Is Soap An Emulsifier or Not

Q1 has been a challenging quarter for the chemicals sector with multiple headwinds including RM inflation, increased energy/ power cost, elevated logistics costs, and inventory destocking at customer end. However, demand environment remained good across the chemical segments excluding domestic agrochemicals where inventory destocking and delayed rains affected Q1 sales. Amidst the European issues, US inflation, Russia-Ukraine war, exports demand didn’t exhibit any slackness and managements indicated neither any demand cutbacks, order cancellations in Q1, nor in early part of Q2. On the positive side, generally chemicals prices have been softening over the past couple of months which shall start reflecting in Q2 numbers. Barring any unforeseen events, chemicals sector is expected to perform better QoQ and even the domestic agrochem is likely to do well due to overall good monsoon.

Management comments on operating environment

- RM inflation – During Q1, RM inflation impacted gross margins, however prices have started alleviating. Companies have been able to take price increases to pass on the RM inflation

- Energy/ power/ coal costs – Increased energy costs has been impacting opex, coal prices have surged by 2-3x YoY which hasn't been completely passed on

- Logistics – Increased logistics also impacted opex, however during past few weeks the freight rates have started coming down which shall start benefitting companies

- Exports – Demand environment remained/ remains good despite European issues, US inflation etc. Companies haven't witnessed any demand side challenges

- Domestic agrochem – Delayed monsoon in some parts of the country led to postponement in demand, coupled with inventory destocking, Q1 sales were affected. However, managements indicated that during July sales were back on track which shall aid Q2

Operating performance in Q1FY23

- Total 46 (excl. Tata Chem. And UPL) – Gross margins contracted more QoQ than YoY. Opex jumped 231bps YoY and 46bps QoQ. EBITDA margins thus contracted 146bps YoY and 83bps QoQ

- Large (18) – Gross margins contraction was lower while Opex jumped YoY and QoQ leading to EBITDA margin contraction, both YoY and QoQ

- Mid-size (19) – Gross margins contracted QoQ while increased YoY. Opex was marginally lower QoQ while higher YoY

- Small (9) – Gross margins contracted 359bps QoQ and 180bps YoY, opex was lower QoQ while up substantially YoY leading to EBITDA margin contraction, both YoY and QoQ

Performance of coverage companies

- Dhanuka Agritech – Muted Q1, margins impacted due to normalisation of costs, confident of double-digit growth in FY23E

- PI Industries – Supernormal performance from CSM segment with 42% YoY growth supported by volumes, FY23 guidance upped to 20%+ revenue growth with margin expansion and higher capex at Rs6.0-6.5bn

- UPL – Strong Q1 however WC deteriorates, elevated net debt at USD3.4bn, expect USD400mn debt reduction in FY23, guidance upped to 12-15% revenue and 15-18% EBITDA growth

Download the full report: Chemicals - Q1FY23 Results Review and Concall Highlights - Centrum18082022.pdf