Chemical stocks to face near-term pressure on demand slowdown but capex to aid future growth

About this update from Navin Fluorine International Limited

Chemical companies in India are clearly looking at the bigger picture. Even as they face a continued global demand slowdown, they are not holding back on capital expenditure to enhance capacity, despite this adding to stress on their balance sheets. However, the near-term pain could mean long-term gain given that the outlook for the country's chemicals sector is robust, especially helped by the capacities coming onstream now.The impact of destocking in Europe and the US has significantly dented global demand, while a decline in Chinese demand has prompted companies there to offload inventories in other regions. This has collectively resulted in a downward pressure on prices."In several of the segments, despite a poor global demand, China appears to have been raising its production in 2023, putting downward pressure on realisations, especially for domestic players," brokerage firm Prabhudas Lilladher highlighted.The weak demand environment also coincided with a time when domestic chemical players were going big on capacity expansion to reap the benefits of the growing China+1 sentiment. But in the face of the demand slowdown, chemical players are now feeling the heat of the ongoing capital expenditure, which is weighing on their margins.Slow demand, margin pressure drive bearish ratings on chemical stocksAnticipating prolonged pressure on demand and margins for the chemicals sector, Prabhudas Lilladher, like many other brokerages, opted for a cautious view.The firm has a 'hold' rating on Gujarat Fluorochemicals, Jubilant Ingrevia, Clean Science Technology and Fine Organic Industries. It has a 'reduce' call on SRF, Vinati Organics, Aarti Industries, Deepak Nitrate and NOCIL. The brokerage has a 'sell' recommendation on Laxmi Organic.In contrast, Navin Fluorine emerged as the only chemical stock garnering an upgrade to 'buy' from the brokerage, largely due to the recent correction in the stock price.The concerns of further pressure on the sector become clearer when one looks at their Q3 report card.Chemical companies’ revenues, margins hitIn the fiscal third quarter, 8 out of 22 chemical companies recorded their lowest quarterly sales since the COVID-19 outbreak. Four companies’ sales were close to their lowest quarterly numbers since the pandemic. Additionally, 16 of these companies reported a year-on-year decline in revenue.Also Read | Indian chemical play...

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