Leading market position, expansion and growth in bromine and industrial salt
Archean attributes their strong market position to factors such as their long-standing relationship with global customers, their established infrastructure and access to brine reserves at the Rann of Kutch, their manufacturing facility, and their consistent delivery of high-quality products. Their leadership position and low cost-production offers them competitive advantages such as product pricing, economies of scale, increase customer loyalty and expand their client base, all of which have in turn resulted in the growth of revenues and EBIDTA in the last 3 fiscal years. The market position in India and globally for each of their products:

High entry barriers in the specialty marine chemicals industry
The specialty marine chemicals industry in which Archean operates has high entry barriers, which include 1) the high cost and intricacy of product development, manufacture, and investment in salt beds, 2) the limited availability of raw materials necessary for production, 3) the limited number of locations with a suitable climate and access to reserves, and 4) the lead time and expenditure required for research and development and building customer confidence and relationships, which can only be achieved through a long gestation period.

Given the nature of the application of their products and the processes involved, their products are subject to, and measured against, high quality standards and sensitive and rigorous product approval systems with stringent impurity specifications. Thus, customer acquisition is difficult.

Further, bromine and certain raw materials that Archean use in production is highly corrosive, hazardous, and toxic chemicals. Therefore, handling these chemicals requires a high degree of technical skill and specialized expertise.

Company’s existing brine fields were established over a period of 3 to 4 years before commercial cultivation was possible and, accordingly, the development time of brine reservoirs creates an entry barrier to potential domestic competitors. In addition, the Rann of Kutch brine fields are in environmentally sensitive coastal areas which require several regulatory hurdles before production could be established.

Largest Indian exporter of bromine and industrial salt
As of June 30, 2022, Archean had 18 global customers and 24 domestic customers. Its major customer for industrial salt includes Sojitz Corporation (which is also a shareholder in the Company), Wanhau Chemicals and Qatar Vinyl Company Limited; for bromine, Shandong Tianyi Chemical Corporation and Unibrom Corporation.

Key geographies to which they export their products include China, Japan, South Korea, Qatar, Belgium, and the Netherlands.

The exports and domestic sales as a percentage of the revenue from operations:

Long standing relationship with clients
ACIL enjoy relationships more than 5 years with 7 out of their Top-10 customers. Their long-term relationships and ongoing active engagements with customers also allow them to plan their capital expenditure, enhance their ability to benefit from increasing economies of scale with stronger purchasing power for raw materials and a lower cost base. Company’s strong customer relationships have enabled them to expand its product offerings and geographic reach.

Established infrastructure and integrated production with cost efficiencies

• Integrated facility: Archean has an integrated production facility for their bromine, industrial salt, and sulphate of potash operations, located at Hajipir, Gujarat, which is located on the northern edge of the Rann of Kutch brine fields.

• Largest facility fully compliant with environment protection measures: They have one of the largest salt works at one single location in the world. Their industrial salt washing facility has 3 washeries, each having a capacity of 200 tons/hour. Their facility is equipped with their own quality department, effluent treatment plant, sewage treatment plant and stockyard. Their operations have an ISO 9001:2015 certification.
• Location advantage:Their manufacturing facility is in the proximity to the Jakhau Jetty and Mundra Port from, where they can transport their products to various international customers.

Production cost efficiency & quality driven mechanism: The company has increased the mechanization of their production process which will bring further increased efficiencies and product consistency. The cost of production for Industrial salt from sea water brine is about US$12 to 15 per MT, while their costs are in the range of US$5.5- 6 per MT. Further their quality of salt is on par with Grade 1 salt required by chlor-alkali producers.

Strong and consistent financial performance
Archean has demonstrated consistent growth in terms of revenues and profitability. In Fiscal 2021, they were the largest exporter of bromine and industrial salt by volume in India (Source: Company Commissioned F&S Report). Their total revenue from operations has increased at a CAGR of 36.34 % from Rs.608 cr in FY20 to Rs.1130 cr in FY22. Revenue from exports has grown at a CAGR of 29.11% from Rs.477 cr in Fiscal 2020 to Rs.795 cr in Fiscal 2022.

The company’s EBITDA has witnessed a robust growth from Rs.149 cr in FY20 to Rs.467 cr in FY22; increasing at a CAGR of75% while EBITDA Margins has grown to41% in FY22 from 25% in FY20. ROCE stood at 34.62% at the end of June 30, 2022.

Financial Snapshot

Peer Comparison

Risks

High Debt:
Company’s total debt as of June 30, 2022, stood at Rs.915 cr comprising of secured non-current borrowings of Rs.841cr and current borrowings (including current maturities of non-current borrowings) of Rs.71 cr. On revenue base of Rs.1130 cr total debt of Rs.915 cr is too high and poses risk to continuity of business in adverse macro – economic conditions.

Exchange rate fluctuations:
Archean Chemical is an export-oriented business. In Fiscal 2022, 70% ofCompany’s revenue from operations were attributed to export sales (Rs.1130*70% = Rs.790 cr). A portion of its expenditures and sales from exports are denominated in foreign currencies and any sort of fluctuation in exchange rate could adversely affect its result of operations.

Dependency on top customers for major portion of its revenues:
In the 3 months ended June 30,2022, and in Fiscal 2022, Fiscal 2021 and Fiscal 2020, their largest customer, Sojitz Corporation, contributed 19.29%, 20.56%, 30.51% and 31.94%, respectively, of their revenue from operations;

• The top 10 customers contributed 60.69%, 61.99%, 75.70% and 77.14%, respectively, of the revenue from operations
• Their top 20 customers contributed 81.75%, 80.94%, 88.66% and 92.05%, respectively, of our revenue from operations.

Contingent Liabilities: As of June 30, 2022, company had contingent liabilities amounting to Rs.21.7 cr. The table below sets forth details of contingent liabilities:

Valuation

On the valuation front, ACIL is valued at 22x FY22 EPS of Rs.18.26 calculated at the upper price band of Rs.407 per share. Given the differentiated business of the company asking price appearsto be reasonable.

Considering strong fundamentals of the company, market leadership position, strong financial performance, steady return ratios, high entry barriers, strong competitive advantage, and strong customer base, we believe that ACIL is poised for strong growth ahead and thus we assign a subscribe rating to the issue.

Key Information

Use of Proceeds:
Use of Proceeds: The total issue size is Rs. 1462 cr, of which Rs. 805 cr is Fresh issue and balance (Rs.657 cr) is Offer for Sale (OFS). The company will utilize the net proceeds of Rs.644 cr from the fresh issue for Redemption or earlier redemption, in part or, fullof NCDs issued by the Company and the rest will be utilized for general corporate purposes.

Book running lead managers:
IIFL Securities Limited, ICICI Securities, JM Financial Limited

Management:
Ranjit Pendurthi(Promoter and Managing Director), Ravi Pendurthi (Promoter and Non-Executive Director), Subrahmanyam Meenakshisundaram (Non-Executive Director), Padma Chandrasekaran, Chittoor GhatambuSethuram, Kandheri Munaswamy Mohandass (Independent Director) and Raghunathan Rajagopalan (Chief Financial Officer).