Chemplast: Blending prudence and risk

T M A Raman & P Vinod Kumar

When the going gets tough, the tough gets going. During these times, this seems to be relevant to the Chennai-based, Rs 443 crore Chemplast Sanmar Ltd (Chemplast). Indeed, the times are even such that there is a certain degree of caution about predicting the future. Says Mr. N. Sankar, chairman, Chemplast, “ I will not hazard a
guess about where the businesses financials would be in the current fiscal, considering the highly cyclical business that we are in.”
Mr Sankar’s answer may not surprise those who are familiar with the volatile chemicals business, which is at the core of Chmeplast’s operations. With demand for the product going yo-yo at periodic intervals and the feedstock required needs to be sourced from the international market to a greater extent, it needs uncanny management ability and knack to keep afloat in the business.

The financials of the company reflect Mr Sankar’s current caution. Last year, the company posted a profit after tax (PAT) of Rs 16.45 crore on a turnover of Rs 443.39 crore. That’s a substantial drop in PAT from 1999-2000’s Rs 40 crore and marginal drop in revenues from Rs 446 crore.

Chemplast’s chemical business encompasses a wide range, but nearly 80 per cent of the turnover comes from commodity chemicals like polyvinyl chloride (PVC) resins, caustic soda, specialty chemical resins and chloromethane products. Chemplast’s response in these trying times has been a rather simple business axiom: Peg the bottomline just above the trough of the cycles. For this, managing cost and capacity are critical. Over and above all this, it is banking on a number of other strategies.

Financial restructuring
The company has recently approached leading international financial institutions and a domestic financial powerhouse with a unique proposal, that helps it to convert its intellectual capital, or managing the cyclical business, to equity and line up funds from investors to fund the proposed project. If the move pays off, it will be an interesting instance when a manufacturing company would convert its intellectual capital into equity and attracts investment from both
home and abroad.

Consolidating and expanding existing businesses
Chemplast is looking to its consolidation and expansion on the one hand and to seeking newer pastures on the other, in areas like specialty chemicals and shipping, to name some.

According to Mr P.S. Jayaraman, managing director, after much soul-searching Chemplast has taken a decision to go ahead with expansion plans in PVC by putting up a greenfield project with world-scale capacity of 1,50,000 tonne per annum (tpa). The project to be located in Cuddalore in Tamil Nadu will have a capital outlay of Rs 500 crore. Currently the company has 25,000 tpa capacity in specialty chemicals and 35,000 tpa in commodity PVC.

According to the project proposal, which has got in-principal clearance from two multilateral lending agencies, the International Finance Corporation (IFC), Washington and German Investment Company DEG of Germany, as well as the domestic financial institution IDBI, Chemplast would set up a Rs 500 crore special purpose vehicle and bring its existing capacity as well as the new capacity under the management of the new entity. The financial institutions are expected to pick up equity to the tune of Rs 160 crore in the total Rs 200 crore equity portion. Besides, the agencies are also extending credit to the company to fund the debt portion. The proposal also provide exit option to the institutions.

As part of this expansion, it is also proposed to convert the Mettur PVC plant with a capacity of 60,000 tonne per annum (tpa) to one entirely manufacturing specialty chemicals. With this total capacity of company will be 2,10,000 tonne annually. There is consolidation in other areas too. After seeing its worst phase in four years, the shipping division has come through. The bulk carriers and product tankers business did well and plans are to expand in the product tanker segment. The shipping company has a fleet of eight vessels—five bulk and three product tankers. Mr Sankar claims the quality of management of the shipping activities is one of the best in the country. From a loss of Rs 16 crore last year, the shipping business is expected to post a profit this year.

Environment friendly
With regard to the refrigerant gases business, the company has begun phasing out its chloroflurocarbon (CFC) products as required under the Montreal Protocol.Chemplast which has a installed CFC capacity of 2,500 tonne per annum accounting for about 10 per cent of the turnover of Rs 500 crore will be receiving $ 5.2 million over 10 years for the phase out of M-11 and M-12. These products account for 6 per cent to 7 per cent of 1900 tpa capacity. M-22 accounts for only three per cent of this capacity and will be continued to be manufactured until year 2040. For producing 60,000 tpa of PVC, the company meets 75 per cent of feedstock requirement through ethylene-di-chlorine (EDC). It produces alcohol through the molasses route and using chlorine as additive makes EDC. The balance 25 per cent is imported. The company also has set up about 40 MW captive power units to cater to the needs of PVC and chlorine production.

Newer areas
While Chemplast is expanding PVC capacity to 1,50,000 tpa, Mr Jayaraman says the strategy will be to convert its existing plant
in Mettur into specialty chemicals and bring in greater focus to this segment in future.

Chemplast is making a foray into biotechnology research in a big way. A new R & D centre with an initial capital investment of Rs 10 crore is to be established at Perungudi near Chennai. This will take up contract research for big pharma companies. One identified area is anti-arthritic drugs.

Says Mr Sankar “This research lab intends to develop into a full scale unit catering to small as well as big manufacturing sector on contract research basis. We are good at selling to business, not people (retail). It is much less trouble to reach out to business than at the retail level through pharma shops.”

Management reorgansiation
Last year, Mr Sankar took a major decision of divesting management control in Chemplast and ushered in greater professional management. For it’s four divisions, four managing directors were appointed. A fifth managing director is to manage the innumerable joint ventures which the Sanmar group has established over the years.

The management structure of the group is now clearly defined: there is the Corporate Executive Committee with representation of all MDs and Mr Sankar as members. At the group level, there is the Coporate Management Board providing functional representation for major businesses. Under these CMBs are Executive Business Staff Committee who receive information inputs even from the shopfloor.

Today, Chemplast chairman Mr Sankar has distanced himself from direct involvement in management of the company as well as group companies under the Sanmar banner on the plea:” I am getting to be 55 and I think now is the time to have some time for myself.” But at
the same time, he holds the reins at the board level keeping control of the shareholders’ interest in the companies. With all this, the company is aiming to touch a turnover of about Rs 1,000 to Rs 1,200 crore in the next two to three years. That calls for trebling its turnover in the next three years.

Clearly, a tall order. But that will clearly show whether Sanmar and Sankar have truly coped with the tough times.