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SIGACHI is a "micro monopoly" manufacturer only set to grow
The company's excipient production capabilities means growth is strongly correlated to pharma and food processing industries. Diversification into adjacent product categories is a plus.
Incorporated in 1989, Sigachi Industries Ltd. (SIGACHI) is one of the largest manufacturers and exporters of Chlorinated paraffin, Hydrochloric acid, and Microcrystalline cellulose (MCC) and has 3 Multi-locational facilities in Telangana and Gujarat.
As an industry pioneer in Pharma excipients (i.e. “bulking agent” or “filler” added to the active ingredient for giving shape to the drug), SIGACHI has established itself as a high-end, quality conscious and dependable supplier of pharma excipients, nutra and food ingredients in India and across Asia, Europe, and the Middle East market.
SIGACHI exports c. 70% of its product value to 40+ countries.
The company derives 75% of revenues from pharmaceutical companies, while food and cosmetics contribute 10% each with the remaining 5% coming from nutraceuticals.
The global market for MCC is estimated at $1.1bn in the year 2022 and is projected to reach $1.5bn by 2026, growing at a CAGR of 8%. The growth of the MCC market is driven by rising demand for packaged food and growing production of pharmaceutical, cosmetic and personal care products. India’s rapidly growing population, increasing obesity and shifting consumer expectations towards health food acts as a catalyst for MCC’s growth. As per Globe Newswire, European & North American regions are expected to be the largest market for MCC, primarily driven by increasing investments in drug development and the continuous efforts of pharmaceutical companies to offer superior-quality products.
Asia-Pacific region too could emerge as the one of the leading markets for MCC, with rise in household disposable incomes and demand for personal care products in Indian and Chinese markets expected to be the principal drivers.
The MCC market is partially fragmented in nature, with only a few major players dominating the market. SIGACHI has already become one of the top 10 players in this niche segment and there is too much room for growth in its market share because of the variety it offers at a competitive price.
Expansion plans to capture and hold a dominant position
Since entering the market, the company has developed over 50 grades of MCC, ranging from 15 microns to 250 microns having varied applications. Having established strong brands such as HiCel and AceCel, SIGACHI now aims to diversify its product portfolio by introducing Croscarmellose Sodium (CCS), a water-soluble polymer used in pharmaceutical formulations. SIGACHI has undertaken a project to setup new Brownfield projects at its Kurnool facility with a total project cost of around Rs 90 crores which is being funded through the IPO proceeds. As on Q3FY22, the company has incurred a total cost of Rs.12 crore towards this and commercial production is expected to start in CY2023.
SIGACHI is projecting an increase in installed capacity by 20,000 MTPA on top of its current capacity of 13,128 MTPA (FY21). Being an integrated manufacturer - the company has the advantage of being able to customize its products as per the specifications of the customers in addition to holding meaningful operating leverage. This distinguishes SIGACHI from other players and helped it create a significant presence in India and abroad.
Improving financials and strong balance sheet de-risks the investment profile
SIGACHI’s income from exports grew at a CAGR of 31% from INR 77Cr in FY19 to INR 133Cr in FY21. Revenue jumped from INR 81.1Cr in FY17 to INR 192.8Cr in FY21 registering a CAGR of 24.16%, despite the impact of Covid 19.
Revenue continues to grow thanks to the rising demand for packaged pharmaceutical, food, cosmetic & personal care products. Capacity utilization improved from 66% in FY18 to 89% in FY21, which has pushed EBITDA margins higher (14.68% in FY18 to 21.81% in FY21). The company booked revenue of Rs 179 crore in 9MFY22 which is about 92% of the revenue achieved during FY21. Leverage is accommodative with debt-to-equity of 0.20x resulting in 31.79x interest coverage as of FY 2021. Cash flow generation looks strong with FCFF of INR15.6Cr as of FY21 (11.73% of revenue).
Furthermore with no dependency on China for its supply chain, SIGACHI expects margins to improve by 200 bps on account of increased volumes thereby providing more room for earnings growth. Growth prospects are now also acknowledged by CARE ratings which recently upgraded the company's long-term bank facilities of INR13.93cr. to 'A-' from 'BBB'.
Premium valuation supported by strategic positioning and broader tailwinds
SIGACHI currently trades at 19.6x P/E (LTM) and 14x EV/EBITDA LTM. Comps are all foreign players, such as DuPont (NYSE:DD) which is trading at 5.65x P/E and 10.38x EV/EBITDA, FMC Corp (NYSE:FMC) at 23.19x P/E and 14.60x EV/EBITDA and Avantor INC(NYSE:AVTR) at 34.91x P/E and 21.92x EV/EBITDA.
With an experienced management, long-standing market presence in India and abroad, product diversification thanks to CCS, start of capex expansion, and strong promoter holdings (~48%) justify the optically stretched valuations.
Potential risk factors
Since the company imports a majority of its raw material (wood pulp), it may have to pass on the price fluctuations to its clients. But in an adverse situation if it fails to transfer the cost - it would impact the operating profits. MCC demand is majorly from the pharmaceutical and FMCG industry and any downturn in these sectors could adversely affect SIGACHI’s revenue.
SIGACHI continuously rolls out new differentiated products which address the unmet needs of the pharmaceutical and food processing markets. Increasing demand from rapidly developing countries such as India, China, South-East Asia can be an added advantage. As one of the largest integrated manufacturers of MCC - the company enjoys a domestic micro monopoly of sorts and that’s why we like it. We are LONG.
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Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.