Chemicals Q2FY21 Results Preview - On the road to recovery! - HDFC Securities

Mr. Nilesh Ghuge & Harshad Katkar, Institutional Research Analyst, HDFC Securities

- Our chemical universe is expected to report a stable 2Q, despite the concerns of the COVID-19 pandemic. Revenue for our coverage universe is likely to improve by ~2.9/14.7% YoY/QoQ and EBITDA may be up by 4.4/7.5% YoY/QoQ. The nationwide lockdown has impacted operations of the majority of chemical companies in 1QFY21, but the pick-up has been rapid in 2Q.

- Plants are currently operating at the utilisation of 70-90% of the pre-COVID level. Plant utilisations of companies that cater to end-user industries engaged in essential services such as pharmaceuticals and agrochemicals are even higher. The Automobile industry has shown signs of recovery in 2Q; thus, in the ensuing quarters, we expect a recovery in the segments of companies catering to the demand from the automobile industry.

- The average Brent price was up 36% QoQ to USD 42.7/bbl in 2Q. Crude oil has recovered in 2Q from its recent lows while key input prices are either up or flattish sequentially. Therefore, we expect that, in 2Q, blended gross and EBITDA margins would decline.

- Alkyl Amines (AACL) and Balaji Amines (BLA): Revenues shall increase, given (1) an increase in raw material prices, particularly methanol (+17.5% QoQ) and acetic acid (+7.5% QoQ), (2) higher sales volumes, and (3) higher product prices (DMA-HCL, Acetonitrile, DMF). We expect EBITDA margins for AACL/BLA to decline from 31.6/24.3% in 1Q to 27.2/21.5% in 2Q.

- Aarti Industries (AIL): AIL's business caters to the pharma and agrochemical industries (60%), which belong to the essential services category, and which have been impacted positively by the pandemic. However, the remainder businesses did suffer as the discretionary spends fell due to the pandemic. Discretionary spending has now increased, and hence the non-essential services business has started to recover gradually. Blended plant utilisation has inched up from 50% in April to 90% in September. Nitrotoluene and Hydrogenation plants are operating at 60-70% capacities in 2Q.

- SRF: Strong growth to continue in the speciality chemicals and packaging film segment. Recovery in the automobile sector should support the refrigerant gas business and technical textiles segment. We expect margin for packaging film business to correct owing to the ease of supply.

- Galaxy Surfactants (GSL): The lockdown had impacted its operations in 1QFY21; however, the pick-up was rapid in 2Q. Inventory levels are healthy and rural demand is recovering as well. The volatility of demand is being managed efficiently by higher vendor and customer engagement. Countries in AMET managed the pandemic well and had no lockdowns; the company's Egypt plant remained fully functional in 2Q as well.

- Navin Fluorine (NFIL): Speciality chemicals shall demonstrate strong YoY growth, owing to robust demand from agrochemical and pharma industries. Refrigerant gases segment is expected to improve on the back of a recovery in the automobile sector. Recovery in the CRAMS segment and flat fluorspar price could lead to EBITDA margin improving sequentially by ~112bps.

- Vinati Organics (VO): Demand for IBB is expected to improve QoQ as the company has acquired a new customer and BASF has resumed production of Ibuprofen. EBITDA margin shall be down to 41% vs 42% in 1Q, attributable to a change in product mix (lower sales of high-margin ATBS).

Source : Equity Bulls

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