Back to the future. SPIC’s natural gas play bolsters operations, profitability

Ashwin Muthiah (58) is now a contented man as Southern Petrochemical Industries Corporation Ltd (SPIC), the flagship of the Singapore-headquartered AM International, has achieved a major milestone and embarked on a new phase of growth following a remarkable turnaround over a decade.

“With all legacy issues behind us, we have successfully reorganised SPIC for future growth,” says the Chairman of SPIC, and Founder and Chairman of AM International, with satisfaction.

AM International, as the holding company, oversees a diverse portfolio worth about $2 billion in sectors such as fertilizers and petrochemicals. SPIC stands alongside Manali Petrochemicals Ltd (MPL) in the petrochemical sector. The group includes four listed companies: SPIC, MPL, Tamilnadu Petroproducts (a JV firm), and Tuticorin Alkali Chemicals & Fertilizers.

Under Muthiah’s leadership, since he became Chairman in 2011, SPIC has staged an impressive turnaround. The 55-year-old pioneer in the Indian fertilizer space is now well-positioned to seize emerging opportunities as India is evolving into a cost-efficient producer while achieving self-sufficiency.

Ashwin Muthiah, Chairman of SPIC

SPIC, a pure-play urea producer, has entered a new chapter in its history, undergoing major expansions for future growth. The company transitioned from high-cost naphtha-based operations to 100 per cent natural gas (NG)-based operations. This shift promises to enhance sustainability, operational efficiency and profitability. “We have completely stopped buying naphtha now,” Muthiah proudly states.

The green leap

Urea, the primary fertilizer used in India, is produced in 36 fertilizer plants nationwide. All these factories use natural gas as their main raw material due to its low emissions, ease of handling and reduced energy consumption. After a long wait, SPIC has now joined this group.

In May 2024, SPIC joined the “gas pooling” mechanism which calculates a single pooled gas price based on the weighted average price of natural gas used by all fertiliser companies. Companies with lower natural gas costs pay the difference into the system, while those with higher costs receive the difference.

“Following the full conversion to natural gas, the company’s EBITDA is expected to see a significant improvement supported by some key factors,” says Bhanu Patni, Director, India Ratings & Research (Ind-Ra).

The complete shift to pooled gas is anticipated to boost energy efficiency to 5.8 gigacalories (Gcal) per tonne. SPIC will benefit from the pooled gas price mechanism, reducing forex losses by eliminating naphtha imports. Gas cost reimbursement will be based on actual payments for the pooled gas price, including currency conversion, she adds.

With this transition, SPIC is poised for a ₹970 crore revamp of its existing urea plant to boost capacity and establish a 150 tonnes per day green ammonia plant. This upgrade aims to increase urea production capacity from 7,59,000 tonnes per year to 9,12,000 tonnes per year, with an energy consumption target of approximately 5.7 Gcal/tonne. This revamp will enhance plant stability, improve efficiency, and reduce the government’s subsidy burden. “Completion of capex is key to sustaining EBITDA at the current level,” says Patni.

Greenstar Fertilisers, a SPIC group company, is also investing ₹640 crore in a water-soluble fertilizer (WSF) mixing plant in Chennai, a 2,500 MTPA sulphuric acid plant, and the refurbishment of DAP I and II plants in Thoothukudi.

Next on the agenda is fortifying SPIC’s balance sheet, aiming for zero debt, with minimal long-term and working capital debt in the company. The company is reinvesting its cash into the business and has become a dividend-paying entity. “We are now a dividend-paying company, distributing dividends in a measured way while retaining funds to fuel growth,” Muthiah explains.

Weathering the Storm

However, SPIC’s performance in FY24 was impacted by unprecedented floods in the Thoothukudi region of Tamil Nadu, where its manufacturing operations are located. This led to a decline in net profit to ₹88 crore from ₹284 crore in FY23, and total income dropped to ₹1,962 crore from ₹2,849 crore due to a factory closure lasting over two months.

“SPIC’s EBITDA improved given the difference between the normative and the actual efficiency. In addition to healthy EBITDA generation, SPIC’s working capital situation was also supported by the timely receipt of subsidies from the government allowing SPIC to reduce trade payables,” states Patni.

Muthiah remains optimistic about the future growth of SPIC. “Everything runs smoothly if you have your raw materials, market demand and funds in place. It will be an autopilot operation,” he says confidently.

While the fertilizer sector shows promise, Manali Petrochemicals, operating in the commodity sector, faces challenges from cheap imports. The company has crafted a strategy to balance its portfolio with a mix of commodities and speciality chemicals, leveraging its two UK facilities to enhance business through high-margin, sustainable specialty chemicals.

“We are very clear on our trajectory. We will continue to grow in our core businesses — fertilisers and petrochemicals. In fertilisers, our focus will be on urea and phosphate, while in petrochemicals, we will concentrate on intermediates. Specifically, we will expand in LAB (linear alkyl benzene), polyols, and propylene glycols, exploring opportunities to invest and increase our value,” asserts Muthiah.

But the group companies will not overstretch to achieve growth. “We will not let peer pressure sway us. When you push beyond your limits, you’re forced to manipulate, leading you into weaker territories. We will focus on growing where our strengths lie and trim down where our weaknesses are,” he states.

The group is committed to aligning with its customers’ net-zero ambitions through strategic investments in multiple initiatives. SPIC has moved to NG-based manufacturing; Tuticorin Alkali produces the world’s first green soda ash, and Manali Petrochemicals has implemented carbon capture technology.

Addressing the growing emphasis on environmental issues and compliance, Muthiah acknowledges the heightened demands. “Today, non-compliance is not an option. You must operate within this stringent regulatory framework to succeed and remain strong. Compliance is a way of life,” he asserts.

As the group companies progress through various expansion and growth stages, have the promoters developed the management capacity to ensure business continuity without disruption? “That is something we are very conscious about,” he affirms. The companies are professionally run, focusing on building strong operational teams and balancing family involvement carefully. “Family involvement is centered on strategies, policies, and key man recruitment,” he adds.

What would be his message to shareholders? “The dividend is a message to say we are committed to long-term sustainability. It signals to shareholders and stakeholders our dedication to maintaining sustainable growth,” Muthiah emphasises.