The boom in specialty and bulk chemicals has brought into focus Indian suppliers of aromatic chemicals used in everything from perfumes and lipsticks to packaged foods.
Global companies either acquired stake or partnered with domestic firms in the segment this year in at least three such deals. That comes when suppliers of raw materials to the consumer goods sector are now looking to diversify beyond China.
Consolidation is happening in the industry for the last two decades, Rohit Saraogi, chief financial officer of SH Kelkar and Co., an exporter of aromatic chemicals, told BloombergQuint over the phone. “With growth slowing down post the pandemic, global players are showing active interest in the regional/local companies to expand their footprint and network.”
Aromatic chemicals give perfumes and cosmetics their unique fragrance, and packaged food and cookies to pastries the taste and aroma.
Fragrances and flavours industry is worth $30.4 billion (around Rs 2.2 lakh crore), with raw materials contributing $5.5 billion (about Rs 41,000 crore), according to a report by Haitong Securities. And the overall market is expected to expand at a compound annual growth rate of 5.8% by value from 2020 to 2027.
Growing demand for perfumes and body deodorants in recent years and new product line-ups with toiletries are also aiding growth, according to the Haitong Securities report. “Medical products and treatments using aromatic ingredients will further spur growth.”
That's prompting companies to tie up supplies and expand capacity.
"Large global formulators (companies that produce fragrances and flavours) are backward-integrating in the form of some strategic partnership or acquisition," Rajesh Kothari, founder and managing director of AlfAccurate Advisors Pvt., told BloombergQuint. The firm has invested in Privi Speciality Chemicals Ltd., an Indian supplier of raw materials for these companies.
At the beginning of this month, the Swiss firm Firmenich SA acquired a 10% stake in Mumbai-based fragrance company SH Kelkar & Co.
In April, SH Kelkar acquired the Italy-based Nova Fragrances S.r.l.
In July, a joint venture was announced by Privi Speciality and the Swiss multinational company Givaudan SA for setting up a greenfield production facility in Mahad, Maharashtra.
And in February this year, Eternis Fine Chemicals Ltd. acquired the U.K.-based specialty chemicals firm Tennants Fine Chemicals Ltd.
The global fragrance and flavour market is largely oligopolistic with a few aroma formulators, said Kothari. These include Givaudan, Firmenich, American firm International Flavors & Fragrances Inc., Germany’s Symrise AG and Japan’s Takasago International Corp. This group controls the market and supplies to consumer and personal care industries.
India’s largest aroma chemicals company SH Kelkar is also a formulator.
Privi Speciality Chemicals and Oriental Aromatics Ltd. are suppliers of raw materials that go into making these chemicals. Eternis Fine Chemicals Ltd. and Anthea Aromatics Pvt. are their unlisted peers.
Why Indian Companies Stand Out
According to Kothari, Indian companies benefit from lower labour costs and less-stringent pollution control norms as compared to Europe where penalties can raise costs or cause losses and bankruptcies.
China-Plus-One
While it would be difficult to match operating costs with China, companies are looking for alternative raw material sourcing channels to reduce dependence on China. The Asian nation is reducing electricity supply to heavily polluting industries to cut emissions.
The China-plus-one strategy will lead expansion of capacity in other Asian countries, according to Saraogi of SH Kelkar. “However, it will take around two decades to develop a material base for end-to-end integration and reduce dependence and will have no impact on formulators."
Backward Integration
Kothari said the aromatic chemical formulators have long-standing relationships with multinationals with a minimum contract period of 12 months. While fragrance and flavour chemicals contribute a small portion of the overall cost of manufacturing, they're indispensable. As a result, formulators face heavy penalties in case of default. So, internal sourcing reduces supply risks, he said.
Competition
As more formulators backward integrate by acquiring bulk manufacturers, which earlier supplied to multiple companies, there is a race to protect business secrets, according to Kothari. And they are also looking at other manufacturers with captive raw material, he said.
Companies are also looking to expand their business reach, driving consolidation.
Saraogi said, "Regional players have significant market participation and influence established over local companies. Global companies see enough potential and in these regional jewels."
Emailed queries to Privi Speciality and Oriental Aromatics remained unanswered.
Outlook
SH Kelkar
The company produces aroma chemicals while manufacturing a small portion of its raw materials in-house for captive consumption and sale.
In the second quarter earnings call, Chief Executive Officer Kedar Vaze said the company registered a 15% growth across Europe and emerging markets.
The demand from emerging markets has revived and the company does not see a challenge clocking 12% CAGR for this year.
Vaze, however, flagged cost concerns.
Saraogi told BloombergQuint that SH Kelkar is open for any strategic opportunity which helps drive shareholder .
Set up a raw material plant at Mahad for captive consumption and third-party sales.
Privi Speciality
According to Haitong Securities:
Enjoys more than 20% market share in 10 products globally, contributing 80% of its revenue.
Backward integration to make pine-based aroma chemicals from crude sulphate turpentine is its key strength.
CST has advantages over gum turpentine oil as it’s 15-20% cheaper and allows long-term contracts, providing stability in supply and prices.
The company is set to launch multiple new products including camphor and galaxmusk in the next four to five months.
Backed by new capex of Rs 500 crore, utilisation of existing capacities and research and development initiatives, the company is likely to more than double its revenue to Rs 3,000 crore in the next three to four years.
The joint venture with Givaudan is also of strategic importance for the company.
Oriental Aromatics
The company uses gum turpentine oil to manufacture aroma chemicals.
It has registered a CAGR of 12% over five years through FY21.
Kothari said there is good demand visibility due to large capex expansion plans.
In the earnings call, the company's Chief Executive Officer Parag Satoskar said it expects capex investment to contribute 1.7 times to the top line.
The management expects to renegotiate/pass on/work out prices with customers to absorb the increase in raw material costs.
Sector Risks
Raw materials are usually imported from Europe, Canada and North America. Some of these are hard to procure as sources lie in remote locations. That could trigger a major supply and logistic issue for availability and logistics.
The raw material prices have been volatile in the recent past and any adverse changes may impact operating margins.
Since the sector sees frequent exports and imports, they face a significant forex risk as currency volatility could affect profitability.
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