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Better Q3 Show Awaits Special Chemical Cos

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“The Indian specialty chemicals industry is poised to deliver strong earnings growth, against the fear of margin squeeze on account of higher input prices,” analysts at Philips Capital (India) Pvt Ltd said in their Q3 preview note. Earnings growth, according to analysts, will be driven by continued improvement in demand and industrial manufacturers’ ability to pass on higher input costs to customers. The brokerage estimates Vinati Organics Ltd., SRF Ltd., Camlin Fine Sciences Ltd. and Aarti Industries Ltd. to deliver strong earnings growth of 34-59% year-on-year (y-o-y) in Q3.

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Specialty Chemical manufacturers are likely to report a decent set of numbers for the quarter ended December (Q3FY22). Over the past few months, the sector has faced several constraints, such as rising input costs, supply chain constraints and high freight costs. However, earnings outlook for specialty chemical companies is expected to improve, with concerns gradually easing, analysts said.

“The Indian specialty chemicals industry is poised to deliver strong earnings growth, against the fear of margin squeeze on account of higher input prices,” analysts at Philips Capital (India) Pvt Ltd said in their Q3 preview note. Earnings growth, according to analysts, will be driven by continued improvement in demand and industrial manufacturers’ ability to pass on higher input costs to customers. The brokerage estimates Vinati Organics Ltd., SRF Ltd., Camlin Fine Sciences Ltd. and Aarti Industries Ltd. to deliver strong earnings growth of 34-59% year-on-year (y-o-y) in Q3.

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Significantly, the demand for specialty chemicals remains flexible despite the COVID-19 pandemic. This has boosted sales for many firms, but manufacturers are facing other constraints, especially on the cost front. Crude oil prices have risen, while basic material and chemical prices are also high. With China’s supply affected due to power shortages, low coal and gas supplies made matters worse, leading to higher electricity and fuel costs.

For perspective, key input prices such as crude oil, benzene, toluene, phenol and caprolactam rose 76-126% in Q3. However, sequentially, growth has been slow and many chemical prices remained stable. The above chemical prices were up 0.7-7% sequentially. Still, a strong sequential increase in product prices could lead to a healthy improvement in margins after a sharp fall in the September quarter, according to analysts.

Many analysts are of the view that raw material prices are peaking and should ease. Analysts at JM Financial Institutional Securities Ltd in mid-December said operating margins are likely to improve and return to normal levels in the next 1-2 quarters. “Several Indian chemical companies have indicated that their customers have accepted the necessary price hikes to offset higher input costs. Hence, we believe that the major Indian players should be able to pass on the full price hike in the next 1-2 quarters,” said analysts at JM Financial.

Meanwhile, several specialty chemical companies have recently either integrated their product portfolios or added downstream products, which should help boost earnings momentum. This, along with improving demand, should keep specialty chemical manufacturers in good standing.

Rising exports is another potential area for growth. The adoption of China+1 strategy by multinational companies (MNCs) is a factor of optimism. Indian manufacturers favor supplies from international customers as compared to China, which may support the former’s export momentum. Here, manufacturers offering contract research and manufacturing services or custom synthesis are well placed. MNCs considering cost control may resort to more outsourcing.

In general, shares of specialty chemicals companies such as SRF and PI Industries have appreciated meaningfully over the past year, suggesting that investors are holding on to a good bit of optimism in the price. Investors will closely track any disruptions due to the new surge in COVID cases globally. Unfavorable results on this front may weigh on the sentiments of these stocks.

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Usama Younus

Usama Younus is the owner and super admin of the site he's is an expert in news editing, tech and entertainment magazine management, and articles editing E.T.C.

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