Indian ChemCos are saddled with high performance expectations, driven by strong macroeconomic tailwinds. The markets have certainly baked it in – chemical stocks have noticeably decoupled positively from the overall index over the past couple of quarters. 

Multiples are reaching a level where they are raising thorny questions: there is a lot of cash being generated in the business, capital is accessible at levels seldom seen before – how is management utilizing capital to deliver for stakeholders? 

This piece proposes three specific areas for management teams to boldly build their business, and to deliver against this ask. 

1: Build hockey-stick valuation options 

Management teams are faced with a constant barrage of questions about participation in future trends. Sustainability is top of the agenda, but so are many other “future” areas – health trends impacting specialty value chains, reinvention of energy, fundamental process innovation, AI/ML, … 

There is a fundamental challenge to resolve, best encapsulated by Mark Twain: “Prediction is difficult – particularly when it involves the future”. 

Essentially, while there is broad alignment that these trends will happen, no one can predict when they will be material. How do management teams participate in these effectively? 

The answer – set up Corporate Venture Capital (CVC) arms. These are dedicated teams (small: typically 2-3 strong) with a mandate to invest in future technologies and build option value for the firm. They have assured funding every year of a certain amount – say Rs. 20-100 cr. per year, depending on the firm’s size and risk appetite. 

The design of the CVC is critical to its success. Some key points to consider: What are the strategic goals? Which fields to invest in and what investment model to apply? What is the value proposition to startups? What should the governance and value models be? 

An effectively designed and executed CVC can accelerate value creation, and give a competitive edge to the firm. 

2: Explore outbound M&A for specialty chemicals technology (Europe/US/Japan) 

Base companies follow a very different valuation pathway compared to specialty chemical firms. For example, delivering a billion-dollar valuation for a base chemical firm might mean generating ~Rs. 700 cr. at 8-10x multiple. By contrast, this would be ~Rs. 200-300 cr at 20-30x for a specialty-first firm. The latter is, of course, significantly more capital efficient (both absolute, and on asset-turnover) – but carries higher risk due to the need to foray into newer areas. 

Thus, the imperative to build a strong, scale specialty business at speed is clear. However, with wave 1 of specialty firms in India already successful in key value chains, the question for management teams is how to quickly get a competitive edge. 

The answer: outbound M&A to acquire technology, with the target being small to mid-sized firms in Europe / US / Japan ideally. 

The climate is favourable: global chemicals M&A has been on a high over the past decade, with $134 bn worth of deals in 2021 alone. Global conglomerates have been streamlining portfolios to focus on their core – the market share of the top 20 ChemCos has reduced from 19% to 14% over the past 15 years. This has created opportunities for carve-out acquisitions. 

Firms should use these acquisitions as the “core” of their foray into newer specialty chemicals – reducing the risk, and accelerating outcomes. 

3: Aggressively pursue roadshows with global ChemCos 

The geopolitical trade shifts are real. BCG’s trade finance model predicts that out of a projected ~$18tn of global trade in 2023, at least $170 bn of trade from traditional supply chains is prone to readjustment. Chemicals will be an important component of this, and our survey of global executives shows this is more than just intent signaling – real capital decisions are now backing the movement. 

The move to India will not be automatic, however. There are many potential destinations for this business – Eastern Europe and South East Asia being the prime ones. 

We believe an aggressive roadshow approach by individual chemical companies in a targeted fashion will be beneficial. The pitch: set up greenfield/brownfield capacity in India with reliability on supply and IP ; start with 5-10% movement of supply ; take-or-pay arrangements to safeguard interests of both parties. 

If the value chains and partners are chosen well, this can be a high-valuation foray at scale for a base or intermediates firm. 

Conclusion 

It is a tough time to lead a Chemicals firm in India – the asks and expectations from investors are unrelenting, and the option set feels virtually unlimited. 

We believe answering three questions can help navigate this effectively:

1. What is our Corporate Venture Capital strategy to deliver hockey-stick valuation in uncertain future trends?
2. What is our outbound M&A strategy for specialty chemicals technology and market access?
3. What is our roadshow strategy to lock in business emerging from global trade shifts? 

Bold moves on these three areas can ensure a significantly elevated valuation profile, a stronger underlying business, and a satisfied stakeholder base. 

Amit Gandhi, MD & Partner leads BCG’s Chemicals and Agribusiness practice in India and BCG’s Strategy topic for Asia-Pacific.