By Baniya Beast,
When you handover your money to a competent management, making some brilliant strategic decisions, you need to be happily patient for the numbers to show up. – Anonymous
CMP – Around 90, illiquid counter.
IVP Limited (IVP) was incorporated in 1929 with two manufacturing facilities: one each in Tarapur (Maharashtra) and Bengaluru with combined capacity of 50,000 MTPA catering to the foundry chemicals, coatings, composites & insulation resin industries.
It was originally part of the Tata Group and later it was acquired by the Allana Group which was founded in 1865 and a US $5 Bn group based out of Dubai.
IVP became the 1st company in India to start Foundry Chemicals manufacturing in technical collaboration with Ashland USA.
Change in Strategy
Around 11 years ago, IVP used to manufacture Vanaspati, vegetable oils, and foundry chemicals. It also produced spark plugs & industrial ceramics. These businesses were little value add and therefore margins were minuscule.
In 2008, the management took some smart and important decisions of exiting from all non- profitable businesses (ceramics, spark plugs, Vanaspati and vegetable oil) to ensure that performance of the profitable business (foundry chemicals) does not subsidize the loss making ones.
It simultaneously focused on adding more products which will add value and create niche place in the market.
Current Product Portfolio
Now this PU business is the latest entrant to their portfolio. The management laid the foundation of this business in 2015.
Foundry chemical finds application in automobile sector. This is more of commodity chemical. Composite resins are performance plastics which is future of materials.
It is evident from their journey that IVP wants to increase their product offering and cater to wide and niche application areas.
PU Systems – Major Manufacturers in India
How did IVP enter a niche PU business?
PU business has high entry barrier. IVP could have formed a JV or Technology transfer to obtain the process know-how. But it went with slightly different strategy.
IVP utilized the knowledge pool of the industry to enter the PU market. The new team came on-board in 2015. They were hired from BASF and having experience of 25-30 years. These people know the business, processes and that’s the real technology. They also have the relationship with clients which would enable them to create the trust which IVP as fresher would be lacking.
Vishal Pandit – Chariman
In the past Mr. Pandit was Senior VP-Middle East & Global Sourcing at Genpact Ltd., President and CEO for GE Money India.
Mandar Joshi – CEO
He is the man who is turning things on. He has been CEO of IVP since August, 2015. A B.Tech (Chemical) from IIT Bombay and MMS (Marketing) from JBIMS. Mr. Joshi has about 23 years of work-experience in the Chemical Industry.
He started his carrer with Gharda Chemicals in 1995 as MT. Post which he joined BASF Group in 1996, worked for 4 years in overseas geography. In India, he has worked in different BASF group companies such as Site Manufacturing Director and Business Director PU.
How Is Polyurethane Made?
PU chemistry is complex, but the basics are relatively easy to understand. PU is formed by reacting a polyol (an alcohol with more than two reactive hydroxyl groups per molecule) with a diisocyanate or a polymeric isocyanate in the presence of suitable catalysts and additives.
Because wide range of diisocyanates and a variety of polyols can be used to produce polyurethane, a broad spectrum of materials can be manufactured to meet the requirement for specific applications.
PU exists in various forms, including flexible foams, rigid foams, chemical-resistant coatings, specialty adhesives and sealants, and elastomers.
Key Types of Polyurethane
Flexible Polyurethane Foam
They are used as cushioning for a variety of commercial and consumer products, including bedding, furniture, automotive interiors, carpet underlay and packaging. The foam can be created in almost various shapes and firmness. It is durable, light, supportive and comfortable.
Rigid Polyurethane Foam
Rigid polyurethane and polyisocyanurate (polyiso) foams create one of the world’s most popular, energy-efficient and versatile insulations. These foams can significantly cut power costs thereby making commercial and residential properties more efficient and comfortable.
Key Applications of Polyurethane
When scientists discovered that polyurethanes could be made into fine threads, they were combined with nylon to make more lightweight, stretchable garments. Over the years, polyurethanes have been improved and developed into spandex fibers, polyurethane coatings and thermoplastic elastomers.
Polyurethanes are used throughout cars. In addition to the foam that makes car seats comfortable, bumpers, interior “headline” ceiling sections, the car body, spoilers, doors and windows all use polyurethanes.
Polyurethane also enables manufacturers to provide drivers and passengers significantly more automobile “mileage” by reducing weight and increasing fuel economy, comfort, corrosion resistance, insulation and sound absorption.
PU India Market
The addressable market for Polyurethane in India is Rs.10,800 crore with volume growth in the range of 7-8%. The PU industry is one of the rapidly growing industries in India which has registered double-digit growth during 2011-2015 and is expected to double every four years in the coming decade.
The major end-user industries for PU are refrigerators, automotive, mattress & furniture, footwear and construction. The India demand for PU in 2015 was estimated at 565,000 MT with a consistent year-on-year (YoY) growth rate of 10-12 percent.
MNC’s PU expansion saga
Mitsui Chemicals & SKC Polyurethanes Co Ltd (July 2015)
Its a 50:50 JV between Japan’s Mitsui Chemicals and South Korea’s SKC Co. They invested $ 7.3 Mnn (about Rs 49 crore) for setting up a PU system house in Andhra Pradesh.
Plant became commercially operational in August 2018. The plant produces polyol based PU foam products, with an annual capacity of 15,000 MTPA.
BASF India (2018)
Even BASF started with trading business of Polyurethane which was low in margin (EBIT of 3.5%, say EBITDA could be 5-7%). Then it set up plant in Dahej.
The Dahej plant is fully backward integrated, with production facilities for precursors, such as Polyetherols and Polyesterols, and an MDI (Methylene Diphenyl Diisocyanate) splitter.
BASF India has an advantage due to its integrated production facilities for Polyetherols, Polyesterols and MDI Splitter, which is a feedstock for PU Systems.
With rising consumption of polyurethane in the country, BASF has been constantly striving to localize production to strengthen its capability and serve Indian consumers.
BASF plays a very important role in India PU growth and has a strong presence in India in terms of local manufacturing capability as well as application development to support market needs. It is present in both flexible as well as rigid PU systems.
Dow Polyurethanes, a part of the US-based Dow Chemical, is planning to expand its manufacturing base in India with 50 percent increase in the production capacity of its PU system house at Ratnagiri in Maharashtra.
India PU Story
Polyols and isocyanides are two key raw materials (crude oil derivatives) required to manufacture PU. While there are three manufacturers of basic raw materials in the country, there are many system houses which are blending units that tailor the formulation according to customer’s needs.
Polyurethanes is considered as an alternative to conventional material like PVC, wood, rubber etc and caters to various major industries like automotive, construction, footwear, appliances to name a few.
Expanding middle class with increasing disposable incomes and rising urbanisation is driving growth in these markets leading to growing demand and opportunities for polyurethanes.
Since the industry is largely dependent on imports (~150,000 MT), IVP’s foray into PU business is sensible move and the project should have higher IRR. Currently domestic production is unable to meet the growing demand for this material.
Though polyurethane globally is fifth largest polymer family due to its versatility, in India the production and consumption is relatively small compared to other Asian countries as production costs are higher.
Besides, there is inverse rate of duty structure added with costly logistic and interest cost Indian produced raw material are more expensive. Where as in countries like China, Korea, Thailand, Singapore where scale of production is very high they are exporting to India in large quantities at lower price.
IVP’s PU Expansion
IVP is currently producing two PU products – Polyester PU Systems and Polyether PU Systems.
IVP did a capacity expansion of 24,000 MTPA for PU. They had a small capacity before that and the remaining sale was contributed by trading.
At peak utilization levels IVP’s PU plant can generate sales of Rs.500-600 crore.
Given the current situation, the gross margins should only improve from here as trading sale is replaced by own production sale and revenues increase by way of higher volume.
The new PU plant commenced commercial operation in March 2019. The company expects to sweat the assets and reach close to full capacity utilization levels by November 2019.
Raw material sourcing
IVP sources raw material from Dow, BASF and Huntsman. They’re competitors for the finished goods product. Then why don’t they feel threat of competition? It is because IVP is a very small player and for these MNC’s companies, they can even make money by selling raw materials to IVP.
Since raw material is derivative of crude oil and it is imported, therefore Rupee Depreciation acts as a double-edged sword.
PU Revenue profiling
Currently IVP is supplying to unorganized players in the footwear industry. It plans to start supplying to organized players after some months. They have already initiated relationships with Relaxo, Bata and others.
Since IVP is entering new markets and establishing relationship with the clients, it might have to give away margins. Market penetration remains key monitorable. After 3-4 quarters the company can start charging rationally as per market rates.
Cash Cushion – Sale of Old Plant Property
IVP has a property in Chikalthana Industrial Area of Aurangabad. The property might fetch around Rs.20 crore as per my naïve understanding. The Board is going ahead for Shareholder approval with price not exceeding Rs.30 crores. The closure of the deal could take around 6-12 months’ time. But then while the stock is currently trading at Rs.87 crore market capitalization, this surely provides a comfort.
It will be much detailing for this post. I’m just sharing topline and gross margins for now. Detailed financials and their analysis should follow in later posts.
The fall in the margins in past two years is due to the increase in trading of PU business. The topline is healthy at Rs.320 crore for FY19.
Lap it up
IVP is surely one of the companies which are doing all the right things and it is just the matter of time for the numbers to start showing up. It is currently under-researched (no research coverage rather). This stock qualifies for mid-single digit allocation in the portfolio and to be accumulated as story gathers more steam.
This article was originally published by author Baniya Beast. Views are personal and not a recommendation.