Indian chemical companies are likely to see their profit margins tighten in the second quarter as low-cost raw material stocks are depleted. Despite a strong first quarter, analysts warn that rising input costs and uncertain demand could dampen earnings in the coming months.
Indian chemical manufacturers are heading into a period where profit margins may come under pressure, according to recent analysis from Kotak Institutional Equities. While many companies in the sector reported strong financial results in the first quarter of the current fiscal year, analysts suggest these gains may be hard to repeat as the business environment changes.
In the first quarter, several major chemical producers achieved a 17% increase in sales and a 22% rise in operational profits compared to the same period last year. Companies such as Aarti Industries, Deepak Nitrite, Jubilant Ingrevia, and SRF benefited from a unique market situation. They were able to use raw materials purchased at lower costs, while selling their finished products at higher prices due to supply chain disruptions caused by global tensions in the Middle East.
This advantage is now fading. As chemical firms have largely used up their cheaper raw material stocks, they are now forced to buy inputs at current, higher global prices. This shift in the cost structure is expected to affect overall profitability in the second quarter. Furthermore, analysts have noted that while select products like phenol may continue to benefit from persistent supply chain issues, most of the sector is facing a return to more standard operational conditions.
The broader sector also faces challenges related to customer demand. Global economic uncertainty and higher product prices are making it difficult for some companies to maintain previous levels of demand. CRISIL Ratings has projected that specialty chemical revenue growth may moderate to 6-7% for the full fiscal year, with profit margins expected to settle between 14% and 14.5%. This shift reflects a cautious outlook as firms manage the balance between rising costs and their ability to pass these costs on to customers.
There is a slight positive outlook for the agrochemical segment, which may see some support in the second quarter. This is linked to a delayed Kharif sowing season and a lower comparative performance from last year, which creates a more favorable baseline for growth. However, the overall industry must remain careful about balancing debt and cash flow. Increased reliance on borrowing for projects meant to expand capacity can also add risk if earnings do not grow as planned.
Investors may track upcoming quarterly reports to see how well companies manage their profit margins in this cost-heavy environment. The ability to maintain stable demand despite higher prices and the successful management of money spent on expansion projects will be important factors to watch in the coming quarters.