Chemical companies are likely to reel under pricing and demand headwinds which are expected to drag earnings for the April-June quarter. For specialty chemicals players, a weak seasonality, broad-based disruption in global demand, inventory rationalisation and enhanced competition from Chinese companies are expected to dent their financials.
A similar weakness is also expected for agrochemical companies due to falling input prices, delayed monsoon, and inventory destocking due to excess supply from China. Factoring those trends, most brokerages anticipate a decline in revenues as well as operating margins for the overall chemicals sector, even though its extent may vary across segments.
Several headwinds for specialty chemicals
Brokerage firm Philip Capital anticipates the specialty chemicals sector to face one of the worst quarters in Q1, with not just a disappointing revenue performance, but also deteriorating profitability caused by weak spreads and negative operating leverage.
"Moreover, the likelihood of the said situation extending into Q2 and early Q3 makes the near-term earnings outlook bleak," the brokerage highlighted in its report.
Even within the specialty chemicals space, Nuvama Institutional Equities forecasts better earnings for players catering to FMCG and agrochemicals (such as PI Industries, Galaxy Surfactants, Anupam Rasayan) as compared to bulk chemicals and refrigerant gas players (like Aarti Industries, Deepak Nitrite, SRF, Gujarat Fluorochemicals).
The latter have faced sluggish demand due to delayed summer in India and extended winter in Europe, along with softening realisations and price cuts from Chinese counterparts, which has cast dark clouds over their financials. As for the companies catering to FMCG and agrochemicals, even thought they too have been facing adverse demand from export markets but domestic demand has remained steady.
Overall, an estimate of brokerages polled by Moneycontrol pegged an on year revenue decline of 8 percent along with a 25 percent fall in bottomline during the April-June period for the specialty chemicals sector. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margins are also expected to contract in the range of 15-16 percent.
Lacklustre show for agrochemicals
Even though agrochemical players are likely to report better earnings as compared to specialty chemicals companies, they too are expected to face moderation on the back of prevailing headwinds.
Delayed monsoon, sluggish rural demand and high-cost inventories are seen dragging earnings for agrochemcial players down. Revenues are expected to decline 1-15 percent on a weak volume and price mix. The bottomline is also likely to decline 19-50 percent while EBITDA margins are predicted to witness a 10-33 percent contraction as reduction in fertiliser subsidy due to the fall in raw material prices will add to the pressure.
The persisting concerns for the industry also prompted brokerages like Nuvama Institutional Equities and Prabhudas Lilladher to maintain a cautious stance on the sector. Within the entire agrochemical space, Nuvama forecasts UPL and Sharda Cropchem to be the worst hit with
liquidation of high-cost inventory while domestic fertiliser players such as Coromandel International are likely to report volume growth, although
margins may come under pressure.
Moreover, while Axis Securities does hope for a recovery from the second half of the current fiscal, it believes a slower-than expected uptick in global demand may delay the comeback.
In conclusion, the trend for the chemicals space is expected to remain weak, but what's more concerning is the bleak hopes when it comes to predictions of a recovery for the industry.
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