India has remained in China’s shadow for a very long time in the global chemical speciality market. But now it is gradually emerging out with its own structural benefit and the spill over effect of China’s declining competitiveness. The factors driving the growth of speciality chemicals market is high demand from the Asia Pacific region and end use industries. Exponential growth expectations in the pharmaceutical, personal and home care product segments present a humongous growth opportunity for speciality chemical manufacturers which is expected to reach a market size of over USD 60 billion in the next few years. India is the sixth largest producer and the sixth largest consumer of chemicals worldwide.
The speciality chemicals industry in the country represents a USD 25 billion market having delivered double digit growth in the last five years on the back of domestic consumption and is seen to be one of the next mega trends that investors can bet on. The key speciality segments in India are agrochemicals, paints, coating, fine chemicals, personal care chemicals, colourants and construction chemicals. The success factors for most of the speciality chemical segments are understanding the customers’ needs and product development to meet the favourable price performance ratio.
Many large global firms are facing the heat of compliance, cost and capacity issues and hence are looking to outsourcing their manufacturing processes to India. The speciality chemical manufacturers in China are facing key raw material shortages, rising energy costs, higher labour costs and compliance charges. China’s prolonged slowdown offers a much larger window for Indian chemical producers to establish themselves in the international market by building global clients and tapping the vast and lucrative export opportunity.
The government of India is also supporting the industry in the form of robust patent framework, appropriate regulations to protect intellectual capital, improvement in infrastructure, promote investments in research and development as well as green technologies with an excellent pool of knowledgeable workers.
The corporate tax cuts announced by the government recently should disproportionately benefit the chemical sector in a big way. Indian companies were suffering from a relative tax disadvantage impacting their retained earnings and ability to expand. This would also help Indian chemical companies to take advantage of the US-China trade war. Stocks of many speciality chemical companies have been on a roll this year as Indian manufacturers are filling in the global supply shortage and have gained handsomely in the last six months in the Indian stock market. But analysts are worried and have warned investors of rich valuations for many speciality chemical companies.
Aarti Industries is a leading Indian chemical company with blue chip fundamentals and merits a buy in spite of run up in its stock price. The company has just given a 1:1 bonus and quotes at an ex bonus price of Rs 815 on the bourses. Fund managers and analysts are bullish on the Aarti Industries stock for a 20% price appreciation in the next six months time frame.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.