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PL Sector Report: Chemicals - Jul-Sep’23 Earnings Preview – Demand uncertainty continues
Prabhudas Lilladher Pvt Ltd
Chemicals - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.
Chemicals - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.
Jul-Sep’23 Earnings Preview – Demand uncertainty continues
Chemical companies in our coverage universe are expected to deliver drop in EBITDA/PAT YoY & QoQ by 10%/20%, due to continued pricing pressure and low demand. However, we expect performance to recover post H2FY24 particularly for agrochemical companies. We expect companies with exposure to crop protection and agrochemicals to witness margin pressure. While base chemical prices are moderating (ex-crude oil), the demand environment continues to be weak, particularly in discretionary end user industries. Also companies with exposure to industries such as refrigerants and fluoropolymers to see pricing pressure on account of demand slowdown.
Our top picks in the sector are Navin Fluorine International Ltd and Vinati Organics Ltd
§ Uncertain macros impact product prices: Ongoing economic slowdown in Europe, inflationary trend in US/EU coupled with aggressive dumping by China (increased exports from China) continues to hurt product prices.
§ Near term outlook bleak for global agrochemical companies: Commentaries of global agrochemical manufacturers conclude, generic players to continue to be impacted than specialty/ patented players, as a result, we expect weak earnings from companies exposed to agrochemicals.
§ Cost normalization fail to protect margins: Several basic chemicals continued correction in prices YoY in Q2FY24 as crude oil prices moderated ~9% YoY on macro uncertainties and US/Europe banking crisis fears. We believe, margins to remain under pressure as realizations fail to recover amidst poor demand.
§ Slowdown in demand continues across discretionary end use applications such as dyes & pigments, polymers, automobiles coupled with global agrochem. However, we believe, inventory destocking to be over by H2FY24, demand to recover post that.
§ Capex delayed but not revoked: Commercialization of capex for companies such as SRF Ltd, Aarti Industries Ltd, Gujarat Fluorochemicals Ltd appear delayed but not revoked showcasing confidence.
