Chemicals Q2 Preview: Speciality chemical cos to outpace agrochem players

The earnings of companies in the agrochemicals space for the quarter ended September is likely to be subdued compared to that of speciality chemical ones, due to uneven distribution of rains and weak offtake of volumes in the quarter.

Revenue growth for agrochemicals players is expected to be in mid-single to low double digits from the year-ago period.

The crop acreages as on September 23 was down 1 percent YoY, with more than 100 per cent of the normal area covered under the current kharif season, according to brokerage firm Prabhudas Lilladher.

Crop sowing has remained a mixed bag, largely due to uneven distribution of monsoon rains.

Further, gross margins are expected to remain under pressure even though companies undertook price hikes to pass on input cost inflation. According to brokerage Prabhudas Lilladher, companies undertook a 4-5 per cent hike in prices during the quarter.

As a result, EBITDA margins will also be under pressure and the brokerage expects up to 130 bps YoY fall in margin of companies due to lower gross margins and higher other expenses.

The brokerage remains cautious on the agrochemicals sector.

“Though good soil moisture and water reservoir levels augurs well for upcoming rabi season, the dent which has been made in 1HFY23 due to uneven rainfall coupled with higher base of last year 2HFY22 is likely to pose challenges for domestic agri-input players,” Prabhudas Lilladher said in its report.

While the earnings are likely to be subdued for domestic-oriented companies, analysts expect export-oriented companies such as UPL, Tata Chemicals, and PI Industries to fare better.

Sales to international markets have grown at a faster pace, benefitting from higher crop prices and increased outsourcing, said Kotak Institutional Equities.

Strong performance of the international business is likely to help Tata Chemicals post strong double-digit growth in the topline and operating profit for the September quarter.

SPECIALITY CHEMICALS

Companies in this segment are seen reporting strong double digit growth in earnings YoY on the back of higher realisations and increase in sales volumes.

Sequentially however, earnings could be subdued due to a decline in Brent crude prices and other organic compounds, analysts said.

Brent prices averaged at $100.7 a barrel in Q2, having corrected about 11 per cent sequentially. Meanwhile, prices of organic compounds such as butadiene and toluene are down 27 per cent and 13 per cent, respectively, sequentially.

Brokerage house Axis Securities expects aggregate growth of 34 per cent YoY in revenue of speciality chemical companies in Q2, and a 40 per cent increase in operating profit. The net profit is expected to rise 42 per cent YoY.

From a medium to long-term perspective, the specialty chemicals sector remains in a sweet spot owing to robust domestic demand, rising import substitution opportunities, and a strong growth in exports, said Axis Securities.

Further, growing costs within China due to environment-related issues, and the Indian government’s proactive support under the ‘Make in India’ initiative also bodes well for the sector, the brokerage said.

Barring Galaxy Surfactants and Deepak Nitrite, brokerage Motilal Oswal expects Alkyl Amines, Clean Science and Technology, Fine Organic Industries, Navin Fluorine, and Vinati Organics to report 30-57 per cent YoY growth in revenue, and 45-94 per cent rise in operating profit.

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