Home / Companies / News /  Specialty chemical cos’ worries may ease

After a strong performance in the last two financial years, specialty chemicals manufacturers have seen margin headwinds in the first nine months of FY23, led by high raw material and logistics costs, but analysts expect these concerns to ease gradually.

However, caution prevails on global demand considering the recessionary environment in the developed world.

On the positive side, growth for specialty chemicals firms is set to continue despite margin blips, CareEdge said in a note. The rating agency is confident that growth, primarily driven by strong domestic demand and exports, is bolstered by the China plus one policy of major global economies. It projected sales to rise by over 19% until FY25. Notably, it is better than the 17% demand growth of the sector in FY21 and FY22.

The confidence on domestic demand will remain strong and Indian manufacturers will benefit from ‘China plus one’, said other experts. Meanwhile, plant closures in Europe could benefit Indian manufacturers.

Sharekhan analysts expect plant closures in Europe to provide a ‘Europe plus one’ opportunity and market share gain for Indian chemicals players, considering massive capex plan. Fall in stock price of quality companies provides good entry opportunity, as long-term outlook for earnings growth is intact, said analysts

With the optimism around a ‘China plus one’ and ‘Europe plus one’ opportunity, relaxed covid norms and opening up of China may lead to improved demand for Indian manufacturers in the coming quarters, said analysts. However, concerns persist with the threat of a looming recession in developed countries, especially in Europe, which has been witnessing a slowdown.

In Q3FY23, Indian chemical firms reported some moderation in exports, while rising inflation had been among reasons impacting demand for the discretionary sectors. Specialty chemicals manufacturers reported a mixed performance with the portfolio related to discretionary sectors under pressure. Certain product prices like domestic soda ash prices also declined sequentially, impacting the performance of domestic manufacturers.

That said, global slowdown concerns still persist for specialty chemical firms with high exposure to exports or discretionary sectors. Based on some commentaries from global peers, Q4 exports for Indian companies may remain subdued, said analysts at Centrum Institutional Research. The impact of inventory destocking, weak demand and inflation pressure are also likely to be seen, they added.

Analysts said global chemical companies remain apprehensive in the near term and expect the performance for January and March to be subdued, and marred with volatility. Recovery is expected only in the second half of 2023, said analysts at Centrum.

While Jan-March is likely to see some respite in input cost pressures and logistics cost, inventory destocking and sluggish exports remains a short-term negative, said analysts.

CareEdge also predicts that there may be some pressure on operating profitability in the near future due to the recessionary conditions in major global economies. Despite this, the operating profitability margins are expected to remain healthy, hovering around 18%. Further, all sub-segments of the specialty chemicals sector have undertaken significant capex in the past three fiscal years, ended FY22, and a similar size of capex is currently underway and expected to be completed by the end of FY24, say analysts. The next phase of growth is expected to occur post-completion and stabilization of this capex.

The investments in the Indian chemical industry had surged 2.5 times from 1,700 crore in FY13 to 6,100 crore in FY22, suggests data by Centrum. Further there are 17,500 crore investments lined up over FY23-24, signifying 27,500 crore peak revenue potential, analysts said. The Indian specialty chemicals market is also expected to continue growing at 12% CAGR (compound annual growth rate) taking it to $120 billion by 2025, from $70 billion in 2020, as per analysts.

Despite the large size of capex, the capital structure of the majority of sub-segments in the specialty chemicals sector remains comfortable, said analysts at CareEdge. This, they said, is due to healthy internal accruals, which are expected to enable them to pursue substantial capex in the future.

Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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