Since the beginning of the fiscal, stocks in the specialty chemicals space have been on the radar for investors. On a year-to-date basis, these stocks have given investors returns in the range of 13 to 42 per cent till date. A few small cap players, such as Neogen chemicals and Balaji Amines, also recorded 80 per cent plus gains during the same period.
Much of the rally can be attributed to the positive sentiments around an expected demand surge for the industry. This is because the domestic specialty chemicals space is witnessing strong tailwinds from the anti-China sentiments world over. The global de-risking of supply chain away from the Chinese markets has provided immense scope for the domestic industry that was already operating with excess installed capacities. Like China, India is also a low labour cost economy. Besides, the domestic specialty chemical industry was amongst the first to recover from the lockdown, given the increasing need for its inputs towards essential supplies such as pharmaceuticals, personal health and hygiene and agrochemicals.
Exports surge
In FY20, when India’s overall exports shrank by 5.1 per cent, exports of specialty chemicals — including drug formulations, bulk drugs and drug intermediates, organic chemicals, agro-chemicals, and fertilisers — rose 3 per cent (y-o-y) to USD 45 billion. That year, the imports of these products stood at USD 44.3 billion- down 7.3 per cent. As a result, India turned a net exporter of chemicals and related products in FY20 – the first time in at least a decade.
Amongst exports, India has a strong base in agrochemicals; dyes and pigments; and intermediates for active pharma ingredients- which constitute 27, 19 and 18 per cent respectively of the country’s specialty chemical exports (in value).
For example, UPL — a major player in the agrochemical space — derives about 90 per cent of its revenues from exports (FY20). Due to supply chain disruptions, following the global lockdowns, the share of exports in the company’s revenue, dropped to 81 per cent in the recent June quarter.
Despite the movement restrictions, in the first quarter of FY21, the company posted revenues of ₹2,651 crore, while the revenue growth was flat (y-o-y).
Demand from essentials
While exports continued to be buoyant on one hand, companies also witnessed a domestic demand ramp-up in select segments.
Post the lockdown, the domestic specialty chemical industry was amongst the first to recover, given the increasing need for its inputs towards essential supplies such as pharmaceuticals, personal health and hygiene and agrochemicals.
Despite the complete shutdown for most part of the recent June quarter, companies such as Aarti Industries, Vinati Organics, Navine Fluorine and Rossari Biotech contained the drop in their topline numbers to sub 20 per cent (y-o-y) in the recent June quarter. This is largely because these companies have at least 30 per cent of their product portfolio catering to the needs of pharmaceutical or health and hygiene industries.
BASF India was an outlier, altogether. The company reported a 9.7 per cent (y-o-y) increase in its revenue in the June 2020 quarter. This was on the back of a strong volume offtake in agricultural solutions and nutrition & care segments - that grew by 26 and 156 per cent (y-o-y), respectively. The share of these segments rose to 60 per cent of the total revenues in the June quarter, from 33 per cent in March 2020.
Ailing segments
That said, the story is not all bright and sunny for all companies in this space. Specialty chemical makers that supply raw materials to discretionary industries, such as textiles, paints, printing inks, plastics and polymers, automobiles, and adhesives so on, are severely hampered by the pandemic.
Despite a 14 per cent contribution coming in from the pharma segment, Atul industries reported a 37 per cent (y-o-y) drop in topline numbers in the June quarter. This was due to a 42.6 per cent (y-o-y) decline in its ‘performance chemicals’ division (which constitute 58 per cent of the revenue).
Companies that continue to have exposure to such industries, saw a drag in their overall numbers, despite a spike in the pharma and agro-chemicals segments. Consider our earlier example of BASF India. Despite robust performance in the Agriculture and Nutrition segments, the overall revenue growth for the company was limited to just 9.7 per cent (y-o-y) in the June quarter. This was due to the demand slump witnessed in the remaining 40 per cent of its product portfolio. The muted demand from end-user industries such as automotive, refining, and construction led to a weak performance in its Materials (down 60 per cent y-o-y), Industrial Solutions (down 22 per cent y-o-y) and Surface Technologies (down 55 per cent y-o-y) segments.
Similarly, Aarti Industries which derives about 60 per cent of its revenues from such end-user industries such as dyes, pigments, paints, and polymers, reported a 15 per cent drop in its overall revenues, in the June quarter.
Rossari Biotech, that made a stellar listing in July this year, reported a 14.4 per cent (y-o-y) drop in the overall topline numbers in the first quarter of FY21. This was because about 53 per cent of the company’s product portfolio comes from textile specialty chemicals and animal health and nutrition segments. In the June quarter, these segments reported a 67.8 and 31.1 per cent decline (y-o-y), in revenues, respectively.