Indian chemical manufacturers face a challenging second quarter as increasing raw material prices and subdued demand threaten profit margins, despite a strong start boosted by inventory advantages and supply disruptions amid Middle East tensions.
Indian chemical makers may be heading into a less forgiving second quarter after a strong start to the year, as higher raw material costs and weak demand begin to squeeze margins. Kotak Institutional Equities says the boost from cheaper inventory in the first quarter is unlikely to last, even though some segments may still be helped by supply disruptions tied to the Middle East conflict.
The brokerage noted that companies it tracks posted 17% year-on-year sales growth and 22% EBITDA growth in the first quarter, helped by higher finished-product prices and stocks of lower-cost inputs bought before the latest jump in feedstock costs. That combination allowed producers such as Aarti Industries, Deepak Nitrite, Jubilant Ingrevia and SRF to sell at improved prices while still benefiting from earlier procurement costs.
But as those inventories are used up, manufacturers will increasingly have to replace them at current, more expensive levels. Kotak expects that to weigh on Q2 margins, with weak end-user demand limiting the scope for a rebound. The concern is not just cost inflation, but also demand destruction, as higher prices can curb buying across parts of the chemical chain.
The broader backdrop remains unsettled. ICIS has reported that the Middle East conflict is disrupting energy prices, logistics and trade flows across global chemical markets, while other industry analysts say the strain on shipping routes and feedstock availability could persist well into 2027 in some regions. That has kept prices firmer in selected segments, including phenol, where tighter supply may support some producers even as the wider sector feels pressure.
Agrochemicals could be one of the few brighter spots in the second quarter. Kotak said a delayed recovery in Kharif sowing may lift sales, and an easier comparison base from last year could help year-on-year growth. Still, the overall outlook remains cautious, with the brokerage pointing to elevated valuations, macro uncertainty and uneven performance across chemical sub-sectors.
Recent company results underline how mixed the picture can be. J.G. Chemicals reported stronger revenue and profit in its latest quarter, while Kanoria Chemicals & Industries posted rising sales but weaker net profit, showing how sharply outcomes can diverge once raw material costs move against producers. For the sector as a whole, the next few months are likely to hinge on inventory cycles, pricing power and whether demand improves enough to offset higher input costs.
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