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Business News/ Market / Mark-to-market/  Cost leadership puts speciality chemical firms on better footing
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Cost leadership puts speciality chemical firms on better footing

Speciality chemicals producers are weathering the economic slowdown better than their pure commodity producing counterparts

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Speciality chemicals producers are weathering the economic slowdown better than their pure commodity producing counterparts. Shares of Aarti Industries Ltd and Navin Fluorine International Ltd have more than doubled since the beginning of this year. Shares of Camlin Fine Sciences Ltd, Omkar Speciality Chemicals Ltd, Oriental Carbon and Chemicals Ltd, PI Industries Ltd and SRF Ltd gained in the range of 24-53%. The BSE 500 index in the same period was little changed.

In the five years to 2014-15, revenues of these companies on average increased in the range of 17-41%, data compiled by Ambit Capital Pvt. Ltd shows. Product prices of several companies are linked to feedstock rates. Hence as input costs softened, revenues of some firms fell in the June quarter.

But that did not upset investors much, as operating profits continued to grow at a healthy pace. Barring Camlin Fine Sciences, earnings per share of the companies mentioned above rose strongly in the June quarter.

Speciality chemicals are used for development of agrochemicals, animal feed, cosmetics, refrigerants and several other products. Companies need to have process expertise for manufacturing them.

For Indian companies, the competitive advantage comes from cost leadership. Companies focus on niche products and backward integration, and find customers across the value chain, which keeps the costs low. “In many cases, the processes work on involvement of a catalyst which is our proprietary innovation. Such catalysts improve the yields and recovery of the product by more than 8-10%, resulting in lower cost of production," said Omkar P. Herlekar, director of Omkar Speciality Chemicals.

According to Ambit Capital, the global speciality chemicals market is expanding at an average of 5% per annum. Facing compliance, cost and capacity issues, global firms are looking to outsource their manufacturing processes to India. Indian companies are tapping this opportunity by building new capacities, which is expected to help them grow.

“For our various projects in the pipeline we have a total outlay of 450 crore- 500 crore, including normal capex which would be invested over FY16 and FY17 for a basket of products and processes. This capex shall facilitate the growth in volumes of about 15% to 20%," Aarti Industries Ltd told analysts in August.

SRF expects the refrigerant volume to rise and sees a “robust" outlook for the speciality chemicals business despite the slowdown in the agriculture sector.

Similarly, Omkar Speciality Chemicals expects the veterinary business to grow at a strong pace. Herlekar said the firm is confident of maintaining strong double-digit growth in sales.

But these companies face risk from three areas. One is currency volatility, which can swing product prices in export markets. The second risk is competition from other emerging market economies, which are seeing a sharper slowdown. And the third is the cut in client purchases.

All three risks have intensified in recent weeks. How well they are able to overcome these challenges will be seen in the coming quarters.

The writer does not own shares in the above-mentioned companies.

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Published: 06 Oct 2015, 01:56 AM IST
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