Chemicals - China+1 is here to Stay – Decadal Opportunity for India

India’s emergence in the chemicals space a decade ago was influenced by China’s environmental drive since 2013, followed by multiple supply chain disruptions. Indian chemical companies benefitted from Global MNCs diversification of sourcing which is also reflected in 11% CAGR in chemical exports over 2009-2019. Although rising domestic consumption story still remains intact for India, we believe India to still remain a favourable destination for chemicals exports due to labor cost advantage, regulatory compliances, favourable policy measures, strong technical/ synthesis capabilities, and Indian entrepreneur’s drive for global presence. A part of China+1 has played out, however India is now at a strong footing with ongoing investment momentum which shall accelerate growth further.

Indian specialty chemicals continue to remain in flavor – Investment driven

Our analysis of 10 large specialty chemical companies over the past decade exhibits revenue/ PAT CAGR of 14%/ 15% during FY13-22. Moreover, investments have surged 2.5x from Rs17bn in FY13 to Rs61bn in FY22. This capex momentum is further accelerated with ~Rs175bn investments lined up over FY23-24E, signifying ~Rs275bn peak revenue potential. Overall, Indian specialty chemicals market growth is expected to continue taking it to ~USD120bn by 2025 from ~USD70bn by 2020 (growing at ~12% CAGR over 2020-25).

Policy support favoring domestic manufacturing – Awaiting PLI for chemicals

Indian chemical industry’s last decade growth was purely driven organically apart from some policy in later years including reduction in corporate income tax rate in 2019, customs duty reduction, BIS standards implementation etc. We believe further policy support from lower tax rate for newly formed companies at 15%, development of PCPIRs, feedstock availability, and expected PLI scheme in chemicals would foster growth for the chemicals sector.

Fluorine – Aspirational Chemistry

Fluorination space remains attractive as the applications are evolving apart from agro and pharma segments which certainly indicates growth potential.  Fluorine chemistry has become a buzzword for the Indian chemical industry recently with new entrants. Even some of specchem companies are upping their fluorination capabilities in their area of applications. Despite new players entering the market, the incumbents such as SRF, Navin Fluorine, Gujarat Fluorochemicals will remain go to vendors for global players. We believe Anupam with its synthesis skills and recent Tanfac acquisition is better placed to capitalise on the fluorination opportunity.

Exports rising, imports coming down

During 2010-20, India’s exports rose at ~11% CAGR while imports have risen at ~4% CAGR. China+1 is favoring exports while Make in India is favoring import substitution. Deepak Nitrite started import substitution theme through large Phenolics investment and is further banking on through downstream derivatives. Analyzing top 10 specchem companies’ exports performance, it can be inferred that their exports contribution has moved up over the past decade which is expected to improve further.

Chemicals for EV, new energy – Opens up a new frontier

Indian government has initiated PLI scheme for Advanced Chemistry Cell (ACC) Battery Storage with incentives of Rs181bn. Although, the sun rising segment is at a nascent stage, it has opened up a new and rapidly growing frontier for the Indian chemical industry. The new energy value chain encompasses polymer films, fluoropolymers, electrolyte salts, and additives. Some of the Indian companies have initiated their participation in the value chain including Gujarat Fluorochemicals, Neogen Chemicals, Tatva Chintan Pharma Chem, Ami Organics, Himadri Specialty Chemical among others. New energy space, growing exponentially has opened up a new growth avenue for domestic chemical industry with material benefits starting 2025 onwards.

India Chemicals benefitted since 2015, to continue further

Indian chemical industry has emerged as a clear winner of China+1 over the past decade; strong financial performance supported by rise in valuations. We believe that Europe challenges further foster the China+1 and India will be the key beneficiary due to ongoing investments, exports focus, and government support. China’s 14th Five Year Plan further emphasizes tight supervision of its chemical industry, relocation of chemical plants, self-sufficiency in high-end chemicals, environment friendly routes, and control on energy consumption. China’s forte in low cost manufacturing and global supplier is waning amidst the escalating challenges faced by its chemical industry. Indian specchem segment has taken the mantle over the past decade and is confidently marching ahead.

Specchem shifting gears to accelerate further – Initiate coverage on nine specialty chemical companies

We like Navin Fluorine International and Gujarat Fluorochemicals due to their high growth. Atul Ltd., Galaxy Surfactants, SRF, and Vinati remain compounding stories. Commodity to specialty transformation can provide Deepak Nitrite valuation upside while Anupam Rasayan to benefit from fluorination foray and financial performance improvement remains a key for Aarti Industries.