Capital expenditure (capex) of specialty chemical manufacturers is set to gallop 70% to almost Rs 13,000 crore combined in the two fiscals through 2020, compared with Rs 7,500 crore in fiscals 2017 and 2018, for three reasons: Indian suppliers increasingly occupying space vacated by the Chinese, healthy domestic demand, and improving operating rates.
CRISIL’s analysis of 1341 companies (accounting for 26% of sector revenue of Rs 3 lakh crore) shows that despite partial debt funding of this capex, credit profiles of manufacturers will remain buoyant, supported by better operating metrics and cash generation.
Over the past two fiscals, China, which has a ~20% share of global specialty chemicals revenue, tightened environmental norms resulting in closure or shifting of capacities in 50 chemicals manufacturing clusters. And more closures are expected in the Jiangsu province over the next two fiscals.
This supply disruption and increasing cost of compliance for Chinese players have meant global end-user industries diversifying their vendor base, including tapping Indian players.
The good part is that Indian manufacturers have already invested to comply with environmental norms, and have gained considerable technical know-how in certain product segments owing to collaboration with global clients. They are now leveraging this experience to set up large units to cater to both, import substitution and exports.
Also, domestic demand for specialty chemicals grew at a healthy 8-10% between fiscals 2017 and 2019, on steady demand from end-user industries such as textiles, automobiles, paints, plywood, and personal care.
Consequently, capacity utilisation surged to over 85% in fiscal 2019, compared with 75% in fiscal 2017.
“Utilisation rates of new capacities coming up will remain high over the medium term because of improving environmental compliance and cost competitiveness,” said Anuj Sethi, Senior Director, CRISIL Ratings. “As a result, the share of Indian specialty chemicals in global supply chain is seen rising 100 basis points to 5.2% in fiscal 2022, from 4.2% last fiscal.”
The credit profiles of CRISIL-rated manufacturers have been improving steadily over the past three fiscals with operating profitability improving to 17-18% in fiscals 2017-2019 from 15-16% in fiscals 2015-2016. The improvement is also reflected in the credit ratio (upgrades to downgrades) of CRISIL-rated specialty chemicals manufacturers, which has stayed above 2 times between fiscals 2017 and 2019.
Also, with benefits of ongoing capex, cash accrual of the sample set is set to increase at a compounded annual growth rate of 12% to Rs 12,000 crore in fiscal 2022 (the first full year of operations after stabilisation of additional capacities) from Rs 8,400 crore last fiscal.
“Despite substantial investments in capacity, the debt/Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of these manufacturers is expected to improve to 1 time in fiscal 2020, compared with 1.2 times in fiscal 2018,” said Gautam Shahi, Director, CRISIL Ratings. “Healthy cash accrual and prudent funding of capex will support credit profiles.”
Going forward, volatility in crude oil prices and currency, and supplies from Chinese producers will be the key monitorables.
1 CRISIL’s analysis includes 129 CRISIL rated companies and 5 non-CRISIL listed companies