The specialty chemicals sector shows further growth potential beyond a stellar FY22

The chemical sector is critical to a country’s industrial and agricultural development. It produces raw materials for a variety of downstream industries, including papers, paints, textiles, soaps, and detergents. India’s chemical sector is immensely diverse, covering over 80,000 commercial goods and can be divided into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilizers.

The chemical industry in India is one of the world’s fastest-growing industries. After the United States, China, Germany, Japan, and South Korea, it currently ranks third in Asia and is the world’s sixth largest market in terms of output. In India, specialized chemicals account for 22% of the total chemicals and petrochemicals market.

Specialty chemicals are chemical products that have a wide range of effects and are used in a variety of industries. Automotive, aerospace, food, cosmetics, agriculture, manufacturing, and textiles are among of the industries that rely extensively on it.

 

India’s chemical industry is a global outperformer in terms of shareholder returns, and the country continues to be a desirable location for chemical businesses. As a result of this outperformance, the industry’s top line and bottom line are expected to increase at a rapid pace. Even as the Indian economy was facing headwinds between 2016 and 2019, the chemical industry maintained a CAGR of 17%.

Whereas the structure of China’s chemical industry changed due to stricter environmental norms, tighter financing, and consolidation. While these shifts benefited select large players in the long run, as they caused uncertainty for international players that source chemicals from China. Thus, this created opportunities for India’s chemical companies in certain value chains and segments, especially in the short term. Moreover, trade conflicts have erupted around the world, especially among China, the United States, and Western Europe. These have led to shifts in global supply chains, affecting bilateral trade between China and the United States, with possible repercussions for other economies. Large chemical markets that remain accessible in this scenario could present opportunities for chemical companies in India.

Furthermore, the chemical sector growth in India as a result of China’s decision to shut down numerous plants in 2015 due to pollution and other challenges. The epidemic also prompted many Western economies to reduce their reliance on China starting in FY21, a phenomenon known as the ‘China+1’ factor. This has given the industry a boost in the last two years, as evidenced by the fact that all of these companies generated their highest-ever annual revenues in FY22

Let us look at some of the key specialty chemicals players in India.

Aarti Industries: Largest Manufacturer of Benzene

Aarti Industries Limited with market cap of 25k crores is a leading Indian manufacturer of Specialty Chemicals and Pharmaceuticals with a global footprint. It operates primarily in three segments, namely, specialty chemicals, pharmaceuticals and home and personal care.

Specialty Chemicals is the major revenue-generating segment, contributing approximately 78% of the company’s sales and is the largest producer of benzene derivatives in India and one of the leading manufacturers globally.

The company reported a total revenue from operations of Rs 2,017.80 crore, up by 50% YoY as against Rs1,346.80 crore in Q4FY21. For FY22, the company reported a total income from operations of Rs 7,000 crore as compared to Rs4,506.10 crore in FY21.

It reported a 39% rise in consolidated net profit to Rs 194 crore in Q4FY22, while consolidated net profit surged to Rs 1,307 crore in FY22 from Rs 535 crore in FY21.

 

SRF Limited: Largest manufacturer of technical textiles & textile oriented in India

SRF Limited is a multi-business chemicals conglomerate engaged in the manufacturing of industrial and specialty intermediates. SRF is the largest manufacturer of technical textiles and textile oriented in India. SRF’s product basket for technical textiles contains Tyre cord fabrics, belting fabrics, and industrial yarn. It is a runner up in terms of market cap with capitalization of 66k crores.

On a consolidated basis, SRF Ltd recorded a 36.12% increase in revenues YoY for the Q4FY22, totaling Rs 3,549.42 crore. Revenues increased 6.08% sequentially in the last quarter. Revenues for the full fiscal year FY22 increased by 48% to Rs12,434 crore. The overall net profit for Q4FY22 was Rs 605.65 crore, up 59% from the previous quarter and up 19.8% sequentially.

Atul Limited

Atul Ltd is one of the largest integrated chemical companies of India serving about 6,000 customers belonging to 31 industries across the world. The company manufactures more than 900 products from 65 manufacturing plants.

Atul Ltd reported 22.81% growth in total revenues YoY for the Mar-22 quarter on consolidated basis at Rs1,370.42cr. On a sequential basis, revenues were lower for the quarter by -0.72%. For the full year FY22, the revenues were higher by 34.5% at Rs5,157cr. On a YoY basis, the company saw growth across both its key verticals. The consolidated net profit for Q4 was down -22.16% at Rs 136.26cr while it was down on a sequential basis by -12.33%.

 

Vinati Organics: world’s largest manufacturer of Isobutyl benzene (IBB)

Vinati Organics Limited was established in 1989 to manufacture specialty organic chemicals. It is the world’s largest manufacturer of Isobutyl benzene (IBB) and second largest manufacturer of 2–Acrylamido 2-Methylpropane Sulfonic Acid (ATBS).

Net profit of Vinati Organics rose 42.70% to Rs 101.10 crore in Q4FY22 as against Rs 70.85 crore during Q4GFY21. Sales rose 73.75% to Rs 486.09 crore in Q4FY22 as against Rs 279.77 crore during Q4FY21.

For the full year, net profit rose 28.70% to Rs 346.62 crore in FY22 as against Rs 269.32 crore during FY21.

Fine Organics: Largest Producer of Oleochemical-based Additives in India.

Fine Organic Industries is the largest manufacturer of oleochemical-based additives in India and a strong player globally in this industry. The Company produces a wide range of specialty plant derived oleochemicals-based additives used in food, plastic cosmetics paint ink coatings and other specialty applications in various industries.

In Q4FY22, net sales were Rs 616.87 crore, up 91.05 percent from Rs 322.88 crore in Q4FY22. The quarterly net profit was Rs. 121.85 crore in FY22, up 283.29% from Rs. 31.79 crore in FY21.

To understand the long-term growth picture of companies in this sector, let us look at the past three years top line of these 5 companies. All 5 companies recorded the highest ever YoY  growth in the last 5 years in FY22, albeit on a low base, but clocking the highest ever annual revenues in FY22.

Stupendous return in the last 5 years by companies in Specialty Chemicals sector

All the companies have given stupendous returns over the last few years and have outperformed benchmark indices by a wide margin. It also signifies the growth trends in the chemical Industry which is most likely to continue at the same pace and would offer higher returns in subsequent years.

Key Fundamental Ratios depict healthy financials

All the companies except Atul Limited have both ROCE & Operating profit margins % above 20%, indicating all of them have sound financials.

Aggressive Capex Expansion Plans for most players

Vinati Organics is in the midst of completing an investment of Rs 800 crore to enhance its top line. It recently finished expanding its acrylamide tertiary-butyl sulfonic acid (ATBS) manufacture and began construction on a butyl-phenol plant. It has also begun the process of merging with Veeral Additives Pvt. Ltd (VAPL) to achieve a revenue target of 2,000 crore in 2022-23.

SRF Limited’s Board of Directors approved a project for specialized facilities to create intermediates for agrochemicals in the New Plant Structure at Dahej at a cost of Rs115 crore at its meeting on May 9, 2022. They also planned last year to invest 4500-5000 crores in capex over the next 2-3 years in order to expand the specialty chemicals business.

Fine Organics has also started development of its new polymer additives manufacturing site in Maharashtra. This new complex will cater Fine Organics’ range of polymer additives to its growing customer base in India and abroad. The manufactured range will have expanded capacities of its various polymer additives including slip additives.

Atul Limited began investing Rs. 487 crores in companies like Atul Bioscience, Anaven, Amal, and DPD, which includes a few initiatives since FY19. It is expected that they would announce capex plans soon.

Growing Opportunity:

Rise in demand from end-user industries such as food processing, personal care and home care is driving 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 FY22, owing to an improvement in domestic demand and higher realization due to high prices of chemicals.

Between April 2000 and December 2021, FDI inflows into the chemicals sector totaled US$ 19.09 billion. Indian Oil Corporation (IOCL) announced plans to invest Rs. 3,681 crore (US$ 495.22 million) at its Panipat Refinery in Haryana to build India’s first mega-scale maleic anhydride factory for manufacturing high-value specialty chemicals in November 2021.

Our View:

Inadequate infrastructure facilities, inflated costs of fundamental raw materials such as natural gas and crude oil, excessive cost of capital, logistics issues due to shortage of shipping containers are some of the challenges that are likely to continue in the short term.

Specialty chemicals market is expected to reach USD 879.4 Billion by 2030. The specialty chemical businesses in India are growing their capacities to meet increased domestic and international demand. With global firms looking to de-risk their supply chains, which are heavily reliant on China, India’s chemical sector has a lot of room to grow.