Profit gains reported by several Indian chemical companies in Q1FY27 could moderate in the second quarter as manufacturers begin consuming higher-cost raw material inventories. At the same time, weak demand continues to pose a significant challenge for the sector, according to Kotak Institutional Equities. The brokerage expects companies to face margin pressure in Q2FY27 as low-cost inventories accumulated earlier are depleted and firms procure raw materials at higher prices. However, supply disruptions linked to the Middle East conflict could keep prices elevated in selected chemical segments, potentially supporting margins for some producers.
Q1 Performance Benefited from Lower-Cost Inventories
Several chemical intermediate manufacturers delivered stronger-than-expected results during the first quarter. Companies covered by Kotak recorded 17% year-on-year sales growth and 22% EBITDA growth in Q1FY27. Aarti Industries, Deepak Nitrite, Jubilant Ingrevia and SRF were among the companies that benefited from higher finished-product prices and relatively inexpensive raw material inventories. Supply disruptions involving raw materials, fuel and shipping following the Middle East conflict pushed up both input costs and selling prices across parts of the chemical industry. Consequently, companies holding inventories purchased before the price increases could sell their products at higher prices while retaining the benefit of lower input costs. This temporarily strengthened their margins.
Higher Input Costs Could Weigh on Q2 Margins
The inventory advantage, however, is unlikely to continue at the same level. As companies exhaust their cheaper inventories, they will increasingly have to purchase raw materials at prevailing higher prices. As a result, Q2FY27 margins could come under pressure. Kotak expects the temporary gains seen in Q1 to fade, while weaker demand could further limit earnings growth. The brokerage also highlighted demand destruction as an important concern for the sector. Therefore, chemical companies could face a less favourable operating environment in the second quarter as higher input costs begin to flow through their production costs.
Middle East Disruptions Could Support Some Chemical Segments
Despite the broader margin concerns, supply disruptions could continue to influence pricing in selected chemical markets. Kotak noted that segments such as phenol could continue to benefit from tighter supply conditions for a longer period. If disruptions persist, higher product prices could provide some protection to margins for companies operating in affected segments. However, the impact is likely to vary significantly across chemical categories depending on raw material availability, pricing power and demand conditions.
Agrochemical Demand May Improve in Q2
The agrochemical sector could offer a more positive trend in the second quarter. According to Kotak, a delayed recovery in Kharif sowing could support agrochemical sales in Q2FY27. Furthermore, an easier year-ago base may help improve year-on-year growth. Agrochemical demand faced pressure during the previous year because of erratic rainfall. Consequently, improved sowing activity could provide some support to demand as the current season progresses.
Chemical Sector Outlook Remains Cautious
Despite the strong first-quarter performance, Kotak has maintained a cautious outlook on the Indian chemical sector. The brokerage highlighted several risks, including higher raw material costs, weak end-user demand, potential demand destruction, continued supply disruptions, broader macroeconomic uncertainty and elevated valuations of several large chemical companies. Moreover, earnings performance is expected to remain uneven across chemical segments as companies respond differently to changes in input costs, product prices and supply availability.
Q2 Earnings to Depend on Costs and Demand
Overall, the Indian chemical industry is moving away from the unusually favourable conditions that supported earnings in Q1FY27. As low-cost inventories run down, raw material prices and demand trends are likely to play a much greater role in determining profitability. While certain segments may continue to benefit from supply constraints, the broader industry could see margins normalise in Q2. As reported by knnindia.co.in, for investors and chemical manufacturers, the key factors to watch will therefore be input-cost inflation, pricing power, inventory levels and the recovery in end-user demand.
