November 10, 2017 I Ratings. Stricter regulatory landscape - harbinger for brighter outlook for organized dyes and dye intermediate industry players

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1 Stricter regulatory landscape - harbinger for brighter outlook for organized dyes and dye intermediate industry players Contact: Maulesh Desai Associate Director Maulesh.desai@careratings.com Palak Vyas Deputy Manager Palak.gandhi@careratings.com Mradul Mishra (Media Contact) mradul.mishra@careratings.com November 10, 2017 I Ratings Executive Summary: India enjoys leading position in the reactive dyes segment (end use in cotton textile segment) with low threat of imports. Demand of reactive dyes has grown at healthy CAGR of 8% for the period FY2012-FY2017. China is the largest producer of dyes intermediates (used for dyes production), disperse dyes (end use in polyester textile segment)and azo dyes. Cheaper imports from China and competition within domestic manufacturers had impacted the profitability of Indian players till FY2013. Nevertheless, structural changes in environmental regulations in China have improved cost competency and sales volume of domestic players while reducing imports of dyes intermediates. Combined total operating income of major players grew by CAGR of 17% during FY2013-FY2017 while PBILDT margins improved significantly from 7.74% during FY2013 to % during FY2014-FY2017. This has also resulted in rationalization of debt levels and strengthened debt coverage indicators for the industry. CARE Ratings expects domestic dyes industry to witness Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report growth of around 8.50% over FY2017-FY2022 mainly driven by growth in exports volume and demand from textile industry. Consequently, dyes intermediate segment is also expected to witness similar demand growth due to demand from dyes and increase in dyes intermediates exports from India. However, CARE Ratings expects that overall size of dyes and dyes intermediate industry is expected to remain constant during FY2018 despite growth in volume due to correction in sales prices though it is expected to remain far above FY2013 levels. Profitability though expected to be moderated in FY2018 from peak of 16.25% by bps on account of stabilization of sales prices of dyes and intermediates (notwithstanding disruption of production in China) and increase in some of the

2 RatingsI Indian Dyes and Dyes Intermediate Industry crude linked raw material prices, it shall continue to remain comfortable in the medium term. Although threat of imports from China continues due to its large capacities, improved capital structure of the major industry players is expected to result in strong resilience for the domestic dyes and dyes intermediate players. Furthermore, increase in effluent handling cost, prices fluctuations of intermediates and implementation of goods and service tax (GST) are expected to provide competitive edge to the organized integrated players over un-organized dyes manufacturers lacking backward integration for intermediates. 2

3 RatingsI Indian Dyes and Dyes Intermediate Industry Chemical Industry in India: An Overview India is the third largest producer of chemicals in Asia and seventh largest in world with estimated market size of around USD 139 billion as of FY2016.Wide gamut of products produced by chemical industry finds applications across various segments like Textile, paper, leather, paints, pesticides, plastic, fertilizers, pharmaceuticals, detergents, soaps, automobiles and food industries. The chemical industry in India is projected to grow at CAGR of 9% during FY2017-FY2021. Indian Chemical Industry can be classified into three broad segments: Basic Chemicals, Speciality Chemicals and Agro Chemicals. Classification Characteristics Chemicals Included Basic Chemicals High volume Organic chemicals Low Value Petrochemicals Limited differentiation Fertilizers Industrial gases Chloro- alkali Speciality Chemicals High value Colorants- Dyes, Dye intermediates and Pigments Low Volume Textile Chemicals Customizable Leather Chemicals Construction Chemicals Other speciality Chemicals Knowledge Chemicals Highly differentiated Agrochemicals chemicals & biological Pharmaceuticals substances Biotechnology Table 1: Classification of Chemical Industry Understanding Dyes and Dyes Intermediate Industry The size of global dyes industry is estimated at USD 5.60 billion as of CY2016 (CY refers to the period January 1 to December 31). The global dyes market has gradually shifted from the countries like Europe, Japan and United States of America to Asian countries predominantly China and India in last two decades on account of the stricter environmental and pollution control norms in the developed countries. China is the largest manufacturer of dyes followed by India. India accounted for approximately 16% (during CY2016) of the world production of dyes and dye intermediates and is a leader in the production and export of reactive dyes while China is the largest player in disperse and azo dyes. Global dyes intermediate capacity is estimated at 17,50,000 metric tonne per annum (MTPA) to 18,00,000 MTPA as of CY2016. In terms of production, China contributes more than 70% share followed by around 17% share of India as of CY2016. Domestic Dyes Intermediates Industry: Dyes intermediate (DI) are the organic compounds that are used for synthesizing various dyes. The various types of DI and their end uses are as below: DI Name Vinyl Sulphone (VS) H-Acid Gamma Acid End Use Reactive dyes Reactive dyes and azo dyes, Acid and direct dyes 3

4 Quantity in MT RatingsI Indian Dyes and Dyes Intermediate Industry DI Name End Use DASA Leather dyes Beta napthol Gama-acid K-Acid Reactive, direct and acid dyes for production of specific color- Blue, Black, Red G- Salt Food dyes and manufacturing of Amido G R-Salt Acid dyes and food color Acetanilide Manufacturing of VS Meta Ureido Aniline Used along with K-acid to manufacture Yellow dyes Table 2: Major DI The total installed capacity of various dye intermediates in India is estimated in the range of 2,65,000 MTPA to 2,80,000 MTPA as of FY2017 (FY refers to the period from April 01 to March 31) of which H-acid and VS accounts for around 40% of the installed capacity and 60% of the domestic dyes intermediate production. The estimated production of dye intermediate during FY2017 is the range of 1, 45,000-1, 55,000 MTPA. Vinyl Sulphone (VS): Total installed capacity of VS in India is estimated at 79,000 MTPA while annual production 65,000 60,000 55,000 50,000 45,000 40,000 FY2013 FY2014 FY2015 FY2016 FY2017 Estimated Industry Production Estimated Domestic Demand Figure 1: Estimated domestic demand and production of VS is estimated in the range of 55,000-58,000 MT as of FY2017. Trend of estimated domestic production and demand is as depicted. The demand of VS is largely dependent on reactive dyes and hence the demand growth of VS replicates the growth in the production of reactive dyes. India has been a net exporter of VS with stable export volumes over the period of FY2012-FY2017. Asian countries like Korea, Taiwan, China, Indonesia and Thailand are the major export destinations for VS. Details of exports and imports of VS for FY2012-FY2017 are tabulated below: Exports Imports Average Year Value Quantity Export Value Quantity Import Cost Domestic Realization Prices (Rs crore) MT (Rs/Kg) (Rs crore) MT (Rs/Kg) (Rs/Kg) FY , , FY , , FY , , FY , , FY , , FY , , Table 3: Exports and Imports of VS and respective realization; Source: Ministry of Commerce and Industry The price differential between average domestic prices of VS and average import prices has been lower. Although, the quantity of imports of VS has more than doubled during the period from FY2012-FY2017, the 4

5 Quantity in MT Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Rs/Kg RatingsI Indian Dyes and Dyes Intermediate Industry imports as a percentage of domestic demand has been on a declining trend during the same period from 15% in China. during FY2014 to 7% during FY2017. Prices of VS were largely stable till April However, shutdown of one of the largest producer of VS in China, Hubei Chuyuan during FY2017 due to environmental issues had resulted in spike in prices of VS in FY2017.The prices of VS have been stabilized since January CARE Ratings expects that prices of VS shall remain range bound around Rs.220-Rs.230 per kg notwithstanding disruption in production H-Acid:Total installed capacity of H-acid in India is estimated at 40,750 MTPA as of FY2017. As the H-acid is one of the most polluting intermediates that generate 50kg of waste for every one kg of useable material, no large/major capacity expansion has been done by the industry in the past five years. The production of H-acid in India is estimated in the range of 27,000 MTPA- 28,500 MTPA during FY2017.Domestic capacity utilization of H-acid has increased since FY2015 post implementation of stringent pollution control norms in China. Demand growth of H-acid is also derived from demand growth of reactive dyes. Subsequent to FY2014, import of H-acid from china has declined considerably while the export of the same has grown at a steady pace as tabulated below ,000 30,000 25,000 20,000 15,000 10,000 5,000 - Figure 2: Volatility in the price of VS FY2013 FY2014 FY2015 FY2016 FY2017 Estimsated Industry Production Estimated Domestic Demand Figure 3: Estimated Domestic Demand and Production of H-acid Exports Imports Average Year Value Quantity Export Value Quantity Import Cost Domestic Realization Prices (Rs crore) MT (Rs/Kg) (Rs crore) MT (Rs/Kg) (Rs/Kg) FY , , FY , , FY , , FY , , FY , , FY , , Table 4: Exports and Imports of H-acid and respective realization; Source: Ministry of Commerce and Industry 5

6 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Rs/Kg RatingsI Indian Dyes and Dyes Intermediate Industry During FY2014 the average sales prices of H-acid in the domestic market was higher than import prices which resulted in increase in imports. However, subsequent to stabilization of prices, imports declined considerably from FY2015. Imports as proportion of domestic demand has reduced steadily and declined from 32% during FY2014 to 10% during FY2017. Given lower supply from China, the export of H-acid from India registered a healthy CAGR growth of 22% and 14% in value and volume respectively over the period from FY2012-FY2017. Major exports destination of H-acid from India were Korea, Taiwan, China, Thailand and TurkeyduringFY2017. It is to be noted that India s exports of 1,400 1,200 1, Figure 4: Volatility in the prices of H-acid H-acid to China was around Rs. 21 crore in FY2017 as compared to almost nil in FY2013-FY2016. The prices of H-acid had remained stable and in the range of Rs /Kg till FY2012. However implementation of the stricter pollution and environmental norms in both China and India has created shortage of H-acid and hence resulted into high volatility in the prices of H-acid during last three years. However, prices have stabilized over last one year to around Rs per kg. CARE Ratings expects that prices of H-acid shall remain range bound and higher than FY2013 levels. Key raw materials for dye intermediates The basic raw materials used for the manufacture of dyes intermediates are Benzene, Toluene, Xylene and Naphthalene (BTXN). Apart from these basic raw materials sulphuric acid, Chlorosulphonic acid, Oleum 65% (together referred as basic chemicals), acetanilide, caustic soda flakes, ethylene oxide and soda ash are also used for manufacturing dyes intermediates and dyes. Majority of these raw materials are petroleum based and sulphur based and subject to volatility of crude oil and sulphur prices in domestic and international markets. This makes the profitability vulnerable to sharp movements of raw material prices. Nevertheless, prices of basic chemicals have not exhibited major volatility in the past. Further, sulphuric acid being by product of large zinc manufacturers is available easily in the domestic market. Moreover, integrated players also get benefit of captive production of basic chemicals and some of the dyes intermediates. 6

7 '000 MTPA RatingsI Indian Dyes and Dyes Intermediate Industry Domestic Dyes Industry: The dyes industry in India is fragmented and unorganized comprising of more than 800 small scale units and large sized organized players manufacturing more than 600 different type of dyes. The western state of Azo Dyes 7% Acid Dyes 15% Other Dyes 4% Gujarat and Maharashtra accounts for more than 90% of the country s production. The total installed capacity for various dyes in India is Disperse Dyes 18% Reactive Dyes 56% estimated at 3,80,000-4,00,000MTPAas of FY2017while the domestic production of the dyes is estimated at 2,05,000 MT during FY2017. The domestic installed capacity and the Figure 5: Share of various dyes in the total installed capacity during FY2017; Source: Department of Chemicals & Petrochemicals production is largely driven by the reactive dyes, followed by disperse dyes which majorly finds application across various segments of textile industry FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Azo Dyes Acid Dyes Disperse Dyes Reactive Dyes Other Dyes Over the years the end users focus has shifted from highly toxic azo dyes to reactive and disperse dyes resulting into increased contribution of the reactive dyes and disperse dyes in domestic production during FY2012-FY2017 as tabulated below: Figure 6: Domestic Production of various Dyes; Source: Department of Chemicals & Petrochemicals Production of Dyes 000 MTPA Types of Dyes FY2012 % Share FY2017 % Share CAGR of 5 years Reactive Dyes % % 8% Disperse Dyes % % 7% Acid Dyes % % 1% Azo Dyes % % -4% Other Dyes % % 1% Table 5: Production comparison across two years; Source: Department of Chemicals & Petrochemicals; CAGR: Compounded Annual Growth Rate Overall demand driver for domestic dyes in India is textile Industry with 70% consumption of dyes followed by food (8%), leather (6%), Paper (5%) and other industries (11%). India is the major player in the reactive dyes segment with low threat of imports. Hence, demand of reactive dyes has grown at healthy CAGR of 8% for the period FY2012-FY

8 Rs crore RatingsI Indian Dyes and Dyes Intermediate Industry The export volume of the dyes registered CAGR of 9% for the period FY2012-FY2017 as presented below. In terms of value, the export of dyes has increased from Rs.3,216 crore during FY2012 to Rs.7,535 crore during FY2017 registering healthy CAGR of around 19%. It was on account of healthy volume growth and increase in the average sales realization subsequent to volatility in the prices of dyes intermediates mainly H-acid and Vinyl 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Sulphone (VS) from FY2014. The major export destinations of dyes are United States of America (USA), followed by Turkey, Bangladesh, Germany, Italy, Brazil and China. Reactive dyes contributed 52% in total exports volume followed by azo dyes (25%), disperse dyes (6%), basic dyes (4%), Figure 7: Export trend of dyes in India; Source: Department of Chemicals and Petrochemicals acid dyes (2%) and other dyes (11%) during FY2017. Average sales realization of reactive dyes has increased from around Rs.204 /kg during FY2013 to Rs.335/kg during FY2014 and declined marginally to Rs.312/kg during FY2017. CARE Ratings expects softening of the prices of reactive dyes to around Rs /kg in the medium term on the back of decline in the prices of dyes intermediates and appreciation of rupee against USD. However, sales prices are expected to remain higher than pre-fy2013 levels. Structural changes in China, aiding India China is the largest producer of disperse dyes and various dyes intermediates with estimated capacity of dyes intermediates of 12,50,000 MTPA-13,50,000 MTPA as of CY2016. Cheap imports of intermediates from China were threat for domestic manufacturers till CY2014. Imports from China catered around 21% of aggregate demand of VS and H-acid in India during FY2014.H-acid and VS generates relatively higher effluent as compared to reactive dyes and other intermediates. Hence, one of the major reasons for higher imports was lower effluent treatment cost in China with relatively less stringent norms. Nevertheless, China has imposed stringent norms for handling of effluent from January 2015 which requires sizeable investment in the effluent treatment capacity along with increase in its cost of production. China s local authorities has also taken following steps to curb the chemical pollution plaguing the Yangtze river as middle and lower reaches of river are home to more than 4,00,000 chemical enterprises. Since CY2015, more than 150 heavily polluting companies have been shut down and hundreds of environmental damage cases investigated in Hubei, according to the provincial environmental protection department. 8

9 RatingsI Indian Dyes and Dyes Intermediate Industry In neighboring Hunan Province, 1,182 heavily polluting companies were closed along the Xiangjiang River, a tributary of the Yangtze, from CY2011 to CY2015. During the same period, Jiangsu Province, located on the lower reaches of the Yangtze, shut down about 7,000 chemical companies. In June 2016, the local environmental watchdog in central China's Hubei Province heavily fined Hubei Chuyuan Group, a leading domestic dye and dyes intermediates manufacturer of China for discharging excessive pollutants. Hubei Chuyan is the largest producer of VS in China with estimated annual production of 40,000 MT which is equivalent to 70% of domestic demand of VS in India. Shutdown of the plant of Hubei Chuyuan group had resulted in spike in VS prices during FY2017. Environment Healthy and Safety department of North China has also imposed ban on exports of hazardous chemicals from Qingdao port from August Over and above this, China has also taken various other steps placed below which has improved competitiveness of Indian dyes intermediate producer. Setup of effluent treatment mechanism and strict adherence to effluent handling norms has been prerequisite for availing export incentives for dyes and dyes intermediate manufacturer. Export as well as tax incentive on dyes and dyes intermediates have also been reduced considerably. Impact analysis: Structural changes in environmental regulations in China have increased both capital cost and operating cost for companies in China. This has also resulted in decline in capacity utilization for dyes intermediate producers in China along with increase in their cost of production. This along with the reduction in supply has improved competitiveness of Indian dyes intermediate manufacturers. This has also been reflected from decline in aggregate import of VS and H-acid in India since 2015 as tabulated below: Particulars FY2014 FY2015 FY2016 FY2017 Aggregate imports of VS and H-acid as % of domestic demand 21% 13% 11% 8% Table 6: Imports of VS & H-acid from China as a % of domestic demand; Source: Ministry of Commerce & Industry Reduction in imports from China has also increased sales volume and sales prices for domestic dyes intermediate players. However, domestic players continue to be exposed to threat of imports from china on account of its large capacities in dyes intermediate segment. Regulatory environmental norms in India Pollution control authorities in India have also tightened the norms especially for companies manufacturing dyes intermediates. Recently, Gujarat Pollution Control Board has issued directive for granting permission of new capacities of dyes intermediates only in Petroleum, Chemical, Petrochemicals and Investment Region (PCPIR). Further, companies have also been directed to install both VS and H-acid facilities with permitted capacity ratio of 1.50:1.00 at single location in place of standalone facility of VS or H-acid. Rationale of integrated facilities is to 9

10 RatingsI Indian Dyes and Dyes Intermediate Industry reduce the generation of waste and utilize the spent acid generated in VS for manufacturing H-acid. Effluent handling cost for domestic companies has also increased over last three years. Large and organized players are expected to benefit as against the unorganized sector as the effluent treatment cost for integrated players in India is estimated at around Rs.18-Rs.25 per Kg as these players derives synergy due to benefit of use of spent acid generated in VS while manufacturing H-acid and Sulphur dioxide generated in manufacturing H-acid for manufacturing VS along with economies of scale. Major Industry players Dyes Intermediates Bodal Chemicals Limited Kutch Chemical Industries Limited Kiri Industries Limited Colourtex Industries Private Limited Jay Chemical Industries Limited Aksharchem India Limited Ambuja Intermediates Limited Bhageria Industries Limited Mayur Dyechem Industries Limited Shree Pushkar Chemicals and Fertilizers Limited Table 7: Leading Industry Players in Dye Intermediates and Dyes Dyes Colourtex Industries Private Limited Jay Chemical Industries Limited Atul Limited Kiri Industries Limited Lonsen Kiri Chemical Industries Limited Bodal Chemicals Limited Asiatic Colourchem Industries Limited Shree Pushkar chemicals and Fertilizers Limited Combined industry financials of major players: The combined financials of the twelve major players of dyes and dyes intermediate industry for FY2012-FY2016 and FY2017 financials for eight major players is tabulated below: (Rs crore) Particulars FY2012 FY2013 FY2014 FY2015 FY2016 FY2017* Total Operating Income 3,918 4,681 7,232 8,564 8,048 7,264 PBILDT ,075 1,245 1,168 1,181 PBILDT/Debt PBILDT Margin 7.80% 7.74% 14.86% 14.53% 14.51% 16.26% Total Debt 2,005 2,333 2,390 2,223 1,500 1,327 Tangible Networth 1,323 1,152 1,557 2,162 2,770 2,984 Overall Gearing Table 8: Combined brief financials of twelve major industry players; Source: Ace Equity, Ministry of Corporate Affairs (MCA) & Bombay Stock Exchange (BSE).* Combined of eight major players CARE estimates aggregate total operating income (TOI) of around Rs.8950 crore for major twelve players mentioned above for FY2017. These players are estimated to contribute around 85% of domestic market size. Scale of operations for the industry players has increased significantly on account of growth in sales volume and sales realization. Improved sales realization due to structural changes in regulatory environment in China, moderation of competition in domestic market with increasing share of large organized players and economies of scale has upgraded the range of profitability for domestic players since FY2013. Improved profitability coupled with moderate level of capital expenditure incurred by these industry players has resulted in rationalization of 10

11 RatingsI Indian Dyes and Dyes Intermediate Industry debt levels for the industry which in turn also led to significant improvement in the debt protection matrix for the industry players. Outlook Demand of reactive dyes has grown at healthy CAGR of 8% for the period FY2012-FY2017. CARE Ratings expects domestic dyes industry to witness growth of around 8.50% over FY2017-FY2022 mainly driven by growth in exports volume and demand from textile industry. Key drivers for growth shall be increase in disposable income, higher penetration in the rural market and around 75% share of cotton fabric in total fabric consumption. Implementation of stringent pollution control norms in China is expected to increase India s share in the global dyes and dyes intermediate market from 16% currently to 20% by FY2021. Consequently, dyes intermediate segment is also expected to witness similar demand growth due to demand from dyes and increase in dyes intermediates exports from India. CARE Ratings expects that overall size of dyes and dyes intermediate industry is expected to remain constant during FY2018 despite growth in volume due to correction in sales prices. On supply front, capacity addition of 23,000-25,000 MTPA is estimated in the dyes segment over FY2018-FY2019. Dyes intermediate segment has higher entry barriers for environmental clearance due to generation of large quantum of effluent and challenges involved in treating the same. Hence, CARE Ratings doesn t envisage major capacity addition in the dyes intermediate segment over next three years except for balancing capacity of VS and H-acid aggregating around 15,000 MTPA for efficient handling of effluent as well as for captive consumption and 4,000-5,000 MTPA for other intermediates. Significant increase in average sales realization of dyes intermediates and dyes had resulted in healthy profitability for industry players. Profitability though expected to be moderated in FY2018 by bps on account of stabilization of sales prices of dyes and intermediates (notwithstanding disruption of production in China) and increase in some of the crude linked raw material prices, it shall continue to remain healthy in the medium term. Furthermore, increase in effluent handling cost, prices fluctuations of intermediates and implementation of goods and service tax (GST) are expected to provide competitive edge to the organized integrated players over un-organized dyes manufacturers lacking backward integration for intermediates. CORPORATE OFFICE: CARE Ratings Limited(Formerly known as Credit Analysis & Research Ltd) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai ; CIN: L67190MH1993PLC Tel: I Fax: care@careratings.com I Website: Follow us on /company/care Ratings 11 /company/care Ratings