CHEMICAL SECTOR
UPDATE
Indian Chemical Sector Update
Inside
1. Economy Update
a. Global
b. Domestic
2. Industry Update
a. Global
b. Domestic
a. Domestic
b. Global
ECONOMIC
OVERVIEW
GLOBAL ECONOMY
The global economic growth during
the second half of FY17 continued
to improve steadily. In fact, after
six long years of sub-par growth,
for the first time, all key economies
beckon stabilization / improvement
in most of their growth indicators.
The optimism was also visible in Apr
2017 World Economic Outlook
release of IMF. For the first time in many
years, IMF upgraded global growth
forecast to 3.5 percent in 2017 and 3.6
percent in 2018, a tad better than its forecast in Oct 2016 and considerably better than 3.1 percent seen
in the 2016.
The pickup in global growth is backed by stronger growth across all key markets. The early part of 2016
saw bottoming out of most commodity prices and other cyclical assets. Despite, the potential challenges
of protectionism, especially from new elected political regime across many leading economies, the global
trade index bottomed out in early 2016. These helped to not only allay the much feared deflationary risks
but also edging up of headline inflation in most advanced economies (AEs). The core inflation in most
markets remained subdued, though theyll be challenged by the diminishing slack and tighter labour
market condition.
Fed increased the rate twice during this period to a target range of 0.75 percent to 1 percent, a 50 bps
increase. Most economists expect at least two more rate hikes during the year. Not surprisingly, due to
the increase in cost of capital, the record valuations seen in 2015 have already receded by a few notches.
Despite these increases, it is important to take note of the fact that historically whenever the global
economy has made an upturn, the interest rates have been much higher than the current levels.
Additionally, while the deal multiples optically look near all-time high, they are well supported by low cost
of debt, better visibility of economic upturn, greater pricing power due to industry wide consolidation and
larger economies of scale.
CHEMICAL SECTOR UPDATE
INDIAN ECONOMY
In contrast to most other large economies that are at onset / witnessing tighter monetary policy, in India
the monetary policy loosened during the year. Helped by sharp surge in deposits due to demonetization
and incomplete pass-through of earlier reductions in policy rates, H2FY17 saw a much steeper drop in
bank lending rate.
As we had debated in our last newsletter, demonetization is likely to have a short term negative impact on
CY16 and CY17 economic growth though over the longer term, if implemented well, it is expected to
boost economic growth. In line with same, the sharp liquidity squeeze had a short term debilitating
impact on almost all industries, specifically unorganized sector and those where cash transaction was
well entrenched in the business value chain.
Due to sharp liquidity squeeze in Q3FY17 and Q4FY17, IMF downgraded economic growth estimates to
6.8 per cent and 7.2 per cent for the year 2016 and 2017 respectively, from the earlier estimated 7.6 per
cent each for both the years. However, with the liquidity getting back into the system, the economy is
gaining back its mojo. IMF expects Indian economic growth to pick up to 7.7 per cent in calendar year
2018. Despite these diminutions, Indias growth rate remains admirable. Indian economy is expected to
be the fastest growing large economy both in FY17 and FY18.
INDUSTRY
OVERVIEW
Chemical industry, akin to technology industry, helps almost every other industry to enhance
their appeal, longevity, performance and efficiency. The Chemical industry is gradually
transitioning from a process industry to an innovation led customer-centric industry.
GLOBAL
During H2FY17, many large corporates continued to streamline their product portfolio by downsizing or
completely exiting from non-core assets while in the same breath acquiring (even larger) core assets.
FMC-Dupont was one such deal and has been discussed in the latter part of this section.
Number of factors such as natural evolution of the industry, slow yet steady improvement in global
economy, record low interest rates and potential loss of competitive edge on back of industry wide
consolidation have transitioned M&A from an optional strategic instrument to an integral part of their
business strategy.
The global deal announcements in Chemical space during H2FY17 remained robust and broad based.
The first nine months of the calendar year 2016 witnessed many large deals, especially in agrochemical
space. The deal activity in the second half of FY17 comparatively was more homogeneous. With many
large deals already announced, the fulcrum of deal activity is gradually shifting to middle-market segment.
All key sub-sectors viz. Coatings, Specialty Chemicals, Agrochemicals and Petrochemicals witnessed
good amount of deal activity.
Linde AG merger with Praxair Inc. (US). The combined entity leverages unique strengths of each
company: Lindes long-standing leadership in technology with Praxairs operational excellence to
create a more diverse and balanced end market portfolio
Assets swap deal between FMC and DuPont. FMC will acquire a part of DuPonts crop protection
business. The assets FMC will acquire include Cereal Broadleaf Herbicides and Chewing
Insecticides portfolios and DuPont Crop Protection R&D pipeline. FMC will sell its health and
nutrition unit to DuPont.
Global alternative asset manager Carlyles acquisition of Atotech BV, a specialty chemicals
business division of French energy giant Total for USD 3.2 billion.
Blackstone acquisition of Acetow, cellulose acetate tow business of Solvay, predominantly used
in cigarette filters.
CHEMICAL SECTOR UPDATE
Lonzas acquisition of Capsugel from KKR for a consideration of USD 5.5 billion. Capsugel
designs, develops and manufactures a wide range of innovative dosage forms for the
biopharmaceutical and consumer health and nutrition industries
Despite the growing headwinds, the aggression to grow inorganically was palpable. During Q4FY17 PPG
made an unsolicited proposal to acquire AkzoNobel, one of the largest global paints and coatings firm.
The offer values the Companys stock higher than its ever traded price.
CHEMICAL SECTOR UPDATE
INDIA
The use of Chemicals, both in terms of quantity and orientation, is an important indicator of the
development of any economy or industry. Indian Chemical Industry is at a very early stage of its
development. India based Chemical companies, unlike Middle East or US based chemical companies
have limited access to raw materials. They also are in initial stages of developing Know How on the
differentiated applicability of these chemicals that can help them develop innovative and customized
solutions for their clients. This area is denominated by knowledge intensive companies primarily based
out of US, Europe and Japan.
Over the last few years though, the Indian Chemical industry has seen considerable advancement in its
growth and orientation. There are number of reasons for the same. Indias proven knowledge / R&D skills
and track record as an alternate innovation hub for technology and pharmaceutical industry, English
skills, availability of skilled scientists and researchers at competitive cost have aided the growth of sector,
especially Performance and Specialty Chemicals.
Other factors such as such as Indias decent and improving ranking in International Property Rights index
also places it well as compared to most other emerging markets. Tightening of global environmental
norms especially in developed countries (EUs REACH regulation) and shutting of factories in China also
boosted margins and revenue of Indian players especially for industries such as Agrochemicals, Dyes &
Pigments and Flavours & Fragrances. Gradual realignment of Chinese economy along with make in India
campaign is likely to further enhance Indias attractiveness as an alternate sourcing hub.
From the deal activity perspective Specialty Chemicals, Coatings, Flavor & Fragrances and
Petrochemicals were among the most active in H2FY17.
Domestic Transactions
In a horizontal M&A, Bodal Chemicals, one of the largest manufacturers of Dyes Intermediate, Dyestuff
and Sulphuric Acid, did two domestic transactions during this period. They acquired 70 per cent stake in
S P S Processors, a Kosi, Uttar Pradesh based manufacturer of dye intermediates. Their second
transaction, investment in Trion Chemicals, is aimed at expanding and diversifying their product portfolio.
Trion Chemicals is engaged in manufacturing of specialty chemicals for swimming pools and water
treatment.
Another product expansion transaction was In OmniActive Health Technologies, a producer of natural
food colours and oils acquisition of Indfrag, a producer of natural extracts. Indfrag is a leading supplier of
high quality botanical and plant extracts from India and South East Asia for the dietary supplement and
nutraceuticals industry.
In a vertical integration transaction, IG Petrochemicals acquired Mysore Petro Chemicals, the sole
manufacturer of maleic anhydride in India. The acquisition will forward integrate IG Petrochemicals wash
water business and help it optimize its end realization.
CHEMICAL SECTOR UPDATE
Inbound Transactions
ZCL Chemicals Ltd, formerly known as Zandu Chemicals received Private Equity of around USD 25
million from Morgan Stanley Private Equity Asia. The funds will help ZCL to expand its capacity in
advanced intermediates and bulk drugs, and strengthen its product portfolio in therapy areas including
anti-diabetic and anti-coagulants.
Outbound Transactions
Asian Paints, through its Singapore-based indirect unit Berger International Pvt Ltd., acquired Srilankan
Company, Causeway Paints. Causeway Paints manufactures decorative and refinish paints for
automotive and industrial clients,
Camlin Fine Sciences, a leading Indian antioxidants, aroma ingredients and performance chemicals
company entered into an agreement to acquire 51 percent stake in Ningbo Wanglong Flavors &
Fragrances, based out of China.
Manali Petrochemicals acquired Notedome Ltd, manufactures neuthane polyurethane cast elastomers
and based out of UK. The acquisition will help Manali Petrochemicals upgrade its technologies,
strengthen its specialty and value-added products portfolio, and expand its global customer base.
CHEMICAL SECTOR UPDATE
INPUT PRICE
TREND
Source: Reuters
KEY
TRANSACTIONS
DOMESTIC
Announce Deal Type Target Country Target Description Acquirer Country
Date
NPL makes hydrogen peroxide, a
chemical used in industries such as
Partner's textile bleaching, chemical synthesis,
National
Mar-17 Stake India paper and pulp and metal extractions. It Wadia Group India
Peroxide
Acquisition also makes specialty chemicals such as
sodium perborate. It has a capacity of
95,000 metric tonnes a year.
Partner's
Indian Oil The joint venture makes chemical Lubrizol India
Mar-17 Stake India India
Lubrizol JV additives for lubricants. Pvt Ltd
Acquisition
Ningbo
Ningbo Wanglong Flavors & Fragrances
M&A Wanglong Camlin Fine
Dec-16 China is a Chinabased vanillin and fragrance India
Outbound Flavors & Sciences
manufacturer.
Fragrances
GLOBAL
Announce Target Country Target Description Acquirer Country
Date
Houghton International is an international subsidiary
of Gulf Oil, a Hinduja Group Company. The
business will have one of the worlds most
expansive metalworking platforms comprised of
specialty products that include removal fluids, Quaker
Houghton forming fluids, protecting fluids, heat treating fluids, Chemical
Apr-17 International US industrial lubricants and greases. Corporation US
Wisdom
Worldwide Wisdom is the longest continuously operating H.B. Fuller
Jan-17 Adhesives US adhesives manufacturer globally. Co. US
MacKenzie Edgewater
Chemical's The product Line manufactures metal Capital
Acetylacetonat acetylacetonates which finds use as catalysts, cross Partners LP
es Product linkers, curing agents and stabilizers, primarily in and FAR
Nov-16 Line US adhesives and urethane applications. Chemical US
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