Indias finished lubricants market, which was estimated to be 2.4 million metric tons in 2016, is growing at a compound annual rate of 2.5 percent, according to the U.S.-based consultancy Kline & Co., and so may reach 2.7 million tons by 2021. Over the past year, the domestic lubricants industry has seen several acquisitions, joint ventures, product launches and business expansions. These have included German chemicals distributor Brenntag AG signing an agreement to acquire Mumbai-based Raj Petro Specialities Pvt. Ltd. in two phases. The financial terms of the deal were not disclosed, but Rajs enterprise value was reported at the time by local media at U.S. $108 million. And U.S. company Quaker Chemical Corp. became the sole owner of Quaker Chemical India Pvt. Ltd. after acquiring the remaining stake from its former joint venture partner, Asianol Lubricants Pvt. Ltd.

Apart from these deals, India also hosted several joint venture transactions and the entry of foreign lubricant brands such as the United Kingdoms Morris Lubricants, German Mirrors Mirr Oils products from the United Arab Emirates and Japans Suzuki Ecstar, among others.

Inorganic Growth

Anuj Kumar Singh, project manager for Klines energy practice, said that a steadily growing Indian market provides an attractive opportunity for international companies, especially in light of flat global demand.

Shailendra Gokhale, managing partner of Mumbai-based Rosefield DAA International Consultancy LLP, concurred. Gokhale said many companies want to grow in double digits, and some are even looking at doubling volumes in five years. However, it wont be possible to achieve all this for the companies unless they opt for inorganic route as the market is very competitive, he added.

Inorganic [growth] is the most appropriate strategy after an exhaustive management push, Gokhale said at the All India Base Oil, Lubricant and Wax Conference, which was jointly organized by Rex Fuels and Petrosil Group in Mumbai in February.

Hari Prakash Moothedath, CEO of GP Petroleums Ltd., echoed the sentiment. Organically, we can only grow as per the market or slightly more than the market rate, but if you want to look at exponential growth, you have to go for acquisitions, he stated. The signs that the Indian lubricants industry is ripe for consolidation are clearly visible, according to Gokhale.

Coming Together

Factors such as pressure on companies margins because of rising raw materials costs, huge growth potential due to shifts towards higher performance lubricants and a boom in Indias economy are some of potential early signals of consolidation in the lubricants industry, Gokhale noted.

Companies clearly want to be a part of the lubricants industry, as it has remained recession-proof for the past 25 years, he said. Gokhale added that foreign companies are looking at India even more seriously now following an improvement in the countrys ease of doing business. India jumped 30 places to 100th in the World Banks 2018 Doing Business rankings, thanks to sustained business reforms.

India is clearly a bright and sweet spot, Gokhale said.

Ashish Navalkar, deputy general manager of supply chain at Gulf Oil Lubricants India Ltd. agreed. He said global agencies like the World Bank and several foreign companies are upbeat about growth in India, and the country is likely to overtake China in terms of growth in the coming years.

GPs Moothedath said that India is an attractive market due to its growth potential and because there is space for everybody. Foreign players are also investing more into India today as the governments emphasis on infrastructure development is expected to boost overall economic growth, he added.

GST Factor

The governments focus on formalizing the economy through initiatives such as demonetization and the introduction of the Goods and Services Tax (GST) are also expected to support mergers and acquisitions, joint venture and partnership activities going forward, Gokhale said.

India implemented the GST from July 1, 2017, partly to make tax on goods and services uniform across the country and to prevent goods from being taxed multiple times as they move between states on the way to market.

Gokhale acknowledged that the GST is one of the factors that could help drive consolidation in the industry, as unorganized business would gradually move towards the organized sector. The bigger organized players may look at acquiring smaller unorganized players in order to increase market share faster, he noted. (The unorganized sector is defined by the Indian government as all unincorporated private enterprises operated on a proprietary or partnership basis with fewer than 10 workers.)

HPCLs Kumar concurred. He said that India has more than 35 organized established players that are handling viable volumes right now, but there are more than 500 regional players doing good business every year, and their brands are well known locally. The synergies with small regional players will give organized companies access to these local markets where they are not very active presently, Kumar added. This is one big opportunity, he noted.

Other opportunities are integrating business with packaging manufacturers to create a product differentiation in the market and acquiring independent blenders to become self-reliant, Kumar said. Companies with no manufacturing facilities or international players who are eyeing India entry can acquire independent manufacturing units for an immediate access to producing facilities, he added.

The big players, or the organized players, can really go for acquiring these small players, which will give them immediate access to new and unrepresented markets, Kumar told LubesnGreases. He also noted the inclusion of lubricants under the GST has benefitted the industry, and if the government also brings petrol and diesel under its ambit, there will be a significant shift in consumption centers across the country due to parity in prices. At present, fuel prices vary from state to state, but demand is clustered in certain areas like the northern state of Haryana, also called the diesel bowl of India, due to relatively cheaper fuel prices, Kumar said.

Inclusion of petrol and diesel under the GST will result in a shift of consumption centers because of a change of maintenance hubs, he added. There will be a lot of opportunities for organized players to have synergies with unorganized players if they redesign their logistics based on new consumption hubs, Kumar noted.

Likely Collaborations

Theres a growing appetite among companies to either acquire smaller firms or go for horizontal integration to boost growth and market share, said Gokhale, who offers specialized consultancy services in the lubricants sector.

A couple of companies from India and abroad are currently looking for opportunities in India, he said. There would be more traction in the industrial segment as far as a joint venture is concerned, while the automotive lubricants segment could see acquisitions, Gokhale added. He declined to give further details on upcoming deals.

GP Petroleums, a part of the UAE-based GP Global Group, has its sights set on acquisitions to boost growth and establish a manufacturing plant in a different geography within the country, according to its CEO Moothedath. He said the company is also looking at acquiring or partnering with companies in the technology space.

We are looking at whether [a plant] could be in the south or any other place. We are still exploring, he said. The Mumbai-based company currently has blending plants in western Indias Daman region and in Vasai, north of Mumbai. The lubes producers total production capacity is around 70,800 metric tons per year.

Apart from these two opportunities, the maker of Ipol-branded lubricants has also set its sight on entering the marine lubes business this year, Moothedath said. For this, GP plans to have a partnership with a European company, he added, without disclosing further details.

Im sure there are other companies which are also looking at it because it adds economic sense, Moothedath said.

Mergers, acquisitions and partnerships will certainly boost companies growth prospects, but such transactions are no cakewalk. Companies need to devise strategies to cope with the frequent case that sellers decline to part with their entire holdings in the company.

This is the challenge that organized Indian players or even multi-national companies will face while going for mergers and acquisitions in India, HPCLs Kumar said. In such cases, the acquirers must look at developing a business model or an equal joint venture partnership with the target firm as a viable solution instead of 100 percent takeover, he suggested.

It wont be surprising to see some deals emerging from unexpected quarters in the Indian base oils and lubricants industry going forward as companies build new relationships to stay ahead in the game.