Better Q3 show awaits specialty chemical cos

“The Indian specialty chemical industry, against the fear of margin squeeze caused by elevated input prices, is all set to deliver strong earnings growth,” said analysts from PhillipCapital (India) Pvt. Ltd in their Q3 preview note. The earnings growth, according to the analysts, will be driven by a steady recovery in demand and industrial manufacturers’ ability to pass on higher input costs to customers. The brokerage estimates Vinati Organics Ltd, SRF Ltd, Camlin Fine Sciences Ltd, and Aarti Industries Ltd to deliver strong earnings growth of 34-59% year-on-year (y-o-y) in Q3.

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Specialty chemical manufacturers are likely to report a decent set of numbers for the quarter ended December (Q3FY22). In the past few months, the sector faced multiple headwinds, such as rising input costs, supply chain constraints, and higher freight costs. However, the earnings outlook for specialty chemical companies is expected to improve with the gradual easing of the concerns, analysts said.

“The Indian specialty chemical industry, against the fear of margin squeeze caused by elevated input prices, is all set to deliver strong earnings growth,” said analysts from PhillipCapital (India) Pvt. Ltd in their Q3 preview note. The earnings growth, according to the analysts, will be driven by a steady recovery in demand and industrial manufacturers’ ability to pass on higher input costs to customers. The brokerage estimates Vinati Organics Ltd, SRF Ltd, Camlin Fine Sciences Ltd, and Aarti Industries Ltd to deliver strong earnings growth of 34-59% year-on-year (y-o-y) in Q3.

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It is worth noting that demand for specialty chemicals has remained resilient notwithstanding the covid-19 pandemic. This has boosted sales of many firms, but manufacturers have been facing other headwinds, especially on the cost front. Crude oil prices have risen, while basic ingredients and chemical prices are also higher. With China supplies getting impacted due to power shortages, lower coal and gas supplies had made matters worse, leading to high power and fuel expenses.

For perspective, key input prices such as that of crude, benzene, toluene, phenol, and caprolactum, in Q3 rose by 76-126% y-o-y. However, sequentially, the rise has been slow and many chemical prices remained steady. The above-mentioned chemical prices were up 0.7-7% sequentially. Even so, a strong sequential rise in product prices can lead to a healthy recovery in margins after a sharp squeeze in the September quarter, according to analysts.

Many analysts feel that raw material prices have peaked and should soften. In a mid-December note, JM Financial Institutional Securities Ltd’s analysts said operating margins are likely to improve and revert to normal levels over the next 1-2 quarters. “Several Indian chemical players have indicated that their customers have accepted the price hikes needed to offset higher input costs. Hence, we believe major Indian players should be able to pass on the complete price increases over the next 1-2 quarters,” JM Financial analysts said.

Meanwhile, many specialty chemical companies have recently either integrated their product portfolio or added downstream products, which should help boost earnings momentum. This, along with demand recovery, should hold specialty chemical manufacturers in good stead.

Rising exports are yet another potential area of growth. The China plus 1 strategy adoption by multinational companies (MNCs) is a factor for optimism. Indian manufacturers are finding favour for supplies from international customers over China, which can support the former’s export momentum. Here, manufacturers offering contract research and manufacturing services or custom synthesis are well placed. MNCs looking at cost controls are likely to resort to more outsourcing.

In general, shares of specialty chemicals companies such as SRF and PI Industries have appreciated meaningfully over the past one year, suggesting that investors are capturing a good portion of the optimism into the price. Investors will closely track any disruption caused by a fresh surge in covid cases globally. Adverse outcomes on this front can have a bearing on the sentiments for these stocks.