While cost pressures are here to stay, the rebound in demand with the easing of lockdown curbs and firm chemical prices mean that some of the cost pressure may be passed on
Makers of speciality chemicals have been in the spotlight for a while now, with rising demand and realisations. The companies have seen significant improvement in profitability and earnings over the last one year.
Not surprising then that share prices of Deepak Nitrite Ltd, Alkyl Amines Chemicals Ltd, Gujarat Fluorochemicals Ltd, among others, have more than tripled in the last one year. Manufacturers as Vinati Organics Ltd, Navin Fluorine International Ltd, Atul Ltd, Galaxy Surfactants Ltd have also seen significant gains.
Factors which pushed up chemical prices in the first half 2021 included supply disruption from the US due to cyclones and the Suez Canal blockage. Rising crude prices have also helped. Nevertheless, domestic companies saw some challenges emerge in the June quarter, led by lockdowns in the wake of the more devastating second wave of the pandemic.
As demand for chemicals from the end-user industries saw a temporary blip, rising freight costs and higher input costs did put pressure on margins during Q1. While cost pressures are here to stay, the rebound in demand with the easing of lockdown curbs and firm chemical prices mean that some of the cost pressure may be passed on.
While prospects look good, the China-plus-one strategy is expected to remain a key outlook driver for domestic speciality chemical manufacturers.
Consolidation of polluting chemical companies in China, pandemic-related supply chain disruptions and supportive margins have provided fillip to the Indian specialty chemicals industry, say analysts at Motilal Oswal Financial Services Ltd (MOFSL), adding that the China consolidation story is not over yet.
Besides these, the government's initiative under Atmanirbhar Bharat and Production-Linked Incentive (PLI) schemes also bode well for the manufacturers.
Analysts at MOFSL pointed out that a slew of underway petrochemical expansion projects, by major companies like Indian Oil Corporation, Hindustan Petroleum Corporation, GAIL, Nayara Energy, Haldia Petrochemicals, and HPCL-Mittal Energy, will drive demand for chemicals and specialty chemicals in the country.