Chemical Sector Gets its Formula Right

Chemical Sector Gets its Formula Right

The chemical sector in India is rapidly moving from a commodity player to a value-based solutions provider. This upward integration will help both big as well as smaller players and create avenues to foster higher collaboration across the value chain

The Indian chemical industry covers more than 80,000 commercial products and is extremely diversified. It can be broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers and fertilisers. Globally, India holds the position of being the fourthlargest producer of agrochemicals after the United States, Japan and China. India accounts for approximately 16 per cent of the world production of dyestuffs and dye intermediates. Meanwhile, the Indian colorants industry qualifies to be a key player with a global market share of around 15 per cent. In India, the chemicals industry is de-licensed, except for few hazardous chemicals.

India holds a strong position in export and import of chemicals at a global level and ranks 14th in exports and 8th in imports at the global level, excluding pharmaceuticals. The domestic chemical sector’s small and medium enterprises are expected to exhibit 18 to 23 per cent revenue growth in FY22 that can be traced to an improvement in domestic demand and higher realisation due to high prices of chemicals. India gains economies of scale on the back of its proximity to the Middle East, the world’s source of petrochemicals’ feedstock. A key role is played by the manufacturing sector in the output of the Indian economy and chemical manufacturing is a crucial segment with roots spread across a wide range of end-use industries.

Market Size

The Indian chemicals industry stood at USD 178 billion in 2019 and is expected to reach USD 304 billion by 2025, registering CAGR of 9.3 per cent. The demand for chemicals is expected to zoom by 9 per cent per annum by 2025. A contribution of USD 300 billion is expected from the chemical industry to India’s GDP by 2025. An investment of Rs 8 lakh crore (USD 107.38 billion) is estimated in the Indian chemicals and petrochemicals sector by 2025. In April 2021, the production of key chemicals stood at 8,50,622 metric tonnes and petrochemicals was 18,68,939 metric tonnes.

Specialty chemicals constitute 22 per cent of the total chemicals and petrochemicals market in India. The demand for specialty chemicals is predicted to increase at 12 per cent CAGR in the period from 2019-22. On the other hand, petrochemicals demand is expected to record 7.5 per cent CAGR between 2019 and 2023 with polymer demand growing at 8 per cent. The Indian agrochemicals market is expected to register 8 per cent CAGR to reach USD 3.7 billion by FY22 and USD 4.7 billion by FY25. In May 2021, exports of organic and inorganic chemicals rose by 20.05 per cent on a YoY basis to reach USD 2,179.11 million.

Industry Performance

The chemical industry in India is a mix of small and large-scale players including multinational companies. The main demand drivers are agriculture, infrastructure, energy, water and waste management. India holds leverage in the manufacture of basic chemicals that are also known as commodity chemicals. These account for about 57 per cent of the total domestic chemical sector. The chemical sector in India is rapidly moving from a commodity player to a value-based solutions provider. This upward integration will help both big as well as smaller players and create avenues to foster higher collaboration across the value chain.

Over the past few months, the development of specialty chemicals with a dedicated focus on sustainability or ecofriendly solutions has emerged as a strong trend. The industry is keenly aiming at specialty chemicals and development of new products whether related to alternate material for environmentally unfriendly products or performance improvement of downstream products. The sector is also witnessing increasing use of technology while innovation is driving growth due to increasing investment in research and development as well as technology for the betterment of services and product quality. Additionally, the inclination of production and consumption towards Asian and Southeast Asian countries in all sectors is boosting the demand for chemicals and petrochemicals.

Three-Year Performance

The chemical industry has had to face the brunt of a global slowdown over the past 2-3 years. Global economic uncertainty along with recent regulatory issues has resulted in low FDI inflows to the country. To get a bird’s eye view we have extracted performance data for listed companies in the chemical sector. In the last three years, in totality 55 companies can be rightfully declared as multi-baggers giving returns beyond 100 per cent. Looking at the performance of the top 15 companies, the absolute returns have rallied from 411 per cent to 9,600 per cent.

Best Agro Life has skyrocketed with massive returns in three years followed by Alkyl Amines Chemicals and Chemcrux Enterprises zooming by 1,533.04 and 1,246.67 per cent in three years. Recently, Best Agro Life Ltd. secured a patent for an insecticide composition to control sucking pests like whitefly. In the first quarter of FY22, the net profit of the company has jumped over three-fold to Rs 25.78 crore as compared to Rs 7.24 crore in the year-ago period. The company has been infusing tremendous efforts in innovation, research, backward integration and good execution.

The main demand drivers for chemical sector are agriculture, infrastructure, energy, water and waste management. India holds leverage in the manufacture of basic chemicals that are also known as commodity chemicals

The Pandemic Impact

India’s chemical sector had continued to witness strong growth momentum over the last couple of years. However, due to the global supply chain disruptions and the government’s lockdown measures to restrict the spread of the corona virus, Indian chemical markets experienced a significant decline in business. Meanwhile, even before the pandemic, global chemical manufacturing operations had already increasingly relocated to India from China, which is likely to continue in the postpandemic phase as more companies evaluate alternative supply chain solutions. A decline in crude oil prices will also have a significant impact on raw material pricing from a short-term to medium-term perspective. Sectors like specialty chemicals, agrochemicals and pharmaceutical intermediates will have limited impact given their essential nature. Because of the effects of the pandemic, global chemical production declined by 3.3 per cent in March 2020 and a further 1.3 per cent in April 2020.

"The Index of Industrial Production (IIP) for chemical manufacturing is gradually returning to the pre pandemic levels and the industry is expected to grow attractively by FY25. Demographic dividends, low per capita consumption, increasing export demand and enabling government initiatives will contribute as the key growth drivers for the Indian chemical industry."

In April 2020, India suffered the largest monthly production decrease as compared to other countries at 15.9 per cent, similar to many European companies. The first wave of the pandemic had a negative impact from March 2020 to the end of December 2020. Yet, during this period, 104 chemical companies managed to give double returns to investors. Khaitan Chemicals and Fertilizers, Kilpest India, Bhansali Engineering Polymers, Resonance Specialties and Fineotex Chemical were the top five performers in the chemical space. The pandemic’s second wave caused the equity markets to dip around late January 2021. There has been economic recovery since then. The data below highlights the top gaining stocks during the second wave.

Quarterly Performance

On the sectoral front we have analysed 72 companies in the chemical sector according to their market capitalisation. During H1FY20 the overall revenue of these companies increased by 10.7 per cent with EBITDA reporting a rise of 10.9 per cent. The net profit of these companies has also grown by 3.5 per cent in the first half of FY20. Of this set of companies, the performance was mixed. The revenue of 42 companies registered an impressive rise. Among these, 19 companies delivered double-digit growth. The following table depicts the performance in terms of net sales, operating profit and PAT of the top 10 companies according to market capitalisation.

Broad Outlook

A key role is played by the manufacturing sector in the output of the Indian economy and chemical manufacturing is a crucial segment with roots spread across a wide range of end-use industries. The Index of Industrial Production (IIP) for chemical manufacturing is gradually returning to the prepandemic levels and the industry is expected to grow attractively by FY25. Demographic dividends, low per capita consumption, increasing export demand and enabling government initiatives will contribute as the key growth drivers for the Indian chemical industry. As mentioned earlier, some untapped attractive business opportunities are present in different segments.

These include petrochemical intermediates, downstream petrochemicals and specialty chemicals. The coming decade is expected to bring in investments worth more than USD 87 billion solely on the basis of the major petrochemical products under consideration. The Union Cabinet has cleared production linked incentive (PLI) scheme worth Rs 15,000 crore which is expected to enhance local production in India. The Chinese government has been aiming on reducing pollution which has led to the closure of 80,000 Chinese chemical companies, thereby giving an edge to Indian chemical manufactures. The growth in the chemical and petrochemicals industry is also contributing to the country’s vision of moving towards self-reliance.

 

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