Capital expenditure (capex) is expected to remain high
The Indian specialty chemical sector has been registering strong growth in recent years and has become a significant contributor to the country's economy. According to a report, the Indian specialty chemicals market was valued at $32.01 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 7.6% during the forecast period of 2021-2026.
The growth of the specialty chemicals sector in India can be attributed to various factors, including an increase in demand for specialty chemicals in end-use industries such as pharmaceuticals, agrochemicals, and cosmetics, as well as the government's favorable policies promoting the growth of this sector.
Moreover, India's strategic location, abundance of raw materials, and low labor cost have attracted multinational companies to invest in the Indian specialty chemicals market.
Looking ahead, the Indian specialty chemicals sector is expected to continue its growth trajectory, driven by increasing demand from end-use industries, technological advancements, and the growth of the Indian economy. The Indian government's focus on building a robust manufacturing ecosystem, including initiatives such as the ‘Make in India’ campaign, is also expected to drive the growth of this sector, making it an important part of the country's future economic growth.
Credit rating agency CRISIL states that the Indian specialty chemicals sector will see revenue growth of 6-7% in fiscal 2024, with higher domestic demand (~60% of total revenue) driving up volume growth even as macroeconomic headwinds in the US and Europe subdue exports. Besides, realisations are expected to remain flattish this fiscal, which will have a moderating effect on the overall revenue growth. Last fiscal, revenue growth had plunged to ~11% from 41% in fiscal 2022 owing to steep correction in realisations in the second half triggered by dumping from China, where consumption fell sharply owing to strict zero-Covid policy.
Capital expenditure (capex) is expected to remain high as manufacturers focus on augmenting capacity and expanding downstream to value-added products to seize opportunities emanating from Europe, where high labour cost makes local operations less competitive. This will be in addition to the continuing China+1 strategy adopted by global majors as part of their diversification strategy. Steady cash generation and healthy balance sheets will ensure debt metrics remain adequate, despite higher debt for capex and incremental working capital lending stability to credit profiles.
However, there are also several challenges and opportunities that the industry faces. Some of them are:
Raw material availability: The availability and price of raw materials have a significant impact on the profitability and competitiveness of the Indian specialty chemicals industry. The industry heavily relies on imports, making it vulnerable to global price fluctuations and supply disruptions.
Technological advancements: The Indian specialty chemical industry must constantly innovate and upgrade its technology to keep pace with global competition and meet the changing needs of customers. This can be a challenge for smaller companies that do not have the resources to invest in research and development.
Environmental regulations: The industry is subject to stringent environmental regulations that can increase the cost of compliance and limit the ability to expand operations.
Growing domestic demand:The Indian specialty chemicals industry has significant potential due to the growing demand for specialty chemicals in various end-use industries, including pharmaceuticals, agrichemicals, and personal care.
Favorable government policies: The Indian government has introduced several initiatives to promote the growth of the specialty chemicals industry, including tax incentives, subsidies, and simplification of regulations.
Export potential: The Indian specialty chemical industry has significant export potential, given the high quality of products and low manufacturing costs. The slowdown in Chinese manufacturing has also created an opportunity for India to capture a larger share of the global market.
Innovation and collaboration:Collaboration and innovation can help Indian companies stay competitive in the global market by enhancing their product offerings. Public-private partnerships and collaborations between industry players can help spur innovation and research.
While the Indian specialty chemical industry faces challenges, it also has significant opportunities to grow and become a major player in the global market.
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