margins since MCC is a commodity…
Could not find any such competitive advantage they enjoy…
Now they are diversifying in human supplements…I don’t understand if MCC has such huge market why not grow in that space first and then diversify…also human supplements does not seem to me as such directly related to its core competence …
I found company not able to convert profits into cash flows.

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MCC has a big mkt globally. Sigachi is majorly exporting which is a big market itself.
Pharma Market for MCC itself is of 3000 Cr globally whereas Sigachi does 211 cr of sales
in the Pharma segment which is 7% of the global mkt.

MCC as a Product has multiple SKUs.
It is not just a single variety but multiple SKUs that get sold which Provide the margins + Sigachi is exporting which has realizations higher than domestic realizations.

Although, MCC is still a commodity and thats why the company is venturing into PRoducts like croscarmellose sodium which has lesser competition and better margins than MCC.

Also, i think the newer segments that the company is talking about are related to MCC
as its the food segment which the company has not ventured into Properly yet as they have
been focussing on Pharma. The Product complexity is more here and so the margins
are better too. It is related to the current Product line of MCC albeit with more complexity so
execution is what matters.

Disc- Studying. No Positions.

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Sigachi Industries Ltd report.pdf (428.6 KB)
Found this research report free. Seems like they are doubling their capacity of two of its plants in another two years. Also, company has been associated with clients in the industry for more than two decades on an average.

Here is the detailed product use.

Pharmaceutical:

API
Pre Formulated Excipients
High Functionality Excipients
Thickeners/ Stabilizers
Binders
Superdisintegrants
Carriers
Lubricants
Nutraceutical Formulations

Food & Nutraceutical

Nutrition
Ready-to-Use Additives
Stabilisers
Dietary Fibre

COSMETIC APPLICATIONS
Skin Care
Hair Care
Toiletry

Chemical:
In chemical industries our cellulose products are used in electrodes, and as filter aid. These products are economical and environmental friendly.

GloCel
In welding electrodes GloCel is a versatile product which prevent cracks in welding rods and gives good texture. GloCel burns completely and produce less slag. It is therefore suitable for deep penetrating welding.

CoatCel
CoatCel®Alpha cellulose is the purest form of cellulose, free from lignin and hemicelluloses. It is produced from purified wood pulp having 99.5% purity, producing almost ash less. Alpha cellulose is an inert porous material used to separate solid (impurities and turbidity) from the liquid, making almost free from suspended solids.

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They have competitors like DuPont. Also, concerning usage of tree for making MCC is a risk factor. The addressable market is not so large. Isn’t it correct?

Interview about the new segment. Some key Pointers -

  1. In Food, they currently focus on functional food in food segment of theirs and now they are moving to nutritional segment

  2. they will have the same set of customers in nutraceuticals segment

  3. they will supply Pre-mix to the nutritional segment. They see themselves as a 20% mkt share in a 3-4 yrs time Period.

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It’s not exactly a commodity. I relate to it as a mental model you’ll find in Modison Metals. An essential constituent of the end product costing single digit or low double digit. It can’t be replaced. Even the mature small molecules for their life cycle management would rather look at process efficiencies than replace excipients.

On the cash conversion, I would again differ as there’s no reason to believe the long term should change for their detriment. Their reinvestment need to maintain their per unit value is very low. It’s a high asset turn business gladly with good margins. Working capital cycle historically has been there in their favour. Obviously in B2B, unless you have amazing demand side business dynamics, it could be hard to take this as a given. Only in FY22 have their FCFs been not satisfactory (OCFs down and FCFs negative due to Capital Investment).

And there’s also a need to relate generally how EU/US, Chinese, Indian, etc. receivable cycles vary (not to generalise but very often you would find longer term contracts for EU/US).

As for human supplements, FMCG, etc. I don’t think it’s not the natural course for them. Because in pharma, it’s hard to uproot the relationships already built. It’s extremely sticky even for excipient sources. The others can be easier to penetrate and you also get the benefit of product development activities that go on in there. Like for eg, what happened with Cocoa Butter Equivalent. A player like Manorama would stand to benefit immensely if the regulations go up to accept greater than 5% CBE in place of CB. The companies then start formulating the product and get newer varieties out. That’s when you stand a good chance to get into their suppliers.

So the potential of MCC as say an thickening agent without increasing the calorie content. For low cal ice creams, etc. There would be a much greater market size just because of the sheer volume. So it makes sense to get the foundations laid.

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I find merit in the governance issues that have been raised about Sigachi. The statutory auditor M/s. T. Adinarayana & Co. appears to be a related party, and therefore cannot be said to be independent. Until they get a reputed auditor, their numbers will have to be taken with a pinch of salt.

Secondly, amazingly the company has assigned its own trademarks to Amit Raj Sinha Family Trust and then agreed to pay 1% of net sales as royalty to the Trust w.e.f. 1st April 2025 for a period of 10 years ! Couldn’t understand the business logic behind this.

I tried to search for the pre-IPO analyst conference video but could not find it. Let me know if someone has the link – I want to see if the management was asked about this and what was the answer. I also note that the IPO was lead managed by a little known firm called Unistone Capital Private Ltd founded just two years ago.

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Just a bit of background check. My understanding regarding T. Adinarayana being claimed a related party is that it’s premature, conjectural and in all likelihood false. For “Sigachi Industries”, they function only as a Statutory Auditor. But for “Sigachi Laboratories”, they are the principal owner (promoter).

Sigachi Laboratories was founded by the current Sigachi Promoter Mr Rabindra Prasad Sinha in 1994. He ceased to be a director in 2010 and Mr Adinarayana joined in 2008. Most likely, the subsidiary was sold off in 2010 because it’s no more a group company (at least as per the RHP and other checks online).

Adinarayana


Sigachi Laboratories currently has minuscule operations divided into Bulk Drugs and investment in Equity. The latter in all likelihood is the principal business. So it’s likely Sigachi Industries, early in their journey ventured into APIs but they couldn’t take it forward or decided at some point in the journey to offload it and focus on their current core business.

I didn’t find any managerial or promoter overlap between the two companies.

Another interesting thing is the current registered office premises for M/s T. Adinarayana and the change in office addresses given in Sigachi Industries RHP. Also, the current corporate office of Sigachi Laboratories


Not the very same office premises but it’s the very same floor. It could have very well been a part of the deal. But regardless, the timing of the transition is indicative of not something fishy really.


As for the trademark royalty, would have made a lot more sense had it been a percentage of profits. Sales alignment is an easy call option detached from shareholders’ incentives. This should be sternly taken up with the management.

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Thanks @KeshavKumar for this, that’s a lot of hard work and I appreciate it.

But you are missing the woods for the trees. For example, the promoter of Sigachi Industries is the founder of Sigachi Laboratories and the current owner of Sigachi Laboratories is the auditor of Sigachi Industries. Or that Adinarayana, the auditor of Sigachi Industries is a part owner & Director in Usha Kiran Finance which has a shareholding in Sigachi Industries through Preferential allotment, and where Amit Sinha & family also hold a stake.

The question here is not the legal definition of the term “related party” but whether the governance norms are followed in their right spirit. What stops Sigachi Industries from appointing a completely different auditor, especially when they are going public is beyond my understanding. Is the management so naïve as to not understand the implications of this? In this background, the fact that no banker of repute was associated with the IPO also caught my attention.

Please note I am not alleging that a fraud exists, but just that it doesn’t give me the comfort I need when investing in a newly listed company.

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Agreed and would take it up with the management. Thanks for pointing it out in detail. I was missing the indirect link and should have probed in more detail. Definitely will help if there’s a visual and practical independence. Would be the first one in their call to put these questions forward. And I’m sure I won’t (shouldn’t either) be the only one!

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Agreed, opportunity size is less and that is the reason I believe, there are not many into this business. Utilization is 90% range now and major capex will be completed in 1.5 to 2 years. Foresee growth for 3-4 yrs and don’t see similar growth after that at this point.

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Detailed analysis on Sigachi

Above link explained your question about margins

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Good results. Q1 profit jumps 42.5% YoY to Rs 12.82 crore on strong revenue. The company reported 42.5% year-on-year growth in consolidated profit at Rs 12.82 crore for the quarter ended June 2022, driven by revenue and other income. Revenue grew by 42.5% to Rs 78.31 crore during the same period.

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Results
Q1FY23 Concall
IP

Excellent set of questions in today’s call and response appears to be positive on 1% royalty, we have to track it.

In this call they said in nutraceuticals it is going to be B2B but in today’s call they are saying it is OTC / BTC

They just wanted to do everything along with their core competence, eg.

Alkali plants management
OTC products in Nutraceuticals (Will rely on contract manufacturing and sell on their name , I am not clear on this they said they leased a asset with 15 lakhs per month rent that asset will be used to manufacture and sometimes they said it is mainly taken from a 3rd party )
Ethonol - tone has changed they might not go ahead with this

CCS - Initial idea was setting up at Kurnool but they are setting up at Dahej (Looks like due to delays by AP government there will not be any investments in Kurnool )

All the capacities (under progress ones) will come online by FY24

CFO is jumping on everything :slight_smile:

Any idea why the stock price is still taking a beating? Results seem good and so does the commentary? Is it because of the capex which will not add to revenues until 2024?

Have they shared the receivables numbers? Cashflows went for a toss the last FY22 and this Quarterly they haven’t shared the balance sheet yet.

All thanks to @Chandragupta for gently nudging into asking difficult questions!

Apart from their core business, their entire communciation is something I would want to see last in any company. On one hand there is slower but more holistic growth that they could have targeted with their MCC and CCS market. There are exciting opportunities in the food industry for which they have communicated in the past and that it will grow faster than other verticals. But looks like they’re getting trapped by the short term or they are looking at some competition headwinds that we fail to realise.

The 1% royalty bit is something which makes the company a no go if they don’t back track and rectify it. Because of a lack of focus, the capital allocation can go for a toss. I wouldn’t want to buy an ethanol business via Sigachi. Nor would I want to buy a generic marketing one (can suck working capital, increase opex and takes a different kind of accumen to succeed). Topline isn’t that hard to increase per se. But will be difficult to do along with better or stable RoCE’s. That’s what their responsibility is but the soft signs are not very good.

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