Q1FY19 Conference Call Notes: Notes in Italics are emphasis mine.
1st call after 5 years.
ATBS
Largest product with 50% of sales. FY18 finished with strong growth due to increased usage as applications of this product is growing. Used to make polymers that go into water treatment, EOR and personal care products. Lubrizol’s exit helped us as well. ATBS grew at 35% in value terms and 25% in volume terms in FY18 over FY17. Overall market size is growing.
In FY19 we command global market share of more than 60%. We expect to grow more than 30% on volume basis. Have added new customers and have renegotiated pricing contracts. It is a very difficult monomer to manufacture and we have proprietary technology, we do not see any new competitors entering the market. These kind of margins are expected to continue in the coming years.
Capacity expansion is underway that will take capacity from current 26000 TPA to 40000 TPA. Expected to be completed by April 2019 with a CAPEX of 75-80cr. Expect to grow ATBS volumes by 25% for next 2-3 years. We will need this 40000 TPA to service the market for next 3-4 years. 40000 TPA utilization for the next 5 years is achievable. Reaching full capacity will take 3 years.
FY18 Capacity Utilization - 100%. Have started running at 100% from April this year, as Lubrizol exited in Jan. So yoy basis 30% volume growth over FY18.
For Lubrizol, this was not a core product, they had less than 1% revenue share from ATBS, they had 20% market share. Benefit for us is increased volumes at better prices. Earlier there was a supply surplus, now there is a shortage. This has increased margins and it is a difficult product to manufacture and we do not see any new competitor coming up. We have formula based pricing with our customers, as crude prices go up, our RM prices go up, so do our end product prices but the margins are not affected by crude price. (Margins per volume $/Kg not margins per Revenue.)
There are no inventories in the market due to current situation. This will be a brownfield expansion. Have a Japanese and Chinese competitor, they are not expanding capacity as per our knowledge.
Midyear debottlenecking has been shelved.
IBB
2nd largest product for us. Q1 sales were stable, Q2 will be slightly slower due to shutdown by one of largest customers. Expect to make up for this in Q3 & Q4. Already increased IBB capacity from 16000 to 25000 TPA, this will take care of demand for the next 3-5 years. Last year customer took shutdown to increase capacity, that would have meant 25% growth this year, but unfortunately due to technical failure customer has taken a 3 month shutdown, so this year we will see a 3-5% growth. In FY20 we expect double digit growth (15%) over FY19 as global demand is increasing and customer has already expanded.
IBAP project is on hold because the customer we were making it for is not interested anymore in sourcing IBAP from us.
FY18 Capacity Utilization - 60%
Only 5-6 customers for IBB.
IB & MTBE
Have fared well, and keep growing yoy. IB capacity is at 30000 TPA, it has been increased to cater to BPs. Currently running at 50%. For every KG of ATBS we need 0.35 KG of IB, We sell 6000-7000 TPA of IB in the domestic market.
12000 TPA will go for BPs and 12000 TPA for ATBS rest 8000 TPA we will sell in domestic market.
Customized Products
Delivering as per Expected. We do get queries from customers for customized products because a lot of our processes can be replicated to make other smaller products. They are small in terms of revenue share but much higher in terms of profit share. These being specialized products we get much higher margins here.
BPs
CAPEX to finish by April 2019. Has 4 products. PTBP & OTBP are used as intermediates in resins and perfumes. DTBP are used as RM in anti-oxidants, which are used as additives in plastic manufacturing. CAPEX of 240 cr. Will result in sales of 350-400 cr. In FY20 we expect 60-65% capacity utilization and from FY21 at 100%.
Mostly imported into India from Korea and Singapore. They are not made in India because they do not have the necessary RM which is IB. Since we are the largest manufacturer of IB in India it makes sense to forward integrate and make these products in India. We work on a ROI of 15-20%, so on a CAPEX of 240 cr we can calculate the margins. They will be lower than ATBS but we still expect a payback in 5 years. At 400 cr our market share in India will be 80-90%. 24-25000 TPA are already imported and we are going for a 36-37000 TPA capacity. We will also be exporting some BPs. Globally market size is in lacs of TPA. We are competitive globally as well. We are backward integrated with IB and that gives us a cost advantage. There is scope for increase in capacity and selling products outside India.
For every KG, we need 2/3rd phenol and 1/3 IB for their production. Phenols are readily available in our country and imported as well. We will source it locally. Margins will be similar to IBB. 15-20%. Our costs will be similar to other manufacturers, customers in India will not have to pay for international freight. Usage of products in which BPs are used is growing, that is why we feel our excess capacity will be able to cater to expanding demand. BPs end use market could be growing at 10-12%.
With all of the above we expect to grow by 25% CAGR for next 3 years.
PAP
Have set up a prototype pilot plant. Proprietary technology developed by NCL has been successfully demonstrated at the lab level. Trials on the pilot plant will take 3-6 months. Will take a decision on commercialization only when pilots are successful for 6 months. That is why we haven’t mentioned it in our CAPEX plans. Having teething problems right now, have ordered new equipment.
If commercialized, it would have an asset turnover of 1 and EBITDA margins of 20%.
An analyst asked that with 20% EBITDA margins, we have WC and D&A to pay for, how does it qualify 20% ROI? The answer was, "Do not take PAP into your projections, even we are not. Saying this to all analyst, none of us here are taking PAP into our projections for the next 3-5 years also because we are not sure we are going to do this."
FY09 PAP pilot plant was with different technology with 4 cr investment. Market conditions changed and so did our process.
Now we have made changes to the process, improvised it more. This is a different pilot plant. We were successful in that process. (But then why not take it further, why new process?)
Q&A
FY19 EBITDA margins will be at 35%. ATBS is higher margin product and higher volume as well but with BPs coming online we expect same blended margins for next 3 years at EBITDA level.
We do not import anything from China, most of the imports are coming from USA, Korea and ME.
New products beyond PAP
For us to commercialize one product we have to study 10-15 different products at various stages of the RME pipeline. At any given time, we are working at 15-20 products, developing new chemistries, one ex. is that we could further integrate from BPs to make anti-oxidants. It is too premature to talk about any of them. This is what keeps us busy. Our products have a limited market size so to keep growing we need to keep adding new products.
Our criterion for new products is beyond revenue potential, we have set rules:
- we look for 20% ROI,
- it should be a clean and green process,
- there should be a barrier to entry through a unique process, or there is an integration for us with our existing products.
Right now our biggest endeavour is to close on PAP, one way or the other. Once we decide that, then we will make a pilot plant for the new product and go from there. So any new product is at least one year away from the announcement.
Dividend Payout
We will have healthy cash flows of 400 cr on revenues of 1000 cr this year. We prefer to reinvest capital into our business as that gives us the best returns. Payout will stay at 20%. We need these reserves to pay for our projects via internal accruals without taking on debt.
Growth
Excluding PAP this year we will see an increase in bottom-line by 35-40%, for the next 3 years we will see our profits growing at 25-30%.
CAPEX
FY19 around 300 cr on account of BPs and ATBS. FY20 we do not have the figure as it is mainly dependent on PAP.