Speciality chemicals manufacturers look set to post strong Q2 performance

For their speciality chemical stocks coverage universe, analysts at ICICI Securities estimate revenues to grow 19.3% year-on-year (YoY), and down 0.6% sequentially, in Q2FY23, partly due to a rise in prices due to input cost inflation. Gross profit will likely grow 22.7% YoY and down 1.4% sequentially, largely due to seasonality, indicating a strong underlying trend. Net profits will likely rise 16.5% YoY, as per analyst estimates.

Speciality chemical manufacturers have been in focus, given the the turmoil in the European chemical markets. Higher energy costs as well as lower availability of gas has had an impact on European manufacturers, leading to closure of many facilities in the geography and a consequent surge in chemical prices.

Production of various energy-intensive chemicals such as ammonia, caprolactam, methanol, melamine, etc. has declined more than 50% in some cases of available capacity, suggest reports.

Analysts at JM Financials Securities India Pvt Ltd have said that the market for other energy-intensive chemicals such as caustic soda and soda ash could also see tightness.

This has led to expectations that Indian manufacturers can benefit from the global shortage. 

A prolonged crisis, like elevated gas price, would compel European companies to start collaborating (technology transfer), to shift energy-/electricity-intensive chemicals, and consequently, speciality chemicals out of Europe and/or outsource more, said analysts at IIFL Securities. Indian chemical companies should benefit from such initiatives in the medium to long term, feel analysts.

While this puts Indian speciality chemical manufacturers in a sweet spot, challenges remain.

Any slowdown in demand due to recession in the western world can have a bearing. 

Rohit Nagraj, analyst at Centrum Broking, said that while the impact is not visible yet and management interactions have not indicated any softness in demand, one will need to be watchful in Q3. Existing supply contracts are set to lapse and new deals will be indicative of the impact, if any.

Concerns about the weak demand environment due to destocking, higher input and logistic costs, and higher energy costs all did have a bearing on investor sentiment during the first half of the calendar year. The impact on the profitability of manufacturers was also visible in Q1.

The April-June quarter (Q1) had been challenging, with multiple headwinds including raw material inflation, increased energy and power costs, elevated logistics costs, and inventory destocking at customer end, said Nagraj.

But in a positive, management commentaries have not highlighted major issues except some destocking.

Off late, the correction in commodity prices and softening of crude prices have been leading to expectations of improvement in margins. High-cost inventories may still be there but over time some respite will be seen on the margins front, say analysts.

Overall outlook remains positive for producers, and opportunities on contract manufacturing and outsourcing may also increase. Nevertheless, in the near term some impact slowdown may be felt. Indian manufacturers may see some softening of export demand in the near term in case of a recession.

India exported an estimated ₹61,900 crore worth of chemicals to Europe while imports stood at ₹39,100 in FY22, suggests IIFL Researh data. Bulk chemical exports were low while overseas sales of organic chemicals were high.