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Business News/ Companies / News/  Chemicals sector outlook brightens as risks recede

Chemicals sector outlook brightens as risks recede

Companies are aiming to expand their capacity to capitalize on growth opportunities

The capital spending plans of these companies suggest they are positioning themselves to tap robust growth opportunities. (Bloomberg )Premium
The capital spending plans of these companies suggest they are positioning themselves to tap robust growth opportunities. (Bloomberg )

NEW DELHI : India’s speciality chemicals sector appears upbeat about its prospects, as companies aim to expand capacity to capitalize on growth opportunities after a period of sluggish earnings growth because of rising input costs.

Global uncertainties may still be cause for concern for the sector, but analysts have not yet seen any evidence of weakened demand and management commentaries are consistent with this view.

The capital spending plans of these companies suggest they are positioning themselves to tap robust growth opportunities.

The chemical industry continues to be attractive despite global uncertainties, analysts at HDFC Securities said. They believe that Indian companies could see new opportunities, including collaborations with technologically advanced global firms.

The China Plus One opportunity is what analysts believe may drive growth for the sector. The disruption in supplies from China due to the pandemic has forced global companies to look at diversifying their operations by establishing a presence in a second country.

Indian manufacturers hope to benefit from this trend in the contract research and manufacturing space.

China’s prioritization of capacity rationalization, environmental protection, and reducing its carbon footprint are likely to inhibit the growth of the chemical industry in that country, analysts said.

The Indian chemicals sector, on the other hand, has continued to develop its capabilities over the past decade and is now well-positioned to serve overseas markets, according to analysts.

Investments in the chemical industry surged 2.5 times in the past decade to 6,100 crore in FY22, suggests analysis of 10 large specialty chemical companies by Centrum Institutiona Centrum Institutional Research. The momentum will be further enhanced by the 17,500 crore investments planned for FY24, which could generate revenues of as much as 27,500 crore, Centrum analysts said.

Analysts expect the Indian speciality chemicals market to continue growing at 12% annually, reaching $120 billion by 2025 from $70 billion in 2020.

Not surprisingly, the chemicals sector is leading private sector capex announcements in FY23, accounting for 45% of the total projects by value, according to data from Nirmal Bang Institutional Equities.

Following the covid-19 pandemic, enquiries from global companies have increased, which is evident in the accelerated and large capex programmes planned in the chemicals space, analysts said.

During the past few quarters, companies in the sector faced challenges such as high energy costs, rising freight costs, limited container availability, and surging prices of basic raw materials, impacting their quarterly earnings. However, the situation is improving as energy costs are coming down, providing some relief. Analysts believe this will help margin and earnings recovery in the December quarter and beyond.

According to analysts at Centrum, there were no demand side challenges in the September quarter, and none have been reported thus far in the current quarter. However, investors should remain vigilant, as global chemical makers have provided muted commentary and guidance for the December quarter, they said.

On the positive side, domestic demand remains strong, according to analysts. Additionally, the per capita consumption of chemicals in India is one-tenth of the global average, indicating good growth opportunities. Domestic chemical companies are also expanding their capacities to keep pace with the rising domestic demand and remain competitive.

Meanwhile, expectations in the industry and among investors are also building, with news reports suggesting that the government may be working on a production-linked incentive scheme for the chemicals industry.

On 23 November, Mint reported the government is working on a production-linked incentive scheme worth 10,000 crore for the chemicals and petrochemicals industries. The country aims to triple its capacity to manufacture these key ingredients by the year 2040, the report said.

The Union budget will likely announce the scheme, under which selected companies may get an incentive of 10-20% on their incremental sales.

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Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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Published: 08 Dec 2022, 09:57 PM IST
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