Sector Watch: How are things looking up for speciality chemicals industry?

The speciality chemicals sector has been sporting healthy growth rates in the recent past including the first half of this financial year with the uptick in the economy even after factoring in the impact of the Covid-19 pandemic.

As a result, the credit outlook for the specialty chemical industry remains stable, despite profit margins getting softened due to higher raw material costs, according to credit ratings firm ICRA.

In a research report, ICRA said higher material costs and impact of China’s energy crisis will continue to exert some pressure on margins, but the sector will manage to sail through it with healthy demand from both domestic and exports markets. It noted that global demand for speciality chemicals from India has also received a boost as the world seeks to diversify their dependence on China for sourcing, especially in the medium term.

Meanwhile, the companies in the sector have relatively robust balance sheet with moderate gearing and comfortable coverage indicators, despite some of the major players incurring debt-funded capex in the recent years.

The report also touched upon the various subsegments and the outlook for them.

Dye and pigments: Demand for dyes and pigments was impacted in FY2021 due to Covid-19. However, it recovered partly in the second half of last fiscal. Demand recovery trend is expected to continue in the current financial year.

Flavour and fragrance: The outlook remains stable, owing to its end use in FMCG, pharmaceutical and food and beverage industries, which have been less impacted by the pandemic.

Agro-chemicals: Its outlook, too, remains stable driven by robust domestic as well as export demand. On the flip side, the issue of ban on 27 pesticides in India for domestic use remains work in progress.

Surfactants: The surfactant segment benefited in FY2021 from higher demand for cleaning products. In the medium to long term, the demand outlook remains favourable aided by growth in demand for the personal and home care segment as well for the use of surfactants in niche sectors and export market.

Fluoro-chemicals: The performance of refrigerant segment was adversely impacted in FY2021 due to impact of Covid-19 on white goods and refrigeration segment, however, demand from other fluorochemical segments remained healthy. The domestic demand was subdued in Q1FY2022, but good export demand supported domestic manufacturers. For the full year FY2022, demand is expected to witness recovery.

Construction chemicals: Demand had weakened due to the impact of Covid-19 pandemic on construction and infrastructure sector during the first half of FY2021. However, there was healthy recovery in the second half. The demand witnessed modest impact in the first quarter of the current fiscal year, but subsequently there is good demand recovery and full-year demand is expected to be robust.

ICRA said the medium- to long-term outlook remains favourable, driven by infrastructure growth, increasing urbanisation, and low consumption of construction chemicals in construction.