June 2022, Tuesday, Mumbai: Candle Partners, a leading Investment Banking & Advisory services firm, today announced the launch of the updated “Indian Speciality Chemical Industry 2022”. Candle Partners initiated an exhaustive study on the trends in the Indian Speciality Chemical Sector over the last decade and defined the developments that will shape the industry in the coming years. The predictions are based on an extensive study of recent financial results of the Chemical Industry and benchmarking done over the last 10 years along with the stock market performance.
Key sectoral trends at a glance –
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Sr no |
Key trends |
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1 |
One in every four companies has grown at a revenue CAGR of 15% in the last decade (2012-2022) |
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2 |
60%+ of these companies are delivering upwards of Rs 10 Bn annual sales showing that the sector is achieving incremental scale every year |
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3 |
Average ten-year EBITDA margin for the sector has been 15% while PAT margin has been 8% |
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4 |
Average ROCEs & RONWs continue to be ~ 14-16% range; partly due to aggressive capex cycle of most players. At a stable state (& for some part of CP universe ie top quartile), this sector continues to demonstrate an 18-20% ROCE |
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5 |
While in the earlier years – FY 2019 & FY 2020 the average working capital cycle was being maintained at around 113-114 days; it inched up in the Covid year (FY 2021) to 130 days; substantially being driven by the environment and the higher growth and margins the sector witnessed. FY 2022 we saw the average working capital cycle coming down to 124 days |
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6 |
Trend of limited investments in R&D continues and total R&D spend as a % of sales is around 0.9% of sales in India; while it has inched up from last year (from 0.7% of sales) – it is still low compared to global standards |
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7 |
Post 2017, the Indian chemical industry has been investing aggressively in capex & has been averaging roughly 14-15% of Gross Block |
Candle Partners for this report has assessed a universe of 70+ listed Chemical companies that represent approximately USD 20 billions of sales. Their collective trajectory demonstrates that the sector has a 10-year CAGR of 8%+, representing excellent resilience and ability to grow consistently. Moreover, the Indian Speciality Chemical industry was viewed as an alternate source by global chemical companies which substantially enhanced the export component of Indian companies thus enhancing EBITDA & PAT margins. These factors led to the emergence of the Chemical industry as an out-performer during the Covid years.
FY 2022 vs FY2021:
Candle Partners Universe of companies reported a Sales Growth of 31% while EBITDA growth was 17% ; in terms of Sales Growth this was the best year for the Industry over the last decade – substantially being driven by the higher commodity price effect of most chemicals. Key Financial Metrics reported :
Average sectoral Gross Margins reduced from 48% to 44%
Average sectoral EBITDA margins reduced from 18.4% to 16.4%
Both average ROCEs and RONWs improved marginally due to better capital efficiency and lower financing costs
Average cash conversion cycle reduced from 130 days to 124 days.
Continuation of the trend of aggressive capex investment – 14% of Gross Block in FY 2022
Furthermore, the sector is achieving incremental scale every year with 60%+ of the companies tracked now delivering upwards of Rs 10 Bn annual sales and one in every four companies growing at a revenue CAGR of 15% in the last decade.
Additionally, post-2017, the Indian chemical industry has been investing aggressively in Capex with ~14-15% of Gross Block, however, the trend of limited investments in R&D continues and total R&D spend was 0.9% of sales in India. Though the total R&D spend has inched up from last year’s 0.7% of sales, it remains low compared to global standards.
Speaking on the launch of the update, Mr. Navroz Mahudawala, Founder & Managing Director, Candle Partners, said, “We’ve been monitoring a universe of 70+ listed mid cap and big cap chemical industry businesses for the last three years and closely witnessed the highs and lows of the industry throughout the years. With “Chemicals being the new Pharma” buzzword in the industry and with the recent listing of several mid-sized players like Anupam Rasayan, Rossari Biotech, and Aether, we anticipate that several mid-cap and small cap companies will soon chart the threshold of a USD 1 billion market cap. The universe of chemical companies in the USD 500 million – USD 1 billion market cap universe is also set to change over the next 12-24 months.”
On the performance on Bourses for FY 2022, the report outlined that in FY 2022, Chemicals continued to be an out-performer with NIFTY 50 Returns of + 8% and Candle Partners Chemical Large Cap Universe stood at +28% and Mid-Cap Universe was at +11%. On the stock markets front, there was a very sharp divergence in valuations of large caps (ie market caps > USD 1 billion) & the small/mid cap companies. However, there are now a dozen companies with market caps greater than USD 1 billion and each of them saw a sharp upside in valuations since 2020. This divergence shows that India has an almost negligible representation of companies in the USD 500 – 1000 million market cap range. The trend further seems to suggest that capital market investors are willing to pay higher multiples for size however are yet not willing to take the risk yet with small / mid-caps. The universe of chemical companies in the USD 500 million – USD 1 billion market cap universe is also set to change over the next 12-24 months.
While relatively Chemical Industry IPOs have done well compared to other sectors, the recent correction (especially over the the last few days of June 2022) has wiped off the earlier gains and optimism. The consistent cause of worry has been the sub-scale nature at which most companies have been wanting to IPO. The majority of the companies that have done their IPO in this space have not even crossed Rs 100 crore Profit After Tax (PAT); thus any kind of corrections in the markets make the majority of these “small-caps” highly vulnerable and won’t even be tracked by quality institutional investors.