Specialty Chemicals poised to create value in India

Specialty chemicals, which comprise low volume, high value chemicals with specific applications, constitute
a significant part of the Indian chemical industry. With increasing need for value added high performance
products, growth in demand is expected for specialty chemicals that add such functionalities to products. At
the same time, the shift of manufacturing to the East and India’s export competitiveness is expected to
strengthen India’s position as a manufacturing hub for specialty chemicals. A glimpse of India’s emergence
as a major export hub is already seen in segments such as agrochemicals and colorants, in which a significant
part of India’s production is exported.

The specialty chemicalsspace can be viewed as an amalgamation of parts – multiple segments having unique
characteristics and correspondingly witnessing different industry dynamics. The definition of specialty
chemicals varies widely across the industry, but generic specialty chemicals are which are used in low
quantities (not in bulk) and are targeted towards specific end-use applications. From a financial perspective,
a more tangible metric to distinguish between specialty and bulk chemicals is the EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization) margin of the business.

Specialty chemicals, by virtue of being high value, specialized products command higher margins than most
bulk products. Globally, specialty chemicals are driven by extensive product R&D and innovation, which is a
significant differentiator over the commoditized bulk chemical industry. However, in the Indian context, this
line of demarcation is almost non-existent due to the genericized nature of the specialty industry. This also
leads to a visible difference in margin structure of global and Indian specialty chemical companies.

Specialty chemicals can be sub-divided based on end-user driven segments, still few categories are used
across several end-user segments for similar applications. The chemical group can be broken down into a
mix of end-use driven segments (agrochemicals, personal care ingredients, polymer additives, water
chemicals, textile chemicals, construction chemicals) and application-driven segments (surfactants, flavours
and fragrances, dyes and pigments). These are the largest constituents of the specialty chemicals industry
and cumulatively constitute over 80% of the specialty chemicals universe.

Segments within specialty chemicals vary in attractiveness and witness varying levels of competitive
intensity, margin profiles, defensibility against raw material cost movements, and growth (including growth
of the end-user segment in many cases). The nine segments cumulatively constitute a market of USD 18.8
bn in India and are expected to grow at 12% p.a. to reach USD 33.2 bn by 2019. The largest segments are
agrochemicals and dyes and pigments; expected to grow at 11–12% p.a. Water treatment and construction
chemicals, are expected to be the fastest growing segments with expected growth rate of 15% p.a. over
2014-19.

Market growth drivers: Domestic Demand and export opportunities

The growth for specialty chemicals is driven by both domestic consumption and exports. Specialty chemicals
finding applications across consumer (eg. personal care chemicals), industrial (eg. water chemicals) and
infrastructure (eg. construction chemicals) segments are driven by the overall growth of the Indian economy.
Agrochemical growth has a strong linkage to the growth of the rural economy.

In certain segments (such as agrochemicals, dyes and pigments, flavours and fragrances), a significant
proportion of production in India is exported. Exports are growing rapidly as India is becoming an important
manufacturing hub for such chemicals. Tightening environmental norms in developed countries and the
slowdown of China are contributing to the growth of exports. The recently launched “Make in India”
campaign is also expected to add impetus to the emergence of India as a manufacturing hub for the
chemicals industry in the medium term.

Key Success Factors

Low cost labour and raw material availability have been the advantages enjoyed by Indian manufacturing
companies traditionally. Increasingly, though, specialty chemicals companies are focusing beyond these
traditional cost advantages. In agrochemicals, for instance, the focus is largely on branding and distribution.
Product development capabilities have become increasingly important across segments and account for the
difference between top and bottom performers. Surfactants and dyes are areas where scale and operational
efficiency are still the success factors, as these segments correspondingly have lower margins.