Specialty chemicals to witness multi-year growth cycle

Specialty chemicals to witness multi-year growth cycle

Overall, the specialty segment is expected to grow by 10-12% per annum over the next few years

  • By Prashant Vasisht & Sai Krishna , ICRA Limited | January 11, 2022
Specialty chemicals are value added products targeting specific applications, which entails relatively high research and development investment. The market size of the specialty chemicals is relatively smaller with few players having high market share. The Indian speciality chemicals sector was valued at US $32 billion in 2019. The segment has witnessed healthy growth of around 12% CAGR in the last few years and the trend is expected to continue in the medium term. Some of the key specialty chemical segments are agrochemicals, dyes and pigments, surfactants, flavors and fragrances, fluorochemicals, construction chemicals, water chemicals, etc. The industry has a mix of  organized and unorganized players, with segments like agrochemicals and dyes and pigments having several large players, who have scaled up over the years, while other segments have relatively few large players. 
While currently, the per capita consumption of speciality chemicals is low, it is expected to grow in the medium term driven by changes in consumption patterns, economic growth, expanding middle class and adoption of global practices by consumers and industry. Further, there is significant export opportunity, which will be further supported by the supply chain diversification trend adopted by global chemical majors under the “China+1” strategy. The above factors coupled with some of the advantages like availability of low cost and skilled labor, established relationship with global players in several specialty sub segments, favorable intellectual property rights (IPR) policies and government policies like ‘Atmanirbhar Bharat’ and ‘Make in India’ should drive multi-year growth for the sector. 
Nonetheless, there are certain challenges which need to be addressed to leverage the opportunities, like high dependence on imported feedstock, lack of scale, increasing environmental regulatory requirements, and low R&D spend. The good news is that many of these issues are being addressed backed by industry initiatives and government policies. The high dependence on imported feedstock exposes the sector to volatility in forex rates and freight costs and availability issues. The domestic feedstock capacity has lagged demand  partly on account of unfavorable duty structure arising from several free trade agreements (FTAs) leading to inverted duty structure in some instances. 
However, several recent measures including rationalization of duties on feedstock, trade protection steps including both tariff and non-tariff measures for several chemicals, steps to prevent misuse of FTAs by ensuring rules of origin through CARTOTAR 2020 and support for cluster based development approach through plastic parks and revised PCPIR (Petroleum, Chemicals and Petrochemicals Investment Region) policy,  should aid in increasing domestic feedstock capacity and reduce import dependence in the medium term. Already several companies in the private and  public sector have made capacity addition announcements, which are expected to come online over the next few years. 
With focus on increasing domestic manufacturing further favorable policy measures are expected for the chemical sector, which includes further rectification of anomalies in duty structure and expansion of trade protection measures, introduction of production linked incentive (PLI) scheme, fiscal incentives for infrastructure additions and policies and support for better ESG compliance and registration of products for export. 
Apart from the government initiatives, the industry has also been scaling up and increasing R&D investments. The larger players in the organized sector have scaled up through both organic and inorganic routes, including acquisition of overseas entities or domestic units of MNCs. The drivers for M&A include portfolio expansion, technology absorption, new market entry and scaling up of size. The sector is currently in the midst of a capex cycle and several companies have raised funds through IPO or from private equity investors to support the capex. There have been several successful IPOs in the last two years by companies like Rossari Biotech, Laxmi Organics, and Anupam Rasayan India. The trend is expected to continue in the medium term.
The specialty chemical sector has witnessed healthy revenue growth during FY2021 and has largely bucked the adverse impact of COVID-19; the growth trend has continued in the current fiscal also, although the profit margins are expected to  witness some moderation due to sharp increase in feedstock prices, while  remaining healthy. In the medium term, while relatively mature segments like agro chemicals, dyes and pigments etc. are expected to have moderate growth of 7-8% per annum, segments like construction chemicals and fluorochemicals are expected to have higher growth. 
Overall, the specialty segment is expected to grow by 10-12% per annum over the next few years.
Authored By: Prashant Vasisht, Vice President and Co-Head - Corporate Ratings, ICRA Limited and Sai Krishna, Assistant Vice President & Sector Head - Corporate Ratings, ICRA Limited.
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of ICN and ICN does not assume any responsibility or liability for the same.

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