Companies in the chemicals sector have been growing strongly for several years but earnings growth will slow down in the financial year 2023-24, Ranjit Cirumalla, vice-president for research agri, chemicals and mid-cap at IIFL, said on July 17.
“Most of these companies are at risk of both domestic and import substitution stories. On the export side, most MNCs have started raising their profit warnings. For them, this is the first half of the outcome. So, understandably , they are also watering down their guidance,” he told CNBC-TV18.
Much of this commentary has been driven by inventory draws, on top of the sharp price corrections these companies are experiencing, he explained. They still hope that price adjustments should normalize within a quarter or two, he said.
As a result, Indian chemical companies with higher exposure to these sectors will see some slowdown, Cirumalla said.
However, IIFL analysts remain fairly optimistic about the chemical industry’s success story. “This is the longest-term story, and we expect more and more of the outsourcing story to pick up.” But with some companies just getting ahead of fundamentals, analysts expect a bit of cooling in the near term, with most of these names Should provide a good entry point.
Reflecting on specific companies, Cirumalla said Aarti Industries has higher exposure to discretionary sectors, which is why it needs to see if it can maintain its growth guidance.
“There has been some slippage in execution over the last few years. Contracts that would have given them good development have unfortunately been terminated. Although they have received funding, it will be a while before the facilities are fully utilized.”
Portfolio-wise, Aarti Industries has relatively high exposure to discretionary demand compared to its peers. In this way, some pain has continued over the past few quarters, Cirumalla explained.