11 May 2020
COVID-19’s Impact on Indian Chemicals Sector
In the weeks following India’s lockdown to contain the spread of novel coronavirus (COVID-19), the chemicals sector has witnessed considerable short term volatility but is well positioned to benefit in the near future, given the decline in prices of key feedstocks, and COVID-19 related manufacturing shifts away from China. We have examined both the short-term and long-term factors shaping this sector in India, and where future opportunity may lie for corporates, private equity and private owners of business.
The BDA Chemicals sector team would like to share our latest findings with you.
- India’s chemicals sector is the 6th largest in the world and has witnessed strong growth momentum over the last couple of years. Following global supply-chain disruptions and the government’s lockdown measures to restrict the spread of COVID-19, Indian capital markets experienced a significant decline in March 2020, and a subsequent rebound in April. Given the essential nature of the chemical sector, manufacturing operations resumed shortly after the initial lockdown, reflected by a moderate price impact for listed Indian chemical companies
- Even before COVID-19, global chemical manufacturing operations had already increasingly relocated to India from China, which will only continue after COVID-19 as more companies evaluate alternative supply chain solutions. Decline in crude oil prices since the beginning of this year will also have a significant impact on the raw material pricing from a short-term to medium-term perspective
- The short-term impact related to COVID-19 will disrupt the current year financial performance of companies until virus-related economic disruption is mitigated. However, companies with strong balance sheets and low debt levels will be well-equipped to operate through the uncertainty, likely emerging stronger and more resilient operations
- For unorganized players, the inability to adhere to strict social distancing guidelines for resuming operations have led to loss in business to large organized players
- Sectors like Specialty Chemicals, Agrochemicals and Pharma Intermediates will have limited impact given their essential nature
- Insights informed by BDA’s longstanding experience in the Chemicals sector highlights how M&A activity will evolve for corporates, PEs and private owners of chemicals business. We would see consolidation, new investments, and distress sale raise the level of M&A activity for corporates and private equity
Overall, we continue to see M&A activity such as growth capital and distress sales to continue in the short-term while consolidation will resume once the impact of the virus can be translated to the financials and future of the businesses.