Q1 results preview: Here’s why PI Industries, Galaxy Surfactants, Anupam Rasayan to post better earnings than others

The domestic brokerage Nuvama Institutional Equities anticipates subdued Q1FY24 (April-June) results across the specialty chemicals sector, with aggregate revenue/earnings before interest, taxes, depreciation, and amortisation (EBITDA)/profit after taxes (PAT) set to decline by 6%/15%/17% of the companies under its coverage.

In addition to the fact that the brokerage expects Q1FY24 to be the lowest quarterly growth, it also thinks that the entire H1FY24 (April to September) may indicate the bottoming-out of earnings.

In its analysis, the brokerage outlined the causes of the decline and noted that they were due to inventory destocking, decreasing input prices that were pushing down realisations, greater supply and aggressive pricing from China, as well as the effects of the recession on demand in Europe and the US.

In the near future, the brokerage believes that H2FY24 (October to March) would be defined by a recovery driven by a resurgence in demand, stabilisation in input prices, and less pricing pressure from China.

"We believe earnings pressure is likely to persist in H1FY24, as the demand scenario remains weak while inventory destocking and price pressure are eroding margins. However, we expect a remarkable improvement in H2FY24 led by demand recovery, stabilisation in input prices and reduced pricing pressure from Chinese manufacturers. However, recessionary fears in Europe and the US continue to remain an overhang with potential medium-term impact on growth outlook," the brokerage said.

End-users – FMCG, innovator agrochemicals – relatively safe

The brokerage also stated that it anticipates players catering to fast-moving consumer goods (FMCG) and agrochemical industries, such as PI Industries Ltd, Galaxy Surfactants Ltd, and Anupam Rasayan Ltd, to post better results than players in the bulk chemical and refrigerant gas industries, such as Aarti Industries Ltd, Deepak Nitrite Ltd, SRF Ltd, and Gujarat Fluorochemicals Ltd (GFL).

"In the current scenario, we expect players such as PI Industries, Galaxy Surfactants, Anupam Rasayan to continue to witness earnings growth while Aarti Industries, SRF, GFL and Deepak Nitrite faces the earnings downgrade risk," the brokerage added.

The brokerage explained in its report that, despite the fact that export markets are suffering due to the recessionary environment in Europe and the US, companies with exposure to the FMCG industry, such as Galaxy Surfactants and Fine Organics, are not likely to experience significant demand pressure.

SRF and PI, two companies that cater to agrochemical innovators, remain optimistic that their product will continue to be in demand and will experience volume increase of 15% to 20%. Volume growth is being driven by the commissioning of new items. Additionally, given the supply agreements with its clients, Anupam Rasayan is optimistic about volume growth.

Bulk chemicals, refrigerant gases to suffer sharp margin contraction

The brokerage further stated that it anticipates key participants in the refrigerant gas sector, including GFL and SRF, to experience a steep decline in profitability due to weak local and international demand as well as a decline in realisations. While prolonged winters and recessionary fears have harmed demand in Europe and the US, a delayed summer has slowed demand growth in India.

Deepak Nitrite, Jubilant Ingrevia, and Aarti Industries are among the bulk chemical manufacturers who are experiencing softening realisations and aggressive price cutting from Chinese suppliers, all of which have a negative effect on overall realisations.

Q1FY24 Preview - Valuation summary