710
11 days ago
Chemicals sector loses steam; wait for a turnaround gets longer
Summary
The Indian chemicals sector has had a rough FY26. Weak demand in an oversupplied market has played spoilsport for a large part of the year. The ongoing tensions in the Middle East could accentuate the pain. Chemical companies that rely on Gulf countries for imports of key raw materials such as crude-based derivatives (propylene, xylene, methanol, styrene, polymers) could feel the heat in the form of a likely near-term supply shock.
According to Emkay Global Financial Services, “As of FY25, Indian chemical companies’ Middle East exposure is around 0-9% in terms of revenue, with the highest being for Fine Organic Industries Ltd at 9% and 6% each for Aarti Industries Ltd and Navin Fluorine International Ltd.” Higher freight rates and the disruption at the Strait of Hormuz are the main factors that could hurt exports to the Middle East. “A prolonged conflict may lead to demand erosion in certain parts of the world due to inflation,” said the Emkay report, dated 4 March. On the other hand, a de-escalation of the conflict followed by normalcy may trigger a pent-up demand led upcycle in chemicals.
For investors in the chemicals sector, China’s policy is another important variable to track. When 2026 began, China introduced the ‘one certificate, one label’ policy for agrochemicals, effective January. This policy is expected to partially address overcapacity in the agrochemicals sector, which in turn should lift muted prices. China has also announced tweaks to export tax rebates on various chemical products; likely to take effect from 1 April.
These policy changes, termed as anti-involution, aim to curb hyper-competitive price wars and overproduction, which reduce profitability. China’s execution of these policies will be an important catalyst for Indian chemical stocks, but the real impact on pricing due to lower export rebates may only be visible in H2FY26, after low-cost inventories are absorbed.
The sector’s December-quarter (Q3FY26) earnings performance was hardly encouraging. Management commentaries across domestic chemicals companies indicated a gradual volume-led recovery with pricing still uneven. “The sector narrative is shifting from pure destocking to early-cycle normalization, though China-linked pricing pressure persists in multiple chains,” said an Anand Rathi Share and Stock Brokers report dated 24 February. Additionally, the report cautioned that 2026 is shaping up as a year of gradual global normalization rather than a broad recovery in demand, with companies prioritizing cost control, debt reduction, and cash generation.
In short, expectations for the Q4FY26 earnings of Indian chemical companies should remain low.
To beat the demand and pricing blues, chemical companies are undertaking measures such as backward integration and new product development to revive earnings growth. They are also focusing on other areas such as contract development and manufacturing organization (CDMO), battery chemicals and semiconductor chemicals. “Acutaas Chemicals Ltd and Aether Industries Ltd are seeing good traction in CDMO projects across end-use industries, including pharma, material science and oil & gas additives,” said a Kotak Institutional Equities report dated 27 February.
Separately, battery chemicals and semiconductor chemicals are emerging as new growth areas, with Neogen Chemicals Ltd and Acutaas indicating traction in battery chemicals, and Acutaas and Aether making progress on product development for semiconductors, it added. Even so, Kotak cautions that there isn’t enough visibility around a full-blown recovery in sector fundamentals yet. Stock returns of chemical companies have been mixed in the past six months, driven by external and company-specific factors. Valuations have eased for some companies, but are unattractive in the current situation.
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According to Emkay Global Financial Services, “As of FY25, Indian chemical companies’ Middle East exposure is around 0-9% in terms of revenue, with the highest being for Fine Organic Industries Ltd at 9% and 6% each for Aarti Industries Ltd and Navin Fluorine International Ltd.” Higher freight rates and the disruption at the Strait of Hormuz are the main factors that could hurt exports to the Middle East. “A prolonged conflict may lead to demand erosion in certain parts of the world due to inflation,” said the Emkay report, dated 4 March. On the other hand, a de-escalation of the conflict followed by normalcy may trigger a pent-up demand led upcycle in chemicals.
For investors in the chemicals sector, China’s policy is another important variable to track. When 2026 began, China introduced the ‘one certificate, one label’ policy for agrochemicals, effective January. This policy is expected to partially address overcapacity in the agrochemicals sector, which in turn should lift muted prices. China has also announced tweaks to export tax rebates on various chemical products; likely to take effect from 1 April.
These policy changes, termed as anti-involution, aim to curb hyper-competitive price wars and overproduction, which reduce profitability. China’s execution of these policies will be an important catalyst for Indian chemical stocks, but the real impact on pricing due to lower export rebates may only be visible in H2FY26, after low-cost inventories are absorbed.
The sector’s December-quarter (Q3FY26) earnings performance was hardly encouraging. Management commentaries across domestic chemicals companies indicated a gradual volume-led recovery with pricing still uneven. “The sector narrative is shifting from pure destocking to early-cycle normalization, though China-linked pricing pressure persists in multiple chains,” said an Anand Rathi Share and Stock Brokers report dated 24 February. Additionally, the report cautioned that 2026 is shaping up as a year of gradual global normalization rather than a broad recovery in demand, with companies prioritizing cost control, debt reduction, and cash generation.
In short, expectations for the Q4FY26 earnings of Indian chemical companies should remain low.
To beat the demand and pricing blues, chemical companies are undertaking measures such as backward integration and new product development to revive earnings growth. They are also focusing on other areas such as contract development and manufacturing organization (CDMO), battery chemicals and semiconductor chemicals. “Acutaas Chemicals Ltd and Aether Industries Ltd are seeing good traction in CDMO projects across end-use industries, including pharma, material science and oil & gas additives,” said a Kotak Institutional Equities report dated 27 February.
Separately, battery chemicals and semiconductor chemicals are emerging as new growth areas, with Neogen Chemicals Ltd and Acutaas indicating traction in battery chemicals, and Acutaas and Aether making progress on product development for semiconductors, it added. Even so, Kotak cautions that there isn’t enough visibility around a full-blown recovery in sector fundamentals yet. Stock returns of chemical companies have been mixed in the past six months, driven by external and company-specific factors. Valuations have eased for some companies, but are unattractive in the current situation.
Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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AI Description
The Indian chemicals sector is facing challenges due to geopolitical tensions and pricing pressures, impacting recovery prospects. Investors are looking towards long-term opportunities in CDMO and battery chemicals.