Domestic Demand Better Than Export Demand, Says Vinati Organics CEO Vinati Mutreja

India’s exports have been a cause for concern as global economies grapple with a slowdown in consumption. In the last five years, India has lost global market share in labour-intensive export sectors such as apparel, marine products, plastics, and gems and jewellery. One of the largest manufacturers of specialty chemical and organic intermediaries, Vinati Organics, has also seen better domestic demand this year compared to export demand.

“About 65% of our revenues come from exports. This year, that number will be lower, simply because domestic demand is doing better than export demand. So maybe that shift from 65, maybe we'll be down to between 55-60%,” Vinati Saraf Mutreja, CEO and MD of Vinati Organics told The Core.

The weak demand from developed countries because of interest rate hikes, and higher exports from China impacting realizations and the destocking cycle has had a significant impact on companies in the chemical manufacturing sector during the last few quarters. Vinati Organics reported a 27.4% decline in net profit for the July-September 2024 quarter to Rs 84.16 crore from Rs 115.93 crore in the year-ago period.  The company's revenue during the quarter fell 20.9% to Rs 448.13 crore against Rs 566.29 crore in the previous year.

“The few new products that we have added in the last few years, a lot of them cater to the domestic industry. But it wasn't an intentional choice that we wanted to cater to domestic demand versus export, it was more a product-specific choice,” Mutreja said. 

In the second episode of The Core’s weekly podcast series Future Compatible, financial journalist Devna Gandhi spoke with Vinati Saraf Mutreja to understand how soon the sector would see a revival in export demand.

Edited excerpts:

So the euphoria, if you will, was surrounding the chemical industry, over Covid. And over the last three or four years, seems to have come off a bit. It's reflected in a lot of numbers also across the segment. So what is the growth potential now?

I think the chemical industry, like any industry, has its cycles to say, and the euphoria, if that's the right word, I think, in good times, people tend to overestimate the potential and in bad times, people tend to underestimate the potential business for us, when we look at a 10-year horizon, these are just small blips. And the last two years have been so good for the chemical industry that this year is just a normaliser. It's an equaliser and then when you look at three years hence, you will see that over the last five years, in general, the trend has been that the industry has grown. But growth is never linear. There are many years where you can go 30%, and there are those that are flat and negative, but on the whole, there will be 15% year-on-year growth.

Would you say that, as a sector, you feel like it's more cushioned than other traditional sectors of the next few years, given the western slowdown?

A lot of companies, chemical companies that export to the west, whether it's the US or Europe, are definitely feeling the hit a bit more, than the ones that supply domestically. Now domestically, what I'm seeing is competition from China has increased, which was almost nil in the last two years during Covid. But it's not the competition from China, that has always been there if you look at the last 30 years. I guess, if you have a short-term memory, you may feel oh, it's such suddenly we're in a competitive environment. But five years back or seven years back, it was as competitive as it is today.

More than 70% of your turnover, 75% comes from exports. Have you seen a shift in markets that you're focusing on or some more, some less?

Yes, in general, about 65% of our revenues come from exports. This year, that number will be lower, simply because domestic demand is doing better than export demand. So maybe that shift from 65, maybe we'll be down to between 55-60%. Of the few new products that we have added in the last few years, a lot of them cater to the domestic industry. But it wasn't an intentional choice that we want to cater to domestic demand versus export, it was more a product-specific choice. The product made sense for us to get into because there was no player in India or it was a value-added product. It was integration for us. So there was another set of strategies behind it, not just a market-driven approach.

But how are you, say hedging now, for the global uncertainty that we're facing? Of course, the India focus has hopefully been a bonus for you, even though it wasn't planned that way.

If you have a diversified product basket, diversify, not only in terms of geographies but in also in terms of applications. During Covid, the pharma sector did well. Then the oil and gas started doing well when pharma was down. Now, again, pharma is up but agrochemicals is down. So thankfully, we have products that cater to at least 10 to 15 different industries. And that gives us an actual hedge in times like this.

I would say also, the leadership, the lean balance sheet, you've had product diversification, as you said, now for a few years, but for any leader, this is a tough environment, right? You have war, you have climate change. You have a definitive slowdown in the West. In the US and Europe, I mean, it's a stretch, but people say that it's heading towards being a sort of dead market for a lot of people in a lot of sectors. So how are you planning for the next couple of years?

I don't think it's such a toughened environment as it is been made out to be. I think the last two years were a rosy environment and we are comparing it just that but if you look at it again, the last decade or two decades, I think these these events happen. And in any case, when you invest in a new product or a new factory, you're looking at taking a 10-year or 20-year view, not a two-year or three-year view. And again, being a leader in India and being a company in India, it's a great time to be in India because the west and others are looking at us, they are looking at us as an alternate supplier, which wasn't the case 15 years back. So we have that edge of being in India well positioned, I think, for the next for the coming two decades.

Tell me about input costs, and supply chain freight costs. I believe freight now for the first time is normalising in the last couple of months or the last couple of quarters. But tell me about the imbalance in input costs by and large. And when there are wars that take place, for example, how that kind of tilting the balance.

The input costs and freight have been so volatile in the last three years, even. And that's a fair point. I haven't seen this volatility ever pre-Covid. But thankfully, for us, we can pass on most of these costs. Most of our end product prices are based on my input costs of freight costs. So whether the freight is up or down, or input is up or down, my product price changes accordingly. It could be with a one-month lag or a quarterly lag. And so this volatility has less effect for us. And the same holds true for FX (foreign exchange) as well. Because most of the raw materials we import are also priced in dollars. Hence, we have I would say we don't have as much exposure to the dollar as one would assume.

Okay, also you have a fairly large expansion that you've announced, which should be completing. Now, given that there is a little bit of a slowdown in the ATBS segment, there is some destocking, how do you view this strategically?

Again, you know, this expansion is being done from a 10-year perspective. It takes two years to build a plant and then another five years to get your payback, and then you start making money, because I still feel the long-term prospects of the products remain the same. There will be double-digit growth on average, but you have to look at it over 20 years.

Okay, some of us know, your company, your products, your chemicals, your chemical compounds, and the end users, but explain the sectors that you think are going to work for you from an end-user perspective. Over the next couple of years.

Last three years, we have added products for the fragrance industry, the resin industry, for the plastic and polymer industry, and I think these are all going to grow over the next decade, we are adding a new range of products somebody will be used as a polymer inhibitor again, that's using the polymer industry and other ones will go in pharmaceutical and I think these are all high growth places given the India demand but as well as a global demand scenario.

And tell me about Ibuprofen, which in Covid was, if I might say, a ridiculous performer for you.

Ibuprofen we made the raw material for ibuprofen IBC, which did well these past few months of Covid simply because the customers got scared. There was a freight they got scared about the freight prices and inventory constrain but then post 2021-22, it didn't do that well. Paracetamol was the one that everyone was taking because you always prescribed Crocin or whatever it was. And Ibuprofen came down. It's coming back again in the last year. So it has also seen its share of cycles but it's a stable, fairly widely used pain killer fever reducer. Growth there's just similar to overall GDP growth, maybe 3-5% and in the end that's that's fine. When I joined the company, it used to be 70% of our revenue today it is 10%. So the key here again has been adding new products to our basket

This has been incredible because you've been very agile about that in the last few years, and I think it's made a huge difference to your numbers. So tell me about your product mix that you think is ideal at this point.

I think our monomer business accounts today for about 40-45% of our revenues, the IBB and related products will be maybe 15%. The newer products will be another 15%. And then we have some niche products and custom manufacturing products at about 10%. We have IDI units used in agro that’ll be another 10%. And in the future antioxidants will also be a big revenue generator for us.

In terms of global factors like war and climate change, even climate change is being talked about with seeing it. But how do you factor in these things? Sustainability, like how do you how do you factor these things in?

Sustainability, climate change, all these have become so critical, that all our customers are coming to evaluate us on these parameters on our carbon emission norms. We have to give all sorts of disclosures and try to find biobased routes for the production routes of our products. So it's expensive. It's not feasible, the biomass roots, but sustainability is something we look at very seriously. About 50% of our power consumption comes from renewable sources. And that holds us in high regard with our customers, and we just got, we were just given a goal rating by EcoVadis, which is given to some 5% of suppliers, globally, and they rank us on these parameters mainly of sustainability and ethics.

Where do you see the main pressure points going forward over the next year?

I think timely execution of projects. Of course, it demands recovery. I think the demand recovery might be slower than what we might have anticipated six months hence. But having said that, in a down market, everyone's always pessimistic. And then suddenly something goes up. And then people become overly optimistic.

There is certainly a resilience within India and Asian countries that hopefully should also create some buoyancy. What about a market like Australia?

Australia is a very small market for chemicals. The larger markets tend to be North America, Europe, then Southeast Asia of China of course. Australia is quite small.

Regarding the China plus strategy that we were talking about, you said that now they want an alternate, is that not lip service? Now, there's a proper sort of anti-China sentiment also in the West. So you think in a down market, per se, this is going to help the sector maintain numbers?

It's not as much anti-China, I would say. There are two things. The cost of manufacturing has increased in China over the last 10 years. As the GDP per capita increases or the company or the country becomes more progressive, the overheads increase, and the salary costs increase. That makes India competitive. Secondly, of course, during Covid, given the closures, now people are becoming very wary of the political situation in China. And thirdly, they have just realised that they can't be so dependent on one country, any one country and so they need to create alternate suppliers.

Especially from a country like India, where they see it as being relatively more sort of rational and sustainable. As a country and as therefore companies within that country.

Directly. I mean, one can argue that we might be more politically stable. So from that perspective, next year, let's see. 

Lastly, tell me how would you describe your leadership style in good times and in bad times.

I think a good leader should not be affected by good times or bad times. I think you're consistency and clarity of thought should be there. And that comes out in your work in your ethos and how you translate that to your employees not getting affected by these minor things that are happening. I think there was some way you did ask me previously about the Israel conflict and these conflicts if they are affecting us so far no, not really. I mean, okay, the price may go up, my raw material will go up and my price will also go up right accordingly.

And having the kind of product that you can pass on. 

Correct. And most products are like that because they have to move in tandem. Otherwise, people will stop manufacturing, if there's a negative contribution, or if it's to higher contribution, someone else will start manufacturing.