 "M&A deals in Indian chemical industry down with economic slowdown")
In a written reply to a query in Lok Sabha on August 26, 2013, Anand Sharma, Union Minister of Commerce and Industry, stated that the FDI equity inflow in India was $ 22,423.58 million in 2012-13 compared to $ 35,120.80 million in 2011-12, and $ 5,396.65 million during April-June 2013. Slowing domestic economy, unfavourable external environment, policies issues are some of the factors responsible for this reduced FDI inflow.
Chemical industry has not remained unscathed. According to E&Y, the FDI inflows in Indian chemical industry increased to $ 7,534 million in 2011-12 from $ 2,690 million in 2010-11, however it recorded FDI inflows of just $ 789.4 million during April 2012-October 2012, compared to $ 7007.6 million during the same period in 2011. This was a result of slowing economic growth and deteriorating investor confidence.
“FY 2013 has been a sedate year in terms of M&A activity across sectors and chemicals has followed a similar trend. While we did witness some activity on the fine chemicals side (APIs); majority of the other sectors witnessed a slow year,” said Navroz Mahudawala, Managing Director, Candle Partners – a boutique investment bank with sizeable focus on chemicals & lifesciences sectors.
Even the outbound investments were limited, with very few M&A agreements been signed by Indian companies overseas. Mahudawala said, “Except for some activity on the agri-space; overall the activity was limited. The aggregate M&A deal value was sizably skewed by two large big ticket deals aggregating almost $ 1.9 billion.” These two marquee deals involving Indian companies were Gulf Oil Corp’s, the lubricants subsidiary of Hinduja Group, acquisition of US-based specialty chemicals company Houghton International for $ 1.05 billion in December 2012 and Rain Commodities’ acquisition of Belgium-headquartered coal tar pitch manufacturer Rütgers N.V. for $ 917.5 million in October 2012. However, he added, if one ignores these two deals, the deal activity was limited.
Fishing in troubled waters
Sanjay Singh, Director - Corporate Finance, KPMG in India, said, “The current economic slowdown may have adverse impact on local/import driven companies that primarily sell in the Indian market. The segments that are differentiated and export focused are likely to benefit from the rupee depreciation. Besides, segments such as personal care ingredients, pharmaceuticals and food ingredients that are consumption led businesses are likely to remain bullish from the M&A perspective.”
However, Mahudawala believes that M&A will be subdued in a slowing economy. He said, “Globally M&As increase in a bull market, thanks to the activity being very closely linked to business sentiments. Thus, while in the current slowdown valuations are on the lower side, the optimism on the buy side is also tepid.”
With global chemical majors looking at acquiring Indian companies in last few years, one can expect this activity to gain further momentum in coming years. “The inbound activity would continue. For various chemical sub-sectors India is a favorite geography. We expect consolidation activity in the entire chemical distribution space; construction chemicals & adhesives; agrochemicals, flavours & fragrances, APIs, and plastic additives,” said Mahudawala.
Singh agreed, “Yes, the global chemical majors are looking to expand significantly in the Indian market from two pronged strategy, one to cater to the growing Indian economy and also to use India’s low cost R&D and manufacturing infrastructure to develop and export to the global markets.”
What’s in store for 2013?
Specialty chemical companies are likely to be the target for M&As as they offer better margins. “The transactions are likely to be more into specialty chemical segments as opposed to commodities. Agrochemical, fragrance and flavours, food ingredients, pharmaceuticals, water treatment chemicals, etc are some of the segments that are likely to attract M&A activity,” said Singh.
The M&As are expected to lead to further consolidation in the fragmented Indian chemical industry. Mahudawala observed, “We think FY 2014/CY 2013 is year of consolidation for the agri-inputs space; we definitely would see some activity in both agrochemicals and the fertilisers space.”
Chemical industry has not remained unscathed. According to E&Y, the FDI inflows in Indian chemical industry increased to $ 7,534 million in 2011-12 from $ 2,690 million in 2010-11, however it recorded FDI inflows of just $ 789.4 million during April 2012-October 2012, compared to $ 7007.6 million during the same period in 2011. This was a result of slowing economic growth and deteriorating investor confidence.
“FY 2013 has been a sedate year in terms of M&A activity across sectors and chemicals has followed a similar trend. While we did witness some activity on the fine chemicals side (APIs); majority of the other sectors witnessed a slow year,” said Navroz Mahudawala, Managing Director, Candle Partners – a boutique investment bank with sizeable focus on chemicals & lifesciences sectors.
Even the outbound investments were limited, with very few M&A agreements been signed by Indian companies overseas. Mahudawala said, “Except for some activity on the agri-space; overall the activity was limited. The aggregate M&A deal value was sizably skewed by two large big ticket deals aggregating almost $ 1.9 billion.” These two marquee deals involving Indian companies were Gulf Oil Corp’s, the lubricants subsidiary of Hinduja Group, acquisition of US-based specialty chemicals company Houghton International for $ 1.05 billion in December 2012 and Rain Commodities’ acquisition of Belgium-headquartered coal tar pitch manufacturer Rütgers N.V. for $ 917.5 million in October 2012. However, he added, if one ignores these two deals, the deal activity was limited.
Fishing in troubled waters
Candle Partners' Navroz Mahudawala
Sanjay Singh, Director - Corporate Finance, KPMG in India, said, “The current economic slowdown may have adverse impact on local/import driven companies that primarily sell in the Indian market. The segments that are differentiated and export focused are likely to benefit from the rupee depreciation. Besides, segments such as personal care ingredients, pharmaceuticals and food ingredients that are consumption led businesses are likely to remain bullish from the M&A perspective.”
However, Mahudawala believes that M&A will be subdued in a slowing economy. He said, “Globally M&As increase in a bull market, thanks to the activity being very closely linked to business sentiments. Thus, while in the current slowdown valuations are on the lower side, the optimism on the buy side is also tepid.”
With global chemical majors looking at acquiring Indian companies in last few years, one can expect this activity to gain further momentum in coming years. “The inbound activity would continue. For various chemical sub-sectors India is a favorite geography. We expect consolidation activity in the entire chemical distribution space; construction chemicals & adhesives; agrochemicals, flavours & fragrances, APIs, and plastic additives,” said Mahudawala.
Singh agreed, “Yes, the global chemical majors are looking to expand significantly in the Indian market from two pronged strategy, one to cater to the growing Indian economy and also to use India’s low cost R&D and manufacturing infrastructure to develop and export to the global markets.”
What’s in store for 2013?
KPMG India's Sanjay Singh
Specialty chemical companies are likely to be the target for M&As as they offer better margins. “The transactions are likely to be more into specialty chemical segments as opposed to commodities. Agrochemical, fragrance and flavours, food ingredients, pharmaceuticals, water treatment chemicals, etc are some of the segments that are likely to attract M&A activity,” said Singh.
The M&As are expected to lead to further consolidation in the fragmented Indian chemical industry. Mahudawala observed, “We think FY 2014/CY 2013 is year of consolidation for the agri-inputs space; we definitely would see some activity in both agrochemicals and the fertilisers space.”