Indian Chemicals is the new Sizzle

 

Indian Chemicals is the new Sizzle

India is 3rd largest producer of chemicals in Asia, 6th largest in the world and chemicals sector contribute to around 8% of GDP.  India is steadily moving up the rank as global economic power and becoming business magnet for investment. High domestic consumption, Diversified industry, Ease in doing business and Increased Export demand from developed nations are the key drivers for success of the sector. The economic influence of the sector is promising for the future.

Sub categories of Chemical Industry

  1. Base Chemicals- are high-volume and low-value products that are sold to other industries for further processing.
  2. Speciality Chemicals- are high-value and low volume products used on the basis of performance or function and include diverse range of products and application to various sectors.
  3. Consumer Chemicals- includes end consumer user chemicals such as paints, adhesives, health nutrition, detergents etc.

While Pharmaceuticals, Biotechnology can also be classified into above categories they are highly specialized industries in themselves now and deserve their own space.

In this post I will be writing about some of my thoughts on the Base chemicals space and how one can do comprehensive study on this sector on the DistrictD website. The platform provides an extensive way to build a comprehensive understanding of the space through a coverage of nearly 60+ chemical companies in India complete with financial data, performance ratios, geographical presence, product portfolios, ownership and asset prices.

Indian Base Chemicals

Indian Basic chemical industry is worth USD 150-155 billion at present and growing at 8-10% annually and is expected to reach USD 300 billion by FY 2021. Out of this India currently imports ~78% of the domestic requirement. Internally meeting domestic requirements alone can drive significant growth over the next decade. Also India is increasingly becoming a favored destination for Global firms looking to diversify away from supply shocks from China’s environmental concerns. The growth drivers of basic chemicals include 1) Growing domestic economy; 2) Increasing cost competitiveness; 3) Sourcing shift towards India; 4) Strong R&D Capabilities and 5) Increased Government Policy Support.

The below exhibit show the key players in Indian Base Chemicals space covered on DistrictD platform.

**The above pie chart does not include Grasim India since it’s a diversified conglomerate.

The Base Chemicals can be categorised as

  1. Organic Base Chemicals
  2. Inorganic Base Chemicals

Organic Base Chemicals- mainly comprise of Ethane, Ethanol, Methanol, Propene, Urea etc. The base chemicals such as Ethylene, Polymers, glycols etc. are derived from crude oil refining by-products. They find wide application in domestic as well as industrial sector in plastic processing/manufacturing, synthetic clothes/fibres, pigments, dyes etc.

Base Chemicals sector is dominated by large Oil&Gas downstream companies –viz. Reliance, IOC, BPCL and GAIL which have setup large scale petrochemical operations. The primary advantage for these companies is access to feedstock (forward integration) and ability to do large capital investments required to become cost competitive. All the top 3 refiners in India – viz. IOC, Reliance and BPCL have undertaken significant capex in setting up petrochemical plants over the past decade. Reliance’s petchem production has grown by nearly 50% to 30 mmtpa whereas BPCL’s petchem production has grown by 48% to 35 mmtpa over the past 3 years alone. The ROICs of these plants range in 10-15% depending upon the scale, operational efficiency of plants and product mix. Table below shows the key financial metrics for the top refiners and petchem base chemical manufacturer in India.

India Glycols, Supreme Petrochem Ltd, Deepak Nitrite, Bodal Chemicals are some of the large producers of organic base chemicals in India. The table below shows key financial metrics of organic base chemical manufacturers in India.

Base chemicals further includes agri-chemicals such as Urea and such fertilizers. This space has seen muted ROICs on account of being heavily govt controlled. Coromandel International, Chambal Fertilizers, RCF, GSFC, GNFC, Deepak Fertilizers etc are some of the top base agri-chemical manufacturers in India. Players in this space are increasingly looking to diversify into other base chemicals beyond the govt regulated Fertilizer business.

The table below shows the key financials of top base agri-chemical manufacturers in India.

Inorganic Base Chemicals- include Ammonia, Bromine, Calcium Carbide, Caustic Soda, Soda ash, Oxygen, Nitrogen and rare gases, Acids, Carbon, graphite and other such companies. Tata Chemicals, DCM Shriram, Grasim, GHCL and Gujarat Alkalies are among the leading producers of inorganic base chemicals in India. The exhibit below shows financial key metrics of inorganic base chemical players in India.

Graphite, Carbon Black producing companies form an integral part of Chemicals Industry since over past few years, several players in Graphite, Carbon black and Pet Coke industries have benefited as a result of supply shortages created due to environmental concerns in China. Key players in this value chain include Rain Industries, Graphite India, HEG, Phillips Carbon etc.

Historically players in the Inorganic supply chain have been low ROIC businesses, however the acute shortages created in the Graphite, Carbon Black, Pet coke space over the past few years have created abnormally high prices, which have driven the profitability and Returns enjoyed by these specific players.

As such India continues to be a huge net importer of Base Chemicals and this in my view provides a significant growth opportunity for the Indian industry. The key obviously remains capital investment and cost competitiveness. As the global supply chain looks at alternatives to the supply shocks from China, players with good execution and strong balance sheets could capitalize. While the opportunity is up for grabs, players who proactively move to expand capacities and develop the cost advantage stand to gain.

***The tables and charts used in above blog are constructed using DistrictD platform. 

 

 



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