Focus On Specialty Chemical Stocks To Beat Markets

The Indian chemical industry has been on a growth trajectory since 2010. However, it is the Indian specialty chemicals industry that has caught investors' attention lately.

What are specialty chemicals and what are the drivers for the industry ?

The chemical industry can be classified into two broad segments - basic and specialty. Basic chemicals are the ones where there is hardly any product differentiation and are generally high-volume and low-value products. The basic chemical products are highly price elastic and the sales are generally dependent on the price of the products.



Specialty chemicals, as the name indicates, are the special, high-value products and are often low-volume products when compared to basic chemicals. The sales of specialty chemicals will depend on the quality of the product and the utility of the products. In specialty chemicals, the focus is on the customers and the market needs, while the economies of scale is the focus for the manufacturers of basic chemicals.

Specialty chemicals is a low capitalintensive business when compared with the basic chemicals business. Specialty chemicals are primarily sold on a B2B basis and can be further divided into subsegments depending upon the basis of end-use and applications, viz., agrochemicals, textile chemicals, personal care, flavours and fragrances, colourants, construction chemicals, paints & coatings, surfactants, polymer additives and water treatment chemicals.

Growth drivers for specialty chemicals industry in India:-

Availability of raw material domestically:
For the specialty chemicals industry to prosper in any country, it is important for that country to have a thriving chemical industry. Indian chemical industry's history runs back 70 years and has seen several large and small companies prosper. India is the sixth largest producer of chemicals worldwide. Only countries like China, USA, Germany, Japan and South Korea produce more chemicals than India does.

The already established large base for chemical industry in India is being leveraged by the specialty chemical players. The availability of raw materials at cheaper prices is one of the unique features of the speciality chemicals industry in India.



Strong growth in demand for premium products:
Due to increased industrial and economic growth, there is strong demand visibility in the B2B segment for specialty chemicals. The strengthening economy leading to increased aggregate demand in the economy and lower penetration of agrochemicals and other specialty chemicals in India can be the growth drivers for specialty chemicals industry in India.

Lower cost of manufacturing:
When it comes to global specialty chemicals industry, it is the developed countries that are the largest producers of quality products. Only other developing countries that compete in the space is China and India. India has a unique advantage of having low-cost labour and, at the same time, boasts of having technically sound and skilled manpower.

The specialty chemicals industry constitute nearly 20 per cent of the global chemicals industry and is expected to grow at 5.8 per cent per annum, reflecting slightly higher growth when compared to the chemical industry growth in general.

Indian specialty chemicals industry is worth USD 28 billion and has shown a CAGR of 14 per cent during FY10-FY15. In FY15, the Indian specialty chemicals industry accounted for approximately 3.4 per cent of the global specialty chemicals and 20 per cent of the Indian chemical industry.

Government support & higher investment in R&D
Various government initiatives such as 'Make in India' and 'Plastic Park' schemes have been supportive for the specialty chemicals industry in India. The government has been able to provide infrastructure, including the effluent treatment to the industry. The measures taken by the government to protect and incentivise innovation in the specialty chemicals industry has also helped the industry to grow at a faster pace. There is overall increase of 56 per cent in the foreign direct investment (FDI) in the specialty chemical industry in India, which has been supportive to the overall ecosystem, thus fuelling the growth prospects for the industry. The Indian companies have increased their spend on R&D when compared to other developed markets.

The R&D spend has increased by 17 per cent for Indian companies during FY11 to FY16, while that for the US markets increased by 11 per cent and for the European markets the spend increased by 7 per cent.



Conclusion
India’s specialty chemicals industry has all the growth drivers in place. The companies that have a higher focus on R&D and a right product mix strategy in place can witness higher share in revenue. India is increasing its global competitiveness in the industry and it augurs well for those companies that are export-oriented. The Indian companies are reflecting higher RoEs in the specialty chemicals industry along with improved margins.

With increased manufacturing capacity and sustained demand for high performance products and reduced regulatory red-tape, Indian companies are bound to be on the global investors radar. There is a good chance that Indian specialty chemicals stocks will be favoured over their global peers.

The key risks for the sector remain the government intervention and a change in its intent to support the industry and the overall slowness in the growth of the Indian economy.

Investors looking at investing opportunities in the speciality chemicals space will have to bet on the long-term prospects of the industry and identify those companies with a diversified products portfolio and a consistent track record of operational profitability.

Vinati Organics

CMP Rs.1556.30
BSE CODE 524200
Face Value Rs. 2
Market Cap F F (Cr.) 2079.48

Here is why
Very positive financial
performance
Promising growth prospects
Strong earnings outlook

Vinati Organics Ltd. (VOL) is a specialty chemical company that manufactures specialty chemicals and organic intermediaries. It is India’s largest manufacturer of isobutylene (IB) and boasts global leadership in two specialty chemicals, namely - isobutyl benzene (IBB) and 2-acrylamido 2 methylpropane sulfonic acid (ATBS), with a market share of 70 per cent and 80 per cent, respectively. It exports to 31 countries and has developed a growth-oriented business portfolio, with an emphasis on selective capacity expansion and extensive R&D.

The standalone results reported an increase of 57.34 per cent in gross revenue from operations to Rs.252.8245 crore in Q2FY19 from Rs.160.6780 crore in Q2FY18. Its EBITDA increased to Rs.95.2394 crore in Q2FY19 from Rs.45.932 in Q2FY18, posting a growth of CMP Rs.1556.30 Face 524200 Value Rs.2 BSE CODE 2079.48 Market Cap F F (Cr.) 107.34 per cent. Consequently, net profit rose to Rs.65.0288 crore in Q2FY19 from Rs.29.1478 crore in Q2FY18, registering a climb of 123.10 per cent. The EPS grew to Rs.12.66 in Q2FY19 from Rs.5.65 in Q2FY18. The company’s operating profit margin rose 41.81 per cent in Q2FY19 from 39.15 per cent in Q1FY19. Consequently, the net profit margin climbed to 25.72 per cent in Q2FY19 from 24.27 per cent in Q1FY19.



VOL reported one of the highest revenues of Rs.772.90 crore in FY18 as against Rs.693.82 crore in FY17, reporting a surge of 11.39 per cent. Its EBITDA declined marginally to Rs.227.95 crore in FY18 from Rs.229.43 crore in FY17, marking a drop of 0.64 per cent. However, profit after tax rose to Rs.143.88 crore in FY18 from Rs.140.28 crore in FY17, posting a growth of 2.56 per cent. The PAT margin declined to 18.62 per cent in FY18 from 20.22 per cent in FY17, registering a fall of 160 bps. VOL’s return on capital employed (ROCE) surpassed that of its industry peers and stood at 23 per cent. In order to maximise shareholders’ returns, the company bought back two lakh shares in FY18. During FY17-18, the company’s operating performance improved as evidenced by the rise in ATBS sales due to increased usages and the exit of VOL’s competitor, Lubrizol. 

A snapshot of VOL’s long-term performance till 2017-2018 shows a 5-year CAGR of 6.4 per cent in revenue, 14 per cent in EBITDA and 16 per cent in net profit. Since 2010, its gross block increased 4.53x and market capitalisation surged 13.08x. While the ATBS segment demonstrated significant growth during the year, IBB’s performance was relatively flat. However, the management commentary proffers a positive outlook on IBB’s growth prospects in FY19. Its growth strategy involves expanding its market footprint across different product lines and innovative product development. VOL has ventured into new product segments, such as IB derivatives. Its capex investments, all of which were funded by internal accruals, are on course with completion deadlines and are expected to become operational by Q1FY20. VOL is debt-free and holds a strong equity position.

The company endeavours to recalibrate its business model to garner higher share of the market. This will propel margins and facilitate the development of commercially viable products. By virtue of a positive financial performance, robust earnings outlook for the upcoming quarters and lucrative growth opportunities, we recommend our reader-investors to BUY the stock.