Specialty chemicals manufacturers are poised to post strong Q2 performance.
• The overall outlook for producers remains positive, and contract manufacturing and outsourcing opportunities may also increase. Nevertheless, some bearish impact can be felt in the near term.
MUMBAI: Specialty chemical manufacturers are expected to post strong earnings performance for July-September (Q2) of this fiscal. While the results may show a slight decline sequentially, earnings growth is likely to remain healthy on a year-on-year basis.
For its exclusive chemical stock coverage universe, analysts at ICICI Securities expect revenue to grow 19.3% year-on-year (YoY), and down 0.6% sequentially in Q2FY23, partly due to input cost inflation in prices. due to growth. Gross profit is expected to decline 22.7% year-on-year and 1.4% sequentially, largely due to seasonality, indicating a strong underlying trend. As per analysts' estimates, net profit is likely to grow by 16.5% on a year-on-year basis.
Given the turmoil in the European chemical markets, specialty chemical manufacturers have been in focus. High energy costs as well as low availability of gas have had an effect on European manufacturers, causing the closure of many facilities across the geography and resulting in an increase in chemical prices.
The available capacity in the production of various energy-intensive chemicals such as ammonia, caprolactam, methanol, melamine, etc. has declined by more than 50% in some cases, suggest the report.
Analysts at JM Financials Securities India Pvt Ltd said the market for other energy-intensive chemicals such as caustic soda and soda ash may also see strength.
This has raised hopes that Indian manufacturers may benefit from the global shortage.
Analysts at IIFL Securities said that prolonged crises, such as elevated gas prices, would force European companies to initiate cooperation (technology transfer), to move to energy-/electricity-intensive chemicals, and as a result, Europe. Outsource more and/or specialized chemicals, said analysts at IIFL Securities. , Analysts believe that Indian chemical companies should benefit from such initiatives in the medium to long term.
While this puts Indian specialty chemical manufacturers in a sweet spot, challenges remain.
Any slowdown in demand due to a recession in the Western world can have an impact.
Rohit Nagaraj, Analyst at Centrum Broking said that though the impact is yet to be seen and the management talks have not indicated any moderation in demand, one would need to be cautious in the third quarter. The existing supply contracts are set to expire and the new deals will be an indication of the impact, if any.
Concerns about a weak demand environment due to destocking, higher input and logistics costs, and higher energy costs weighed on investor sentiment during the first half of the calendar year. The impact on manufacturers' profitability was visible in Q1 as well.
Nagaraj said the April-June quarter (Q1) was challenging, with several headwinds including raw material inflation, rise in energy and power costs, increase in logistics cost, and inventory destocking at the customer end.
But in a positive sense, management comments have not highlighted key issues except for some destocking.
The fall in commodity prices and moderation in crude oil prices have raised hopes of improving margins. Analysts say high-cost inventory may still be there, but with time, there will be some relief on the margin front.
The overall outlook for producers remains positive, and opportunities for contract manufacturing and outsourcing may also increase. Nevertheless, some bearish impact can be felt in the near term. In the event of a slowdown, Indian manufacturers may see some moderation in export demand in the near future.
IIFL research data shows that India exported chemicals to Europe worth an estimated Rs 61,900 crore, while imports stood at Rs 39,100 in FY22. Bulk chemical exports were low while sales of organic chemicals abroad were high.
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