India’s specialty chemical industry is set for a more gradual growth trajectory this fiscal as weak exports, growing input expenses and global uncertainties put pressure on producers.
Revenue growth is anticipated to reduce to around 6%, down from around 8% growth recorded in each of the previous two fiscals, as per to Crisil Ratings.
While strong domestic demand will persist to anchor the sector, subdued exports—hit via supply disruptions and cautious overseas buying—are anticipated to restrict overall development momentum. Trade flows may take a couple of quarters to normalise if the latest easing of the West Asia conflicts persists.
The pressure will also be felt on profitability. Operating margins of specialty chemical producers are anticipated to decline to 14–14.5% this fiscal from around 16% last fiscal, as lower-margin exports and higher crude-linked input charges weigh on earnings. The impact, moreover, will vary across segments relying on raw material exposure and pricing power.
Crisil Ratings’ evaluation of 126 companies, reflecting around 40% of industry revenue, emphasizes the uneven effect across the sector.
Domestic sales, which contribute around two-thirds of industry revenue, are anticipated to stay the important growth driver. Agrochemicals, dyes and pigments, and flavours and fragrances together account for a considerable share of domestic demand, while exports make up the remaining revenue.
Stated Anuj Sethi, Senior Director, Crisil Ratings, “Supported by varied end-user segments, domestic need will stay the important growth driver this fiscal and guide 7–8% growth in industry revenue.
“Though exports will remain muted target worldwide disruptions, trade flows must normalise over the next couple of quarters if the latest easing of the West Asia war holds. Pricing could also see few assist from the current reduction in China’s export incentives for select products, though sustained dumping will restrict any material advantage.”
Raw material exposure will determine how significantly companies feel the margin squeeze. Producers dependent on crude-linked ethylene, propylene, BTX and fluorine-based inputs are probable to see varying levels of pressure.
Ethylene and propylene manufacturers are anticipated to confront the steepest challenges because of more robust crude linkage and weaker pricing power.
BTX producers may see noticeably better resilience due to value-added products and moderate pricing flexibility, while at the same time as fluorine-based chemical makers are probably to stay comparatively strong because of their niche positioning and stronger ability to pass on costs.
Current custom duty exemptions on select petrochemical inputs may give restricted relief however are unlikely to fully offset wider cost volatility.
Says Poonam Upadhyay, Director, Crisil Ratings “Crude-connected inputs, accounting for almost one-third of raw material cost, will hold to weigh on profitability, even though the latest easing in crude and chemical input prices should restrict the decline in operating margin to a 150–200 bps this fiscal.
“Chinese competition will constrain pricing flexibility, and supply chains might also take a couple of quarters to normalise. Advantages will flow through step by step. This stays contingent on West Asia tensions not re-escalating and enter costs staying contained; or the pressure would boom.”
Amid uncertainty, specialty chemical companies are anticipated to undertake a cautious method toward expansion plans. Capital expenditure is projected at around Rs 16,500 crore this fiscal, with investments targeted on backward incorporation, import substitution and niche chemical segments.
Most companies are probable to fund these investments via internal accruals, though weaker earnings and improved working capital necessities could put pressure on balance sheets.
Debt-to-Ebitda is anticipated to rise to about 2.2 times this fiscal from 1.9 times last fiscal, while interest coverage could weaken to around 6 times from 7.5 times.
Going forward, the sector’s recovery will rely on numerous factors, inclusive of the pace of feedstock price stabilisation, easing competitive pressure from China, revival in global demand and companies’ ability to restore margins via selective pricing actions.
The outlook stays closely tied to geopolitical developments, with any renewed escalation in West Asia tensions or a pointy rise in input prices posing further risks to profitability.
