Specialty chemical makers to see 6% revenue growth this fiscal; margins under pressure: Crisil

Specialty chemical manufacturers are expected to post around 6% revenue growth this fiscal, slower than the nearly 8% growth recorded in each of the past two years, as weak exports and higher input costs weigh on the sector, Crisil Ratings said on Thursday.

The ratings agency said domestic demand will remain the primary growth driver, but export weakness caused by supply disruptions and cautious overseas procurement will limit overall growth.

According to Crisil, trade flows are likely to take a couple of quarters to normalise if the easing of the West Asia conflict is sustained.

Muted exports, which typically fetch better margins, coupled with limited ability to pass on higher crude-linked input costs, are expected to reduce the industry's operating margin to 14-14.5% this fiscal from around 16% last fiscal.

The assessment is based on an analysis of 126 specialty chemical companies that account for around 40% of the industry's revenue.

Domestic sales contribute nearly two-thirds of industry revenue, with agrochemicals accounting for around 30%, followed by dyes and pigments at 22% and flavours and fragrances at 14%. Exports make up the remaining one-third.

"Supported by diversified end-user segments, domestic demand will remain the key growth driver this fiscal and support 7-8% growth in industry revenue. Though exports will stay muted amid global disruptions, trade flows should normalise over the next couple of quarters if the recent easing of the West Asia conflict holds," Crisil Ratings Senior Director Anuj Sethi said.

He said pricing could also get some support from China's recent reduction in export incentives for select products, although continued dumping by Chinese suppliers would limit any meaningful benefit.

Crisil said the impact on profitability would vary across companies depending on their exposure to different raw materials and their ability to pass on higher costs.

Manufacturers dependent on ethylene and propylene are likely to face greater pressure because of their higher linkage to crude prices and limited pricing power.

Producers using benzene, toluene and xylene (BTX)-based inputs are expected to perform relatively better due to higher value-added products, while fluorine-based chemical makers are likely to remain more resilient because of their niche positioning and stronger ability to pass on costs.

The agency said recent customs duty exemptions on select petrochemical inputs would provide some relief but would not materially offset broader cost volatility.

"Crude-linked inputs, accounting for nearly one-third of raw material cost, will continue to weigh on profitability, though the recent softening in crude and chemical input prices should limit the decline in operating margin to 150-200 basis points this fiscal," Crisil Ratings Director Poonam Upadhyay said.

She said that competition from Chinese suppliers would continue to restrict pricing flexibility, while supply chains could take a couple of quarters to normalise.

Any renewed escalation in West Asia or fresh rise in input prices would increase pressure on the sector.

Crisil said companies are responding by moderating capital expenditure to around ₹16,500 crore this fiscal, with investments focused on backward integration, import substitution and niche chemical segments.

Most companies are expected to fund these investments through internal accruals. However, lower earnings and higher working capital requirements are likely to weaken leverage metrics.

Debt-to-Ebitda is projected to increase to around 2.2 times this fiscal from 1.9 times last fiscal, while interest coverage is expected to decline to around six times from 7.5 times.