Can the recession in the US, Europe catalyse adverse ‘chemical’ reactions on D-St?

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

In 2016, when the Chinese government started shutting down chemical factories, it presented a great opportunity for Indian chemical manufacturers who filled the gap in the global supply chain. However, the world was still heavily dependent on China for most chemicals.

About four years later, the entire supply chain crumbled as the COVID-19 pandemic broke out in China, leading to the China+1 strategy—the idea of sourcing from China and at least one other country—being adopted by most major companies. This gave a major fillip to the Indian chemical sector as it was the best option for that ‘plus one’.

To get the most out of increased confidence of global customers demanding more from Indian manufacturers, the sector has witnessed a never-seen-before capex cycle in the past six years. Many are still in various phases of completion.

A Motilal Oswal analysis of 49 chemical companies suggests that these companies have announced a cumulative capex of Rs 23,200 crore for FY22-24. The data further suggests that some of these capex initiatives have already been completed while the remaining would be completed in FY23-24.

Just in the past one year, PI Industries, Jubilant Ingrevia, Gujarat Fluorochemicals, UPL, Aarti Industries, Deepak Nitrite, Bodal Chemicals, Sudarshan Chemical, Meghmani Organics and Navin Fluorine are among those that have announced Rs 700 crore to Rs 5,000 crore worth of capex.

A spanner in the works?
Like the sourcing scenario, the global economic situation is changing rapidly. First it was a pandemic-led slowdown, and now an inflation-led recession is raising its head. The situation has been further exacerbated by central banks raising interest rates to control inflation.

Many believe this will lead to a demand slowdown in many industries. It is quite likely that the chemical sector too will not be unaffected. Though companies have not yet reported any slowdown as the demand situation is yet to moderate, the impact on stock prices is apparent. Many chemical stocks are down up to 60 percent from their 52-week highs.

“This (slowdown) has created short-term headwinds for chemical companies as lower demand will lead to lower capacity utilisations by companies and also delay in capex plans,” said Amarjeet Maurya, AVP, midcaps, at Mumbai-headquartered stockbroking company Angel One.

Sigachi Industries, Valiant Organics, Mangalam Organics, Jubilant Industries, Rossari Biotech, Camlin Fine Sciences, Alkyl Amines Chemicals, Balaji Amines and Deepak Nitrite are among stocks that are down 40-60 percent from their one-year peak.

However, many stocks in the sector have also resisted the market sell-off. Lords Chloro Alkali, Chemcrux Enterprises, Tinna Rubber and Infrastructure, Sadhana Nitro Chem, Jyoti Resins & Adhesives and Meghmani Finechem are some names that have turned multi-baggers so far in calendar year 2022, jumping 100-200 percent. They also trade close to their 52-week highs.

Year to date, losers and gainers in the sector are in the ratio of 6:4.

Some of the resilience of select chemical stocks can be credited to the facts that even if the margins have tapered off from the all-time highs during the pandemic era, we have not seen revenue slowing, with volumes remaining strong throughout and no demand cutback observed so far, as highlighted by Swarnendu Bhushan, vice-president, research, oil and gas, Motilal Oswal.

Wait and watch
Some analysts believe one should bide their time and figure out the actual impact of the slowdown in Europe and the US, key export markets for the Indian chemical sector.

“One will have to wait for the next two quarters to analyse the impact of the current economic turmoil on their ramp-up in sales from new facilities and outlook,” said Deepak Jasani, head of retail research, HDFC Securities.

He acknowledged that due to the current inflationary environment, gross margins have taken a hit as players find it difficult to pass on such a sharp increase in input prices. Motilal Oswal said the aggregate gross margin for its coverage universe has contracted 750 basis points during Q1FY21 to Q4FY22. One basis point is equal to 0.01 percentage point.

“It is to be seen how the pricing environment would be over the next two to three years,” Jasani said.

Long-term game intactPeople who understand the nitty-gritty of the chemical industry say capex for chemical companies usually takes three to four years to show results, when finally revenue from the new investment stabilises.

“We expect the majority of chemicals companies will post strong business growth in coming years as the capex realises,” said Maurya. “For a longer-term horizon, we remain bullish on the chemical sector due to multiple tailwinds caused by policies, demand and strong order books leading to increasing growth and profitability of companies in coming years.”