20 Microns Nano Minerals: the specialist chemical maker that sells through its own parent

The filing describes the company in one line: it is “engaged in processing and selling of a wide range of Specialty Chemicals” ¹. It sorts the output into four families: Functional Additives and Chemically Modified Minerals, which are the specialty end, and Soft Minerals and Hard Minerals, which are the mineral-processing end ¹.

The company does not sell on its own account. It markets and sells through a long-term arrangement with its Corporate Promoter, 20 Microns Limited, using that company’s distribution network ¹. The same entity is the holding company, and the filing lists “support of our holding company” among its stated strengths while separately noting that it “derive[s] substantial synergies from our Corporate Promoter” ².

Ownership before the issue sits almost entirely inside the promoter family. The promoters hold 89,48,270 equity shares, or 99.76% of the pre-issue paid-up capital ³. The promoter group excluding the promoters holds another 21,510 shares, or 0.24% ⁴. A public listing on the SME platform of NSE, NSE EMERGE, is intended to create a public trading market for the equity shares ⁵.

What the company does

Specialty chemicals is a category description, not a product. The four lines the filing names are inputs sold to other manufacturers, which is why the company lists “diversified user industries” as a strength rather than naming a single end market ². The filing’s own list of what it competes on runs to six items: a diversified product portfolio, customers spread across industries, import substitution, backing from the holding company, product innovation and R&D, and its management team ⁶. Only the first three are argued with specifics elsewhere in the document.

The sales arrangement is the structural fact that shapes everything else. Customers place purchase orders; the company states it has not entered into any long-term or definitive agreements with them, so volume, pricing and other terms are set order by order ⁷. The mirror-image risk sits on the supply side, where there are also no long-term agreements with raw material suppliers ⁸.

Customer concentration is disclosed, and it is high. The top ten customers accounted for about 59% of revenue from operations in FY2017, 57% in FY2016 and 59% in FY2015 ⁹. Three years of data, and the number barely moves. This is a structural feature of the business, not a one-year spike.

Exports are small and narrow. Over the five years before the filing the company exported ₹1,068.18 lakh in total, about ₹10.68 crore, to three countries: Nigeria, Saudi Arabia and Sri Lanka ⁹.

The physical footprint is a set of named addresses rather than a plant count. The filing refers to manufacturing facilities at Plot 347, GIDC Waghodia, Vadodara, Gujarat and at Plot 104/3, Thenkasi Road, Pathur Village, Alangulam, Tirunelveli, Tamil Nadu, and to a third site at Plot 9-10, GIDC Waghodia; administrative offices are in Bhuj and Udaipur ¹⁰. The proposed new plant at Plot 336 is a fourth address, not yet built ⁵.

A few numbers a reader might look for are not in the pages this report draws on: a revenue split by product family, installed capacity, production volume, headcount, an order book. Where that is the case, this report says so instead of estimating, and a reader who needs those numbers should go to the full document.

The market it sells into

Specialty chemicals sit inside the wider Indian chemicals industry but are counted separately because they are sold on performance rather than volume. The filing puts India’s chemicals industry excluding pharmaceuticals and fertilisers at ₹5,800–6,200 billion in fiscal 2017, with specialty chemicals (other than agrochemicals and dyestuff) at roughly 17% of that, about ₹1,000 billion ¹¹. A second sizing figure appears later in the same document, ₹1,443 billion for the specialty chemicals market, cited in the outlook section ¹². The two numbers come from different places and measure different things; the filing does not reconcile them.

The segment grew at 10–12% CAGR between fiscals 2014 and 2017, and CRISIL Research forecasts 12–14% CAGR going forward ¹². Within that, the sub-segments forecast to grow fastest matter for a company that will not break out its own revenue split. Construction chemicals, water chemicals and personal care ingredients are each put at 15% CAGR; surfactants at 13%; textile chemicals and flavours and fragrances at 12%; polymer additives at 10% ¹².

Two downstream markets are sized because they are the company’s customers. Paints is a ₹401 billion market as of fiscal 2017 ¹³, and the organised cosmetics and toiletries market is ₹430–460 billion ¹⁴.

The demand drivers the filing names are consumption-led: rising intensity of consumption, end-use demand from a middle class it projects at 148 million households by 2030, improved consumption standards, and government policy including a Draft National Chemical Policy and permission for up to 100% foreign direct investment in the sector ¹⁵. One global factor is spelled out: China dominates commodity chemicals and has paid less attention to specialties, and stricter environmental regulations introduced there in 2015 have curtailed its chemical output, opening a supply gap Indian producers can fill ¹⁶.

The structure of the industry is fragmented. Small and medium enterprises hold 70–75% of the market, and the filing concedes that only a few Indian players have the scale or capability to compete with global majors on product development ¹⁷. No competitor is named anywhere in the excerpt.

The headwinds are acknowledged too. India’s chemicals trade has run a deficit every year from 2012-13 to 2016-17, with imports growing at 6.4% CAGR against exports at 6% ¹¹. Exports into Europe must comply with REACH, the EU’s registration and authorisation regime for chemicals ¹⁸. Two policy changes frame the period the accounts cover: GST came into force on 1 July 2017, and four Petroleum, Chemicals and Petrochemicals Investment Regions have been approved in Gujarat, Andhra Pradesh, Tamil Nadu and Odisha with about ₹9 trillion of proposed investment ¹⁹.

The offer and what the money is for

The proceeds have two named uses. The first is capital expenditure to set up a new manufacturing facility at Plot 336, GIDC Waghodia, Vadodara, Gujarat, a fourth site in the same industrial estate as two existing ones ²⁰. The second is general corporate purposes ⁵. A third object is structural rather than financial: creating a public trading market for the equity shares by listing them on the SME platform of NSE, NSE EMERGE, which the filing says is meant to improve visibility and brand ⁵.

The intermediaries named in the excerpt are Vivro Financial Services Private Limited ²¹ and Link Intime India Private Limited ²².

What the excerpt leaves out is as telling as what it includes. The split between a fresh issue of new shares and an offer for sale of existing shares is not in the pages available here. Neither is the name of any selling shareholder, the total issue size, the price band, or the amount allocated to each object. None of those should be estimated. They are absent.

Six periods of restated numbers

The restated statements cover six periods, not five: the six months ended 30 September 2017, and the years ended 31 March 2017, 2016, 2015, 2014 and 2013 ²³. The filing reports in rupees lakh. Every figure below is converted to crore at 100 lakh to a crore.

Profitability turned in the middle of the period. The company lost ₹0.27 crore in FY2013 and ₹0.12 crore in FY2014, then made ₹1.50 crore in FY2015. It fell to ₹0.90 crore in FY2016, recovered to ₹1.75 crore in FY2017, and reported ₹1.33 crore for the six months to 30 September 2017 ²³. The pattern is not a straight line: FY2015’s ₹1.50 crore profit was larger than FY2016’s ₹0.90 crore, before FY2017 rose to ₹1.75 crore.

Earnings per share tracks the same path: negative ₹0.45 in FY2013 and ₹0.20 in FY2014, then positive at ₹2.47, ₹1.46 and ₹2.43 for FY2015, FY2016 and FY2017, and ₹1.48 for the six months to September 2017 ²⁴.

Cash generation is where the accounts get uncomfortable. Operating activities brought in ₹2.01 crore in FY2013, ₹1.28 crore in FY2014, ₹4.22 crore in FY2015 and ₹8.03 crore in FY2016, then turned to an outflow of ₹3.50 crore in FY2017, before recovering to an inflow of ₹1.25 crore in the six months to September 2017 ²⁵. That FY2017 swing sits behind the company’s own risk disclosure that it had negative cash flows in previous financial years ²⁷.

The balance sheet expanded over the same stretch, from ₹30.19 crore of total assets at 31 March 2013 to ₹32.74 crore at 31 March 2017 and ₹34.25 crore at 30 September 2017, having dipped to ₹25.93 crore at 31 March 2015 ²⁶.

What the accounts do not show in this excerpt: revenue or total income for any period, EBITDA, and the quantum of borrowings. The filing elsewhere refers to loan agreements with restrictive covenants and to unsecured loans that can be recalled at any time, so debt exists, but its size is not on the pages available here and must not be inferred ²⁸.

Who controls it, and the compliance trail

Four promoters are named: Mr. Chandresh S. Parikh, Mr. Atil C. Parikh and Mr. Rajesh C. Parikh as individuals, and 20 Microns Limited as the corporate promoter, which is also the company’s holding company and its sales channel ²⁹.

The register is almost closed. Promoters hold 89,48,270 equity shares, or 99.76% of the pre-issue paid-up capital. The promoter group excluding the promoters holds another 21,510 shares, or 0.24% ³⁰. The two sets of holdings add to 100% of the pre-issue capital.

The capital base the issue dilutes: authorised share capital of ₹2,000.00 lakh, being 2,00,00,000 equity shares of ₹10 each, against issued, subscribed and paid-up capital of ₹897.00 lakh, being 89,70,000 shares of ₹10 each ³¹.

Related-party dealing is not a one-off. The filing states that related-party transactions exist for each of the last five financial years and for the six months to 30 September 2017, disclosed under Accounting Standard 18, and the marketing of the company’s products through the promoter’s network sits on top of that ³².

The compliance record has admitted gaps. There have been instances of non-filing, incorrect filing or delayed filing of statutory forms with the Registrar of Companies, in some cases regularised later with additional fees ³³. More seriously, the company states it has not yet obtained certain statutory and regulatory licences, registrations and approvals required to operate its manufacturing facility at Plot 9-10, GIDC Waghodia, Vadodara, and cannot assure it will not be penalised for that non-compliance ³⁴.

Three smaller flags appear in the same section: the premises at Plot 347 GIDC Waghodia and Plot 104/3, Thenkasi Road, Pathur Village, Alangulam, Tirunelveli, plus the administrative offices in Bhuj and Udaipur, are not owned by the company; the corporate logo has not been registered; and the company, its promoters, its group company and its directors are parties to legal proceedings ³⁵. Contingent liabilities and commitments not provided for, as restated, were ₹29.11 lakh as at 30 September 2017 ³⁶.

The five risks that matter

The order book can vanish between quarters. The company has no long-term or definitive agreements with customers and relies on purchase orders to set volume, pricing and other sales terms ⁷. The mirror-image risk sits on the supply side, where there are also no long-term agreements with raw material suppliers ⁸.

A handful of buyers carry the revenue. The top ten customers made up about 59% of revenue from operations in FY2017, 57% in FY2016 and 59% in FY2015, so this is a structural feature, not a one-year spike ⁹. Lose two or three of those accounts and the top line moves.

FY2017 cash flow went backwards. Operating activities swung from a ₹8.03 crore inflow in FY2016 to a ₹3.50 crore outflow in FY2017 ²⁵. The company flags negative cash flows in previous financial years as a risk ²⁷.

One plant is running without all its approvals. The company has not obtained certain statutory and regulatory licences, registrations and approvals required to operate the Plot 9-10, GIDC Waghodia facility, and says it cannot assure it will not be penalised for the non-compliance ³⁴. It separately admits past non-filings, incorrect filings and delays with the Registrar of Companies ³³.

The company is knitted into its promoter group. Products are marketed and sold through the Corporate Promoter’s network ¹, related-party transactions have occurred in every one of the last five financial years ³⁷, and unsecured loans taken by the company, the promoters, group companies or associates can be recalled by the lenders at any time ²⁸. Loan agreements also carry restrictive covenants that the filing says could influence the company’s ability to expand ²⁸.