The April-June quarter saw specialty chemicals companies report sequential growth on the back of an improvement in demand environment. That said, Nuvama Institutional Equities still holds a cautiously optimistic outlook for the sector, stating that the global agrochemicals industry is still reeling from pressures of high inventories and logistical challenges.
The chemical industry recorded a 7 percent year-on-year topline growth in Q1, alongside a 4 percent EBITDA increase, despite a 4 percent decline in the bottomline due to margin pressures. While this earnings performance may appear modest, it offers a glimmer of hope, as it's the first time in four quarters that the sector has posted year-on-year topline growth following three consecutive quarters of sequential growth.
It was companies such as Aarti Industries, Deepak Nitrite, PI Industries, and SRF that logged year-on-year topline growth in Q1FY25. While Nuvama believes this volume-led growth momentum would continue and likely drive an uptick in prices as the year moves ahead, it also noted that profitability remains a key concern.
The brokerage also highlighted the uneven recovery across different pockets of the industry. "While discretionary sectors like dyes, pigments, and textiles sustained volume-led growth in Q1 FY25, companies catering to end-user industries such as agrochemicals faced ongoing challenges, with realisations remaining subdued due to continued destocking," it stated.
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Meanwhile, commentary by most managements of agrochemicals companies was also muted, hinting at an expected recovery only by the second half of FY25 due to heightened global inventories. Furthermore, the risk of Chinese oversupply poses a risk to prices, Nuvama said.
Going ahead, as the recovery in the agrochemicals segment remains uncertain, Nuvama is tilting in favour of companies serving discretionary end-user industries and FMCG, like Galaxy Surfactants and Aarti Industries. "Companies such as Jubilant Ingrevia, which have expanded into new business lines, and CDMOs are expected to maintain sequential growth momentum. Additionally, players like Gujarat Fluorochemicals, focusing on new-age industry applications such as battery chemicals and semiconductors, are anticipated to enter into long-term agreements, ensuring structural growth," the brokerage said.
On the flip side, the brokerage believes that companies like Anupam Rasayan, which is heavily reliant on agrochemicals, may continue to face pressure.
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