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India’s specialty chemicals industry has been a major growth provider to the economy in the recent years. It is currently valued at nearly USD 25 billion and expected to grow at 11% per annum to reach USD 39 billion by 2021. The flavours, fragrances and nutraceutical ingredients industry forms an important sub-segment of the Indian specialty chemicals space. With a strong linkage to consumer facing industries, including personal care, food and beverages and nutraceuticals, this segment is witnessing strong market demand. Also, segments like nutraceutical ingredients, which have traditionally been export-focused, will now reap the benefit of a strong upsurge in the domestic market, as a fledgling end-user market like nutraceuticals witnesses exponential growth in India.
India is a leading producer of natural base ingredients, given the abundance of the raw material in the country and an important supplier to the global market. It caters to 60% of the global spice oleoresin demand and 80% of the global mint extracts demand. In several critical ingredients (including mint, ginger, chilly, pepper, star anise, fennel, coriander, lemongrass, nutmeg, mace, cardamom), India ranks among the top three producers in the world.
A rich legacy in Ayurveda and other forms of alternate medicine, along with a robust supply chain for oleoresins and extracts, makes India a very strong contender in the nutraceutical ingredients segment. Indian players have successfully added R&D to their repertoire of strengths and are now able to develop and manufacture products which are of high quality, scientifically evidenced, globally accepted and competitively priced. Given India’s natural advantages in these segments, the industry is set to grow at a healthy rate and high-quality Indian players are likely to outgrow most of their global peers.
USA is a large export market for Indian aroma chemical manufacturers. In the US, aroma chemicals are regulated by the Food and Drug Administration (FDA), Environmental Protection Agency (EPA) and Occupational Safety and Health Administration (OSHA). They are further regulated by organizations such as International Fragrance Association (IFRA) and its research center Research Institute for Fragrance Materials (RIFM), Fair Packaging and Labeling Act (FPLA) and Consumer Product Safety Commission.
While these stringent regulations act as barriers to entry, greatly benefitting the players who already have a presence in the market with the required regulations, it can significantly increase operating costs for smaller players and also delays product innovation.
With the growth of the industry, M&A activity has also significantly increased in the flavours, fragrances (F&F) and nutraceutical ingredients sectors. Smaller players with strong competence in a single product and limited geographic presence are getting acquired by larger players giving access to a broader market and stronger distribution capabilities. Considering the overlap between the value chains of F&F and nutraceutical ingredients, some of these acquisitions have allowed companies to gain access to specific customers and complementary products.
There has been some inbound interest for transactions in the F&F space in India from major global players. This is attributed to the fact that India ranks high on most of the parameters that are considered by a global company before making an acquisition in a particular geography. As Indian companies become bigger in size, they are expected to attract strategic interest from global players to strengthen presence in the low-cost manufacturing Indian landscape.
The F&F industry is likely to pose scale-up challenges to the Indian players, given the entry barriers, and dominance of the MNCs but the nutraceutical ingredients segment presents an extremely promising opportunity. It is a large global market, and Indian players have made strong inroads in this space. We expect the nutraceutical industry to grow at the fastest rate, with high-quality Indian companies combining their process efficiencies with an increasing level of R&D, to create globally accepted products. They are poised to scale up rapidly.