Specialty chemical sector continues to witness growth : ICRA
Chemical

Specialty chemical sector continues to witness growth : ICRA

However, the profit margins are expected to witness some moderation in FY2022 as compared to FY2021.

  • By ICN Bureau | January 01, 2022

The speciality chemical sector has largely bucked the adverse impact of Covid-19 pandemic in FY2021 and continued to do well in the current fiscal - driven by sustained demand in domestic as well as export market. However, the profit margins are expected to witness some moderation in FY2022 as compared to FY2021, due to the sharp increase in raw material prices in current fiscal, partly due to energy crisis, related disruption in China and high freight cost.

Nonetheless, the trend of diversification of supply chain from China to India, coupled with growth in domestic consumption is expected to drive growth in the medium term for the sector. Further, expected increase in domestic feedstock capacity in the medium term aided by trade protection measures from the government will also be beneficial for the sector.

The sector also witnessed healthy demand in current fiscal from both the domestic as well as export market.  The sector not only benefitted due to demand revival from pick-up in economic activity in the current fiscal but also from the ‘China+1’ diversification strategy adopted by global companies in sourcing of chemicals. The impact of second wave of the pandemic was limited in Q1 FY2022 due to several measures adopted by companies to operate during the pandemic and also because of relatively robust export demand.

The healthy demand has been witnessed across key segments like agro chemicals, surfactants, dyes and pigments, fluorochemicals etc. Nonetheless, while there has been healthy revenue growth in current fiscal, the profit margin has witnessed some moderation when compared to FY2021, due to sharp spike in raw material prices led by factors like energy crisis and related disruptions in China, higher freight costs and increase in crude linked raw material prices.

ICRA expects the growth trend to continue in the medium term driven by growth in domestic consumption and supply chain diversification from China to India. The Indian specialty chemical sector is well poised to benefit from global opportunities due to multiple supporting factors. These include availability of technical manpower, presence of companies in several specialty sub segments which have scaled up operations in last decade and have established track record, favourable labour cost compared to China and intellectual property rights protection. Further, expected increase in domestic feedstock capacity in the medium term aided by trade protection measures from Gov’t will also be beneficial for the sector.

While, the sector is expected to witness capex in the medium term for capacity addition as well as R&D build up, the credit profile of companies in the segment is expected to remain stable, aided by expected growth in scale; and relatively steady and healthy profit margins, which will result in deleveraging in medium term and improvement in coverage indicators. For an aggregate sample of nine listed specialty chemical companies, ICRA expects the revenue growth to be around 15% in FY2022 and ~11-12% in FY23 and FY24, while OPM is expected to be in the range of 20-22% for the sample set. The coverage indicators are also expected to improve, with TD/OPBDITA and interest cover of 1.8x and 6.8x in FY2022 to ~1-1.1x and 10-11x by FY2024.

(Sabyasachi Majumdar, Senior VP & Group Head - Corporate Ratings, ICRA Limited)

 

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