The Evolving Chemical SectorTanmay Gadre
The Indian Chemical Sector has developed well in the last 10 years wherein, the companies built their initial capabilities to cater to the demand in the domestic and the international markets. Stepping in the FY23, the sector has many opportunities and growth drivers, and a few headwinds. Let’s discuss them in detail:
Opportunities and Growth Drivers:
- China plus one: Supply chain disruptions and raw material unavailability from China caused during the Covid-19 pandemic have made many countries re-think their strategies and their over dependence on China as a raw material supplier. These countries have started reducing their dependence on China and investing in India as a part of the strategy “China plus one”. The Indian Chemical companies will benefit from this arrangement, and due to relaxed policies regarding foreign investments in the companies in this sector.
- Hydrogen based energy: The world is looking at hydrogen as a clean alternative for fossil fuels as they aim towards carbon neutrality. The Chemical sector can benefit from this opportunity by becoming key material suppliers (for electrodes, electrolysers), operating hydrogen production assets, distributing or selling hydrogen, and thereby engaging in the emerging hydrogen market.
- PLI scheme: The Indian government may bring PLI (production linked incentive) scheme for the chemical sector to boost domestic production and exports. This will help in manufacturing all core chemicals and supplying them to domestic as well as global markets.
- Indian opportunity: As India is pushing for green energy and mobility shift to EVs, the Indian specialty chemical companies are well positioned to use their capabilities to create chemicals for batteries, electrolysers and solar panels.
- Other tailwinds: The Indian chemical sector is experiencing strong global tailwinds coming from demand for chemicals from pharmaceutical companies, chemicals required for batteries, EV batteries, etc. The companies are expanding their capabilities so as to meet these ever-growing requirements.
- Supply- side issues: Many chemical producers are still dependent on China for procuring their key raw materials. The supply side issues persist as many of the suppliers in China remain shut, or are functioning at little capacity. This has led to increased raw material costs and reduced margins.
- High freight costs: As the world struggles to contain high ocean freight costs, many chemical producing companies have to either take a margin hit or have to pass on the costs to their customers.
Is it the right time to invest?
- We believe that the headwinds faced by the industry are temporary in nature, and can be dealt with in few quarters. The long-term growth story of the industry remains intact with a growing demand for its products across geographies.
- As the stocks remain affected by multiple issues including the Russia-Ukraine war, rising interest rates, high raw material costs, high freight costs, etc. this may be the right time to look at the listed chemical manufacturing companies from a longer-term perspective.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”