Chemical cos grow 17% in 3 years, but struggle with profits and margins

Revenues of Indian chemical companies grew by a compound annual growth rate (CAGR) of  17% in the last three years, but are struggling with eroding margins and net profits,  mainly due to high investments in capital expenditure for expansion, says a study on Indian chemical industry trends.

A study of more than 70 listed Indian chemical companies (excluding large capex, commodity price driven sub-sectors like fertilisers, petrochemicals and carbon black) by investment and advisory firm Candle Partners say overall revenues grew from ₹87,600 crore in FY13 to ₹2,18,400 crore by FY23 with a CAGR of 10%. Last five year CAGR of these companies was 13% and that in the last three years was 17%. One in every five companies or 20% of the Indian chemical market has grown at a compounded annual growth rate (CAGR) of more than 15% during 2013-2023, says the study.

Analysing profitability trends, the study says gross margins decreased from the peak 48% in FY21 to 42.4% in FY23. Similarly, earnings before interest, taxes, and amortization (EBITDA) CAGR margins were 13.5% and declined from peak 18.3% in FY21 to 13.5% in FY23. Profit after Tax (PAT) also fell from peak 10.7% in FY21 to 8.4% in FY23. Revenues of these companies grew by 16% to ₹2,18,400 crore in FY23  and gross profits by 13% to ₹92,600 crore, but net profits fell by 6% and EBITDA by 4% when compared to FY22, says the analysis. Based on early trends for the first quarter, Candle Partners expects margins to continue to deteriorate for FY 2024

The study finds Aarti Industries, Tata Chemicals, Atul, Divi’s, Godrej Industries and Jubilant as the five large players consistently investing aggressively in capex. In FY23, Tata Chemicals invested ₹1,580 crore, Aarti Industries (₹1,330 crore), Atul (₹870 crore), Godrej (₹830 crore) and Jubilant (₹810 crore). While Tata Chemicals invested ₹1,380 crore and Aarti Industries ₹1,310 crore in FY22, their investments in FY21 were ₹1,240 crore and ₹1,310 crore, respectively.

The industry invested ₹14,800 crore of capex in FY23, 13% higher than the ₹12,500 crore invested in FY22, and from ₹9,900 crore a year earlier. The analysis expects reduction capex in FY24 as companies are focusing now on efficiencies with the expected reduction in demand in FY24.

The study finds that research and development investments by Indian chemical companies are very insignificant, less than one percent of sales since 2014. Average annual spend per company is between ₹14-15 crore a year and top 5 companies by R&D spent on an average 2% of sales. Compared to this, several companies globally spend 1-3% of sales on R&D.

The study also says while chemical initial public offer (IPOs) have done relatively well (compared to other sectors) and are 33% above their IPO price on an average, they are down 38% from their peak prices, showing sizeable correction levels. Majority of the IPOs listed in CY 2021 have corrected substantially. More importantly, approximate ₹93,700 crore ($11 billion) of chemical industry market cap has been added in the last three years giving investors varied options to invest in the chemical universe. About 18 companies floated IPOs between July 2020 and December 2022.