The outlook for the domestic chemicals industry is improving as demand rebounds and inventories stabilize.
In the previous fiscal year, factors such as oversupply from China, weak demand in developed markets, and inventory adjustments led to subdued revenue growth.For the current fiscal year, Crisil Research expects the industry to rebound by 7-9% from a lower base.
While certain segments like dyes and pigments, discretionary industries, and agrochemicals continue to face challenges, these are seen as temporary obstacles, and the medium- to long-term outlook remains optimistic.
This positive outlook is particularly beneficial for the 292,856 micro, small, and medium enterprises (MSMEs) that constitute 30% of the domestic chemical industry (according to Ministry of Chemicals & Petrochemicals data), with significant clusters in Thane, Mumbai, and Ahmedabad. Nearly half of these enterprises are engaged in organic manufacturing, while others focus on dyes and pigments, soaps and detergents, with agrochemicals making up 8%.
Among industry segments, specialty chemicals, representing 19-21% of the domestic industry, are expected to see margins rebound by 200-300 basis points this fiscal year after facing erosion last year due to high-priced inventories and lower product realizations.
Within specialty chemicals, agrochemicals are projected to achieve 10-12% revenue growth this fiscal year after experiencing degrowth last year due to low prices and weak demand caused by El Niño and subsequent deficient rainfall. Agrochemicals margins are expected to normalize from the second quarter due to destocking of high-cost inventories.
Colourants, another significant segment of specialty chemicals, are forecasted to achieve 4-6% revenue growth this fiscal year, driven by expectations of interest rate cuts in Europe and the US boosting discretionary spending. This follows a decline of 1-3% last year due to recessionary pressures and inflation affecting market sentiment.
Overall, domestic producers may still face margin pressures as prices of key bulk materials could remain depressed due to ample supplies and the commissioning of newer capacities.