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Key highlights of the research report as under

* We analyzed the FY22 annual reports of six chemicals companies (SRF, Vinati Organics, Fine Organic, Navin Fluorine, Deepak Nitrite and Atul). The Covid-19pandemic impact, widespread supply bottlenecks, non-availability of key raw materials, higher energy and raw material prices were key challenges in FY22.The companies’ strong revenue growth came from higher realizations and volumes on the low base. Despite the topline growth, EBITDA margins were hurt by lower gross margins (higher raw material costs not fully absorbed), higher power & fuel costs (energy crisis) and higher freight &forwarding expenses(logistic challenges and container non-availability).Ahead, the companies are positive on the long-term structural growth of the Indian chemicals sector on the back of the China+1 strategy, focus on reducing chemical imports, R&D capabilities, and its leading and strong position with favorable government policies.

* Supply diversification from China; growth trigger for Indian chemicals companies. With supply-chain disruptions and uncertainty in China, global manufacturers are seeking to diversify their sourcing. India provides strong alternatives with scale, technology, raw materials and supportive government policies. India’s chemicals sector is in a good position to profit from this change and capture a sizable share of the market. Indian chemicals manufacturers are poised to emerge as a credible alternative and, in some cases, primary suppliers to global firms. While all in the Indian chemicals sector would benefit from this shift, specialty chemicals manufacturers could gain the most due to higher entry barriers and potential for value-added niche products.

* Navin and SRF in a sweet spot in fluorine chemistry. The fluoro chemicals sub-segment is expected to record a 5.2% CAGR to $25.1bn between now and 2026. Fluorinated organic compounds are of interest in the pharmaceutical and agro chemical sectors. Navin intends to deepen its R&D capabilities, in the development process of a new product around the fluoro pyridine platform, expecting to emerge as the first such producer in India with multi-year revenue possibilities. Further, is targeting approval of its R22 PTFE samples. SRF will continue to invest in its chemicals business to sustain healthy growth rates over the next few years. Collaboration with major global innovators for process development, commercialization, and production of complex, new-age molecules with downstream applications in agro and pharma would support growth. With huge capex in polytetrafluoroethylene (PTFE),chloromethane, etc. likely to be capitalized in the next few quarters, it is looking forward to exciting times ahead in fluoro chemicals.

* Vinati and Deepak; focus on import substitution. Vinati, a market leader in key specialty chemicals, is on track to further expand its niche range of products, enabling import substitution. Deepak Nitrite, from its first product ‘sodium nitrate’ to its latest foray into ‘phenol and acetone ,aligned its focus on products where domestic demand was largely import-dependent. Import substitution has always been a major driver of the company’s overall business plan. Deepak continues to focus on launching value-added downstream products with the goal of substituting imports primarily to capitalize on the more favorable demand context.

* Fine Organic’s focus on growth and sustainability. Demand for oleo chemicals-derived additives is increasing as consumers want more environment-friendly and “green” products. Fine Organic’s green additives have been effectively replacing potentially hazardous chemicals in a wide range of industries such as plastics, packaging, foods, cosmetics, rubbers and coatings. Minimized waste generation, effluent management through effective production processes, use of natural gas and stringent compliance with regulations continue to be focus areas of sustainability. The company is intending to expand operations in Gujarat, focusing on expanding facilities for new and present product lines with process improvements and technology upgrades.

Atul is focusing more on improving manufacturing and working-capital efficiencies, adding capacity through de-bottle necking existing capacities. Further, it aims to add more products in different sub-segments and widen its market reach in new regions. It is looking at inorganic growth opportunities in aromatics and evaluating investment opportunities in vertical integration.

Our View. In the last 2-3 years, Indian chemicals companies have been re-rated 2-3x on strong earnings growth given better pricing, stable crude oil prices and benefits from the China+1 policy. Long term outlook is positive on the sector as the fundamentals remains strong. Companies are guiding to huge capex (Aarti Rs12bn-15bn annually for the coming years), Navin (~Rs15bn over FY22-FY23), SRF (Rs15bn-20bn annually), Atul (~Rs15bn), Deepak Nitrite (~Rs20bnin FY23) and many more. For supplies, international manufacturers are preferring India to China considering the latter’s R&D abilities, compliance with environment norms and better products. These are the prime factors for the bright outlook. Companies are entering new product lines focusing on import substitution. Hence, despite near-term headwinds, we are structurally bullish on the long-term growth of Indian chemicals companies.

Risk and concerns. Disrupted recovery, higher inflation, rise in energy cost, fluctuation in raw material prices, and supply-chain bottlenecks are key short-term concerns.

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