New Delhi [India], July 13 (ANI): Continued supply restraint by Chinese manufacturers could keep chemical prices elevated for longer, supporting India's specialty chemical sector, while faster-than-expected normalisation in pricing and profit spreads remains the key downside risk, according to a report by Systematix Institutional Equities.

The report said prices of benzene, toluene and other crude-linked feedstocks rose sharply during the quarter. Prices of R-32 and other refrigerant gases also remained firm, benefiting major chemical companies.

Systematix expects chemical manufacturers to post healthy revenue growth during the quarter, driven by strong demand for fluorochemicals, capacity additions and an improved product mix.

Operating margins are also likely to expand year-on-year, although growth in the specialty chemicals segment may remain subdued due to continued weakness in the agrochemicals industry.

In addition, the ramp-up of newly commissioned capacities and higher supplies under contract development and manufacturing (CDMO) businesses are expected to support profitability and drive margin expansion across the sector.

The near-term earnings setup is flattered by factors that have begun to reverse. Noting 'Brent crude has corrected from a peak of ~USD 110/bbl,' the report said, 'pricing and spread gains embedded in 1Q numbers could now pose as headwinds during the remainder of FY27.'

It further noted that, within the sector, the phenolics segment will likely emerge as one of the strongest performers during the quarter, aided by elevated phenol-acetone spreads that remained firm throughout Q1FY27.

According to the report, key factors to watch during the earnings season include the sustainability of refrigerant gas prices and phenol-acetone spreads, which remain cyclical, as well as the impact of lower raw material costs on margins in the second quarter of FY27.

The brokerage also highlighted management commentary on agrochemical demand and channel inventories, visibility of fresh contract development and manufacturing orders (CDMO), and currency movements as key indicators for the sector's near-term performance.

The report, however, flagged key upside and downside risks to the sector. 'Principal downside risk to the sector: Faster-than-expected normalisation of the pricing/spread environment against still-elevated valuation multiples; Principal upside risk: China's supply discipline extending the current pricing cycle,' it noted.

Overall, the report said conventional intermediates manufacturers are likely to absorb higher input costs with a lag, leading to sequential margin compression. In contrast, companies with strong cost pass-through mechanisms or benefiting from favourable commodity price trends are expected to deliver stronger margin performance during the quarter. (ANI)