Everything You Need to Know About Chemcon Specialty Chemicals. Stock UP 80% in 4 Months.

Chemcon Specialty Chemicals (NSE : CHEMCON) is a manufacturer of specialty chemicals such as HMDS and CMIC, which are mainly used in the pharmaceutical industry. It also manufactures Bromide chemicals, which are mainly used as completion fluids in the oilfield industry.

The company is the only HMDS manufacturer in India and is the third largest HMDS manufacturer in the world in terms of production. The company is the largest CMIC manufacturer in India and globally in terms of production and capacity.

Further, the company is the sole producer of zinc bromide and the largest producer of calcium bromide in India in terms of production. The company added production capacity of 2,400 MT TMCS and 1,200 MT CMIC.

Chemcon supplies its products to domestic customers and also exports its products to countries including USA, Italy, South Korea, Germany, China, Japan, United Arab Emirates, Russia, Spain, Thailand and Malaysia.

Chemcon reported its highest quarterly performance ever on the back of strong product demand. Revenues for the quarter increased by 56.3% year-on-year to 89.4 Crore. Operating margin increased by 630 bps year-on-year to 37.5%. Gross margin increased by 730 bps year-on-year to 57.3%.

Net profit increased by 90% year-on-year to 25.4 Crore. The volume of oil well chemicals increased by 123% year-on-year to 1035 MT. CMIC volume increased by 35.5% year-on-year to 504 MT. HMDS volume decreased by 13.5% year-on-year to 512 MT. The company derived 53% of its sales from the domestic market and 47% from exports.

Major customers include Hetero Labs, Laurus Labs, Aurobindo Pharma, Sanjay Chemicals (India) Private Limited, Vivin Drugs & Pharmaceuticals Limited and Macleods Pharmaceuticals Limited and key customers for its Oilwell Completion Chemicals include Water Systems Specialty Chemical DMCC and CC Gran LLC.

The company has 8 operational plants, two of which are dedicated to the production of HMDS and ancillary products (including one dedicated to the production of high-purity HMDS), one multi-purpose plant currently used for the production of HMDS and other pharmaceutical chemicals, two plants dedicated to production of CMIC and two plants dedicated to the production of its Oilwell Completion Chemicals, along with three warehouses for the storage of products and raw materials.

These additional plants will produce chemicals for the pharmaceutical industry. The company aims to expand product sales to other industries. For HMDS, for example, the company focuses on selling end-use products in industries including the rubber and semiconductor industries.

Chemcon commissioned a new plant specifically for the production of high-purity HMDS, which finds use in the semiconductor industry. The company has strong visibility in its products and remains confident of maintaining momentum in FY23. Out of the total revenue, the company received around Rs 68 crore revenue from CMIC.

The expansion of production capacity will lead to a reduction in TMCS imports and an increase in HMDS production. The company is now the largest CMIC producer in the world with a total capacity of 3,000 MT. The company is setting up two new units P-9 and P-10 for Pharma Intermediate Chemicals. The P-9 is expected to be launched in October 2022 and the P-10 is likely to enter service in March 2023.

It also has its own laboratory in their manufacturing facility for testing the raw materials and products purchased at various stages of the manufacturing process. The company also has six own and two leased warehouses in India. Top 5 customers contributed < 50% of revenue, while top 10 clients contributed < 65% in FY22. The top 7 customers have been with the company for more than 4 years.

HMDS contributed around Rs. 122 crore in revenue in FY22.The company has started commercial operations at P-8 unit with a capacity of 2400 MT TMCS. The company is one of the largest importers of TMCS and this addition will help reduce TMCS imports.

In HMDS, the company has a capacity of 4200 MT and the volume was 2068 MT for FY22. The company reports sales volume of 2800-3000 MT for FY 23. CMIC contributed around Rs. 68 million in sales per year. The global supply chain has disrupted many pharmaceutical multinationals and their overall business dynamics. Overall demand for the CMIC chemical continues to be strong.

The company added an additional capacity of 1200 MT at the P-8 facility, making the company the world’s largest CMIC producer with a total capacity of 3000 MT per annum. Company guides for volume of 2100-2500 MT for FY23 vs 1300 MT for FY22.

Bromide recorded revenue of 60 cr in FY22. The company has healthy inquiries for various bromides and expects significant contribution in FY23. In FY22 volume was 2700 MT and capacity utilisation was just 18%.

Company guides for > 3500 MT volume for FY23. Both 4 CBC and 2.5 DHT are still in early stages and expect these products to perform well in FY23. Management has an ambitious target of achieving revenues of around Rs 1000 crore in the next 4-5 years along with a healthy margin.

The company expects the P-10 unit to be commissioned in March 2023. The investment will be around 15 cr for the said project. The total capacity should be 1200 MT. Management expects asset turnover of ~4x. The company plans to manufacture import replacement products and would have a similar level of margin.

In the past year, the global supply chain has disrupted many pharmaceutical multinationals and their overall business dynamics. Overall demand for the CMIC chemical is strong and still has good inquiries in the coming year.

During FY21, the company commissioned P-2 with a capacity to produce 600 MTPA of HMDS Hi-Purity. The company increased the capacity of CMIC and TMCS by commissioning the P-8 plant.

Chemcon has been manufacturing specialty chemicals for over three decades and has established itself as a reliable supplier of specialty chemicals, these products are used in end-user industries such as pharmaceuticals, oil exploration and refining. The company derives approximately 35% of its revenue from exports and has had a healthy operating margin of over 34% over the past two years.

The specialty chemical industry in which the company operates has high barriers to entry. This is due to (a) complex chemistry involved in the manufacture of the Products, which are difficult to commercialise on a large scale and; b) the long gestation period to be acquired as a supplier to customers, especially Pharmaceutical Chemicals customers.

The products find applications in the pharmaceutical, oil well drilling, semiconductor and electrochemical industries where they are used to produce high value proprietary and specialised products. This is a problematic matter, as any change of product supplier can involve considerable time and cost for the customer.

Therefore, customer acquisition requires a long gestation period, as a result of which very few players are involved in the production of products. Over the years, the company has built strong relationships with its key customers. Some of the raw materials such as bromine, MCF and TMCS are highly corrosive and toxic chemicals. Handling these chemicals therefore requires a high degree of technical skill and expertise.

Chemcon is a leader in its key products with a large market share in India and globally. We remain positive on the company due to its strong position in high-end products and expected new product launches that should drive growth over the next 2 years.

We estimate strong double-digit revenue growth along with robust operating margin over the next 2 years due to capacity expansion and strong demand. We expect the company to see a significant CAGR in revenue driven by strong volume growth.