Sequential recovery to neutralise chemical companies' sales slump

Alchemy of revival: Early recovery catalysts blend with stable prices and eased supplier tensions

For the first time in multiple quarters, specialty chemical companies are likely to report a sequential increase in revenues and earnings for the January–March quarter (Q4). While the sector reported a 9 per cent sequential decline in revenues in the October-December quarter (Q3), it is expected to post 10–11 percent growth (quarter-on-quarter) in Q4.

Early signs of recovery, stabilising price levels, and easing pressure from Chinese suppliers are being cited as reasons for the improvement.

The October-December quarter had been muted for most companies as weak global demand on account of elevated channel inventory led to lower revenue and operating profit growth.

The initial expectation was that weakness would continue in Q4 and a rebound was expected in 2024–25 (FY25) as channel inventory eased on the back of demand revival. Brokerages had upgraded the sector and a few stocks, given the improvement in Q4 itself.

The stock of SRF, the largest specialty chemical player, hit a 10-month high last month on expectations that a recovery in exports amid rising prices could aid a revival in sales and improve its realisations across key segments.

Analysts Krishan Parwani and Siddhinathan K N of JM Financial Research say, “In Q4 of 2023–24 (FY24), most chemical companies under our coverage are likely to report sequential sales recovery; Deepak Nitrite, Archean Chemical Industries, and Aether Industries will be the outliers. For SRF, both refrigerant gas and fluorospecialty chemical sales are likely to see an uptick.”

While the brokerage believes that there might be headwinds in the medium term, things are unlikely to be as bad as those seen over the past few quarters, where there was a dual impact of price correction along with demand contraction.

Its top pick in the large caps is SRF, while in the small and midcaps it is PCBL (earlier Phillips Carbon Black) and Deepak Nitrite, respectively.

The recovery in specialty chemical revenues is expected to result in a 38 per cent sequential growth in earnings for the sector in Q4FY24. Further, the sequential earnings performance is driven by a 200-basis point expansion in margins.

Analyst Surya Patra of PhillipCapital Research believes that the sequential recovery is on account of demand recovery for selective end-user industries globally, stable chemical pricing with no visible sign of Chinese dumping, and continued easing in input costs.

Overall improvement in chemical production across key markets in China, the European Union, and the US signals demand improvement. Within these markets, capacity utilisation in China saw a sequential improvement after three years of continuous decline, and select user industries such as automotive, pharmaceutical, and synthetic detergent witnessed a rise in production. This helped chemical prices, which were hit by Chinese dumping, stabilise.

Given the visible signs of demand recovery, price stabilisation, a strong sequential uptick in exports, and softening input costs, the brokerage believes that the Indian specialty chemical sector has bottomed out as far as macroeconomic challenges and industry demand are concerned.

The brokerage, which has recently upgraded its stance on the sector, has a ‘buy’ rating on Aarti Industries, Camlin Fine Sciences, Vinati Organics, and SRF, while Atul gets a ‘neutral’ rating.

SMIFS Research, too, highlights that the prices of most chemicals have bottomed out and are coming out after a long period of consolidation. It expects a recovery in margins for Indian chemical companies in the second half of FY25.

Analysts Aditya Khetan and Awanish Chandra of the brokerage believe that the sector is on a strong footing, led by the increasing interest of global companies to source from India to derisk their supply chain, the increasing share of specialty chemicals in the overall product mix, and the robust capital expenditure aligned by chemical companies to capture future growth.

The brokerage has a ‘buy’ rating on Bodal Chemicals, IG Petrochemicals, and Oriental Carbon & Chemicals, while Aarti Industries, Apcotex Industries, Galaxy Surfactants, and PCBL get an ‘accumulate’ rating.