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MOSL: SPECIALTY CHEMICALS: Specialty Chemicals Conference 3.0 – Key takeaways

SPECIALTY CHEMICALS: Specialty Chemicals Conference 3.0 – Key takeaways

We hosted an industry expert and 10 companies (Aether Industries, Alkyl Amines, AMI Organics, Fine Organics, Galaxy Surfactants, I G Petrochemicals, Rossari Biotech, Vishnu Chemicals, Yasho Industries and an unlisted surfactant player) in our Specialty Chemicals Conference 3.0 held on 18th August, 2022 at our Motilal Oswal Tower, Mumbai. The key event highlights are furnished below:

Key takeaways from the session with industry expert

• There is an increased focus on cost cutting and movement from batch to continuous process that helps reduce space requirement as well as opex drastically through decline in usage of utilities and waste reduction. Broadly, chemical companies follow two strategies: product and process.
• Under the product strategy, the focus is on product development rather than on cost control or effective process technology. At times, product may not have a ready market – the companies may have to approach consumers and demonstrate the effectiveness of their products towards whatever purposes they are intended for.
• They safeguard knowledge about their products through in-house development/ patents/ use of excipients/ lesser attrition. A few examples are Fine Organics, Galaxy Surfactants, Sudarshan Chemicals, NOCIL, and Aether Industries.
• Under the process strategy, the focus is on process optimization and continuous cost cutting on existing products. Attributes required are engineering skills and co-operation between R&D and production teams. A few examples of such companies are Eternis, Jayant Agro, UPL, and Laxmi Organics.
• The gap between India and the West in terms of knowledge has narrowed significantly. India has vast resources in terms of chemistry and chemical engineers. Howev er, the risk taking capabilities are not high. Since technology development requires high risk appetite, most of the domestic companies have so far not ventured into that direction.

Three common highlights from the corporate sessions

• Capex is a key theme: Fine Organics is looking for a land in Gujarat for the next phase of expansion; their existing capacities would run out soon (by Mar’23). Aether Industries is planning a capex of INR4.5b. I G Petrochemicals is expanding its Phthalic and Maleic Anhydride capacities. Vishnu Chemicals is increasing its capacity for a capex of INR1.8-2.0b. Rossari Biotech expects to add more modules at Dahej. Alkyl Amines is expanding its amine capacity. Yasho is more than doubling its capacity while Ami is adding a new line for electrolytes.
• Import substitution guides product development: Aether is expanding its current basket of 16 products primarily based on import substitution. I G Petrochemicals’ expansion also takes into account the huge import substitution of Phthalic and Maleic Anhydrides. Vishnu’s expansion is also based on domestic demand-supply gap.
• Reliable alternate suppliers: The past few quarters have witnessed unseen volatility in freight and raw material costs. As a result, several suppliers have enforced force majeure. However, companies such as Fine Organics battled the uncertainties and even serviced the consumers who were facing issues with other suppliers. These would further help Indian companies establish themselves as reliable suppliers and take advantage of the China+1 strategy.

Valuation and recommendation from our coverage universe

Please note that Vinati Organics and NOCIL did not participate in the conference. However, we provide our view on the names on which we have a BUY rating in our coverage universe, namely, Vinati Organics, NOCIL and Galaxy Surfactants.

• Vinati Organics (VO): Veeral Organics Pvt. Ltd. (wholly owned subsidiary of VO) is also set to commence production of MEHQ, Guaiacol and Iso Amylene in 1HFY24E, which should propel VO into the next-level of its growth story. Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration. The stock is trading at 36x FY24E EPS and 28x FY24E EV/EBITDA, with return ratios of 22-25%. We value the company at 45x FY24E EPS to arrive at our TP of INR2,680.