Categories Analysis, Industrials

Ultramarine & Pigments: A Hidden Monopoly

Ultramarine & Pigments primarily deals with the manufacture and selling of Surfactants, Business Process Outsourcing (BPO) activities, Pigments, and IT-Enabled Services. The company’s presence extends to both domestic and international markets. Occupying 90% of the company’s revenue, as per FY2021, Ultramine’s surfactants and pigment division continues to be its main source of success.

Factors contributing to the Company’s success:

Geographic advantage in the surfactants industry:

UMP’s surfactants outlets are both located in South India with the recently commissioned Naidupet in Andhra Pradesh and Ranipet in Tamil Nadu. In South India, UMP is the sole relevantly sized surfactant player which has a manufacturing base there. Due to the proximity of crude based raw material, surfactant facilities and outlets have historically been placed in and around West India, particularly in the states of Gujarat and Maharashtra. This also is the reason behind the visibility of major players like Godrej industries, Galaxy, and Aarti Surfactants which have plants in Madhya Pradesh, Maharashtra, and Guajarat. 

While UMP’s location in South India falls behind in its proximity to the raw materials concerned, it also offers a huge advantage when it comes to servicing the customers of South India (low freight costs and reliability in supplies). This gave leeway for the company to penetrate into locations in South India (HUL’s Puducherry, P&G’s Hyderabad facility) and also become the primary choice of supplier in surfactant amongst south Indian based FMCG players. In turn, UMP’s ability to negotiate in the surfactants market and command relatively greater margins and returns compared to its competitors has been aided by its diverse customer base (which is not dependent on a small number of large MNC customers).

Few Global players having mastered the complexities of UB pigment manufacturing:

Previously, the use of UB pigments were largely limited to laundry applications. However, in the last two or three decades the market share has grown to include other industrial applications including paints and plastic owing to its functional characteristics.

However, it is important to note that the pigments used in basic laundry applications to that used in industrial applications are different in certain parameters including the level of purity (defined by content of sulphur/iron/lead/aluminium, etc), brightness (strength of the colour), and the degree of corrosion resistance.

The majority of the world’s industrial grade UB pigment production and sales are made by just three companies. UMP is the third-largest UB worldwide pigment manufacturer and the leading supplier in Asia-Pacific and India (satisfying more than 60% of India’s industrial grade pigment needs).

The weather and climate surrounding the plant (which affects factors like temperature, especially during the natural cooling process), the amount and duration of oxygen introduced during the calcination process, the concentration of heavy metals in the raw material ores, etc., all play significant roles in the manufacturing process. Any variation in these factors might cause a considerable drop in yield and variations across batch qualities.  Over time, only a small number of participants have been successful in increasing the yield by improving the process conditions using sophisticated instrumentation techniques, automation, etc. Also, energy is a considerable expense, and over the years, only a select few companies, like UMP, have been able to considerably reduce energy consumption.

Capital allocation:

The majority of capital allocation has gone into the core business, and non-core investments overall have added to huge value creation. The business regularly makes investments in its fundamental operations. The business has also made several profitable investments in other companies.

Focusing on higher value-added products:

In the field of pigments and surfactants, the company has a proven track record of advancing products upwards in the product curve. Formerly, the UB pigment company sold its products to lower-grade laundry uses, but today industrial grade pigments make up the majority of its sales. In all of UMP’s annual reports, the company emphasises the need of creating higher-grade pigments for industrial uses.

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