In the past five years, India’s chemical industry has come out of the shadows, with significant growth and an expanding number of listed companies. The global chemical market is in flux - while global consumption per capita has increased, China and Europe, the world’s largest chemical producers, have scaled back their production due to environmental concerns. This has created a favourable opportunity for India to ramp up production, and fill the supply gap.
India’s chemical industry constitutes 7% of the country’s GDP and has a market size of $240 billion. In March 2023, India’s Index of Industrial Production (IIP) grew by 1.1%, while the chemical sector outperformed, rising 7% YoY.
After a robust first half in FY23 driven by pent-up demand and disruptions in China's production, the chemical industry entered a phase of consolidation in the latter half. However, the sector is expected to grow at a CAGR of 12% in the next two years, reaching a market size of $300 billion, while the overall economy is expected to grow at a CAGR of 6-7%. According to the Ministry of Chemicals and Petrochemicals, India’s chemical industry is expected to touch $1 trillion by 2040.
Government support has fueled growth in chemicals
The chemical industry thrives on research and development (R&D), as well as capacity integration and expansion. While Indian chemical firms have increased their R&D spending from 2.8% in CY10 to 3.8% by the end of CY22, global firms typically spend around 6%-8% of their revenue, giving them a significant advantage in the value chain. To bridge the funding gap and encourage growth, the Indian government has opened up 100% foreign direct investment in the chemical sector.
The government is also overhauling the Petroleum, Chemicals and Investment Region Policy (PCPIR) to provide additional support. The new policy will provide viability gap funding of up to 20% for infra projects. In the recent budget, the government also reduced customs duty on key raw materials from 21% to 13%. According to estimates by the government, this is expected to attract investments to the tune of $420 billion by 2035. This would enhance India’s global chemical manufacturing share from 3% to 12% by 2040.
Specialty chemicals and dyes drive Indian chemical exports
India's chemical sector has traditionally been a net importer, resulting in a widening trade deficit. The trade deficit in the sector increased from $6.4 billion in FY22 to $10 billion in FY23. The rise in imports can be attributed to higher domestic demand and increased production. However, specialty chemicals stand out as the only segment where India is a net exporter. Four key segments contribute to nearly 80% of the exports: agrochemicals, dyes and pigments, cosmetics and personal care, and food ingredient chemicals.
According to a report by Mckinsey, specialty chemicals will lead India’s export growth in the coming years. Net exports are projected to grow from $2 billion to $21 billion by 2040, with agrochemicals playing a key role. It is expected to account for 40% of overall chemical exports by 2040.
To increase the export of pesticides, the government has made an important change to reduce paperwork and compliance. Previously, exporters were required to provide toxicology reports for their pesticide products as part of the export documentation. However, if the necessary data has already been published, the government has now removed the need to submit these toxicology reports.
Petrochemicals lead India’s chemical industry in FY23
The petrochemical segment emerged as a major driver of India’s chemical industry in FY23. With nearly 80% of its petrochemical capacity integrated with petroleum refineries, this segment has enjoyed a significant advantage. During the Russia-Ukraine conflict, India capitalized on the availability of cheap Russian oil and became a major hub for refining Russian Ural crude and exporting it to the EU. However, limited production capacity has been a challenge in this segment, with most Indian refiners operating above 100% utilization.
The petrochemical industry in India is also currently facing challenges due to China's access to Russian oil. This has affected the industry's pricing power and resulted in lower profit margins. Additionally, the sector is seeing lower consumption, caused by the recession in Europe.
Margin pressure compromises revenue growth
The chemical industry has grown by a staggering 17.8% in the past two years. However, this growth was led by a low base effect and pent-up demand due to Covid. The industry's revenue is expected to grow steadily, at around 12% CAGR in FY24-FY25, with the specialty chemical segment expected to grow even faster at 19% during the same period.
Note: The data includes consolidated earnings of 19 listed companies, including SRF, Galaxy Surfactants, Rossari Biotech, Sudarshan Chemicals, Atul Ltd, Vinati Organics, Navin Fluorine, Supreme Petrochem, Balaji Amines, Anupam Rasayan, UPL, Aarti Industries, Deepak Nitrite, Neogen Chemicals, NOCIL, Gujarat Alkali, Sumitomo Chemicals, Tata Chemicals and Fine Organics
Despite the growth in revenue, the industry has faced challenges with shrinking profit margins. The margin hit was due to increased input costs and a lack of pricing power. The industry's margins have declined from a peak of 22% in Q3FY22 to 18% by the end of Q4FY23. While the specialty chemicals segment has benefited from a stronger dollar, the overall industry has been impacted by higher raw material costs.
But chemical manufacturers have managed to lessen the impact of higher input costs by improving inventory and cost management. Over the past three years, these manufacturers have invested heavily in debottlenecking and vertical integration of plants.
Recessionary fears in key markets like Europe and US, and high raw material costs, have slowed down the export market. According to the CEO of Deepak Nitrite, Maulik Mehta, “The operating environment continues to be highly dynamic. Global supply chains have recalibrated over the last year, due to moves such as the sanctions on Russia.”
Also, the increased availability of chemical supplies from China has put pricing pressure on the Indian chemical industry. However, the effect of this is expected to lessen as demand grows. The industry’s margins are likely to remain at current levels in FY24, with the moderation of growth rates in the top line
