Triple whammy! Indian chemical stocks face tariff, overcapacity, and competition concerns. What lies ahead?

Indian chemical stocks witnessed another round of selling pressure in Monday's trade, with companies including AMI Organics, PI Industries, Fine Organic Industries, Rallis India, Vinati Organics, Clean Science and Technology, and Navin Fluorine tumbling up to 6% in intraday deals amid a broader sell-off in the Indian stock market.

These stocks have been under pressure ever since Donald Trump announced 26% tariffs on Indian exports, as the Indian chemical sector has significant exposure to the US stock market. Moreover, analysts stated that a broad-based slowdown in global economic growth would weigh on demand, impacting the domestic chemical industry.

Chemical industry macros come under added pressure

Domestic brokerage Kotak Institutional Equities warned that a global economic slowdown, triggered by the global trade war, would dampen demand for the chemical sector, which supplies key end-use industries such as automotive, construction, and consumer durables.

It added that overcapacity in China is already putting pressure on global prices, and this could worsen as retaliatory tariffs by other countries—likely to follow soon—can further intensify the competition in markets outside the US.

Kotak sees potential risks to the margins and market share of Indian chemical companies, as US-based customers may push for a “sharing of the pain” in response to reciprocal tariffs. At the same time, price hikes in the US could attract new, aggressive competitors to the market. As a result, the long-anticipated recovery in the chemical industry—particularly in pricing—now appears to be indefinitely delayed.

From its coverage universe, Kotak highlighted that the companies most exposed to US sales include PI Industries (43% of revenues), Vinati Organics (20%), Clean Science (17%), and Navin Fluorine (14%).

In the agrochemicals segment, the brokerage noted that even if Indian companies manage to gain market share in the US at China’s expense (due to higher tariffs on Chinese exports), any such benefits may be offset by increased competition in other key markets.

In the refrigerant market, Kotak said China is already subject to significant antidumping duties in the US, so the difference in newly imposed tariffs between China and India is unlikely to meaningfully shift market share in favor of Indian players.

On the contrary, Kotak warned of a possible slowdown in US demand for refrigerants (used in cars and home air conditioners), along with the risk of pricing pressure in other global markets. The brokerage also added that no major new capacities are expected to come up in the US, given the uncertainty surrounding the regulatory and trade landscape over the next four years.

Q4FY25 preview: What’s in store for specialty and agrochemical makers?

Kotak expects most companies under its coverage universe to report modest quarter-on-quarter increases in operating earnings in Q4, supported by a gradual recovery in volumes. "However, the YoY growth will vary depending on the base effect—in many cases, the year-ago base is low. In a couple of instances, such as SRF and Vinati Organics, the pickup in exports during 4QFY25 may be at least partly attributable to stocking up by customers ahead of the US tariff announcement," said the brokerage.

Kotak expects PI Industries to deliver healthy results, driven by its Custom Synthesis and Manufacturing (CSM) business.

Kotak expects moderate quarter-on-quarter EBITDA growth for companies such as Aarti Industries, Aether, Atul, Clean Science, Neogen, and Sharda Cropchem. However, it also anticipates year-on-year earnings declines for Aarti Industries, Deepak Nitrite, Neogen, and Sharda Cropchem—particularly at the PAT level.

Given the seasonal weakness of the quarter, Kotak believes agrochemical companies will likely report subdued results, pressured by weak pricing, elevated channel inventories in India, and cautious distributor placements ahead of the Kharif season—compounded further by unfavorable weather conditions.

While UPL’s earnings growth may appear robust due to a low base, Kotak expects the company to fall slightly short of its FY2025 EBITDA growth guidance of over 50%. For Godrej Agrovet, results are likely to be mixed, with gains from higher palm oil prices offsetting pressure in the Astec, dairy, and poultry businesses.

For Rallis and Bayer CropScience, Kotak forecasts modest revenue growth amid ongoing industry challenges, with Bayer potentially seeing a YoY earnings decline due to continued gross margin pressure—consistent with recent quarters.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.