Gradual recovery ahead for specialty chemicals sector: Brokerages

After two consecutive quarters of weak margins and subdued net profit for the specialty chemicals’ sector, brokerages believe that there has been a bottoming out of the ongoing trends and a revival is expected by the end of 2023-24 (FY24).

Though chemical prices have remained soft, demand could see a gradual recovery as destocking runs its course. However, the extent and pace of recovery is uncertain. After being in negative territory over the past three months, there has been some recovery in the stock prices of listed specialty chemical players over the past month.

For the September quarter, the sector’s operating and net profits dropped 18 per cent and 25 per cent over the year-ago quarter.

The fall was on account of inventory liquidation across regions and end-user industries, aggressive pricing and dumping from China and muted demand from the US and Europe amid inflation, points out Nuvama Research. Among major players, Gujarat Fluorochemicals was impacted the most with sales and operating profit falling by 35 per cent and 71 per cent, respectively, over the year-ago quarter.

While sales of most players were down, PI Industries was a major outlier, reporting a revenue growth of 20 per cent and a rise in operating profit by 28 per cent. 

Nuvama Research expects margins to stay under pressure as aggressive pricing from China continues but believes that the commodity chemicals category will be impacted more. Players with niche, contract research and manufacturing or specialty chemicals products would gain on margins.

It has a buy on players in consumer business, personal care or the niche product basket, primarily catering to domestic markets such as Galaxy Surfactants. It is also positive on Gujarat Fluorochemical as approvals for new-age applications of products are expected to drive growth visibility. 

Among the segments within the sector, fluorine-based specialty chemicals continue to suffer from a slowdown in agro end-user markets and overall inventory destocking, globally.

Rubber chemicals, dyes and pigment players were affected the most as Chinese oversupply and weak demand affected the realisation drastically, said Axis Securities.

Agrochemicals have reported a mixed set of results with a few players getting drastically affected by the dry spell and irregular rainfall. It impacted insecticide and herbicide sales in certain geographies, they added. Its top picks in this space are PI Industries, Navin Fluorine and Dhanuka Agritech. 

Though there had been an uptick in prices of certain chemicals due to a bit of demand recovery, lower intensity of Chinese dumping, rise in crude oil prices and stimulus for the Chinese economy, the trend did not sustain. 

Kotak Institutional Equities said that prices of several basic chemicals have corrected in the past month, and demand conditions remain soft. This is amid capacity additions in China, economic softness in Europe and uncertainty around the US going into 2024.

Against this backdrop, while customer destocking may fade away sometime starting Q1 of FY25, the trajectory of a recovery is uncertain and contingent on demand conditions across key regions and supply discipline from China, highlighted analysts led by Abhijit Akella of the brokerage. Kotak Research has a buy rating on SRF.