Cover Story

Published: Dec 29, 2021
Updated: Dec 29, 2021

Speciality chemicals rock the market

The Indian speciality chemicals sector has never had it so good, and even the coronavirus — which has laid countries, economies and sectors low during the last one and a half years — has not been able to stall the segment’s stratospheric rise. Stocks of leading and even less-known companies are being chased by investors at prices which are three to four times of year-ago levels. In fact, the Indian stock market owes its current boom in large part to the investor demand for speciality chemical scrips. Needless to say, a major factor in the huge popularity of these stocks is the current trend among global consumers to reduce their input supply dependence on ‘virus-tainted’ China and look at an equally competitive supplier like India. Considering the continuing supply fears around a possible Covid wave, experts feel the good times for Indian speciality chemical companies and their stocks will continue for a good while longer.

Of late, especially during the last couple of years, the speciality chemicals industry has been in the limelight. In fact, even during the disastrous and ongoing Covid-19 pandemic, the sector has blossomed, with stocks of companies operating in this space emerging as top favourites amongst savvy investors. Almost all leading stocks in this segment, which were on offer two years ago in double digits, with a few in three digits, are today in demand in the four-digit, or at least the higher three-digit, range. Interestingly, most of these companies are small- or medium-size ones but their valuations have reached sky-high levels. In fact, investors in this sector have minted money on account of hefty returns offered by these stocks — in the range of 25 to 75 per cent! In fact, speciality chemical stocks have contributed majorly to the current, unprecedented, stock market boom. Deepak Nitrite, which was available at a low Rs 567 during the last 52 weeks, is today in demand in the range of Rs 2,125-2,150, while Alkyl Amines has skyrocketed from Rs 948 to Rs 4,250-4,500. Navin Fluorine International has more than doubled from Rs 1,800 to Rs 3,680, while Atul’s quotation has taken an unbelievable leap from Rs 5,076 to Rs 9,000-9,500. Again, the price of BASF has almost trebled to Rs 3,300 and that of Galaxy Surfactants has almost doubled to Rs 3,200.

Prices of some small-cap shares too have almost doubled, with Laxmi Organics attracting demand around Rs 280, Neogen Chemicals around Rs 1,000, Dai-Ichi Karkaria around Rs 450, Rossari Biotech around Rs 1,430, Hikal around Rs 630 and Aarti Industries around Rs 975. Thirumalai Chemicals, which was friendless around Rs 55, is now in demand around Rs 205, while Meghmani Organics, which was on offer around Rs 44 a few months ago, is today a sought-after stock even at a price three and a half times higher. What is more, the price of Balaji Amines, a lesser-known company, is quoted around six times higher in the range of Rs 3,500-3,600 as against Rs 605 few months ago. Surprisingly, even at such high price levels, stocks in the speciality chemicals space are on the radar of savvy investors.

‘DUMPING’ CHINA

A major driving force behind the impressive rally in these stocks is the positive sentiments surrounding the expected demand surge for speciality chemicals. The domestic industry space for these chemicals is witnessing strong tailwinds from the anti-China sentiments the world over. The global derisking of supply chains away from the Chinese markets has provided immense scope for the domestic industry, that was already operating with excess installed capacities. Like China, India is also a low labour cost economy. Besides, the domestic speciality chemicals industry was amongst the first to recover from the Covid lockdown, given the increasing need for its inputs towards essential supplies such as pharmaceuticals, personal health and hygiene, and agrochemicals. After global importers started reducing their dependence on China – widely seen as the origin of the deadly coronavirus – they have turned to India. After all, India has a strong base in agrochemicals, dyes & pigments, and intermediates for active pharma ingredients, which constitute 27, 19 and 18 per cent respectively of the country’s speciality chemicals exports in value terms.

Little wonder then that during the fiscal 2020, when India’s overall exports shrank by 5.1 per cent on account of the outbreak of Covid-19, exports of speciality chemicals, including drug formulations, bulk drugs & drug intermediates, organic chemicals, agro-chemicals and fertilisers rose 3 per cent to $ 45 billion. In fact, the country turned a net exporter of chemicals as imports stood at $ 44. 3 billion – a feat achieved for the first time during the last one decade.

OTHER FACTORS

Demand for speciality chemicals has continued to rise in fiscal 2021, driving prices up in the process. The easing of lockdown restrictions around the world has improved the outlook for the sector. The winter storm that disrupted chemical supplies from Texas, Louisiana and other parts of the US, and rising crude prices thereafter also caused a surge in prices. Indian manufacturers have also benefited significantly from a rise in demand from global consumers who aim to reduce their dependence on China. Western consumers’ stance, in trade lingo ‘China plus one’, has gone in favour of India as the country has proved to be a quality manufacturer, that too at competitive prices.

Market experts and industry analysts believe that the outlook for the Indian speciality chemical industry is highly robust, as continuing logistics issues and fears of a third wave of the pandemic are going to push prices northwards in the coming months. Among the chemicals that have seen major price increases in recent months are butadiene, ammonia and benzene. Some chemicals such as acetonitrile, aniline and acetone have also seen a rise in prices. According to a research analyst with Motilal Oswal Financial Services, the Indian speciality chemicals industry is expected to deliver a compounded annual growth rate (CAGR) of 12.4 per cent over the next five years.

VERY DIVERSE

The $ 200 billion Indian chemical industry is an extremely diversified business segment and is broadly classified into bulk chemicals, agrochemicals, petrochemicals, polymers, fertilisers and speciality chemicals. Globally, India is the fourth largest producer of agrochemicals after the US, Japan and China. India accounts for 16 per cent of the world production of dyestuffs and dye intermediates, while the Indian colorants industry has emerged as a key player with a global marketshare of 45 per cent. The country's chemical industry is delicensed except, of course, for a few hazardous chemicals. India holds a strong position in exports and imports of chemicals at a global level and ranks 14th in exports and 8th imports. The demand for chemicals is expected to expand by 9 per cent per annum and by 2025, the size of the Indian chemical industry is expected to cross the $ 300 billion mark. Today, the chemical market enters a period of profound transition. The Covid-19 pandemic has had an unprecedented impact on the US economy in general and the state of the chemical industry in particular, which has experienced a significant decline in demand over the past one year.

One expert observes, "While the industry was already facing cyclical challenges such as overcapacity, pricing pressures and trade uncertainty before 2020, many post- pandemic changes have shown a structural or disruptive character. Chemical companies in the US have responded to the crisis by focusing on operational efficiency, asset optimisation and cost management."

As the industry moves into 2022, the changed economic, social, environmental and political expectations are expected to play an even greater role in shaping its future. To succeed in the shifting industry landscape of the chemical market, companies should consider implementing a series of targeted, strategic initiatives across major functional areas such as R&D and technology. Too much focus on the short term, however, could mean that companies end up neglecting long-term opportunities, including investing in innovation, emerging applications, and adopting new business models that generate sustained growth, the expert adds.

SPECIALITY 'FLAVOUR'

Coming back to the Indian chemical market, speciality chemicals are very much the flavour of the season. These products account for around 22 per cent of the total chemical sector in India. These products have specific end-users and are usually manufactured in low volumes. These chemicals find their applications in a wide variety of industries like tyres, manufacturing, agrochemicals, pharmaceuticals, etc. During the last two to three years, this sector has seen an unprecedented boom mainly on account of the fact that speciality chemicals companies in China, a major manufacturer, were shut down due to the 'Blue Sky Policy' strictly implemented in that country.

SPECIALTY CHEMICALS IN INDIA

$40 billion market by 2025: McKinsey

India’s specialty chemicals market is expected to grow to $40 bln by 2025 from around $30 bln last year, according to a study by McKinsey & Company. The country is the fastest growing major specialty chemicals market in the world. Asia is expected to drive 70% of the incremental specialty chemicals demand till FY25, primarily fueled by disproportionate growth in China, and India, thereby laying an imperative for players to make bold moves, according to the report titled ‘Building an at-scale Speciality Chemicals Business in Asia’. “While Asia promises to be an attractive market for specialty chemicals globally, India presents a growing opportunity for local players. Indian companies need to ramp up readiness to realize maximum advantage from the specialty chemical sector’s growth potential,” the study report by McKinsey said, adding that market in specialty chemicals is moving to Asia with strong tailwinds providing growth momentum across the 40 segments that make up the market. While granular assessment reveals that each of the 40 segments have attractive value pools and pockets of growth, combining the historical performance, impact of trends and potential to create value, 12 segments emerge as relatively more attractive for Asia.

Within the specialty chemical segments in India, agrochemicals, surfactants, specialty polymers and textile chemicals and dyes are among the top segments expected to maintain their relative leadership and further grow in line with market demand.

Cosmetic chemicals, adhesives and sealants, flavors and fragrances, printing inks, food additives and water management chemicals are a few emerging segments expected to grow fast and improve their relative positions amidst the 40 specialty chemical segments in India.

Between 2015 and 2018, specialty chemical companies in Asia recorded higher economic profits of around $17.4 mln, compared to commodity chemical ($5.4 mln) or diversified chemical companies ($12.6 mln). Japanese specialty chemical companies led this performance, with the highest positive economic profit of $45.3 mln in 2018. In the medium to low range of economic profit are countries such as China ($21.3 mn) and India ($6.5 mn). Korean specialty chemical companies, on the other hand, reported a negative economic profit of $1.5 mn. In 2018, specialty chemicals were an approximately $710 bln market worldwide. Between 2012 and 2018, a revenue pool of around $60 bln to 70 bln in the specialty chemicals sector moved to Asia. This shift stemmed from a marked increase in discretionary and fundamental consumption among the burgeoning populations of Asian countries. “Today, owing to the Covid-19 crisis, the specialty chemicals market is expected to shrink by 5–8% against FY19. However, given strong fundamentals the market is expected to recover between 2021-22. Overall, there could be a delay of 1–2 years, with market expected to grow by $110-130 billion between FY18–25,” the report says. Nearly 65% of this incremental revenue pool is likely to come from Asia, powered primarily by disproportionate GDP growth in China and India (over 5% CAGR). Asia’s share in the total demand for specialty chemicals could grow from around 47% in 2018 to 50% by 2025.

SMALL BUT SOARING

Realising that there is tremendous growth potential in the speciality chemicals segment in the country, over 100 companies have entered the space. While most of them are small or medium in size, they have been stealing the limelight as the global demand for Indian products in on the rise. Prospects for all these companies are quite encouraging, though in different proportions. Some of the top companies are BASF India, Aarti Industries, NOCIL, Deepak Nitrite, SRF, Navin Fluorine International Chemicals, Dai-Ichi Karkaria, Meghmani Organics, Sudarshan Chemicals, Alkyl Amines, Vinati Organics, Tata Chemicals, Hikal, Galaxy Surfactants, Rassoh Biotech, Balaji Amines, Neogen Chemicals, PI Industries, Laxmi Organics, Pidilite Industries, Bodal Chemicals and Atul Ltd. Viewed in the context of the robust investment outlook for the next five years, Corporate India picks the following 10 scrips:

Aarti Industries
FACE VALUE 05
CMP 958.85
52 WEEK HIGH /LOW 988/483

Deepak Nitrite
FACE VALUE 02
CMP 2122.35
52 WEEK HIGH /LOW 2160/567

Alkyl Amines Chemicals
FACE VALUE 02
CMP 4257.35
52 WEEK HIGH /LOW 4740/948

Vinati Organics
FACE VALUE 01
CMP 1957.75
52 WEEK HIGH /LOW 2130/963

Atul
FACE VALUE 10
CMP 9058.55
52 WEEK HIGH /LOW 9651/5076

Navin Fluorine International
FACE VALUE 02
CMP 3677.80
52 WEEK HIGH /LOW 4014/1800

Pidilite Industries
FACE VALUE 01
CMP 2225.00
52 WEEK HIGH /LOW 2335/1307

Galaxy Surfactants
FACE VALUE 10
CMP 3144.20
52 WEEK HIGH /LOW 3350/1605

Rossari Biotech
FACE VALUE 02
CMP 1422.00
52 WEEK HIGH /LOW 1451/685

Laxmi Organic Industries
FACE VALUE 02
CMP 274.55
52 WEEK HIGH /LOW 284/143