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The silver lining

The first half of CY20 was an unanticipated turning point for the chemical industry. The dual effects of the COVID-related economic downturn and disruption in chemical supply chain impacted the industry adversely. However, this sector was amongst the first few that returned to normalcy. We have assessed the current situation of the industry and our analysis compels us to uphold our positive stance on our specialty chemicals universe.

The chemicals consumed by end user industries like pharmaceuticals, agrochemicals, home and personal care showed strong resilience during the lockdown and the robust demand continued, post the unlock. During the lockdown, the chemicals consumed by certain industries like automotive, construction, textile, FMCG, and dyes experienced a fall in demand owing to a cut in discretionary spending by consumers. But post lockdown, the demand from end user industries has picked up.

Additionally, chemical sector companies saved on costs like travelling, marketing and sales due to restricted movement. Besides, they invested in IT infrastructure, which helped them save operating and administration costs.

We maintain BUY on AIL, Galaxy Surfactants, Sudarshan Chemical; ADD on NFIL, Balaji Amines, Alkyl Amines, SRF; while maintaining SELL on Vinati Organics. We are also initiating coverage on Fine Organic and NOCIL with a BUY and Deepak Nitrite with an ADD recommendation.

Bounce-back in revenue and jump in margins: Our specialty chemical universe witnessed a smart recovery in manufacturing operations, post the COVID-led disruptions and attained normalcy. As the end-user industries for the chemical sector witnessed demand recovery, aggregate revenues inched up 31/10% QoQ/YoY to INR 70bn in 2QFY21. Companies catering to pharma and agrochemical industries showed a higher resilience. Alkyl Amines’ revenue grew 19/24% QoQ/YoY to INR 2.9bn, owing to 18% YoY volume growth and better realisations in 2Q, courtesy robust pharma and agro demand. Similarly, Balaji Amines’ revenue grew 33/22% QoQ/YoY to INR 2.8bn in 2Q. Aarti Industries, which derives ~60% of its revenues from pharma, agro and FMCG industries, also demonstrated revenue growth of 25/9% QoQ/YoY to INR 11.7bn in 2Q.

Gross margins remained protected for most companies in our universe despite the pandemic, mainly due to benign raw material prices and better realisations. While per unit raw material prices fell, realisations did not fall correspondingly. Companies benefited from a cut in administrative expenses, travel and exhibition expenses and delivered higher operating leverages. This has resulted in 194bps QoQ jump in aggregate EBITDA margin to 25% in 2QFY21.

* Capex spending in full swing: Companies in our chemical universe continue to assign importance to investing in Capex to milk future opportunities. All of them have maintained their pre-COVID Capex plans, while a few have deferred them due to the disturbances caused by the pandemic, although, none have announced a cut in them. The managements are more positive and have announced additional projects in the past six months to seize the import substitution opportunity.

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