The implementation of strict environmental norms in China has reduced the competitive advantages for Chinese firms, especially inefficient smaller firms that became unviable. In 2017, an estimated 40.0% of the chemical manufacturing capacity in China was temporarily shut down for safety inspections, with over 80,000 manufacturing units charged and fined for breaching permissible emission limits. Ind-Ra expects the supply of major chemicals from China to remain subdued in FY19, favourably impacting volume and pricing for Indian exporters.
The Indian specialty chemicals sector registered double-digit growth over FY13-FY17, supported by subdued oil prices and strong domestic and export demand. Ind-Ra expects companies operating in the sector to sustain their competitive advantage, given R&D investment and operational efficiencies continue to grow. Ind-Ra expects sector profitability to be sustained in 2018 and, thus, specialty chemical companies to utilise their internal accruals and modest debt to meet capex requirements.
Specialty chemical companies consistently generated strong positive cash flows from operations in FY17 and FY18 on account of higher profitability and low volatility in the working capital cycle. According to an Ind-Ra analysis (based on a sample set of 14 specialty chemical companies across various sub-segments), the average leverage of specialty chemical companies was quite strong in FY17, with net leverage (total adjusted debt less free cash/EBITDA) standing at 1.5x, indicating their high solvency. Moreover, they had a high interest coverage ratio (EBITDA/gross interest expense) of 7.3x in FY17.
Higher-than-expected growth in demand, along with stable feedstock availability at low prices and ability to comply with regulatory norms, would further strengthen operating profile of the sector, according to Ind-Ra. However, the agency believes that sharp changes in oil prices (due to an unfavourable macroeconomic scenario), an uncertainty about feedstock procurement and an uptick in global capacity expansion could have a negative impact on the sector.
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