VP Goa meet 2019 was great accelerated learning experience as always. Our team prepared presentation on Chemicals sector. Idea was to present background on the sector with more company specific focus.
Our team consisting of Ankit Gupta, @phreakv6, @desaidhwanil, @spatel, Narendra and myself have tried our best to bring differential insights about the companies. Hope this will be of help to study the sector further.
Please feel free to post your queries in this thread.
Thanks for sharing it add a new chapter in my learning .The presentation is really good . how to explore more and to seek WHY … The missing link is the management part each of the chemical companies .However briefly your team has discussed in NGL fine Chem and in DMCC … and another missing part which i think will be vital is the anti dumping duties on various products as this give boost to local manufacturer and give them a edge in domestic market .
This is an amazing and excellent work kudos for you all seniors and VP’s team mates
Thanks and regards
Disc: invested in NGL Not an sebi approve analyst or advisor
Thanks for the feedback. We had 4-5 minutes to present for each company, hence kept it brief for differential insights rather than covering facts.
Facts about management is available publicly, on the other hand making assessment of management becomes too subjective and controversial at times. Your feedback is well noted, maybe in future we will include an appendix page with summary of management info.
Great job by the team. There was one sentence in the presentation under key risk of the GLE slide “Market size to fall off the cliff after the capex cycle is completed”. Could not understand this - can any of the guys elaborate on this?
I think we are near to bull run top on ‘specialty chemicals’ theme. This is based on data trending from tweeter, stock advisers, mutual funds houses, wealth advisers, investors forum, etc.
Similar things were seen in 2016-17 for NBFC, HFC when everyone was bullish on NBFC, HFC.
Also, just had look at investors/analysts meeting called by chemical companies…this is highest number of investors/analysts meeting called by chemical companies in last 10 years…means promoters are more interested to increase their company’s market cap than increasing their market share of products (not meeting with consumer/customers more frequent than investors/analysts!!)
When you hear one theme many times in a day from different media/people, one must believe that it is already priced and no safety margin left!!
Couple of things that I want to know since I have never invested in this sector …
Why large MNC companies like Shell etc moved out these spaces ??
Is there a risk like what happened to Sterlite plant in Chennai for these companies - If so what MOS should we take - vis a vis global chemical companies like BASF , DOW etc . who own patents .
In b2b business customers have a fair idea of cost structure of products and hence ability to charge higher margin is difficult unless you have access to cheaper RM or energy cost .
What is driving GMs of these companies as both RM ( Crude oil effective cost and energy cost are higher in India ) and labour accounts for small portion of expenses - hence unlike IT companies that does not give companies an edge …
Small chemical companies doesn’t have good infrastructure to mitigate fire and explosion risk. In a chemical plant, being flammable and explosive chemicals handled, if fire and explosion happen, it could wipe out company and investors money. Insurance doesn’t cover everything
Thanks Shailesh. My views on your questions, maybe others can add as well.
It is difficult for them to compete in all the range of chemicals. Especially when you require economies of scale. MNCs generally keep moving up the value chain and vacate the lower space.
There are multiple risks for all such companies - labour laws, higher compliance in future, risk of plant shutdown, protest from environmental bodies or NGOs etc. We need to understand that its not FMCG, the risks are real and generally these chemicals are hazardous irrespective of who is producing it
Not really. Some of them are required in small quantities and there are limited suppliers. So broadly its governed by demand-supply dynamics. Most of the time consuming industries are price takers.
Apart from low end commodity chemicals like bulk chemicals, dyes, pigments, surfactants etc., the high-end niche chemical producers have created multiple layers of entry barriers listed below:
Patents/process IP etc.
Process excellence and achieving stability and purity levels
Economies of scale + Low cost
Supply chain efficiencies and proximity to raw materials
This is more to do with lumpiness of the GLE business with big capex being spent in the sector over the next 2 - 3 years which will taper off once the capex gets completed. Many of the cos in the sector are almost doubling their gross block in the next 2 - 3 years in anticipation of good growth which will lead to significant growth in the GLE industry size of 500 crore currently (may be 2 - 3 times - we will have to see that). However, these demand will reduce a bit in the precedent years as the chemical companies will try to ramp up their capacities and consolidate before thinking of further capex.
I am a chemical engineer and know better how chemical industries working.
When everyone are too optimistic and extrapolating china’s loss and India’s gain in chemical industries, one must consider following also carefully -
(1) Day by day India is more focused on environment and stricter rules /enforcement coming in India also. (https://www.indiainfoline.com/article/news-top-chai-time/excel-crop-s-bhavnagar-unit-issued-notice-for-closure-by-gujarat-pollution-control-board-119062600412_1.html)
(2) Considering industrial fire and safety incidents, Indian govt in process to update more strict rules
(3) small chemical industries does not have infrastructure to mitigate fire & explosion risk. Insurance does not cover everything. Production loss and rebuilding plant cost could wipe out small company.
(4) Small chemical industries (just like auto ancillaries industries) supplies API/raw chemicals to final product producers (big chemical industries). Overall de-growth of final products could affect small chemical industries. (like presently auto ancillaries industries)
(5) Chinese industries quickly adept changes also there is low public protection. In india, as public become more aware about environment and safety, protection is also increasing against non-compliant industries (recent sterilite case)
Hence, nothing wrong to be optimistic about chemical theme but one must consider factor of safety in investing considering it is also cyclic industries !!
Excellent Presentation @vivek_mashrani. Where can I find more info on the quality of patents and IPs that companies hold. Do you have any examples of companies holding hard to achieve patents and IPS? Thanks.
