Mumbai: India's speciality chemicals companies are catching the fancy of private equity investors amid robust growth in the industry over the last few years and as the country's chemicals businesses find favour with global firms looking to de-risk their supply chains from China.
In the past 10 days, two private equity investors have struck deals in the speciality chemicals space, highlighting this interest.
On Tuesday, Baroda-based specialty aroma chemicals company Best Value Chem (BVC) said Premji Invest, the investment arm of billionaire Azim Premji, will acquire a controlling stake in the company. While last week, Convergent Finance, an investment advisor to Infinity Investment Management, said that it is picking up a minority stake in Camlin Fine Sciences Ltd for Rs180 crore.
"The speciality chemicals sector has been one of the most resilient segments within the manufacturing industry in India, over the last 6 months. In fact, certain pockets within Indian specialty chemicals are expected to benefit significantly from the increased implementation of “China, plus one" procurement strategies in a post-covid world, said Koushik Bhattacharyya, director and head, industrials at investment banking firm Avendus Capital.
"In the current environment, PE funds are actively looking for opportunities to invest in market leaders in insulated and high growth sectors and specialty chemicals sector is one of the few sectors that ticks all the boxes for them," he added.
Within the broader manufacturing space, speciality chemicals is one of the few bright spots, which has witnessed strong growth both in the domestic market, as well as on the export side. In the global markets, Indian chemical companies have reaped the benefits of China curtailing its chemicals industry in the past few years, a trend which is expected to grow further post-Covid-19, as global companies seek to find alternative supply sources.
"This business has continued to grow well, both on the domestic consumption side as well as the export side. Over the last 3-4 years China has been putting restrictions on its chemicals industry due to environmental reasons. So a significant amount of business has moved out of China and a large part of that has been picked up by the Indian industry," said Preet Singh, managing director and head of industrials in India, Lincoln International.
However, while there is a lot of PE money chasing opportunities in the chemicals sector, there are only a few quality deals available in the market.
Data from private market deal tracker Venture Intelligence shows that in the five year period between 2015 and 2019, the sector has seen investments worth just $1.96 billion, across 26 transactions.
"These are typically not very asset heavy businesses. The return on capital is very good. So very few companies actually need growth capital," said Singh.
He added that there are opportunities for buyouts in cases where promoters are facing succession issues, but competition for buyout transactions tends to be high.
"A lot of these companies tend to be owned by people who set up the business in the early 90s and they are now looking at succession. In such cases there is a buyout opportunity. But on buyout deals, we have seen that strategic investors tend to outbid the PE firms," said Singh.