Mr. R.V Kanoria

To know more about Formaldehyde and Hexamine expansion and also the latest developments in the company, Capital Market's Sandeep Kumar conducted a telephonic interview with R V Kanoria, Chairman & Managing Director, Kanoria Chemicals. Excerpts:

Kindly share your ECU (Electro Chemical Unit) realizations for the last two years on a quarterly basis? Going forward what is your expectation regarding ECU realizations?
The ECU realizations have been under pressure for a fairly long time except in December 2008 and January 2009 when the recession in western countries led to fall in Chlorine and Caustic Soda production (Caustic Soda and Chlorine are produced simultaneously). As a result Caustic Soda prices increased, leading to improvement in domestic ECU realizations. As the western countries recovered ECU realizations collapsed. Currently ECU realizations are further looking upwards as the earthquake in Japan has led to a shortage of Caustic Soda availability. As a result Caustic Soda importing countries like Australia, which were earlier importing from Japan, are now looking to China for supply. However, the current rise in Caustic Soda prices is unlikely to be sustained over the long run.

What are the various power generation capacities by feedstock – (a) coal (b) Natural gas (c) bio gas etc. What is the annual coal requirement of the company for 50 MW power plant and what % of the same comes through (a) linkages from Coal India / its subsidiaries (c) e-auction and other domestic sources (c) imports. What will be the additional cost per annum due to hike in coal prices by Coal India.
Our company has 50 MW of power generation capacity based on coal and 2 MW based on biogas (treated distillery effluent under the company's highly successful ‘Waste to Wealth' program). About two third of the coal requirement is met through allocation and the rest through e-auction. Coal prices are up by almost 30% due to the recent price hike by Coal India, increasing power cost by around Rs 60-70 lakh per month.

What % of the company's power generation is captively used, and how is the surplus power being sold, and at what rates.
The company is selling about 16 MW of power to Uttar Pradesh Power Corporation Ltd. (UPPCL) at the rate of about Rs 4 per unit. The company is further planning to increase its Caustic Soda production by about 25,000 MT per annum by 2012. With this expansion, all the power generated is expected to be used for captive purposes.

The company has commissioned the new 105000 TPA Formaldehyde plant in January 2011.What capacity utilization does the company expects it for FY'12? Considering the domestic demand supply dynamics, is the company stepping up export of Formaldehyde until the domestic demand catches up?
Capacity utilization at the newly commissioned Formaldehyde plant at Vizag is expected to be around 50% in FY'12. The company currently is not looking at export markets for Formaldehyde and the additional production from Vizag will be targeted within India.

What is the status of expansion of 5000 TPA of Hexamine? Briefly explain us demand, supply, export and import scenario of Hexamine. What are the other chemicals, besides Formaldehyde and hexamine, planned to be set up in Vizag?
The Hexamine plant at Vizag is currently under trial production. Commercial production is expected to start next month. Hexamine has very specialized applications and we will focus on the export market where it is used by the process industry and realizations are better. We are also planning to add more value to our products by going upstream with Formaldehyde based products, such as resins.

India is witnessing healthy growth in demand for Chlorine in applications like Chlorinated paraffin, water treatment, agro chemicals etc. What % of the company's Chlorine production is used in production of downstream products? What are the company's plans to step up production of downstream products?
About 60% of our Chlorine production is consumed in-house for production of downstream products and we would like to increase the number of such products over time. The major usage of Chlorine worldwide, however, is for PVC manufacturing. With a shortage and high cost of petroleum feedstock in India, growth in PVC production remains limited.

How is the chlor alkali industry expected to perform over the next few years? What is the estimate of current domestic demand, supply and capacity of Caustic Soda and Chlorine and what is the growth rate? What is the current company's market share thereof?
Chlor Alkali industry is expected to keep pace with GDP growth in India and is expected to grow at 8-9% in the next few years. In India the installed capacity of Caustic Soda was 31.86 lakh MT at the end of FY'10. The domestic demand of 26.93 lakh MT is catered largely through domestic supply of 23.26 lakh MT and balance through imports of 3.89 lakh MT. Kanoria Chemicals has a domestic market share of around 4-5% in Caustic Soda and Chlorine.

Do you visualize change in India from being a Caustic Soda dominated economy to a Chlorine-dominated economy like US, EU etc.
I do not see that happening as globally Chlorine is used for PVC production. In India PVC production is restrained due to lack of petrochemical feedstock, particularly the limited Ethylene capacity. PVC is currently being used in India for making pipes for which a large number of substitutes are available.

Pentaerythritol realization fell to Rs 77665 per tonne in FY'10 after continuously rising from Rs 67704 per tonne in FY'05 to Rs 97640 per tonne in FY'09. Kindly guide us through the dynamics involved in the Pentaerythritol business viz. demand, supply, raw material used, competitors etc.
The installed capacity of Pentaerythritol in India at the end of FY'10 was 11,400 MT and domestic production was 11,205 MT. Imports during FY'10 was 12,213 MT, making the total domestic demand of 23,418 MT for the year. Methanol is one of the key raw materials to produce Pentaerythritol. There are two major producers of Pentaerythritol in India, Kanoria Chemicals and Asian Paints. About half of the domestic demand for Pentaerythritol in India is met through imports. We are seeking antidumping duty on Pentaerythritol imports from China and EU.

Which are the major challenges before the Chlor alkali industry? How do you view the industry 5 years down the line?
Chlor Alkali industry is expected to outpace GDP growth in India. Significant capacity expansion is taking place, particularly because of the conversion of Caustic Soda manufacturing technology from Mercury Cells to Membrane Cells and in the process adding capacity. Globally the Chlor Alkali industry is expected to grow where energy costs are low and there is easy availability of petrochemical feedstock for production of Chlorine derivatives. Middle East countries are mostly suited on these parameters.

Greenfield project of 10,500 TPA of Formaldehyde capacity has been commissioned in January 2011 and Hexamine capacity is also being expanded. Post capacity expansion what would be the share of Alco segment in total revenues? What kind of sustainable margins does the company expect in Alco segment?
Post expansion, the Alco chemicals segment of the company is expected to generate additional revenues of around Rs 120 crore on full capacity utilization of Formaldehyde and Hexamine. In FY'12 capacity utilization of Formaldehyde is expected to be around 50%. As such, addition to revenue would be around Rs 50-60 crore. Alco Chemical segment margins are expected to remain at current levels of 15%.

Alco chemical segment profits (PBIT) has tumbled down from Rs 21.41 crore in FY 2007-08 to Rs 12.95 crore in FY 2008-09 and to Rs 6.46 crore in FY 2009-10. The profitability eased further by 6% to Rs 4.94 crore in the nine months ended December 2010. Meanwhile, with bumper sugar cane crop, the country is witnessing rise in production of molasses and alcohol. As a result, do you expect the margins of the alco chemical segment to firm up from the quarter ending March 2011?
Although a marginal decline in the prices of molasses is expected, we do not expect this decline to be significant mainly on account of the government's alcohol fuel programme. We, therefore, only expect a marginal improvement in Alco chemicals.

What is your company's total alcohol production capacity? Whether the entire production is captively used for various downstream products. Are there plans to venture into production of Ethanol for blending with gasohol (Petrol)?
About 55 kilo liters of alcohol is produced per day mostly for onward production of Ethanol and Acetaldehyde. Currently we have no plans to produce Ethanol for blending with gasohol.

Who are your major customers for various product segments? Top 10 customers constitutes how much of revenue?
We are fairly diversified company in terms of customers and the ‘Top 10 customers' parameter is not valid for our company.

What are the key growth drivers and risks in the Chlor alkali segment and Alco segment?
Major growth driver is the robust demand growth across all Chlor Alkali user industries. Major concerns are high energy cost, poor infrastructure facilities adding to logistics costs and lower Chlorine utilization.

Chemical Industry growth is directly linked to GDP growth of country. In spite of India being one of the high growth economy why Chemical Industry is lagging behind in terms of investment compared to other sectors?
Chemical Industry is a capital and energy intensive industry where India is not globally competitive in many segments. Bulk and basic chemicals are expected to grow in line with GDP growth, whereas specialty chemicals are expected to grow at a relatively faster space.