top of page

Archean Chemical Industries – Largest exporter of Bromine and Industrial Salt from India

Updated: Sep 29, 2023


Company Name – Archean Chemical Industries Limited (Archean)


Current Share Price – INR 580 (June 12, 2023)


Market Cap – INR 7,139 cr


 

1. What is interesting about the stock?


India has been experiencing a significant trade deficit with China due to the heavily skewed trade balance in China's favor. This has raised concerns in India and prompted calls for trade policy revisions and measures to address the imbalance.


My attention was drawn to Archean Chemical Industries Limited, an Indian company that has a notable export business to China.


Archean, a renowned marine chemical manufacturer based in India, is an expert in producing and exporting high-quality bromine, industrial salt, and sulfate of potash all over the world. Being the largest exporter of bromine and industrial salt in India, Archean has a competitive edge in the global market due to its cost-efficient production of both products. The company sources its brine reserves from the Rann of Kutch, located on the Gujarat coast, and manufactures its products at its state-of-the-art facility near Hajipir in Gujarat.


Bromine continued to 49% of revenue in FY23 with the remaining coming from Industrial Salt.


The Company’s integrated production facility in Hajipir, Gujarat is a crucial component of its operations, facilitating the production of bromine, industrial salt, and sulfate of potash. Strategically located on the northern edge of the Rann of Kutch brine fields and covering an area of approximately 240 sq. km. Archean has an installed capacity of 28,500 MT per annum of bromine, 3,000,000 MT per annum of industrial salt, and 130,000 MT per annum of sulfate of potash.


Proximity to the Jakhau Jetty and Mundra Port allows the Company to easily transport its products to international customers. Major customers for industrial salt, include Sojitz Corporation (which is also a shareholder in the Company), Wanhau Chemicals, and Qatar Vinyl Company Limited. Similarly, Shandong Tianyi Chemical Corporation and Unibrom Corporation are the major customers of bromine.


During FY23, Sojitz Corporation (A Japanese trading conglomerate, largest customer & equity shareholder), contributed to 23% of revenue. Furthermore, the top 10 customers of the company contributed to 64% of revenue.


The company plans to add bromine derivative performance products to its range in the next few years, including flame retardants, clear brine fluids, and catalysts for PTA synthesis. These are used in electronics, cables, rubber, textiles, and more.


Some background on its key products..


Bromine, a naturally occurring halogen element, manifests as a reddish-brown liquid with a distinct odor that can cause irritation to the eyes, skin, and respiratory system. Even brief exposure to concentrated bromine vapor can prove fatal. In all states of aggregation, bromine exists as diatomic molecules. The principal commercial source of bromine stems from soluble salts present in seawater, salt lakes, inland seas, and brine wells. Inland seas and brine wells exhibit significantly higher concentrations of bromine. The Dead Sea, located in Israel, Jordan, and the United States, ranks among the major producers of bromine and brominated compounds. Bromine, a crucial raw material, finds its applications in various industries, such as pharmaceuticals, agrochemicals, water treatment, flame retardants, additives, oil & gas, and energy storage batteries.


In India, the evaporation method is utilized to produce industrial salt, which offers a more cost-efficient option than the mining method. The cost of production encompasses processing, utility, manpower, fixed costs, and transportation to the market or consumer. Industrial salt is an essential component used in the chemical industry to produce sodium carbonate (soda ash), caustic soda, hydrochloric acid, chlorine, bleaching powders, chlorates, sodium sulfate (salt cake), and sodium metal.


Why invest in Archean?

  • Largest exporter of Bromine and Industrial Salt from India

  • Integrated production facility – one of the lowest-cost producers in the world

  • High entry barriers in the specialty marine chemicals industry - The Company utilizes Bromine and specific raw materials during production, which are known to be highly corrosive, toxic, and hazardous chemicals. Consequently, the handling of these chemicals demands a significant level of technical proficiency and specialized knowledge. It is imperative to ensure that only well-trained personnel undertake operations that involve such hazardous chemicals.

2. Key Historical Financials

  • Company revenue and net profit have grown at a CAGR of 27% and 47% respectively in the last 5 years.

  • Revenue growth was 28% in FY23 on a YoY basis but was flat in Q4FY23 as Bromine business faced challenges – volumes fell ~20% driven by higher inventory levels in China

  • EBITDA margin expanded from 24% in FY20 to 44% in FY23 and 51% in Q4FY23

  • Cash flow conversion (CFO/EBITDA) was 79% in FY23

  • ROCE and ROE were 46% and 45% respectively in FY23 – we need to see if the Company can maintain such a high level of returns.

3. What is my view on company valuation?


Archean made its debut on the NSE and BSE on November 22, 2022, via a successful IPO at INR 407 per share. The shares opened at INR 450 on the NSE, representing a ~11% premium over the IPO price, and closed at INR 458. IPO was subscribed to ~32x. The current share is ~40% higher than the IPO price.


The Company has a P/E (TTM) ratio of 19x, while the EV/EBITDA ratio is ~11x.


Valuation looks high as the growth could be muted in the next few years.


Long-term investors could evaluate investing at lower levels which would also provide a margin of safety.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Customer concentration is high

  • Archean manages a manufacturing facility and brine reserves on land that was leased by the Government of Gujarat. However, these land leases have expired

  • Investment may not be conducive for ESG investors

  • Business could get impacted by India – China geopolitical issues

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

0 comments

Opmerkingen


bottom of page