Indian Specialty Chemical Manufacturers Face Revenue Growth Slowdown and Margin Pressure

Revenue growth of specialty chemical manufacturers is expected to slow by 200 basis points to around 6% this fiscal, from about 8% in each of the past two years, while weak exports and volatile crude-linked input costs could compress operating margins by as much as 200 basis points, according to Crisil Ratings. Operating margins are projected to fall to 14-14.5% from nearly 16% last fiscal, as exporters face global supply disruptions, cautious overseas procurement and limited ability to pass on higher feedstock costs. Export sales typically offer better margins than domestic business. The assessment is based on an analysis of 126 companies accounting for around 40% of industry revenue. Domestic sales, which contribute nearly two-thirds of the industry’s revenue, will remain the key support. Exports make up the balance but are expected to stay muted until trade flows normalise, which could take another two quarters if the easing of the West Asia conflict sustains. “Supported by diversified end-user segments, domestic demand will remain the key growth driver this fiscal and support 7-8% growth in industry revenue,” said Anuj Sethi, senior director, Crisil Ratings. Agrochemicals account for around 30% of domestic industry revenue, followed by dyes and pigments at 22%, and flavours and fragrances at 14%. Sethi said the reduction in China’s export incentives for select products could provide some pricing support, although continued dumping would restrict any material benefit. Raw-material exposure will determine the extent of the margin pressure. Crude-linked inputs, including ethylene, propylene, benzene, toluene, xylene and fluorine-based materials, account for nearly one-third of raw-material costs. Crisil Intelligence data underline the recent volatility. Benzene prices surged from $770 per tonne in February to $1,130 in April, while toluene climbed from $728 to $1,060. Ethylene more than doubled from $664 per tonne to $1,360, and propylene increased from $789 to $1,304 during the same period. Ethylene and propylene manufacturers are expected to face sharper pressure because of their higher crude linkage and limited pricing power. BTX manufacturers may fare relatively better due to value-added products, while fluorine-based chemistries should remain more resilient because of niche positioning and stronger cost-passthrough ability. “Chinese competition will constrain pricing flexibility, and supply chains may take a couple of quarters to normalise,” said Poonam Upadhyay, director, Crisil Ratings. Recent softening in crude and chemical input prices should limit the margin decline, provided West Asia tensions do not re-escalate, she added. Companies are responding by moderating capital expenditure to around Rs 16,500 crore this fiscal, focusing spending on backward integration, import substitution and niche chemistries. Lower earnings and higher working-capital requirements could, however, weaken credit metrics. Debt-to-Ebitda is expected to rise to 2.2 times from 1.9 times, while interest coverage may decline to around six times from 7.5 times last fiscal. Recent customs-duty exemptions on select petrochemical inputs may provide some relief, but are unlikely to offset broader cost volatility.