India had a chemical trade deficit of USD 15.9bn in FY19. The share of chemical and petrochemical imports was 11% in India's total imports in value terms in FY19, up from 9.6% in FY15. On the other hand, in India's total exports in terms of value, it swelled to 12.3% in FY19 from 9.4% in FY15. Still, India's share in the global chemical and petrochemical trade is merely 3%

Evolution to revolution!
Our positive stance on our speciality chemicals universe is premised on (1) domestic availability of raw materials, (2) accelerated capital expenditure (Capex) to build product development capabilities and backward integration resulting in EBITDA and PAT CAGR of 19/23% over FY21-23E, (3) investment in Research & Development (R&D), which would allow these companies to step up their position in the speciality chemical manufacturing value chain to become 'proprietary chemical producers', and (4) import substitution along with export opportunity. Being a B2B business industry, the growth of the industry tends to mimic the
growth of its end-user industry. We believe that companies supplying speciality chemicals to pharmaceutical and agrochemical industries are in a sweet spot due to (1) steady growth and (2) stringent regulations that create entry barriers for competitors. We maintain BUY on Alkyl Amines, Balaji Amines, and Galaxy Surfactants; ADD on Navin Fluorine (NFIL), while maintaining SELL on Vinati Organics. We are also initiating coverage on SRF and Aarti Industries (AIL) with a BUY recommendation.

Accelerated Capex intensity will pay off
For FY18-20, the aggregate Capex spends of our speciality chemicals universe were 1.5x (INR 78bn) those during FY16-18. The companies had spent Capex for capacity augmentation and/or product development based on their end-user industries. Most (75%) of it was spent for revenue generation, and the remaining for backward integration. We expect growth momentum to continue with revenue, EBITDA and PAT CAGRs of 14/19/23% over FY21-23E owing to (1) increase in the share of value-added products, (2) rising backward integration, and (3) rising utilisations ushering benefits of operating leverage. The EBITDA margin is also expected to expand by ~190bps to 23%.