Specialty Chemical Makers Face Margin Pressure Amid Export Slowdown: Crisil Ratings

New Delhi, Jul 6 (KNN) Revenue growth of specialty chemical manufacturers is expected to moderate by 200 basis points this fiscal from around 8 per cent in each of the past two fiscals, as export weakness driven by supply disruptions and cautious overseas procurement offsets firm domestic demand, Crisil Ratings said.

In a release, the ratings agency noted that trade flows are likely to take a couple of quarters to normalise if the easing in the West Asia conflict sustains, the rating agency said, based on an analysis of 126 companies accounting for around 40 per cent of the industry's revenue.

Margin Pressure

Muted exports, which typically offer better margins and limited passthrough of higher crude-linked input costs, will compress the industry's operating margin to 14-14.5 per cent this fiscal from around 16 per cent last fiscal, Crisil said, adding that the impact will vary across segments and manufacturers depending on their raw material exposure and ability to pass on costs.

Anuj Sethi, Senior Director, Crisil Ratings, noted, “Supported by diversified end-user segments, domestic demand will remain the key growth driver this fiscal and support 7–8 per cent 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,” Sethi added.

Segment-Wise Impact

Domestic sales contribute nearly two-thirds of industry revenue, with agrochemicals, dyes and pigments, and flavours and fragrances accounting for about 30 per cent, 22 per cent and 14 per cent respectively, and exports making up the balance.

On profitability, the report highlighted that pressure would vary by exposure to crude-linked inputs including ethylene, propylene, fluorine-based chemicals and benzene, toluene, xylene-linked raw material (BTX). 

Ethylene and propylene manufacturers are likely to face sharper pressure due to higher crude linkage and limited pricing power, while BTX makers may fare relatively better, supported by value-added products and moderate pricing power. 

Fluorine-based chemistries are expected to remain comparatively resilient, aided by niche positioning and stronger passthrough ability. 

Recent customs duty exemptions on select petrochemical inputs may offer some relief but will not materially offset broader cost volatility, Crisil noted.

Poonam Upadhyay, Director, Crisil Ratings, said, “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.” 

She added, “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.”

Capex and Leverage

Companies are likely to moderate capital expenditure to around ₹16,500 crore this fiscal, focusing on backward integration, import substitution, and niche chemistries, with most funding capex through internal accruals despite pressure on earnings and working capital.

Debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) is expected to rise to 2.2 times from 1.9 times last fiscal, while interest coverage may fall to around 6 times from 7.5 times, Crisil said, highlighting feedstock costs, Chinese pricing pressure, global demand recovery, and margin restoration as key near-term monitorables.

(KNN Bureau)