Chemical Sector Earnings Preview

We expect the companies under our chemicals coverage to report revenue growth of ~4.2% in Q4FY20 with 7.3% growth in profitability, driven by the benefit of price increase in few chemicals and reduction in the tax rate. Chemicals being basic building blocks of end-user applications are most likely to feel the slowdown in demand due to nationwide restricted movement. Indian chemical companies’ have a raw material dependency on China. Still, most companies have adequate inventory to cater to demand in the near-term (at least for the current quarter). With the gradual resumption of work in Chinese factories, supply issues are expected to resolve. Additionally, crude derivatives as raw material for chemical companies will be positive for the gross margins given the drop in oil prices. Domestic speciality and Agro-chemicals players with strong supply chains and backward integration are likely to benefit. Supply chain restriction and expected labour migration would be the major impediments to pace and timelines of recovery. Once the lockdowns are eased, plants will gradually resume normal production and outflow. We expect that these restrictions will be lifted in late Q1FY21- paving the way for the demand to start recovering in H2FY21. Overall our Chemical coverage would post Revenue/EBITDA/PAT growth of 4.2%/5.3%/7.3% YoY in Q4FY20. We expect the EBITDA margin of our coverage universe to improve by 20bps YoY, owing to favourable product mix