Chemical Industry : Poised For A Good Run Ahead

With a greater emphasis on research and development, preserving long-term relationships with MNCs and delivering specialised chemicals, Indian chemical companies are moving up the value chain. Mandar Wagh outlines how urbanisation, greater capital expenditure by chemical companies, and India's proximity to the Middle East would all play a role in driving growth in this sector. 

India’s chemical industry contributes significantly to the country’s economy. After the United States, Japan and China, India is the world’s fourth-largest producer of agrochemicals and the world’s thirdlargest consumer of polymers. Except for pharmaceutical products, India ranks sixth in the world in chemical imports and eleventh in chemical exports. India supplies around 15-16 per cent of the world’s total dyestuff and dye intermediate production, making it a major global dye supplier.  

For the next 10-15 years, the Indian chemical industry could experience huge tailwinds. It began with the production of building materials and commodity chemicals. With a greater emphasis on research and development, preserving long-term relationships with MNCs and delivering specialised chemicals, Indian chemical companies are moving up the value chain. Chemicals produced in India are utilised in a wide range of end-applications, including personal care, home care, crop care, healthcare, soaps, shampoos, talcum powder, paints, adhesives, garments, shoes, mobile phones, automobiles, and so on. 

Market Size

The Indian chemicals industry had a market value of USD 178 billion in 2019 and is anticipated to reach USD 300 billion by 2025 with a CAGR of 9.3 per cent. Specialty chemicals account for a sizeable 22 per cent of the chemicals and petrochemicals business in India. The demand for specialised chemicals is predicted to grow at a CAGR of 12 per cent from 2019 to 2023. The chemical sector, which the government recognises as being vital to the growth of the Indian economy, is allowed 100 per cent foreign direct investments (FDI). The industry is predicted to receive investments worth ₹ 8 lakh crore by 2025. It is much diversified, spanning more than 80,000 commercial products and employs more than 2 million people. 

Chemical Stocks and Equity Markets

Indian domestic indices fell sharply between January 2022 and June 2022. There are many factors to be blamed such as the pandemic effect, the war between Russia and Ukraine, the ongoing high inflation rate and the aggressive selling of investments by foreign investors. During this time, the BSE Sensex plunged more than 15 per cent and is gradually recovering. Despite these setbacks, numerous chemical stocks have outperformed the equity markets, yielding substantial gains. 

Out of the top 10 chemical companies in terms of performance with a market capital of over ₹ 10,000 crore that were taken into account, Fine Organic Industries led the way with gains of more than 60 per cent YTD. The key growth drivers for the company are debt reduction, strong ROE and ROCE reflecting excellent efficiency, and a healthy dividend payout ratio. With losses of more than 20 per cent, Aarti Industries and Deepak Nitrite were the list’s top two laggards.

Chemical stocks have risen dramatically during the past month. Tata Chemicals performed remarkably well, providing over 20 per cent returns in just one month! Some of the key growth factors for the company include the completion of its consumer products division’s demerger to focus on becoming a science driven chemical company, its strong global position in quality product manufacturing, the ability to generate excellent profits, and a low PE in comparison to its competitors. 

Despite the challenging environment in the equity markets, there were certain stocks that made investors happy. We discovered multibagger chemical stocks that have more than doubled the wealth of investors on a yearly basis. The top gainer on the list was Tinna Rubber and Infrastructure, which saw enormous gains of 472 per cent. The company’s net sales and net profit soared by over 65 per cent during the June quarter, and EPS grew from 4 to 7 in June 2022. The company has a low price to earnings (PE) ratio when compared to its competitors, which suggests that the stock is undervalued and has potential to rise in the near term. 

100 per cent of foreign direct investments (FDI) are permitted in the chemical industry. By 2025, the industry is expected to receive investments of ₹ 8 lakh crore. It employs more than 2 million people and is highly diversified, encompassing more than 80,000 commercial products. 

Market Players

More than half of the industry’s revenue is made up of agrochemicals, dyes and pigments. The technical side, including formulations, marketing and research and development, make up the agrochemical value chain. Purely technical companies include Bharat Rasayan, Astec Life, Shivalik and Punjab Chemicals and Crop Protection. With the best MNCs, these players typically have long-term contracts. While PI Industries, UPL, Sygenta, and other companies operate in all four industries, formulations and marketing are the focus of Dhanuka, Sharda Cropchem, Sumitomo and Heranba. 

The textile industry generates the majority of income in the dye industry, which has low entry barriers. Among the dye industry players are Bodal Chemicals, Kiri Dyes and Aksharchem. Vidhi Specialty is purely in the food colouring business. Pigments are used in paints, inks and coatings. Pigments can be subcategorised into high-performance pigments (HPPs) and carbon black. Sudarshan Chemicals is purely into HPP which is used in applications like UV protection. India imports bulk chemicals (Acetic Acid and Polyol) and intermediates (Phenol and Styrene), whereas exports include building blocks (Benzene and Paraxylene) and specialty chemicals. 

Outlook

To boost the chemical industry, the government has announced a variety of programmes. The Department of Chemicals and Petrochemicals received ₹ 209 crore from the government as part of the Union Budget 2022–23 in addition to initiatives. PLI projects with an allocated budget of ₹ 1,629 crore have been introduced to further develop bulk drug parks. Four Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs) have been authorised by the Indian government in the states of Andhra Pradesh, Gujarat, Odisha and Tamil Nadu to promote investment and industrial development. 

The government is backing single-window clearance for central and state approvals in order to make business easier. The Production-Linked Incentives (PLI) scheme was introduced by the government in 2021 with a budgetary commitment of ₹ 18,100 crore over five years. The government intends to enhance the local production of advanced chemistry cells in accordance with the strategy to reduce battery prices in the country, which would also reduce the cost of electric vehicles. Another goal of the plan is to increase exports and domestic manufacturing. The chemical sector is faced with numerous difficulties, such as expensive quality audits, supply interruptions, fluctuating foreign exchange rates, price volatility and weaker demand as a result of the global economic downturn. 

The key safety and regulatory concerns for the chemical industry include plant accidents, pollution control board notices and effluent treatment plants. Nevertheless, the industry will continue expanding because of the growth factors. Indian chemical companies have been increasing their capital expenditure due to the rise in demand, and it is anticipated that this capex would increase by 50 per cent to ₹ 15,000 crore over the next two years compared to capex made during the previous two years. Due to its closeness to the Middle East, which serves as the world’s main supply of petrochemical feedstock, India can benefit from economies of scale. Rising disposable income, urbanisation and the massive demand for items in rural areas are some of the key growth factors for this industry. 

The China Factor

China has lately started to lose its pricing advantage as a result of growing government enforcement of stricter environmental laws on environmental pollution from Chinese chemical and pharmaceutical companies. Because the US and European businesses are under pressure from institutional investors to lessen their dependence on China, the pandemic’s disruption of supply chains has also contributed to China’s declining supremacy in the chemical industry. India has the technical expertise and potential to provide the global markets with manufacturing which is also cost-competitive and this might enhance its market share by taking advantage of China’s declining position.