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India’s specialty chemicals segment may have a new opportunity in the wake of Covid-19. Consumers across the globe are diversifying away from China (which holds close to 36 per cent global market share) and that country has cracked down on many segments to cut pollution.
India has quite a few companies well placed to pick up some market share, in the circumstances and there could be acceleration in export growth as well as stable local double-digit demand. The Indian specialty chemicals industry currently generates revenues of approximately $32 billion and the favourable macro-factors mentioned above could help it grow by 12 per cent CAGR, doubling in size by 2025.
It is a rather fragmented industry however, with low R&D expenditure and only one company--UPL--registering $1 billion-plus in revenues. The agrochemicals segment, dyes and paints, and aromatics, etc., are all interesting segments, with double-digit domestic growth and strong exports.
India is the fourth largest agrochemical market in the world, with production of $9 billion-plus, and around 45 per cent of that is exported. India exports generic agrochemicals. Agrochemicals worth $8 billion are scheduled to go off-patent between 2020-2025, enhancing export opportunities.
Despite the size of the local market, there’s room for growth. On a per hectare basis, consumption of agrochemicals is low, with the US, Japan, China, etc., (the three larger markets) consuming between 10x-20x as much. Indian crop yields suffer losses of between 15-20 per cent to weeds, pests, diseases and animals – this can be reduced via more agrochemical penetration.
The Indian pesticide: herbicide consumption mix is also unusual. Pesticides have 55 per cent market share whereas in the larger markets, herbicides hold dominant market share. If labour moves out of agriculture, making manual weeding expensive, herbicide consumption and market share should rise.
Dyes & Pigments were targeted in the environmental crackdown mentioned above. As Chinese units shut down, prices increased and end-users looked for other sources. This is another area of opportunity. Ideally the speciality chemicals segment in India should see some consolidation, coupled to more R&D expenditure, which enables movement up the value chain.
There are many listed companies, including both MNC subsidiaries as well as local outfits. The industry suffered margin pressures through Q2, 2021-22. For a sample of 48 companies of various sizes, Gross Margins dropped to 45 per cent, from 47 per cent a year ago, and 48 per cent in Q1, 2021-22. Operating Expenditure rose to 20.4 per cent of revenues, from 19.9 per cent (YoY) and 20.2 per cent (QoQ). Raw material prices are expected to ease going forward as China is expected to ease production curbs after the Winter Olympics (Feb 2022) while fuel prices have already started easing. This should lead to better Gross Margins and lower Opex by Q4, 2021-22.
Post Q2 results, Bloomberg consensus earnings estimates where available, reduced for nine large companies (out of 13), for 5 mid-sized companies (out of 9) and for six small companies (out of 8). NOCIL, Rossari Biotech, Fine Organic, Jubilant Ingrevia, Deepak Nitrite, Sharda Crop were among the few that saw higher consensus estimates. Rossari Biotech, which had an IPO in July 2020 just after the first lockdowns to contain the coronavirus, has been an outperformer through the last 18 months.
