US tariffs may pressure India's chemical sector margins: CRISIL

India’s specialty chemicals sector faces renewed headwinds, with trade-related uncertainties stemming from recent US tariff actions undermining its fragile recovery in profitability, according to CRISIL Ratings.

The sector’s operating margin, which was earlier expected to improve to 15.5–16 per cent in fiscal 2026, may now retreat by around 150 basis points to 14–15 per cent—in line with levels seen in the previous two fiscals. This marks a potential third consecutive year of pressure on realisations despite recovering volumes.

“The anticipated drop of about 150 bps in profitability will directly impact the return on capital employed, which is already expected at a decadal low of ~13 per cent this fiscal and the next, compared with 16-18 per cent before the pandemic. While debt-to-EBITDA is expected to sustain below 2 times for specialty chemical makers rated by us, persistent profitability pressures can weaken earnings and debt protection metrics, and affect credit profiles,” Poonam Upadhyay, director, Crisil Ratings said in a release.

The imposition of an additional 20 per cent tariff on Chinese chemical exports by the US since February 2025 has heightened the risk of aggressive dumping by Chinese manufacturers. With China grappling with an economic slowdown and surplus capacity, excess inventory is expected to be diverted to India and other global markets.

Data from Crisil Ratings, which analysed 121 rated firms representing nearly one-third of the fragmented ₹4 lakh crore (~$46.78 billion) specialty chemicals industry, reveals significant margin risks, particularly for players in commoditised segments such as polyvinyl chloride, and those supplying intermediates to agrochemical and pharmaceutical industries.

Over the past two fiscals, Indian specialty chemicals companies have seen a 15–20 per cent decline in both domestic and export realisations due to a surge in Chinese imports and intensifying competition. Despite stable demand, further price erosion could undermine profitability and curtail recovery momentum.

"With realisations under pressure, the Indian specialty chemicals sector’s 7–8 per cent revenue growth next fiscal will be largely volume-driven. Domestic revenues, forming 63 per cent of the pie, are expected to grow 8–9 per cent, while exports, may see just 4–5 per cent growth. But with the rising threat of Chinese dumping, further fall in prices could deepen competitive pressure, push realisations to new lows, and impact profitability in an already fragile environment,” said Anuj Sethi, senior director, Crisil Ratings.

However, the impact will vary across firms. Companies with balanced portfolios or strong presence in resilient end-user sectors are expected to better withstand the shocks, while those heavily reliant on exports or commoditised products could face heightened profitability pressure.

ALCHEMPro News Desk (HU)