We see the supply chain costs/margins as key drivers for 3QFY22E in our chemical universe. The sustained surge in chemical/energy prices and buoyancy in freight rates (up more than 100% YoY) could affect margins/earnings in 3QFY22E for the NBIE Chemical stocks. We see a YoY drop in EBITDA margins for all companies, barring Sumitomo Chemicals India (SCIL), ranging from 214bps to 786bps.

This is despite YoY topline growth in all companies – Coromandel International (CRIN) will lead the pack with 48% YoY growth as a result of the massive spike in input costs (largely passed on net of the increase in NBS rates) and the rest following in a close herd with 10.3%-15.5% YoY growth. As a result, we see Tata Chemicals (TTCH) and Coromandel International (CRIN) reporting weak earnings. SCIL, PI Industries and UPL are likely to buck this trend with earnings growth of 14.7%/7.4%/8.8% YoY. The fundamentals are a bit mixed – excess rains in South India and other parts of India have offset the gains from improved monsoon distribution. The Rabi trend to date has been positive as of end-Dec’21, with total area sown up 5.7% YoY, driven by 37.4% YoY growth in Oil Seeds (mainly Rapeseed and Mustard) while the area under wheat is down 6.5% YoY. Positives include good soil moisture, high water storage levels and the product price increases taken in 2QFY22, which should mitigate the adverse impact of rising costs.

Watchlist for 3QFY22: Impact of rising raw material (RM) prices on gross margins, new products, change in working capital and channel inventory. There are reports of shortage of many RMs and fertilizers exported by China. Further supply constraints are expected in 1QCY22 as China is likely to curtail production of hazardous chemicals in an effort to maintain a clean environment for the upcoming Winter Olympics. Potential increase in the prices of key CPC product molecules is likely to cushion the sustained increase in input costs amid (i) rise in chemical RM prices and (ii) the steep increase in container freight rates due to a global shortage of containers.

Key catalysts: Potential easing of input costs and reduction in freight rates with improving supply of containers (likely in the next few months).

UPL: Consolidated 3QFY22 revenue is likely to increase by 10.3% YoY to Rs100.7bn based on volume growth in all regions. LatAm/US/EU/India/RoW markets will see revenue growth of 20%/3%/1%/3%/5% YoY. LatAm will continue todominate the pie at 45.87% contribution to total revenue. We expect the adjusted consolidated PAT to rise by 8.8% YoY to Rs7.79bn. We estimate lower EBITDA margin at 19.9% vs year-ago level of 24.1% due to 500bps increase in RM/sales to 50% (in line with 2QFY22), which implies 22.3% YoY increase in COGS. Consequently, EBITDA is likely to decline by 9.2% YoY. The 34.2% YoY fall in interest expense is likely to aid 16.2% YoY growth in PBT. But, a 490bps rise in tax rate (to 16%) and increase in the share of minority interest (MI) in group PAT from 17.18% in 3QFY21 to 20.31% (2.9% QoQ) will dent consolidated PAT growth. A lower MI at 17.18% would have led to Cons. PAT growth of 12.99% YoY at Rs8.09bn vs our lower estimate. Positives include new launches, potential improvement in cashflows and reduction in working capital/net debt. Gross margin could beat estimate if increase in product prices are adequate to cover the increase in RM cost and opex (management had hinted at this in the 2QFY22 concall). Negatives could be potential pressure from high input costs, higher-than-expected working capital and currency impact.

PI Industries: We expect consolidated 3QFY22 revenue to grow by 11% YoY to Rs12.9bn. Segment revenues – CSM exports growth is expected at 15.6% YoY and domestic CPC is expected to decrease by 4.92% YoY. EBITDA margin is likely to contract by 214bps YoY to 21.6% due to higher input cost in domestic CPC and annual contracts in CSM - ~30-35% of the CSM pie. We expect earnings to rise by 7.4% YoY to Rs2.1bn vs. 0.9% YoY growth in EBITDA.

Sumitomo Chemicals India: SCIL - the only company in our chemical universe to see margin expansion - is likely to lead the sector in earnings growth. We expect consolidated 3QFY22 revenue to grow by 10.4% YoY to Rs6.19bn based on domestic and exports revenue growing by 10% and 12% YoY, respectively. Exports are estimated at 18% of total revenue. EBITDA margin is likely to increase by 89bps to 14.8% due to 37bps expansion in gross margin to 38%, aided by ability to pass on higher costs. EBITDA is likely to grow by 17.3% YoY while we estimate PAT growth of 14.7% YoY at Rs621mn.

Coromandel International:

• 3QFY22 revenue to increase by 48.3% YoY. Key factors: 12.8% YoY increase in the CPC segment and 54.72% YoY growth in Nutrients & Other segment.
• EBITDA to fall by 10% YoY, driven by: 550bps fall in EBITDA margin due to the pressure on the nutrients segment amid sustained increase in the cost of key raw materials, freight rates and energy costs.
• EBIT margin to contract by 520bps YoY to 7.7%.
• PAT to fall by 8.9% YoY to Rs3,040mn.

Segment outlook:

Nutrient segment

Revenue to increase by 54.72% YoY.

But, EBIT margin is expected to dip by 700bps to 6.4% due to the adverse impact of higher input costs, especially on ammonia and MOP, which is not fully recovered in the revised NBS rates that cover the ‘P’ component in DAP, and the three popular grades of NPK fertilizers. As a result, the nutrient segment EBIT is likely to fall by 26.13% YoY.

Key drivers:

• Muted YoY growth in Fertilizer volume (0.82mn te to 0.842mn te) and a steep increase in imported phosphoric acid contract price from US$689/te to US$1,335/te (US$1,160/te in 2QFY22).
• The price hikes taken by CRIN in 3QFY22 on NPK grades, coupled with the increase in NBS subsidy on four phosphatic grades (announced in Oct’21) may help partly offset the higher RM costs in 3QFY22.
• Captive production of Phosphoric Acid at the Vizag unit, to the extent of ~50% of its requirement, is an added positive.

Tata Chemicals:

• 3QFY22 consolidated revenue to grow by 15.5% YoY.
• EBITDA margin is estimated at 10.2% vs. 18.06% YoY due to fall in gross margin and the steep YoY increase in opex estimate - freight/energy cost estimates up 30%/45% YoY; EBITDA is estimated to suffer a decline of 34.6% YoY.
• Adjusted PBT is expected to decrease by 63.9% YoY to Rs895mn.
• Consolidated adjusted PAT to decrease by 80.6% YoY to Rs311mn.
• If we exclude the impact of Rallis, TTCH is expected to post consolidated PAT of Rs47mn vs a PAT of Rs1.41bn in 3QFY21 and a PAT of Rs1.84bn in 2QFY22.

Key drivers for TTCH:

• Basic Chemistry (BC) segment revenue to rise by 16.13% YoY to Rs23.071bn.
• Specialty segment revenue, including Rallis, to rise by 13.83% YoY to Rs7.038bn.

Segment EBIT:

• BC segment’s EBIT to fall by 76.56% YoY to Rs69.8mn.
• Specialty segment’s EBIT loss is expected to marginally dip from Rs138mn in 3QFY21 to Rs133mn in 3QFY22 on a standalone basis (excluding Rallis).