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Specialty chemical companies continue to face pressure from Chinese oversupply amid anticipated US-India trade deal speculations. Per our interactions with industry participants, some companies could pass on the tariff burden to their customers, while few expect tariffs to be the new normal. Overall exports for Oct-25 and Nov-25 do not show any optimism in terms of volume recovery. Thus, we expect Q3FY25 to be muted for most of the chemical companies in our coverage universe, with the only standout being refrigerant (ref) gas manufacturers like SRF and NFIL (R32 prices still in an uptrend). We believe that Aarti is likely to benefit from better gasoline-naphtha spreads aiding strong volumes for MMA. We also expect domestic agri-focused firms to benefit from a better rabi season due to higher reservoir levels. We continue to favor ref gas companies and bulk chemical companies like DFPC and EPIGRAL, trading at reasonable valuations and hedged from geopolitical uncertainty.

Chinese R32 prices now at USD7.5/kg; ref gas players witnessing price stability

R32 prices in China are on a continuous up-move, led by strong RAC demand domestically and lower channel inventory. Also, the recent Chinese quota allocation plan for CY26 is flat YoY for R32, indicating no major supply addition. Prices for R125 (Chinese quotas have exhausted) and R134a (favorable outlook on car production in CY26, in our view) also increased in China by 2-8%, while R22 prices stayed lower at USD3.2. Manufacturers in India are seeing price stability for R32 (impacted due to US tariffs) and a marginal uptick in R134a prices in the US market. Domestic prices for R32 remain firm owing to higher import prices from China, while R134a prices are witnessing support from ADD.

Bulk chemical prices at the trough; INR depreciation to support domestic prices

We believe that the prices of bulk chemicals are at the trough of the cycle and would continue to impact revenue growth and spreads for companies like Aarti, Atul, Deepak Nitrite, and GHCL. Prices of major RMs for the aforementioned companies have bottomed out, while pressure on finished product pricing remains. This has led to contraction in spreads for MMA-aniline, phenol-acetone, ethyl acetate-acetic acid, PVC-EDC, ABS, etc. Prices for caustic soda have improved recently but have been flat at the ECU level. We observe that the prices have stabilized for liquid epoxy resin, soda ash (still depressed due to US dumping), phenol, and 2,4-D. We expect the demand scenario to improve in CY26, leading to better prices. Delay in the US-India trade deal is likely, in our view.

Q3 to be muted owing to sluggish demand and weak exports

The mgmt commentaries post Q2 results stressed on demand recovery in anticipation of a trade deal for India. Q3 has been much of status quo for most chemical companies in terms of exports. Prolonged monsoons have not led to pent-up demand from end-user industries (except for agro) nor capacity ramp-up. That said, we expect gradual margin recovery owing to cost optimization efforts as volume/pricing remain steady.

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