Meghmani Organics Ltd Management Discussions.

Economic Overview

COVID-19 pandemic pushed the global economy into recession with global growth projected at -3.0% in 2020, after registering 3.6% and 2.9% growth for two consecutive calendar years 2018 and 2019, respectively. The steep contraction in the worlds economic growth is considerably more stressful and severe than the 2008-09 global meltdown. The crisis has forced several nations to forcefully opt for isolation, lockdowns and widespread closures hurting the global economic activity.

With the deployment of containment measures weighing on economic prospects, Advanced Economies growth is estimated to contract by 6.1% in 2020. On the other hand, weakening in the global financial environment is likely to shrink Emerging Markets and Developing Economies growth by 1.0%.

The pandemics impact is anticipated to sedate in the latter half of 2020 due to restrictive measures taken by several economies. The global economy is projected to clock 5.8% growth in 2021 with normalized economic activity aided by policy support.

Indian Economy

According to the International Monetary Funds (IMF) WEO October 2019 report, India was ranked as the worlds fifth-largest economy (ranked by nominal GDP) surpassing France and the UK. India has been consistently registering 6-7% GDP growth in the last decade. However, Indias growth decelerated down to 4.2% in 2019 owing to lower consumer demand, NBFC crisis and slump in credit growth. According to the IMFs WEO - April 2020, Indias growth is expected to slip to 1.9% in 2020 due to the COVID-19 pandemic. A sharp economic recovery will push Indias growth to 7.4% in 2021.

The government unveiled an Rs. 21 trillion package ushering long-pending reforms coupled with credit guarantee to the ailing MSME sector. The Reserve Bank of India slashed the Repo by 225 bps to 4.0% in FY20 to revive growth and mitigate the impact of COVID-19.

Global Agrochemical Industry

As per Phillips McDougal, the global market for crop protection products contracted by 0.8% to US$ 59.8 billion in 2019 weighed by extreme global weather conditions from severe flooding in North America to dry conditions and drought across major areas of Europe and Asia Pacific. The global agrochemical industry in 2019 was impacted by rising trade tensions between the US and China, increasing regulatory pressures in Europe leading to the ban of ‘notable chemistries and strengthening of the US dollar.

Global agrochemical market (US$ billion)

Particulars 2018 2019 Change
Crop Protection 60.3 59.8 -0.8%
Non-Crop Pesticides 7.5 7.8 4.0%
Total 67.8 67.6 -0.3%

Source: Phillips McDougall

China manufactured generic products garnered better prices in 2019. Latin America performed well thanks to the normalized inventory levels. The industry saw a rise in the adoption of alternative genetically modified traits, experimenting with new products resulting in demand shift from glyphosate to expensive herbicides such as glufosinate-ammonium, dicamba and 2,4-D.

The Non-Crop Pesticides market registered 4% in 2019 mirroring global growth. Phillips McDougall expects the developing nations to boost the overall industry in the coming years owing to improving economies.

Category-wise Crop protection market

The Herbicide segment held a lion share of 43.8% amongst the global crop protection market in 2019, despite 1.5% contracting sales to US$ 26.2 billion. Adverse weather in most geographies and unfavourable currency impacted the herbicides usage. However, the positive highlights for the year include high prices for Chinese manufactured generic products, favourable market conditions in Latin America and rising acceptance of alternative and expensive Genetically Modified (GM) products.

The Fungicides sales contracted by 0.7% to US$ 16.4 billion with 27.3% market share in 2019. Hot, dry conditions in key regions lead to reduced disease pressure which hindered the fungicides sales.

The Insecticide market registered a tepid growth of 0.2% at US$ 15.1 billion, thereby accounting for 25.3% share of the crop protection industry. The insecticides sales were impacted by currency fluctuations hurting dollar valuations negating positive sales in various national currencies.

Region-wise Crop protection market Asia Pacific

The Asia Pacific continued to lead the Crop protection industry with a market share of 31% in 2019. However, the sales are expected to slip by 2% to US$ 18.3 billion due to adverse currency and unfavourable weather conditions in key markets.

Region-wise Crop Protection Market (US$ in billion) 2018 2019 % Change
Asia/Pacific 18.7 18.3 -2.1%
Latin America 14.8 15.9 7.4%
Europe 12.4 12.0 -3.2%
North America 12.0 11.2 -6.7%
Middle East/Africa 2.4 2.4 -

Latin America

Latin Americas agrochemical market grew for a second consecutive year, reaching US$ 15.9 billion sales, registering 7.4% growth in 2019. The regions market share is projected to improve by 100 bps to 26% in 2019.


The European crop protection market is expected to contract by 3.2% to US$ 12.0 billion in 2019 weighed by the declining demand for crop protection products in France, Germany and the UK owing to adverse weather.

North America

North Americas agrochemical sales experienced a sharp decline of 6.7% to US$ 11.2 billion due to the US-China trade war. Chinas imposition of tariffs on US soybeans in 2018, lead to a drop in US acreages and agrochemical demand.

Middle East and Africa

The Middle East and African region agrochemical sales is expected to reach US$ 2.4 billion in 2019, with a global market share of 4%. The regions demand was dented by a continued severe drought in South Africa.

Leading national markets

The ranking of the leading countries marginally changed in 2019. Brazil continues to lead the chart in 2019 with 9.3% YoY growth to US$ 10.9 billion. The US, i.e. the second-largest agrochemicals market declined by 8.4% to US$ 8.1 billion due to the adverse impact of the US-China trade war. China, Japan and India for the Asia Pacific region held the next three ranks.

Argentina and Canada frog-leaped France with 6th and 7th rank in 2019. Frances agrochemical market was largely impacted by adverse weather conditions propelled to minimize pesticide usage weighed by strict regulations.

Romania entered the top 20 agrochemical market club mirroring the eastern Europe growth with European Unions liberal fund access.

Indian Agrochemical Industry

According to Agropages, India is the fourth-largest global producer of Pesticides followed by US, Japan and China. The pesticides industry was worth US$ 5.08 billion in 2019. The domestic consumption of pesticides was pegged at US$ 2.77 billion and the exports accounted for US$ 2.31 billion. The rising export contribution from the Indian companies is attributed to the generic segment ranging wide range of world-class formulation.

Key Growth Driver of Pesticides Minimize the crop loss

The yearly crop losses due to pests and diseases accounts for 15-20% of Indias total output as per the industry estimates. Hence, it becomes important to utilize appropriate crop protection chemicals viz. insecticides, fungicides and herbicides for protecting the crop.

Low average consumption

The average consumption of pesticides in India stands at 0.65 gm/ha vis-a-vis the global average of 3 kg/ha. The Indian agrochemical sector presents a huge untapped potential as compared to the global norms.

Rising usage of Biopesticides

Biopesticides account for 3% of the crop protection market in India. However, this segment is growing due to the governments promotion to increase the usage of biological products for plant protection. The Governments focus on Doubling Farmers Income and proactive steps for improving agricultural productivity has pushed the demand for biological products for crop protection.

Establish India as a Global agrochemical sourcing destination

The ongoing US-China trade war provides a huge opportunity for the Indian agrochemical industry to be an alternate global source point for agrochemicals. Despite having advanced pesticide technical and formulation research capabilities, Indias manufacturing capacity is under-utilized. The Indian companies are increasing their investments for tapping the export business opportunities.

Lucrative generic agrochemical market

According to FICCI, agrochemicals worth US$ 4.1 billion are expected to go off-patent by 2020 boosting Indian agrochemical production capacities. The agrochemical industry through improving yields and rising export contributions is set to play a key role in achieving the governments vision of US$ 5 trillion economy.

Pigment Industry

According to Grand View Research, the global dyes and pigments industry was pegged at US$ 33.2 billion in 2019 and is expected to grow at 5% CAGR from 2020 to 2027. The pigment industry growth is fuelled from rising demand from various applications such as packaging inks, textiles, paints and coatings, construction, and plastics. The demand for dyes in printing inks application is expected to experience a rising trend with the growing digital printing industry. Additionally, increasing construction activities in the US, UK, China, Indonesia, India, Saudi Arabia, and UAE is poised to contribute to the demand for dyes and pigments.

On the other hand, rising environmental concerns have coerced the industry players to upgrade their manufacturing processes by deploying advanced technologies for efficient removal of hazardous pollutants.

Regional Highlights

The Asia Pacific continued to lead the regional market accounting for over 62% of the global market share in 2019. The industry experienced strict regulations thereby obstructing the production and usage of dyes and pigments in North America and Europe. Hence, Asia Pacific witnessed a rise shift in production facilities owing to favourable manufacturing conditions and lenient regulations supported by the availability of raw materials, cheap labour, and skilled manpower.

Europes overall market share stood at 18.1% in 2019 with rising production capacities of dyes in the region due to higher demand.

India Pigments Industry

According to Ken Research, Indias pigments market is projected to surpass Rs 20,000 crore by 2022. The Indian players are making prudent investments in R&D within the regulatory framework with rising pigment end-user expectations in terms of price and quality. The companies optimizing the manufacturing cost by adopting a backward integration model, procuring raw materials well in advance and manufacturing the product as per the customers needs.

ProductType Pigment Type Description
Organics Pigments Phthalocyanine Phthalocyanine is the most produced organic pigment type in India
Azo Pigments Azo Pigments is mainly used as industry colorant in plastics, building paints and inks
HPPs High Performance Pigments (HPPs) is generally used in automotives, plastics and ink-jet printing
Titanium Oxide
Inorganics Pigments Iron Oxide Pigments Dyestuff and pigment manufacturers operating within India have started to incorporate the use of natural substance including natural dyes and organic pigments owing to environmentally friendly nature and safe usage of the product
Chrome Oxide Pigments

Major Segments

The Pigment industry in India is expected to register 5.5% CAGR in 2017-2022E as per Ken Research. The radical changes happening in the Chinese chemical industry is likely to provide huge opportunities for Indian manufacturers to increase their exports in pigment emulsions in major countries including US, Germany, China, Brazil, Italy and others.

Chlor-Alkali Industry

According to Market Watch, the global Chlor-Alkali industry is valued at US$ 76.0 billion in 2020. It is expected to surpass US$ 94.2 billion in 2026 registering 3.1% CAGR during 2021-26. Chlor Alkali chemicals are broadly classified into three segments namely Caustic Soda (NaOH), Chlorine & Soda Ash. The chemicals have widely used in soap & detergent industry, paper and pulp, textiles, water treatment, plastic industry, industrial solvents, alumina, pharmaceuticals, etc.

Indian Chlor-Alkali Industry

The Chlor-Alkali industry is recognized by global peers as one of the most efficient, eco-friendly and progressive industries. The Indian Chlor-Alkali industry was amongst few of the nations to embrace modern energy-efficient and eco-friendly membrane cell technology.

During the financial year 2019, caustic soda capacity stood at 4.3 MMTPA (Million Metric Tonne Per Annum) with capacity utilization of 84.7%. The total exports during 2018-19 stood flat at 161.1 KMT.

Alkalis products act as the basic building blocks having applications in aluminium, paper, textile and plastic industries. Thus, Alkali and Chlor-Vinyl industry is expected to witness substantial growth potential in the coming years. Additionally, the demand for these products is projected to be in an uptrend with rising middle-class aspirations, higher disposable income coupled with low penetration.

Company Overview

Meghmani Organics is a leading diversified chemical company poised for growth across its three (Pigment, Agro Chemicals and Chlor- Alkali & Derivatives) high potential businesses. Across the three sectors, the Company is one of the leading global pigment players along with a vertically integrated Agro Chemical player and Indias one of the leading low-cost Caustic-Chlorine player. The Company operates 7 facilities in Gujarat, including 3 major facilities for Pigments, Agro Chemicals each and one facility for Chlor- Alkali & Derivatives in Dahej, the chemicals zone of Gujarat. Over the years, the Company has built an extensive pan-India and global footprint with a presence in over 75 countries and a portfolio of over 400 marquee clients. Company continues to strengthen its stance to become one of the leading diversified chemical Company in Organic Chemistry aiming worldwide presence and product acceptability. To set up world class development centre to facilitate upgrading technical capabilities and cost effective measures.

The Company is committed to stick to its core businesses in organic chemistry offering innumerable growth opportunities, create and build a high standard manufacturing base, adhere to prescribed ‘Environmental & Safety Standards and strive continuously to upgrade them, respect minority shareholders and their trust in management and create sustainable ‘Value for all the stakeholders.

The Company has a sustainable business model, well-integrated manufacturing base and plants located in the chemical hub of Gujarat, relatively most stable and peaceful state with a robust infrastructure. The Company has fairly well-balanced plant capacities and layouts with multiple locations that support the economy of scale. We constantly explore more possibilities for backward integration and try to implement them. This helps sizably in eliminating the dependency on input supplies and the Company is able to convert effluents into valuable by-products.

The Company has a strong pool of product basket. The product reach and distribution too, are well diversified geographically with presence in almost every continent, empowering consistency in products off-take all throughout the year.

COVID-19 update

As per the government directives, the Companys office and Plants were temporarily closed for 2 weeks during phase 1 of Lockdown. Meghmani Organics plants and offices are currently operational and functional under strict compliance with the Governments safety and security norms for COVID-19. The Company is ensuring implementation of government directed measures like wearing masks and gloves, proper sanitization, social distancing, etc. for combating COVID-19. Meghmani Organics expects to achieve normalcy in its operations at its all plants by Q2 Fy20.

Financial Performance

Meghmani Organics delivered a robust performance with the consolidated growth of 5% YoY to INR 21,912 million in FY 20. The Companys top-line was impacted marginally by 3%-4% due to COVID-19. EBIDTA at INR 4341 million and EBITDA margin remained at 19.8% in FY 20. The companys PAT decreased by 4.4% YoY to INR 2,401 million during the year. Meghmani Organics continues to deliver a strong return ratio, with a Return on Equity of 22.7% and Return on Capital Employed of 17% in FY 20.

Agrochemical Business

Meghmani Organics has established itself as one of Indias leading vertically integrated Agro Chemicals player with the presence in the entire value chain — Intermediate, Technical grade and Formulations (bulk and branded). The Company effectively manages its raw material costs and ensures a constant supply of consistent quality due to its integrated vertical business integration.

Meghmani Organics enjoys a competitive advantage via presence in the entire value chain (less dependent on raw material) in the highly regulated Agrochemicals industry. The Company has a strong portfolio of 297 export registrations, 356 CIB registrations. Meghmani Organics diverse global client base accounts 79% of its Agro Chemical export sales. The Company exports Technical as well as Formulation (bulk and branded) products to Africa, Brazil, LATAM, US and European countries.

Meghmani Organics major products include 2,4D, Cypermethrin, Bifenthrin, Permethrin, Chlorpyrifos and Profenophos. In branded formulations, the Company has established a strong pan India presence with about 3000 channel partners. Megastar, Megacyper, Megaban, Synergy, Courage, Correct and Mega Claim are its key agrochemical brands.

The Company has three state-of-the-art manufacturing facilities located at: -

• GIDC Ankleshwar, (6,420 MTPA)

• GIDC Panoli, (7,200 MTPA)

• GIDC Dahej, (18,240 MTPA)

Agrochemical - Highlights

Meghmani Organics agrochemical segment exhibited a strong performance in FY20 with 23% YoY increase in net sales to INR 9,734 million. Exports accounted for 79% YoY growth during FY20. EBITDA during the year INR 1,738 million and EBITDA margin for the period was 17.9%.

Outlook and Strategy

Meghmani Organicss backward integrated facilities put it in an advantageous position, given the current rising raw material prices from China. Company is doubling its 2,4-D Capacity by addition of 10,800 MTPA which will be operational by Q3 FY21 and its new formulation plant will be operational by Q3 FY21. The Company is also planning a New Multipurpose plant (MPP) at Dahej with backward integration with capex of INR 3.0 billion which will be spent in next 2 years.

The Company is expanding its branded products portfolio by addition of new molecules.

Pigment Segment

Meghmani Organics is amongst the top 3 global pigment manufacturers of Phthalocyanine-based Pigments with 14% global market share. The Company has vertically integrated facilities manufacturing CPC Blue (an upstream product sold to other Pigments manufacturers) and end products — Pigment Green and Pigment Blue. These Pigments products are used in multiple applications, including paints, plastics and printing inks.

The Companys Pigments business enjoys a strong global presence with exports accounting for 77% of net sales. The Company has forged a deep relationship with its clients resulting in 90% business from its repeat customers. The Company has a global presence in more than 70 countries with a subsidiary in the US which helps in maintaining a front-end presence along with the ability to work closely with end-user customers.

Meghmani Organics has three dedicated manufacturing facilities for Pigments products at: -

• GIDC Vatva, Ahmedabad, (3,180 MTPA) manufacturing Pigment Green and AZO Pigments

• GIDC Panoli, near Ankleshwar, (17,400 MTPA) producing CPC Blue, Alpha and Beta Blue

• Dahej SEZ Ltd, (12,600 MTPA) manufacturing CPC Blue, Alpha and Beta Blue Pigments - Highlights

Meghmani Organics pigment segment recorded 6% YoY increase in net sales to INR 6,406 million in FY20. Exports accounted 77% of the revenues during the year. EBITDA during the year surged by 12% YoY to INR 915 million due to favourable market conditions and better price realizations. EBITDA margin for the period grew by 80 bps YoY to 14.5%.

Outlook and Strategy

Meghmani Organics is amongst the largest producers for the Copper Phthalocyanine Pigment. In the coming years, the Company plans to diversify further with the addition of new pigments. The Company has regulatory approvals and infrastructure in place for expansion at its Dahej facility. Meghmani Organics continues to focus on strengthening its domestic presence, enhance its global market share tapping the prevailing market opportunities in growing end-user industries.

Chlor-Alkali and its Derivatives - Highlights

Meghmani Organics Ltd is 4th largest and one of the most efficient manufacturers of Chloro-Alkali & its Derivatives with forward integrated facilities. Meghmani Organics Caustic soda, Caustic Potash, CMS (Chloromethane) capacity stands at 294000 TPA, 21,000 TPA and 50,000 TPA, respectively and expanding its integrated captive power plant capacity from 60MW to 96MW in Q1 FY21. The power cost consists of 60% of the total raw material cost in Caustic Soda production. The Companys captive power plant lowers the power cost thereby resulting in a higher margin. The Chlor-Alkali facility is strategically located at Dahej with proximity to the port (importing coal) and customers (Caustic Soda & Chlorine supplied via pipeline), leading to lower logistics costs.

Meghmani Organics deploys 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).

The Companys planned capex of INR 10.45 billion involving multiple projects are aligned with its strategic goal of expanding the chemicals business.

In the Phase 1 the Company invested INR 7.6 billion for expansion of the following projects:

a) Chloromethane project of 50,000 MTPA to produce MDC, Chloroform and Carbon Tetra Chloride. The project was commissioned in Q1 FY20. The project facilitates in-house availability of Chlorine empowering cost optimization and enhanced profitability.

b) Hydrogen Peroxide capacity of 60,000 MTPA. The project is expected to be commissioned in Q2 FY21.

c) Expansion of its Caustic soda plant capacity from 1,66,600 TPA to 2,94,000 TPA and Captive Power Plant capacity to 96MW from 60 MW which is expected to be operational by Q1 Fy21

Chlor-Alkali and its Derivatives - Highlights

Meghmani Organics Chlor Alkali segment recorded net sales INR 6,098 million in FY20 lower by 14%. EBITDA during the year INR 1,976 million lower by 36% and EBITDA margin for the period at 32.4% compared to 43.9% during the last year. The decrease in EBITDA during the year was due to the following reasons:

a) Exceptionally higher ECU realisation in FY19

b) Plant shut downs for commissioning of the new projects

c) Impact on sales due to Covid-19 lockdown in March20.

Outlook and Strategy

Meghmani Organics strategic investment as progressing as planned. The key drivers for profitable growth are timely completion of capex projects backed with the strong performance of the ChlorAlkali Industry.

Meghmani Organics plans to incur a capex of INR 2.75 billion to set up Epichlorohydrin (ECH) project of 50,000 TPA capacity which is expected to be operational by Q4 FY22. The Companys ECH project is 1st largest plant in India based on 100% Renewal sources.

The Company has also announced new investment for CPVC Resin project of 30,000 TPA capacity expected to be operational by Q3 FY 2023.

With new downstream derivatives projects, Meghmani to take the share of value-added products to 57% by FY 24

Key Risks and Concerns

Meghmani Organics mitigates its key risks across all levels of business operations by structuring and continuously identifying, assessing, deciding and executing the planned course of action.

Erratic monsoon and Unfavourable weather lowering agrochemical demand

The Indian agrochemical industry is still largely dependent on monsoons. Uneven rainfall affects crop acreages, agrochemical application and overall productivity having a direct impact on the Companys top-line.

Mitigation: The Companys diverse product portfolio backed by established global and national presence can easily navigate through erratic monsoons and unfavourable weather by tapping opportunities in other regions/geographies.

Changes in government policies

The Company exports its products to multiple countries/geographies. Any adverse changes in the political, economic, regulatory or social conditions of these countries might bump the Companys business prospects.

Mitigation: Meghmani Organics de-risked business model reduces its dependency on any single country for selling its multiple products.

Exchange and Interest Rates Fluctuations

Meghmani Organics presence in multiple countries exposes to foreign currency revenue. The Company realizes foreign currency gain or loss based on depreciation or appreciation of the US Dollar.

Mitigation: The Companys exports acts as a natural hedge against imports and borrowing in foreign currency. The Company has foreign currency risk management policy in place. However, any adverse movement in the foreign exchange rates might impact the results of operation, cash flows, liquidity, and financial condition of the Company.

Fluctuations in Raw Material Prices

Drastic changes and continuous fluctuations in the prices of key raw materials can pose critical challenges to the companys growth.

Mitigation: Meghmani Organics diversified business verticals follow prudent procurement, backward and forward integration, quality control measures, technical competence, logistics facilities and deep customer relationship. The Companys high degree of product customization, consistent quality coupled with strict compliance adds to client stickiness.

Capacity additions and Dumping of Caustic Soda impacting realizations

Meghmani Organics Chlor Alkali and derivatives segment prospects can get affected by new Capacity additions and dumping of Caustic Soda from neighbouring countries hurting Electrochemical Unit (ECU) realizations.

Mitigation: The Company has emerged one of the lowest-cost producers of Caustic Chlorine in India thanks to its strategically located proximity to the port (importing coal) and customers (Caustic Soda and Chlorine supplied through the pipeline).

Internal Control System

The Company has a proper and adequate system of Internal Controls commensurate with the size and nature of its operations to ensure that all assets are safeguarded against unauthorized use or disposal, safeguarding 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.

Particulars (Rs in million) FY 2019 FY 2020
Net Sales 20,880 21,912
EBITDA 5,445 4,341
PBT 4,086 3,590
PAT before Minority Interest 2,954 2,890
PAT after Minority Interest 2,513 2,401
Key Ratios
Net Sales Growth 16% 5%
EBITDA Margin 26% 20%
ROE 26% 23%
ROCE 27% 26%
D/E Ratio 0.62 0.57

Human Capital

The Company considers its employees as the most valuable resource and provides a healthy and competitive work environment to enable the employees to excel and create new benchmarks of quality, productivity, efficiency and customer delight. The Company always believes in maintaining mutually beneficial, healthy and smooth industrial relations with the employees and the Unions which is an essential foundation for achieving collective organisational success. The consistent HR Policies of the company helps in attracting the best talent pool; retention and controlling low attrition rate

Cautionary Statement

Certain statements contained in the Management Discussion and Analysis may be statements of the Companys beliefs, plans and expectations about the future and other forward-looking statements that are based on managements current expectations or beliefs as well as a number of assumptions about the Companys operations and factors beyond the Companys control or third party sources and involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. Forward-looking statements contained in the Management Discussion and Analysis regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. There is no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report.