Equity Research: Jubilant Ingrevia Limited

Summary

Jubilant Ingrevia is attractively placed in terms of the cash profit of FY25E which gives an attractive reward potential at the CMP

Jubilant Ingrevia (‘Ingrevia’) have initiated new capex programme with focus shifting towards non commoditised segments of Spec. Chem and Nutrition business. Of the previously announced INR 900crs capex and the additional capex of INR 1250crs, 60% of the amounts are committed towards Spec Chem. Peak Sales potential post capex is INR 9500crs (~2x of FY22 sales) as per the company. CDMO can drive the overall spec chem revenues as it capitalises on multiple niche technology platforms already in incubation. With ramp up of food grade acetic acid plant getting live, Chemical Intermediates should see decreased volatility and the blended margins should improve as well. We strongly believe Ingrevia can grow on FY22 base, on the back of the new capex initiatives commercialising over FY23 and FY24. Currently, the company is attractively placed at ~6x payback period in terms of the cash profit of FY25E which gives an attractive reward potential at the CMP with limited Downside risk. We thus arrive at our valuation and valuing Ingrevia at 11x FY24E EV/EBITDA, which implies 103% upside on the CMP.

Special chemical leading to healthy growth and higher margin:

• Chemical Intermediates revenues were impacted due to Acetic Acid prices (INR 54crs in Q4FY22 Inventory loss) however the segment sales grew by ~60% YoY while Spec chem and Nutrition revenues grew by ~24% and ~22% YoY respectively in FY22. 

• Commercialisation of Diketene, Agro-active and CDMO facility can significantly improve the overall profile of Ingrevia to a specialty focused organisation leading to a better margin profile for the business. CDMO as per us will be a significant growth area for Ingrevia’s Spec Chem segment.

New capex will lead to increase in Potential sales by 2x on FY22 base:

• Ingrevia had previously announced a capex of ~ INR 900Crs and in Q4FY22 announced an additional capex of INR 1250crs. Both these capex programs largely focus on Speciality Chemicals business with ~60% of the funds committed to the same. 

• Peak Sales Potential post capex remains INR 9500crs (~2x of FY22 sales) as per the company and capex initiatives of INR2,050crs can contribute INR 4500crs as peak sales; According to us, Ingrevia should hit the peak sales by FY27. 

• We believe that incremental revenue growth with the commencement of new facilities coupled with increased contribution from the non commoditised business would lead to a better quality and more stabilised margin profile.

Increasing Capex targeted towards non commoditised segments:

• Ingrevia had previously announced a capex of ~ INR 900Crs and in Q4FY22 announced an additional capex of INR 1250crs. Both these capex programs largely focus on Speciality Chemicals business with ~60% of the funds committed to the same. 

• It is believed that these new projects which Ingrevia is foraying into come in the play the contribution from nutrition and Speciality chemicals would increase to ~51% by FY25E as compared to 44% in FY22. 

• With majority revenue contributions shifting to non commoditised segments of Speciality Chemicals and nutrition the EBITDA Contributions from the segments will also increase to ~63% in FY25E as compared to~53% in FY22. 

• It is believed that Incremental revenue growth with the commencement of new facilities coupled with increased contribution from the non commoditised business would lead to a better quality and more stabilised margin profile. 

Acetic acid induces volatility in EBITDA margins 

• Being the a key raw material for acetyl chemistry Ingrevia keeps an inventory of Acetic acid. The volatility in the Acetic Acid prices lead to the loss/gain of inventory. 

• Given the volatility in Acetic acid, the margins optically tends to fluctuate a lot (Q1FY22 margins at 27.3% vs 4.6% in Q4FY22) due to the gains and losses on inventory levels. 

• These inventory adjustments are transitory on a QoQ basis as most of the client contracts are locked at an absolute conversion margin. 

• We thus believe EBITDA margins are not the best way to look at the segment, absolute EBITDA is. 

• Ideally much better metric is EBITDA per tonnes, but the same is very difficult to track as the tonnage data is not provided by the management.

Chemical Intermediates:

• Majority of import for acetic acid is done from China, where the prices dropped from 944 USD/mt in December 2021 to 545 USD/tn by the end of Q4 leading to major inventory losses in H2FY22.

• This continuous decline led to loss of inventory value creating a depressed EBITDA margin for H2FY22.

• With the Acetic Acid prices stabilizing we expect a margin expansion in Q1FY23 due to the lag in passing of raw material costs.

Growth drivers of Ingrevia:

1. Food grade acetic acid to be Margin and Profile accretive for Acetyls: 

• Ingrevia announced the commissioning of its new Green Ethanol-based food-grade Acetic Acid plant facility at its manufacturing site in Gajraula, UP in Q4FY22. 

• This new facility has 25,000 TPA capacity of food-grade Acetic Acid, which as per us fetches better realisations vs normal Acetic Acid (2-2.5x more)
  

• At peak, as per us the plant can contribute revenues of INR 300Crs but owing to the nature of the business we expect a gradual ramp-up in sales. 

• We expect an EBITDA Margin range of 15-20% on food grade Acetic Acid, leading to an overall incremental margin profile for Chemical Intermediates.
  

• We believe as the sales ramp up and food grade acetic acid contributions to EBITDA increases, it can potentially decrease the volatility in the margins for the segment. 

2. Diketene and CDMO to drive Incremental Spec chem growth:

• Commissioning of Diketene plant Phase I, should lead to INR 150crs of incremental revenue in the Spec Chem segment.
  

• The newly commissioned plant in Phase I has a capacity of 6,000 tonnes; as Phase II gets commissioned in H2FY23, additional 2.000 tonnes of capacity will be added with increased focus on value added products.
  

• Jubilant Ingrevia was able to secure a CDMO contract of INR 270crs in Specialty Chemicals business, spanning over a period of three years with one of its international customers. Through the contract the company will supply two key GMP intermediates for one of the ‘patented drugs’ of the Innovator Pharmaceutical customer.
  

• Commercial supplies of both these products will start from FY’23 onwards through the GMP Facility.
  

• We believe specialty chemical segment will have increased contribution to total revenue with improved margins on the back of the above CDMO contract and commissioning of Diketene plant. 

CDMO can be a significant growth area for Ingrevia’s Spec Chem segment. The company recently won a 3 year contract worth INR 270crs from one of the innovator pharmaceutical client. Ingrevia will supply Two key GMP intermediates for one of the ‘patented drugs’ of the client. 

Ingrevia has a total of 165+ products (Speciality Chemicals: 85; Nutrition & Health Solutions: 72; Chemical Intermediates: 8) and 60+ products in pipeline. Given its capability in Process development, optimisation and scaling-up of complex chemistries, we believe CDMO practice can be scaled up meaningfully form the current levels. Commercialisation of dedicated CDMO facilities (GMP & non GMP) in FY23 should further strengthen their CDMO practice. 

Pharma Value chain 

• Ingrevia has 4 Intermediates in Phase III for anti-viral therapeutic, cosmetic applications and 3 Intermediates in Phase II for antineoplastic, antiretroviral, antithrombotic therapeutic applications.

• The company is present across the CDMO pharma value chain from process development phase to clinical phase manufacturing and further production of intermediates on a commercial scale.

Agro Value chain 

• Ingrevia has 1 Intermediates in stage III for Insecticide application and 3 Intermediates in Stage II for insecticide & fungicide applications

• Ingrevia in Agro space provides the developmental services for molecules and commercial production of intermediates

Nutrition Value chain 

• Ingrevia provides raw material, health ingredients, premixes and performance ingredients and is present across the value chain.

Financials:

Conclusion:

It is expected that Ingrevia’s operating profitability to sustain and increment over the near to medium term, given its expanding portfolio of value-added products, and a favorable pricing scenario in the nutrition and Speciality chemical segments. Currently, the company is attractively placed at ~6x payback period in terms of the cash profit of FY25E which gives an attractive reward potential at the CMP.