Archean Chemical IPO Review: What Are Its Key Strengths?

Archean Chemical Industries Limited IPO opens for subscription on 9th November. The company is looking to raise up to Rs 1,462.31 crore through the public issue. Here are the details: 

Archean Chemical IPO Details

• Archean Chemical Industries IPO Date: 9 November - 11 November 2022
• Archean Chemical Industries IPO Price band: Rs 386 - Rs 407
• Archean Chemical Industries IPO Issue Size: Rs 1,462.31 crore (Fresh Issue of Equity shares aggregating up to Rs 805 crore and remaining OFS)
• Reservation: QIB 75%, Retail - 10%, NII 15%
• Minimum Investment: Rs 14,652
• Post Issue Implied Market Cap: Rs 4,791 – 5,008 crore
• Bid lot: 36 shares, and in multiples of 36 shares

Archean Chemical Industries IPO: Objects of the Issue

The selling shareholders are entitled to the entire proceeds of the offer. Also, the company plans to utilize the Net proceeds of the fresh issue towards the funding of the following objects:

• Redemption or earlier redemption, in part or full, of NCDs issued by the company.
• General corporate purposes.

Archean Chemical IPO: About Archean Chemical 

• They are the leading specialty marine chemical manufacturer and are focused on producing and exporting industrial salt, bromine, and sulfate of potash to customers around the world.
• Archean Chemical is India's largest exporter of bromine and industrial salt in FY21.
• The company has two manufacturing units - they produce their products from their brine reserves in the Rann of Kutch ( Gujarat), and another facility near Hajipir in Gujarat.
• The industrial salt manufactured by the company is widely used in the chemical and food and beverage industries. 
• They export 100% of their industrial salt production, primarily, to customers in Japan and China.
• The company's marine chemicals business is predominantly conducted on a business-to-business basis both in India and internationally.

Archean Chemical Industries Limited IPO: Products

Below are its products:

• Bromine: It is recovered from soluble salts found in seawater, salt lakes, inland seas, and brine wells. Bromine is produced from brine after the separation of most of the sodium chloride and potash.
• Industrial salt: It has a high demand due to the diversity of applications in the oil & gas industry, de-icing chemical industry, and Chlor-alkali industry. 
• Sulfate of potash: It is a high-end, specialty fertilizer for chlorine-sensitive crops and also has medical uses to reduce the plasma concentration of potassium when hypokalemia occurs. They are the only manufacturer of sulfate of potash from natural sea brine in India.

Archean Chemical Industries Limited IPO: Industry Outlook

• The global demand for sulfate of potash was 6.9 million MT in CY2021 but is expected to grow at a CAGR of 6.0% between CY2021 and CY2025.
• The global demand for industrial salt was 173 million MT in CY2017, 171 million MT in CY2018, and 173 million MT in CY2019 and declined to 153 million MT in CY 2020 but is expected to grow at a CAGR of 2.8% between CY2020 and CY2025.
• The bromine global market size was US$3.13 billion in CY2021, and the market is expected to grow at a CAGR of 5.8% between CY2020 and CY2025.

Archean Chemical IPO: Listed Peers

The company has many listed peers and includes some popular listed names. The listed peers include Tata Chemicals, Deepak Nitrite, Aarti Industries, and Neogen Chemicals. Below is its comparison with listed peers:

• In terms of total revenue (FY22), Archean Chemical is towards the bottom of the table, only below Neogen Chemicals. Aarti Industries has the highest income among the listed peers for FY22.
• The Earning Per Share (EPS, basic) is the lowest for Archean Chemical among listed peers (18.26). All the listed peers have high EPS with the average being 45.5.
• The company has quoted a PE of around 16.78, which is lower than all the listed peers. From a valuation perspective, the lower PE makes it attractive.
• Return on Net Worth (RoNW) is the highest for Archean Chemical among the listed peers.

Archean Chemical IPO: Financials

• The revenue from operations for FY20, FY21, and FY22 was Rs 608.17 crore, Rs 740.76 crore, and Rs 1130.44 crore, respectively. The revenue has grown at an excellent CAGR of 36.3% in the said period.
• The EBITDA for FY20, FY21, and FY22 was Rs 156.83 crore, Rs 276.25 crore, and Rs 479.54 crore, respectively. The EBITDA margin for the same period was 25.79%, 37.29%, and 42.42%, respectively.
• The company reported a loss of Rs 36.22 crore in FY20. For FY21 and FY22, the company reported profits of Rs 66.61 crore and Rs 188.58 crore, respectively. The profit margin increased from 8.99% in FY21 to 18.265% in FY22.
• They are an export-oriented business. For FY20, FY21, and FY22, 78.41%, 74.41%, and 70.32%, respectively, of its revenue from operations was attributed to export sales.
• For the last three fiscal years, ACIL has posted an average EPS of Rs 10.70 and an average RoNW of (34.05%).
• The debt to Equity ratio has significantly come down from 155.24 in FY20 to 3.53 in FY22.

Archean Chemical IPO: Unique Selling Propositions

Market leaders: They are a leading specialty marine chemical manufacturer in India since 2013. They attribute their strong market position to factors such as long-standing relationships with global customers, established infrastructure, and access to brine reserves at the Rann of Kutch.

High entry barriers: The specialty marine chemicals industry has high entry barriers, which include the high cost and intricacy of product development, manufacture, and investment in salt beds, the limited availability of raw materials necessary for production, building customer confidence and relationships, etc. All this can only be achieved through a long gestation period.

Established infrastructure: Their facility and its surrounding salt fields and brine reservoirs span approximately 240 sq.km. The facilities are equipped with their quality department, effluent treatment plant, sewage treatment plant, and stockyard.

Focus on environment and safety: Environment and safety considerations are an important part of the company's operations. They undertake an annual environment and safety audit and strive to ensure that they do not discharge any harmful elements from their manufacturing operations.

Archean Chemical Industries Limited IPO: Growth Potential

Expand into downstream bromine derivative performance products: They plan to expand their product line into bromine derivative performance products in the next two-to-three years, in particular brominated flame retardants, clear brine fluids, and bromine catalysts used for the synthesis of PTA. 

Expand bromine and industrial salt capacities: They intend to and are in the process of increasing their manufacturing capacity for bromine production. Also, they plan to expand their manufacturing capacities for industrial salt production by adding a washery of 250 tons per hour.

Enter new geographies: They plan on increasing wallet share with existing customers. They also want to enter new geographies by having dedicated sales and marketing teams whose primary focus will be on business development in international markets and certain focus geographies like Asia and Europe.

Continue to focus on quality, environment, health, and safety: They will continue to focus on sustainability by emphasizing quality, environment, health, and safety as a high standard of quality for its products is critical for its brand and continued growth.

Archean Chemical Industries Limited IPO: Risks

Regulatory and other risks: Its manufacturing facility is located in Gujarat exposing them to regulatory and other geography-specific risks such as weather and natural occurrences and regulatory, economic, demographic, and other changes in Gujarat. 

Limited product offering: The company only has three products - two of its products generate 99% revenue for them (FY22). Any impact on the sales of these products (for any reason) will have a cascading adverse effect on their business and financial condition.

Exchange rate: As mentioned earlier, they are export-oriented businesses, and exchange rate fluctuations may adversely affect their results of operations as their sales from exports are denominated in foreign currencies. 

Dependency on top 10 customers: For FY22, FY21, and FY20, their top 10 customers contributed 61.99%, 75.70%, and 77.14%, respectively, of their revenue from operations. The loss of any top 10 customers will have a significant impact on the company's financials.

Archean Chemical IPO: Detailed Review and Recommendation

Strong growth in revenues: Revenue from operations has grown at a CAGR of 36.33% from FY20 to FY22. In fact, in 2021, Archean Chemical was named among the fastest-growing specialty chemicals businesses in the country and the largest exporter of bromine and industrial salt by volume in India (according to a study conducted by Frost and Sullivan). 

Healthy Earnings Margins: The company maintains a high EBITDA margin, thanks to its leadership position across product segments. As mentioned earlier, it is the largest exporter and leader in market sales in the Bromine product category, while it is the largest exporter of Industrial Salt in the country. Not just that, Archean Chemical is the only producer of Sulphate of Potash in the country. All the above factors have led the company to enjoy a robust EBITDA margin of 42.42% in FY22. 

High Entry Barriers: A key thing to remember is that in the specialty chemicals industry, any decision to change the vendor requires lots of time and effort from the customers’ side. This acts as a substantial barrier as it increases the switching costs overall. Also, the kind of products that Archean Chemical deals with are highly hazardous in nature and require a high degree of technical skills in order to operate with them. Further, it took about 3-4 years for the company to establish its existing brine fields prior to kickstarting the commercial cultivation. The Rann of Kutch is an extremely sensitive area and requires additional regulatory permissions to establish brine fields there. All of the factors stated above give Archean Chemical a huge advantage in keeping the competition at bay to some extent.

Relationship with Sojitz Corporation: Archean Chemical derives almost all of its revenues in the industrial salts division through exports. Sojitz Corporation is a Japanese company that engages in a wide range of businesses including manufacturing, selling, importing, and exporting a variety of products. In the 3 months ending June 30th, 2022, Archean Chemical sold over 39.38% of its industrial salt sales to Sojitz Corporation. This figure was as high as 61.95% in the year 2021. (Sojitz Corporation has over 2% stake in the company)

Future Plans: Archean Chemical looks to expand its bromine production capacity by an additional 12,500 mtpa, with an estimated cost of Rs 17.88 crore by 2023. The company has over 18 global customers spread across 13 countries, and in the coming years, the company wants to continue expanding its footprint to several other countries.

Management Team: The company has an experienced management team and they look to guide the firm towards growth while at the same time maintaining their leadership across product segments. India Resurgent Fund, a joint venture between Piramal Enterprises and Bain Capital Credit invested $156 million in 2018, which was instrumental in refinancing the company’s debt and providing for the company's working capital. (

Valuation: In the upper range of the price band, the company is demanding an enterprise value to sales (EV/ Sales) multiple of 3.8x, which is reasonable compared to its peers. 

Recommendation: Given that the company is among the market leaders in the manufacturing and exports of specialty chemicals, external analysts are of the view that this company can reap rewards in the medium to long term.

How to invest in Archean Chemical's IPO?

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