Tycoons Keep Stock Market Chemistry Alive

INDIA’S LEADING CHEMICAL companies — excluding large capex and commodity price-driven sub-sectors such as fertilisers, petrochemicals and carbon black — had a dream run until last year. Their revenue compound annual growth rate (CAGR) was 10% in 10 years, 13% in five years and 17% in three years till start of FY24. However, reduction in orders by innovators, destocking, pricing pressure due to Chinese over-capacity and fall in demand in key global markets due to geo-political tensions hurt growth in FY24. Fortune India data shows that net sales of about 75 leading chemical companies fell 6.54% from ₹1.82 lakh crore in FY23 to ₹1.70 lakh crore in FY24. Combined profit after tax (PAT) fell 30% from ₹17,840 crore to ₹12,404 crore.

However, that did not shake investor faith in the sector, helping most promoters increase wealth. Total shareholder return (TSR) CAGR of chemical sector in India was 20% between 2011 and 2022 compared to 11% in North America and 8% in Europe, according to an analysis by McKinsey. The sector is projected to grow 11-12% during 2021-27 and 7-10% during 2027-40, says McKinsey. This can help India, the sixth-largest chemical market, triple its market share by 2040 on the back of rising domestic consumption, changing consumer preferences and shift of global supply chains from countries such as China. To tap the opportunity, most Indian speciality and agrochemical companies are building huge capacity in niche chemicals to take on China, with full backing from stock investors — combined market capitalisation of Indian chemical sector grew 20.62% from ₹5.19 lakh crore in FY23 to ₹6.26 lakh crore in FY24. This helped promoters of most leading chemical companies increase wealth in FY24.

Basic Chemical Makers Struggle

Large-volume basic organic and inorganic chemical companies had a tough year. But investors kept their faith. Leader Tata Chemicals’ consolidated revenue fell 8% and net profit dipped 89% to ₹268 crore. It also took a non-cash write-down of ₹963 crore in U.K. But market capitalisation increased 11% to ₹27,529 crore. “Global demand is stable. However, the market is cautious due to geopolitical instability, high rates and oversupply,’’ says managing director & CEO R. Mukundan.

Godrej Industries, which makes chemicals and consumer/home care products, reported a 94% dip in net profit. Chemical business revenue fell from ₹4,173 crore to ₹2,697 crore but market capitalisation grew 93% to ₹26,275 crore. BASF India’s market capitalisation rose 46% despite a marginal rise in revenue.

Speciality Focus

Many speciality chemical players also remained investor favourites. Promoters of Solar Industries India Satyanarayan Nuwal and Kailash Chandra Nuwal gained the most — their wealth rose from ₹24,375 crore to ₹69,420 crore on the back of record Ebitda and PAT growth. Solar makes chemicals for defence and space applications. ‘’Our defence order book is ₹2,600 crore. We expect defence revenue (now ₹500 crore) to grow three-fold in FY25,’’ says managing director & CEO Manish Nuwal. The order book for explosives is over ₹2,500 crore.

The 52-year-old chemical intermediates producer Deepak Nitrite is a classic example of how focus on import substitution in speciality chemicals can change a company’s fortunes. Despite 70% market share in inorganic compounds and becoming India’s leading producer of sodium nitrite, a common preservative, it could grow revenues to just ₹1,500 crore by FY16. Its market capitalisation crossed ₹3,000 crore only in FY18. A few years ago, it diversified into phenol, acetone and isopropyl alcohol, used in various products and industrial processes, all import substitutes. That clicked. Revenue tripled and PAT rose five times from FY19 to FY23. Though total income fell 3% to ₹7,758 crore and PAT dipped 5% to ₹811 crore in FY24, investors continue to believe in its growth potential. Market capitalisation grew to ₹28,938 crore in FY24. Deepak Fertilisers and Petrochemicals Corporation, run by group chairman Deepak Mehta’s brother Sailesh Mehta, was also in bad shape last year — revenue fell 23.2% and net profit dipped 62.5%. Despite this, combined wealth of the brothers, who have cross-holdings in both companies, increased 65.37% to ₹24,888 crore.

Adhesive and construction chemical leader Pidilite Industries, owner of the Fevicol brand, is another example of a successful speciality chemical business. In FY24, revenue growth was marginal, but PAT grew 36%, mainly due to divestment of business in the Americas. Investors continue to believe in Pidilite and its 78-year-old chairman Madhukar Parekh. The family’s wealth increased 16.53% to ₹1.08 lakh crore ($12.94 billion). “While there may be short-term softness in the near term, we remain optimistic about demand in the medium term, with overall increase in construction, government spending and prosperity,’’ says Bharat Puri, managing director, Pidilite Industries.

There are several other examples of tepid topline growth not impacting stock market enthusiasm for the company. Chemical and fluorochemical player SRF Ltd.’s revenues fell 11.64% and PAT dipped 38% due to inventory rationalisation by customers and dumping of fluorochemicals by China. That did not affect SRF chairman emeritus Arun Bharat Ram. The family’s wealth increased 7.19% to ₹27,869 crore ($3.32 billion).

Similarly, Vivek Jain’s InoxGFL group, which is into chemicals and wind energy, saw 82.14% rise in wealth from ₹26,408 crore to ₹48,100 crore. Revenues of the flagship, Gujarat Fluorochemicals, fell from ₹5,685 crore in FY23 to ₹4,281 crore in FY24 and PAT from ₹2,047 crore to ₹955 crore. However, investors have taken note of InoxGFL group’s aggressive foray into EV battery chemicals, green hydrogen electrolysers and a turnaround in the wind energy business. “We are setting up an integrated battery chemicals complex with an outlay of ₹6,000 crore cumulative investment over next three-four years. The first phase to make electrolyte salts like LiPF6 has been commissioned at Jolva (Dahej) in Gujarat’’, says Devansh Jain, ED, InoxGFL Group.

Another case in point is plant-based oleochemical derivatives and food ingredient specialist Fine Organics whose revenue and profit fell 29.8% and 33.4%, respectively, in FY24. Promoters Jayen Ramesh Shah & Mukesh Maganlal Shah’s wealth rose 12.61% to ₹9,694 crore ($1.15 billion).

However, some prominent speciality chemical players lost wealth. Vinati Organics chairman Vinod Saraf’s wealth fell 10.56% to ₹12,611 crore ($1.50 billion). Vinati saw 8% and 23% dip in revenue and PAT, respectively, in FY24.

Advanced intermediate and active ingredient maker Aether Industries also had a tough year. A fire at its Surat factory killed seven workers and wiped out stocks, leading to a 4% dip in revenue and a 32% fall in net profit in FY24. Promoter Ashwin Desai’s wealth fell 15.97% to ₹9,793 crore ($1.17 billion).

Agrochem Backlash

Global innovator agrochem companies like BASF, Bayer, FMC and Corteva significantly reduced sourcing last year, affecting Indian speciality suppliers like PI Industries and SRF. This led to huge inventory build-up. Also, post-Covid, China created more capacity in agrochem, causing pricing pressures. But investors realise the sector is on the cusp of a turnaround as inventory has been cleared and more sourcing is likely to happen as the downcycle ends.

Despite troubles in the sector, agrochemical specialist PI Industries had a good run last year. Revenue rose 18% and net profit was up 37%, powered by 19% growth in agrochemical exports. About 78% of PI’s revenue comes from agrochemicals. Chairman Salil Singhal’s wealth rose 22.37% to ₹31,025 crore ($3.70 billion).

But crop protection major UPL was not so fortunate. In FY24, revenue shrunk 20% to ₹43,098 crore. It reported a loss of ₹1,200 crore in FY24 compared to a net profit of ₹3,569 crore in FY23. Its main business in Latin America fell by 21%, while U.S. business shrunk by 55%. India sales declined 16%. Debt ballooned to $2.66 billion. Markets took note of the troubles, causing UPL chairman Rajnikant Devidas Shroff’s wealth to fall 8.72% to ₹12,864 crore.

Clean Science and Technology, one of the largest global manufacturers of some critical speciality chemicals, also had a forgettable FY24. Total income fell to ₹832 crore compared to ₹965 crore a year ago and net profit dipped from ₹375 crore to ₹244 crore. Despite that, wealth of the promoter group led by managing director Ashok Ramnarayan Boob increased 15.10% to ₹12,571 crore.

Analysts predict a better future for India’s chemical companies. The sector has bottomed out as prices have stabilised. “The recovery in chemicals may be gradual as China’s overcapacity remains a problem; however, destocking, which significantly hurt Indian chemical companies in FY24, may ease in FY25,’’ says Sanjesh Jain, analyst with ICICI Securities. This augurs well for India, which is positioned to become the next chemical manufacturing hub of the world.