Chemicals are an integral part of all our lives. It’s also a very subtle part of our lives and hence is quite overlooked. We deal with hundreds and thousands of chemicals on a daily basis. Toothpaste, soaps, shower gels, deodorants, clothes, packaged food – all are made up of some chemical or the other. From the cars we drive to the buildings we live in, speciality chemicals are used in making each and every one of them.

Speciality chemicals are specific products providing a wide range of effects on which various industries rely on. Covering over 80,000+ products, speciality chemicals are products sold on the basis of their performance/function rather than their composition. They are manufactured for very specific uses to meet customer application needs. For example, caramel manufactured from sugar is a commercially produced speciality chemical. Caramel colouring is extensively used in the manufacturing of soft drinks and confectionery items. Agro-chemicals like pesticides and insecticides are also speciality chemicals as they are used by farmers for better produce. Some industries that rely heavily on such chemicals are automotive, aerospace, food, cosmetics, agriculture, manufacturing, textiles, etc.

The speciality chemicals industry constitutes of various subsegments with different end-user industries:

Speciality chemicals constitute 18% of total chemicals and petrochemicals market in India. As of FY19, the total market size of the industry was pegged at around $32 bn and demand for speciality chemicals is expected to grow at 12-13% CAGR from FY18-23 which creates an additional opportunity of $20-25 billion. Moreover, the industry is estimated to employ over 20 lac people in India. The growth drivers of the industry are as follows:

• India’s middle class is fast expanding, leading to a dramatic change in demand for items like food, clothing and transportation. This growth in the end-user industry has been primarily driving demand for speciality chemicals in India.
• Apart from allowing 100% FDI into the sector, the Government’s “Make in India” initiative is expected to provide impetus to infrastructure creation and facilitate the rapid flow of FDI into the sector.
• Firms in the industry are expected to benefit from the increase in the use of technology and data-analytics to improve margins. According to a McKinsey report, chemical companies could see an increase of 3-5% in earnings from using Industry 4.0 technologies.
• Local manufacturing has been ramped up by favourable government policies – as part of which multiple Petroleum, Chemicals and Petrochemical Investment Regions (PCPIRs) were set up. Each PCPIR is a specifically delineated investment region having an area of about 250 sq km.
• Research & Development is of utmost importance in this sector. The government has realised the importance of R&D and hence is expected to come up with a National Chemical Policy that will strive to streamline and promote R&D within the sector.

Other factors that make the Speciality Chemicals industry attractive:

• The speciality chemical industry is knowledge-driven & oligopolistic in nature. Companies that manufacture such chemicals need to have process expertise as well as research and development capability. The industry is also capital intensive. Combination of these factors acts as entry barriers, allowing incumbents to retain a competitive advantage.
• Moreover, firms are also striving to further raise barriers to entry by being more customer-centric. They are focusing less on products and more on support services for customer-specific needs.
• The price of the products is, more often than not, decided through negotiation. Thus, firms can pass on increases in cost to end-users fairly easily. This allows companies to retain their margins.

Chemicals have become especially important to the growth of the overall economy – and it’s the key reason why the entire sector has witnessed tremendous growth in recent years. They also present an interesting and fairly overlooked investment opportunity, which is why the Speciality Chemicals smallcase was created.

This is an ideal smallcase for investors looking to take exposure to the growing and promising prospects of the Speciality Chemicals industry.

Happy Investing!