FORMULA FOR GLOBAL GROWTH
Indorama on acquisition trail again
“First, we look at the company, then we look at the management team in that company and how they can help us grow. We look at how much risk we have and how much time we have to spend to integrate the new company into our value chain”
ALOKE LOHIA
Group CEO, Indorama Ventures
From household appliances to food packaging and medicine, clothing to automotive tyres and highly specialised products, petrochemicals are in indispensable building block for countless products we take for granted in daily life.
For Thailand-based Indorama Ventures Plc (IVL), meeting ever-growing demand for petrochemical products involves a constant search for new opportunities, wherever they may be in the world.
“Our strategy is to be global,” says Aloke Lohia, the founder and group CEO of the world’s leading integrated petrochemical company. “We go around the world and we have no limitations. We don’t say we will not grow in this country or that country.”
IVL currently has 51 manufacturing sites in 17 countries across four continents: North America, Asia, Europe and Africa. Its three core business segments are PTA feedstock (purified terephthalic acid), PET (polyethylene terephthalate), fibres and yarns with total production capacity of 7.2 million tonnes.
Founded in Thailand as a wool yarn producer in 1994, IVL entered the petrochemical industry by establishing a PET resin facility in 1995 to produce bottles, packaging and other fast-moving consumer goods (FMCG).
“After we reached the limit of how much we could grow in Thailand, we knew that if we wanted to grow more, we needed to grow beyond the population of Thailand, beyond the consumption base of Thailand. We have to grow internationally,” Mr Lohia said in an interview with Asia Focus.
Through standalone investments, strategic acquisitions, expansion of facilities and partnerships with local dominant players, the 56-year-old Kolkata-born executive has been tireless in the pursuit of growth. He established IVL in the United States in 2003 and in Europe in 2006.
With acquisitions accounting for 80% of the company’s expansion portfolio, Mr Lohia has learned a thing or two about what to look for. The keys to success, he says, are to have a good company, high-quality management and constant improvement of capabilities from the executive suite to the production line.
“First, we look at the company, then we look at the management team in that company and how they can help us grow. We look at how much risk we have and how much time we have to spend to integrate the new company into our value chain,” he said.
Just last week IVL announced yet another acquisition, this time at home, of Bangkok Polyester, with 105,000 tonnes of annual PET capacity.
Corporate governance is another major factor that IVL looks into when planning expansion. In this regard there are some markets where the company is wary, among them the former Soviet states. “We grow in countries where there is transparency and good governance,” he said.
Aside from horizontal expansion of PET and polyester products, Mr Lohia has pursued vertical integration of the value chain through PTA feedstock since 2008, given that it’s a vital material for PET and polyester products.
“It helps us lower our input cost and increase our margin and allows us to use our capital more efficiently,” he said.
Since the petrochemical industry needs petroleum or natural gas as raw materials, volatile commodity prices are a major concern. However, Mr Lohia acknowledged that the 2008 financial crisis or the recent oil price crash have not negatively affected Indorama; in fact, the company has seen some positive effects.
“Lower oil prices make the end product cheaper for our customers, allowing them to lower their costs so they can save more money and use it for advertising and promotion,” he said. “As a result, they can sell more and they will order more from us.”
Seventy percent of IVL’s revenue comes from staples including PET bottles or polyester fabrics. “These are necessities and everyone has to buy them no matter what the economic climate is,” he said.
“You have to drink water. You will buy clean water and clean water only comes in a bottle.”
MORE VALUE, HIGHER MARGINS
In addition to necessities, Indorama has been moving laterally into the high value-added (HVA) areas that are more lucrative and specialised, allowing it to mitigate weaknesses and risks in commodity sectors and maintain healthier margins
“We think about how we are going to grow five years from now, not only how we can grow today,” said Mr Lohia. “We have the appetite to grow and we don’t want to put all our eggs in one basket.”
While demand for necessities such as PET is relatively predictable, margins are highly volatile due to fragmentation. As a result, Indorama has been increasing its share of HVA products, which will soon account for 30% of its overall capacity.
By way of example, he points to the automotive safety sector including the recent acquisition of Performance Fibers Asia, China’s second largest producer of polyester tyre cord materials, earlier this year. The company complements an automotive portfolio that also includes Trevira GmbH, a maker of high-end fibres and yarns for automotive interiors, and the airbag yarn producer PHP Fibers GmbH in Europe.
Mr Lohia also is determined to lead the company into areas where it can obtain intellectual properties and patents, further increasing the opportunity for good margins.
“This is how we keep growing our business: with the right people and by expanding in the sectors that we are experts in. We provide them with good financial ability to grow the business,” he said.
Over the next three to four years, IVL is planning to invest $2.2 billion in its core businesses including PET, feedstock, fibres and specialties while also expanding its geographical coverage.
“We always select new geographies,” said Mr Lohia. “Two years ago, we went to Africa, last year we went to Turkey. We will enter into new countries including Myanmar and Canada this year.
“However, we don’t go to every market, we choose one by one which market we want to go to. Hopefully, one day we will be in every market.”
He expects to see production capacity to reach 10 million tonnes within four years. Actual production is expected to grow 50% in volume, from 6.2 million to 9 million tonnes.
By year-end, capacity is expected to reach 7.8 million tonnes, up from 7.5 million now, with increased capacity from Performance Fibers Asia in China and Polyplex in Turkey.
“The target profit margin is expected to expand to 5% within four or five years,” he said. “At the moment, the margin is only 2%.”
IVL also expects to benefit this year from lower operating and logistics costs as crude oil prices will remain low.
PET demand is expected to grow 6-7%. Meanwhile, a new PTA production line in Rotterdam is expected to come onstream late this year with a capacity of 330,000 tonnes annually.
Over the next four years, the company will maintain HVA production at 30% in terms of volume with projected output of 3 million tonnes, an increase from 1.5 million this year. HVA revenue is expected to increase by 30% over the same period.
Despite the rapid growth over the last two decades, Mr Lohia believes IVL can do more, in line with the expectations and interests of the company’s investors. “We’re still building our company. We are still at the beginning of our journey, not even halfway yet.”