Crisil SME Tracker: Lean inventory will shore up chemicals units' profits

CRISIL Research expects the chemicals industry’s revenue to grow 5-7 per cent in 2023-24 (FY24), supported by micro, small and medium enterprises (MSMEs) in the specialty chemicals segment. 

These MSMEs — comprising 28-30 per cent of the overall sector and catering mainly to dyes and pigments, agrochemicals, and some niche chemicals — are expected to see revenue growth of 2-4 per cent in FY24.

But, their profits may be hurt by headwinds such as geopolitical tensions, even as robust domestic demand partially offsets weak exports.

The specialty chemicals segment constituted 19-21 per cent of the overall chemicals industry in FY22 and is expected to grow 7-9 per cent in FY24, led by construction chemicals and agrochemicals, where the end-users are expected to log double-digit revenue growth.

Dyes and pigments are expected to grow in single digits in FY24, because of a major natural calamity in Turkey followed by a potential slowdown in major economies such as the US and Europe. Exports, which constitute 48-50 per cent of Indian production by value, have declined by 25-30 per cent, with Turkey accounting for some 10 per cent of the dyes and pigments industries’ total exports. 

Revenue growth for some specialty chemicals sub-segments is expected to moderate, in line with the correction in feedstock prices. Additionally, rising global inflation, interest rate hikes by central banks, and volatility in European markets have led to negative growth in the overall chemicals industry.

In FY23, raw material prices rose 18-20 per cent, hurting margins. To preserve margins in the current fiscal year, MSMEs are resorting to lean inventory and renewal of new contracts on an ex-factory basis to avoid the impact of fluctuating freight costs and higher working capital needs.