India’s chemical industry, which showed early signs of recovery in the first quarter of FY26, is likely to see its growth momentum and margin recovery tested in the second quarter as higher US tariffs begin to weigh on exports, according to India Ratings and Research (Ind-Ra).
In its latest Chemical Insights report, the agency said that the sector recorded around 9 per cent year-on-year revenue growth in 1QFY26, led by strong domestic demand and a rebound in exports due to channel inventory moderation. However, the full impact of the US tariff hike, implemented in late August 2025, will be felt only in 3QFY26 as companies had frontloaded shipments ahead of the change.
Ind-Ra warned that while the long-term demand outlook remains positive, global oversupply, muted pricing, and rising trade barriers are likely to restrain profitability and expansion plans in the near term.
Growth In 1Q Faces 2Q Headwinds
The domestic chemical sector saw a 9 per cent rise in revenue in 1QFY26 compared to 3.5 per cent a year earlier. This improvement was driven by volume gains in specialty and agrochemical segments despite subdued pricing conditions. EBITDA margins held steady at around 14 per cent, slightly up from 13.3 per cent in 1QFY25, suggesting better cost absorption and improved operational efficiency.
However, Ind-Ra noted that the tariff shock from the United States could erode gains made in the first quarter. “Chemical companies likely witnessed the impact of increased US tariffs in 2QFY26, although the full impact will be visible only in 3QFY26,” said Siddharth Rego, Associate Director, Corporates, Ind-Ra.
The specialty segment saw revenue grow about 9 per cent year-on-year in 1QFY26, aided by low base effects and strong performance in fluorochemicals such as hydrofluorocarbons and refrigerant gases. Margins stayed stable at 14–15 per cent despite weak prices, supported by the ability to pass on input costs and efficient fixed-cost utilisation.
Yet, the outlook remains cautious as companies with significant exposure to the US could face revenue losses in the coming months. Ind-Ra said that interest cover for specialty players stood at 8.2x, while overall net leverage remained comfortable at 0.9x, with nearly one-fourth of firms holding net cash positions.
Despite healthy balance sheets, about 20 per cent of players reported leverage above 3x, prompting many to scale down aggressive investment plans. Capital expenditure intensity in FY25 fell to around 10 per cent from 11.6 per cent a year earlier as companies focused on maintenance and committed projects rather than new growth capex.
Agrochemicals and Dyes Show Recovery, But Margins Thin
Agrochemical revenues rose 15.8 per cent year-on-year in 1QFY26 on the back of higher export volumes and restocking demand. Margins improved to 16 per cent from 13.8 per cent in FY25, supported by healthy domestic consumption. However, the segment’s heavy reliance on exports to the US could lead to pressure from tariffs and increased competition in alternative markets.
Domestic-focused agrochemical companies are expected to fare better due to strong monsoon forecasts and stable rural demand. The Indian Meteorological Department has predicted rainfall above the long-period average for FY26, aiding domestic consumption.
The dyes and pigments segment also staged a strong comeback, with revenue up 36 per cent year-on-year in 1QFY26 after two weak years. However, margins remained flat at around 9 per cent, below the mid-cycle average of 11 per cent, as subdued pricing limited profitability gains.
Commodity chemicals, including caustic soda and soda ash, contributed around 40 per cent of the sector’s turnover and recorded stable margins of 11.3 per cent in 1QFY26. The segment benefited from steady volumes and improved cost absorption, though price volatility persisted due to global oversupply.
Across the broader sector, financial metrics remain resilient. Net leverage improved to 0.9x in FY25 from 1.4x in FY24, and interest coverage rose to 5.3x as debt levels declined amid lower inventories and limited new investment. Around 84 per cent of companies maintained interest cover above 3x, indicating sufficient headroom to withstand short-term shocks.
While the long-term capex theme remains intact, Ind-Ra said companies are unlikely to commit to large-scale expansion due to current headwinds. Instead, the focus will shift towards multipurpose facilities that diversify risk and allow flexibility across product lines.
Absolute capex spending in FY25 was 4 per cent lower year-on-year, with a capex intensity of 7.1 per cent, down from 7.4 per cent in FY24. “Players will focus on committed and maintenance capex while adopting multipurpose facilities over specific facility capex,” Ind-Ra said.
The agency concluded that while India’s chemical sector has shown signs of resilience, sustained margin recovery hinges on stabilising global prices, managing tariff exposure, and cautious investment discipline through FY26. |
