While most sectors were grappling with higher costs, chemical companies posted expansion in gross and operating profit margins.
The top line growth was led by higher realisations and gains on the profitability front were on account of low-cost inventory.
Though the gains largely came from low-cost inventory amid sharp rise in raw material and product prices due to the Iran war, the benefit may not last in the near term. This is given the higher cost of raw materials and weak demand.
Brokerages believe that select companies will continue to benefit even as gains for others may reverse in the September quarter.
However, the gains were not uniform.
Shivani More of Axis Direct points out that high-value fluorochemicals, contract development and marketing organisation (CDMO), specialty ingredients, and nutrition players delivered strong beat-driven growth.
However, agrochemical exports, bulk commodities, and monsoon-dependent domestic formulations faced margin compression and volume deferrals.
Global supply chain frictions stemming from the West Asia geopolitical tensions elevated freight costs and delayed export deliveries, says the brokerage.
For Axis, Navin Fluorine International emerged as a standout performer, driving robust asset utilisation and favourable product mix across its high performance products and CDMO segments.
And, Aarti Industries successfully capitalised on high-margin niche projects and a recovery in fuel additives despite severe West Asia-related logistical re-routing.
Additionally, Apcotex Industries demonstrated strong pricing power and domestic volume traction in synthetic rubber.
The segment which did not do well was the global crop protection and bulk intermediates as they faced a deep downcycle.
PI Industries experienced export volume declines and soft pricing, while Dhanuka Agritech was hit by a 40 per cent rain deficit in June that postponed sowing and curtailed herbicide sales.
Margin pressure was most severe for Camlin Fine Sciences, which suffered from unpassed raw material hikes, under-utilisation of its Aroma capacity, and extraordinary freight costs in Brazil.
Aarti Industries, Navin Fluorine and Jubilant Ingrevia are top picks for Axis Direct in the sector.
Q1FY27, according to Kotak Institutional Equities, turned out to be another quarter with windfall benefits arising for several producers of chemical intermediates amid war-related price inflation.
Several companies, particularly in basic chemicals, registered windfall gains due to inflation in prices of finished goods. This comes even as the companies held some stocks of low-cost raw material inventories, say Abhijit Akella and Chaitanya Sawhney of the brokerage.
From its coverage universe, prominent beneficiaries included names such as Deepak Nitrite, Aarti Industries, Atul, Jubilant Ingrevia and SRF. The agrochemical sector was impacted by the late arrival of this year’s Southwest monsoon, which led to a slow start of Kharif season sowing.
Consequently, agrochemical companies, including Bayer CropScience, Rallis India and PI Industries reported soft growth.
The brokerage has a cautious stance on the sector.
Given a looming slowdown in demand due to price inflation and macro uncertainty, combined with still-elevated valuations across most frontline names, Kotak Research remains cautious while selectively choosing bottom-up ideas offering attractive risk-reward ratios.
Its preferred picks are Jubilant Ingrevia, Godrej Agrovet, S H Kelkar & Company and Clean Science and Technology as they offer healthy earnings growth potential at reasonable valuations.
Low cost inventory and strong top line growth rubbed off on the margin performance.
While aggregate gross margins expanded marginally, operating profit margins expanded by about 240 basis points (bps).
Nuvama Research highlights that the quarter was marked by inventory gains across several chemical companies, aided by sharp raw material and product price movements following the West Asia conflict.
Refrigerant gas players continued to benefit from strong demand and higher R-32 prices, supporting improved realisations and profitability across the segment.
However, the brokerage believes that the sector looks particularly interesting as the rupee has depreciated against the Chinese Yuan which should help improve competitiveness.
Furthermore, the capex cycle for the sector is behind and the space is at record-low profit margins. This can result in strong profitability going ahead, it adds. Its top picks in the sector are Navin Fluorine and Aarti Industries.
