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MOSL: SPECIALTY CHEMICALS: Capex juggernaut set to continue; with new and cross chemistries being ventured into

 

• The opportunity for exports owing to global demand in the backdrop of China+1 strategy has driven the Indian Specialty Chemical companies to expand aggressively over the past three years with companies having expansion plans in place for the next three years too.
• Various companies are also entering into new chemistries while keeping their core competencies unaltered in order to de-risk and diversify their product portfolios from the legacy businesses; many of these companies depend on crude derivatives as feedstock or do not deal in complex chemistries.
• The companies under MOSL Universe have spent a cumulative INR44b in capex during FY20-22 and are expected to spend another INR54b during FY23-24, setting the stage for the next leg of growth of our coverage universe in particular. Galaxy Surfactants, Vinati Organics and NOCIL remain our preferred picks in the space.

Capacity expansion still the core thought process…

• The is not new to the specialty chemical industry and has been in place since 2016 when the Chinese government initiated a series of shutdowns on the chemical factories in their country due to environmental concerns.
• This has led to increased confidence of global customers demanding more from the Indian manufacturers, which in turn has led to a never-seen-before capex cycle in the Indian Chemical industry in the past six years.
• An analysis of 49 chemical companies (including our coverage universe) suggests that these companies have announced a cumulative capex of INR232b for FY22-24E. The data further suggests that some of these capex initiatives have already been completed while the remaining would be completed in FY23-24E.
• Relatively speaking, even if the margins have tapered from the all-time highs during the pandemic era, we have not seen the revenue slowing down with volumes remaining strong throughout and no demand cut back observed.

 

…with new chemistries to provide an edge against competition

• Many of the specialty chemical companies are legacy businesses dating back to more than four decades and run by promoter families. These businesses form the cornerstone of the identity of these companies. However, long-term sustainable growth remains a question for these companies now.