Page 136 - CW E-Magazine (20-8-2024)

Point of View

Trading multiples continue to be high, despite correcting downward
In 2024, trading multiples of large-cap Indian speciality chemical companies (11 companies with a market cap in excess of $1-bn),
corrected downward and under-performed the markets. While NIFY50 companies gave average shareholder returns of 10% over a year,
the large-cap chemical companies were laggards with negative 2% returns. In the first quarter of 2025 these scrips performed better.
Valuations continue to be rich and large-cap multiples continue to be in the 29-30 multiples range (Enterprise Value/EBITDA).

Smaller-sized companies (16with market cap below $1-bn) also under-performed the market – delivering average shareholder returns
of 5%, compared to twice as much for the NIFTY50. Valuations (at EV/EBITDA of 20) are at a substantial discount to the large-caps, but
like the latter have also improved in the current year.

Despite the corrections, Indian chemical companies trade at a substantial premium (28-30x EV/EBITDA) compared to global peers
(14-15).
IPO performance – strong returns but now below peaks
One of the noteworthy trends – over the last five years – is the attention the chemicals sector has received from capital markets.
In the past, the sector was largely shunned (with few exceptions) and had little option but fund new projects and expansions through
expensive debt, which weighed very heavily on financial performance.

In the last five years about 20 companies have floated IPOs, and while their current prices are on average about 43% higher the issue
price, this is a ~34% decline from peak levels, indicating a substantial correction.

Where do valuations go from here?
Over the last five years the chemical industry has been an outperformer – providing returns of 24% for mid-caps and 27% for the
large-caps, in comparison to 15% for the Sensex. While in 2019-2020, the large caps traded at 15-18 (x) EV/EBITDA, currently they are
in the range of 30-32. Likewise, mid-caps, which used to quote at 7-8 multiples in 2019-2020, are now priced in the range of 22-25.

Seen another way, P/E multiples of large-cap chemical companies were comparable to the Sensex (both in the range of 22-24) in
the past, but a divergence has taken place with the former racing away to P/E of 50-53, while the latter has remained unchanged. In the
last few months, there has been an uptick in chemical mid-caps as well, as investors eye opportunities beyond the large-cap space.

Strong business fundamentals
Whether the chemical industry will be able to continue to reward shareholders going forward is a debatable point, but there are good
reasons to be optimistic at least from the business fundamentals standpoint.

There is, first and foremost, the domestic market opportunity, which is still substantially below its potential and has considerable
head-space for growth. The chemicals industry underpins all economic activity – industrial, agricultural and consumer-related – and is
by no means a sunset industry, as some would like to think or wish. The products of this industry serve uses not every evident to the
layperson – be it paints & coatings, foods, pharmaceuticals, electronics, automobiles, textiles, renewable energy, etc. None have the
term ‘chemical’ embedded in their names but are deeply and irreplaceably connected to the chemical industry. As India grows in numbers
and, more importantly, in living standards, consumption of all of these will rise, without exception.

The business opportunities in the international market are no less important and the much-discussed ‘China+1’ sourcing strategy
of international buyers seems here to stay and continue to be a key driver of growth. There are not too many countries that can take the
place of China – even partly – and India tops the list.

All in all, the Indian chemical industry is well placed to build on the momentum generated in the last five years or so, and the capital
markets in India are right to be excited about the long-term prospects of the industry.

For the industry this has at least two benefits: it enables promoters place larger bets, in response to signals from local or export
markets; and, just as significantly, it lowers the financial burden on companies, especially when they are just starting production and
hence at their most vulnerable.
Ravi Raghavan

136 Chemical Weekly August 20, 2024

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