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Demand remains muted; realizations stabilizing

We believe that Q1 witnessed stable-to-muted demand for the specialty chemical players, whereas there were pockets of realization uptick for certain products, owing to normalization of the business environment. The following factors are influencing cautious behavior from customers: a) container unavailability leading to increased freight rates; b) destocking of channel inventory and restocking for past contracts; and c) Chinese influence in the price reduction. Companies in the non-discretionary products business should fare better compared with discretionary spends, as this quarter is seasonally strong for agrochemicals. Export environment has remained relatively stable for most of the companies and demand-led recovery is expected from H2FY25. We prefer ARTO and DN within our sector universe for now. We have a BUY rating on ARTO and EPIGRAL; an ADD on SRF, DN, and ANURAS; a REDUCE on NFIL; and a SELL on GFL.

Q4 results – Key expectations (refer to Exhibits 1 & 2 for detailed numbers)

SRF (SRF IN): SRF’s chemicals business (CB) revenue to witness contraction QoQ due to muted export environment, coupled with marginal decline in realizations. Ref gas business saw lower realizations for some gases in US due to preliminary investigation for ADD cut on Chinese companies, which could impact EBIT margin for CB QoQ (domestic realizations are stable). Packaging films business (PFB) continues to face an oversupply overhang with improved realizations, whereas the technical textiles business (TTB) remains the cash cow.

PI Industries (PI IN): PI’s CSM business is likely to grow 10% YoY in Q1FY25E on the back of increased exports, largely led by pyroxasulfone. Due to seasonality element in the domestic business, we have built 6% revenue growth YoY. Pharma business is likely to add new molecules building a gradual increase in revenues, though it will remain the cost center in FY25E due to inherent R&D and other fixed costs. EBIT margins are likely to improve QoQ to ~23.6% in Q1FY25E from 20.8% in Q4FY24, due to better product mix.

Gujarat Fluorochemicals (FLUOROCH IN): GFL’s Q1FY25E revenue should improve with moderate recovery in exports on a lower base. We believe the fluoropolymer volume recovery in PTFE & PFA (FKM still under pressure) could help GFL clock 9% growth QoQ, along with better realizations in bulk chemicals. Margins are likely to report better QoQ performance (~22.4% vs 21%) on improved pricing and volumes across businesses.

Deepak Nitrite (DN IN): DN is likely to report better YoY performance and relatively stable revenue in Q1FY25E. Phenolic business witnessed higher realizations compared with Q4 last year, although we believe that production offtake will be lower due to the summer season. Advanced intermediates business should grow marginally QoQ. Last quarter, the EBIT margins for phenolics business were ~8.5-9% (ex-exceptional items). We expect that improved spreads in the current quarter shall lead to margins of ~10%.

Aarti Industries (ARTO IN): Aarti is expected to report revenue of Rs18bn vs Rs17.7bn last quarter, with recovery in benzene downstream demand and marginal improvement in export realizations. In our view, Aarti’s Q1FY25E EBITDA is expected to improve sequentially due to the better RM pricing environment, thus clocking a fourth quarter of sequential improvement, driven by higher volume growth (with certain pricing benefit).

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