This Specialty Chemicals Company with 65% Global Market Share is Poised to Remain No.1 Over the Next 10 Years

One way for a company to increase its return on capital is by increasing its market share.

Many academic studies appear to have confirmed this relationship.

However, innovation and technological developments have made it difficult for many companies to barely survive, forget grow their market share.

But even then, there are some companies that constantly overhaul themselves and keep apace. This ensures not only their survival but their leadership position.

There're a handful of companies so dominant in their industries, that it seems highly unlikely they will lose their leadership anytime soon.

Last month, we set out to identify the most dominant companies in their specific sectors / categories that are likely to retain their top position over the next ten years.

So as to avoid any ambiguity, we restricted our study to only those companies enjoying at least a 50% share or more in their respective categories.

In the first part of our "Leadership Series" published last month, we covered an Ahmedabad based firm whose solid grip on wellness has set it up for ten years of dominance.

If you missed reading that article, you can read it here.

In this second part of our series, we will cover an obscure company. It's not widely covered but has a dominant 65% global market share in its niche segment.

A Specialty Chemical Company with a Dominant Global Market Share

The word 'chemical' brings about a general feeling of disenchantment even among savvy equity investors smitten by renewables, auto, banking, and defence.

And frankly, chemicals does seem like a boring business as compared to Artificial Intelligence, drones or electric vehicles.

But chemicals are goods which are constantly, in demand. This satisfies the fundamental tenet of long-term value investing.

Everything, from toothpaste to detergents to paper, salt, medicine, paints, resins, and cosmetics contain some sort of chemical, making it a crucial component of the industrial sector.

In recent times, the chemical sector has seen mammoth tailwinds due to initiatives being taken by western countries to avoid concentration of manufacturing activities in China.

India is the sixth-largest producer of chemicals in the world and the total industry size stood at Euro 104 billion (bn) in 2021.

India's specialty chemicals sector has been playing a pivotal role in driving the chemical industry's growth.

It constitutes approximately 20% of the total chemicals market in India by value and it is expected to grow 12% to reach an estimated US$ 64 bn by 2025. It's expected to provide an opportunity of an additional US$ 60 bn across specialty chemicals segments over the next 8-10 years.

But what makes specialty chemicals a segment to watch out for is the role it plays in enabling India's advances in megatrend industries. These are nutrition and wellness, hygiene, and personal care, water treatment, lightweight vehicles (including EVs), and renewables.

With such optimistic projections, there is bound to be strong competition among the leading specialty chemical companies.

However, there is one company that stands apart as it enjoys a dominant market share not only within India, but a global share of 65% in a niche segment.

And this has helped the company grow its revenues from under Rs 350 million (m) in 2003 to Rs 16 bn in 2022. That's an absolute growth of 4,515% over the last 20 years!

Vinati Organics Ltd (VOL)

In the 1980s, Vinod Saraf worked in the chemicals manufacturing division at the Aditya Birla Group owned by the late Aditya Birla, billionaire Kumar Birla's father. Impressed by his work, he was soon made managing director of an upcoming refinery.

But in 1989, Saraf gave it all up to start a small specialty chemicals venture. Today, Saraf, Chairman of Vinati Organics, is a billionaire himself. His company's marketcap currently close to Rs 190 bn.

Vinati Organics Ltd (VOL) is among the leading global manufacturers of specialty chemicals.

VOL is the largest manufacturer of Isobutyl Benzene (IBB) and Acrylamide Tertiary Butyl Sulfonic Acid (ATBS) in the world commanding a 65% global market share in these product categories.

The company exports about 75% of its production and has around 300 customers. Global chemical manufacturers like Dow Chemical, BASF, and Ecolab are major clients of the chemical manufacturer.

Almost every person at some point in their life may have used the drug, Ibuprofen. After all, is one of the most widely used drugs across the world.

Ibuprofen is used to relieve pain from various conditions such as headache, dental pain, body pain, and arthritis. It's also used to reduce fever and relieve pain due to the common cold or flu.

The primary raw material for Ibuprofen is Isobutyl Benzene (IBB). But even though it is so widely used, surprisingly, IBB was not being manufactured in India and was imported from China and other countries.

Saraf realised this presented him an opportunity to start his own IBB manufacturing business. Initially VOL started operations in 1992 with just one product, IBB with 1,200 metric tonnes (MT) annual capacity at its plant in Mahad, Maharashtra.

Initially, American customers were reluctant to import IBB from a new Indian supplier. But with Saraf's persistence, he was able to convince them to buy his product in small quantities and over time gradually increased its export.

Soon, VOL also started supplying IBB to China, Europe, and other countries around the world. Towards the end of the 90s, VOL boosted capacity to became the largest manufacturer of IBB in the world.

VOL: Validation of Leadership

As we mentioned in the first part of this series published last month, one of the key characteristics that make certain companies so dominant is their first mover advantage.

VOL clearly had that as it pioneered the production of IBB in India. It then built on that to become its largest manufacturer in the world.

But getting to first place doesn't always ensure you remain there forever. Saraf and his team have never been ones to rest on their laurels.

It seems, Mr Saraf had the "Make in India" theme in mind long before our prime minister, Narendra Modi launched his ambitious campaign.

After having tasted success with IBB, Saraf was on the lookout for an opportunity to pioneer manufacturing of another product in India.

In the year 2000, Saraf approached the National Chemical Laboratory in Pune to explore other feasible and profitable production opportunities for VOL.

Due to its numerous and diverse applications, Acrylamide Tertiary Butyl Sulfonic Acid (ATBS) was identified as one of the potential products.

At the time, there were only two other manufacturers of this product in the world, one of which was Lubrizol, the American Specialty Chemical giant.

ATBS is a versatile molecule used for making polymers. It is also used in water treatment, construction chemicals, medical applications, personal care products, emulsion coatings, adhesives, and textile chemicals.

However, probably its most important application is in Enhanced Oil Recovery, where it is used in its highest possible purity grade.

VOL yet again took up the challenge to become India's first and only the third company in the world to manufacture ATBS. A plant was set up in 2002 at Lote, Maharashtra with a 1,000 MT production capacity per annum.

However, the project, was plagued by quality issues in its initial years and was rejected by VOL's global clients as it did not meet their quality parameters.

At the time, VOL was still a small company and had exhausted all its resources and expertise available. As the ATBS plant was a loss-making unit, VOL considered shutting it down or selling it off.

But fate had other plans for the company...

Right about then, Saraf's elder daughter, Vinati (after whom the company is named) had joined the company.

She realised that as this was a niche market and VOL was only one of three companies in the world making this chemical, if they could get this right, ATBS could be the trigger that could take VOL to the next level.

Vinati hired a consultant, ironically a retired Lubrizol executive, to help them address the quality problems.

This resulted in a major breakthrough and VOL figured out how to greatly improve the quality of its ATBS. After that there was no looking back.

Over the next few years, VOL quickly ramped up its production of ATBS to 26,000 tonnes becoming the world's biggest manufacturer of the chemical.

And like they say, fortune favours the brave.

In 2018, Lubrizol which had a 20% market share of ATBS exited operations. Since then, VOL has further ramped up production to 40,000 MT leading to VOL's market share gaining from 45% to 65% globally as of today.

Today VOL dominates the market with 65% share in both of its primary products- IBB and ATBS. Being the lowest cost producer of both these chemicals, VOL is miles ahead of the competition.

The company is poised to maintain its leadership in both these products as it manufactures these chemicals through a closely guarded technology, which very few companies in the world possess.

Cost leadership and scale economies in IBB and technological entry barrier in ATBS, are great strategic advantages. New entry into this segment with similar technological strengths is very difficult. The technologies used are inimitable due to exclusive tie-ups.

Further, the products manufactured by VOL are specialised chemicals used for specific purposes. There are no substitutes available for the products as such.

Widely used for oil recovery applications, ATBS revenue is highly resilient to oil market mood swings as lower oil prices reduces raw material costs enhancing margins whereas higher oil prices increase ATBS demand helping the company's top line.

Finally, as the company only makes niche products and there are only two or three manufacturers in the world, VOL's customers get into long-term contracts with them.

This ensures that margins remain fixed and as customers place orders in advance, it also gives the company visibility of orders for the next few quarters.

VOL: What Lies Ahead?

Over the years, the company has evolved from being a single product manufacturer to an integrated business, offering a wide range of products to some of the largest industrial and chemical companies across US, Europe, and Asia.

VOL's product portfolio comprises 20+ products, majority of them being market leaders. In addition to the company being the largest manufacturer of IBB and ATBS in the world, VOL is also the largest manufacturer of the chemicals, Butyl Phenols, IB, and HP MTBE in India.

The company's product portfolio is niche and enjoys a massive export opportunity, which the government is encouraging significantly as part of the 'Make in India' initiative. VOL's new product initiatives is expected to lead to significant growth in the coming years.

VOL has already lined up substantial capital expenditure plan, which will create a significant headroom for growth.

The demand for high-grade ATBS has increased in recent years with a current shortage of the product globally. Hence, the company is going ahead with an expansion of ATBS capacity by 50% to 60,000 MT keeping in mind the demand perspective for the next four to five years.

With no other competitors having announced plans to increase capacities, this could possibly lead to VOL gaining further market share to approximately 80% of the global ATBS market in the future.

The company has been able to sustain growth and market leadership in key products due to its unwavering commitment to research and development.

On an average, VOL's R&D team works on the development of 10-12 new products, most of them, niche with unique chemistries that cannot be replicated.

The company is looking at bringing out new products over the next 5 years that will further boost revenues.

VOL is also expected to complete its merger with Veeral Additives Pvt Ltd (VAPL) in 2023.

VAPL is engaged in the manufacture of antioxidants used in plastics, LDPE, LLDPE, and polypropylene.

The merger with VAPL is expected to enhance the synergies of both entities. This integrated business model will further strengthen with the use of Butylphenols and IB for antioxidants - a Rs 100 bn market opportunity that VAPL addresses.

Antioxidants presents a huge market opportunity and post the amalgamation, VOL will be the largest or only manufacturer of some of the antioxidants in India.

Currently, global demand of antioxidants is estimated to be 300,000 MT while the same for India is 10,000 MT. Veeral Additives has capacity of 24,000 MT, which means that it could meet the entire demand for India as well as export the rest to meet global demand.

Similarly, Indian demand for butyl phenols is expected to remain at 25,000 MT against global consumption of 400,000 tonnes. As VOL is the only manufacturer of butyl phenols in India, the company is looking at substituting entire imports of India and also capture global market share.

With that in mind, the company has announced a capex of Rs 1 bn to increase production capacity by 42% to 50,000 MT per annum by the end of 2023.

Previously, one of the key concerns of investors was the product concentration risk in VOL's business model. After all, IBB and ATBS still contribute to close to 70% of the company's total revenue mix.

But with the new products such as antioxidants and butyl phenols picking up steam in recent times, and with the expected launch of newer products, VOL is expected to become a diversified business over the next few years.

The global market size of antioxidants and butyl phenols is huge when compared to Indian markets. Additionally, both these markets are growing in nature.

VOL could succeed in capturing market share at a global level in the future due to the combination of two factors - growing market and technology focused process development.

Currently, VOL is largely an export-oriented company, with exports contributing to 75% of its revenues. With new set of products increasingly contributing to domestic sales, VOL's share of domestic revenues could increase sizeably.

And then there is the long-awaited launch of Vinati's Para Amino Phenol (PAP) project, an intermediate for manufacturing Paracetamol.

Paracetamol is one of the most widely used pain reliever and antifever drugs. More than 80% of PAP worldwide is used to manufacture Paracetamol.

The total demand of PAP in India is fully met through imports (25,000 MTPA). Vinati Organics is expected to grab this as an import substitution opportunity with a cost leadership in manufacturing PAP due to its novel manufacturing process.

The company has applied for the PLI (production-linked incentive) scheme and is evaluating its feasibility. If undertaken, this project could generate an incremental revenue of Rs 5-6 bn.

However, as of now, there is no further update on whether the company is still actively pursuing this project.

The total capex expected is likely to be around Rs 6 bn over the next two years. The company's strong balance sheet will enable it to fund the entire capex through internal accruals.

Vinati Organics: Financial Highlights

If one was to look at Vinati Organics, the company has had two major phases.

First, where the company started off with a single product, IBB and its initial unsuccessful foray into manufacturing ATBS right up to 2006.

And the second phase, wherein the company's product ATBS was widely accepted and the company was able to get key international clients like BASF on board to buy its products such as IBB.

Over the years, the company has enjoyed consistently high EBIDTA margins due to ATBS which has a higher margin but since 2020, the margins have declined.

This is because the performance of Vinati Organics is driven by a shift in the revenue mix towards lower albeit healthy margin products such as IBB and butyl phenol compared to ATBS as the company makes a conscious effort to reduce its over dependence on it.

However, the management expects the margins to stay at the current levels of 30% over the next couple of years as it consciously aims to bring the revenue contribution of ATBS to around 40% levels.

It's hard not to be impressed by Vinati Organics' returns on capital. The company follows a strict criteria to produce only niche products with a target of minimum 20% return on investment and a payback period of up to 5 years.

Over the last 10 years, VOL has delivered an average ROCE of 33% and the capital employed within the business has risen in that time. As of 31 March, 2022, the company remains debt free.

Revenue jumped from Rs 7.4 bn in 2018 to Rs 16.1 bn in 2022 while net profit zoomed from Rs 1.4 bn to Rs 3.5 bn over the same period.

The company has delivered a 5 Year CAGR for revenue and net profit of 19% and 20% respectively.

In 2013, VOL had a market capitalisation of barely Rs 4 bn and today it stands at just under Rs 190 bn. Over the last 10 years, VOL's marketcap has surged 49 times as investors have lapped up the company's shares.

In Conclusion

Projecting a company's position and market share ten years out or for that matter even ten months ahead, isn't an exact science.

However, with an unchallenged dominance in a particular segment, investors can look at some of such companies which are unlikely to lose their leadership anytime soon and potentially find likely winners.

A company might be the leader in its industry having a near monopolistic market share. But even if it has a track record of sustained profit and sales growth, current valuations might not be right.

In such cases, it is prudent for an investor to keep such companies on their stock list and only consider investing in them when valuations seem fair.

It's crucial to conduct your due diligence before making any investment decisions. Despite the favourable outlook, don't overlook the significance of sustained research.

Investing your hard-earned money should not be taken lightly, so make sure to conduct thorough research before making any commitments. Take the time to meticulously analyse the financial statements of potential investment opportunities.

With that we conclude our coverage of the second company that could continue to dominate its industry and remain the leader over the next decade.

Hope you found this information useful. Stay tuned for the next part in our series to find out the next company on our list.

Happy Investing!