Chemplast Sanmar’s (Chemplast) Q1FY23 spreads were impacted by various factors including: 1) China dumping excess supply into India and other regions; 2) falling PVC / VCM prices pushing buyers to start destocking, which hurt volumes; and 3) sharp fall in prices and slower volume offtake leading to inventory write-downs. EBITDA dipped 44% QoQ (vs volume decline of 16%), which was exacerbated by higher power cost (coal). Considering that the company will record nil PVC spreads for almost half of Q2FY23, we can infer that full recovery in financials will be visible only in H2FY23.

Chemplast has started construction of its custom manufacturing plant while that of the paste-PVC plant is progressing as planned and these plants should go on-stream in FY24. Chemplast is working on fresh capex for existing products and expansion into new products as well.

Volumes hurt from destocking and lower spreads. Specialty volumes rose 54% YoY (fell 38% QoQ) to 14kte, which was lower than normalised levels as volumes were impacted from destocking by customers in anticipation of fall in prices and excess supply from China. This compressed spreads and the company had to sacrifice volumes. S-PVC volumes increased by 40.5% YoY (declined 14.9% QoQ) to 74kte.

Company should see rise in S-PVC volumes with new debottlenecking capacity available from the next quarter. Non-specialty volumes were up 32% YoY (down 6.2% QoQ) to 38kte. Specialty spreads (gross profit per kg) dipped 6.1% YoY to Rs251/kg, and S-PVC spreads were down 6.3% YoY to Rs22/kg.

Underlying S-PVC-VCM spreads at US$300. Though Chemplast saw compression in spreads for PVC in Q1FY23 due to excess supply from China, fall in raw-material pricesshould have accelerated destocking by the Chinese. Company had to take write-down on inventory of Rs0.8bn for finished PVC (S-PVC: 10kte; P-PVC: 4.5kte) and intermediates (S-PVC: 35kte; and P-PVC: 22kte).

Chemplast has taken a hit on realisation based on prices of Jul’22 such that closing stock are marked down to current selling prices; and normalised spreads will made only on new VCM purchase. Chemplast said spot PVC spreads are stable at US$300, which means spreads should recover as Chinese supplies normalise and India volumes pick up post monsoon.

EBITDA and net profit collapse in Q1FY23. Revenue grew 47% YoY (fell 22%) to Rs14bn. Gross profit rose 40% YoY (down 16% QoQ) to Rs5bn; however, employee and other expenses rose 31% and 52% YoY to Rs363mn and Rs2.8bn, respectively. Other expenses rose on account on higher power cost (coal). EBITDA rose 28% YoY (declined 44% QoQ) to Rs1.9bn. Chemplast has taken one-time hit of Rs0.8bn from inventory write-down, which resulted in 83% QoQ crash in net profit to Rs406mn.