Financial Year 2016 was a year of strong performance for Meghmani Organics Limited as we continued to reap the benefits of Rs. 5.57bn mega capacity expansion made over the past 5 years. Today, we have emerged as a well diversified chemicals player operating in three segments, i.e. Pigments, Agrochemicals and Basic Chemicals. We have developed a growing basket of higher value added and high-margin products, along with an extensive pan-India and global presence. Meghmani is now present in 75 countries with over 400 clients.

During the year, we witnessed continued growth in our Pigments and Basic Chemicals businesses. We are amongst the top 3 players in the world in Blue Pigment, with increased market share of 15%. Following our capacity expansion, we have increased our focus on the domestic Pigments market. Our focus on building our branded agro formulations business has resulted in an expanded distribution network consisting 2,370 stockists, agents, distributors, and dealers, compared to 1,000 in FY15. We have also increased our presence in high margin Caustic Soda and added capacity in Caustic Potash.Our Caustic Potash plant with a revenue potential of Rs. 1,250 mn and EBITDA margin of 30% started Commercial Production in April 2016.

During the year, we continued our efforts to increase capacity utilization across segments. In fact, volumes have registered significant growth across all the three segments, i.e. Pigments, Agrochemicals and Basic Chemicals where volumes grew by 19%, 21% & 4%, respectively.

Overall Performance

Robust growth in profitability driven by higher volumes and better operational performance

Due to our well planned expansion strategy, we were able to deliver strong performance despite a challenging environment during the year, which saw a bad monsoon, tough global markets, falling raw material prices and volatile foreign exchange rates. We reported consolidated revenue of Rs. 13,370 mn for FY16 compared to Rs. 12,678 mn in FY15, on account of 13%, 10% and 2% growth in Basic Chemicals, Pigments and Agrochemicals, respectively.

Diversification into higher margin products, lower input prices along with improved operational performance and financial leverage resulted in significant improvement in our profitability as well. EBITDA for the period increased by 41%, taking EBITDA margin to 21.5% for the year, up from 16.0% in FY15. Profit After Tax (PAT) for FY16 was up 88% at Rs. 826 mn from Rs. 439 mn in FY15, PAT margin increased to 6.2% in FY16 from 3.5% in the previous year. We have reduced our debt by Rs. 633 mn this year and plan to reduce it by a further Rs. 1,000 mnin FY17 in line with our earlier guidelines. Financial cost has declined by 15%, led by debt reduction.

Going forward, with higher volumes, increased share of higher-value-added products, better capacity utilization, strengthening position in the basic chemicals (high margin) business and de-leveraging of the balance sheet, we expect to deliver increasing returns.

Business Segments

At Meghmani, all our businesses are on a strong growth path. We have adopted a conscious strategy of focusing on value added offerings,i.e. in Pigments (Beta Blue) and Agrochemicals (branded Agro products), besides monetizing the CRAMS (Contract Research and Manufacturing Services) opportunity in Agrochemicals and Pigments and recently diversifying into Caustic Potash. The improved performance and higher utilization of capacities bode well for us.

I. Pigments

1. Industry Opportunity

Global Pigments market is expected to reach $32 bn by 2023

According to Transparency Market Research,the global pigments market is anticipated to reach $32 bn by 2023, expanding at a CAGR of 3.8% between 2015 and 2023. Paints & Coatings is the largest end user segment of the pigments market, driving demand for the industry. The architectural Paints & Coatings market has grown considerably, owing to rising infrastructural development and construction activities in emerging economies.

Asia Pacific dominated the global pigments market with 40% market share. Rapid industrial development, rising infrastructural activity, and economic progress in developing countries played a key role in driving the automotive and construction industries, which fuelled the demand for pigments. China dominates the pigments market in Asia Pacific. The mature paints & coatings and plastics markets have driven demand for pigments in developed regions, such as North America and Europe. North America was the second-largest consumer of pigments, followed by Europe. In terms of volume, U.S. dominated the pigments market in North America. In terms of demand, Germany held the largest share of the pigments market in Europe.

Middle East & Africa has been projected as a lucrative market for pigments during the forecast period. The Paints & Coatings segment is estimated to dominate the pigments market in Middle East & Africa in the next few years. Brazil is likely to be the key market for pigments in Latin America (LatAm) by 2023.

Dyes and Organic Pigments to grow at 6% CAGR

Global demand for dyes and organic pigments is expected to grow 6% per year to $19.5 bn in 2019. The organic pigments market is expected to witness growth on account of its use in various end-use industries, including printing inks, paints and coatings, plastics, rubber and textiles. Urbanization, coupled with rise in infrastructure spending, is likely to boost the paints market which, in turn, is anticipated to fuel the organic pigments market over the forecast period. Furthermore, use of organic pigments as colorants in textile and plastic industries is expected to contribute to growth. Moreover, rising demand for value-added, high-quality organic pigments in the cosmetic industry is likely to drive growth over the next few years.

Although the organic pigment market has reached maturity in North America and Europe, the market is anticipated to receive a boost as major companies are aiming at designing and developing products in sync with continuously changing requirements for evolving technologies. However, volatility in raw material prices is likely to be a major constraint in the growth of the organic pigment market. Numerous North American and European organic pigment manufacturers have been shifting their manufacturing bases to low-cost countries in Asia Pacific on account of absence of stringent environmental compliance issues and lower production costs at the latter locations.

Growing infrastructure development coupled with rapid industrialization are key factors that contribute to expansion of the organic pigment market, particularly in developing countries, such as India, Indonesia and China.

Growth in Paints & Coatings and Textiles is expected to drive growth of Indian Colorant market

The Indian Dyestuffs and Pigments industry has transformed from being import dependent to one driven by exports. Developed countries are now focusing on sourcing dyestuffs and pigments from cost effective Asian markets, thanks to stringent environmental constraints back home. Exports have grown in double-digits over the last few years.Going forward, availability of skilled professionals and low cost of manufacturing coupled with Research and Development

(R & D) capabilities are seen as strong demand drivers for the dyestuffs and pigments industry in India. Several multinational corporations (MNCs) have established facilities with world class technologies with a view to tap the growing market. Growth in the end user segments, especially paints & coatings as well as textiles, is expected to drive growth in the dyestuffs and pigments industry.The main end-users of pigments in India are printing inks, plastics, rubber and paints & coatings industries.

2. Business Overview

Meghmani is one of the largest manufacturers of Phthalocyanine-based pigment with a global market share of 7% in volume terms. We have vertically integrated facilities manufacturing CPC Blue (an upstream product which is also sold to other pigment manufacturers) and end products i.e. Pigment Green and Pigment Blue. These Pigment products are used in multiple applications, including paints, plastics and printing inks.

Our Pigments business enjoys strong global presence with exports accounting for 72% of net sales. The customers comprise mainly MNCs, such as Sun-DIC, Flint Group, Akzo Nobel, DuPont, and PPG Industries. Our relationship with our clients is sticky with 90% business arising from repeat customers. We have a global distribution network of 70 overseas distributors. Our direct presence with subsidiaries in US, Europe, Indonesia and Dubai helps us to maintain a front end presence and the ability to work closely with end user customers. We also have warehouses in USA and Uruguay.

We have three dedicated manufacturing facilities to manufacture Pigment products. These are located at:

• GIDC Vatva, Ahmedabad (2,940 MTPA) where Pigment Green 7 products are manufactured

• GIDC Panoli, near Ankleshwar (17,400 MTPA), where CPC, Alfa, Beta Blue and Pigment Blue 15 products are manufactured.

• Dahej SEZ Ltd (10,800 MTPA) where CPC, Alfa and Beta Blue Products are manufactured.

3. Performance of Pigments Business

Net sales from Pigments business increased to Rs. 4,667 mn in FY16, up 10% from Rs. 4,244 mn registered in FY15. Volumes have registered strong growth of 19%, driven by increased production at the Panoli and Dahej SEZ plants of 24% and 34%, respectively. However, realizations were impacted as the benefit of reduction in raw material costs was passed on to long-term customers. Margins climbed to 16.5% from 10.1% on account of improved operations and softening of raw material prices.

Plant-wise performance:

Particulars 31.03.2016 31.03.2015
(Rs. mn) (Rs. mn)
Domestic Sales
Vatva 89 82
Panoli 967 637
Dahej SEZ 95 40
Total Domestic 1,151 759
Exports Sales
Vatva 945 1,025
Panoli 1,567 1,852
Dahej SEZ 1,004 608
Total Exports 3,516 3,485
Grand Total 4,667 4,244

4. Outlook and Strategy:

Value-added products and better capacity utilization to lead profitable growth

We are focusing on the high-margin paints and plastics market by improving the product-mix and specialty pigment products for the international market. We are in preliminary talks with certain international players to supply specialized Pigment products on a long-term basis and are eyeing untapped markets, such as Japan. We are also focusing on increasing our presence in the growing Indian market. Being a leader in the Indian Pigment market (CPC Blue and Green Pigments) with strong international presence and strong client-base, we are positive that the Company will continue to deliver profitable growth, led by increased capacity utilization, increased contribution of value-added products and higher demand in the market place.

5. Risks, Concerns and Threats

Fluctuating and volatile prices of key raw materials, including benzene and toluene, coupled with an increasingly stringent regulatory environment, are critical challenges to the growth of this industry. Since we derive a significant portion of our business from exports, volatility of the Rupees vis--vis the Dollar and the Euro may affect our realizations. We also face competitive pressures, including competition from Chinese manufacturers who have installed large plants for Pigments. We compete in the areas of quality, technical competence, backward integration, logistics facilities, after-sales service and customer relationship. Changing competitive environment may impact our business and future prospects.

II. Agrochemicals

1. Industry Structure

Financial Year 2016 was a challenging year for the Agrochemicals industry as the rate of growth of global agricultural productivity stagnated for the second year in a row. In this period, prices of farm products continued to slide, currency was devalued, and extreme weather conditions occurred from time to time all of which led to profitability of agricultural activities taking a hit.Other factors that contributed to this state of affairs included high inventory levels at the distributor end in many countries.

While future augurs well as global market is expected to cross $250bn mark by 2020

According to research by Markets and Markets, value of the agrochemicals market is estimated to reach $ 250.5 bn by 2020, from $ 214.2 bn in 2015; a CAGR of 3.2%. Asia Pacific dominates the global market with a share of around 36.7%. The European region is expected to be the fastest growing market in the near future, with a rising number of farmers moving towards technology driven agricultural practices. The market is primarily driven by the increasing demand for food, in tandem with the growing global population, rising standards in agricultural farming and extensive use of technology in agrochemicals development. Intensive R&D efforts are expected to lead to delivery of enhanced yields and superior produce.

The Indian crop protection industry is expected to grow at a CAGR of 12%

Given the current economic growth projections, India is likely to become the third largest economy in the world by 2030, accompanied by a rise in urbanization levels, which will lead to changes in dietary needs. To sustain the growing population’s food and nutrition needs, India will have to adopt to the most modern techniques in the agriculture sector. According to a FICCI report on the Indian Agrochemical Industry, the Indian crop protection industry is expected to grow at a CAGR of 12% to reach Rs. 470 bn by FY19. The domestic market, on the other hand, would grow at a CAGR of 8%, as it is predominantly dependent on monsoons. Insecticides are the largest sub-segment of agrochemicals with 60% market share, while herbicides, with 16% market share, form the fastest growing segment in India. Although yield per hectare has doubled in the past years due to increased use of hybrid seeds, fertilizers, and crop protection chemicals, among others, it is still low in comparison to global standards.

There is now a need for the agriculture sector to undergo technological transformation and adopt modern methods which reduce dependency on monsoons, ensure more productive use of available resources and thereby serve the nation more efficiently. These factors therefore, highlight the importance of the use of agrochemicals for enhancing food and nutrition security of the nation. This would require ushering in the Second Green Revolution in India. The Government of India is striving to usher in the 2nd Green Revolution which would require a holistic approach to farming in India and include adopting the following measures on various fronts:

1) Reduce dependency on monsoons through better irrigation/water harvesting methods.

2) Develop high-yield variants of other crops besides food grains.

3) Educate the farmers on right agricultural practices.

4) Integrate pest management techniques.

5) Bringing in technology & mechanization to consolidate fragmented farm holdings.

6) Developing measures such as crop insurance.

7) Generating alternate sources of livelihood for farmers to mitigate the risk of crop failure.

Opportunities and Key growth drivers for Indian Crop Protection Market:

1) By 2020, $6.3 bn worth Agrochemicals are expected to be taken off patent. This will open up significant opportunities for Indian companies which have expertise in the generic segment. India exports only 44% of the Agrochemicals it produces. In order to build a strong export base, companies would need to set up marketing offices in export geographies. They could also look to enter into strategic alliances with smaller, local companies to expand their marketing and distribution reach.

2) Herbicide consumption in India is expected to grow at a CAGR of 15% over the next five years to reach $0.8 bn by FY19.

3) India’s capabilities in low-cost manufacturing, better price realization, strong presence in generic pesticide manufacturing, availability of technically trained manpower, seasonal domestic demand and overcapacity, are some of the key growth drivers of India’s agrochemical exports. Following the tsunami of 2011, Japanese companies are trying to build manufacturing capacities outside Japan to de-risk themselves. These Japanese companies, very particular about confidentiality and protection of intellectual property (IP), have perceived the opportunity in India and are now creating a base here.

4) Per hectare consumption of pesticides in India currently stands at 0.6 kg/ha, compared to 5-7 kg/ha in UK and 13 kg/ha in China. Clearly, penetration of agrochemicals in India is the key to raise yields and ensure food security for its enormous population.

2. Business Overview

Meghmani is a leading vertically integrated Agrochemicals player with product offerings encompassing the entire value chain intermediate, technical grade and formulations (bulk and branded). Our vertical integration of business allows us to effectively manage raw material costs and assure a constant supply of consistent quality.

The agrochemicals industry is highly regulated and we enjoy competitive advantage via 183 export registrations, 400 registrations in pipeline, 309 CIB registrations and 27 registered trademarks. We have a strong global client base with exports accounting for 69% of our Agrochemical sales. We export technicals as well as branded products to Africa, Brazil, LatAm, US, and European countries. Recently, the Company also received nod from the US regulatory agency for an amendment in label registration for its Permethrin technical product, expanding the scope of application from households only, to agri too.

Meghmani produces commonly used pesticides for crop and non-crop applications, such as for public health, insect control in wood preservation and food grain storage. Major products include 2, 4-D, Cypermethrin, Permethrin, Metaphenoxy, Benzaldehyde, Chlorpyrifos and Profenophos. In branded formulations, we have established a strong pan-India presence with about 2,370 stockists, agents, distributors, and dealers spread across 17 states compared to 1,000 in FY15. Key brands include Megastar, Megacyper, Megaban, Synergy and Courage.

We have three state-of-the-art manufacturing facilities located at:

• GIDC Ankleshwar (6,660 MTPA)

• GIDC Panoli (3,600 MTPA)

• GIDC Dahej (10,260 MTPA)

3. Performance of Agrochemicals Business

Net sales from Agrochemicals increased to Rs. 4,477 mn in FY16, from Rs. 4,380 mn in FY15 a rise of Rs. 97 mn. This was thanks to strong volume growth of 21% to 13,369 MT compared to 11,044 MT in FY15. Volume growth helped offset the fall in net realization,on account of change in product mix to match demand. Margins increased to 13.7% from 13.2%,driven by reduction in raw material prices and improved capacity utilization.

Plant wise Performance:

Particulars 31.03.2016 31.03.2015
(Rs. mn) (Rs. mn)
Domestic Sales
Ankleshwar 331 368
Panoli 560 495
Dahej 505 421
Total Domestic 1,396 1,284
Exports Sales
Ankleshwar 1,178 1,904
Panoli 1,017 641
Dahej 886 550
Total Exports 3,081 3,096
Grand Total 4,477 4,380

4. Outlook and Strategy

Increased focus on branded business and higher utilization are key growth drivers

In our branded formulations business, we have established significant presence through a strong pan-India network of about 2,370 stockists, agents, distributors and dealers. We plan to add a further 3500 dealers to the network and achieve revenue of Rs. 2,500 mn in the next three years.

We will continue to invest in new registrations in regulated markets, such as the US, Brazil and European Union (EU). We have planned to obtain Good Laboratory Practices (GLP) Certificate, which will significantly reduce the time required to secure new registrations. We will also continue to focus on increasing the utilization levels of current assets. With an increasing number of companies setting up manufacturing units in India, we will also leverage on the CRAMS opportunity to boost revenues.

Further, recovery in the global agro market, favourable monsoon in India during the year and crude prices remaining low will lead to strong growth in Agrochemicals.

5. Risks, Concerns and Threats

Despite strong growth drivers, the Indian Agrochemicals industry faces challenges in terms of low awareness levels among farmers about agrochemical products and their usage. Also, rising sale of spurious pesticides and spiked bio pesticides pose a major threat to industry growth.

We export our products to various countries. Thus, any adverse changes in the political, climatic, economic, regulatory or social conditions of these countries might impact our business prospects in these countries. Any change in the policies implemented by the governments of these countries, which result in currency and interest rate fluctuations, capital restrictions, changes in duties & taxes and a registration regime detrimental to our business could adversely affect our operations and future growth. Increase in crude prices will also impact the costs and prices of various products.

We operate in a competitive environment and compete with international as well as domestic players on various fronts, such as quality, technical competence, distribution channels, logistics facilities, after sales service and customer relationships. The threat of illegal, cheap imports from China is ever present and becoming a major factor in the performance of local Indian producers.

The performance of the Indian agrochemical industry is dependent on monsoon. Erratic rainfall affects crop acreages, pest application and overall productivity, directly impacting our sales performance.

III. Basic Chemicals Industry Structure

Global Chlor-Alkali Industry to grow at 5.4% CAGR (2016-21)

According to Markets and Markets research, the global market size of Chlor-Alkali is estimated to reach $102.60 bn by 2021, upfrom $78.72 bn in 2016, growing at a CAGR of 5.4%. Caustic Soda enjoys the largest demand among other Chlor-Alkali products as it has a wide range of applications in different end use industries, such as Alumina Refining, Organic & Inorganic Chemicals, Soaps & Detergents, Water Treatment, Food and Pulp & Paper. EDC/PVC, and Glass Industries are the largest users of chlorine, caustic soda, and soda ash, respectively and are driving the overall Chlor-Akali market. In 2015, Asia-Pacific was the largest market for Chlor-Alkali products. The region is projected to register the highest growth rate, both in terms of value and volume, owing to high demand from emerging countries of the region. China is the largest Chlor-Alkali market globally with the highest demand.

Indian Chlor-Alkali Industry poised to grow

According to the XIIth Five-Year Plan note on Indian Chemical Industry, size of the Indian Chlor-Alkali sector is 7 mn tonnes, i.e. 4% of the world market of 170 mn tonnes. The market for Chlor-Alkali chemicals in India is broadly classified into three segments, namely Caustic Soda, Chlorine and Soda Ash. Positive policy changes happening in India are expected to result in positive outcomes for the Caustic Soda industry in India.

Increasing investment in the Alkali Chemical industry in order to fulfil consistently rising demand is a major growth driver for the market. Major end-user industries, such as Textiles, Glass, Alumina and Soaps & Detergents are expected to witness increase in volume consumption of Chlor-Alkali chemicals, which is expected to boost the India Chlor-Alkali market in the next five years.

Globally, Caustic Chlorine industry is driven by demand-supply of Chlorine; however, in India, the key demand driver is Caustic Soda.

Chlorine growth in India remains limited due to lack of merchant feed stocks, for high/bulk Chlorine consuming petrochemicals industry.

2. Business Overview

The Company entered the Basic Chemicals segment in 2009 with capacity of 119,000 MTPA at Dahej. It expanded capacity by 40% in FY15 to 166,600 MTPA, making it the fourth largest Caustic Chlorine producer in India. The current product portfolio includes Caustic Soda, Chlorine and Hydrogen.

Meghmani is one of the most efficient manufacturers of Caustic Soda with an integrated Captive Power Plant of 60MW. It uses the latest fourth-generation ‘membrane cell technology’ sourced from Asahi Kasei Chemical Corp, Japan, (one of the most established technology providers of Chlor-Alkali products). Since power cost accounts for 60% of total raw material cost in Caustic Soda production, captive power plant provides power at lower cost resulting in high margins. The Dahej facility is strategically located due to its proximity to port, providing ease of importing coal and proximity to chemical manufacturers. The Company is supplying Caustic Soda and Chlorine via pipeline to select buyers, thus substantially reducing its logistics costs. We have recently changed the Membrane of our existing Caustic Soda Plant; this has helped increase the capacity to 500 TPD from 400 TPD.

Our new Caustic Potash facility at Dahej of 60 TPD capacity commenced production in April 2016. Caustic Potash is one of the very few chemicals that find universal application. The largest users of Caustic Potash are the Soaps, Detergents, Fertilizers and Chemicals manufacturer. Minor users of Caustic Potash are Molten Salt, Dyes, Pharmaceuticals and Photography industries. Caustic Potash has also played a crucial role in identification of metallic element, and continues to be important in research science, medicine, household cleaners and several industrial processes.

3. Performance of Basic Chemicals

Net sales from Basic Chemicals increased 13% to reach Rs. 3,987 mn,compared to Rs. 3,518 mn in FY15, driven by increased volumes (up 4%) and higher realization leading to higher EBITDA Margin of 38.2%, compared to 31.3% in FY15.

4. Outlook and Strategy

Our newly commenced Caustic Potash facility at Dahej of 60TPD capacity, along with increased capacity of existing Caustic Soda Plant on account of the recently-changed membrane, will be the key growth drivers of the Basic Chemicals segment. The Caustic Potash Plant has revenue potential of Rs. 1,250 mn and 30% EBITDA Margin. These two growth drivers, blostered by the flourishing chemical industry in Gujarat led by the successful Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR), will drive the high-margin future growth of the Basic Chemicals segment.

5. Risks, Concerns and Threats – Basic Chemicals

We operate in a competitive environment and compete with international as well as domestic players on various fronts, such as quality, technical competence, distribution channels, logistics facilities, after-sales service and customer relationships. Dumping of Caustic Soda from neighbouring countries might impact the Electro Chemical Unit (ECU) realizations.

Internal Control System

The Company has a proper and adequate system of Internal Control commensurate with the size and nature of its operations to ensure that all assets are safeguarded against unauthorized use or disposal, ensuring true and fair reporting and compliance with all applicable regulatory laws and company policies. Internal Audit Reports are reviewed by the Audit Committee of the Board.

The following ratios reflect the consolidated financial performance for the year in relation to the previous year.

Particulars 31.3.2016 (Rs. in mn) 31.3.2015 (Rs. in mn)
Net Sales 13,370 12,678
EBITDA 2,869 2,031
PBT 1,504 600
PAT before Minority 1,130 460
PAT after Minority 826 439
Key Ratios
Net Sales Growth 5.5% 9.6%
EBITDA Margin 21.5% 16.0%
ROE 13.8% 8.2%
D/E ratio 0.9 1.2
EPS 3.2 1.7