Neogen Chemicals – Niche player in specialty chemicals

My Notes from 2023 Annual Report for Neogen Chemicals:

• One of India’s leading manufacturers of bromine-based and lithium-based speciality chemicals.

• 4 state-of-the-art manufacturing facilities with reactor capacity of 463 cubic meters – [Organic chem] and 39 cubic meters- [ InOrganic chem] for manufacturing Organic & inorganic chemicals capacity respectively.

• Growth plans for our existing Organic and Inorganic Chemicals as well as the Battery Chemicals business – both of which will be commissioned during the financial year FY 23-24

• There are multiple levers fuelling the long-term marathon to success. This encompasses the

• • strengthening of our product portfolio and
• • our expansion initiatives, and
• • expanding our R&D prowess across high-potential chemistries to offer deep value to our customers.

• We have shaped up compact growth plans for our organic and inorganic chemicals business, and also for the upcoming and fast growing battery chemicals business.

• Expanded our product portfolio from 20 products in 2001 to over 244 products by end of March 2023, with application across multiple industries.

• Our Value-Added Product Chain
  With an experience of more than 3 decades, our manufacturing capabilities and with value-added products (advance intermediates and organolithium derivatives ), we are moving up the value chain.

• We not only manufacture speciality chemicals, but also undertake custom synthesis and contract manufacturing to develop custom products through in-house process know-how and technical specifications.

• Organic chemicals
  Organic compounds containing Bromine, Chlorine, Fluorine, Iodine-based combinations thereof and specialty chemicals, such as, organometallic grignard reagents and organolithium derivatives (with recent acquisition of BuLi Chem) as well.

• • Revenue from Organic segment was 68% and InOrganic was 32% for FY23.
• • Export : Domestic = 50-50

• Customer segments

  

BULI CHEM

• We acquired 100% stake in BuLi Chem. These landmark steps are set to significantly bolster our competitive position in the market.
• • This acquisition will allow Neogen to offer organolithium compounds which are offered by very few companies in the world, which are used for Lithiation chemistry in mostly pharmaceutical, agrochemical and electronic industries.
• • BuLi Chemicals owns the technology to manufacture N Butyl Lithium and other organolithium products using lithium metal, which are key reagents for lithiation reaction used in manufacturing of several complex pharmaceutical and agrochemical intermediates.
• • The backward integration into N Butyl Lithium also enhances Neogen’s ability to win Custom Synthesis and Manufacturing project using Lithiation chemistry.
• • BuLi Chem houses the Indian operations of Livent USA Corp, a global leader in speciality lithium technology. It has managed to develop one of the few facilities outside of China for this chemistry, with a strong track record in safety and sustainability.
• Neogen’s experience to recycle lithium for last >20 years, the recycle of waste produced during production of N Butyl Lithium will also make Neogen’s Inorganic lithium salts business more attractive.

MU Iconic Solutions

• With 3 decades of experience in lithium chemistry to manufacture lithium-ion battery materials, we entered into an agreement with the world’s oldest electrolyte producer, MU Iconic Solutions in Japan, acquiring the manufacturing technology licence for lithium electrolytes – with 30,000 tonnes per annum capacity.
• MU Ionic Solutions (MUIS) is a JV between
• • Mitsubishi Chemical Corporation (MCC) and
• • UBE Corporation and is a group company of The Mitsubishi Chemical Group, a Japanese conglomerate. The group is one of the global leaders in electrolytes used in lithium-ion batteries with a strong track record of 30 years and has 5 electrolyte manufacturing plants located in Japan, USA, UK and China.
• • As per the agreement, Neogen has obtained the licence from MUIS for proprietary and confidential manufacturing technology for making electrolyte solutions at its manufacturing facility in India with a planned maximum installed capacity of up to 30,000 MT per annum.
• • It will also help Neogen to greatly reduce approval times with Lithium-Ion Battery makers.
• • Opportunity set:
• • A) We are the largest users of lithium carbonate in India and a manufacturer of speciality lithium-based derivatives. With our early entry into making of electrolytes and electrolyte salts, we hope to manage the initial demand for electrolytes and electrolyte salts in India.
• • B) In the international market where the demand for electrolyte salts is projected to be 20 times higher than that in India by 2030. Neogen is eyeing a revenue of Rs. 1,000-1,200 crore from the battery chemicals segment by 2027 which would be even prior to the licence agreement.

BATTERY CHEMICALS DIVISION
Neogen Ionics – Our Battery Chemicals business will commence in a separate entity – Neogen Ionics, a wholly-owned subsidiary of Neogen Chemicals on March 29, 2023.

• The battery chemicals business will have high volumes compared to Neogen’s legacy business.
• This company will also have the advantage of lower corporate tax rate of 15%.
• Neogen had planned to add 10,000 MT electrolyte capacity and 2,000 MT specialty lithium salts capacity, to be commissioned over FY 24-25 and FY 25-26. Post agreement w/MU Ionic – now reviewing its capex, since it now has a licence to manufacture electrolytes which has further increased customer confidence. This licence comprises the transfer of technology for a manufacturing ‘facility’ and ‘process’ with a maximum capacity of 30,000 MT intended to meet the demand for electrolytes in India.
• To support such expansion plans, Neogen approved a Rs. 450 crore capital expenditure for setting up in phases 10,000 MT electrolyte and 2,000 MT Lithium electrolyte salts manufacturing capacity, by September 2025, however, the same is currently being reviewed pending completion of design by MUIS team and long-term MoUs/ agreement with customers for the same.

Opportunity Set

• In the past, the growing demand for consumer electronics among the country’s population has been the main factor driving the market for lithium-ion batteries in India. However, with the growing global need to achieve Carbon Neutrality, the demand for lithium-Ion Batteries is being driven by increasing usage of Electronic Vehicles (EV) as well as Battery Storage systems for Renewable energy. India is expected to have a demand of 160 GWh of Lithium Ion batteries by 2030.
• There are more than 10 companies in India – establishing Giga Factories having targeted annual cell production of 5 GWh – 40 GWh by 2030. Together they are expected to have an annual cell production of >150 GWh by 2030 of which 50 GWh is currently supported by Government’s Rs. 18,000 Crore Advance Cell Chemistry (ACC) PLI Scheme, which requires start of production by 2024 and reaching peak potential by 2028.
• The PLI scheme also requires the companies to reach min 60% India value addition, which creates a significant demand for Lithium-Ion ACC supply chain.
• By 2030 expectation for India is to reach production >150 GWh cells & the world demand to be >3,000 GWh approximately 20 times India’s demand, thus also creating an export market for Indian Lithium-Ion Battery Cell materials manufacturer.
• The government’s battery swapping policy would gain popularity in commercial applications like 2W and 3W autos due to the fact that replacing the depleted battery is more feasible than on-the-spot charging for EVs. This would allow for faster penetration of lithium batteries in these market segments.

Capacities

General Commentary / Notes

• We have implemented current good manufacturing practices prescribed by the USFDA as applicable for intermediates. Our world-class operational facilities include Zero Liquid Discharge, significantly reducing water usage.

• The Company achieved its highest-ever revenues, driven by higher contributions from expanded capacity, a consistent demand situation and a positive shift in the business mix towards value-added products. Revenues grew 41% at Rs. 686 crore owing to incremental contribution from expanded capacities, positive demand trajectory and a favourable product mix.

• We were able to pass on the significant increase in prices of lithium raw materials to the customer, protecting the absolute EBITDA.

• Business Segments:

• • 28% increase in Revenue of Organic Chemicals which was largely volume-driven,
• • while Revenue of Inorganic Chemicals grew 80%. A large part of which was on account of significant increase in prices of lithium raw materials and the balance was from contributions by new customers that we added during the year.

• In FY 22-23, we added 82 new customers, which contributed 7% to our revenue within India and globally, taking our total customer tally to almost 1,550 customers.

• In the CSM/ advanced intermediate business, the Company started witnessing traction from other newer sectors which are non-agro and non-pharma and we endeavour to progressively increase the contribution at the Company level.

• The Company intends to make significant capital investments in the field of electrolytes and lithium compounds over the next 3 years, while also focussing on innovation in these products.

• On sourcing of Lithium risk – The Company’s more than 3 decades of relationship with two of the world’s largest Lithium mining companies ensure stable supply. To further de-risk, Neogen has added 2-3 additional global suppliers’ of Lithium to ensure continuity of supply. In order to safeguard its profit margins, the Company makes it best effort to pass on the fluctuating costs of lithium to its customers and getting into Lithium market price linked FG price arrangement with customer for a long period of time.