Demand Outlook for Indian Chemical Companies

The raging Russia-Ukraine crisis can build an unexpected opportunity for Indian chemical companies. This is because the rising energy cost is weighing on the performance of the European chemical industry. Even before the Russia-Ukraine war, the European chemical industry was facing high energy prices. 
According to CRISIL, the Indian chemicals industry will outpace its Chinese counterpart and double its share in the global market to 6% by 2026 from 3-4% in fiscal 2021.
Growth will be powered by two ingredients- strong tailwinds in exports due to a shift in the global supply chain driven by the China+1 policy of vendors and demand recovery in domestic end-user segments.
 

Indian Chemical Industry Demand Outlook:

1. Aarti Industries:

Aarti  Industries is among few players globally which are completely integrated into the Benzene value chain. Over the years it has added more value-added products by applying newer chemistries and gained a significant market share of up to 25-40% globally. Toluene value chain ramp-up has been relatively slow due to a frequent shortage of Nitric Acid. The company is entering the Chlorotoluene chain (import substitution led opportunity) and plans to set up the new ultra multi-purpose plant (to introduce multiple products and multiple chemistries).

2. Ami Organics:

Ami Organics Limited (AOL) is one of the leading API intermediate and specialty chemical manufacturers with 450+ niche product offerings across 17+ key therapeutic segments with a focus on high-growth high-margin therapeutic areas such as anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant/ coagulant. AOL is one of the leading suppliers for certain key APIs like Trazodone, Dolutegravir, and Entacapone globally. It has 150+ customers globally including India and has a presence in 25+ countries including large, fast-growing markets of the US, EU, China, Japan, Israel, UK, and Latin America. The acquisition of GOL will strengthen its specialty chemical business to expand in agrochemicals, pigments and dyes, fine chemical industries, etc.

Its top 3 products contribute 35-40% to sales. Intermediate for Trazodone is the top
product contributing ~20% revenue, while Oxcarbazepine and Entacapone contribute
~9%. Contribution of Its key product intermediate for Dolutegravir declined to ~6% of the
total revenue in 9M’22 (vs ~20% in FY21) due to lower demand. Overall, it expects to
sustain 10-12% growth in its mature product basket for the next few years. Other key
products like Nintedanib, Apixaban, and Darolutamide have seen a strong scale-up in the last
two years. The company has more import substitute products in the pipeline with a focus on segments like oncology, CNS, anti-coagulants, etc.

3. Clean Science and Technology:

Clean Science’s (Clean) HALS project is on track (stabilizer product range). To commission two new products under HALS in H2FY23 – (a) #770 – application in masterbatches with a focus on import substitution as India imports 3-4k tons annually. Clean will be putting up ~2k ton capacity to start with; expects competitive pricing vs. global peers, (b) #701 – application in water purification led products. Expected revenue from Units 1 - 3 will be at ~Rs 10 bn. The rest of the HALS series would come up at the upcoming Unit 4 facility (initial Capex of Rs 3 bn).

It is also working on other range of products (7-8 products) with applications across Pharma, Flavor & Fragrances, etc. It launched 2 new products, PBQ (Para Benzoquinone 40 tons capacity with a focus on the domestic market) and TBHQ (capacity of 1,200 tons) in Q3FY22. TBHQ is to be mostly sold to existing customers and the target is to increase cross-selling and wallet share with customers (focus on the export market). 
 

4. Fine Organic Industries:

Fine Organics has witnessed strong demand across domestic and export volumes, as it benefitted from disruption in the global supply chain and industry consolidation and ramp-up in existing volumes, and top-up from supplies of newly approved products. Management highlighted healthy growth across Food, Plastics, and Cosmetics segments. Current revenue mix of exports: domestic stands at 60:40. Management expects revenue ramp-up in new product launches, as travel restrictions ease. 

Targets full capacity utilization by Mar’23 (ahead of earlier guidance of full utilization by Mar’24). Management to focus on further capacity expansion through (a) new land purchase (shortlisted Gujarat), (b) Thailand JV with local partner (45% share) – address rising demand in Europe/ South-East Asia. It is also open for inorganic acquisition, which can accelerate growth. New plant commissioning may take 18-24 months (once approvals are in place). 

Edible oil prices and its derivatives have continued to see an inflationary trend given supply chain disruption led by the Russia-Ukraine conflict (sunflower oil prices) and crop diversion to Ethanol production. The company is evaluating alternative sourcing for certain raw materials and has been passing through raw material inflation though with a lag of 3-4 months, subject to client contracts. 

5. GMM Pfaudler:

GMM Pfaudler Ltd (GMM) is a leading supplier of engineered equipment and systems for critical applications in the global chemical and pharmaceutical markets. It has 13 manufacturing facilities with a portfolio across fluoropolymers, filtration & drying, engineered column systems, lab & process glass, sealing technology, and glass-lined & alloy systems. The company’s revenue mix has changed from 60% pharma and 40% chemicals to 60% chemicals and 40% pharma now.

It is witnessing good order intake across India and international markets. Europe and US orders are booked for 9-12 months, with some units booked for up to 18 months. Overall, international business has been growing at 20%, while management has been selective to take orders in India currently as it is trying to control costs, improve manufacturing efficiencies, inventory days, and process improvement in India. The company expects some margin pressure for the next 2-3 months due to a hike in energy prices in Europe; however, being a market leader, it is relatively better placed.