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CHEMICAL SECTOR UPDATE

CAPITALSQUARE ADVISORS PRIVATE LIMITED

CHEMICAL SECTOR
UPDATE
Indian Chemical Sector Update

Inside

1. Economy Update

a. Global

b. Domestic

2. Industry Update

a. Global

b. Domestic

3. Price Trend of Key Raw Materials

4. M&A Transaction Review

a. Domestic

b. Global

5. About CapitalSquare Advisors


CHEMICAL SECTOR UPDATE

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.

Moreover, steps like demonetization and GST,


though have potential to create large systemic
difficulties in short term, over the medium to longer
term can considerably boost the productivity and
efficiency of the system as a whole. These steps
also enhance the confidence of both local and global
investors on governments ability to take tough
reforms. Additionally, the recent state elections
victory has provided the government with additional
ammunitions to undertake such large reforms.

These factors along with stable / improving


macroeconomic indicators such as shrinking fiscal
deficit and stable current account deficit have considerably boosted the interest of long term investors in
Indian economy. The strong global interest was also evident in strong capital inflows. As a result, the
balance of payment was high, has resulted in strong INR gains against most currencies
CHEMICAL SECTOR UPDATE

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.

A few of the billion dollar deals during the period included

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

Energy Natural Resources (USD/MT)

Olefins (USD/MT) Aromatics (USD/MT)


Aromatics
CHEMICAL SECTOR UPDATE

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.

Trion Chemicals recently started


manufacturing Trichloroisocyanuric acid
(TCCA). TCCA is a disinfectant,
Strategic Trion Bodal
Mar-17 India algaecide and bactericide mainly for India
Investment Chemicals Chemicals
swimming pools and dyestuffs, and is
also used as a bleaching agent in the
textile industry.

Partner's
Indian Oil The joint venture makes chemical Lubrizol India
Mar-17 Stake India India
Lubrizol JV additives for lubricants. Pvt Ltd
Acquisition

S P S Processors Pvt. Ltd. is engaged


SPS
M&A in manufacturing of dye intermediates. Bodal
Feb-17 Processors India India
Domestic The manufacturing plant is located at Chemicals Ltd
Pvt. Ltd
Kosi, Uttar Pradesh.

Causeway Paints makes decorative and


M&A Causeway Sri refinish paints for automotive and
Feb-17 Asian Paints India
Outbound Paints Lanka industrial clients, besides other
products.

Tanishka Products (TP) is a partnership


firm into business of manufacture and
sale of micro-encapsulated fragrances.
M&A Tanishka
Feb-17 India Fragrance encapsulation technology is SH Kelkar India
Domestic Products
ideally used in the fabric & laundry
industries to ensure that fragrance lasts
long on dry fabrics.
CHEMICAL SECTOR UPDATE

Four M Propack is a step down


subsidiary of Cipla and a wholly owned
M&A Four M subsidiary of Goldencross Pharma. The Shriji Polymers
Jan-17 India India
Domestic Propack company is engaged in the business of India Ltd.
manufacturing of HDPE bottles and PP
caps for the pharmaceutical industry.

Indfrag is a producer of natural extracts


OmniActive
M&A for dietary supplements, sports nutrition,
Jan-17 Indfrag India Health India
Domestic pharmaceuticals, food and cosmetic
Technologies
industries.

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

Zero Waste Agro-Organics specialises


in the business of converting bi-products
Partner's Zero Waste materials into high grade customized
Nov-16 Stake Agro- organic soil conditioning fertilizers. The Rallis India
Acquisition Organics Company has multi location Toll
Manufacturing Facilities with sugar and
ethanol based industries.

Mysore Petro Chemicals is the sole


manufacturer of maleic anhydride in
India. Maleic anhydride is used to
Mysore manufacture of alkyd resins, IG
M&A
Nov-16 Petro India agrochemicals, malic acid, copolymers, Petrochemicals India
Domestic
Chemicals fumaric acid, lubricant additives, Ltd
surfactants and plasticisers. Alkyd
resins in turn are used in manufacturing
of paints and coatings

Notedome has presence in 45


countries. It manufactures neuthane
M&A Notedome Manali
Oct-16 UK polyurethane cast elastomers, used in a India
Outbound Ltd Petrochemicals
range of industries including automotive
and agriculture sectors.
CHEMICAL SECTOR UPDATE

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

FMC will acquire DuPonts Cereal Broadleaf


Herbicides and Chewing Insecticides portfolios
DuPonts Crop along with crop protection R&D assets. The
Protection transaction will also involve DuPont acquiring FMCs FMC
Mar-17 Business; US Health & Nutrition business Corporation US

Sirrus using its cost advantaged processes


produces reactive monomers at high purities. Its
leading target monomer, diethyl methylene
malonate, or DEMM, together with its derivatives, or Nippon
Mar-17 Sirrus, Inc Japan MM-D, can be used in a variety of applications. Shokubai Japan

BASF Leather Chemicals business is present along


the entire industry value chain, it offers innovative
BASF Leather and sustainable solutions for all wet-end to finishing Netherla
Mar-17 Business Spain processes in the leather industry. Stahl nd

Covestro manufactures high-tech polymer materials


and develops innovative solutions for products used
in many areas of daily life. The main segments
Covestro served are the automotive, electrical and Accella
Polyurethane electronics, construction, medical and sports and Polyurethan
Feb-17 foam business US leisure industries. e Systems US

SummitRehei, SummitReheis, Inc. is a global leader in anti- Elementis


Feb-17 Inc. US perspirant actives market Plc UK

Century Century Industrial Coatings manufacturs high Axalta


Industrial performance industrial coatings for structural steel, Coating
Feb-17 Coatings US oil and gas, rail cars and other OEM applications. Systems US

Niacet is a leading producer of organic salts,


Niacet including propionates and acetates, serving the
Feb-17 Corporation US food, feed, pharmaceutical, and technical industries. SK Capital US
CHEMICAL SECTOR UPDATE

Announce Target Country Target Description Acquirer Country


Date
Aakash Chemicals is a supplier of colorants,
additives and other specialty chemicals. The
Aakash Company supplies products for use in a variety of
Chemicals & industries, with a focus on plastics, coatings and CenterOak
Jan-17 Dyestuffs, Inc. US graphic arts end markets. Partners US

Wisdom
Worldwide Wisdom is the longest continuously operating H.B. Fuller
Jan-17 Adhesives US adhesives manufacturer globally. Co. US

Prochem is a manufacturer of professional RPM


equipment and chemicals for cleaning and restoring International,
Jan-17 Prochem US carpet, upholstery and hard flooring surfaces. Inc. US

Diversified Silicone Products is a custom silicone


product development and manufacturing Company.
Products manufactured serve a wide range of high
Diversified reliability applications across industries such as
Silicone aerospace, automotive, life sciences and general Rogers
Jan-17 Products, Inc US industrial Corporation US

Arnette Polymers, LLC is a manufacturer of


specialty chemical raw materialssuch as resins, RPM
Arnette hardeners, curing agents and other intermediates International,
Jan-17 Polymers US for use in epoxy and polyurethane materials. Inc. US

Fremont Kurita Water


Industries, Fremont Industries is a water treatment chemicals Industries
Jan-17 LLC US manufacturing company. Ltd Japan

Dunn-Edwards manufacture premium paint products


and is one of largest independent manufacturers Nippon Paint
Dunn-Edwards and distributors of architectural, industrial and high Holdings
Dec-16 Corporation US performance paints and paint supplies. Co., Ltd. Japan

Linde AG produces and distributes gases for


applications in industry, medicine, environmental
protection, and research and development. The
company also offers plant engineering and supply
Dec-16 Linde AG Germany chain services. Praxair, Inc. US

Capsugel is a globally leading provider of high-


quality, innovative dosage forms, technologies and
solutions to the pharma and consumer healthcare Switzerla
Dec-16 Capsugel US and nutrition industries. Lonza nd

J.M. Huber Huber's silica business manufactures silica products Evonik


Silica for industries such as consumer, animal feed, and Industries
Dec-16 Business US paints. AG Germany
CHEMICAL SECTOR UPDATE

Announce Target Country Target Description Acquirer Country


Date
Acetow is a leading global producer of cellulose
acetate tow predominantly used in cigarette filters.
The product is the second-largest component of
cigarettes, and about 90 percent of sales are to the
Dec-16 Acetow Germany tobacco industry. Blackstone US

Canexus Corp. primarily produces sodium chlorate Chemtrade


and chlor-alkali products for the pulp and paper, Logistics
Dec-16 Canexus Corp. Canada petrochemical, and water treatment industries. Income Fund Canada

DanChem Technologies provides process scale-up Edgewater


DanChem and contract manufacturing (tolling) services to the Capital
Dec-16 Technologies US fine and specialty chemical industries. Partners LP US

Proviron offers chemical solutions in fields like


polymer additives, PLA compounds, functional
chemicals (stabilisers and pharmaceutical
Proviron Basic intermediates), and aviation de-icing fluids, feed
Dec-16 Chemicals Belgium ingredients, microalgae and toll manufacturing. Livia Group Germany

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

GMM Group is a specialty non-stick coating


chemicals manufacturing company headquartered
in Hong Kong, China. Their application is mainly in
the field of consumer goods such as cookware, Showa
Nov-16 GMM Group China bakeware, and various home electrical appliances. Denko Japan

BASFs BASFs inorganic specialties business includes the


inorganic Evans City (Pennsylvania, US) production site and Edgewater
specialties the specialty alcoholates, boranes and alkali metals Capital
Nov-16 business US product lines Partners LP US

Sapec Agro Business manufactures crop protection


products (such as herbicides, insecticides and
fungicides) and speciality crop nutrition solutions Bridgepoint
Sapec's Agro (speciality fertilizers such as micronutrients and Advisers
Nov-16 Business Portugal biostimulants (PE) UK

K-Resin styrene-butadiene copolymers (SBC) is a


unit of Chevron Phillips Chemical Company
(Chevron Phillips Chemical) and Daelim Industrial. It
manufactures remier clear resin which is used in
K-Resin SBC South various applications ranging from packaging and Ineos
Oct-16 business Korea toys to medical components and displays Styrolution Germany
CHEMICAL SECTOR UPDATE

Announce Target Country Target Description Acquirer Country


Date
EPChem is distributor for special performance
Distribution chemicals for waxes and wax related products. The
business of transaction involves acquisition of its distribution
Oct-16 EPChem Singapore business in Indonesia and China. Brenntag Germany

Mactac Americas is owned by Private equity firm


Platinum Equity LLC . It produces pressure-
sensitive materials, including adhesives, that serve
Mactac companies that make graphics, specialty labels and
Oct-16 Americas LLC US industrial tapes. Lintec Japan

Cappelle Pigments is a leader in specialty, high-


Cappelle performance inorganic and organic pigments used Ferro
Oct-16 Pigments Belgium in coatings, inks and plastics Corporation US

NOCO supplies high quality lubricant products to a


Lubricants broad range of industries. The acquisition does not
business of impact NOCO's energy distribution or retail
Oct-16 NOCO Inc US businesses. Brenntag Germany

Chromaflo Chromaflo is a leading independent global supplier


Technologies of colorant systems, chemical and pigment American
Oct-16 Corp US dispersions. Securities US

Atotech B.V. is a global leader in metal and surface


finishing technologies, with two business segments:
electronics (printed circuit boards, semiconductors)
and general metal finishing (for end-markets such
Oct-16 Atotech B.V Germany as automobile, construction, furniture etc). Carlyle US

Dominion Colour Corporation is a leader in colour


pigment solutions and preparations for the coatings,
Dominion plastics and specialty ink industries worldwide. It
Colour offers a broad product portfolio focused on high H.I.G.
Oct-16 Corporation Canada performance inorganic and organic pigments. Capital US

Resin Designs is a formulator of customized


adhesive and sealant systems used in high-
reliability electronic applications. Applications
include semiconductor packaging and devices, EMI
Resin shielding, enclosures, smart cards and hybrid Chase
Oct-16 Designs, LLC US microelectronics assemblies. Corporation US
CHEMICAL SECTOR UPDATE

ABOUT CAPITALSQUARE ADVISORS


CapitalSquare Advisors is a mid-market focused investment bank and a Category I Merchant
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