Growth Strategies

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Growth Strategies Issues Affecting Indias
Competitive Advantage

• DEEPAK MEHTA
• November 9, 2006

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32 Bn chemical industry expected to cross 60
Bn by FY2010
With current rate it is possible that Indian
Industry will grow much bigger than this
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Indian chemical industry is in hurry to
demonstrate its strength to world

• Beyond exports the industry is helping improve
  BOP position of country though income from its
  various subsidiaries, mergers across globe.
• Its constant zest to excel has proven to help
  consolidate leadership position in certain
  product segments
• Pyridine gtgt Jubilant
• Soda Ash gtgt Tata Chemicals

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Global Scenario, conducive for growth in India

• Low Growth in developed countries drives leading
  players to explore new developing markets
• Core Business PoliciesResulting in multi-segment
  companies exiting non-core product lines
• Cost optimization Consolidation, assuming slow
  growth coupled with pressure on Pricing
• Increasing investments in RD (Specialty
  Knowledge Segment)
• Increased Business Transactions through IT

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Marching towards future...

• India embracing IPR
• Will help mark as strong technological innovation
  hub
• LNG - The New Options In Power Fuel Basket
• Rationalization of tax and duty structure of LNG
  projects, to become a low-cost economy.
• Power plants and LNG plants to set up an
  integrated structure, which will drastically lead
  to cost reduction
• Multi Fiber Agreement
• Implementation of the W TO agreement , phasing
  out QUOTA system will boost trade in China
  India.

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Changing Global Scenario benefit India
Changing Economic Geographies gtgtgt Speciality
Chemicals

• Globalization
• Driven By
• COMMODITIZATION
• of
• SPECIALITY CHEMICAL
• with focus on
• COST REDUCTION

• Opportunities
• to players in low cost locations
• INDIA
• CHINA
• SOUTH KOREA
• Global Scale Plants
• Market Globally

Industry Sub-segment undergoing Change PRINTING
INKS PIGMENTS
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Its all happening around the world.. Indian
chemical Industry is at the core of it
Franchising
De-Mergers
Core Competence
Tie-ups
JV, Alliance
Consolidations
Strategy Alignment
Diversification
Acquisitions
Hiving off
Take Over
Mergers
Turn Around
Backward Forward Integration
Harvesting
Reverse Mergers
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The Urge to Merge

• Mergers Acquisitions are poised to exceed 33Bn
  in 2006 globally.
• Relentless upswing in valuation shows confidence
  in bottom line improvement over the long-medium
  term
• EBITDA Multiples
• Year 2006 gt 11.2X
• Year 2005 gt 9.6X
• Year 2004 gt 9.3X
• Consolidation, Restructuring Geographical
  Repositioning surges the board
• India, China are the beneficiaries in terms of
  enhancement and improvement in value chain
• Phenomenon is exactly reverse for Indian
  companies
• As they are venturing out for enriching their
  global presence

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Inorganic Chemicals

• FY0506 has been good year for Inorganic Industry,
  keeping up growth rate of 9
• Significant price jump for inorganic commodities
• Higher demands leading to higher capacity
  utilization, some companies doing extremely well
• Debottlenecking and Capacity enhancement has been
  focus for major players. (GACL, Grasim, Bihar
  Caustic, Shriman etc.)
• New Capacities were also added responding to
  increase in demand (Gujarat Fluoro)
• Growth Prospects
• Short Term temporary bunching is likely to take
  place
• Demand for Caustic in India is likely to go up as
  a result significant rise in Aluminium production

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Organic Chemicals The fortune will move in line
with extended Petrochemical cycle

• FY0506
• BTX Prices and supply conditions were relatively
  stable as compared to last year
• (Benzene price decline from 932 of FY0405 to
  770 in FY0506)
• Propylene Phenol seen violent fluctuations
• O-xylene price decline despite the rise in
  feedstock
• Margins of MAN improve due to lesser decline in
  prices
• Coming Years
• New IPA capacities being commissioned may
  catapult India as a net exporter.

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Fertilizers

• FY0506
• India headed for short supply of phosphatic
  fertilizers
• Consolidations OSWAL, a giant group de-merged
  into two entities
• Phosphatic group is taken over by IFFCO
• Nitrogeneous group is soled off to KRIBHCO
• First Oman fertilizer plant installed, based on
  low cost gas exclusively for exports of urea to
  India
• Growth Prospects
• fertilizers are expected to grow at 3 to 4 rate
• Urea prices are estimated at 130-150 for long
  term, should India continue its self reliance in
  Urea?

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Agrochemicals

• Worldwide agrochemical market is shrinking
• India
• Combined market of Rs 40 bnof Y2004 is estimated
  to have reached at Rs 42.5 Bn, mainly on account
  of export growth while largely domestic market
  size remained constant and bad season.
• While export grew by 17.3 in Y2004 in value
  terms, its estimated growth of Y2005 is 16
• Insecticides accounted for 71 of exports in
  volume and 83 of exports in value.
• 65 of global market is off-patented by 2005,
  posing major opportunity for Indian firms for
  growth

Market size based on actual consumption
industry size accounts for institutional sales
also.
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Pigment World size (Organic Pigments)

• Consolidations
• XSYS formed through merger of BASF Printing
  Systems and ANI Printing Inks in Y2004
• XSYS acquired US based Flint Ink Corporation in
  September Y2005
• Will lead to creation of a strong global supplier
  to the graphics packaging industries with
  revenues of about 2.6 billion

• Azo
• Consumption to increase 6.4 per year till Y2008
• HPP yellow to record greater growth
• Phthalocynin
• Growth 6.9 per year till Y2008
• Application will remain concentrated in ink
• Other organic pigments
• Growth 6.6 per year till Y2008
• Other HPP, Anthraquinone derivatives, thioindigo

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Paints Growth rate of domestic industry will
boost pigment consumption

• Domestic Paint Industry constitutes for 22 of
  end use segment for the organic pigments

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Pigment Indian Scenario

• Consolidations
• Huber buying stake in Micro-inks
• Dainippon Ink has withdrawn from Sudarshan
• Sun Chemicals USA initiated aggressive sourcing
  from India
• Clariant declared its Indian arm as one of the
  important sourcing HUB

• Globally fastest growing market with the rate of
  6
• Demand Drivers are Paints, Coating plastic
  industry
• Capacity built ups by multinationals
• Clariant expansions in Roha
• Heubach (India) building capacities for global
  requirement

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While growth rates estimated by FI are attractive
from local perspective Global forays of
Indian Chemical Firms are taken seriously

• Overall Industry estimates are indicating better
  growth prospects for Indian chemical industry
• Indian companies are seen aggressive on global
  platform through activities like overseas
  acquisition, takeovers, consolidations and bring
  CRAM to India
• Big Multinational players are shifting their
  manufacturing base to India.
• Saturation in domestic market is being covered by
  aggressive export.

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Issues Macro-economic Environment

• Policy for Price competitiveness
• Maintaining the Real Effective Exchange rate of
  the Rupee at a level appropriate for ensuring
  price competitiveness of exports.
• Balancing of overall lower tariffs by protecting
  sensitive items which are likely to be affected
  due to removal of QRs.
• Trade Defense Mechanism
• Effective and fast-responsive trade defense
  mechanism to provide protection to domestic
  industry, as and when it faces unfair trade
  practices.
• WTO Compatible Policies
• India needs to constantly examine as to whether
  the subsidies are actionable or not.
• Trade Agreements
• FTA shall be on Check List of broad country /
  region / continent specific Comprehensive
  Economic Partnership Strategy and not as stand
  alone agreement

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Issues Macro-economic Environment

• Flexibility in labour policy
• Export Credit
• Treatment of term loans to EOUs as part of export
  credit
• Inclusion of Export credit as part of priority
  sector lending
• Inclusion of EXIM bank among eligible
  institutions for export refinance facility
• Ensuring that domestic and foreign currency
  credit reflect movements in market interest rates
  and LIBOR respectively
• Market Development Programs and Dissemination of
  Information
• Loan guarantees and export credit insurance in
  difficult markets and medium/long term projects
• Enhanced funding for existing export promotion
  activities like trade fairs, trade missions,
  reverse trade missions, buyer-seller meets,
  catalogue shows etc.
• Technical assistance for bids and attaining
  international quality standards and
  certification,
• Concessional funding for technology absorption
  and market development
• Intellectual Property Right (IPR)
• Institutional Mechanism for Follow-up

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Level Playing Field Required

• TAX on AIL while zero tax on imports against
  Advance License
• VAT benefits are still not available on CST
• Power rates in states are very high Cess
  introduction for in-house production
• Overall taxes yet at over 27as compared to 17
  in China so local growth of end product has
  shrunk.

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GIVE US INFRASTRUCTURE WE PROMISE GROWTH

• Integrated SEZ Mega Chemical Complex
• Overhaul of total domestic infrastructure
• Phenomenal growth in RD is anticipated in near
  future, Expect shortage of Skilled Technical
  Manpower in thousands
• THINK BIGgtgt Be World-Size by design not by
  default

HARDWARE
SOFTWARE
MINDWARE
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Typical Models expected to be persuaded by
Chemical Industry
Chemicals companies in India are developing
strengths to compete globally, not just this
year .. or next year. but in Y2010
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Thanks