One of and largest and only manufacturer of speciality chemicals such as….

Chemcon Speciality Chemicals is a completely debt free company engaged in manufacturing of specialised chemicals, such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry and inorganic bromides used as completion fluids in the oilfield industry. As per the management it is the only company in India engaged in manufacturing (HMDS). It is also the Largest Manufacturer of CMIC in India as well as 2nd Largest Manufacturer of CMIC worldwide. It is also the only Manufacturer of Zinc Bromide in India and Largest Manufacturer of Calcium Bromide in India 

CHEMCON SPECIALITY CHEMICALS

Current market price on the date of publishing this report-: 316 Rs

Originally incorporated as Gujarat Quinone Private Limited at Vadodara, Gujarat in 1988, it was only in 2004 pursuant to amalgamation the name of the company was changed to Chemcon Speciality Chemicals Private Limited .  The main objective of the company as mentioned in its memorandum was

“To carry on the business as manufacturers, processors, importers, exporters, dealers, sellers, buyers, consignors, consignees, agents, stockiest, suppliers of all classes, kinds, types and nature of chemicals, dyes, pigments and auxiliaries, intermediates including but without limiting the generality of the foregoing, heavy chemicals, fine chemicals, organic and inorganic chemicals, pharmaceuticals, drugs and medicinal chemicals, gum, allied chemicals, and boiling agents for textiles, paints, cosmetics, pharmaceuticals, paper, processing, leather, metals, food pigments and other industries made from whatever substances including minerals”

From a humble beginning in almost 30 years CSC has come very far such that is most of the products manufactured by the company it is either only manufacturer in India or one of the largest manufacturer globally. That is 

• Chemcon Speciality Chemicals is the only Manufacturer of HMDS in India and 3rd Largest Manufacturer of HMDS Worldwide 
• Chemcon Speciality Chemicals is the Largest Manufacturer of CMIC in India and the 2nd Largest Manufacturer of CMIC worldwide 
• Chemcon Speciality Chemicals is the only Manufacturer of Zinc Bromide in India.
• Chemcon Speciality Chemicals is the Largest Manufacturer of Calcium Bromide in India 

Company supplies its products to domestic customers and also exports products to countries including United States of America, Italy, South Korea, Germany, People’s Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. 

In Fiscals 2020, 2019 and 2018, company’s revenue from exports (including Deemed Exports) contributed 39.78%, 31.99% and 47.84%, respectively of its revenue from operations. Revenues from exports (including Deemed Exports) have grown at a CAGR of 17.57% between Fiscals 2018 and 2020. 

The key customers of Pharmaceutical Chemicals include Hetero Labs Limited, Laurus Labs Limited, Aurobindo Pharma Limited, Sanjay Chemicals (India) Private Limited, Lantech Pharmaceuticals Limited, Ind-Swift Laboratories Limited, Vivin Drugs & Pharmaceuticals Limited and Macleods Pharmaceuticals Limited and the key customers of Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company. 

Business / Products

HMDS -: Hexamethyl Disilazane

HMDS or hexamethyldisilazane (also known as bis(trimethylsilyl)amine) is an organosilicon compound with the molecular formula [(CH3)3Si]2NH. The molecule is a derivative of ammonia with trimethylsilyl groups in place of two hydrogen atoms. This colourless liquid is a reagent and a precursor to bases that are popular in organic synthesis and organometallic chemistry. 

Application of HMDS 

• Pharmaceutical
  • Antibiotic Drugs
  • Anti-viral Drugs
  • Rubber Industry – Used in vinyl silicone rubber in order to improve the tearing strength. 
• Semiconductor
• Organic Synthesis 
• Other- Photolithography, electron microscopy, and pyrolysis-gas chromatography-mass spectrometry are all uses for hexamethyldisilazane. HMDS (Hexamethyldisilazane) may substantially expand the range of applications for GC and enhance the chromatographic findings of sugar and related material silanization.

HMDS is widely used in manufacturing of antibiotics such as penicillin, cephalosporins and other types of penicillin 

For the 3rd Quarter FY22

Overall pricing of HMDS had been volatile during the quarter and it varied in the range from Rs.1500 per kg to 700 per kg. This had impacted overall turnover figures.

Trimethyl Chlorosilane – (TMCS/TMSC) 

TMCS is also known as chlorotrimethylsilane is an organosilicon compound. It is a colourless liquid that is stable in the absence of water. It is widely used in organic chemistry. It is used as coating for silicon and glass surfaces, and in the production of silicone (polysiloxane) polymers.

Hexamethyl Disiloxane – (HMDSO/HMDO)

HMDSO finds its application in Cosmetics and pharma for topical treatments, such as in conjunction with fungicides, it can be utilised as a volatile excipient in spray pump systems. The low surface tension of this disiloxane promotes skin covering while also possibly increasing the active drug’s bioavailability.

Company currently has 2400 MTPA capacity and the same is being utilised for the captive consumption as Chemcon currently is one of the largest importers of TMCS. With the new manufacturing facility set up to manufacture the same it would not add much to the toppling however management expects that there could be significant improvements to the bottomline on account of this.

CMIC (chloromethyl isopropyl carbonate) 

The CMIC is also known as chloromethyl (1-methylethyl) carbonate. It belongs to the product category of chemicals used as pharma intermediates. India is the largest consumer of CMIC in the world, accounts for ~65% of the global CMIC demand. 

Chloromethyl isopropyl carbonate is an antiviral drug intermediate product that is a critical intermediary for the anti-AIDS and anti-hepatitis B medication Tenofovir. Tenofovir is a nucleotide antiviral medication produced by Gilead Corporation in the United States. It is a byproduct of chloromethyl isopropyl carbonate.

The US Food and Drug Administration licenced it in 2001 for the treatment of human immunodeficiency virus (HIV) infection. It is the first-line anti-HIV medicine recommended by many treatment recommendations because of its exact therapeutic impact, good applicability, and optimum dose. Tenofovir and its combination formulations have become the anti-AIDS medications with the highest sales.

Key End-Use Applications of CMIC is in  Pharmaceutical Industry for manufacturing drugs to treat HIV & HBV Intermediate. Thus this accounts for almost 100% of the demand for CMIC.

Chemcon is one of the leading players in the market of CMIC industry. Other major players are Shanghai Twisun, Inner Mongolia Saintchem, Anshul Specialty, Huangshi Fuertai and Paushak. India and China are the only countries that produce CMIC. In 2019, India and China accounted for 36% and 64% of the global production share respectively. 

CMIC reported subdued activity in the current quarter, mostly owing to weaker demand as clients were unable to secure other important raw materials, as well as a restricted business cycle for the product Tenofovir. Many Pharma MNCs’ overall business momentum has been affected by the global supply chain. The overall demand for CMIC chemicals is high, and Chemcon has received several inquiries over the next two to three quarters.

For the 3rd Quarter FY22

According to management, due to high demand in the local market, chemcon will have added additional capacity of 1200 metric tonnes per year at the P8 plant by the end of this month, making it the world’s largest CMIC manufacturer with a total capacity of 3000 metric tonnes per annum. CMIC imports account for almost 40% of domestic consumption in India, showing that the product has a very promising future.

Oil Well completion chemicals (BROMIDES)

Client profile includes Halliburton , Baker Hughes, Schlumberger, NIS in Serbia and some customers with a lengthy relationship in Azerbaijan. 

In this category company manufactures 

• Calcium Bromide (CaBr2) Solution 
• Calcium Bromide (CaBr2) Powder
• Sodium bromide (NaBr) solution
• Zinc bromide (ZnBr2) solution

Well completion is a vital stage in oil well construction that includes drilling into oil-bearing strata, running casing, injecting cement, perforation, and the running of production string. Oil Well Completion Chemicals are a salty solution made composed of chlorides or bromides that are used to finish the well.

The oil well completion segment performed marginally better in the third quarter of FY22, as overall offshore oil and gas wells fueled modest expansion in the drilling and completion fluids market. With oil prices continually rising, management anticipates that demand for this product will steadily increase.

Financials

For Q3FY22

• Total Revenue from operations for Q3FY22 stood at Rs.49.5 Crores.
• Total production volume for the Q3 stood at 1333 metric tonnes.
• EBITDA stood at Rs.17.3 Crores in Q3 FY2022. 
• Net profit for Q3 FY2022 stood at Rs.13.5 Crores

Domestic market contributed around 77% whereas international market contributed around 23%.

FOR 9M Ended Q3FY22

• Total revenue stood at Rs.168 Crores.
• Production volume for nine months FY2022 was at 4182 metric tonnes.
• EBITDA stood at Rs.54 Crores. 
• Net profit for nine months FY2022 stood at Rs.41.5 Crores 

For FY 21

• Revenue from operations for the year ended March 31, 2021 stood at Rs 24,348.72 Lacs as against Rs 26,205.16 Lacs during the previous year. 
• Profit after tax increased by 15.44% from Rs 4,885.25 Lacs to Rs 5,639.82 Lacs.
• EBIT increased by 15.47% from Rs 7,026.14 Lacs to Rs 8,112.97 Lacs. 
• Earnings per share increased by 7.22% from Rs 15.37 per share to Rs 16.48 per share. 

New Production Facility / Capex

Chemcon had successfully begun commercial manufacturing of plant number P8 facility, one of two plants funded by the IPO funds to be built at Manjusar in Vadodara. The firm has increased capacity to generate 2400 metric tonnes per year of Trimethylchlorosilane (TMCS), a basic raw ingredient for net HMDS synthesis. It was a big milestone for the firm since it had finished its backward integration process to make TMCS, which is primarily employed in the creation of HMDS. Going forward, management is optimistic about reporting a solid business in the next quarters.

Capex was included in the company’s IPO proceeds as an investment of about Rs.41 Crores in the plants number eight and nine combined, which has already been completed. The payback period should be less than a year and a half, resulting in considerable margin gain.

Plant nine’s expansion got underway in the third quarter of fiscal year 22 and is projected to be completed in the first quarter of fiscal year 2023. In addition, the company has begun the construction of Plant No. 10 at the same area for other pharma intermediate goods.

Capital commitment for Plant 10 is expected to be around Rs.15 Crores and that would be done from the internal accruals. 

Pollution Control Board Notice and Closure of Plant for 25 days

In September 2021, the Company got notice from GPCB ordering the shutdown of production at its factory, and as a result, the Company was forced to shut down operations for 25 days. The company paid a penalty of Rs.50 lakh as an interim payment and also provided a bank guarantee of Rs.10 lakh.

Managements Comments / Future Outlook

• Going forward with additional capacities and new plants starting commercial productions management expects significant improvement in margins.
• Volumes for bromides had dropped down , however going forward management expects it to grow as the crude oil prices have inched upwards.
• The company is seeing extremely high demand for its HMDS product, and it does not have inventories of less than a half-day output on hand. Whatever the firm produces is sold and shipped the same day. The facility is now operating at 65 percent to 70 percent capacity, which is a common trend in the industry and will continue.
• Guanine is the newest product that company will manufacture in Plant 9 and there is no other new product. Crystalline guanine is used as an ingredient in the cosmetics industry to produce a pearly iridescent look to various products (e.g., shampoos). It can also be found in metallic paints, imitation pearls, and plastics. It adds a gleaming sheen to eye makeup and nail polish.
• Because of the COVID scenario throughout the world, the company is unable to enter the Semiconductor business and has no domestic consumers. However, whether it goes to the semiconductor or the rubber, the company’s realisation, profitability, working conditions, and everything else stay the same.
• Despite facing production loss for 45 days company was still able to maintain the PAT of the industry as management chooses to focus on bottomline instead of topline. And despite that it is expected there could be about 25% growth on the same. 
• Chemcon is operating with zero bad debt. Company do not have bad debts. If we see the history of Chemcon we would not find the bad debt that is the safety management is taking in respect to the business receivables. 
• Company currently is working for more than half a dozen products. (New Products)

Competitive Advantage

CMIC is entering the ARV API, ARV API market, which is very competitive. Regardless, other firms do not practise backward integration. So, as indicated by management, volume is what is preventing rivals from implementing backward integration. CMIC Chemcon’s production capacity will be around 3000 tonnes per year. Individually, the largest consumer would be around 900 tonnes per year at most. So dealing with a facility of this magnitude is really challenging, and for rivals, it is not high volume or value addition, making it unappealing and giving chemcon an edge.

Conclusion 

Chemcon Speciality is a completely debt free company having operating margins of more than 20% over past several quarters which going forward is expected to improve significantly as per the management. Company recently has completed backward integration of some of its products as well as also added capacity of some of its major products, the impact of which would be visible on the bottomline in the coming period. Over the past period company has posted a stellar performance with sales growing at 20% and 16% cagr over 5 years and 3 year period respectively while at the same time Net profit has seen a solid growth of 77% and 29% cagr over the same period respectively. The chemcon Speciality, only Manufacturer of HMDS in India and 3rd Largest Manufacturer of HMDS Worldwide, Largest Manufacturer of CMIC in India and the 2nd Largest Manufacturer of CMIC worldwide, only Manufacturer of Zinc Bromide in India as well as the Largest Manufacturer of Calcium Bromide in India is worth exploring for long term.

Chemcon has failed to deliver any meaningful returns post listing on the stock exchange despite amazing fundamentals. Therefore users need to be careful if they choose to invest in this company and have patience of holding it for at least 2-3 years. Please do not send queries regarding underperformance of the stock.