India’s specialty chemical industry is expected to witness slower revenue growth in the current fiscal as weak exports offset healthy domestic demand, according to a report by Crisil Ratings. The ratings agency estimates that industry revenue growth will moderate by 200 basis points to around 6% this fiscal, compared with approximately 8% growth recorded in each of the previous two years. The slowdown is primarily attributed to supply chain disruptions, cautious procurement by overseas customers, and continued uncertainty in global trade. Crisil’s assessment is based on an analysis of 126 specialty chemical companies, which together account for nearly 40% of the industry’s total revenue.
Domestic Demand Remains the Primary Growth Driver
Despite weaker exports, the domestic market is expected to continue supporting the industry’s growth. According to Anuj Sethi, Senior Director, Crisil Ratings, demand from diversified end-user industries will keep domestic sales strong, helping the sector achieve 7-8% growth in local demand during the fiscal year. However, export demand is likely to remain subdued in the near term due to ongoing global disruptions. Crisil expects trade flows to gradually normalize over the next couple of quarters, provided the recent easing of tensions in West Asia continues. The report also notes that China’s reduction in export incentives for select chemical products could provide some pricing support. Nevertheless, continued dumping of chemicals by Chinese manufacturers is expected to limit any significant pricing gains.
Operating Margins Under Pressure
Weak export demand is also expected to affect industry profitability. Since export sales generally generate higher margins, their slowdown, coupled with rising crude-linked raw material costs that cannot be fully passed on to customers, is expected to reduce operating margins to 14-14.5% this fiscal from around 16% in the previous year. The extent of margin pressure will vary across companies depending on their product mix, raw material exposure, and pricing power.
Impact Varies Across Chemical Segments
The report highlights that the financial impact will differ significantly across various specialty chemical segments. Domestic sales account for nearly two-thirds of total industry revenue, with agrochemicals contributing around 30%, followed by dyes and pigments (22%), and flavours and fragrances (14%). The remaining revenue comes from exports.
Manufacturers dependent on ethylene and propylene are expected to experience greater pressure because these feedstocks are closely linked to crude oil prices, while their ability to pass on higher costs remains limited. In contrast, companies using benzene, toluene, and xylene (BTX)-based raw materials may perform relatively better due to their focus on value-added products and moderate pricing flexibility.
Meanwhile, businesses specializing in fluorine-based chemicals are expected to remain comparatively resilient, supported by niche product portfolios and stronger pricing power. Although recent customs duty exemptions on select petrochemical inputs may reduce some cost pressures, Crisil believes these measures will not significantly offset broader raw material price volatility.
Crude Prices and Chinese Competition Continue to Challenge Profitability
According to Poonam Upadhyay, Director, Crisil Ratings, crude-linked feedstocks account for nearly one-third of the industry’s raw material costs, making profitability highly sensitive to fluctuations in oil prices. She noted that while softer crude oil and chemical prices should limit the decline in operating margins to around 150-200 basis points, pricing flexibility will continue to remain constrained by intense competition from Chinese suppliers. She also cautioned that supply chains may require another couple of quarters to stabilize, with benefits likely to emerge gradually. However, this outlook depends on geopolitical tensions in West Asia not escalating again and input prices remaining under control.
Companies to Moderate Capital Expenditure
Amid earnings pressure, specialty chemical manufacturers are expected to adopt a more cautious investment approach. Crisil estimates that industry capital expenditure will moderate to around ₹16,500 crore this fiscal. Companies are likely to prioritize investments in backward integration, import substitution, and high-value niche chemistries while funding most expansion projects through internal accruals. This strategy is expected to help companies strengthen supply chain resilience and reduce dependence on imported raw materials over the long term.
Leverage Likely to Increase
The report also projects some deterioration in key financial metrics. The industry’s debt-to-EBITDA ratio is expected to increase to around 2.2 times, compared with 1.9 times in the previous fiscal. Similarly, interest coverage is likely to decline from 7.5 times to approximately 6 times, reflecting weaker profitability and higher working capital requirements.
Outlook Hinges on Global Recovery
As reported by knnindia.co.in, Crisil believes the performance of India’s specialty chemical sector will depend on several critical factors, including the stabilization of global supply chains, recovery in export demand, crude oil price movements, and competitive pricing from China. If geopolitical risks remain contained and raw material prices stabilize, the industry could gradually regain momentum. However, prolonged export weakness and persistent cost pressures may continue to weigh on growth and profitability in the near term.
