CAPEX Acceleration in Indian Chemical Companies

CAPEX Acceleration in Indian Chemical Companies -  USD 300 bn  domestic market by 2025

Twitter Handle: @shuchi_nahar

India’s chemical industry was estimated to be worth USD 178 billion in FY 2019-20 and has a significant potential to reach USD 300 billion by FY 2024-25. In terms of demand, the industry has grown at approximately 1.3 times the country’s average GDP growth in the last five years and shows a strong linkage with its GDP. Indian specialty chemical sector has grown at 12%+ in the last five years and is well poised to expand its global market share to 7-8% from 4% in the coming years.

The structural drivers are in place like global best practice manufacturing standard and R&D capability along with government impetus of make in India policy with pro-growth policies will act as a further catalyst for growth. Further, a global MNC looking at China Plus one strategy will help Indian incumbents to gain market share. In the short to medium term, supply disruptions emerging from power outages in China along with limited new capacity addition provides a tactical opportunity for Indian players to increase market share and also will get benefits for increase in products prices.

Demand for chemicals in India is poised to reach USD 300bn by FY25 from USD 178bn in FY20, according to the Department of Chemicals & Petrochemicals’ presentation during its India Chem March 2021 Conference. Demographic dividend, low per capita consumption, growing disposable income, urbanization, rural consumer penetration, increasing export demand and government initiatives are key growth drivers. The industry has already started to focus on CAPEX to build new capacity, driven by a revenue CAGR of 10% and 21% EBITDA margin over FY18-21.

Opportunities led by government push, production linked schemes

The government had announced a PLI scheme in FY20 to incentivize incremental sales from domestic units manufacturing automobiles, pharma, food products & textiles, which would drive domestic demand for specialty chemicals for polymers, resins, fibers, active pharmaceutical ingredient (API), bulk chemicals, paints, pigments, and food additives. It overhauled the Petroleum, Chemicals, and Petrochemicals Investment Region (PCPIR) policy to encourage investment of INR 20tn by FY35.

 

Changing China dynamics

In sharp contrast to China, most chemical manufacturers in India are largely in compliance with emissions norms due to stricter environmental policies, and as a result, are already done with significant investment in environment-friendly processes. However, during the past decade, the same spending on environmental compliance has led to domestic products becoming costlier than China’s.

 

With the stricter environment norms in China and consequent supply uncertainty, India’s chemicals companies are at an inflection point of gaining major share globally, resulting in increased capacity utilization and margins.

 

Consolidation in the industry, environmental reforms, and tightened financing is changing the structure of China’s chemical industry, resulting in uncertainty for companies dependent on the country for their supply of raw material. In addition, the COVID-19 outbreak has compelled companies to move their supplier base and look for alternative locations such as India that offer the advantage on low-cost labor and favorable investment policies.

Impact of China’s policy on Indian Chemical Companies

China’s chemicals industry is facing structural headwinds in the form of tightening environment norms, stricter financing, and consolidation, leading to global supply concerns. These factors promote India as a strong global supplier. As per BCG Survey, 44% of US CFOs and 25% of North Asian CFOs say firms are already moving production out of China.

 

Indian Specialty chemical industry witnessed strong y-o-y demand and improved pricing scenario (led by cost-push) in general during Q2. Such a scenario couple with a covid impacted base of last year makes the revenue trend strong.

 

While there is some sequential stagnation in the demand trends driven by the trade challenges, the product prices remained firm/stable in Q2 primarily driven by a spike in input/freight cost. While Crude prices saw a steady rise (+67% YoY, +4% QoQ), the prices of most key inputs like - Benzene (127% YoY, -3% QoQ), Toluene (74% YoY, 5% QoQ), Phenol (118% YoY, 13% QoQ), caprolactum (115% YoY, 28% QoQ), etc have doubled.

India’s specialty chemicals companies are expanding their capacities to cater to rising demand from domestic and overseas. With global companies seeking to de-risk their supply chains, which are dependent on China, the chemical sector in India has the opportunity for significant growth.

 

Most Indian specialty chemical peers have either integrated their product portfolio or added downstream products in the recent past, keeping their margins firm. On the other hand, the sharp rise in container cost and its unavailability brings in trade challenges and margin pressure. However stronger sales drive overall earnings momentum.

 

Increasing investments and spending to boost the growth

A Petroleum, Chemicals, and Petrochemicals Investment Region are expected to attract investments worth 7.63 lakh crores (US$ 104.36 Billion). Indian chemical companies spend ~1% of their revenue on R&D. An investment of 8 lakh crores (US$ 107.38 Billion) is estimated in the Indian chemical and Petrochemicals sector by 2025.

The rise in demand from end-user industries such as food processing, personal care, and home care is driving the development of different segments in India’s specialty chemicals market. The domestic chemicals sector’s small and medium enterprises are expected to showcase 18-23% revenue growth in FY 2021-22, owing to an improvement in domestic demand and higher realization due to high prices of chemicals. Around USD 17.1bn of petrochemical projects of 9.2mn tonne products capacity are under implementation in India, which would help drive competitiveness of downstream chemicals industry due to availability of cheaper feedstock to cater to rising domestic demand.

Chemical Sector Report: https://myweekendspot.blogspot.com/2021/10/disruption-in-china-beneficial-for.html

Source: McKinsey Chemical Report

Sharekhan Research Report

Nirmal Bang Securitieses

Kotak Securities Chemical Report

Twitter Handle: @shuchi_nahar

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