The Indian chemical industry is currently grappling with significant challenges, as a wave of selling pressure swept through the market on Monday. Key players like AMI Organics, PI Industries, Fine Organic Industries, Rallis India, Vinati Organics, Clean Science and Technology, and Navin Fluorine faced declines of up to 6% in intraday trading. This downturn comes in the wake of President Donald Trump’s announcement of a hefty 26% tariff on Indian exports, which has raised concerns due to the sector’s considerable ties to the U.S. market.
Impact of Global Economic Slowdown
The Indian chemical sector is feeling the heat from a broader global economic slowdown, with analysts warning that this could have dire consequences for market demand. According to Kotak Institutional Equities, a slowdown triggered by ongoing trade tensions is poised to negatively affect industries reliant on chemicals, including automotive, construction, and consumer durables.
- Overcapacity in China: This situation is compounded by existing overcapacity in China, which is already exerting downward pressure on global prices.
- Potential Retaliatory Tariffs: Further retaliatory measures from other countries could heighten competition for Indian chemical firms in markets outside the U.S.
Risks to Indian Chemical Companies
Kotak’s report highlights the vulnerabilities of Indian chemical companies, particularly those heavily reliant on U.S. sales. The firms most exposed include:
- PI Industries: 43% of revenues from U.S. sales
- Vinati Organics: 20%
- Clean Science: 17%
- Navin Fluorine: 14%
The brokerage expressed concerns that U.S. customers might demand a “sharing of the pain” in response to reciprocal tariffs, which could squeeze profit margins. Additionally, price hikes in the U.S. could attract new competitors, stalling the anticipated recovery in pricing for the chemical industry.
Agrochemicals and Refrigerants Facing Challenges
The agrochemical segment might see some market share gain against Chinese competitors due to higher tariffs, but this advantage could be offset by increased competition in other regions. In the refrigerant market, the impact of existing antidumping duties on China means that the newly imposed tariffs are unlikely to significantly benefit Indian firms.
- Potential Slowdown in U.S. Demand: There’s also a looming risk of decreased demand for refrigerants, used in automotive and home air conditioning applications, which could apply further pricing pressure globally.
Q4FY25 Earnings Preview
Looking ahead to Q4 FY25, Kotak anticipates modest quarter-on-quarter earnings growth across its coverage universe, fueled by a gradual recovery in volumes. However, year-on-year growth may vary due to the base effect, as many companies faced weaker performance in the previous year.
- Expected Strong Performers: PI Industries is expected to shine, particularly due to its Custom Synthesis and Manufacturing (CSM) segment.
- Mixed Results for Others: Conversely, Aarti Industries, Deepak Nitrite, Neogen, and Sharda Cropchem may see year-on-year earnings declines, primarily affecting their profit after tax (PAT).
Seasonal Challenges for Agrochemical Companies
The seasonal dynamics of the quarter suggest that agrochemical companies could report lackluster results, hindered by weak pricing and excessive channel inventories ahead of the Kharif season. While UPL might record growth due to a low comparison base, it may still fall short of its ambitious FY2025 EBITDA growth target.
In summary, the Indian chemical industry is navigating a tumultuous landscape marked by external pressures and internal challenges. With the potential for significant shifts in demand and competition, firms must adapt quickly to maintain their market positions.
