Thirumalai Chemicals Ltd: Sailing the Chemical Horizon

Summary

Thirumalai Chemicals Ltd (TCL), a key player in the chemical industry, dominates the Phthalic Anhydride (PAN) market with a 33% share, operating in a duopoly. With a diverse product portfolio and global reach, TCL faces mixed financial performance but anticipates growth in the dynamic Indian chemical industry, set to surge by 11-12%. Challenges include raw material price volatility and revenue concentration, prompting TCL to diversify and expand. Strategic initiatives, anti-dumping duties, completed capex, and adequate liquidity position TCL for future opportunities, aiming to weather market uncertainties and capitalize on chemical industry growth.

Overview: Sailing the Chemical Seas

Thirumalai Chemicals Ltd, a small-cap player in the chemical industry, has carved a niche for itself as a dominant producer of Phthalic Anhydride (PAN). The company's product portfolio extends beyond PAN, encompassing derivatives such as di-ethyl phthalate (DEP), phthalimide (PID), food ingredients, and fine chemicals like Malic Acid and Fumaric Acid.

Market Standing: Anchored in Duopoly

In the landscape of PAN production, Thirumalai Chemicals secures a formidable position, boasting a 33% market share. Operating in a duopoly alongside a longstanding relationship with Reliance Industries as a raw material supplier under an assured offtake model, the company enjoys stability in its operations. Furthermore, it has a global footprint, exporting products to over 60 countries and maintaining overseas subsidiaries in strategic locations.

Product Portfolio: Crafting Chemical Solutions

Thirumalai Chemicals' product lineup includes:

1. Phthalic Anhydride (PAN): A crucial compound used in the manufacture of plasticizers, pigments, dyes, and resins.
2. Diethyl Phthalate (DEP): Employed to enhance the flexibility of plastics, DEP finds applications in diverse products, from toothbrushes to automobile parts.
3. Malic Acid & Fumaric Acid: Organic compounds with applications ranging from food and beverages to medicines and chemicals.

Manufacturing Prowess: Facilities and Capacities

The company operates two manufacturing facilities in India, strategically located in Ranipet, Tamil Nadu, and Dahej, Gujarat. The Ranipet plant boasts a capacity of 145,000 TPA of phthalic anhydride and 50,000 MT of maleic anhydride and derivatives. Meanwhile, the Dahej plant has an impressive capacity of 180,000 TPA of phthalic anhydride.

Financial Snapshot: Navigating the Waves

As of the second quarter of FY24, Thirumalai Chemicals faces mixed financial tides:

• Revenue: ₹542.05 Cr, showing a modest 3.7% QOQ increase but a notable 5.24% YOY decrease.
• Operating Profit Margin (OPM): 2.85%, witnessing a decline from 10.60% YoY.
• Profit After Tax (PAT): ₹-6.00 Cr, reflecting a significant 156% QOQ decrease and a 125% YOY decline.

Industry Outlook: Riding the Chemical Wave

The Indian chemical industry, ranked sixth globally, is poised for growth, expected to surge by 11-12% from 2021 to 2027. In alignment with this, the Phthalic Anhydride market is forecasted to grow at a CAGR of 2.46%, reaching 4.83 mnt by 2028.

Challenges and Strategies: Sailing Through Uncertainties

Despite its strong market position, Thirumalai Chemicals faces challenges, including fluctuating EBITDA margins due to raw material price volatility. Additionally, a significant portion of revenue is tied to a single customer. To address these concerns, the company is working on diversifying into non-phthalic products and expanding its PAN facility.

Growth Drivers & Risks: Paving the Path Ahead

The company's strategic initiatives and projects position it as a key contributor to the domestic PAN demand. With a robust portfolio and an eye on diversification, Thirumalai Chemicals aims to navigate the industry's challenges and capitalize on growth opportunities.

1. Strong Market Position in Phthalic Anhydride (PAN):

• Current Position: TCL holds the second-largest market share in PAN manufacturing in India, contributing 35%-40% to domestic production.
• Capacity Expansion: Ongoing capacity expansion, including a 90,000mtpa increase in PAN plant capacity in Dahej and the setup of a 10,000mtpa fumaric acid plant, is expected to enhance operational efficiencies.
• Diversification: The expansion into food acids, phthalate esters, maleic acid, and fumaric acid contributes to diversification and improved business profile.

2. Anti-dumping Duty and Domestic PAN Market:

• Government Intervention: The imposition of a five-year anti-dumping duty on PAN imports from specific countries has provided support to domestic manufacturers like TCL.
• Impact on Imports: The anti-dumping duty has led to a reduction in imports from around 32% of domestic demand in FY20-FY21 to 18%-19% in FY22-FY23. However, challenges persist due to Chinese exports of low-grade toxic PAN.

3. Capex Completion for Locational Efficiency:

• Locational Advantages: Completion of the Dahej Phase 2 capex is expected to enhance locational efficiencies, particularly benefiting from proximity to key feedstock supplier Reliance Industries Ltd.
• Improved Distribution: With approximately 70% of PAN consumed in western India, the completed capex is anticipated to enhance distribution capabilities.

4. Adequate Liquidity Position:

• Cash Reserves: As of FYE23, TCL maintains unencumbered cash of INR 4,572 million and margin money deposits of INR 860 million.
• Utilization: The company utilizes banking channels and internal accruals to meet funding requirements, with interchangeability between fund-based and non-fund-based limits.

5. Impact of Malaysian Subsidiary on Profitability:

• Volatility Concerns: TCL's Malaysian subsidiary, Optimistic Organic Sdn. Bhd. (OOSB), reported EBITDA losses in FY23 due to market-related issues, impacting consolidated profitability.
• Consolidated Performance: Despite modest performance in FY23, TCL anticipates volume growth over FY25-FY26, supported by the ramp-up of projects.

6. Large Ongoing Capex and Leverage Concerns:

• Capex Projects: TCL is executing significant capex projects in Dahej and West Virginia, aimed at increasing revenue base and capturing growing PAN demand.
• Leverage Projection: The large debt-funded capex is expected to lead to a rise in net leverage in FY25 before normalization by FY27. The company has historically maintained a low leverage position.

7. Profitability Volatility and Risk Mitigation:

• Raw Material Dependency: TCL faces volatility in profitability due to the dependency on crude derivative OX, influenced by crude prices and PAN-OX spreads.
• Risk Mitigation: Diversification into non-phthalic products and incremental PAN facility ramp-up are expected to reduce volatility in the medium term.

8. Foreign Currency and Interest Rate Risks:

• Currency Exposure: TCL manages foreign currency risk through options/forward contracts, with its functional currency being the Indian rupee.
• Interest Rate Management: The company, relying on internal accruals and borrowings, actively mitigates interest rate risks by regularly reviewing and managing its debt portfolio.

Future Outlook: Weathering the Storm

Despite recent financial challenges, Thirumalai Chemicals remains optimistic about a demand recovery and margin improvement. The company's focus on diversification and expansion signals a commitment to long-term resilience in the volatile chemical market.

Shareholding Landscape: Anchors and Sailors

The shareholding pattern reveals a balanced distribution:

• Promoters: 42.17%
• FIIs: 1.86%
• DIIs: 0.16%
• Retailers: 55.81%

About Management

Mr. R. Parthasarathy is the Chairman & Managing Director of Thirumalai Chemicals Limited. He also served as Vice-president and President of the Indian Chemical Council from 2007-2011. He has managed Manufacturing, Technology Development, Marketing, and Business startups in India, Europe and the US.

Management is well experienced with high educational background and qualifications.

Shareholding Pattern

Conclusion

In conclusion, Thirumalai Chemicals Ltd stands as a robust player in the chemical industry, navigating challenges through strategic initiatives and a diversified product portfolio. As it sets sail in the chemical seas, the company aims to weather uncertainties and capitalize on the promising growth prospects in the evolving chemical landscape.