In 1-line: Large market, massive tailwinds, high margins however getting suppliers export-ready and solving for high lead times to acquire buyers are 2 key challenges.
Speciality chemical is any chemical which imparts a very specific property to a finished good. Eg. Colour, fragrance, durability.
It's formulation is done working backwards from the desired property required in the finished good.
3/ Then there are commodity chemicals. Think of them as raw materials for speciality chemicals.
Examples of commodity chemicals are: Acetic acid, Acetone, Benzene, Toluene, Glycerol etc.
4/ Let's first try to understand the existing market for speciality chemicals export out of India.
Present market stands at ~$24B, which has been growing at a healthy ~11% CAGR.
5/ To put this in context, global buying for speciality chemicals stands at ~$800B which pegs India's share to a mere 3%.
China and US are the two largest exporters with ~25% share each, followed by EU at ~17%.
6/ Let's double click on exports out of India a bit.
In terms of destination countries, China, US and Brazil are the largest with ~14%, ~13% and ~7% share. And rest ~66% is the long tail.
7/ In terms of categories, agro-chemicals and dyes and pigments are by a distance the 2 largest categories with ~$9B and ~$7B in export volumes.
Rest (personal care chemicals, textile chemicals, construction chemicals etc) are all small (sub $2B) individually.
8/ In terms of supplier segment, while no credible numbers we could get hold off, but we believe most of the market is served by large suppliers today. Eg. Aarti, Navin, Atul.
And small suppliers are not meaningfully playing in the export market.
9/ Now that we have covered market 101, before I go on to covering key gaps in the market,
I wanted to call out two different (international) buyer segments who today have very different supply chains and different needs i.e. Large buyer and Small buyer segment.
10/ A large buyer of speciality chemicals today has a close network of large and reliable suppliers who supply to them.
Given the criticality of speciality chemicals for imparting specific properties, large buyer likes to deal directly with suppliers and not have intermediaries.
11/ Large buyer is very sensitive to quality and needs the supplier to deliver the same quality reliably on-time and in-full time and again.
Large buyer likes to get into long term agreements with suppliers.
12/ Another aspect which is very key to the buyer is compliance i.e. regulatory and legal compliance with the local laws,
ESG compliance and having a minimum standard of plant automation and practices.
13/ Another aspect key to large buyer is ability of the supplier to honour long term contracts.
This means supplier's ability to absorb volatility in commodity chemical prices while still charging the pre-decided price to the buyer. This needs him to have a certain BS strength.
14/ A large buyer is relatively price inelastic as the share of speciality chemicals to the overall COGS is often ~20%, while the criticality is of course high.
This is the reason why large speciality chemical exporters from India have very healthy gross and EBITDA margins.
15/ Coming to the small (international) buyer supply chain, intermediaries often exist in this chain between them and the end suppliers from India.
On a relative basis, small buyer is less quality and compliance sensitive, and is more price and credit sensitive.
16/ Small buyer is in the business of rotating working capital, and a healthy credit is key for that.
Small buyers are also more availability sensitive and unplanned, because of which intermediaries often stock inventory in the destination country, at least the fast moving SKUs.
17/ Now that we've gone through the two supply chains, let me focus on 2 key challenges that lie ahead for any B2B commerce intermediary building in this space.
This is for who intends to target large international buyers while working with small Indian suppliers at the back.
18/ First challenge is (A) Getting small suppliers export-ready
Our assessment is that a meaningful one-time CAPEX is required to make the suppliers export ready. The CAPEX will go primarily into plant automation and compliance adherence (Eg. chemical waste treatment).
19/ In addition, the intermediary will also have to level the playing field for small suppliers when it comes to R&D. They may have to build this muscle centrally.
In this market, new product innovation if often supplier led with large suppliers invest ~5% of topline on R&D.
20/ The intermediary will also have to support the small suppliers with balance sheet depth in case of adverse raw material (i.e. commodity chemical) price movements, which are not uncommon.
This is to ensure small suppliers are able to honour their contracts with large buyers.
21/ Above upgradation and associated change management for small suppliers won't be trivial.
However, new generations taking charge in small supplier organisations might facilitate this change management.
22/ Second challenge is (B) High lead times to acquire new buyers in this industry
Buyer-supplier relationships in this industry are very very sticky, and hard to break into.
23/ A large buyer's process to onboard a new supplier often includes physical plant audit, getting samples, auditing sample, first order, few more orders (to build comfort).
We've heard the above process from exploration to supplier onboarding can take 6 to 12 months.
24/ However, the opportunity lies in targeting new to India buyers who're looking to diversify away from China and EU,
Or existing to India buyers who's now looking to buy new products.
In both the above cases, buyers might be more amenable to work with new suppliers.
25/ We've heard from credible industry people that tailwinds towards India are indeed real, and large buyers are looking to diversify away from China and EU.
This could potentially mean exports growing at 20-25% CAGR over the next few years for India.
26/ China supply chain disruptions during COVID and tensions between US-China has led buyers to look for more options.
While Govt's push on ESG compliance in EU has led to prices increasing for EU suppliers.
27/ So, we do believe opportunity is both real and large with a clear "Why now", though it's comes with its set of challenges.
However, we believe strong founders with deep pre-existing supply chain knowledge and buyer relationships will be have the best shot at the opportunity.
28/ We look forward to meeting and brainstorming with founders building in this space,
OR in any B2B export-oriented commerce plays out of India. DM is open. <eom>
1/ We love *Spend lines* at @Stellaris_VP, and have recently invested in two i.e. @GoKiwiNow and other’s still in stealth.
I remember me and @jindalprateek87 being completely blown away the first time we heard it in 2018 at Ola FS. A #fintech thread 👇
2/ Definitions first:
Spend line is a credit line designed to drive convenience for daily /weekly spends, while Lend line is a credit line or credit designed to drive affordability or liquidity in times of need.
3/ Some examples:
Spend line examples include neighbourhood grocer Khaata, Credit card, BNPL (Eg. Paytm Postpaid, Simpl).
Lend line examples include Personal loans, EMI cards (Eg. Bajaj), Credit card EMI, Pre-approved bank lines, Debit card EMI, PL lines (Eg. CRED Cash).
1/ Recent “Credit line on UPI” launch by @NPCI_NPCI is a pivotal point in India's credit journey, one which will breed several #fintechs.
View In 1-line: Credit line on UPI will be what Debit card EMI could never become, and much more!
2/ For the uninitiated, Credit line on UPI brings all pre-approved bank lines at the point of consumption, i.e. ~30M UPI merchants and 1M+ terminal merchants (carrying ~6M terminals), accessible through any UPI app.
3/ Present popular instruments that bring credit at point of consumption include Credit card, Debit card EMI and @Bajaj_Finance EMI card - each having their deficiencies.
1/ Thread on our investment thesis in "Payment reward infra".
Thesis in 1-line: There is an opportunity to build pipes (and later on intelligence) between issuers and merchants to enable payment linked rewards at point of sale (PoS).
Issuer is broadly referred to as any entity like a bank, NBFC or fintech which has issued payments instruments like credit cards, debit cards, pre paid cards, wallets, EMI cards etc.
Merchants could be online or offline, large, mid-sized or small.
3/ Work on this thesis got triggered because of a few reasons:
Wanted to crowdsource from the good folks at Twitter as to where all lies massive under penetration in #insurance in India? What all categories, both existing and new?
Let me quick this off with some obvious ones. 1) retail health = only 35M lives insured as of FY18
more 👇
2) group health = only 100M lives insured as of FY18 (includes employee and his family members he's opted)
3) life = estimates peg penetration at ~25% lives; however claim significant under insurance at ~10% of the desired sum cover
4) motor = actually sees a good penetration overall, with car and commercial vehicles at 85% and 76% pen respectively. Two wheelers are under penetrated though at 36% pen.
5) views on other categories like crop, marine, fire, home etc?