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Chemical prices still under pressure
Major raw materials such as Fluorspar, Toluene, Propylene, Acrylonitrile and Phenol for our chemical company universe have declined in the range of 10-15% in the past three months. Overall demand was impacted by global slowdown amid economic uncertainty, and the ongoing trade war between the US and China. Most companies in our coverage universe are holding up to their margins due to price pass-through mechanism. We expect better margin performance in SRF and NFIL due to lower Fluorspar prices. On the back of falling input prices, we expect revenue decline for APCO. Although lower soda ash prices could impact the revenue growth of GHCL and TTCH (standalone), margins should sustain due to lower fuel cost (coal prices down 15% yoy). In our sector EAP, we remain OW on SRF and NFIL.
* SRF and Navin Fluorine: Automotive slowdown has impacted the refrigerant gas (R-gas) business in the domestic market. However, the prices of R-22/R-32 gas have remained firmed (~Rs475/kg/~Rs425/kg) due to strong aftermarket sales and robust AC demand. The prices of Fluorspar – a key raw material for the chemical segments of SRF and NFIL – have corrected 10% in the last two months to Rs29.3/kg (China) which could help margin improvement in their specialty chemical segment. The prices of Chloroform, a key input of Chloromethane, have fallen 11% in the last three months (5% mom) to Rs39/kg (India) which could also help in margin improvement for SRF as demand remains firm for Chloromethane.
* Tata Chemicals and GHCL: The prices of soda ash – the core product of GHCL and TTCH – remain lower in November and are at USD17.1/50kg (Mumbai spot) due to the oversupply situation prevailing in India. However, the drop in the prices of coal, which accounts for ~30% of the total cost, should mitigate the impact of lower soda ash prices. We expect margins to remain stable. Soda ash prices have touched a one-year low in November, down 8% yoy.
* Vinati Organics: The prices of Toluene, the key raw material for Iso Butyl Benzene (15% of total sales), are holding the ground with an increase of 4% mom to USD675/MT (China), while Propylene prices have corrected 8% mom and 4% qoq to USD840/MT. With the pass-through clause, the impact on VO could be minimal. However, prices of Acrylonitrile – a key RM for ATBS that contributes 53% of total sales – have corrected 5% mom in the South East Asian market which might affect realizations. We expect margins to remain steady but revenue could soften by 3-5% in Q3FY20.
* BASF: TDI is an isocyanate used primarily in the manufacturing of flexible foams (mattresses, cushions, etc.). The prices of TDI – which accounts for about 5% of the total RM cost – are lower (down 7%/36% qoq/yoy) due to lower demand and the fall in crude prices. With TDI being an imported raw material for BASF, the trend of falling prices results in lower realizations in the domestic market.
* Camlin Fine: The prices of Phenol, a key RM for Hydroquinone and Catechol, are down 35% yoy and touched a two-year low in November at Rs66/kg (Kandla Bulk) due to subdued demand and lower import prices. The slowdown in the economy has impacted the demand from the housing sector, a large consumer of phenol. However, some improvement was visible lately in housing sector demand.
* Apcotex: The prices of Apcotex’s key inputs - Acrylonitrile (ACN), Styrene and Butadiene which together consist of 80-90% of the total RM cost - are in a downward spiral for the last six months, denting the company’s performance in the last two quarters due to lower realizations. The demand for ACN is largely linked with the Auto industry, which is currently under pressure globally, and we do not expect prices to bounce back significantly in the near term. Meanwhile, Styrene has hit a five-year low in November to USD835/MT (down 13% yoy).
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