CRISIL SME Tracker: Equations getting better for chemicals MSMEs

Prospects of the domestic chemicals industry appear to be brightening as demand revives and inventories normalise.

Last financial year, factors such as oversupply from China, weak demand in developed markets and inventory corrections dampened revenue growth.

This financial year, Crisil Research expects the industry to rebound 7-9 per cent on a low base.

Although some segments — dyes and pigments, discretionary industries, and agrochemicals, to name some — continue to face headwinds, these are viewed as temporary challenges, and the medium- to long-term outlook remains positive.

The outlook augurs especially well for the 292,856 micro small and medium enterprises (MSMEs) that represent 30 per cent of the domestic chemical industry  (according to Ministry of Chemicals & Petrochemicals data) , with significant clusters in Thane, Mumbai and Ahmedabad. Nearly half of these are organic manufacturing units, while the rest primarily produce dyes and pigments and soaps and detergents, with agrochemicals constituting Rs 8 per cent.

Among the industry segments, specialty chemicals, representing 19-21 per cent of the domestic industry, is projected to see margin rebound 200-300 basis points this fiscal after suffering an erosion last fiscal due to high-priced inventories and a fall in product realisations.

Within specialty chemicals, agrochemicals should see revenue grow 10-12 per cent this financial year after a degrowth last financial year owing to low prices and weak demand resulting from El Niño and, thereby, deficient rainfall. 

Agrochemicals margins could normalise from the second quarter due to destocking of high-cost inventories.

Colourants, another key specialty chemicals segment, should see revenue grow 4-6 per cent this financial year on expectations that interest rate cuts in Europe and the US will boost discretionary spending.

This would follow a decline of 1-3 per cent last financial year as recessionary pressures and inflation dampened market sentiment. 

Overall, though, domestic producers may continue to face margin pressures as the prices of key bulk materials could remain depressed due to ample supplies and newer capacities being commissioned.