Chemical Firms May See Q1 Profit Gains Fade In Q2 on Higher Raw Material Costs: Kotak Report

New Delhi, Aug 20 (KNN) Profit gains recorded by several Indian chemical companies in the first quarter are likely to moderate in the second quarter as firms begin using costlier raw materials, while weak demand remains a key concern, according to Kotak Institutional Equities.

The brokerage said many companies likely exhausted their low-cost inventories during Q1FY27 and will now have to procure raw materials at higher prices. This is expected to put pressure on margins in Q2FY27, ANI reported.

However, supply disruptions linked to the Middle East conflict could keep prices and margins elevated in some chemical segments, including phenol, for longer, Kotak noted.

Q1 Gains Driven by Prices and Inventories

Several chemical intermediate producers reported stronger-than-expected results in the first quarter. Companies in Kotak’s coverage universe recorded 17 per cent year-on-year growth in sales and 22 per cent growth in EBITDA in Q1FY27.

Aarti Industries, Deepak Nitrite, Jubilant Ingrevia and SRF were among the companies that benefited from higher finished-product prices and relatively cheaper inventories.

The gains followed disruptions to raw material supplies, fuel and shipping caused by the Middle East conflict, which pushed up costs and selling prices across parts of the chemical industry.

Companies holding raw materials purchased before the price increases were able to sell products at higher prices while benefiting from lower input costs, temporarily improving margins.

Kotak expects this advantage to diminish as those inventories are depleted and companies shift to more expensive raw materials. “Fortuitous gains will mostly fade next quarter, while demand destruction remains a key concern,” the brokerage said, as quoted by ANI.

Agrochemicals May See Improvement

The agrochemical segment could see some improvement from Q2FY27, according to Kotak.

A delayed recovery in Kharif sowing is expected to support sales, while an easier year-ago base could also aid growth. Agrochemical demand had been affected by erratic rainfall during the previous year.

Cautious Sector Outlook

Kotak retained a cautious view on the chemical sector, citing risks from weaker demand, higher prices and broader macroeconomic uncertainty. Elevated valuations of several large chemical companies were another concern.

The brokerage expects performance to remain uneven across segments as companies adjust to higher input costs and supply disruptions.

Overall, Kotak expects the sector to move away from the unusually favourable conditions seen in Q1 towards a more normal earnings environment, with demand trends and raw material costs becoming increasingly important drivers of profitability.

(KNN Bureau)