Specialty Chemical Makers May Recover From Covid-19 Setback Earlier Than Others
As a national lockdown to contain the novel coronavirus outbreak froze supply chains, specialty chemical makers too faced logistics and labour problems.
But it is one sector that’s expected to rebound faster than others. That’s because the industry continues to operate, though at a reduced capacity, as it supplies chemicals to essential sectors such as pharmaceuticals, personal health and hygiene and agrochemicals.
Analysts and company executives expect performance to improve as the sector relies on exports. Moreover, supply from China is likely to reduce in this category, providing a bigger opportunity for domestic specialty chemical makers.
For several years, China has dominated global chemical supply with its continuously improving technology, better infrastructure and favourable government policies, Rajendra Gogri, chairman and managing director of Aarti Industries Ltd., told BloombergQuint. “But with the Covid-19 outbreak and action on environmental front in the recent past, consumers across the world have been prompted to seek alternate venues for sourcing, making India a more attractive option.”
The government has granted permission to resume operations with restrictions after April 20 to several industries, including chemical makers.
- Deepak Nitrite Ltd. said on April 20 it partially commenced production of some products at its facilities at Nandesari, Roha, Taloja and Dahej in Gujarat.
- SRF Ltd. said a few plants belonging to the essential goods value chain at its chemical complex in Dahej, Gujarat, resumed operations. Other plants at Dahej and other sites, it said, will restart when permissions from local authorities related to people, logistics and supply chain are received.
- Fine Organic Industries Ltd. resumed partial operations at its manufacturing sites on March 31.
- PI Industries Ltd. said on April 21 that it would partially operate its plants in Panoli and Jambusar in Sterling SEZ, Gujarat.
Speciality chemical companies have the potential to scale up their production once economic activity resumes, Emkay Global said in a note. The production shutdown will definitely hurt first-quarter numbers but they can manage to complete the annual orders in the remaining period of the year, provided the Covid-19 issue normalises in second half of the fiscal, it said.
An elongated recovery may result in further erosion in the earnings power, the brokerage said, adding that demand in the pharma and agro-chemical industries would outpace the demand for chemicals during the economic slowdown, given their essential nature.
Still, not all companies in the sector can expect demand to rebound. Those catering to automobiles, paints and polymers firms may witness a prolonged slowdown as demand is expected to remain weak, resulting in higher risk of an earnings downgrade.
Analysts from Edelweiss Securities, Emkay Global, IIFL and Sunidhi Securities said in their recent reports that the lockdowns in western countries—which are witnessing a rapid increase in the number of people infected by Covid-19—will impact demand negatively in the near term
They also expect export business to remain subdued for the first half of the ongoing fiscal.
Yet, the overall outlook remains positive over the long term as the export-oriented sector will gain from a weaker rupee and falling raw material prices.
The rupee slumped to an all-time low of 76.86 versus the U.S. dollar amid global growth concerns.
Crude oil prices have fallen by more than 80 percent so far this year to their lowest in nearly two decades led by lower demand and lack of storage for unused oil. As a result, prices of a majority of downstream products, key raw materials for the chemical companies, have fallen and can boost margins of companies like SRF.
Valuations of most chemical makers fell as stocks tumbled in the world equity selloff in more than a decade triggered by the pandemic. Analysts remain bullish citing increasing demand from end-user industries, disruption in China and overall low per capita consumption of chemicals.