By Florian Budde, Pinak Dattaray, Tejas Dave, Avinash Goyal, Suyog Kotecha, and Karthikeyan K S
India’s chemical industry: Unleashing the next wave of growth
India’s chemical story is one of outperformance and promise. A consistent value creator, the chemical industry remains an attractive hub of opportunities, even in an environment of global uncertainty. Worldwide trends affecting the global chemical industry could lead to near-term opportunities for chemical companies in India. How chemical players prioritize and tap this value-creating potential could shape the future of the industry in India as well as the country’s trade performance.
India’s chemical industry: A consistent value creator with a positive outlook
India is an attractive hub for chemical companies. The chemical industry is a global outperformer regarding total returns to shareholders (TRS),1 and this has resulted in high expectations for sustained, continual growth. The macro perspective on India indicates that while the short-term outlook is challenging, the country’s long-term-growth story remains positive.
Until 2014, TRS growth was primarily underpinned by an increase in top line. Over the last five years, the triple effect of margin expansion, an increase in multiples, and continued revenue growth has raised TRS (exhibit).
Between 2006 and 2019, the compound annual growth rate (CAGR) in TRS for India’s chemical companies was 15 percent—a figure much higher than the global chemical-industry return, with a CAGR of 8 percent, and the overall global equity market, with a CAGR of 6 percent. Even between 2016 and 2019, when India’s economy faced headwinds, the chemical industry maintained a CAGR of 17 percent.
Exhibit
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The growth is likely to continue despite the economic challenges that caused India’s GDP growth rate to drop to 4.5 percent in the third quarter of 2019.2 A long-term perspective indicates that India has averaged an annual GDP growth of 7 percent for the last 30 years.3 The country is also working on becoming a $5 trillion economy.4 This long-term optimistic scenario bodes well for chemical companies, especially in light of a long investment cycle. Chemical companies can also benefit from rising domestic demand in chemical end-use sectors,5 India’s attractiveness as a manufacturing destination,6 and its improved ease of doing business.
Global trends: Uncertainty for the world, possibilities for India
Six trends are shaping the global chemical industry. While they spell uncertainty in the global context, they could open near-term opportunities in India.
Several global oil and gas majors are turning their sights on downstream chemical opportunities. This may increase the focus on petrochemicals in India, and higher investment in the sector could ease feedstock challenges and boost self-sufficiency.
The structure of China’s chemical industry is changing due to stricter environmental norms, tighter financing, and consolidation. While these shifts may benefit select large players in the long run, they could cause uncertainty for international players that source chemicals from China. That could create opportunities for India’s chemical companies in certain value chains and segments, especially in the short term.
Trade conflicts have erupted around the world, especially among China, the United States, and Western Europe. These have led to shifts in global supply chains, affecting bilateral trade between China and the United States,9 with possible repercussions for other economies. Large chemical markets that remain accessible in this scenario could present opportunities for chemical companies in India.
Industry-wide, there seems to be a move toward prioritization of core businesses and consolidation on a greater scale, often through big-ticket mergers and acquisitions. For players in India, scale will matter even more, as it could help to fortify their competitive advantage.
Digital technology has established itself as a lever to enhance efficiency and productivity. Many companies worldwide are embracing digital’s potential; India’s companies could also tap into this opportunity to expand their profit margins.
Sustainability is becoming an imperative, not a buzzword, with various stakeholders placing a premium on it. Chemical companies could prioritize environmental sustainability to protect long-term shareholder value, while continuing to comply with local regulations.
Investment opportunities in India
We analyzed India’s trade flow in the chemical sector to identify and better understand themes for investment. Chemicals are a significant part of India’s overall trade flow, consistently ranking third in imports and fourth in exports for the past five years.
Today, India has a chemical trade deficit of $ 15 billion. Analysis of India’s chemical exports and imports, coupled with a review of opportunities emerging from global trends, suggests two themes for investment:
Building self-sufficiency in petrochemicals to plug the shortfall of domestic supply of 52 percent (by volume) in petrochemical intermediates: six value chains make up about 77 percent of this shortfall, creating an opportunity worth approximately $ 11 billion.
Ramping up exports in select areas, such as specialty chemicals, to obtain a larger share of global value.11
The chemical industry already contributes significantly to India’s trade volume. Capturing emerging opportunities in the near term could make a positive difference to India’s chemical companies and to the industry overall.
A charter for industry players
As India’s chemical companies seek to capture opportunities, keep up their above-average TRS, and buoy investor sentiment, they could focus on three priorities:
Accelerate to build an at-scale business and take advantage of economies of scale. This could benefit companies in India by opening geographic areas and customer segments; providing exposure to cutting-edge technological capabilities and to economies of scale in capital expenditures and fixed costs; and giving access to alternative and cheaper feedstock.
Use digital and analytics to improve margins. Chemical companies could see an increase of three to five percentage points in earnings before interest, taxes, depreciation, and amortization from Industry 4.0 technologies.
Protect value in the long term through a pursuit of sustainability-beyond-compliance requirements. Companies could seek out more effective approaches to engage with regulatory bodies, focus on decarbonization, and embed sustainability across their organizations—from governance models and corporate culture to capital allocation, feedstock, and products.
In addition, industry players and associations could actively work with the government to address sector-level challenges. Supportive government measures could include an integrated petrochemical and specialty-chemical master plan and fast-tracking the implementation of Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs). The government could continue to work toward the ease of doing business in India by streamlining regulations and processes and by issuing clear directives on future regulatory requirements. Finally, introducing sector-specific skill-development programs and a technology-upgrade fund could boost skill levels and innovation across the industry.
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