Q4 tepid for speciality chemical firms as cocktail of factors play spoilsport

According to a report by Nuvama Research, in Q4FY23, overall sales for the sector grew a modest 6% year-on-year (YoY), and 3% sequentially, driving Ebitda (earnings before interest tax, depreciation and amortisation) growth also at 6% while maintaining Ebitda margins at 22%. 

“Demand for specialty chemicals catering to agro-chemicals innovators such as PI Industries Ltd and SRF Ltd remains strong while players catering to generic molecules witness weakness as supplies from China increase," said the Nuvama report dated 6 June. Further, export demand remained subdued in select pockets, particularly in the discretionary segment.

Input cost moderation and a reduction in energy and fuel costs could offer some respite for margins. Likewise, ebbing logistics costs are expected to lend support. However, agri-input companies might encounter volume and margin hurdles in Q1FY24 due to high inventory that still requires liquidation.

Nonetheless, as the China/Europe plus one strategy continues to unfold, long-term growth prospects for Indian specialty chemical companies appear promising.

But these near-term hurdles to growth need to be monitored. Management commentaries have been largely cautious even though domestic demand seems to be on a relatively better footing.

“Q1FY24 would continue to see subdued demand for speciality chemicals players with a high exposure to exports/discretionary sectors while we expect some respite from falling input prices and energy costs. The agri-input space would also see challenges of inventory liquidation in Q1FY24," said Sharekhan by BNP in a recent report.

Meanwhile, in the calendar year so far, the stock returns of listed companies in this sector have shown mixed results. “We expect growth driven by sustained capex, FY25 to witness growth revival while current valuations (sector average at 23x FY25E price-to-earnings) limit downside," added the Nuvama report.