It is now common for CEOs and MDs at the top of their game to quit their high-paying jobs and start out on their own. But when Vinod Saraf, the 62-year-old promoter and founder of Maharashtra-based specialty chemicals company Vinati Organics, did so in the late 1980s, it was almost unheard of. Earlier a joint MD of Mangalore Petrochemical Refinery (MRPL), Saraf decided to start out on his own, putting on the line his entire savings of ₹57 lakh as well as the security of a plum job. He attributes the urge to do so to his being a Marwari, the Indian clan known for its entrepreneurial expertise and drive. But it sounds unexpected to hear the 1971 batch BITS Pilani MBA gold medallist insist he took no risk at all. He talks with the quiet confidence of a man who has a finger on each nerve of his business and the enthusiasm of a fresh business graduate brimming with new ideas for growth and innovation. In his view, his jump to entrepreneurship was almost failsafe.
Saraf explains his bet on Vinati Organics and the isobutyl benzene (IBB) technology as a very calculated one. IBB is the key raw material used for making ibuprofen, a popular over-the-counter painkiller. “By 1990, I had set up and managed textile and sponge iron plants for many companies, including the Birlas. Then, Mr Birla chose me to set up and run MRPL, so running a plant was not a risk. Working with Mr Birla, I studied close to 5,000 proposals for specialty chemicals and was able to persuade Institut Francais du Petrole (IFP), France, to give us the technology for IBB, then available to only a few,” he recalls.
Incidentally, IFP also got one of its associate companies, Technip, an engineering procurement and construction firm that specialises in building such technology-intensive units, to build the plant for Vinati at Mahad. “So, we had the technological risk well-covered. The demand was already there as India was importing IBB at about $6 (landed cost) when it cost about $3 otherwise. So if we could manufacture the same in India, we realised that we could sell it for almost 30-40% less price and still make money. So, market demand was not a risk,” points out Saraf. Raising capital could have been a bit of an issue but that too was taken care of with Indian financial institutions coming in. By 1992, Saraf was able to get his IBB plant of 1,200 MT up and running. As the plant became operational, the company went public in 1991.
Playing the niche game
Vinati’s revenue is largely driven by specialty organic intermediaries and industrial monomers
But it’s only in the last decade or so that the company really came into its own. Saraf beams when he mentions October 2006, an inflection point that changed the fortunes of Vinati Organics. That year, the company signed a long-term agreement with a valued customer in the US that changed the complexion of Vinati’s story forever — from ₹57 crore in 2006, the specialty chemicals company’s revenue grew nearly 10-fold to ₹553 crore in FY13. And the company expects to have hit ₹660 crore in revenue in FY14. “We hope to grow at over 20% for the next few years,” says Saraf.
It took eight years of concentrated effort to get that commitment from the client, though. Starting 1998, Saraf visited the customer’s facility in the US twice a year to convince it to place larger orders. The customer — Saraf doesn’t disclose the name — would buy just around 100 tonne of IBB from Vinati every year and wasn’t quite comfortable with working with an Indian company. “They would ask if tension between India and Pakistan would make any difference to the supply of IBB,” says Saraf, still obviously disbelieving of the kind of questions he had to deal with. The customer finally softened in late 2006 and hiked its requirement by at least two-fold. “That year was a real turnaround for us. In that sense, the growth we have shown has really taken place over the past eight years,” says Saraf. “They came to our plant before inking the deal and they liked what they saw.” It now buys over 6,000 tonne of IBB.
Now, Vinati is the largest manufacturer of IBB globally, apart from being the leader in 2-acrylamido-2-methylpropane sulfonic acid (ATBS). This has usage across segments such as water treatment chemicals, detergents, adhesives, acrylic fibre and emulsions for paint and paper coatings. In the case of IBB, Vinati is its lowest-cost producer in the world. “We have very good operational efficiencies, which comes with the experience of two decades. In ATBS, our USP lies in making value-added products,” says Vinati Saraf Mutreja, Saraf’s daughter and the company’s executive director.
In addition to IBB and ATBS, Vinati Organics also makes normal butyl benzene (NBB), hexanes (C6H12) and methanol, which are used in applications such as water treatment, personal care products and mining. It has a clientele that includes names such as BASF, Dow Chemicals, Ciba, Rohm and Hass, Akzo Nobel, Shasun Chemicals and United Phosphorus. But there’s no question of resting on its laurels. Saraf is clear on his goal for Vinati: if it took the company 21 years to reach a ₹500-crore revenue figure, it should now replicate that in three years. In fact, the target is to be a ₹1,200-crore company by FY16. How will Vinati get there?
Capacity expansion will be a big part of the growth story in time to come. Over the next three years, Vinati will spend about ₹200 crore on capex. Already, ATBS’ capacity has been increased from 12,000 tonne per annum (tpa) to 26,000 tpa. “This alone will bring in additional revenues of ₹200 crore,” says Saraf. The second leg will be the debottlenecking of the IBB capacity to 16,000 tpa, which should be done by the end of this year. “That should contribute another ₹100 crore to our revenue.” On the anvil are more IBB-based products and further debottlenecking of the Mahad plant, which will bring in the other ₹250 crore. Vinati today has two manufacturing facilities: Mahad in Maharashtra’s Raigad district, where the plant was set up in 1992, handles IBB, while the one at Lote Parshuram, about 70 km from Mahad, is where ATBS is manufactured. Isobutylene is manufactured at the Lote plant, where production commenced in September 2010.
Today, ATBS brings in 42% of Vinati’s revenue, while another 35% comes from IBB. “Isobutylene with other smaller products contribute about 20%,” points out Mutreja. Isobutylene (IB) is the raw material for ATBS and until 2010, Vinati used to import it. But the economics of sourcing this “basic building block” from outside were not favourable. “We were paying through our nose and realised that manufacturing it ourselves was the smarter thing to do. This way, issues related to high freight and logistics are taken care of,” Saraf says. Vinati sells the product only in the domestic market, which is not the case with IBB and ATBS. IBB is exported to China and the US, with only 25-30% sold in India. “In the case of ATBS, just about 5% is sold locally. We sell the product in over 20 countries globally, with Europe being an important market,” says Saraf.
The ATBS business has shown robust performance in the past five years
Going forward, while the management expects ATBS’ proportion to remain the same, IBB’s contribution will come down since the market is quite mature. “We anticipate IBB to be at about 30% of revenue, with IB and other products accounting for the rest,” says Mutreja. A conscious effort is being made to reduce dependence on these two key products: at the end of FY13, Vinati had a portfolio of 14 products, up from just two about a decade ago. “The thinking is to look for synergy both in terms of backward and forward integration. IB is one such example,” says Saraf. As a result, over 15% of Vinati’s revenue in FY13 came from products that were not part of the company’s portfolio five years ago.
It helps immensely that Vinati is in a business with limited competition. According to Ankit Jain, research analyst, Equirus Capital, the other big global manufacturers of ATBS are Lubrizol in the US and Toagosei in Japan. “But, for them, what is manufactured is for captive consumption. This puts Vinati in a very strong position,” he adds. Globally, the market for ATBS is about 40,000 MT, which is controlled by these three players.
IBB is a similar story, with Vinati having only two competitors, both of which are Indian — IOL Chemicals & Pharmaceuticals and SI Group. Jain points out that both ATBS and IBB are characterised by low capex requirements. “If there is an entry barrier, it is technology. Besides, the process of customer acquisition is a big challenge,” he explains. For IB, too, competition is limited to smaller local players such as Savla Chemicals.
Saraf agrees with the theory that the issue is more about time than capex. “At any point, at least 10 products are at the R&D stage. It takes about two years to develop a product and another year-and-a-half to execute it for the market,” he says. ATBS, for instance, had a time to market of four years. “This is a very difficult technology and it was not till the end of 2006 that we got it right. It is not easy to be patient for four years,” Saraf says.
Specialty chemicals being a niche business, growth very rarely comes on the back of big-bang buyouts. “We make niche products and that limits the number of options. We are clear that our own story will largely be organic and there is no reason to believe why we cannot adopt that route,” Saraf says. Jain echoes that thought. “Growth in this industry cannot be inorganic. For a player to make a mark, he has to get it right on technology, which is the tricky one.” Vinati, for its part, licenses the ATBS technology from Pune’s National Chemical Laboratories, while that for IBB has been licensed from IFP, as mentioned earlier.
The exports market continues to be the growth driver for the company
Currently, Vinati is focusing on ATBS, where Saraf is convinced the challenge lies in sustaining growth. “ATBS offers us very good margins — more than 25% at the Ebitda level,” points out Mutreja. Possible raw material cost increases aren’t a worry, either. “We have a formula-based pricing that allows us to maintain our margins,” she explains. With exports forming such a big part of the business, the currency fluctuation issue does come up for discussion. Mutreja clarifies that the forex exposure is hedged on the back of input costs being largely in dollars. “To that extent, any dollar fluctuations do not greatly affect our margins,” she says. But Jain points out that the company’s performance in 9MFY14 was certainly helped by the rupee’s unrealistic levels. “That was not a normal occurrence and something like that does not take place very often. The growth will moderate to 20-22%,” he cautions.
Going forward, Vinati plans to continue catering to the needs of existing clients and coming up with related products, though Mutreja insists new products, too, will need to have healthy margins. Though Saraf does not reveal any details, the company is known to have a contract with a Japanese company to make a product similar to IBB that will lead to a surge in revenue. Saraf reiterates the immense potential of the project.
That is something that has got the Street excited as well, with the company’s stock up nearly 173% in FY14. “Yes, there is an economic slowdown. But that has not affected the pharmaceutical industry, with whom we work very closely,” says Saraf. “We will just sustain our current pace and get to our goal.” It’s a formula for success that’s worked in the past, but with expectations running high, the margin for error is zilch.