Vinati Organics Ltd Management Discussions.

Global Economy Overview

Global economy posted a growth of 3.6 % during 2018 after facing several ups and downs on account of ongoing trade tension among US and China. Both these countries continued to play a leading role, while the growth in Euro area was moderate. The stabilization of monetary policies in the advanced countries generated substantial pressures on the emerging markets. The US witnessed a sharp acceleration in growth, while the unemployment remained at a historic low and general inflation crossed the target of central bank. The euro area economies moved at different pace during the year. While Italy was impacted by political uncertainty and discussions with the European Union, Spain continued to record rapid growth despite facing unstable political situation. In the coming year, the global economy is expected to grow at 3% on account of tariff enacted by US and China. With this, higher tariff rates are expected to increase the price of imported goods for both households and firms. Further, EMDE investment growth is anticipated to remain soft, particularly in commodity exporters and countries affected by recent pressures. (Source: IMF, World Bank)

Indian Economy Overview

Indian Economy witnessed a growth of 6.8% during FY19, on account of improved customer confidence, slowing inflation and robust investment as the policy reforms materialized. While the urban consumption was supported by an enhanced credit growth, rural consumption faced headwinds on account of soft agricultural prices. On industry front, manufacturing, construction and financial, real estate and professional services sector witnessed a substantial growth on account of expansion in corporate earnings. Meanwhile, the fiscal deficit for FY19 was recorded at 3.39% of GDP. It was marginally lower than 3.4% estimated in the revised estimates of the Budget, mainly due to increase in non-tax revenue and lower expenditure. In absolute terms, fiscal deficit at the end of the year, stood at Rs. 6.45 lakh crore as against Rs. 6.34 lakh crore in the revised estimates of Budget. Further, direct tax revenues also remained strong due to improvement in compliance procedure. The recent pick up in the investment growth and improvement of Countrys position in World Banks Ease of Doing Business Report, is expected to boost the growth of the economy with a GDP of 7.5% in FY2020. Steps to ease agricultural distress and strong hike to procurement prices are further expected to augment rural demand in the coming fiscal. In urban areas, consumption demand is likely to receive a boost from reduction in interest rates, continued low prices for food, and declining fuel prices. Further, improved compliance procedures and measures undertaken to widen tax base are expected to boost the growth of the personal income. (Source: ADB, World Bank)

GDP Growth in FY19

Global Chemical Industry

The year CY 2018, has been represented as the sixth year of an extended up cycle for the global chemical industry. This extended period of profitability has caused a surge in re-investment planning activity in North America, the Middle East, China and some parts of Asia. During October 2018, the Global Chemical Regional Index (CPRI) increased marginally at lower rate of 83.6% as compared to 85.9% in October 2017.The global chemical production increased to 3% in CY 2018, as compared to 2.5% in CY 2017. (Source: Mckinsey, C&EN) Upstream chemical industries like petrochemicals rely upon the dynamics of their main end market like the manufacturing market. While the downstream chemical industries like, cosmetics are driven by changing trends in consumer spending such as higher per capita income of individuals. Due to global economic growth and pass-through of increasing naphtha prices, the global chemical sales volume is projected to accelerate at a CAGR of 6%-8% between CY 2018-19. (Source: Mckinsey, Pwc) The speciality chemicals market has emerged as one of the most important chemical segments, globally. Adhesives & Sealants, agrochemicals, coatings and engineering thermoplastics constitute the largest market for speciality chemicals, collectively covering an estimated share of 50% of the global chemical sector. With a market size of $850 Billion for CY 2018, the speciality chemicals sector forms a significant part of the global chemical market. During CY 2018, the global speciality chemicals production registered an increase of 3.7% as compared to 2.2% in CY 2017.Amongst the global chemical competitive countries, China and India in particular, have emerged as major chemical hubs and presently are abode to some major names in the speciality chemicals. (Source: Research and markets)

Indian Chemical Industry

The chemical industry is an essential and integral part of the growing Indian industry and is one of the oldest industries of India. This sector occupies a pivotal position to cater to basic needs and improving quality of life. It provides building blocks for downstream industries such as textiles, papers, paints, soaps, detergents, pharmaceuticals, varnish etc. The Indian chemical industry is the main stay of industrial and agricultural development of the country. This sector accounts for around 10.3 % of the total export segment of the country. It is an integral part of the Indian economy contributing and it is projected to grow at a rate of 9%, with a market size of US $ 214 billion in FY 2019.

During FY 2019, Alkali chemicals has the largest share in the chemical industry with an approximate share of 69% of total production, while production of polymer accounts for 59% of total production of basic major petrochemicals. The market for crop protection chemicals in India is projected to be US $ 7.5 billion for FY 2019. The acceleration in demand is driven by rapid growth in population and decrease in per capital availability of arable land, both of which result in a greater need to increase agricultural yield. (Source: Market Watch, Ministry of Chemicals and Petrochemicals, Make in India)

Trends and their impact on key segments of chemical industry

Key Trends Bulk Chemicals Petrochemicals Specialty Chemicals Fertilizers
Growing per capita consumption
Move towards greener solutions
Nanotech & Advanced polymers
Disruption through 3D printing
Emergence of Technology Platforms
Evolving B2B consumer preferences
Alternative feedstock: Creating new normal
Mega Mergers & Consolidation
Access to strategic natural resources

Source: TSMG Analysis

Indian Speciality Chemical Industry

Speciality chemicals are low volume but high-value compounds known as performance chemicals. The speciality chemical sector represents around 20% of the Indian chemical sector. This sector grew at a CAGR of 19% between FY 2016-19. The growth in CAGR is driven by increased adoption of speciality chemicals and their increased utilization in different product categories. Specialty chemicals can be sub-divided based on end-user industries which are driven by consumer demand (it has been highlighted in the figure below). These industries are the largest constituents of the specialty chemicals industry and cumulatively constitute over 80% of the specialty chemicals universe. (Source:

Growth Drivers

The major growth drivers of the Indian chemical sector can be elated as under:

Structural advantage: With an increasing market and purchasing power, the domestic industry is likely to grow at over 15-19% in the coming years. Growing disposable incomes and increasing urbanization are fuelling the end consumption demand for paints, textiles, adhesives and construction which in-turn leads to substantial growth opportunity for the domestic chemical industry.

High domestic consumption: The chemicals industry in India is the largest consumer of its own products, consuming 33% of its output. With promising growth trends in the chemical industry, this internal consumption is likely to accelerate.

Diversified industry: The Indian chemicals industry has a diversified manufacturing base that produces world-class products. There is a substantial presence of downstream industries in all segments. Further, this large and expanding domestic chemicals market also boasts of a large pool of highly-trained scientific manpower.

Export potential: Chemicals constitute ~10.3 % of Indias total exports. India already has a strong presence in the export market in the sub-segments of dyes, pharmaceuticals and agro chemicals. India exports dyes to Germany, the UK, the US, Switzerland, Spain, Turkey, Singapore and Japan. (Source: The Hindustan Times, Make in India)


Indian chemical sector has moved up from a small scale sector to a multi-dimensional sector, which is taking on the challenges of globalization. With innovation and development, this sector has secured a recognized position in the global chemical sector map. However, there are few factors which hinder the growth of the industry which are as under.

• Scarcity of Raw Materials: The raw materials utilized in organic and inorganic chemical industry are not easily available in the Indian market. Major feedstock like naphtha and natural gas are available at a very high price in the country as compared to other countries like, Middle East, China, and other South East Asian countries. Hence scarcity of feed stock makes Indian materials uncompetitive in the global chemical market.

• Low capacity Utilization Due to oversupply of chemical products in global markets, the prices of petrochemicals have witnessed a steep decline. Which in-turn has led the domestic chemical companies to underutilize their plant operating levels.

• Inadequate Locational and Infrastructural Facilities: The major Indian chemical industry has been set up along the west coast in Gujarat, while the highest demand of chemicals is in southern and eastern India. This gives rise to logistics, thus increasing the overall cost of production. In addition to that, there are several infrastructural problems faced by this sector viz, the ports do not have adequate facilities, the pipeline connectivity is quiet poor, the power supply is insufficient etc.

• Complex Regulatory Issues and High Taxes: The heavy duty tax imposed on various raw materials is higher than the tax imposed on the finished products. This discourages the Indian chemical industry from manufacturing more chemicals because of the high price of raw materials and encourages the import of the same chemicals because of negligible taxes on import of finished products. Plus, the regulatory process is very complex with a number of certificates and licenses that are required for the setting up a chemical industry in India. (Source:, Hindustan Times)

Porters Five Forces Analysis

1. Competitive Rivalry:

• Indian Chemical industry is highly prone to intense rivalry amongst chemical companies.

• 100 % FDI is allowed hence, domestic chemical companies face tough competition from foreign competitors.

• International companies deport chemicals at low price.

2. Threat of new Entrants

• Huge capital requirements and patent protection can be considered as significant barriers for the Indian Chemical Industry.

• Other barriers include R&D and personnel requirements.

3. Substitute Products

• Buyersareinclinedtohavespecificchemicalrequirements.

• There are no direct substitutes for a specific chemical requirement.

4. Bargaining Power of Suppliers

• Small chemical companies rely on supplies from larger plants or petrochemical units.

• Inputs for a chemical plant cannot be easily substituted.

5. Bargaining Power of Customers

• Customers have multiple sources of supply.

• Chemical companies are confined by long-term contracts.

• Niche speciality chemicals have some pricing power. (Source: IBEF)

Government Initiatives

The Indian government has identified chemicals as one of the key priority segments where it is looking to facilitate investment and build infrastructure. This sector has witnessed a growth of 14% in the last five years with an expected market size to reach to $ 70 bn by FY 2020. Under the PCPIR (Petroleum, Chemical and Petrochemical Investment Regions) Policy, GoI has conceptualized PCPIRs in a conceptualized approach for promotion of Petroleum, Chemical and Petrochemical sectors in an integrated and environment friendly manner on a large scale. During Rs. 1 of FY 2019, the Ministry of Chemicals and Petroleum has set up four PCPIRs in the states of Andhra Pradesh, Gujarat, Odisha and Tamil Nadu. The PCPIRs are projected to attract an investment of ~117 bn by FY 2022 and generate employment for 34 lakh people. (Source: Make in India, IBEF, Hindustan Times)


The Indian chemical sector is on the verge of rapid growth in the coming years due to increasing population and employment opportunities in the country. The market size of the domestic agrochemical sector is expected to reach US $ 8.1 billion by FY 2025. This acceleration in market size will be backed by the availability of cheap labour and low processing cost opportunities to set up manufacturing for its export market. The Indian speciality chemical sector is expected to increase by about 10% annually to almost double the market size by FY 2025, driven by growth in end user industries. The upcoming PCPIRs are anticipated to provide state-of-the-art infrastructure for the Indian chemical sector. (Source:, Make in India)

Company Overview

Vinati Organics Limited (VOL) is a speciality chemical company which engages in the manufacture and sale of speciality organic intermediaries and monomers primarily in India. It has a diversified chemical manufacturing base with an impeccable product portfolio mix. It is the worlds largest manufacturer of Isobutyl benzene (IBB), which is the basic raw material for manufacture of the Ibuprofen bulk drug. VOL is also the largest manufacturer of 2-Acrylamido 2-methylpropane sulfonic Acid (ATBS). argin (%) It has a strong market presence in over 35 countries across the globe.

Research and Development

Process innovation has always been a key strength of VOL and a dedicated team of experienced scientists keep working towards enhancing innovative process development and enhancing process efficiencies.

Financial Review

FY19 is one of the most remarkable years for VOL. For the first time in its history VOL crossed the figure of Rs. 1000 crores. During the year, the company grew its Total Income by a robust 50% whereas EBIDTA & PAT grew spectacularly by 99% and 96% recpectively.

2018-19 2017-18 Y-o-Y Growth
Total Income 115,809 77,290 50%
Earnings before Interest, 45,357 22,795 99%
Depreciation and Taxes
Profit Before Tax 42,524 20,337 109%
ProfitAfter Tax 28,249 14,388 96%


2018-19 2017-18
Total Debt Equity Ratio (X) 0.00 0.02
Current Ratio (X) 5.98 4.66
Interest Coverage Ratio (X) 512.73 184.68
Receivables Turnover Ratio (X) 5.26 4.67
Inventory Turnover Ratio (X) 7.86 7.19
Operating Profit Margin (%) 37% 26%
NetProfit 24% 19%
Net Worth (Rs. Lacs) 105,128 79,666


The companys Butyl Phenols project is on course and revenues should start accruing from Q2FY20. In addition to this, the companys expansion of ATBS capacity from 26000 MT to 40000 MT is also expected to come on-stream from Q2FY20. With the addition of new products in and a health growth expected from the existing product line, VOL is well placed to double its revenues from its present levels over the period of next 3 years.

Risk Mitigating Strategies

There are certain key risks associated with VOL which can be curbed by the following mitigating strategies and can be illustrated as under:

Key Risks Nature of Risk Mitigation Strategies
1. Availability of Skilled Personnel • The key success of VOL depends upon its ability to attract and retain skilled personnel. Any failure in being able to do so would adversely affect the business and operations. • VOL conducts induction programmes to embrace a bottoms-up approach towards nurturing talent in a structured manner.
• The company has created processes to select, train and mentor employees to address any leadership challenge across the organisation.
• It ensures all-round learning experience through classroom and online environments, as well as project assignments.
• To retain talented and skilled employees, the company offers opportunities.
2. Risk of Foreign Exchange • The companys revenues are largely generated from exports and hence denominated in foreign currency, predominantly US dollar. Given the nature of business, a large proportion of the costs are denominated in Indian rupees (INR), leading to currency exposure. • VOL procures raw materials through imports and local purchases, where local purchases track import parity price.
• Also, contracts entered into with customers have provision to share the forex risk.
3. Economic Downturn • A downturn in the economy could adversely affect demand for the products. • Products of VOL are exported to countries around the world. VOL has been actively engaged in widening its geographical presence worldwide and is also continuously expanding its product portfolio.
4. Customer Retention Risk • The company may not be able to retain its customers due to its inability to meet their increasing complex demands and requirements. • VOL enjoys robust long-term relationships with large multinational chemical companiesand is a preferred partner to many of its customers.
• A strong R&D focus, attractive prices, world-class infrastructure and consistent investment in scale provides a competitive value proposition to customers.
5. Quality Risk • Any divergence in the quality standards of the companys products may lead to customer and client erosion. • The quality of product is monitored rigorously by a dedicated quality assurance department and technically qualified executive.
• This department supervises quality control and quality assurance requirements and provides technical services to customers, certifies the sample specifications given by the client that are required to develop by the company and provides approval certificates for what has been produced. VOL holds the most stringent certifications for quality and environment like ISO 9001: 2008, ISO 14001: 2004 and ISO 18001:2007. Customers carry out an EHS audit at the Companys premises in addition to stringent quality control which strengthens its quality commitment.
6. Technology Risk • A technology-intensive business like VOL could attract technological obsolescence. • VOL continuously upgrades technical support used in its manufacturing, research and development facilities.
• The company invests in R&D to keep itself updated with the technological change and replace the obsolete technology.