India’s specialty chemical industry is set for a slower growth trajectory this fiscal as weak exports, rising input costs and global uncertainties put pressure on manufacturers.
Revenue growth is expected to ease to around 6%, down from nearly 8% growth recorded in each of the previous two fiscals, according to Crisil Ratings.
While strong domestic demand will continue to anchor the sector, subdued exports—hit by supply disruptions and cautious overseas buying—are expected to limit overall growth momentum. Trade flows may take a couple of quarters to normalise if the recent easing of the West Asia conflict continues.
The pressure will also be felt on profitability. Operating margins of specialty chemical manufacturers are expected to decline to 14–14.5% this fiscal from around 16% last fiscal, as lower-margin exports and higher crude-linked input costs weigh on earnings. The impact, however, will vary across segments depending on raw material exposure and pricing power.
Crisil Ratings’ analysis of 126 companies, representing around 40% of industry revenue, highlights the uneven impact across the sector.
Domestic sales, which contribute nearly two-thirds of industry revenue, are expected to remain the key growth driver. Agrochemicals, dyes and pigments, and flavours and fragrances together account for a significant share of domestic demand, while exports make up the remaining revenue.
Says Anuj Sethi, Senior Director, Crisil Ratings, “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. Pricing could also see some support from the recent reduction in China’s export incentives for select products, though sustained dumping will limit any material benefit.”
Raw material exposure will determine how sharply companies feel the margin squeeze. Manufacturers dependent on crude-linked ethylene, propylene, BTX and fluorine-based inputs are likely to see varying levels of pressure.
Ethylene and propylene producers are expected to face the steepest challenges due to stronger crude linkage and weaker pricing power.
BTX manufacturers may see relatively better resilience due to value-added products and moderate pricing flexibility, while fluorine-based chemical makers are likely to remain comparatively stable because of their niche positioning and stronger ability to pass on costs.
Recent custom duty exemptions on select petrochemical inputs may provide limited relief but are unlikely to fully offset broader cost volatility.
Says Poonam Upadhyay, Director, Crisil Ratings “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 bps this fiscal.
"Chinese competition will constrain pricing flexibility, and supply chains may take a couple of quarters to normalise. Benefits will flow through gradually. This remains contingent on West Asia tensions not re-escalating and input prices staying contained; or the pressure would increase.”
Amid uncertainty, specialty chemical companies are expected to adopt a cautious approach towards expansion plans. Capital expenditure is projected at around Rs 16,500 crore this fiscal, with investments focused on backward integration, import substitution and niche chemical segments.
Most companies are likely to fund these investments through internal accruals, though weaker earnings and increased working capital requirements could put pressure on balance sheets.
Debt-to-Ebitda is expected to rise to about 2.2 times this fiscal from 1.9 times last fiscal, while interest coverage could weaken to around 6 times from 7.5 times.
Going ahead, the sector’s recovery will depend on several factors, including the pace of feedstock price stabilisation, easing competitive pressure from China, revival in global demand and companies’ ability to restore margins through selective pricing actions.
The outlook remains closely tied to geopolitical developments, with any renewed escalation in West Asia tensions or a sharp rise in input costs posing further risks to profitability.
