Booming specialty chemicals segment on the radar of MNCs

Specialty chemicals segment has been registering robust growth within the Indian chemical industry thanks to rising demand for premium consumer goods which require specialised properties to be differentiated in the highly crowded retail shelf. According to a report released by McKinsey & Co, India’s specialty chemical industry is likely to grow 4-5 times to $ 80-100 billion by 2020 from the current market size of $22 billion.
 
As a result, there is an increased interest by global specialty chemical companies to expand their base in India. While companies are investing in green and brown field expansion, certain others have adopted the M&A route to widen the reach. For example, Swiss company, Clariant Chemicals, last month completed the process of acquiring masterbatches manufacturer Plastichemix Industries in a Rs 135-crore deal. With this, Clariant has now become one of the leading masterbatches producers in India.
 
Aashish Kasad, Partner - Tax & Regulatory Services, Ernst & Young LLP, opined, “The growth potential of Indian speciality chemicals industry is well known globally as there has been a growth of around 11-13% in the last five years and it is expected that it could continue to grow above 14% in the next five years. MNCs are eyeing India speciality companies for mergers & acquisitions (M&As) as a strategic and long term investment.”
 
Advantage India
The global chemical majors are looking to expand significantly in the Indian market from two pronged strategy - one to cater to the growing domestic market and to use the country’s low cost R&D and manufacturing infrastructure to develop and export to the global markets. Hence, many MNCs are looking at the Indian chemicals sector with interest. Specialty chemical companies are their prime target for M&As as these products offer better margins.

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Manish Panchal, Practice Head - Chemical & Energy, Tata Strategic Management Group, says, “Indian specialty chemicals companies have become an attractive target for MNCs. During FY12 itself, there were 24 deals in specialty chemicals with an estimated value of $ 800 million. Indian specialty chemicals industry is one of the fastest growing industries in the country. It is poised to grow at 2 times the GDP over next decade.”
 
Agrochemical, fragrance and flavours, food ingredients, pharmaceuticals, water treatment chemicals, etc are some of the segments that are witnessing increase in M&A activity. And there good reasons for it. Increasing urbanisation, growing Indian economy and rising rural wages have given a boost to these segments. While some MNCs are riding growth inside India, while others are leveraging India's low-cost production base to feed global business.
 
Panchal says, “India is well positioned for M&A activities in specialty chemicals as companies in this sector have customised their product portfolios with right value proposition driven by strong local presence and in-depth understanding of specific customer needs. However, they have limited financial resources to compete on global scale. Global chemical companies, on the other hand, have access to low cost financing with good cash positions. This creates a win-win situation for MNCs and Indian companies.”

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According to Panchal, there are three major drivers for M&A in Indian chemical industry. First, companies are constantly looking to rationalise their product portfolio and hence, acquisition of an existing company with supplementary/complementary product portfolio is a preferred way to expand presence. Second, acquiring local companies, which dominate regional markets in India, helps MNCs build strong pan India presence. Third, M&A provides faster route to market for MNC’s and saves precious time which otherwise goes into overcoming regulatory and infrastructure challenges.
 
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Multinational companies are eyeing to target small & medium scale companies having niche products that can fill the missing product portfolio gap for MNCs. “Growth of end user sectors like coatings, foods, agrochemicals and pharma make it critical for all relevant MNC companies to have a presence in India. Several Indian entrepreneurial companies have built strong business - typically in the Rs 50-200 crore size bracket. These businesses have grown much faster than their MNC counterparts and, hence, are extremely attractive targets,” said Navroz Mahudawala, Managing Director, Candle Advisors – a boutique investment bank with sizeable focus on chemicals & lifesciences sectors.
 
According to Mahudawala, though there will be a pickup in M&A deals in this year, 2015 and 2016 will be years which would see higher M&A activity as valuations would improve closer to FY 2015/FY 2016.
 
While MNCs are spreading their wings in India, Home-grown specialty chemical companies, who were earlier reluctant to move out of their comfort zones, are also expanding beyond known exporting geographies. Acquisitions abroad have seen an increase, with cash rich local companies taking over niche speciality players across globe to gain markets, technologies and knowledge leadership for the future. Examples such as that of UPL Ltd (former known as United Phosphorus Ltd) acquiring 51% in DVA Agro Brazil, signify that the thrust of companies (Indian or MNCs) is towards raising the competitiveness at the international level to sustain growth and prosper in the increasingly globalised world.
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Gain plan for MNCs The reason why multinational chemical companies are eyeing to buy Indian specialty chemicals companies are: To strengthen their specialty chemical portfolio and geographic presence in India for reaping the benefits of healthy growth in India To get a faster access to Indian market and to reduce the gestation period To capitalise on the better understanding of the customers possessed by the local players and their established customer and distribution network; and To leverage India’s cost advantage in setting/expanding a manufacturing unit and a separate R&D unit