Knowledge Paper

2
nd
Gujarat 2011
on Specialty, Fine Chemicals , Agrochemicals Dyes & Pigments and SME Sector in Gujarat State
Theme: Leveraging Gujarat State Advantage In The Global Chemical Industry
Knowledge Paper
CONTENTS
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Gujarat state advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Industry reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1. Agrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2. Fine chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3. Dyes and pigments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4. Other specialty chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Thought notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 1. Farming solutions - the next frontier for breakthrough growth of Indian agrochemical companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 2. Contract research - driving strategic value from emerging markets . . . . . . . 69 3. GST: An opportunity to assess your supply chain . . . . . . . . . . . . . . . . . . . . . 75 About Tata Strategic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Executive Summary
his FICCI report on the specialty chemical industry in India, prepared by Tata Strategic Management Group, provides an analysis of key industry segments agrochemicals, fine chemicals, dyes, pigments and colourants and other specialty chemicals. The report highlights the current market size, projects future market size and growth, map demand-supply scenario and outline the demand drivers. It also provide insights on key market, technology and regulatory trends and conclude with a brief outlook on the levers for delivering growth - through capitalizing on opportunities and addressing imminent challenges. The report provides a brief overview of the business environment in the state of Gujarat, with special emphasis on agrochemicals, fine chemicals, dyes, pigments and colourants and other specialty chemicals. It describes salient features and key developments in the investing climate and industrial policy of the state. Over the past two decades, Gujarat has become one of the most preferred locations for industrial investment in India. Gujarat has achieved an annual growth rate of over 10% p.a. over the past five years and is one of the most industrialized states of India. It accounts for 16% of the nation's industrial production and 22% of its exports. Gujarat possesses several key factors which have enabled it to chart a path of rapid growth and industrialization - sound infrastructure facilities, availability of skilled and semi-skilled manpower, excellent domestic and international connectivity and rich natural resources. But the key differentiating factor has been Gujarat's investor-friendly policy towards industrial development. These have resulted in Gujarat evolving as the hub of India's chemical and petrochemical industry - with the state accounting for more than half of India's total chemical industry and ~63% of total national petrochemical production. The chemical industry is today the largest and fastest growing component of Gujarat's manufacturing sector. The Indian chemical industry forms the backbone of the industrial and agricultural development of India and provides building blocks for downstream industries. The industry has registered a growth of ~10% p.a. over the last few years and is currently estimated to be around $ 80-85 Bn. Specialty and knowledge chemicals together account for $ 27 Bn and could grow at a higher rate of ~15-17% over the next few years, outpacing the overall GDP growth rate.
Agrochemicals
As an allied industry of agriculture, which accounts for about one fifth of India's GDP, the agrochemicals industry is a significant industry for the Indian economy. The Indian agrochemicals market grew at around 10%-11% over the last five years to reach ~$ 3.4 Bn in FY10. With 125 technical grade manufacturers and 800 formulators, India is the fourth
01
largest producer of agrochemicals in the world after USA, Japan and China. Indian agrochemical exports have shown an impressive growth in the past few years driven by excess capacity and availability of cheap labor. Exports account for almost 53% of the industry revenues and manufacturing cost-competitiveness vis--vis developed economies is expected to driver exports growth at around 15% annually in the next decade. Government focus on achieving food grain self sufficiency coupled with limited farmland availability is expected to provide a further impetus to the industry.
Fine chemicals
The Indian pharmaceutical industry size stood at nearly $ 21.4 Bn in 2010, 40% of which was accounted for by fine chemicals. The fine chemicals market is poised for rapid growth in the next decade driven by increased focus on contract manufacturing (CRAMS) by global players to reduce costs and increasing exports to innovators (as opposed to generics). The market size is expected to exceed $ 45 Bn in 2016.
Dyes and pigments

The Indian colorants industry stood at nearly $ 3.5 Bn in 2010 with exports accounting for 68%. It is expected to grow between 11% and 15% to $ 10 Bn to $ 14 Bn by 2020. The steep growth is expected to be driven by boom in infrastructure market and consumer products and India and increasing scope for manufacturing for exports.
Specialty chemicals
Other specialty chemicals primarily consist of paints & coatings chemicals, construction chemicals, polymer additives, water treatment chemicals and aroma chemicals. Paints & coatings is the largest segment, with a market size of ~$ 3.4 Bn in 2010. Other key segments include water treatment chemicals valued at ~$ 540 Mn, construction chemicals valued at $ 400 Mn, aroma chemicals valued at ~$ 300 Mn, and polymer additives valued at ~ $ 300 Mn in 2010. All these segments are expected to grow at rates above the chemical industry average, based on growth in their respective end use industries, evolving applications and changing regulatory environment. Additionally, a separate section containing recent Thought Notes published by Tata Strategic Management Group has been included. This section provides key insights on contemporary trends and issues related to Indian businesses, especially pertinent to the chemical industry and small & medium scale industries (SMEs).
02
The Gujarat State Advantage
03
04
India growth story and the chemicals industry

India is one of the fastest growing large economies of the world, having a track record of sustained high growth over a prolonged period of time, and a positive growth outlook driven by strong macroeconomic, demographic and consumption fundamentals. Two decades of the post-reforms period have ushered in intense economic activity, driving India's GDP growth rate to 7.7% over the previous decade.
Real GDP Growth Rate (%)
7.7% 10% 9% 8% 7% 6% 5% 4% 3% '93 '95 '97 '99 '01 '03 '05 '07 '09 11
Source: RBI Handbook of Statistics, Analysis by Tata Strategic
Availability of skilled manpower, access to local and international markets and strong market fundamentals backed by rising per capita income have propelled India to become a leading economy by 2010 (ninth-largest in nominal terms, fourth largest in Purchasing Power Parity (PPP) terms). This growth story is driven by manufacturing and service sectors, which cumulatively account for more than 85% of current GDP.
Composition of GDP (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% '90 '94 '98 '02 '06 '10 Agriculture: 14.4% Industry: 20.0% Services: 65.6%
Source: RBI Handbook of Statistics, Analysis by Tata Strategic
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Chemical industry is a significant contributor to the Indian economy, accounting for 11% of total industry output and 13% of Gross Value Added by the manufacturing sector in FY10. The industry contributes to 10% of India's total exports and is a net earner of foreign exchange. It is also a significant employment generator and participation field for small and medium scale industries (SMEs). The size of India's chemical industry was approximately $ 83 Bn in FY10, and could grow at 15% annually to $ 330 Bn in 2020 in the most likely scenario, outpacing the GDP growth rate. The growth is expected to be driven by rising demand in end-use segments and rising exports fuelled by increasing export competitiveness.
Indias chemical industry, FY10 (% of total)
Petrochem , 16, 20% Other base chemicals, 27, 33% Biotech, 3, 3% Agrochem, 2, 2%
Pharma, 20,24% Specialty chemicals, 15, 18%
Total: $ 83 Bn
Source: Tata Strategic estimates
Foreign Direct Investments ($ Bn)
Annual FDI inflows to India exceeded $ 30 Bn for the first time in 2007, and India became the second largest FDI destination globally. Though FDI inflows have dipped to $ 23 Bn in FY11 due to the combined effect of aftershocks of global recession and bunching effect of FDI, it is expected to re-touch pre-recession levels by 2012.
40 35 30 25 20 15 10 5 0 9 6 5 4 6 23 23 34 35 33 35
06
Source: Economic Advisory Council to the Prime Minister, Department of Industrial Promotion and Policy
20 01 -0 2 20 02 -0 3 20 03 -0 4 20 04 -0 5 20 05 -0 6 20 06 -0 7 20 07 -0 8 20 08 -0 9 20 09 20 10 10 -1 1E 20 11 -1 2P
FDI in chemicals industry ($ Mn)

749
Acquirer Avantor Performance Materials Holdings Jordan Phosphates Mines Company
Major FDI deals in FY11

Target Acquisition price ($ Mn) 100 Deal Type RFCL Ltd. Indo -Jordan Chemicals (subsidiary of SPIC) PI Industries Ltd Fumakilla India Private Ltd Laffans Petrochemicals Ltd Shreeji Pesticides Pvt Ltd Cindu Chemicals (held by Corus, the British -Dutch subsidiary of Tata Steel) Majority Stake Increasing stake to 100% Acquisition Acquisition Acquisition
50.6
390 198 205 229
362
398
Rhodia SA Fumakilla Ltd Huntsman Corporation
17.5 0.11 N.A. N.A.
Willowood Chemicals Koppers International Koppers
Acquisition
N.A.
Strategic Stake
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Source: Department of Industrial and Policy & Promotion,Industry Reports
Source: Industry Reports, Analysis by Tata Strategic
Gujarat: The chemical hub of India

Over the years, Gujarat has become one of the most preferred locations for industrial investment in India. Apart from having sound infrastructure facilities, skilled manpower, excellent domestic and international connectivity and rich raw materials, a key differentiating factor for Gujarat is its focus on industrial development in the state. Gujarat has achieved an annual growth rate of 10.5% p.a. over the past five years and contributes ~16% to the industrial production of the country.
Gujarat s share in India,FY10

Population Area No. of factories Net mfg. value Value of output Fixed capital investment Exports
Source: Gujarat Socio-Economic Review,2009-10
5% 6% 10% 12% 16% 17%
22%
The chemical and petrochemical industry in Gujarat is the fastest growing sector in the state's economy. Gujarat has truly emerged as the hub of chemical manufacturing in India, accounting for more than 62% of national petrochemicals and 51% of national chemical sector output in 2007. It leads all states in MoU formation and committed investments in the sector. 30% of total fixed capital investments in the state are allocated to manufacturing of chemicals and chemical products, and the sector employs about 20% of the workforce of the state.
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Industry composition: Gujarat, FY09

Others, 19%
Nonmetallic products, 5%
Chemicals, 42% Textiles, 6%
Energy, 26%
Source: Gujarat Socio-Economic Review,2009-10
Gujarat houses production facilities for some of the largest global and Indian chemical and petrochemicals manufacturers. Gujarat State Fertilizers & Chemicals Ltd. (GSFC), Gujarat Alkalis & Chemicals Ltd. (GACL) and Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC) are the largest public sector units located in Gujarat. GSFC is the only producer of melamine and largest producer of caprolactum in India. GACL is the market leader in caustic soda whereas GNFC is one of the leading fertilizers company in the country. Apart from these 3 PSUs, a large number of domestic and multinational companies across various chemical segments have presence in the state. Leading Indian and multinational private organizations which have a footprint in Gujarat are Reliance, ONGC, Dow Chemicals, Cheminova, Lanxess, India Oil (IOCL), Indian Petrochemical Corporation Limited, Nirma, Essar, BASF, Bayer, Rallis, Novartis, Cadila, Aarti Group and Deepak Nitrite. Gujarat accounts for ~40% of India's pharmaceutical output with more than 3200 pharmaceutical companies located in the state
Investment climate in Gujarat

A key indicator of investor and industry confidence in Gujarat is the number and scale of investments and business ventures committed to the state. More than 80 MoUs and announcements were signed in the Vibrant Gujarat summit 2009 for projects to be executed and established in the chemical and petrochemical sector. The cumulative proposed investment in the sector stood at more than INR 56,000 crore. Most projects are for establishing industrial parks and production plants for base chemicals, specialty chemicals and dyes and intermediaries.
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Proposed investments in Gujarat (Rs Cr)

90 80 70 60 50 40 30 20 10 0 2003 2005 # of MoUs 2007 2009 2011 60000 50000 40000 30000 20000 10000 0
Investments
Source: Vibrant Gujarat, 2011 Note: 1) In chemical & petrochemical sector
The sustained economic success and rapid industrial growth have been made possible by an unambiguous pro-industry approach by the State. Several policy decisions, execution of key projects and geographic and demographic factors have helped increase the ease of doing business in Gujarat, specifically in the chemicals industry.
Infrastructure and strategic location

Gujarat is well connected by the Indian Railways network and has built one of the best road networks in India. It's a power-sufficient state with a low cost of utilities and one of the highest per capita power consumption levels. It has the highest number of airports and second highest number of ports. It's the only state with an integrated state-wise gas grid and has a very high tele-density. Also, the Sardar Sarovar Narmada project, once completed, is expected to create continuous water supply throughout the state. Gujarat is favourably located midway on the highly industrialized Delhi-Mumbai corridor, giving it ease of access to high-growth states in North and West. The state has the longest coastline in the country (1,600 kms) and is well-connected to major trade routes to Europe, Middle-East, East Asia and Australia though a large number of ports. 38% of the proposed Delhi Mumbai Industrial Corridor will pass through Gujarat, thereby providing the opportunity for chemical companies to base their production in Gujarat and serve the Indian market.
Raw material availability

Rich availability of natural resources and basic feedstock facilitate production of a large number of downstream chemical products. Wide availability of limestone, salt, petroleum
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and natural gas make Gujarat a leading manufacturer of basic chemicals (e.g. caustic soda, caustic potash), petrochemicals (e.g. polymers, PE/PP/PVC) and fertilizers (e.g. urea, biofertilizers).
Availability of talent
Gujarat has always been well known for its entrepreneurial talent who have spread their footprint nationally and across the globe. Additionally, over 45 government and private management institutes provide a pool of business administration talent. Moreover, there are ~40 engineering colleges teaching chemical engineering and ~50 polytechnic institutes offering courses focussed towards the chemicals sector. Overall, Gujarat offers a worldclass pool for talent in entrepreneurship, business administration and engineering, which could be easily tapped by the industry.
Impetus for growth: Integrated development and PCPIR

The presence of mega-estates in chemical manufacturing at several industrial clusters in the state has helped growth and expansion of the industry by providing an appropriate business ecosystem. Chemical clusters especially at Ankleshwar, Panola, Vapi, Vatva, Jhagadia, Vilayat and Dahej facilitate rapid development and growth.
Chemical manufacturers in Gujarat
Chemical centres in Gujarat
Ahmedabad Chemicals
Baroda Chemicals & petrochemicals
Jamnagar Chemicals & petrochemicals
Dahej PCPIR Hazira Chemicals & petrochemicals
Bharuch Chemicals Valsad Chemicals
Source: Secondary research, Analysis by Tata Strategic
DAHEJ PCPIR:
The PCPIR at Dahej, southern Gujarat is spread across a notified area is 453 sq km and it has received formal approval from DoC&PC in March 2009.
Existing infrastructure
10
The Dahej PCPIR enjoys proximity to Gujarat Chemical Port Terminal Company Limited (GCPTCL) and LNG port and access to Delhi - Mumbai Broad Gauge railway line at
Bharuch. A 50-km of four-lane Dahej-Bharuch State Highway connects six lane DelhiMumbai National Highway & Expressway.
Investments - Planned and realized

As of June 2011 ~80% of the planned investments in Dahej PCPIR have been realized and accounting for $ 16 Bn out of a total committed investment of ~$ 20 Bn. Approximately 70% of the land development is complete and an infrastructure investment of $ 1.7 Bn is proposed. Also, Dahej PCPIR is notified under the rules for special investment zones with several tax-related advantages extended to incoming investors.
Major players at Dahej PCPIR Greenfield
Existing
Upcoming external infrastructure

External infrastructure is being developed to ensure excellent connectivity (sea, road, rail and air) to Dahej PCPIR:
v Ports:
40 MnTPA Solid & Liquid Cargo and Container Port with investment of $300 Mn; Container Feeder Terminal (10000 TEU) to Pipavav and Marine Shipbuilding Park by GMB
v Roads:
Ahmedabad-Baroda National Expressway to be extended to Mumbai (PCPIR loop planned); six-laning of Dahej-Bharuch road; upgradation of 8 km of port linkage & four-laning of 42 km of State Highways within PCPIR; construction of 25 km of coastal roads airport for PCPIR ; airstrip at Ankleshwar
v Air: Greenfield v Broad Rail:
gauge conversion of Bharuch-Dahej rail line (62 km); connection with Delhi-Mumbai Dedicated Freight Corridor (DFC)
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Support for micro, small and medium enterprises

Gujarat state government, since 2000, has adopted a policy of supporting SMEs. Some of the features mentioned could be favorably capitalized by existing companies and new entrants in the chemical industry:
v 5% interest v Interest v Venture
subsidy on loans for modernization programmes
subsidy on eligible parameters, e.g. sector, size, etc. capital and patent monetization assistance acquisition fund
v Technology v Support v Support v Cluster
for vendor development for auxiliary industries for value-addition
development in PPP mode of sick units
v Rehabilitation
With the existence of conducive business environment, presence of leading companies, availability of a strong talent pool, entrepreneurial culture and strong policy support by the State Government, Gujarat is poised to retain and further build on its leadership position in India's chemical industry going forward.
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INDUSTRY REPORTS
13
14
Agrochemicals
Introduction
Agrochemicals or pesticides are chemical substances used to control or kill pests, unwanted plants or animals that may harm or damage the crops. Agrochemicals can be classified into the following key segments: 1. Insecticides 2. Herbicides/ Weedicides 3. Fungicides 4. Bio-pesticides 5. Others (Nematocides, Rodenticides etc.)
Global agrochemicals industry

The global agrochemicals industry grew at over 6% annually since 2005 to reach $ 43.7 Bn in 2009. However, the growth in 2009-2010 tapered off at 1.1% and the market grow to $ 44.2 Bn due to major adverse weather phenomenon globally, including flooding in Canada and Central Europe, record drought in Vietnam and heat waves in Russia. The mediumterm demand outlook remains upbeat, with an expected growth of 4% annually till 2015.
Global agchem market (USD Bn)

4.0% 4.0% 5.7%
33.5 43.7 44.2 53
2005 Source: Industry report; Tata Strategic estimates
2009
2010
2015E
15
The crop protection chemicals market is mainly concentrated in the major developed countries such as United States and Western European nations. Europe has the largest share in the agrochemical market followed by Asia, Latin America and North America. There is an increased usage of products in Europe due to high commodity prices and in order to boost yield and quality. Increased demand for palm oil has led to increasing usage of herbicides in Japan, Malaysia and Indonesia. Strong rice prices and other food grains are driving the agrochemical consumption in India. In Latin America, increased production of soybean and sugarcane for animal feed as well as for bio-fuels is the driving the growth of agrochemical consumption. The top 6 crop protection companies cumulatively account for approximately 70% of the market by revenues.
Global demand share, 2008

Lat Am, 21% North America, 21% Asia, 23% MiddleEast & Africa, 4% Europe, 32%
Source: BCC Research, Tata Strategic analysis
Indian agrochemicals industry

Overview and outlook
India is the fourth largest producer of agrochemicals globally, after United States, Japan and China. The agrochemicals industry is a significant industry for the Indian economy. The total size of the agrochemicals industry stood at $ 3.4 Bn in FY10, of which 53% was exports. Imports to India are minimal and mainly limited to next-generation pesticides and patented molecules. The current domestic consumption of $ 1.4 Bn is expected to grow at 8% annually, driven by rising population, decreasing per capita availability of arable land and focus on increasing agricultural yield. In the same period, exports are also expected to grow at a rapid pace (15% annually), driving the total agrochemicals market size to almost $ 11 Bn by 2020.
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Demand outlook (USD Bn)

12%
10.8
15%
7.3
3.4
1.6 1.8
2010
8% 3.5
2020
Domestic
Exports
Source: PMFAI and government data, Meeting of the GOI Chemicals Task Force
India's agrochemicals consumption is one of the lowest in the world with per hectare consumption of just 0.58 Kg compared to US (4.5 Kg/ha) and Japan (11 Kg/ha). The key reasons for low usage are low purchasing power of farmers, lack of awareness about crop protection benefits and poor reach and accessibility of crop protection chemicals. Annual crop losses due to pests are estimated at $ 17 Bn for FY09.
Average crop protection consumption, 2009 (kg/ ha)

17 14 12 7 5 0.58 1 France Korea USA Japan China Taiwan 5 7
India Pakistan UK
Source: Industry reports, Meeting of the GOI Chemicals Task Force - Crop protection sub sector discussions, Tata Strategic Analysis
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The top three states Andhra Pradesh, Maharashtra and Punjab account for ~50% of the total pesticide consumption in India. Andhra Pradesh is the largest consumer of pesticides with a market share of 24%.
State-wise pesticides consumption, FY09 (% of total value)

Others, 23% AP, 24%
West Bengal, 5% Haryana, 5% Tamil Nadu, 5% MP & Chattisgarh, 8% Gujarat, 7% Maharashtr a, 13%
Punjab, 11% Karnataka, 7%
Source: Industry reports, Tata Strategic analysis
Industry structure
The agrochemicals/ crop protection market in India is characterized by a high degree of fragmentation. In India, there are about 125 technical grade manufacturers (10 multinationals), 800 formulators, over 145,000 distributors. 60 technical grade pesticides are being manufactured indigenously. Technical grade manufacturers sell high purity chemicals in bulk (generally in drums of 200-250 Kg) to formulators. Formulators, in turn, prepare formulations by adding inert carriers, solvents, surface active agents, deodorants etc.
Technical grade manufacturers
Formulators
Distributors
End use customers
The total installed capacity in FY09 was 146,000 tons and total production was 85,000 tons leading to an average capacity utilization of 58%. The industry suffers from high inventory (owing to seasonal & irregular demand on account of monsoons) and long credit periods to farmers, thus making operations 'working capital' intensive. India due to its inherent strength of low-cost manufacturing and qualified low-cost manpower is a net exporter of pesticides to countries such as USA and some European & African countries. Exports formed ~50% of total industry turnover in FY08 with 29% CAGR from FY04 to FY08.
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Installed capacity & production (000 TPA)

148 145 146 146
82
85
83
85
FY06
FY07 Capacity
FY08 Production
FY09
Source: Ministry of Chemicals & Fertilizers
Key Segments
Insecticides: Insecticides are used to ward off or kill insects. Consumption of insecticides for cotton has come down to 50% from 63% of total volume after introduction of BT cotton. Fungicides: Fungicides are used to control disease attacks on crops. The growing horticulture market in India owing to the government support has given a boost to fungicide usage. The market share of fungicides has increased from 16% in 2004 to 20% in 2009. Herbicides: Herbicides are the fastest growing segment of agrochemicals. Their main competition is cheap labor which is employed to manually pull out weeds. Sales are seasonal, owing to the fact that weeds flourish in damp, warm weather and die in cold spells. Bio-pesticides: Bio-pesticides are pesticides derived from natural substances like animals, plants, bacteria and certain minerals. Currently a small segment, bio-pesticides market is expected to grow in the future owing to government support and increasing awareness about use of non-toxic, environment friendly pesticides. Others: Plant growth regulators, Nematocides, Rodenticides, Fumigants etc. Rodenticides and plant growth regulators are the stars of this segment.
Segment Insecticides Fungicides Herbicides Biopesticides Others Major Products Acephate , Monocrotophos Cypermethrin Mancozeb , Copper Oxychloride Ziram Glyphosate , Isoproturon , 2,4 -D Spinosyns , neem -based Zinc Phosphide , Aluminium Phosphide Main Applications Cotton, Rice Fruits, Vegetables, Rice Rice, Wheat Rice, Maize, Tobacco Stored produce
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Product share, FY09 (% of total)

Fungicides 20% Biopestici des & Others, 5%
Herbicides 20%
Insecticides, 55% Source: Ministry of Chemicals & Fertilizers, Industry reports, Tata Strategic analysis
Competitive landscape
The Indian agrochemicals market is highly fragmented in nature with over 800 formulators. The competition is fierce with large number of organized sector players and significant share of spurious pesticides. The market has been witnessing mergers and acquisitions with large players buying out small manufacturers. Key market participants include United Phosphorus Ltd, Bayer Cropscience Ltd, Rallis India Ltd, Gharda Chemicals Ltd, Syngenta India Ltd, BASF India Ltd, etc. Top ten companies account for 75%-80% of the market share. The market share of large players depends primarily on product portfolio and introduction of new molecules. Strategic alliances with competitors are common to reduce portfolio risks and get access to a wider customer base.
Market trends
v Focus
on developing environmentally safe pesticides by the industry as well as the Government. The Department of Chemicals has initiated a nationwide programme for "Development and production of neem products as Environment Friendly Pesticides" with financial assistance from United Nations Development Programme (UNDP).
v Focus
by larger companies on brand building by conducting awareness camps for farmers and providing complete solutions.
v Increase
in strategic alliances among large players for greater market reach and acquisitions of smaller companies globally to diversify product portfolio. For example: Rallis has a marketing alliance for key products with FMC, Dupont, Syngenta, Bayer and Nihon Nohayaku. In addition, UPL has had a series of small acquisitions globally to enter new geographies and gain product expertise.
v Increasing
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scope for contract manufacturing in India, consistent with the trend of international companies looking eastwards for contract manufacturing partners.
Technology trends
v Increased
R&D expected for development of new molecules and low dosage, high potency molecules
v Focus
on R&D in bio-pesticides segment with increasing preference for environmentally safe products in the market
Growth drivers
v Growth
in demand for food-grains: India has 16% of the world's population and less than 2% of the total landmass. Increasing population and high emphasis on achieving food grain self-sufficiency as highlighted in the FY10 budget, is expected to drive growth.
v Limited
farmland availability and growing exports: India has ~190 Mn hectares of gross cultivated area and the scope for bringing new areas under cultivation is severely limited. Available arable land per capita has been reducing globally and is expected to reduce further. The pressure is therefore to increase yield per hectare which can be achieved through increased usage of agrochemicals. Indian agrochemical exports accounted for ~50% of total industry size in 2009.
FOODGRAINS DEMAND & SUPPLY, INDIA (MT)

80 300 220
Rice
Yield for select major crops (Tons/ Hectare) World 4.2 3.0 5.0 74.0 2.2 1.9 India 2.3 2.8 2.2 67.0 0.9 1.1 Yield gap 1.9 0.2 2.8 7.0 1.3 0.8
Wheat Corn
FY10 Gap FY20 Demand Production Source: Industry reports; Analysis by Tata Strategic
Sugarcane Soybean Rapeseed
v Growth
of horticulture & floriculture: Buoyed by 50% growth experienced by Indian floriculture industry in last 3 years, Government of India has launched a national horticulture mission to double production by 2012. Growing horticulture and floriculture industries will result in increasing demand for agrochemicals, especially fungicides.
Increasing v
awareness: As per Government of India estimates, total value of crops lost due to non-use of pesticides is around $ 17 Bn every year. Companies are increasingly training farmers regarding the right use of agrochemicals in terms of quantity to be used, the right application methodology and appropriate chemicals to be used for identified pest problems. With increasing awareness, the use of agrochemicals is expected to increase.
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Potential opportunities
v Scope
for increase in usage: With only 35-40% of the total farmland under crop protection, there is a significant unserved market to tap into. By educating farmers and conducting special training programmes regarding the need to use agrochemicals, Indian companies can hope to increase pesticide consumption.
Yield improvement potential (%)

30% further losses 42% actual losses 28% prevented losses Due to pests, weeds & diseases 58% 30% Due to pests, weeds & diseases 100% Due to drought, heat, cold, salinity 130%
Yield without protection
Actual yield with crop protection
Attainable yield without pests
Additional potential without abiotic stress
Huge v
export potential: The excess production capacity is a perfect opportunity to increase exports by utilizing India's low cost producer status.
Patent v
expiry: Between 2009 and 2014 many molecules are likely to go off patent, throwing the market open for generic players. The total viable opportunity through patent expiry is estimated at over $ 3 Bn.
Product v
portfolio expansion: New developments including genetically modified seeds, Integrated Pest Management and organic farming can be turned into opportunities if the industry re-orients itself to better address the needs of its consumers and broadens its product offering to include a range of agro-inputs instead of only agrochemicals.
Key challenges
High v R&D costs: R&D to develop agrochemical molecule takes an average of 9 years and ~ $ 180 Mn Indian companies typically have not focused on developing newer molecules and will face challenges in building these capabilities, while continuing to remain cost competitive.
Threat v
from Genetically Modified (GM) seeds: Genetically modified seeds possess self-immunity towards natural adversaries which have the potential to negatively impact the business of agrochemicals.
Support v
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for Integrated Pest Management (IPM) & rising demand for organic farming: Promotion of IPM, zero budget farming and usage of bio-pesticides by
Indian Government and NGOs is gaining momentum. With increasing demand for organic food, farmers in certain states like Karnataka have reduced chemical usage and have adopted organic farming. Agrochemical companies will have to tackle the rising environmental awareness and address concerns on negative impact of pesticide usage.
v Counterfeit
Products: The spurious pesticides market size in India is estimated to be $ 233 Mn in 2009. This negatively impacts the revenues of the organized sector.
v Need
for efficient distribution systems: Since, the number of end users is large and widespread, effective distribution via retailers is essential to ensure product availability. Lately, companies have been directly dealing with retailers by cutting the distributor from the value chain thereby reducing distribution costs, educating retailers on product usage and offering competitive prices to farmers.
Profile of select players Brief profile: Bayer CropScience

Bayer CropScience India www.bayergroupindia.com Company overview Sales Revenue in FY2011 Bayer CropScien ce is one of the worlds leading crop science companies in the world with presence in 122 countries 2,127 Cr (includes revenue from other product Rs. segments), 88% of revenue through domestic sales Insecticides: Confid or, Calypso Fungicides: Antracol, Baycor Herbicides: Atlantis, Basta Seed treatment: Gaucho, Raxil Three manufacturing locations at Thane , Himmatnagar & Ankleshwar Total production capacity of 5770 MT of active ingredients and form ulation capacity of 10,025 KL & 3650 Mt for liquids & solids resp ectively Merger with Aventis Cropscience Limited worldwide, 2002 Acquisition of Biotech company Athenix Corp., 2009
Key brands
Manufacturing locations
Key Mergers/ Acquisitions
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Brief profile: Rallis India
Rallis India www.rallis.co.in

Company overview Sales Revenue in FY2011 Rallis is one of the leading Indian agrochemical companies 1,127 Cr (includes revenue from other product segments) Rs. with 22% from outside India Insecticides: Asataf, Koranda Herbicides: Dhar, Fateh Fungicides: Blitof, Contaf manufacturing plants at Turbhe, Akola, Ankleshwar, Lote Five & Patancheru installed capacity of pesticides is 16,720 MT for solids Total &12,500 MT for liquids Acquired majority stake in Metahelix Life, 2010 Key Mergers/ Acquisitions Co-marketing alliances with several companies such as DuPont, Syngenta, Bayer, FMC, Makhteshim Chemical works, Ghrada Chemicals, etc
Key brands
Brief profile: United Phosphorus Limited

United Phosphorus Limited www.uplonline.com
Established in 1969 and has its presence in all value -added agricultural inputs ranging from seeds to crop protection & post harvest activity its own subsidiary offices wor ldwide Has Global player with customer base in 86 countries Sales Revenue in FY2011 Key brands 3,133 Cr (includes revenue from other product segments) Rs. Chlroban, Copter, Flora, Magnaphos, Oorja, Tiktok, Zoom manufacturing locat ion across the globe with 9 in India 21 Production capacity of 98,264 MT of pesticides & 42,631 MT of pesticides intermediates Product acquisitions from DuPont and Bayer Company acquisitions of Metahelix Life, Evofarms, AG, Cequisa and ICONA
Company overview
Manufacturing locations Key Mergers/ Acquisitions
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Brief profile: Syngenta India Limited

Syngenta India Limited www.syngenta.co.in
Company overview Sales Revenue in FY2011 Key brands Manufacturing locations subsidiary of Syngenta Global 84% Formed by merging agri -businesses of Novartis & Astra 2,147 Cr. (includes revenue from other product segments) Rs. Fungicides: Amistar, Ridonil, Kavach Herbicides: Rifit, Gramoxone, Topik Insecticides: Actara, Proclaim,Pegasus Manufacturing plant at Santa Monica, Goa Co-marketing alliance with Rallis India Crop protection technology exchange with DuPont, partnership on improving crop quality with Embrapa the Brazilian Agricultural Research Corporation, R&D agreement with Dow AgroScience Product license from Sumitomo
Key Mergers/ Acquisitions
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Fine Chemicals
Fine chemicals refer to chemicals prepared to a very high degree of purity for specific applications, and generally cover agrochemicals and active pharmaceutical ingredients. Since agrochemicals are being discussed separately in this report, this section shall only refer to APIs.The global pharmaceutical market was estimated at ~ $ 880 Bn in 2011 with 7% annual growth since 2004. The developed markets, which have been the traditional stronghold of innovator companies, are expected to witness lower than historical growth going forward. Higher R&D costs, relatively dry pipeline for new drugs, increasing penetration of generics and pressure from governments for reduced healthcare costs are putting a lot of pressure on global pharmaceutical companies, Future growth is expected to be primarily driven by generics and emerging markets. The global pharmaceutical market is expected to grow at 6% CAGR to reach $ 1,100 Bn in 2014.
Global pharmaceuticals market ($ Bn)

837 773 712 605 649 856 880
2005 2006 2007 2008 2009 Source: Industry reports, CRISIL, GoI Task Force, Tata Strategic estimates
2010
2011E
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The top 10 players account for over 42% of total global sales. Pfizer is the market leader, followed by GSK and Novartis AG. Lipitor is the largest selling drug followed by Plavix and Nexium. Oncology continues to be the leading therapy class globally followed by lipid regulators.
Domestic Market Overview

The Indian pharmaceutical industry is ranked 3rd in the world in terms of production volume and 14th in terms of domestic consumption value. The Indian pharmaceutical industry is estimated at $ 21.4 Bn in FY11. Formulations account for ~65% and bulk drugs for the balance 35% in value terms. The industry is expected to reach $ 46 Bn in FY15. Bulk drug exports are expected to grow the fastest at ~35% followed by formulation exports at ~25%. The domestic formulation market is expected to grow at ~11% with key growth drivers being increased per capita spend on pharmaceuticals, improved medical infrastructure, greater health insurance penetration and increasing prevalence of lifestyle diseases. Today the Indian pharmaceutical sector meets 95% of the country's medical needs. The Indian pharmaceutical industry consists of both domestic companies and subsidiaries of multinational corporations. Indian companies manufacture a wide range of generic drugs (branded and non-branded), intermediates and bulk drugs/Active Pharmaceutical Ingredients (API). Among the product segments, anti-infectives is the largest segment, accounting for 17% of the domestic formulations market. The other large segments are cardio-vascular and gastro-intestinal.
Leading segments- domestic formulations, India, FY10

% share Anti-infectives Cardio Vascular Gastrointestinal Respiratory Pain/ Analgesics Vitamins/ Nutrients Gynaecological Anti-diabetic Central Nervous System Dermatology 533 516 516 509 838 804 711 1,053 1,000 1,602 17% 11% 11% 9% 9% 8% 6% 6% 6% 5%
Source: IMS Health, Crisil Research, Analysis by Tata Strategic
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Pharmaceuticals market, India ($ Bn)

46.0
17% 17% 21.4
16.5
11.5 23% 7.6 1.5 1.6 4.5

FY04 5.2 7.5 FY10E Formulation Exports FY15P 18.0 8.7
Domestic Formulation Consumption
API Exports
Source: IMS Health, Crisil Research, Analysis by Tata Strategic
Fine chemicals manufacturing companies can be categorized into 2 broad segments:

v Generic v CRAMS
drug companies with predominant focus on export of APIs and bulk drugs specialized companies
Both the segments have established players but contract manufacturers enjoy better margins than generic API exporters. Major players in the contract manufacturing segment include Dishman, Divis, Jubilant, NPIL and Shasun. Lupin, Aurbindo Pharma, Ranbaxy, Dr. Reddy's and Matrix Laboratories are the major generic API exporters. Indian players have used acquisitions to build capabilities in the high value segments. Nicholas Piramal's acquisition of UK based Avecia, Dishman's acquisition of Switzerland based Carbogen Amcis and Jubilant's acquisition of US based Hollister Stier are some of the noteworthy acquisitions made by domestic companies in the recent past. The demand growth drivers are as follows:
v Margin
pressures of global players leading to increased outsourcing and focus on contract manufacturing
v Supply
base of APIs shifting from Europe to emerging countries like India and China due to low cost advantage
v Export
to generic players constitute the biggest segment but export to Innovators is expected to grow at a faster rate
Market, technology and regulatory trends

The market is characterized by high buyer power and limited supply power due to buyer's focus on lowest possible costs and presence of more than 1000 Indian companies competing in manufacturing. This is further augmented by intense competition from Chinese manufacturers. Barriers to entry in generics are insufficient whereas barriers to entry are tough in innovator drugs. The underlying reasons are adherence to strict and costly international certification norms, strong chemistry & process knowledge and
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presence of numerous IPR norms. However increasing number of Indian companies are focusing on IP creation and protection and setting up world class manufacturing facilities to meet innovators demand. Divestment by European companies has resulted in significant number of acquisitions by Indian companies in the recent past. Lower market valuations together with exchange rate fluctuations pose considerable threat to Indian API manufacturers.
Profile of select players Brief profile: Dr. Reddys Laboratories

Dr. Reddys Laboratories Ltd. www.drreddys.com Company overview Sales Revenu e in FY2011 Key API lines Manufacturing locations Integrated global phamra company, established 1984 Three businesses: Pharmaceutical Services & Active Ingredients, Global Generis and Propreitory Products 1,965 crore (Pharma Services & APIs SBU) Rs. Cardiovascular, oncology, Anti -diabetic, gastro -intestinal, ophthalmic, expectorant, steroids, anti -allergic, etc. India: Six plants USA: One plant Mexico: One plant
Brief profile: Lupin

Lupin www.lupinworld.com Company overview Sales Revenue in FY2011 Key API lines Manufacturing locations innovation led transnational pharmaceutical company producing a wide range of quality, affordable generic and branded formulations and APIs 777 crore (API business) Rs. Antibiotics, cardiovascular, central nervous system, anti -TB Aknlweshwar, Baroda (Gujarat) Mandideep (Madhya Pradesh) Tarapur (Maharashtra)
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Dyes & Pigments

Introduction
There are two types of colorants - dyes and pigments. Dyes are soluble substances used to pass color to the substrate and find applications primarily in textiles and leather. There are several types of dyes, however in India disperse, reactive and direct dyes are most commonly used. Pigments are insoluble substances and could either be in powdered or granular form. They impart colour by reflecting only certain light rays. Their major end use industries are paints and inks. Pigments can be broadly classified as organic and inorganic.
Global industry
The global colorant industry is valued at US$ 27 Bn and has been growing at 2-3% p.a. The dyestuff industry has seen turbulent times in the past decade. The decline of the traditional producers in the developed world, particularly in Europe, and the simultaneous ascent of new ones in Asia, particularly India and China, is arguably one of the most significant changes ever seen in this industry. The shift has been quite swift and followed the migration of end-user industries - notably textiles and leather - to low cost economies of Asia.
Indian industry
Overview and outlook
India accounts for 12% of the global colorant industry, out of which nearly 2/3rd is exported. In 2010, India produced ~200,000 tonnes of dyes. Of this, 50% were reactive dyes due to the availability of important raw materials like vinyl sulphone, etc. Nearly 70% of the dyestuff was supplied to the textile industry while leather and paper industries accounted for the remaining. The sector is dominated by unorganized players and has ~1000 players in the small scale category. There are only 50 large organized units. These units are mainly present in Gujarat and Maharashtra, with the former accounting for almost 80% of capacity. Per capita consumption of dyestuff is ~50 gms compared to the world average of 300 gms
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demonstrating a largely untapped domestic market. India has largely been an exporting country and has emerged as a global supplier of reactive, acid, vat and direct dyes accounting for ~10% of world trade. Also, these dyestuffs are exported to Europe, South East Asia and Taiwan to cater to the textile industries in these countries. However, almost 80% of these are commodities and face intense pricing pressures reducing the margins of the industry.
Indian Dyes : Capacity (tpa)

Others, 20,000 Basic, 10,000 Sulphur, 10,000 Direct, 20,000
Reactive, 100,000
Acid, 30,000
Disperse, 10,000
The pigment market is estimated at ~7 lakh tons p.a. with a market size of ~$ 970 Mn. Carbon black and Titanium dioxide (TiO2) account for 90% of the total pigment production.
Pigments demand, India: FY10 (tons per annum)

Pigments (678,000)
Carbon Black & TiO2 (615,000)
Colour & Special Effect (63,000)
Organics (19,500)
Inorganics (44,000)
Special Effect
Others
Chrome oxide
Others
Synthetic Iron Oxide
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Printing inks and coatings account for over 70% of consumption of pigments in India. Titanium dioxide is a major raw material used in the manufacture of paints. The paints industry is growing at 13.5% p.a. which has been a major demand driver for pigments. There are also niche markets in India for special effect pigments such as metallic and pearlescent. These pigments are usually imported into the Indian market, with Sudarshan chemicals being the only domestic manufacturer. Though the volume for these pigments would be very small as compared to other pigment segments, they usually command a premium for the design appeal that they provide to the final product such as automotive coatings and packaging goods. India has grown significantly as a producer and exporter of organic pigments, particularly phthalocyanine blue, green and some high performance pigments. India is amongst the largest sources of coloured organic pigments, competing with China for a dominant share of the export market.
Pigments by end use (% volume)

Others, 9%
Plastics, 10%
Textiles, 10%
Inks, 47%
Coatings, 24%
Source: Industry reports
Demand-Supply Scenario
Major players in the pigments industry are Sudarshan Chemicals and Clariant India while in the dyestuff industry companies such as Atul, Clariant India, Kiri Dyes and IDI are large players in the organized sector. The organized sector, with a better product range, technology and marketing reach, has been able to increase market share. Further bans on certain dyestuffs due to regulatory norms from the European markets and stricter local pollution norms have forced many in the unorganized sector to exit resulting in increase in the share of the organized players. Total installed capacity for organic pigment is 80,000 tons p.a., which is way higher than the demand from the Indian market. Large proportion of the organic pigments produced is exported. Major producers of organic pigments include Meghmani Organics, Clariant India, Sudarshan Chemicals, Pidilite Industries and Heubach Colours.
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Growth Forecast & Drivers

There has been a strong growth in the dyestuff industry during the last decade. Export opportunities created by the closure of several units in countries like USA and Europe due to enforcement of strict pollution control norms, has resulted in a spurt of capacity building in India. However, the financial crisis in 2008 has resulted in a demand slump, worldwide over-capacity and has resulted in further margin pressures on the dyestuff industry.
Colorant Industry size ($ Bn)

CAGR 14.5
15.3%
Aspirational
10.0
11.1% Base case
3.5
2010
Source : Industry reports, Analysis by Tata Strategic
2020
As per industry reports, demand for dyes and organic pigments is expected to grow at 11% p.a. till 2020 to reach US$ 10 Bn. However, the industry can aim to grow faster at 15% to reach US$ 14.5 Bn. To achieve its aspirations, the industry needs to focus on the following:
Innovative products
v Increase
emphasis on R&D v Optimize the product portfolio v better quality and high performance colorants Build
Green chemistry practices

v Improve
environment friendliness of products and services v Ensure compliance to international regulations to continue access to the exports markets Due to greater use of polyester and cotton-based fabrics, there has been a shift towards reactive dyes, used in cotton-based fabrics, and disperse dyes, used in polyester. The demand for reactive and disperse dyes is expected to grow fastest due to this trend. The textile industry will remain the largest consumer of dyestuffs; however growth will be driven by markets such as printing inks, paints and plastics. These segments will also increase the consumption of high performance pigments helping improve profitability. However, the gains will be restrained due to the commodity nature of the products and intense competition.
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Industry Trends
Market Global overcapacity Demand for green & highperformance products
Trends in colorants industry Technology Colour solution approach to counter commoditization Regulatory Stricter domestic environmental laws s REACH compliance
Market Trends
The global capacity of dyestuffs has exceeded demand resulting in an oversupply scenario. Due to the lack of export demand, the prices of the colorants had dropped by roughly 20%. It is expected that consumer preference for environmentally friendly products and high performance dyes and organic pigments will help improve overall value of the market.
Regulatory Trends
Fiscal policies and excise concessions led to a high level of fragmentation in the Indian dyestuffs market. However, a gradual reduction in the excise duties has resulted in a more balanced pricing differential between the organized and unorganized sectors. Regulations such as REACH (Registration, Evaluation, Authorization and Restriction of Chemical substances), which have been designed with the objective of protecting human health and environment from the hazards of chemicals, require that apparel and apparel chemical exporters to EU provide their buyers with information regarding the substance used in manufacturing. Exporters who are not able to comply will lose their market share, resulting in closure of small establishments.
Technological Trends
Since majority of dyestuffs are commodities there is not much product differentiation and duplication of products is easy. To counter the same, global manufacturers are investing in Research and Development to improve the specialty end of their portfolio. The industry could leverage technology to come up with newer products to meet the bottom of
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pyramid needs with innovative solutions. New technologies such as reduction with hydrogen & sulphonation with liquid sulphur trioxide could be adopted as they are clean technologies and give better yields, thereby reducing effluents. There is also a trend towards providing colour solutions rather than just a colourant. Collaborations with equipment manufacturers are being undertaken to provide integrated solutions to customers.
Future Outlook
The financial crisis in 2008 has resulted in a demand slump, worldwide over-capacity and further margin pressures on the dyestuff industry. The Indian dyestuff industry is facing challenges due to reduced export demand growth and decreasing profitability. Companies with greater focus on innovation and R&D will benefit in the long run. Adopting green chemistry practices and compliance to more stringent export market regulations would help ensure greater access to export markets. Such a holistic approach could ensure that the Indian dyes and pigments industry is able to overcome the challenges and convert them to opportunities, resulting in profitable growth.
Profile of select players Brief profile: Sudarshan India

Sudarshan India www.sudarshan.com Company overview Sales Revenue in FY2011 Key brands Manufacturing locations Largest pigment and sole effect pigment manufacturer Present in business for over 50 years Rs. 747 crore Colours: Sudaperm, Sudafast, Sudacolor Effects: Sumica, Sumicos Roha and Mahad (Mahasrashtra)
Brief profile: Atul Industries

Atul Industries www.atul.co.in
Company overview Sales Revenue in FY2011 Key brands Manufacturing locations Diversified company with presence in colours, aromatics, agrochemicals, polymers and pharma intermediaries Rs. 1,600 crore Vat dyes: Novatic Acid dyes: Tulacid Direct dyes: Tuladir Atul and Ankleshwar (Gujarat)
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Other Specialty Chemicals

Introduction
Specialty chemicals are defined as a "group of relatively high value, low volume chemicals known for their end use applications and/ or performance enhancing properties." In contrast to base or commodity chemicals, specialty chemicals are recognized for 'what they do' and not 'what they are'. Specialty chemicals provide the required 'solution' to meet the customer application needs. It is a highly knowledge driven industry with raw materials cost (measured as percentage of net sales) much lower than for commodity chemicals. The critical success factors for the industry include understanding of customer needs and product/ application development to meet the same at a favorable priceperformance ratio.
BASE CHEMICALS Sold by "specification", defined purity
SPECIALTY CHEMICALS Sold by "performance/impact", not composition Seller provides required "solution" to meet customer application needs CSFs: Price/performance ratio for specific application, technical assistance, channels to market Generally low to medium volume products with higher price realization
Selection of chemical done by customer CSFs: Access to secure and competitive supply of raw materials, efficient operations and supply chain Generally medium to high volume products with lower price realizations
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Overview of Indian market

The specialty chemicals segment (including the knowledge chemicals) is, currently estimated at ~$ 27 Bn, The specialty chemicals segment caters to a large number of end use industries including construction, automotive, polymers, personal care products, water treatment, textile, paints and coatings, etc. The knowledge chemicals segment caters to the key end use industries of pharmaceuticals, agrochemicals and biotechnology. The specialty and knowledge chemicals industry combined has been growing at rates higher than the overall chemical industry and is expected to continue to grow at 15%-17% p.a. to reach $ 80-100 Bn by 2020. Changing income distribution and evolving end use market are the key growth drivers for specialty chemicals. Rapid rise of the mid income households is expected to create a larger consumer base for products using specialty chemicals.
Indias specialty & knowledge chemicals market (USD Bn)

80-100
15-17%
11% 18
27
FY06 Source: Tata Strategic estimates
FY10
FY20
Additionally, high growth in end use markets and evolving customer needs are expected to drive the growth of specialty chemicals. Major end use industries - textiles (esp. performance textiles), automotive, glass, construction and paints- are all expected to register double digit growth rates in the next five years. Also emerging needs in several of these end use industries is creating demand for high performance specialty chemicals driving penetration growth.
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Current & potential regulatory changes in end-use industries

INDUSTRY Potential customer standards in India
Nationwide implementation of stricter emission norms (Bharat IV/ V) Fuel efficiency standards to improve average fuel economy of vehicles Mandating energy conservation and building code (2007) guidelines Banning mixing and production of concrete at sites in urban areas Re-usability norms for all types of waste water Shifting to pollution load-based norms from concentration-based norms Tighter emission norms for VOCs in line with the developed world Mandatory use of lead-free pigments and coatings in all applications Moving from a negative list (of banned chemicals) to a positive list of (acceptable chemicals) in flavors Mandating the usage norms by IFRA (International Fragrance Association)
Comparable standards in other countries

Entire EU has specific targets for CO2 emissions for cars (120 g/ km by 2012) US CAF standards specify minimum fuel efficiency at 36 MPG by 2016 Germanys EnEV is one of the most stringent energy conservation codes China has banned site mixing of concrete in 240 major states Industries are incentivised to use Singapores NEWater (recycled water) US EPA sets effluent emission guidelines for each industry US has set 250 g/ litre as the limit for VOC in paints US has a norm of maximum 90 ppm of lead in paints EU has E numbers for food additives that have been assessed for use (positive list) Majority of the developed world (US, UK, EU) follow IFRA guidelines
Automotive
Construction
Water treatment
Paints and coatings
Flavours and fragrances
Source: CII, McKinsey report in Specialty chemicals
A brief overview of some of the key segments of specialty chemicals is covered in this report, focusing on the demand and supply scenario, projected growth & drivers and key trends & future outlook in each segment.
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1. Construction Chemicals
Introduction
The Indian construction chemicals market, valued at ~$ 400 Mn in 2010, consists of a variety of products ranging from admixtures to sealants to flooring chemicals. However, the market is still very small when compared to other global markets like the United States which is estimated at ~$ 7.7 Bn. Admixtures form the biggest segment with 35% share followed by flooring chemicals and water proofing chemicals.
Other Specialty Chemicals

Product share (% of total value) FY10
Misc., 31 Admixtures 35
Repair & rehabilitati on, 9 Flooring, Water 15 proofing, 10 Source: Industry reports, Tata Strategic analysis
Demand-supply scenario
The demand for construction chemicals, boosted by investment in the construction sector, has been growing at 16% p.a. from $ 180 Mn in 2005 to reach $ 400 Mn in 2010. With the economic crisis, the growth slowed down in 2009, but has gained momentum thereafter.
Construction chemicals market, India ($Mn)

400 16%
180
2005 Source: Industry reports; Tata Strategic estimates
2010
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The overall market is fairly consolidated but there is considerable fragmentation of individual products and application areas. The top 5 players account for ~50% of the market; the rest being accounted by small and unorganized players. Fosroc, SIKA India & BASF SE are the leading players in the Indian construction chemicals market.
Market share by revenue: 2009
FOSROC, 14%
SIKA India, 13% Others, 50%
BASF, 12% Pidilite, 6%
SWC, 5%
Projected growth and demand drivers

The market for construction chemicals is expected to grow at a CAGR of 14% to reach ~$ 800 Mn in 2015 and $ 1.6 Bn in 2020. Key growth drivers include:
v Growth
in end-use market: Indian construction industry is expected to growth at 11% annually over the next decade o Rising disposable incomes and changing demographics driving demand for residential real estate o Growth in construction activities due to increased investments in infrastructure, backed by Government of India's commitment to increase spend in infrastructure to 10% of GDP in the 12th Five-Year Plan o 100% Foreign Direct Investment (FDI) in real estate to boost construction activities
v Increasing
penetration of construction chemical products
o Better awareness about performance-enhancing products among consumers and builders, leading to increasing usage of newer products like ready-mix concrete, etc. o Increased construction activities triggered by urbanization and development of rural areas
v Changing
regulatory environment
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o Current and prospective regulatory guidelines incentivizing/ driving
energy-efficient and green buildings to drive demand for suitable, innovative protective coatings and safe chemicals
Future outlook and levers for growth

Construction chemicals market has a huge growth potential due to the construction and manufacturing boom in India. However, competition is high and several low value products are being sold in the market. Margins are lower because most contractors prefer low cost chemicals to reduce the construction cost. High value products have limited demand from premium construction houses. Product innovation and diversification, producing low cost-high value products and creating product awareness among end users are the key success factors. Construction chemical manufacturers could address these challenges primarily by focussing on development and marketing of high-end products (e.g. silicone-based sealants) which are expected to outgrow traditional products. They could also consider investing in programmes to educate construction benefits of using superior construction chemicals in terms of lower project completion time and ease of use could accelerate adoption of new-age products.
Profiles of key players Brief profile: Fosroc India

Fosroc India www.fosroc.com Company overview Key products Manufacturing locations Wholly owned subsidiary of Fosroc International Admixtures, joint sealants, surface treatments Bangalore Ankleshwar Rudrapur
Brief profile: SIKA India

SIKA India www.sika.in
Company overview Convened India operations in 1987 Subsidiary of Switzerland -based parent company Waterproofing: Sikacim Tiling: Sika Tilofix Sealing: SikaBoom Manufacturing locations Kalyani, West Bengal Goa Jaipur Blending units in Mumbai and Chennai
Key products
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2. Water Treatment Chemicals

Introduction
Water treatment chemicals are used for a wide range of industrial and in-process applications such as reducing effluent toxicity, controlling Biological Oxygen Demand (BOD) & Chemical Oxygen Demand (COD) and disinfecting water for potable purpose. The Indian water treatment chemicals market is estimated at ~$ 560 Mn in 2010. Coagulants and flocculants form the largest segment with ~40% market share followed by biocides and disinfectants with ~17% market share. Apart from use in potable water, the customer base is widespread across diverse industries ranging from large power plants, refineries and fertilizer factories to pharmaceuticals, food and beverages, electronic and automobile companies.
Product share (% of total) Fy09
Others, 30% Coagulant s& flocculants, 40% pH adjusters, 5% Defoaminga gents, 7%
Biocides & disinfectan ts, 18%
The Indian water treatment chemicals market experienced an 8% CAGR in the period from 2005-10 to reach ~$ 560 Mn in 2010. Certain segments like the industrial and drinking water segments have witnessed higher growth rates.
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Water treatment chemicals market ($ Mn)

560 8% 380
2005
2010
The market is highly competitive, and participants include private companies, MNCs, as well as joint ventures. Around 60% of the market is dominated by the organized sector, largely multinationals and large-scale domestic companies like Nalco Chemicals India Ltd., Thermax Ltd. and Ion Exchange (India) Ltd. These companies have a diverse product portfolio and a strong distribution network to cater to the Indian market.

The market for water treatment chemicals is expected to grow at a CAGR of 10% to exceed ~$ 870 Mn in 2015. Key market drivers include:
v Growth
in end-use market
o Rise in population and increasing urbanization leading to increased per capita and overall water consumption o Rapid industrialization leading to increasing water demand for running manufacturing plants and their corresponding effluent treatment facilities
v Changing
demographics and lifestyle
o Higher awareness about impact of quality of drinking water on health to drive household consumption of water treatment chemicals o Rising income levels and better living standards to increase demand for cleaner, safer potable water
v Changes
in regulatory environment
o Stricter effluent norms to create significant scope for demand from industries as they adopt effluent treatment practices
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Water treatment chemicals market growth ($ Mn) 872

10% 560
2010 Source: Industry reports, Tata Strategic estimates
2015

The market for water treatment chemicals has seen a shift from the traditional products to technically more advanced products. For example, traditional products like alum are being replaced by coagulants and flocculants. In the corrosion and scale inhibitor market, there is an ongoing shift from the traditionally used heavy metal based products to the ones which have better environmental profiles. Manufacturers are increasingly producing patented formulations with exclusive rights that offer customized solutions in a particular market. The market is expected to grow in light of stricter Government regulations in industrial and institutional domains. Innovative products catering to niche applications are likely to help market participants build/ sustain their competitive edge. Water treatment chemicals companies could look at transforming from pure-play chemical manufacturers to end-to-end service providers. They could capitalize on the opportunity offered by urban bodies in India who are moving to the "Build-Own-OperateTransfer" model for water treatment management, either through building capabilities or through partnerships. Another critical success factor could be working closely with regulatory bodies like pollution control boards to understand and implement evolving environmental norms governing water safety.
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Profiles of key players Brief profile: Ion Exchange (India) Ltd.

Ion Exchange (India) Ltd. www.ionindia.com Company overview Sales Revenue in FY2011 Key product lines Formed in 1964 as a subsidiary of Permutit, UK Became independent in 1985 590 crore Rs. Industrial: Arsenic removal units, cooling water chemicals, dealkalisers, filters, nitrate removal units Home: Zero -B range of water purifiers Ankleshwar, Gujarat Manufacturing locations Hosur, Tamil Nadu Patancheru, Andhra Pradesh Rabale, Maharashtra Goa
Brief profile: Nalco Chemicals

Nalco www.nalco.com
Company overview Sales Revenue in FY2009 Key product lines Manufacturing locations Formed in 1964 as a subsidiary of Permutit, UK Became independent in 1985 195 crore Rs. Treatment solutions for boiler water, cooling water, wastewater, pollutant con trol Konnagar, West Bengal
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3. Paints and coatings chemicals

Introduction
The Indian paints and coatings market was estimated to be ~$ 3.4 Bn in 2010. The industry can be broadly classified into two product segments: decorative paints and industrial paints. Decorative Paints: This segment primarily caters to the residential and commercial buildings and accounts for 70% of the total paint industry. Enamels are the most widely used followed by distempers and emulsions. Interior and exterior paints account for 75% and 25% of the decorative paints respectively. On the basis of product composition, decorative paints are of two kinds - water based and solvent based.
Decorative paints segments (% of total volume)

Ext. coatings 12% Wood finishes 2%
Emulsions 17%
Enamels 50%
Distemper 19% Source: Industry reports, Tata Strategic analysis
Industrial paints: This segment includes paints used in automobiles, auto ancillaries, consumer durables, containers, etc. This segment requires technological expertise and therefore it is largely served by the organized sector. It accounts for 30% of the overall market.
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Industrial paints segments (% of total volume)

Marine, 10% Others, 5%
Refinish, 12% Auto OEM, 36% Powder, 13%
Protective, 24%
Paints and coatings chemicals market size in India is estimated at ~ $ 1.5 Bn in 2010. The segments comprise three main types of additives:
v Binders
like epoxy and polyurethane (for durability, adhesion and finish) (add desired colours to paints) including emulsifiers, mould releasing agents and stabilizers
v Pigments
v additives, Other
The Indian paint industry, valued at ~$ 3.4 Bn in 2010, has been outpacing the GDP growth rate by about 1.5 times, having experienced a CAGR of 13.5% over the last five years. The key growth driver has been rapid growth in end-use segments like automobiles and textiles. Owing to the economic downturn, the growth slowed down in the last 2 years. However the growth is reported to have picked up with the resurgence of the construction industry.
Paints & coatings market, India ($ Bn)

3.4 13.5%
1.8
2005
2010
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The paint industry is highly consolidated with the organized sector accounting for ~80%of the market. The major players in the paint industry are Asian Paints, Kansai Nerolac, Berger Paints and ICI. In the decorative segment, Asian Paints is the market leader followed by Berger and Kansai Nerolac. Kansai Nerolac is the market leader in industrial paints followed by Berger and Asian Paints.
Decorative paints segments (% of total volume)

Ext. coatings 12% Wood finishes 2%
Emulsions 17%
Enamels 50%
Distemper 19% Source: Industry reports, Tata Strategic analysis
Industrial paints market share, Fy09

Kansai Nerolac, 29%
Others, 36%
Shalimar, 4% BASF, 7% Asian PPG, 12%
Berger, 12%
Source: Industry Reports, Tata strategic analysis
On the other hand, the paints and coatings chemicals industry is comparatively more fragmented with significant participation from unorganized players, in addition to major manufacturers like Rhodia Chemicals India, BASF Coatings India and DuPont India.

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With the market recovering from the economic downturn, the paint & coatings chemicals industry is expected to grow at a CAGR of 14-15% in the next five years. In the decorative paints segment, water based paints are expected to drive growth with a CAGR of 15%. The
key growth drivers are going to be the growth in paints demand, which in turn are expected to be influenced by:
v Growth
in end-use industries
o Growth in industrial paints to be primarily driven by demand from automotive manufacturing, expected to grow at 15% annually o Growth in decorative paints to increase due to rapid growth in residential and commercial real estate, in turn driven by rising disposable incomes and regulations permitting 100% FDI inflow in real estate
v Increasing
penetration
o Increase in current low per capita paints consumption to move closer to global levels (The per capita consumption of paints in India is very low at 1.25 Kg against 38 Kg in Singapore, 25.8 Kg in the U.S or 2.5 Kg in China) o Marked shift in rural demand- moving from cement paints to higher quality paints
v Changes
in regulatory environment
o Framing of tighter emission and effluent norms to increase demand for watersoluble paints
Growth outlook, India ($ Bn)

6.5 14% 3.4
2010 Source: Industry reports, Tata Strategic analysis
2015

There is a shift in market share in favour of organized companies at the expense of unorganized segment due to entry of organized players into low cost distempers and enamels. While solvent-based enamels are still popular in India, a shift is being seen from solvent to water based paints. Keeping the environment concerns in mind, companies are coming up with new lead free and low Volatile Organic Compound (VOC) products. There is also a perceptible shift towards usage of
49
organic pigments in premium paints with heavy metal pigments being phased out. Companies which adapt to these trends could grow successfully in the paints market. Players could capitalize on the opportunities presented by changing trends in the paints and coatings market. One effective lever could be marketing high-margin, high-end decorative paint products which offer end customers longer replacement cycles. Besides, customizing paint products to meet changing regulations (environment-friendly, green, water-soluble paints) could help sustain profitable growth. Profiles of key players Brief profile: Rhodia India
Rhodia Specialty Chemicals India Ltd. www.rhodia.com

Company overview Sales Revenue in CY2010 Key products Manufacturing locations Formerly Albright & Wilson Chemicals India Ltd. (acquired in 2000 by Rhodia) 174 crore Rs. Alkamuls OR 36, Igepal BC/4, Rhodafac Roha, Maharashtra
Brief profile: BASF Coatings India Ltd.

BASF Coatings India www.basf -india.com Company overview Sales Revenue in FY2011 Key product lines Manufacturing locations Independent division of BASF India Prominent in automotive c oatings 3,229 crore (BASF India) Rs. Electrodeposition coatings, primer surfacer, top coats, base coats, paint system for plastic components Dadra & Nagar Haveli
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4. Polymer additives
Introduction
Polymer additives are specialty chemicals added to the base polymer to enhance certain properties or improve processing. The Indian polymer additives market is estimated at ~ $ 300 Mn in 2010. Plasticizers form the largest segment with 43% market share followed by heat stabilizers with 21% market share. From the applications perspective, PVC consumes the maximum amount of additives accounting for 40% of the total market followed by poly-olefins with 20%. However, this does not include the master batches segment, which separately accounted for a market of approximately $ 400 Mn in 2010.
Product share: 2008 (%)

Others, 19% Light stablizers, 4% Flame retardents, 5% Antioxidants, 8% Heat stablizers, 21% Source: Industry reports, Tata Strategic analysis Plasticizers, 43%
Indian polymer additives market has been growing at a CAGR of 10.5% in the last five years and is estimated to be ~$ 300 Mn in 2010. The organized segment has ~35 players and is dominated by multinational companies like Clariant Chemicals India Ltd., BASF, Lanxess India Pvt. Ltd., Baerlocher India Ltd., Akzo Nobel Chemicals (India) Limited and Dow Chemical International Pvt. Ltd. Major domestic players include KLJ Group, Fine Organics and Vision Organics Limited. KLJ Group and Baerlocher India are the market leaders in plasticizers and heat stabilizers, respectively. BASF, after its acquisition of Ciba, is the market leader in flame retardants, light stabilizers, and antioxidants.
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Polymer additives market ($ Mn)

300 10.5% 165
2005 Source: Industry reports,Tata Strategic estimates
2010

The market for polymer additives is expected to grow at a CAGR of 10% to reach ~$ 500 Mn in 2015. Key demand drivers include:
v Growth
in end-use industries:
o Increasing growth in plastic demand due to higher usage in packaging, construction and automotive sectors
v New applications:
o Increasing environmental concerns and cost considerations leading to replacement of wood, metals and glass by plastic in various applications
Market outlook ($ Mn)

500 10% 300
2010 Source: Industry reports, Tata Strategic estimates
2015

Development of environment friendly additives is a major challenge being faced by the industry. Increasing demand for environment friendly additives by domestic market together with regulations such as REACH is forcing companies to adopt environment friendly products. With rising consumer awareness, players switching to oleo-chemical
52
route could have a competitive advantage over others. Strict regulation on additive use in plastics is expected to drive demand and increase sales. The market has recently witnessed falling prices and low profit margins due to overcapacity of major manufacturers and reduction in import tariffs. The problem of overcapacity could be addressed by consolidation in the industry resulting in entities with better economies of scale. Also, manufacturers able to rapidly develop and customize products in line with customer requirements are more likely to succeed. Additionally, a focus on developing products that can be used after recycling of plastics (many current plastic additives lose their usability post-recycle) could help attain competitive advantage.
Profiles of key players Brief profile: Lanxess India

Lanxess India www.lanxess.in
Company overview Sales Revenue in CY2010 Key products lines Manufacturing locations India subsidiary of Lanxess GmbH Business Units in the fields of Performance Polymers, 13 Advanced Intermediates and Performance Chemicals 816 crore Rs. Antioxidants for polymers, blowing agents, polymer auxiliaries, plasticizers for polymers Jhagadia, Gujarat Nagda, Madhya Pradesh
Brief profile: Baerlocher India

Baerlocher India www.baerlocher.com
Company overview Key products lines Manufacturing locations
Entered India through acquiring Dewas polymer additive unit of National Peroxide Ltd. plasticizers: Baeropan, Baerostab, Baerolub PVC Non-PVC plasticizers Dewas, Madhya Pradesh
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5. Aroma chemicals
Introduction
Aroma chemicals, also commonly called flavours & fragrances are the essential ingredients used as additives in a variety of food, personal and home care products for adding taste and smell. Globally, the aroma chemicals industry size stood at $ 19.8 Bn in 2010, roughly equally split between flavours and fragrances. The five largest global manufacturers of aroma chemicals are Givaudan, International Flavors & Fragrances (IFF), Firmenich, Symrise and Quest International. The Indian aroma chemicals market size is of $ 300 Mn, with fragrances accounting for ~55% of the market. The Indian aroma chemicals industry can be segmented based on the end-use application, as follows:
v Flavours
o o o o o o o o o
Bakery Confectionary Dairy and frozen foods Savory food items Beverages Pharmaceuticals Meat, poultry and seafood Tobacco Toothpaste
v Fragrances
o o o o o o o
Detergents and fabric care products Wash products Talcum powders Skin care products Deodorants and sprays Air fresheners Household cleaners Tobacco
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End-use application: Flavours

Others, 12% Pharma, 9% Toothpaste, 11% Savory foods, 14%
End-use application: Fragrances
Tobacco 20% Others, 38%
Wash products, 42%
Beverages, 20%
Skincare, 6% Talc, 3%
Bakery, 14%
Detergents, 10%
Source: Industry reports; Tata Strategic estimates
The demand for aroma chemicals has increased annually at 8%, to grow from $ 225 Mn in 2006 to ~ $ 300 Mn in 2010. Demand has been driven by growth in consumption of FMCG products (both food and non-food), which in turn has been increasing on the back of rising population and growing per capita income.
Aroma chemicals market, India ($ Mn
300 8% 225 Flavours, 45%
Key segments, 2010
Fragrances, 55% FY06 FY10
The top five global companies have a significant presence in India's aroma chemicals market, cumulatively accounting for ~55% of the market. Beyond the five players, the supply side is heavily fragmented and is characterized by the presence of numerous privately-owned manufacturers, including SH Kelkar, Sachee Aromatics and Oriental Flavors & Fragrances, Ultra International, Gupta & Company.

The demand for aroma chemicals is expected to grow between 11%-14%, p.a. over the next decade. The total industry in India could potentially grow to nearly $ 1 Bn in 2020.
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Projected demand, India ($ Mn)

970
12.5%
300
2020
The demand growth in aroma chemicals has a positive outlook, and would be growing at 1.5 times the GDP growth rate, driven primarily by three levers:
v Growth
in demand for end-use products: Driven by rising disposable incomes, leading to increased consumption of processed foods and non-food FMCG including personal care and detergents
v Changing
lifestyles: Demand for high-end aroma chemicals is set to increase driven by increasing demand for higher-end personal care products
v Regulatory
environments: Regulations mandating stringent consumer products quality standards will lead to substitution of low-end chemicals with high-end, safe replacement formulations

Though traditionally aroma chemicals commanded high prices due to the nature of customization involved, the prices have fallen over the last decade due to increasing price pressures from customers (mainly FMCG manufacturers), who are finding it difficult to pass on input price increases to the end customers. This, combined with the increasing price of petrochemicals (feedstock for manufacture of numerous aroma chemicals), has led to consolidation among large players in the industry and this trend is expected to continue. Globally, aroma chemical manufacturers are moving towards long-term supply contracts and joint product development with its customers. This has given them the freedom to invest in product innovation and customization and charge higher margins in return. Thirdly, owing to implementation of stringent quality norms in FMCG products many downstream companies globally are now reverting to captive R&D for manufacture of certain aroma chemicals, especially in flavours. This would pose to be a threat to specialty chemical manufacturers and can only be countered by implementing the stringent quality and safety norms as well as focusing on product innovation themselves. Indian aroma chemical manufacturers could address these challenges through three key strategic levers. Firstly, they could enter long term supply contracts with organized FMCG
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(food and non-food) players, allowing them stability of business and the flexibility to invest in customization of products. Secondly, they should increasingly focus on development of formulations which would meet changing environment and safety standards. Lastly, acting closely in association with regulatory authorities could help develop quick and accurate understanding of global food standards. This would facilitate implementation of such standards locally and significantly enhance access to export markets, especially to developed economies.
Profiles of key players Brief profile: S H Kelkar & Co.

S H Kelkar www.kelkargroup.com Company overview Sales revenue in FY2009 Key end -use customer segments Manufacturing Largest Indian flavours and fragrances manufacturer business for over nine decades In 228 crore Rs. Flavours: Dairy products, bakery, savouries, pharma Fragrances: Personal care, hair care, fabric care Patalganga, Maharashtra
Brief profile: Sachee Aromatics

Sachee Aromatics www.sachee.com Company overview Key end -use customer segments Manufacturing locations Started by Mr. Manoj Arora, a leading aroma chemical manufacture r for five decades Personal wash, personal care, fabric care, incense sticks, aerosols, candles, tobacco products Delhi Paris
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6.Personal care ingredients

Introduction
The Indian personal care industry is estimated to be ~$ 6 Bn in 2010. It can be categorized into distinct product segments such as bath & shower products, hair care, skin care, oral care, fragrances etc. The bath and shower products segment is the largest one. The Indian personal care ingredients market stood at ~$ 400 Mn in 2010 and can be divided into active and inactive ingredients. Actives and inactives account for 40% and 60% by value of the total personal care ingredients market respectively.
Inactive ingredients Colorants Surfactants Preservatives Polymer ingredients Active ingredients Anti - ageing Exfoliants Conditioning agents UV ingredients
Major sub-segments, 2010 (% of total)

Others, 17% UV ingredients 10% Polymer ingredients 33%
Conditioni ng agents, 14% Surfactants 25% Source: Industry reports; Tata Strategic estimates
Personal care ingredients market has grown at 12% p.a. in the period from FY05 to FY10 to reach ~$ 400 Mn. Rising income, increased availability and wider product portfolio of companies has led to growth in personal care products and thereby personal care ingredients.
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The market is extremely competitive with more than 1,500 manufacturers of personal care ingredients in India. The market is dominated by small and medium scale domestic companies which account for more than 50% of the market. Major domestic players include Vivimed Laboratories and Sami Labs. On the other hand, multi-national companies currently account for about 35% of the market. BASF India Ltd. and Clariant Chemicals are the leading multinational players in India.
Personal care ingredients market ($ Mn)

400 12% 220
2010

Personal Care Ingredients market in India is expected to grow at 14% to reach ~$ 770 Mn by 2015 and has the potential to grow to ~$ 1.5 Bn by 2020.
Projected demand growth ($ Mn)

1500
14% 770 400
2010
2015E
2020E
The demand for personal care ingredients is expected to be driven by two major factors:
v Growth
in end-use industry
o Rising demand for personal care products due to growing population and increasing per capita income
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o Increasing personal care ingredient usage in formulation: Demand for products with higher/ better performance
v Changing
lifestyle
o Increasing demand for multi-functional personal-care products o Growing global demand for green products giving rise to huge exports potential

The industry is highly competitive with large number of domestic and international players. Domestic companies are registering good growth due to their meeting the market need for cost effective products. Indian personal care industry is highly cost sensitive and companies develop domestic substitutes for ingredients used globally. Indian market for personal care products like anti-ageing creams, sunscreen lotions etc. is very nascent and is developing at a fast pace leading to increasing requirement for investments in research and development of personal care ingredients. The growing awareness amongst the consumers is increasing the market for natural personal care products and in turn for natural ingredients. The rich heritage of Ayurveda is expected to make India a hub for natural ingredients. Manufacturers of personal care ingredients could explore capitalizing on this opportunity by collaborating with personal care FMCG companies to jointly develop customizable, localized ingredients - offering opportunities for higher margins and stable demand for the manufacturers. Also, companies which are able to innovate and come out with value offerings to meet unique needs of the Indian consumers could have a competitive edge in the market. Finally, they could explore working together with regulatory agencies to develop a quick and accurate understanding of global regulations and ensure domestic manufacturing quality meets exports requirements, thereby opening up access to overseas opportunities.
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Profiles of key players Brief profile: Vivimed Labs

Vivimed Labs www.vivimedlabs.com Company overview Sales Revenue in FY2011 Key product lines Manufacturing locations Sales footprint across 50 geographies with SBUs in USA, Europe and a marketing office in China Rs. 211 crore Oral care: Anti -bacterial, enamel protection Skin care: Anti -ageing, skin lightening Hair care: Jarocol, dyes, anti -dandruff, UV filters Bonthapally, Bidar, Jeedimetla (Andhra Pradesh) Haridwar, Kashipur (Uttarakhand)
Brief profile: Sami Labs

Sami Labs Ltd. www.samilabs.com Established 1991 in Bangalore Company o verview Sales footprint and s trategic alliances in USA, Europe, Japan, Australia, Middle East, South Africa, China, Alpha lipolic acid Key products Cococin Ellagic acid Bangalore (4 plants) Hyderabad Utah, USA
Conclusion
Given India's potential to emerge as a global specialty chemicals destination, both in terms of domestic demand and as a global manufacturing hub. Companies could explore how best they could participate in this growth story. A detailed growth strategy formulation would need to be based on each company's respective strengths and focus areas. Emerging trends in consumer industries call for innovation and development of local products/ solutions based on understanding of the unique needs of the Indian consumer. Secondly, the development of strong channels to reach out effectively to customers is of immense strategic significance. Establishing leadership position in sustainable growth through an integrated approach across the value chain could help create positive differentiation. This would not only help companies create value through green product/ process innovation but also generate end consumer pull through
61
ingredient branding in "green products". The development of chemical/ petrochemical infrastructure/ clusters through PCPIRs (Petroleum, Chemicals and Petrochemicals Investment Regions) could enable companies to establish effective upstream linkages for increased cost effectiveness. Finally, the chemical industry in the coming decades has to promote sustainable development by investing in technology that protects environment and stimulates growth while balancing economic needs and financial constraints.
References
1. 2. 3. 4. 5. 6. 7. 8. 9. RBI Handbook of Statistics Economic Advisory Council to the Prime Minister Department of Industrial Policy and Promotion Gujarat Socio-Economic Review, 2009-2010 Vibrant Gujarat summit, 2011 Company websites Annual reports IndiaChem 2010 handbook on Indian chemical industry, FICCI and Tata Strategic Conference on Agrochemicals, 2011, FICCI and Tata Strategic
10. Chemical Task Force, Government of India 11. Meetings with senior officials of Government of India 12. Department of Chemicals & Petrochemicals 13. Indian Chemical Council 14. Chemical Weekly magazine 15. Farm chemicals international 16. Phillips McDougall report on agrochemicals 17. Crop protection business in the new decade, Cheminova 18. Global Market for agrochemicals,BCC Research 19. Crisil research 20. IMS Health 21. Frost & Sullivan industry report 22. CMIE report 23. European Federation of Admixtures Association 24. Business press
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THOUGHT NOTES
10
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Farming solutions - the next frontier for breakthrough growth of Indian agrochemical companies
India has a population of 1.18 Bn which is expected to reach 1.45 Bn by 2030. This rising population will lead to increasing demand for food grains. On the other hand, per capita land available for agriculture has been steadily decreasing. This coupled with rapid urbanization and non availability of agricultural manpower has had a strong impact on farm production. Agricultural produce has not been growing in tune with demand. Currently average crop yields in India are much lower than global benchmarks. For example, average yield for rice is 3.2 tons/ha in India vis--vis 4.2 tons/ha globally. Similarly, yields for soybean and corn are 1.0 and 2.4 tons/ha domestically compared to 2.5 and 5.0 tons/ha globally. The current price increases of food products reflect the situation having reached alarming levels and we have to rely on imports to meet our domestic consumption. This is only expected to worsen further if we do not take necessary steps to reverse it. Improving crop yields has become very critical and will become imperative in the future.
India has the resources necessary to meet all its increasing needs and be left with a handsome surplus if we can use our significantly large area under cultivation effectively. This would however call for a holistic 'friend of the farmer' approach, offering locally relevant farming solutions, where agrochemical companies could lead and benefit by improving yield and productivity. The Indian agrochemical industry, which is Rs. 15,000 Cr today, could grow well beyond its aspirational target of Rs. 50,000 Cr by 2020. The opportunity lies in developing and executing innovative farming solutions that address the needs of the Indian farmer with very low landholding size, resources and knowhow available to him. Farming solutions would require a collaborative approach together with seed technology, IT, nutrients and other service providers. For the agrochemical companies it implies that to achieve such growth, capacity additions of over 100,000 tons would be required with significant capital investments of over Rs 3,000 Cr. In addition, substantial investment will be required for R&D and farmer-awareness activities. Besides effectively creating farming solutions with other partners, the Indian agrochemical industry itself faces critical challenges which could hinder its growth if not addressed effectively. The industry is predominantly generic in nature with very little investment in R&D. Lack of awareness amongst farmers on usage of agrochemicals and best practices followed globally is a major roadblock for the growth of the industry. Current per capita consumption of pesticides in India continues to be very low at 0.6 kg/ha compared to 7 kg/ha in USA and 13 kg/ha in China. It is estimated that crop losses
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in India due to non usage of agrochemicals amount to Rs. 90,000 Cr p.a. Relatively weak IP protection regime is another area of concern. A huge parallel market for spurious and spiked pesticides exists which leads to significant revenue loss for genuine manufacturers. In addition, long lead times for new product registrations and non-availability of land and regulatory clearances are hindrances to setting up new investments. The Indian agricultural landscape is distinct from most other countries of the world and needs to be well understood to arrive at relevant farming solutions. We have a largely fragmented land-holding structure (refer fig.1) with subsistence farming in several regions. Farmers are typically not educated or exposed to modern methods of farming. The fragmented and small landholdings translate to lesser spending power by individual farmers for seeds, irrigation, fertilizer or agrochemicals. Deeper understanding of the market by geography, perhaps even at a district level, becomes critical to success. These differences need to be clearly understood and call for customized solutions to suit India's diverse agro-climatic conditions. Fig. 1: Land ownership pattern by district - rural India
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Agrochemical companies can take the lead to look beyond the traditional offerings and adopt a holistic approach to farm management to enable India to achieve its true potential in agriculture. These companies have a strong farmer-connect and reach, with the potential to influence and change the way farming is traditionally done in this country. If ever there was a burning platform necessitating this, it is now! The Indian market abounds with such examples where innovative and customized solutions have grown the market and catapulted the first movers to market leaders. The automotive industry in India received a strong fillip with India becoming a manufacturing hub for small cars. A call to develop the low cost car meeting specific needs of the Indian customer who could not afford it earlier, helped to create and proliferate the low end 'micro' segment. Similarly, the paint industry experienced a huge growth with introduction of tinting machines which offer customized paint solutions closer to point of sale, recognizing the Indian consumer's need for tailored shades and 'look and feel' before deciding. Castrol took the initiative to develop a completely new channel for lubricant sales. This offset the disadvantage of not being able to utilize traditional sales channels, which were controlled by PSUs, and created a robust distribution network for Indian motorists and car owners through other points of sale. Let us consider the benefits of adopting a holistic and innovative approach with the case of pulses. A brief study indicated that India could more than double its current production of pulses if crop nutrients, timely availability and usage of better seed varieties, requisite irrigation and proper storage were available (refer fig.2). This would improve our yield to global levels and help us meet our domestic demand. Arriving at the solutions innovatively recognizing the Indian context is critical. However the real challenge lies in the execution. First movers will be able to reap the benefits and enjoy sustainable growth.
India could increase production of pulses to 37 Mn tons with an integrated approach INDIA: LEVERS TO INCREASE PRODUCTION OF PULSES (Mn tons) 9 3 4 4 28 15 2 37 INDICATIVE
HW Seeds Current Production 25% increase in yield due to use of HYV seeds. (Potential 35-40%)
Irrigation/ Past Storage/ Increased yield Additional Area Total availability Management Nutrient supply Transportation 20% increase due to supply of irrigation and nutrients. (Potential 20-25%) 15% increase due to proper storage. (Potential 20%) Increase due to additional arearice fallows & intercropping
25% increase due to pest management. (Potential 30-40%)
STRATEGIC MANAGEMENT GROUP Source: Primary interviews with Ministry of Agriculture, Pulses Research Institutes and Associations, Tata Strategic Analysis
Fig 2: Realizing India's potential for production of pulses
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Agrochemical companies could adopt specific crops or geographies within their sphere of influence and help farmers increase output. This may mean working with various stakeholders such as microfinance companies, adopting contract farming, increasing farmer awareness through demonstrations and extension services, propagating better farm practices, ensuring right usage of crop protection chemicals, increasing usage of hybrids/ GM seeds and providing better storage facilities to reduce post harvest losses. The power of IT can be effectively leveraged to provide farmers with timely advice and guidance for improving productivity, addressing pest related issues and optimizing the value chain. This article has been authored by Pratik Kadakia (pratik.kadakia@tsmg.com), Practice Head- Chemicals & Energy and Jeffry Jacob (jeffry.jacob@tsmg.com), Principal -Chemicals of Tata Strategic Management Group
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Contract Research - Deriving Strategic Value from Emerging markets

Global pharmaceutical companies are re-looking at their R&D processes in order to leverage the opportunity presented by emerging economies, such as India, in contract research. Besides offering the opportunity to save costs tactically in the short term, this is also a strategic move to improve productivity and develop further capabilities in order to compete successfully in the future, while staying close to geographies which will drive future growth; say Aleksandar Ruzicic of Roland Berger Strategy Consultants and Jeffry Jacob of Tata Strategic Management Group
Matching R&D footprint with long-term growth in emerging markets

Globally pharmaceutical companies are under immense pressure with existing business models under threat. The growth is expected to taper off in the US and other developed countries while emerging economies are expected to drive a large part of the future growth. Until 2020, pharmerging countries will represent more than a quarter of the healthcare and pharma market value globally. These markets will contribute almost half of the absolute growth for both the healthcare and pharmaceutical markets (Refer Figure 1). Hence, it does not come as a surprise that pharmaceutical companies have started to boost their footprint and presence in these locations and also elevated these regions organizationally. For example, GlaxoSmithKline has created an Emerging Markets unit in June 2008 headed by Abbas Hussain and executed numerous acquisitions and direct investments resulting in a significant part of its workforce being located in emerging markets. Declining productivity, relatively dry pipeline for new drugs, increasing penetration of generics and margin pressures have been leading to lower profitability for global pharmaceutical companies. This trend is expected to further intensify going forward into the future. This has forced companies to continuously adapt their cost structures, as exemplified by major multi-billion cost cutting/restructuring projects in all major pharmaceutical companies, as announced most recently in September 2010 by the Roche group that is not affected by imminent significant patent expirations.
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Fig. 1: Geographic shift towards pharmerging markets (USD Bn)

Assessment of shift Healthcare market Pharmaceutical market 1,250 1,500 29% 450700 17% 7% 4%
Share of healthcare and

pharma market value of pharmerging countries more than doubling between 2009 and 2020
5,400
9,900
4,500 26% 14%
800
USA 43%
35%
USA 38%
Share of absolute
healthcare and pharma market value growth between 2009 and 2020 larger than 40% 19% Europe 22% Top 5 Japan 7% Pharmerging 12% Other 16% 2009 Source: EIU; OECD; WHO; IMS; Roland Berger 6%
14% Europe 19% Top 5 Japan 11% Pharmerging 12% 8% 27% 49%
5%
43% 26% 14% 2020 12%
Other 20% 2009
22% 2020
23%
The pharmaceutical industry is fundamentally re-evaluating the make-up of its value chain, differentiating clearly between core capabilities and those that could be potentially outsourced. Within R&D, particularly pre-clinical and discovery seem to be representing potential outsourcing opportunities, also driven by huge cost differences (Refer Figure 2 & 3). In the future, the pharmaceutical industry will be forced to capture the increasing benefits from emerging countries, particularly given the long-term benefit from matching better its global work force footprint to the future geographic distribution of revenues. The initial wave of pharma outsourcing was successfully witnessed for manufacturing of Active Pharmaceutical Ingredients and off patent drugs. As late as 2006, contract manufacturing accounted for over 70% of the revenues of the Indian CRAMS market. However post compliance with WTO norms on intellectual property, there has been a spurt of off-shoring activities in the areas of clinical development and manufacture of patented APIs and formulations, as well as discovery and pre-clinical services.
Fig. 2: Core competencies across the value chain
Distribution/ logistics 1% Research 12% Sales Discovery 22% 6% Pre-clinical 3% development 16% 9% 6% Clinical development Quotes from Top Executive Interviews
"We have paid for the same pre -
Fig. 3: Pharmaceutical Companies R&D Budget Split

R&D Budget break- up (%) Clinical Budget break- up (%)
16 11 4 20 27 18 38 67
Phase IV
24% Marketing
Regulatory 1% Pharmaceutical Active ingredient production production R&D Production Distribution
Marketing and sales
clinical work USD 120,000 in China, which would have cost us USD 5 million in the US" "Data management can already be outsourced to places like India, for example leveraging IT companies such as Tata Consultancy Services" "Emerging markets do provide cost savings potential for clinical development which need to be balanced with the demand for clinical data generated in the US/EU"
Phase II and III
Phase 1
QUESTION: What are the top 3 core competencies of your company concerning the following steps along the value chain? Source: Top executive interviews; Roland Berger Survey 2007/2008
Clinical Development Non-clinical Others
Discovery Regulatory
A study by the Tufts Center for the Study of Drug Development concluded that:
Pharma companies with high reliance on CROs stay closer to schedule than others CROsexpand the speed and capacity of product development pipeline while
maintaining high levels of quality

CROs help companies reduce costs
Source: Secondary research, Zinnov, Tata Strategic Analysis
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Multitude of key success factors in R&D drive relevance of emerging countries

Many key success factors for pharmaceutical R&D apply equally to all phases, such as the availability of highly skilled English speaking staff, adherence to quality and compliance, flexibility and agility given significant attrition, costs per unit (related for example to activity, FTEs, patients) and tight project management. In addition, exploratory R&D also requires IP protection, trained/ experienced scientists/ researchers, speed of learning/ know-how development, access to academia/ basic research labs, as well as access to funding whether public or private. In case of confirmatory R&D, the key success factors are driven by fast access to patients, local regulations for animal/ clinical studies, overall speed for critical path activities, e.g. data analysis upon database lock of clinical trials, access to product approval regulators and cost/benefit assessment agencies in key markets as well as strength of relationships with medical opinion leaders driving product adoption through international and national guidelines. Pharmaceutical companies need to decide on their geographic footprint by assessing the various locations rigorously against the suggested key success factors. In addition, we suggest differentiating outsourcing decisions by activity type (differentiating ongoing/ repetitive tasks from projects) and outsourcing option (off-shoring leading to a strategic cost advantage vs. outsourcing within US/ EU/ Japan). Near and off-shoring seems to be equally driven by unit cost advantages, e.g. animal studies, as well as critical resource access, e.g. patients meeting clinical trial inclusion criteria, experienced medicinal chemists.
Fig. 4: Selected R&D examples by outsourcing option and activity type

Competitive Intelligence Outsourcing option Low cost off-shoring CMC for Optimization
Complexity
Medicinal Chemistry Animal Studies Pivotal Trials
Outsourcing to US / EU / Japan
PharmaIT Services Drug Safety Reporting Ongoing/ repetitive tasks Activity type
PMS Studies
Projects
India's strong positioning on the key success factors India's large population of 1.15 Bn people translates into a vast patient pool and faster patient recruitment for clinical trials, which go a long way in meeting overall timelines
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faster. This results in substantial acceleration of the drug development time in addition to lower costs per patient. In addition, India has a large population of doctors and scientists, representing the largest English-speaking talent pool in some disciplines. For example, India produces three times as many master graduates annually in chemistry than the US. With the large number of DMF filings, technical competency is well established. It has the largest number of USFDA approved facilities outside US with GMP and GLP certifications. Intellectual property is respected and the laws are conducive to IP protection. Moreover, Indian strength in synthetic and medicinal chemistry makes it a lucrative destination for contract research, even for early research and discovery activities. Given the advantages of focus, cost and speed, the question is no longer about whether to outsource but rather of finding the right partners. Overall, clinical development, discovery and non-clinical services costs account for 85% of R&D budget which can be reduced by using CROs. In addition to cost advantages, multinational pharmaceutical companies benefit from staying closer to schedule and their ability to expand speed and capacity of their R&D operations while maintaining high levels of quality resulting in a much required boost of R&D productivity (Refer Figure 4).
Moving up the value chain ladder

Contract work in research/ discovery has evolved from low end research activities to more value added high end research. Reputation for research quality, speed in project execution, world class infrastructure, quality manpower, patent protection and strong client relationships are critical for growth of CRAMS. Currently clinical trials account for the largest share of the Indian CRO market (Refer Figure 5). Increasingly, Indian CRAMS such as Jubilant Biosys are striving for end-to-end solutions, integrating a large array of services into a holistic offering, particularly within Discovery/ Pre-clinical. Furthermore, Indian CRAMS have also started to engage in performance-based contracts enabling them to retain a larger share of their value-added, as exemplified by the collaboration between Jubilant Biosys and Endo on the area of oncology.
Fig. 5: Indian CRO Industry
CRO segments in India Break up of Development stage in India Break up of Clinical studies Phase IV, 10% Phase I, 7%
(Focus on generic drug development)

Discovery 20% BE/ BA Studies, 37% Clinical studies, 63%
Phase II, 30% Phase III, 53%
Development stage (Clinical), 80%
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Availability of large patient population in diverse therapeutic category is the major driver for growth of CRO - Clinical Trial in India Cost of clinical trials is a fraction compared to developed markets like US
Source: Crisil Research, Tata Strategic Analysis
Outsourcing in drug discovery occurs mainly in the following segments - broad based screening, genomic targets, chemistry and gene therapy. Therapeutic areas involved include oncology, infectious diseases, CNS, cardiovascular disorders, autoimmune/ inflammation and metabolic diseases. Currently Phase II-III has emerged as the most established component of clinical development. The adoption of new tools and techniques such as biotechnology, bio informatics, genomics etc. along with new IT solutions has brought about a change in the way new drugs are being developed and brought to market. This will increasingly drive outsourcing of research and development to India, also due to its strong IT services sector (Refer Figure 6).
Fig. 6: Indian CRO Industry
Indian CRO Revenues, 2002-2010e (USD Mn.) Leading Indian CROs
R CAG 62%
1020 485
22 2002
202 70 2004 2006 2008 2010e
Source: Secondary research, Zinnov, Tata Strategic Analysis
Illustrative list of areas addressed eg. GVK Bio: Medicinal chemistry Informatics Biology Process R&D Clinical research BA/ BE Studies Knowledge process outsourcing
Data management and early phase trials offer immense opportunities for CROs. There have been several Private Equity (PE) investments in the recent past, driven by current attractive returns and future potential. Actis' investment in Veeda Clinical Research, Kotak Private Equity Group and 3i Capital in Siro Clinpharm, OrbiMed in Ecron Acunova and MPM Capital in Sai Advantium are some examples. Actis Biologics is working together with the Malaysian government on new molecules for diabetes, anti-cancer diagnosis, and asthma and also jointly building the Bio-City Park in Malaysia. 'Developing country' diseases offer another area of huge potential where the focus of Western drug companies is currently limited. The long term arrangement between the Malaysian government and Vivo Bio for manufacturing malaria vaccine is one such example.
Contract research (and manufacturing) offers a long term strategic advantage The nature of relationships between Indian CRAMS suppliers and the pharma companies is transitioning from transactional based to long term partnerships, often involving sharing and creation of joint intellectual property triggering performance-based milestone payments. Big pharma companies are also acquiring stakes in their CRAMS partners to secure supply and develop a stronger relationship.
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It is a foregone conclusion that pharmaceutical and biotech companies need to relook at their business models if they have to successfully compete in the new environment. Contract manufacturing was just the tip of the iceberg. If companies have to be really successful and optimize their operations for better business results, they need to revamp their R&D process and capture the opportunity presented by emerging economies. Price realizations that the pharma companies have got used to may be a thing of the past, especially with focus on reducing final cost of dose by payers and governments even in the developed world. Off-shoring contract research (and manufacturing) services are therefore an opportunity to not just save costs tactically for the short term, but also a strategic move to improve productivity and develop further capabilities, while also moving closer to the future healthcare customers in developing markets.
Tata Strategic Management Group. All rights reserved
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GST: An Opportunity to reassess your Supply Chain

The cascading effect of local taxes and complex regulatory structure of central and state bodies have added to the inefficiencies for businesses. The proposed GST augurs well for businesses thru simplified process that will create competitive advantage for those who are prepared say Siddharth Paradkar (Principal - Logistics) and Pratik Kadakia (Practice Head - Chemicals & Energy) of Tata Strategic Management Group.
Introduction
The dual governance structure of central and state bodies make the current tax system very complicated. The multi-layered system, with both Central and State governments having the power to levy taxes brings about many inefficiencies in the system. The double taxation policy also adds cost as the tax paid in earlier in the value chain gets re-taxed and firms end up paying tax on the tax paid. The government over the past years has tried to bring about some changes to try and minimise this cascading impact, however this is not to the same extent as the new Goods and Services Tax (GST) intends to do. GST is expected to be the next big bang fiscal reform in the Indian context. GST, if implemented in the true spirit of its intent, will bring about major change and result in rationalizing and simplifying the tax structure at both the Central and State levels (even across state borders).
What is Goods and Services Tax (GST) GST is an evolution of the current tax regime, transforming the complex and cascading structure into a unified value added system of taxation. Under this, a value added tax would be levied at every point of the supply chain providing for credit for any / all taxes paid previously. Keeping in line with the governance structure of the country GST would be levied simultaneous by the Centre and State (CGST and SGST respectively). All essential characteristics in terms of its structure, design applicability, etc. would be common between CGST and SGST, across all states. GST is expected to replace most of the current applicable indirect taxes as listed in the table below (Exhibit 1).
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Exhibit 1: Taxes subsumed under GST Central Taxes > Central Excise Duty > Service Tax > Additional customs Duty > Surcharge and cesses State Taxes > VAT / Sales Tax > Entertainment Tax > Entry Tax (not in lieu of Octroi) > Other Taxes and Duties (includes Luxury Tax, Taxes on lottery, betting and gambling, and all cesses and surcharges by States)
Impact of GST
Implementation of GST will have significant impact and will change the manner in which business is carried out in comparison with the ways of the current tax regime. With a single rate being applied to all goods and services there will be a significant redistribution of taxes across all categories resulting in reduction in taxes on manufactured goods and hence impacting the pricing of the product. The integration of tax on Goods and Service through GST would provide the additional benefit of providing credit for service tax paid by manufacturers. Both CENVAT & VAT which are in practice now, give tax credit to the manufacturer for the tax paid for raw materials (hence a tax is charged only on the value added by the manufacturer). More often than not, there are various services including logistics involved in getting the input material to its final customer. Service tax is paid on the cost of such services. With the implementation of GST, cost of any services including logistics cost will be considered a value add, and the manufacturer will get tax credit for the service tax paid.
Inter-state transactions to become tax neutral

Under GST inter-state sales transaction between two dealers would be cost equivalent compared with stock transfers / branch transfers. According to the proposed model, Centre would levy IGST which would be CGST plus SGST on all inter-state transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. Similarly the importing dealer will claim credit of IGST while discharging his output tax liability in his own State. This will result in inter-state sales transaction becoming tax neutral when compared to intra-state sales. India would become one single common market no longer divided by state borders.
Business implication of GST

Logistics and supply chains will therefore see a major change; sourcing, distribution and warehousing decisions which are currently planned based on a state level tax avoidance mechanism instead of operational efficiencies will be reorganized to leverage efficiencies of scale, location and other factors relevant to the business.
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Rationalization of Warehouses and Transport network
GST would eliminate the existing penalties on inter state sales transactions and facilitate consolidation of vendors and suppliers. This will eliminate the need to have state wise warehouses to avoid CST and the associated paperwork, leading to elimination of one extra, redundant level of warehousing in the supply chain. This will result in reduction in the number of warehouses (Exhibit 2), improved efficiencies, better control and reduction in inventory due to lesser numbers of stocking points and cases of stock outs. This would allow a firm to take advantage of economies of scale and consolidate warehouses at the same time reduce capital deployed in the business. Larger warehouses can benefit from technological sophistication by deploying state-of-the-art planning and warehousing systems which are not feasible in smaller, scattered warehouses. At the same time IT costs of having ERPs deployed at many small warehouses can be saved. This will pave the way for improved service levels at lower cost in the overall supply chain. A rationalization similar to warehousing can also be done in distribution and transportation routes as tax ceases to become the deciding factor. Since the tax rates across states are envisaged to be uniform, state boundaries will no longer be the parameter for deciding routes. At the same time, with larger warehouses, transportation lot sizes will automatically increase, making way for more efficient bigger trucks. The optimization and rationalization that these options can bring about in the supply chains of a firm on account of GST will provide a competitive advantage to the business through better service and faster turnaround times at lower costs.
Exhibit 2 : GST will enable manufacturers to realize higher margins

COMPARISON BETWEEN CURRENT AND POST -GST 1 SCENARIO A Current Scenario - Companies have depots in destination states to counter CST
State Border
2
INDICATIVE All figures in Rs. / Unit
Manufacturer Landed cost Margin CST Final Price
100 30 0 130
Depot Landed cost Depot cost Margin VAT Final Price
130 5 0 5.4 140.4
Distributor Landed cost 140.4 Margin 5 VAT credit 5.4 VAT 5.6 Final Price 145.6
Retailer Landed cost Margin VAT credit VAT MRP
145.6 25 5.6 6.6 171.6
B Post GST Scenario - Zero CST on inter -state sales

State Border
Manufacturer Landed cost Margin Final Price
100 35 135
Distributor Landed cost 135 Margin 5 VAT 5.6 Final Price 145.6
Retailer Landed cost Margin VAT credit VAT MRP
145.6 25 5.6 6.6 171.6
Post-GST the supply chain can be designed purely on logistics cost and customer service considerations that will positively impact the business
Notes : 1) Goods and Services Tax STRATEGIC MANAGEMENT GROUP Source: Tata Strategic analysis 2) Central sales tax: Inter-state sales tax
STRATEGIC MANAGEMENT GROUP 9 9
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Opportunity to explore alternate distribution models

Organizations will now be able to explore different distribution models such as setting up mother warehouse and regional distribution hubs and possibly step away from traditional C&F and distributor based models currently adopted. This will lead to logistics and distribution to evolve more strongly as a competitive advantage. The government has already begun the process of amending the constitution and getting the necessary consensus from all the stake holders. Though the exact details are still sketchy, the structure and deliverables have been clearly laid down for all to see. We expect GST to be implemented during the course of the financial year 2012-13. Thus GST offers a great opportunity to revisit your Supply Chain & Distribution strategy, and identify what is required to become GST ready. Those who move early are likely to gain an advantage on cost and service levels over their competitors and deliver a better value proposition to the customer.
Tata Strategic Management Group, 2011. No part of it may be circulated or reproduced for distribution without prior written approval from Tata Strategic Management Group.
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Industrys Voice for Policy Change
About FICCI
Established in 1927, FICCI is the largest and oldest apex business organisation in India. Its history is closely interwoven with India's struggle for independence and its subsequent emergence as one of the most rapidly growing economies globally. FICCI plays a leading role in policy debates that are at the forefront of social, economic and political change. Through its 400 professionals, FICCI is active in 53 sectors of the economy. FICCI's stand on policy issues is sought out by think tanks, governments and academia. Its publications are widely read for their in-depth research and policy prescriptions. FICCI has joint business councils with 75 countries around the world. A non-government, not-for-profit organisation, FICCI is the voice of India's business and industry. FICCI has direct membership from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 3,00,000 companies from regional chambers of commerce. FICCI works closely with the government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sector specific consensus building and networking. Partnerships with countries across the world carry forward our initiatives in inclusive development, which encompass health, education, livelihood, governance, skill development, etc. FICCI serves as the first port of call for Indian industry and the international business community.
Contact Details
Mr P. S. Singh
Consultant-Chemicals Division
Ms Charu Smita
Assistant Director- Chemicals Division
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FICCI Federation House, 1 Tansen Marg, New Delhi-110 001 Tel: +91-11-2331 6540 (Dir) EPBX: +91-11-2373 8760-70 (Extn 395) Fax: +91-11-2332 0714/ 2372 1504 E- Mail: rkbhatia@ficci.com

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Theme: Leveraging Gujarat State Advantage In The Global Chemical Industry

Dyes and pigments

The Gujarat State Advantage

India growth story and the chemicals industry

Source: RBI Handbook of Statistics, Analysis by Tata Strategic

Source: RBI Handbook of Statistics, Analysis by Tata Strategic

Pharma, 20,24% Specialty chemicals, 15, 18%

Foreign Direct Investments ($ Bn)

FDI in chemicals industry ($ Mn)

Major FDI deals in FY11

390 198 205 229

Rhodia SA Fumakilla Ltd Huntsman Corporation

17.5 0.11 N.A. N.A.

Willowood Chemicals Koppers International Koppers

Source: Department of Industrial and Policy & Promotion,Industry Reports

Source: Industry Reports, Analysis by Tata Strategic

Gujarat: The chemical hub of India

Gujarat s share in India,FY10

5% 6% 10% 12% 16% 17%

Industry composition: Gujarat, FY09

Chemicals, 42% Textiles, 6%

Investment climate in Gujarat

Proposed investments in Gujarat (Rs Cr)

Source: Vibrant Gujarat, 2011 Note: 1) In chemical & petrochemical sector

Infrastructure and strategic location

Raw material availability

Impetus for growth: Integrated development and PCPIR

Chemical manufacturers in Gujarat

Chemical centres in Gujarat

Baroda Chemicals & petrochemicals

Jamnagar Chemicals & petrochemicals

Dahej PCPIR Hazira Chemicals & petrochemicals

Bharuch Chemicals Valsad Chemicals

Source: Secondary research, Analysis by Tata Strategic

Investments - Planned and realized

Major players at Dahej PCPIR Greenfield

Upcoming external infrastructure

v Air: Greenfield v Broad Rail:

Support for micro, small and medium enterprises

subsidy on loans for modernization programmes

v Technology v Support v Support v Cluster

for vendor development for auxiliary industries for value-addition

development in PPP mode of sick units

Global agrochemicals industry

Global agchem market (USD Bn)

2005 Source: Industry report; Tata Strategic estimates

Global demand share, 2008

Indian agrochemicals industry

Demand outlook (USD Bn)

Average crop protection consumption, 2009 (kg/ ha)

State-wise pesticides consumption, FY09 (% of total value)

Punjab, 11% Karnataka, 7%

Source: Industry reports, Tata Strategic analysis

Technical grade manufacturers

End use customers

Installed capacity & production (000 TPA)

Source: Ministry of Chemicals & Fertilizers

Product share, FY09 (% of total)

FOODGRAINS DEMAND & SUPPLY, INDIA (MT)

Sugarcane Soybean Rapeseed

Yield improvement potential (%)

Yield without protection