For makers of specialty chemicals¹, revenues are likely to decline only 300-500 basis points (bps) this fiscal on higher exports, cashing in on the gradual shift in global supply chains because of tighter environmental norms in China. Material capacity expansions, compliance with stringent environmental norms and enhanced cost efficiencies over the past three fiscals are also helping Indian specialty chemicals benefit.

The relatively limited revenue decline, healthy profitability, strong balance sheets, and only moderate capital expenditure (capex) will also help maintain a stable credit outlook for specialty chemical manufacturers. This is as per a study of 115 CRISIL-rated specialty chemical makers, which account for a fourth of the sector’s annual revenue of Rs 3 lakh crore.

Exports, which account for half of the sector’s revenue, are likely to grow 300-500 bps this fiscal as domestic manufacturers continue to benefit from new orders, wider product range, and resilient supply chains. This is reflected in the first-quarter performance reported by six large listed specialty chemical companies, which indicated 1% growth in export revenues even as domestic revenues declined 28%.

Exports of specialty chemicals have risen significantly over the past three fiscals. Significant investments made in backward integration for reducing dependence on raw material imports has improved players’ cost competitiveness, making them more reliable suppliers.

This has coincided with changing rules in China resulting in closure or shifting of capacities in 50 chemical manufacturing clusters. More closures or relocations are expected in the Jiangsu province over the next two fiscals, which will push up the cost of Chinese specialty chemicals.

Says Gautam Shahi, Director, CRISIL Ratings, “Since fiscal 2018, global end-user industries have been diversifying their vendor base and supply chains beyond China, including to India. Consequently, exports of specialty chemicals have registered a CAGR² of ~15%, outpacing domestic growth (~12% CAGR) over the past three fiscals. With healthy growth in exports, the share of Indian specialty chemicals in the global supply chain increased 100 bps in the past three fiscals to 4.5% and is likely to improve further by 100-150 bps in the next three fiscals.”

On the other hand, domestic revenue, however, is seen falling 7-9% this fiscal because of moderation in demand from key end-user industries such as textiles, colorants and polymers, given a contraction in economic activity. Demand from agrochemicals, pharmaceuticals, and fast moving consumer goods, however, remain supportive.

The growth in exports will partially offset slack domestic demand this fiscal. Consequently, overall revenue will decline only 300-500 bps compared with CRISIL’s earlier expectation of a 15-20%.

The moderation in demand and recent capacity additions mean the utilisation level could decline to 70-75% this fiscal from 85% in the previous. With players in the sample set having incurred capex of Rs 18,000 crore in the past three fiscals, sufficient capacity exists, limiting the need for material spending in the next 1-2 years.

This decline in capacity utilisation, resulting in lower absorption of fixed costs, and increase in overheads such as freight costs will lead to fall in operating margin for the sample set by ~200 bps to 15-16% this fiscal, while depreciation of the rupee should provide some offset.

Says Sushant Sarode, Associate Director, CRISIL Ratings, “Limited moderation in operating performance, along with reduced capex intensity and well-capitalised balance sheets will help sustain gearing at comfortable levels of 0.5-0.6 times this fiscal (0.4 times in fiscal 2020). This will ensure stability in credit profiles of specialty chemical makers.”

In the road ahead, volatility in crude oil prices, and currency movements and its impact on profitability will be key monitorables.

¹ Performance chemicals with applications in end use industries such as agrochemical, pharma, textile, FMCG, textile, polymer, pigments, fuel additives, dyes, colorants, surfactants, among others
² Compound annual growth rate