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Business News/ Markets / Stock Markets/  Indian chemical industry: A growing force and its prospects

Indian chemical industry: A growing force and its prospects

Indian chemicals sector set for rapid growth, with specialty chemicals expected to be the most lucrative segment. India attracts investment as companies diversify away from China. Chemical industry revenue has been growing at an average rate of 15% in the last 5 years.

Speciality chemicals are a new area mostly used for industry purposes and also have applications in the agro- and food industries. (Representational image) Premium
Speciality chemicals are a new area mostly used for industry purposes and also have applications in the agro- and food industries. (Representational image)

The Indian chemicals sector stands out as one of the most rapidly advancing industries globally. It has attained the status of being the sixth-largest chemical producer, with a market size of $178 billion in 2021. As per industry reports, this sector is poised for further expansion, with an anticipated CAGR of 11–12%, reaching a value of $290-310 billion by 2027. When categorizing the chemical sector by its function and usage, it is typically classified into four distinct segments: (a) Pharmaceuticals, (b) Agrochemicals (c) Industrial Chemicals: including substances such as solvents, lubricants, and catalysts, (d) Specialty Chemicals: which include unique offerings like specialty polymers, coatings, and electronic chemicals. Among these segments, the Specialty Chemicals category is expected to exhibit the most accelerated growth, with projections indicating a value of approximately $50 billion by 2025.

Speciality chemicals are a new area mostly used for industry purposes and also have applications in the agro- and food industries. Distinguished by their specialized attributes and performance advantages tailored for specific applications, these chemicals often command a higher price point compared to commodity chemicals.

Given the diverse usage spanning across various industries, the opportunity is immense. Currently, it stands as the most lucrative and rapidly expanding segment within the Indian chemical sector. The driving forces behind this growth trajectory include both domestic and external demand.

In contrast, base chemicals (raw materials) have commodity properties; hence, attaining a large scale and monopoly in the ingredients is the most important factor in building and sustaining competitive advantage. This dominance allows for greater flexibility in pricing, often surpassing prevailing market rates, and ensures profitability by exerting control over the cost of production. The technique, which was actively used by Chinese players extensively about 5 to 10yrs ago, with support from government subsidies. And it was supported by the fact that waste management and pollution control norms were feeble. China was the largest player, however, escalating environmental concerns prompted the imposition of more stringent regulations, resulting in a slowdown of industrial, manufacturing & construction activities. Ultimately, in between it led to the halt of many industry plants to control the quality of the air.

This benefited other Asian players as it spurred global players to diversification the chemical supply chain. With India's preexisting adherence to quality and waste management standards, the acceptance of Swadeshi products in the international market surged. Consequently, there has been a consistent shift in demand toward India, leading to a rapid expansion of export opportunities. The chemical industry’s revenue has been growing at an average rate of 15% in the last 5yrs. And the total revenue of all the listed India’s chemical companies grew by a handsome 18% in FY23. That too at a time when chemical prices in the international market have corrected heavily as the global economy slows down and supply from China increased post-laxation of COVID-19 restrictions (generally the realisation of the chemical industry is volatility depending on the cost of raw materials and market demand-supply situation). It is a sheer indication of the high-volume growth & pricing power of Indian players. It is forecasted that the industry had a rapid capex program in the last 5yrs by expanding its manufacturing capacity by more than 3 times by pending a total capex of 1.5 lac cr. Prominent players in the global chemical industry are taking measures to reduce their reliance on China as a primary source of raw materials, thereby mitigating the risks associated with supply chain disruption. The onset of the COVID-19 pandemic accelerated this trend, prompting a more rapid adoption of the China plus strategy.

This approach involves diversifying sourcing locations beyond China. Further, the ongoing trade war between the United States and China has led to a number of companies shifting their manufacturing operations from China to other countries.

This shift has opened up enticing prospects for India to attract investment in the chemical sector. India is seen as a "China+1" destination for chemical manufacturing due to its low labour costs, skilled workforce, and proximity to the growing markets of Southeast Asia. The “Europe+1" strategy, is also being opined, as the European Union is a major maker and consumer of chemicals. Europe is also working on stringent policies and regulations (climate policy) and is positioning to relocate some of its chemical manufacturing to India in anticipation of low cost of manufacturing costs.

The performance of the chemical stocks in the last year was muted due to elevated valuation and moderation in realisation, led by a slowdown in the global market and high raw material costs. The industry is forecast to grow at a handsome rate in the future, as noticed in the last 10yrs. As indicated above, the realisation of chemicals which was downgraded in FY23 is expected to improve in FY24. Specialty chemicals are the upcoming area of the Indian chemical industry. Furthermore, agrochemical players are intensively concentrating on research and development to create environmentally friendly products that promote organic farming practices and benefit both the environment and human health. Such areas are expected to be more profitable and beneficial for both the producer and the user.

*The author, Vinod Nair is Head of Research at Geojit Financial Services

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 24 Sep 2023, 04:53 PM IST
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