A revival in domestic demand and continuing robust exports will spur a 50% on-year increase in the capital expenditure (capex) of specialty chemicals¹ manufacturers this fiscal to Rs 6,000-6,200 crore.

That would also be well above the Rs 5,000 crore spent before the pandemic in fiscal 2020, a Crisil Ratings study of 106 speciality chemicals manufacturers it rates, which account for a fourth of the sector’s annual revenue of ~Rs 3 lakh crore, shows.

Operating profitability is seen healthy at 18-20% on better operating leverage. That, along with strong balance sheet supported by healthy cash flows and equity raised in the recent past, will keep the credit outlook of companies rated by Crisil stable despite the ramp-up in capex.

The spurt in capex comes on top of substantial spend already incurred to add capacity in recent years, given the strong export demand for specialty chemicals, which has boosted revenue.

Says Gautam Shahi, Director, Crisil Ratings, “Revenue growth is likely to improve sharply to 19-20% on-year this fiscal, compared with 9-10% in the pandemic-marred last fiscal, driven by recovery in domestic demand, higher realisations owing to rising crude oil prices, and better exports. With western nations becoming more environment-focussed, production is increasingly getting outsourced to India, which has also emerged as an efficient and cost-effective alternative to China. This has helped Indian players log a compound annual growth rate of 11% in revenue between fiscals 2015 and 2021, increasing India’s share of the global speciality chemicals market to 4% from ~3%.”

Export growth is expected to accelerate to 17-18% (refer chart in annexure), from 12-13% last fiscal, owing to competitive positioning of players, recovery in global demand, and a ‘China-plus-one’ strategy of customers. This will also be supported by weakened competitiveness of China due to implementation of stringent environmental norms, rising labour cost, and geopolitical issues (US-China trade war).

Domestic growth, on its part, will surge to ~20% (refer chart in annexure), riding on strong demand from agrochemicals, fast-moving consumer goods (FMCG), pharmaceutical and textile sectors, as well as a rise in discretionary spend. This compares with 5-6% growth last fiscal, when sluggish growth in income levels impacted discretionary end-user segments such as colourants, polymers, textiles, and FMCG.

Extensive research and development (accounting for 2-3% of sales for the top 10 listed players) and investments in backward integration by Indian manufacturers over the past few years have resulted in import substitution and a wider product range, including in value-added speciality chemicals. This has boosted their efficiency and helped them become more cost competitive, as reflected in healthy operating profitability of 18-20% in the last three fiscals. Further, the cost plus pricing model (fixed mark-up over and above input prices) also supports operating profitability.

Says Sushant Sarode, Associate Director, Crisil Ratings, “While capex has been high, players have also prudently funded these, with sizeable equity raise, and healthy cash flows, thereby obviating pressure on the balance sheet. The trend is expected to be sustained this fiscal, which will ensure debt levels remain under control. Key debt metrics such as debt/Ebitda and interest cover are expected to be close to 1 time and ~16 times, respectively, this fiscal, compared with 1.1 time and 13 times, respectively, in the last.”

That said, the impact of volatile crude oil prices and ramp-up of new capacities will be key monitorables.

¹ Performance chemicals with applications in end-use industries such as agrochemical, colourants, dyes, FMCG, fuel additives, pharmaceuticals, pigments, polymers, surfactants, and textiles, among others