Value creation has just begun for Archean Chemical: ICICI Securities
Chemical

Value creation has just begun for Archean Chemical: ICICI Securities

Archean has entered into an agreement with a Chinese company for technology transfer for manufacture of flame retardants

  • By ICN Bureau | January 14, 2023

Archean Chemical Industries (Archean) enjoys the natural advantage in elemental bromine due to its access to brine reserves, which is difficult to replicate. Further, the bromine business has unique advantages such as value extraction from brine, China’s position as a major buyer (not competitor), INR depreciation, etc.

Archean has scaled up its bromine production and is now adding capabilities and capacities in the bromine compounds business, which is helping create long-term value. The company has resolved issues with sulphate of potash (SOP) production, which is now expected to scale-up over the next few years allowing Archean to extract more value from its brine.

It also plans to extract magnesium chloride in the future. Industrial salt capacity addition will likely help drive volumes. Archean is a net-debt-free company and its return ratios are healthy and sustainable at >30%.

Bromine offers multiple competitive advantages.Bromine production is correlated to brine field availability, which is globally limited and has long gestation period for commercial development. Archean uses brine from its own reservoirs, which provides a huge cost advantage. Government has allocated most of the land surrounding the brine reservoirs, and we understand there is no large land parcel available to be leased near the Great Rann of Kutch brine reserves.

Bromine is a highly concentrated industry with the top-5 producers accounting for ~85% of the global production, largely from two natural resources, viz. Dead Sea and brine wells in US. China is the largest buyer of bromine as its domestic production falls significantly short of demand. India’s proximity to China is an advantage for Indian producers to sell elemental bromine to the Chinese.

Bromine is sold on long-term contract basis. International bromine sales are based on 12-month volume and pricing contracts, which increases revenue predictability. Archean benefits from INR depreciation (as its peers’ national currencies are stable vs USD).

Bromine derivatives – way to add value. Bromine producers are forward-integrated to manufacture bromine compounds. Supply of bromine in the form of derivatives is preferred because elemental bromine is very hazardous, hence it is utilised at origination. The top bromine producers consume majority of their captive production for manufacturing bromine compounds. ICL has highlighted its strategy of growing its business through long-term contracts with bromine compound users to lock supplies. Archean historically has sold its entire bromine production in elemental form due to balance sheet issues, and limited bromine capacity. It is now in the process of commissioning its bromine compound plant (28ktpa capacity) in H2FY24.

Archean has entered into an agreement with a Chinese company for technology transfer for manufacture of flame retardants. The tie-up also includes buyback of a minimum of 90% of the produce (this significantly increases visibility of revenues from Archean’s upcoming bromine compound business in the next two years). It is strengthening its R&D capabilities with new hires for building a strong and sustainable bromine compound business across flame retardants and agro / pharma bromine compounds. 

Sulphate of potash (SOP) –New method to reduce chloride content. Archean is India’s only manufacturer of SOP (an essential nutrient for plants) from natural sea brine. SOP produced from sea brine makes Archean the third-cheapest SOP producer globally. Company’s SOP production in past two years has collapsed as the required raw material KTMS feed suffered from an unacceptably high ratio of chloride content, which it has lately fixed by using a new method. We understand the company has harvested 200kte of KTMS by the new method. In FY23E, SOP production should jump to 9-10kte. If the new process becomes successful, the company can gradually scale up its SOP production to 55-60ktpa over the next few years.

Strong earnings visibility. Archean has strong earnings growth visibility across its products. The expected growth is primarily volume-driven aided by normalisation of commodity prices. 1) Elemental bromine volumes are expected rise to ~30ktpa in FY25E from 20ktpa in FY22; 2) Bromine compound business will benefit from the capacity of 28ktpa to be commissioned in H2FY24; 3) SOP production is expected to ramp up over the next three years to 55-60ktpa from negligible levels in FY22; and 4) Industrial salt segment will benefit from addition of two washeries, which will expand the capacity from 3.6mtpa to 5mtpa.

Register Now to Attend NextGen Chemicals & Petrochemicals Summit 2024, 11-12 July 2024, Mumbai

Other Related stories

Startups

Petrochemical

Energy

Digitization