Arun Singhal, Founder & CEO, Source.One
In an exclusive interview with Pravin Prashant, Editor, Indian Chemical News, Arun Singhal, Founder & CEO, Source.One shared views on his company’s foray into online chemical business, industry trends, business expansion, topline and bottomline growth, USP, user experience, and second round of funding.
What is the size of chemical distribution in India in FY 2022-23 and what percentage of the total is online distribution?
The chemical consumption distribution industry in India is almost US $200-230 billion and is growing at a CAGR of 6-7%. We foresee this to be touching US $250 billion in the next few years. Currently only 1% of chemical business is online but it is growing much faster than offline. Covid was a great trigger for the industry to adopt digital means. Given the trends, the share of online chemicals is expected to reach 10% in the next ten years.
What's the reason behind this tectonic shift from 1% to 10% in online business?
One of the stronger reasons is that adoption of technology is not one sided whether it is producers, distributors or consumers, all are equally excited towards adopting digitization methods and one strong nudge was provided by pandemic lockdowns where nobody had the choice but to adopt digital means. Not many have gone back to their old methods as some of them have stuck to their old methods or techniques. Just to exemplify this, phone calls used to be the primary mode of communication before Covid and today WhatsApp has replaced phone calls as a primary mode of buying and selling chemicals. We are talking about a product that costs few lakhs in a single transaction and just one message on WhatsApp is good enough to conduct the business transaction. So phone calls to WhatsApp are a shift towards digitization and there are many portals coming up which will transform the way chemicals are bought and sold in India.
What are trends in the global chemical industry?
There are three radical shifts happening in India. First, India is being seen as a very targeted hub for producers across the globe where people are looking at India as a major destination to sell off their excess inventories and even as a consistent export market. That comes out very clearly in all our conversations with international manufacturers and it’s not just petrochemical or bulk chemicals but across the whole chemical space. Second, within the Indian chemical space, there is a tectonic shift towards digitization. The digitization is not only the one part of it but it is on the production part where producers have now taken digital initiatives to streamline their planning and production. On the distribution side, there are more technology players who are streamlining the whole distribution chain. Source.One is one such example. Third, is consumption where even the MSMEs partly due to GST and demonetization have shifted to a tax compliant regime and are more than happy to share data, adopt digital means to procure data and raw materials which is again chemicals largely served.
Source.one is active in the polymer distribution business in India. Size of distribution business and what percentage is online and future growth forecast?
Polymer is about 12-13% of the total chemical space which is close to US $28 billion. At almost 12-13% CAGR, the growth is much faster in polymers compared to overall chemicals. The online share is almost 4.5%, half of which is Source.One share. We are happy to play a small part in the digitization journey of the chemical industry and in polymer space we have achieved it in a very sustainable manner where we have become both Amazon and Zomato of the chemical industry. Like Amazon, we provide the Price benchmark,and like Zomato we are strengthening our distribution at the local level.
Source.One is focusing on MSMEs or large companies? What's your USP?
We are largely focused on MSMEs as the chemical industry has a very typical nature where volumes play a major part in cost efficiency. There are a lot of economies of scale that kick in within the chemicals and commodities as well. We are talking about the commodity part of chemicals and more standardized distribution centric businesses. With MSMEs, the problem statement was not able to procure as efficiently as larger manufacturing enterprises and this is the kind of problem we started with. And obviously in the journey we came across a much larger problem than this: it was the problem of distribution. When you solve the problem of distribution, the original problem of MSMEs not being able to procure also gets solved as well.
Going forward, MSMEs would still be your focus or will you try to shift gears and move towards medium and large companies?
As of now we are solving the dual problem of distribution. One is on the consumption side where we are working with almost 15,000 MSMEs, trying to solve their problem of just-in-time (JIT) fulfillment and at the same time keep a very low inventory and manage their manufacturing efficiency. On the supply side, we are working with almost 1,500 stockists and helping them to liquidate their inventory on a very fast basis. Helping them to rotate their inventory increases their RoI (Return on Investment) for better. These are the two problems we are trying to solve.
How was the journey of reaching out to 15,000 MSMEs and how are you trying to solve their problem?
It was interesting as we got to speak to so many MSMEs whose ambition for the overall manufacturing sector is so positive that we don’t hear about it on a daily basis. Manufacturing is not a subject on which today’s generation gets very excited about but at the same time there is a community of business owners who are visionaries and ambitious about how manufacturing works and what it entails for the country. So we get a different world view of things and I sometimes feel that there are two worlds, one that knows manufacturing and second that has done it.
On the question of digitization, I feel the manufacturing industries have been typically devoid of digital initiatives that the country has been adopting. The digitization has been slow in manufacturing as compared to other areas such as service, distribution, or E-commerce. This whole opportunity to bring the digitization to the manufacturers’ fingertips is something that keeps us very excited and very humble at the same time. This is a very small portion of what we are going to do in the future.
You have done close to Rs. 1,600 crore in revenue in FY 2021-22. Revenue and profitability forecast for FY 2022-23 and how are you planning to achieve it?
Since its inception in 2018, one of the beautiful aspects of the growth journey of Source.One has been that the majority of business has come from MSMEs. One has to remember that more volume doesn’t mean more wallet share but means increased number of MSMEs that we have reached out to. It doesn’t matter whether Rs. 16,000 crore or Rs. 1,600 crore but the number of lives we have touched in the manufacturing industry actually matters to us.
On a forecast basis, we are expecting a growth of 30-50% over the next 3-4 years. We expect to remain profitable and at a gross profit or EBITDA level, we will remain at half a percent of the topline and at PAT level, we will be at 0.3% of overall topline. Over a period of time we have set up a very good machine to keep churning out the distribution ecosystem that we have created. In the future, we will not focus much on increasing the manpower but rather use the same manpower along with strengthening the technology infrastructure to keep growing our numbers. That is where our profit lines will come from.
We will touch around Rs. 2,000 crore in FY23, Rs. 2,500 in FY24, and Rs. 3,000 crore in FY25. The profit numbers at the EBITDA level is going to be half a percent. So about Rs. 10 crore in FY 23, Rs. 12 crore in FY 24 and Rs. 15 crore in FY 25.
Any plans of increasing profitability percentage as it is presently on the lower side?
In the next few years, I don’t foresee any major deviation from current half a percentage profitability. It may be 10-20 basis points from over and above what we are working. When I say EBITDA level, the cost and expansion that we are doing at company level is eating a lot of profit. There is a difference between EBITDA and gross profit which we are strengthening by 20-30% on a yearly basis. It was about half a percent for two years, last year it was 0.7% and this year we are targeting about 0.9%.
Commodities or chemicals don’t offer you much higher margins although you have higher volumes. It is very easy for me to increase it to 3% by giving a credit of 2 months but we don’t follow this business model. The next three years are going to be tight but in the next 7-8 years, we anticipate more opportunities such as being looked at as distribution partners and gateway to the Indian market but then again we don’t expect more than 4% profit margin.
Even on an offline distribution business do you see the same profitability numbers?
We would like to categorize chemicals into bulk, petrochemicals, specialty, and performance. We are into polymers which are 60% of petrochemicals. We are now expanding into non-polymer and bulk chemicals where we are witnessing the same traction as in the polymer business.
How tech savvy is the platform and key technologies that you have utilized to enhance user experience?
We have a core belief that guides our technology. This belief is that there are only two ways in which you can change the user behaviour. One if you are two big for the user to be ignored and second by burning money. When we started the company, we were neither too big nor did we want to burn any money. Hence, we decided not to change user behaviour and rather decided to adopt a technology which was friendly and was pre-sold to the user. This is the mistake most of the tech companies do is to manipulate the user behavior. We plan to continue with WhatsApp where any transaction happens at the speed of 5 minutes. Such technological avenues have helped us to reach 100% growth in the last few years.
The company has completed the first round of funding worth US $8 million. When are you planning to go for the second round and how much money are you planning to raise?
Beginning next year, we are planning to go for the second round of funding. However, we haven’t yet pinpointed a number. We plan to use the money for expansion into bulk chemicals. Nothing within the chemicals is off the cards and we therefore plan with the distribution machine that we have set up including GST intelligence, credit underwriting, data collection to hold us in a good position to collect data on any industry we want to get into. While we may need half a dozen people in business operations, functions such as logistics, operations, and technology are fully centralized. We certainly plan to replicate what we have done in polymers for other industries.
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