Q3 Earnings Preview | Nothing special about specialty chemicals

High channel inventory, subdued export demand, high sales returns and repricing of chemicals likely dented the performance/earnings for the quarter ended December

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The Indian specialty chemicals industry is likely to report muted third-quarter financial results as fresh dispatches were impacted by high inventory build-up at the dealer level and because of the higher sales returns forced by unpredictable climatic conditions.

Continued correction in crude price, a sharp decline in freight rates, elevated energy costs and lower demand are the factors that created headwinds for the sector.

Most crop protection companies are likely report a decline in their earnings, barring a few that  have specific drivers working in their favour.

Experts suggest that the stocks valuations are still quite rich and with sluggish macros, investors should wait for better entry points in the future.

Challenges 

Macros 

High channel inventory was one of the biggest challenges faced by crop protection players during the quarter.

“Erratic climatic conditions impacted farmer demand for agrochemicals and resulted in sales returns to companies, impacting growth and margins,” wrote analysts at Kotak Institutional Equities.

Demand in export market was also impacted by high inventory levels in key regions of the US, Europe and Brazil.

Analysts at Phillip Capital Institutional Equities Research are of the opinion that the industry was also plagued by the “repricing of chemicals post – A) >25 percent sequential correction in crude price over last 6 months (-23.5 percent QoQ in Q2 & -3 percent in Q3), B) sharp decline in container freight (by 71 percent YoY and 51 percent QoQ) and C) moderated demand mainly for discretionary applications (visible since Q2 itself) suppressed the revenues growth of Indian Specialty chemical industry in Q3”.

Input Costs 

The decline in input prices may not have been enough to ease the pressure on margins as the prices of key inputs have definitely softened sequentially but on a Year-on-Year (YoY) basis, they continue to remain elevated.

“The higher energy cost (coal price up +81 percent on year, down 1 percent on quarter), the high cost inventory or container contract, potential inventory loss, etc continue to build margin pressure for the quarter,” added Phillip Capital analysts.

Moreover, volatile crude prices in Q3 deferred the input price adjustment/correction leading to margin pressure.

Currency 

Currency provided a silver lining amid the challenging business environment and was marginally favourable. On a sequential basis, the Indian rupee depreciated by 2 percent against the US Dollar and by 11 percent against the Euro which will likely favour entities in the export segment.

In general, while input costs are falling, high-cost inventories of raw materials and the soft demand scenario may cap margins.

Company-specific factors 

Some companies have specific drivers driving their performance up and among them Vinati Organics is uniquely positioned to deliver strong earnings with improved YoY margins led by improved demand for its products like ATBS (Acrylamide tertiary butyl sulfonic acid); IBB (Isobutyl benzene) and Butyl Phenol.

Navin Fluorine has entered into a partnership to manufacture Honeywell’s proprietary Solstice range of hydrofluoroolefins (HFO) in India which will aid the performance of the company.

PI Industries has been garnering market share through its most important product, pyroxasulfone, which is driving its sales. These companies are likely to report strong YoY growth in earnings.

“Tata Chemicals should report fairly healthy earnings, up sharply YoY on the back of higher prices of soda ash but modestly down QoQ following the slight price dip in Nov 2022 owing to aggressive exports by Chinese producers, consequent to the slowdown in their local market,” analysts at Kotak Institutional Equities said.

However, there are certain companies for which the slowdown in their segments is hurting earnings growth. Experts expect companies like SRF, Atul and Aarti Industries to report subdued results.

Analysts at Phillip Capital estimate a modest rise (+6 percent YoY/-17 percent QoQ) in sales of Camlin Fine Sciences due to repricing of products on account of the crude price correction, readjustment of freight cost and energy cost (for its Italy operation). Its margins are forecast to correct by 100bps (basis points) to 13.5 percent on account of higher operating cost in general leading to flat Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of Rs 54 crore.

Analysts at Kotak expect Rallis India, Godrej Agrovet and Bayer Cropscience to report subdued results on the back of declining demand in export markets as well as inventory overhang. They expect UPL to fare much better in terms of growth, given its global diversification, but increasing finance costs and promotional spending on the soccer World Cup could curb its earnings growth.

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