Geopolitical tensions could dampen earnings of Indian specialty chemicals

The Indian specialty chemicals sector is grappling with a series of challenges that could dampen earnings in the second quarter of FY25, said industry analysts. Persistent trade disruptions and geopolitical tensions are impacting supply chains and export momentum, leading analysts to predict muted growth for the sector despite resilient domestic demand.
 
Specialty chemicals are specially formulated substances used in smaller quantities than commodity chemicals. They are vital in industries like agriculture, automotive, pharmaceuticals, personal care, and electronics, featuring products such as adhesives, surfactants, and catalysts designed to meet specific customer needs.
 
Despite an estimated year-on-year (YoY) sales growth of 10%, sequential sales are projected to decline by 2%. Industry experts attribute this slowdown primarily to trade challenges, including container shortages and extended shipping routes due to ongoing conflicts. “We are witnessing a slow continuation of supply chain destocking due to weakening demand in export markets,” said Salil Kallianpur, a pharmaceutical analyst. “However, we expect to see better demand recovery in the second half of the year,” he said.
 
Amid these challenges, some companies within the sector are expected to perform reasonably well. Atul Ltd and Vinati Organics are forecast to achieve profit growth of 45% and 33% YoY, respectively. “The demand for crop protection, polymer products, and chemicals like butyl phenol will significantly drive earnings for these companies,” said Surya Patra, a research analyst with PhillipCapital in a report.
 
Conversely, Aarti Industries is likely to experience a decline in earnings, with projections indicating a 60% drop quarter-on-quarter (QoQ) and a 41% drop YoY. “This decline is primarily due to a weakened supply in its key product, MMA,” noted Patra, highlighting the sector’s volatility.
 
Geopolitical tensions, particularly in the Red Sea region, have compounded the sector’s challenges. “The geopolitical situation is crucial for the earnings recovery of the Indian chemical sector in the second half of FY25,” Patra added, emphasising the need for stable trade conditions. Rising input costs have also taken a toll, with prices for essential materials, such as benzene, increasing by 14% YoY.
 
Despite these pressures, the long-term outlook for the specialty chemicals sector remains positive. Analysts from Sharekhan highlight that the sector is positioned for growth, driven by structural factors like the ‘China Plus One’ strategy and import substitution. “While companies may face short-term headwinds, India’s specialty chemicals sector could see its global market share increase in the coming years,” the report states.
 
Kallianpur urged a focus on companies with differentiated product portfolios, asserting that these firms will likely perform better than their generic counterparts in a challenging market. “Generic products are facing pricing instability due to increased supply from Chinese manufacturers, compounded by higher freight costs driven by geopolitical tensions,” he explained. “If conflicts escalate, this situation could worsen, impacting overall demand.”