Are M&As shapingnew road map Indian chemical industry?

Indian chemical industry – Will M&A be a game changer?

5:54 AM, 26th February 2018
A representative image of chemical industry. File photo
A representative image of chemical Industry. (File photo)

The chemical industry in India is the third largest producer in Asia and sixth largest in the world. According to the Department of Chemicals and Petrochemicals, as of 2017, the domestic chemical industry’s size is pegged somewhere between $150-155 billion, accounting for 2.1 percent of the country's gross domestic product (GDP) but only a little more than 3.4 percent of the global chemical market.

With more than 80,000 chemical products being developed for either direct or indirect consumption for almost all the other sectors, the chemical sector is highly diversified. Besides the obvious petrochemicals, agrochemicals, speciality chemicals and fertilizers, other sectors such as pharmaceuticals, textiles and paints offer a huge market opportunity too in India. Hence, the chemical sector is instrumental in the overall economic development of the country.

The government itself expects the chemical industry to double in size to over $300 billion by 2025, clocking an annual growth rate of nearly 8-10 percent. According to leading market players, plans to introduce a new policy to promote the domestic industry and curb imports are already in motion.

Taking all these factors into account, the domestic chemical market shines brightly as a lucrative space to invest. Bundle these with a significantly lower cost of labour, easy availability of key raw materials, a large consumer base and the potential to scale-up with the adoption of technology, it becomes too good an opportunity to give it a miss for both existing and aspiring players. A number of local and MNC firms are already vying to get a larger share of the market as even more players make plans to enter the Indian market.

Faced with many handicaps like lesser funding than their foreign counterparts and intense domestic competition, local chemical companies continue to survive though with slim margins. As the global economic order awkwardly shuffles along with low growth volumes, the hypercompetitive environment continues to throw many new challenges.

Sluggish sales volumes in the industry clocked low growth rates in 2016 riding on the wave of a severe shortfall in industrial production and a large-scale optimization of inventories by their customers. Petroleum-based products were worse hit in particular recording a lower-than-normal industry average.

In a bid to maintain sustainable production levels and take home encouraging profit margins in the face of weakened industry fundamentals, chemical companies are proactively exploring inorganic growth avenues such as mergers and acquisitions. The limitations of organic growth are in fact forcing firms to look at strategic mergers and acquisitions (M&As) as a viable way forward for sustaining high valuations.

Most firms take the plunge keeping scalability as the central motivating factor for their growth plans. A consolidation of product offerings not only enables the players to leverage organisational synergies but even allows them to explore previously unexplored business areas, which are in line with their long-term objectives. The restructuring of the merged DuPont and Dow entity is a perfect example of this.

A flurry of inbound and outbound deals have taken place. Larger corporations abroad have made big tickets purchases to enter the promising Indian market.

Huntsman Corporation, an American chemicals major acquired Gujarat-based chemicals producer Laffans Petrochemicals in 2010. This gave quick access to Huntsman to implement their technology and expertise in the Indian market. The company’s plant at Ankleshwar became an integral part of Huntsman Performance Products, giving the group its first dedicated production plant in the country.

The pull of the Indian chemical sector as a strategic investment for foreign investors was further strengthened with the Japan-based Nihon Nohyaku Co Ltd acquiring a majority of 74 percent stake in Hyderabad Chemical Ltd in 2014. This gave the firm an opportunity to utilize the agrochemical manufacturer’s own distribution network and research and development function.

Another notable example of a foreign firm making a quick entry into the Indian market is the acquisition of Monarch Catalyst by the German speciality chemicals maker Evonik Industries in June 2015. Abroad, Evonik has a presence in almost 100 countries, serving life sciences and fine chemicals, industrial and petrochemical market segments. The acquisition allowed Evonik Industries to hit the ground running.

Balance sheets of companies and investment decisions also play a vital role in influencing M&A deals. Caught between steep investor expectations and frequent lull periods in demand, companies are increasingly turning to M&As to ensure uninterrupted business operations and sustainable profitability.

In 2016, The Chatterjee Group (TCG) picked up a majority stake in Mitsubishi Chemical Corporation’s (MCC) Indian unit in Haldia, West Bengal for an estimated $48 million which gave TCG management control of the ailing company. TCG bought a 90 percent stake in the company with MCC retaining limited shares. The MCC PTA had been making losses for several years as revenue had declined due to cheaper imports from China. The Competition Commission of India cleared the acquisition, giving MCC a second lease of life.

The lure of increasing export revenues and acquiring technical expertise potent factors for Indian firms to scout for partnerships abroad.

The number of joint ventures too have picked up the pace. For example, Pidilite Industries Ltd entered into a joint venture agreement in 2016 with Italy based Industria Chimica Adriatica Spa (ICA). Pidilite holds 50 percent of the shareholding in the JV and the balance is held by ICA and Pratik Mehta, an India-based distributor. Such joint ventures with foreign firms will help all sides to scale their business operations and tap new markets with specialized products. Though valuations have soared, many companies continue to pursue M&A as a strategy to achieve growth and spur innovation.

Source: Ava Chemicals Pvt Ltd.

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