This will come on the back of strong revenue growth of 18-20% this fiscal and 14-15% in the next, compared with single-digit growth in the previous two financial years, a report by the ratings agency said.
Growth will be powered by two ingredients – strong tailwinds in exports due a shift in global supply chain driven by the China+1 policy of vendors and demand recovery in domestic end-user segments.
Meanwhile, resurgence in demand has spurred players to ramp up their capacity expansion (capex) plans. As a result, capital spending will jump 50% to ₹15,000 crore over the two fiscals through 2023, compared with fiscals 2020 and 2021, the report said.
A sizeable portion of this spend will be for backward integration, import substitution, and to meet increased demand for exports, it added.
Healthy cash generation will keep reliance on incremental debt to fund capex and working capital low, helping improve credit profiles.
An analysis of 90 companies rated by Crisil Ratings, accounting for 25% of the ₹2.5 lakh crore industry, indicates as much.
Specialty chemicals are low-volume, high-value products used in a large number of consumer-facing sectors. The Indian specialty chemicals sector derives almost equal revenue from exports and domestic sales.
This fiscal, domestic revenue is set to grow 18-20%, driven by resurgence in demand from key end-user segments such as agrochemicals, dyes, foods, and fragrances (55-60% of total demand). Domestic growth is expected to be healthy next fiscal, too, at 13-15%, Crisil said.
Exports are also expected to log a similar 18-20% growth this fiscal and 10-12% in the next.
Gautam Shahi, director, CRISIL Ratings, said “China has been losing its cost-competitiveness of late owing to increased environmental costs and reduced government sops. This, along with pandemic-induced disruptions, has forced customers to diversify their supplier base. India, with its cost-competitive manufacturing and technical expertise, is well set to seize the opportunity.”
Additionally, the cost-plus pricing model of Indian players is likely to minimise the impact of the sharp increase in raw material prices this year (over 40%). Raw materials such as benzene, ethylene and toluene, which are crude derivatives, form around 55% of the overall cost structure. Raw material prices are also expected to remain elevated in near term due to ongoing Russia-Ukraine war. However, downside risk to operating profitability is limited given players’ ability to pass on cost increases, though with a lag of few weeks.
Operating profitability will moderate by 150-200 basis points (bps) this fiscal from a high of ~20.5% last fiscal, but will be healthy at the pre-pandemic level of 18-19% despite higher raw material prices. While rising logistic and power costs also pose risks, increased scale of operations and better operating leverage will ensure operating margins remain healthy.
The ongoing capex is also expected to be remunerative, driven by healthy demand, track record of ramp-up of new capacities, and sustenance of return on capital employed of 20% over the past five years.
Sushant Sarode, associate director, CRISIL Ratings said, “The credit outlook for the specialty chemicals sector is positive, given healthy increase in cash accruals — which reduces dependence on external debt — and strengthened balance sheets, with equity raising in the past by some players despite rising capital spend.”
As a result, the ratios of debt to earnings before interest, tax, depreciation and amortisation, and interest coverage, are expected to be 1 time and 13-14 times, respectively, over this fiscal and the next, compared with 1.2 times and 12 times, respectively, for fiscal 2021.
Any further escalation of logistics costs and the impact of any more Covid variants, however, remain key monitorables.