By: ICN Bureau
Last updated : October 08, 2025 5:46 pm
FY26 capex will be largely focused on cost optimisation and committed capex with deferrals of early-stage capex in most export-oriented segments
India Ratings and Research (Ind-Ra) believes the increased US tariff of 50% can lead to a single-digit decline in revenue for the Indian chemical industry, given the US accounts for around 15% of India’s exports, of which nearly half is under the list of exempted products.
Given the vastly different dynamics of various chemicals, the impact of tariffs would not be uniform across the sector. Domestic-focused companies present in chemicals not exported to the US would see minimal impact, while the hit will be higher for a few entities with a sizeable exposure to non-exempt products in the US.
The direct impact of tariffs on the sector profitability for the year is likely to be limited to 10%-15% of EBITDA margins, with the Chinese demand-supply balance remaining a key determinant of global chemical prices and profitability. Although remaining below than the cycle average, Ind-Ra expects a lower price erosion to cushion the sector EBITDA in FY26. The sector EBITDA margins recovered marginally to 14% over 4QFY25-1QFY26 (average of 13% over 4QFY24-3QFY25) as inventory losses reduced and volumes recovered.
“Domestic demand is likely to be healthy in FY26, as growth in end-user industries enables chemical companies serving the domestic market to outperform their export-focused peers. Also, the balance sheets of most Ind-Ra-rated players have the headroom to manage any immediate pressure on their profitability and credit profiles. However, companies undergoing large capex or medium, small and micro enterprises (MSME) with limited liquidity headroom and financial flexibility could face challenges over the near term”, says Siddharth Rego, Associate Director.
Most of the portfolio has comfortable liquidity, barring a few entities undergoing large capex. About 12% of Ind-Ra’s chemical portfolio was on a negative directional indicator as of end-August 2025.
Tariffs to Pressure Exports and Affect Sector Recovery
The Indian chemical sector was poised for a turnaround in FY26, led by volume growth with a gradual moderation in channel inventories and near bottoming out of prices after two weak years. This is indicated in the improving performance over 4QFY25-1QFY26. However, the uncertainty and disruption from the increased US tariff rate effective 27 August 2025 could affect the performance over the near term. Exports would be under pressure, given the muted global demand environment, exacerbated by the high tariffs.
The US accounts for close to 15% of India’s chemical exports, where India’s tariff is higher than not only China, but also other competing countries namely Canada, Mexico, Germany, and Ireland. While India’s cost structure is competitive compared to European countries, the tariff difference could offset the advantage, affecting specialty chemical players. However, the silver lining is that around half of India’s exports to US are on the exempt list, limiting the first order impact.
Organic chemicals and agrochemicals form the biggest chunk of India’s exports to the US segments. Dyes and inorganic chemicals have less than 10% exposure to the US and will therefore see a limited first order impact. However, the slowdown in textiles because of a decline in export demand and the US tariff could affect demand for dyes.
Players with Strong Market Position and Cost Competitiveness better Placed
Ind-Ra opines that US bound chemical shipments slowed down in September 2025, even as discussions and negotiations are on with customers on possible sharing of the additional cost. While typically a critical component, the cost of chemicals is often a small part of the total value of the product, which may enable a higher pass-through to the end user in some cases. Furthermore, some large specialty chemical players are global leaders in their products with a high level of integration in the value-chain, placing them at a relative advantage compared to small players that may be easily replaced. However, given India’s relative tariff disadvantage over competing countries, the risk of losing market share does exist. Ind-Ra believes the extent of market share loss will depend on the interplay of a) the share of the customer’s business, b) the criticality of the chemical in the final product performance, c) the proportion of the cost of the end-product, d) the scale of integration and cost competitiveness determining the ability to absorb additional cost, and e) the customer’s focus on supplying chain diversification.
China’s share in the US chemical imports declined to around 10% in 2023-2024 from an average of 12.8% during 2018-2022. However, India’s share remained largely stable at 3.5% - 4% over 2018-2024, indicating Indian exporters’ inability to gain the market share lost by China. However, the US remains India’s key chemical export destination. India’s chemical exports in FY25 stood at USD34.6 billion, of which the US accounts for roughly 13%. Players are also in discussion with other export customers, particularly in Europe and Latin America, to increase their market share, though that will happen only gradually. However, discussions with the US on tariff/trade deals has resumed due to which the current situation could change.
While the reversal in India’s tariff differential with China limits the benefits of China+1 supply chain re-orientation, it also reduces some of the risks of excess capacities finding their way into the Indian markets.
Sector-level Revenue Hit Likely to be Limited to Single Digit; Lower Price Erosion to Cushion Tariff Impact on Profitability: Ind-Ra expects a single-digit revenue decline for the Indian chemical sector, due to the additional US tariffs, given around half of the 15% exports are in the exempt category. The fall could stretch to low teens for a few entities that have a sizeable exposure of non-exempt products to the US. The direct impact of tariffs on profitability is likely to be limited to 10%-15% of EBITDA margins but will be contingent on the additional tariff cost-sharing arrangements.
While margins are likely to remain lower than the cycle average, Ind-Ra expects a lower price erosion to cushion sector EBITDA in FY26. Specialty chemical prices witnessed signs of bottoming out, with China’s Producer Price Index growing yoy in early 2025, after almost 2.5 years. Sector EBITDA margins recovered to 14% over 4QFY25-1QFY26 (average of 13% over 4QFY24-3QFY25) as inventory losses reduced and volumes recovered. However, the tariff induced disruption is likely to affect profitability in 2Q-3QFY26. Also, other than India’s access to the US markets, a recovery in China’s domestic consumption and global demand fundamentals remain key to a rebound in operating margins.
Bulk chemicals are likely to be a mixed bag, with segments such as soda ash, caustic soda, and carbon black, witnessing a comfortable performance, even as polyvinyl chloride, phthalic anhydride could witness pressure. Government policy support in the form of anti-dumping duties/minimum import price to combat the threat of low-priced imports and incentives to boost export competitiveness would also be a monitorable amid the external weakness.
Capex in Slow Lane, Working Capital Management Key: Considering the ongoing industry headwinds, FY26 capex will be largely focused on cost optimisation and committed capex with deferrals of early-stage capex in most export-oriented segments. While a continued high tariff can lead to a supply chain re-orientation over the medium term, any capex in this direction is unlikely at this stage given that the scenario is still evolving with ongoing negotiations.
Lower shipments could unwind working capital, aiding cash flows for specialty chemical companies that typically operate on moderate-to-high working capital cycles. However, Ind-Ra opines that a slowdown in orders can result in entities offering longer credit periods to their customers and/or raising inventory cycles to optimise production cost and cater to anticipated order flow in the near term. As a result, the movement in working capital will be a key monitorable from a liquidity stand-point.
Balance Sheet Headroom to Absorb Near-term Weakness: Balance sheets of most Ind-Ra rated chemical players have headroom, although those undergoing large capex could face challenges. Most high-rated commodity chemical players have limited debt. The higher leverage of specialty players is typically offset by a less volatile margin profile, but working capital movement could be a key determinant of the liquidity profile. Also, large corporates with better access to funding through banking and capital markets are better placed to weather the storm than MSMEs that typically operate with limited cushion and funding flexibility. However, Ind-Ra believes continued high tariffs, affecting revenue and profitability, could gradually reduce the headroom. Ind-Ra will therefore continue to monitor the fast-evolving geo-political developments and assess their impact on the sector participants.