Is the Chemistry still strong? A perspective on the Indian chemicals sector
India’s manufacturing sector has for long lingered under the shadows of the country’s services sector which has seen an unprecedented growth over the recent years. However, India is now vying for a place in the sun as a manufacturing and sourcing hub. And it can turn out to be a major advantage, given the regulatory restrictions on setting up manufacturing in advanced markets and slowdown in the manufacturing sector in China due to increasingly stringent environmental regulations. One of the key industries contributing to the manufacturing sector growth is the chemical industry comprising of commodity and specialty chemicals serving many end user industries including pharmaceuticals, agriculture, industrial, Flavors & Fragrances, textiles, cosmetics, water treatment, and more.
However, due to intense competition in the chemicals industry, the companies continuously need to focus on business transformation strategies to remain competitive as the survival of the fittest is the mantra in this market. Further, the fragmented industry structure poses as a big challenge for small and medium players. Apart from the industry level challenges, the chemical companies today are facing specific issues with respect to the redundant processes, technologies, quality of products, labor-intensive operations impacting efficiency, and dated business structures. Amid the strong disruptive forces and changing business realities today, business transformation has become a critical need for the companies to reinvent the existing business models and leverage opportunities.
I am delighted to present a story line on Practus’ involvement in a leading specialty chemicals company, here is how we did it.
The company is a $200 million group and its customers include leading Indian and global consumer goods companies.
- Family run and managed with the need to induct professional managers
- Weak production planning and control processes
- Growth capital
- Data integrity leading to incorrect decision making
- Product portfolio mix
- Poor asset turnover
- Working Capital management
- Inducted a professional management team in place
- Spun off non-core assets
- Digital transformation through ERP, BI tool roll-out and reviews with the business/ functional heads
- Private Equity investment
- Acquisition of company leading to debottlenecking on the supply side
- Preparing the company for a public listing
- Improvement in Enterprise valuation from $60 million to $750 million over four years
- Implementation of a comprehensive change management project – Promoter managed to a professionally managed board driven company – Strengthened governance mechanism
- Capital structure optimization – Transitioned from largely debt funded to PE investee company
- Released $13mn in inventory working capital through focused SKU management,
re-order levels and better production planning
- Improved gross margins by 240 basis points over 3 years through strategic sourcing, product range rationalization and implementation of costing/ pricing framework
- Successful listing after 4 years providing the PE investors with a profitable exit
The Last Word
Amid changing business models and market dynamics, chemical companies need to focus on the ‘right’ business drivers and prioritizing the areas that will deliver the maximum buck will be the key differentiation.
A majority of the companies in this space are often constrained by technological challenges, capital constraints, low governance standards and obsolete business models thereby not being able to derive the results that they seek to achieve. To survive and thrive in today’s world, companies need to re-imagine their business models, focus on fundamental business drivers, focus on new product development/improving the existing product portfolio and use technology as an enabler to drive business results better. The chemical company case study enumerated above is a case in point that ‘When the Patient is ready and available, you will find a doctor to treat you’
About the Author
Sonal Choudhary is a finance professional with a demonstrated history of working in the financial services industry with strong domain knowledge of primarily chemicals and healthcare sector. She is a B.Tech graduate and has an MBA in Finance from NMIMS, Mumbai. Skilled in strategy, business planning, financial modelling, valuation, equity research, and data analytics.
Currently working with Practus Advisors as a key member of its business transformation practice – MyCXO which works with the stressed/ underperforming/ stagnant companies to turn them around and achieve their true growth potential.