Amongst the many ways to play India growth story, the chemicals sector, which is ubiquitous across applications, looks poised to sustain its momentum of the past decade. India aspires to transform into a major manufacturing hub as Europe and China are balancing environment concerns with manufacturing.

The modernised chemicals industry in India, serving the manufacturing base of a growing middle class and export demand from developed markets, has matured into a robust industry. Here we discuss the sector’s growth in the last decade, sector classification and the outlook for the drivers underlying the industry.

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Growth so far

The industry has matured from bulk chemicals to speciality chemicals. Chemicals manufactured for a specific client/product/application, in a specific process, are referred to as speciality chemicals.

The transformation is reflected in the stock returns as well. Leading players (by market cap) such as SRF, Solar, and Gujarat Fluorochemicals, returned a whopping 50, 37 and 57 per cent CAGR from January 1, 2013 to January 10, 2023, respectively. If one constructed an index of chemical companies weighted by market capitalisation, the chemicals index with top ten constituents would have returned 34 per cent CAGR in the past decade — compared to 12 per cent CAGR for NIFTY-50 in the same period or 8 per cent for Nifty Pharma (a related industry).

The sector outperformance actually took off from CY16 and except for CY2022 (-2 per cent) and CY2013 (-5 per cent), the index would have been ranked in the top three sectoral indices every calendar year. The chemicals index’s PE metric (top 10 companies market cap weighted one-year forward PEs) is now trading at 33 times forward earnings after correcting from 43 times in January ‘22. In the last three years, the valuation rallied from 22 times in January ‘19. The high valuation, even after CY22 correction, indicates the strong growth potential expected from the sector even after such high growth phase.

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Industry composition or classification

The chemicals industry can broadly be classified into three major sub-segments — bulk, Speciality and CRAMS, which map the industry evolution to the underlying demand drivers.

Bulk chemicals

These are the starting materials for chemicals or other industries and are generally ‘low-margin high-volume’ products. Most chemical companies in India started with bulk chemicals and continue to operate the legacy division for captive consumption and external sales. Caustic soda, Anisole, industrial salts, gases and solvents are some of the examples. These are not made to order and the segment competes on volumes as there is low pricing power and hence capacity addition is the main driver of growth.

Backward integration and improving product portfolio have supported growth in recent periods. Domestic bulk chemical supplies are being secured by companies moving up the value chain or for captive consumption. This is applicable to domestic and international clients as well, who have been severely affected by volatile supply situation in Chinese manufacturing from Covid disruption and pollution concerns in the last five years. China holds the largest capacities for bulk chemicals.

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Speciality chemicals

As mentioned earlier, these are chemicals custom manufactured for specific applications. The manufacturing may involve several steps with different chemistries, hence, companies develop strengths in specific niches over several years. For example, Navin Fluorine, Gujarat Fluorochemicals and SRF have developed fluorination capabilities, Deepak Nitrite in phenols and Aarti Industries in benzene chemistries.

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Specifically for speciality chemicals, customer acquisition spans several years of developing the manufacturing process, production stabilisation, customer sampling and appraisal, before deliveries can start. This is even more pronounced for international customers. On the flip side, this supports customer stickiness for companies that have gone through the grind. This also allows for pricing power, which has aided companies to pass through the high input prices in recent periods.

Custom manufacturing

Moving up the customisation scale, domestic companies are bagging contracts for manufacturing (CMO), development and manufacturing (CDMO) and product research, development and manufacturing (CRAMS). SRF, Aarti Industries, and Navin Fluorine are active in the space and Tatva Chintan is also generating traction in the segment. Companies with such contracts dedicate manufacturing blocks for such products, which enter the commercial scale after being developed from pilot stage. The commercial stage ensures revenue visibility and margin protection.

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Indian speciality chemical manufacturers in this space are eyeing sun rise industries in EV and energy storage based on their research capabilities. Cost advantage, skilled manpower and increasing backward integrated producers allows domestic companies to capture a higher value share of research outsourcing from developed economies.

Growth drivers

There are two levers of growth  for the industry — capex addition and product addition. The sharp jump in either of the drivers in recent periods has been on account of R&D capabilities and domestic demand strengthening from pharma, auto, FMCG and other industries. Additionally, with Chinese supplies facing pollution controls from 2016, Covid disruption from 2020 and anti-dumping duty in the US, import substitution in India and customer diversification to developed market clients have also contributed to industry growth.

Gross block addition grew at 19 per cent CAGR from FY18-22 for the top 10 companies, compared to 9 per cent CAGR during FY16-18. The capex momentum remains intact in the industry, given the opportunity ahead. Navin Fluorine, with an eye on agrochem, plans to spend ₹1,800 crore by CY23 aimed at speciality chemicals and also CDMO and new product capacity as well. SRF has completed ₹1,250 crore capex in H1FY23 and may maintain the momentum at ₹2,000–3,000 crore capex per year in FY23-24. The company will add capacities for agrochem, refrigerant gases and multi product plants (MPPs).

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Aarti Industries is a quarter of the way into its planned ₹4,500-crore capex plan for its next three years, aimed at creating space for contract capacities. Vinati Organics has reinforced capacities for one of its three main products and will be adding 50 per cent more capacity to the other by FY24. Clean Science launched, and gained significant traction in HALS (hindered amine light stabilisers) as a play on import substitution. The company plans to spend ₹300 crore on expanding the same in CY23.

Gujarat Fluorochemicals will be adding ₹1,000 crore each year in FY23-24 to create capacities for new fluoropolymers, including capacities for electrolytes for battery and new-age solutions. The capex momentum is showing no sign of easing. According to a Centrum report on speciality chemicals, the ₹6,000-crore capex in FY22 will increase to ₹17,500 crore over the next two years for the ten companies in its coverage.

The growth path is not by brute force alone, but accompanied by product development as well. Fluorination and electronic material chemicals are the new buzz words in the industry. Owing to a higher launch of fluorine-based products by innovators in agrochem and pharma, fluorine-based chemistries are in demand. Leading players Navin Fluorine, SRF and Gujarat Fluorochemicals are developing new products in the space, along with increasing capacities for existing products. SRF’s PTFE (fluorine-based  Teflon) facility is expected to be commissioned by CY23 end, which should lead to even more product development in the space.

In the new-age, environment and energy-related space, Tatva Chintan’s electrolyte salts for batteries are finding new clients. Gujarat Fluorochemicals is expected to be the next entrant in the space with inputs for battery chemicals, solar films and hydrogen cells expected to be commercialised in the next two years. Navin Fluorine also plans to enter the portfolio depending on how the demand pans out and a similar approach may be adopted by several other companies.

Contract manufacturing continues to remain robust, with most players reporting a sharp increase in enquiries and discussions in the last 2-3 years. SRF has increased its MPPs to 15 from five in five years. These product dedicated plants are built with solid demand and requirement in place. Navin’s CDMO plan has got off to a slow start (raw material sourcing issues), but expects to double the capacity in two years. On the pharma CDMO side, the company expects stronger volume growth as products get commercialised over time. Aarti Industries’ long-term contracts have been commercialised and new contract is expected to be signed in CY23.

The above mentioned are the new spaces that companies expect to enter in the next two years. Existing facilities, which have been greatly expanded, will contribute with increasing utilisation. The companies’ focus on backward integration to ensure supply discipline is also increasing along with new product introduction.


At bl.portfolio, we had recommended, over the last one year, holding Navin Fluorine, accumulating shares of Deepak Nitrite, Aarti Industries and Tata Chemicals, and buying Gujarat Fluorochemicals. While prospects of the industry are strong, valuation concerns were the primary reason for the cautiously optimistic recommendation.  

Gujarat Fluorochemicals has a well-integrated back-up to the bulk chemicals and has monetised most nodes in its internal supply chain. Expanded capacities in fluoropolymers and new fluoropolymers have been under way over the last two years and should continue. Furthermore, the company is testing new products in energy solutions and should build a portfolio in the new-age sector in the next two years. LiPF6 (Lithium hexafluorophosphate), an electrolyte required in EV battery, should be commercialised by Q1FY24. Existing fluoropolymer PVDF for solar films and battery is being developed and the plant for the specific grades should be commercialised by H1FY24.

Navin Fluorine has an impressive track record in fluorinated chemistries, which is picking up now. Navin’s CDMO business in Pharma segment has been lumpy so far. But as molecules in clinical phase get commercialised, the revenue stream will increase in quantum and visibility. Navin Fluorine’s large client Honeywell with dedicated service for Hydrofluoroolefins (HFO) can be expected to double over the next 2-3 years. Backed by strong capex into legacy, CDMO and new-age products, Navin Fluorine should report strong growth.

Aarti’s speciality business is a backward integrated producer of benzene and toluene chains of products, with downstream applications in various industries. Aarti Industries, post recent demerger of pharma business, is trading 10 per cent below its last three-year valuation (one-year forward PE at 26 times). Two long-term contracts have been commercialised and a third is under construction. The margin growth will be subdued in the short term as the company is in a build-up phase (reflected in valuations) and can provide a good opportunity to accumulate the stock on dips.

As economies see demand recovery, the basic chemicals segment of Tata Chemicals supplying soda ash can see better growth. The shortfall in capacity and high energy costs for production in Europe and China, in the same, can aid the sharp growth of Tata Chemicals. Similarly, Deepak Nitrite, which has commercialised large capacities for Phenols and acetones and continues to add capacities in the same, which are feeder chemicals across industries, can gain from import substitution playing out in India. The company is also planning to develop value-added portfolio from the backward integrated model being built.

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