The Rubber Chemicals industry in India is charting a growth trajectory owing to the massive demand for raw materials in the automotive, and electronics sectors. Given the wide usage of rubber in almost everything, it is an industry hiding in plain sight of investors and often overlooked. In this edition of Industry Analysis we take a look at how the cogs are turning in the rubber chemicals industry.
Raw Materials and Applications
To get a bird’s eye view of the industry, it is crucial to understand the supply chain, raw materials and applications of Rubber chemicals.
Basically, Rubber Chemicals refer to chemicals that are used in the production of various rubber goods. These chemicals enhance the durability, strength, and flexibility of the products and are crucial for manufacturers converting Natural or Synthetic Rubber into finished products, including Tyres, Hoses, Footwear, Industrial Belts etc. As for the raw material, the rubber chemical industry uses 70% natural rubber. Different categories of Rubber Chemicals include anti-degradants, accelerators, flame retardants, and various others, each serving different purposes in the production process.
Industry Overview
Market expansion in this industry right now is primarily fuelled by the increased utilisation of rubber in the automotive and electronics sectors. Moreover, its application in various construction segments, such as floor coverings, sound insulation, roofing materials, and sealants, is anticipated to further boost the demand for rubber chemicals.
However, stringent government policies governing the use of these chemicals pose a potential obstacle to market growth. Additionally, the environmental risks associated with the discharge of processing chemicals into water bodies hinder market progression. In addition, tight regulations imposed by the EPA and European Commission on the use and disposal of these chemicals further impede market growth.
Global Trends
Despite efforts of the rubber chemicals industry to recover from the COVID-19 disruption, the years 2022-23 saw a downturn due to the prolonged Russia-Ukraine war. This was compounded by an energy crisis in the Western world and supply chain disruptions from renewed lockdowns in China.
Speaking of the larger macroeconomic headwinds, the banking system in the US also faced setbacks, contributing to a global economic slowdown. Meanwhile, the Reserve Bank of India raised interest rates by 250 basis points, responding to subdued export markets and volatile crude prices ranging from USD 80 to 120 per barrel. These factors directly affected the global rubber chemical industry, which closely mirrors the trends in global rubber consumption.
Challenges
Despite China's significant global rubber chemical production, its surplus for export arises from relatively low domestic consumption amounting to around 35%. Helped by ongoing US sanctions, China aggressively dumps rubber chemicals in the Indian market. This has directly affected the Rubber Chemical players in India. As a response, companies like NOCIL have even approached DGTR and appealed at CESTAT, prompting a relook of the government's decision.
Furthermore, despite global efforts to control inflation through increased interest rates, the delayed recovery of the world economy may impact the rubber chemicals industry's overall prospects. While companies have diversified their supply chains, disruptions from China can still significantly affect raw material prices.
The interconnected nature of the Rubber chemicals industry can also disrupt manufacturing activities across sectors due to imbalances in supply and demand. Fluctuating currency exchange rates, with the Rupee ranging between Rs 74-83 per USD, also continue to pose risks. Moreover, the delayed monsoon and firm interest rates may dampen rural demand.
In addition, an ET Auto report highlights Tyre manufacturers’ issue of reducing tyre pollution, particularly in light of the surge in electric vehicle (EV) usage. According to data provided by Michelin, an estimated 3 million tonnes of particles are emitted annually from tyres globally, with an additional 3 million tonnes generated from road surfaces. A particular concern revolves around 6PPD, a common tyre component that has raised toxicity concerns for aquatic life and potential human health implications.
Trends in the Indian Market
India has emerged as a key manufacturing hub for the automotive industry, benefiting from the availability of skilled labour at lower costs. A massive 4.7 million passenger cars and commercial vehicles were sold in India in 2022. Also, the demand for rubber processing chemicals, particularly for green and high-performance tires, is driven by an increased focus on safety and quality.
In India, the expanding automobile production capacities and the rising demand for high-quality automotive tires are propelling the growth of the rubber processing chemical market.
As for the push factors, challenges in China, including pollution disruptions, power shortages, accidents in chemical plants, and the COVID-19 pandemic, raised concerns about the rubber chemical industry's supply chain sustainability.
This dependence on China prompted the rubber chemicals companies in India to de-risk by diversifying their supply sources. The Rubber chemical companies no longer wanted to depend on China solely. Further, the government’s embracing of the ‘China Plus One’ strategy provides a push to manufacturing hubs in India. The Production Linked Incentive scheme for 14 sectors, especially electronics, provides a growing market for rubber chemicals.
For a quick look, here are some of the major players in the Indian Rubber Chemicals Industry:
Name of the Company | Market Cap | Last Traded Price | P/E Ratio |
Seya Industries Ltd | Rs 60.6 Cr | Rs 22.8 | - |
NOCIL Ltd | Rs 3,894 Cr | Rs 234 | 33.3 |
Deepak Nitrite Ltd | Rs 28,415 Cr | Rs 2,083 | 37 |
Tata Chemicals Ltd | Rs 26,370 Cr | Rs 1,035 | 11.7 |
Aarti Industries Ltd | Rs 17,620 Cr | Rs 486 | 36.7 |
Fine Organic Industries Ltd | Rs 15,011 Cr | Rs 4,896 | 26.9 |
Alkyl Amines Chemicals Ltd | Rs 11,592 Cr | Rs 2,268 | 59 |
Balaji Amines Ltd | Rs 7,119 Cr | Rs 2,197 | 27.9 |
PCBL Ltd | Rs 7,647 Cr | Rs 203 | 18 |
Recent Notable Stocks
One of the case studies of well-performing rubber chemicals stocks is of Alkyl Amines Chemicals which has delivered substantial returns to investors over the past decade, with shares surging 7500%, translating a Rs 10,000 investment into Rs 7 lakh, as per ET Markets analysis. Over the last 3 years, the stock has seen a 366% surge, while it provided 878% returns over 5 years. With a market capitalisation of approximately Rs 12,480 crore, the mid-cap company specialises in manufacturing and supplying amines and amine-based chemicals to various industries.
Another example is Pentagon Rubber's Rs 66 crore IPO, which garnered remarkable investor interest, and was oversubscribed by 25.69 times on the third day of the bidding process. The IPO, which opened on June 26, 2023, received subscriptions for 3.95 crore shares against 23.10 lakh shares offered.
Apart from this, there are players like NOCIL which holds the title of the largest company in the market with over 40 export destinations. Kapil Shah, Technical Analyst, Emkay Global Financial Services and Trainer at FinLearn, spoke to ET and said “Recent price action suggests that there has been some initial buying in chemical stocks, particularly those that have been underperforming. As the prices have declined, some of these stocks have reached their long-term support levels.” He added “One such stock is NOCIL which has tested its long-term moving average and coincides with a horizontal support line. The breach of the falling trend-line is an indication that buying may resume from lower levels.”
The Gist
The Rubber Chemicals industry in India is looking towards an optimistic horizon owing to the automotive sector demand. The further boost to the industry comes from the government initiatives, and the refusal of companies to rely solely on China. Owing to these factors and the others we noted above, investors must keep a close watch on the Rubber Chemical industry for robust diversification.
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