New Delhi [India], August 19 (ANI): Profit gains made by several Indian chemical companies in the first quarter due to higher prices are likely to weaken in the second quarter as companies shift to costlier raw materials, while weaker demand remains a key concern, Kotak Institutional Equities said in a report.

The brokerage said most chemical companies are likely to have used up their low-cost inventories during the first quarter and would now need to buy raw materials at higher prices. This could put pressure on margins in 2QFY27.

However, supply disruptions linked to the Middle East may keep prices and margins higher than normal in some chemical segments, including phenol, for some time, it said.

The report noted a stronger-than-expected first quarter for several chemical intermediate producers. Kotak's coverage universe recorded 17 per cent year-on-year sales growth and 22 per cent growth in EBITDA in 1QFY27.

Companies such as Aarti Industries, Deepak Nitrite, Jubilant Ingrevia and SRF benefiting from higher finished-goods prices and low-cost inventories.

The gains came as the conflict in the Middle East disrupted the supply of raw materials, fuel and shipping, pushing up costs and prices across the chemical industry. Companies that still had cheaper raw materials bought before the price rise were able to sell products at higher prices while their input costs had not risen to the same extent.

Kotak expects this benefit to fade as companies use up their cheaper inventories and begin buying raw materials at higher prices. 'Fortuitous gains will mostly fade next quarter, while demand destruction remains a key concern,' the brokerage said.

At the same time, Kotak expects the agrochemical segment to see some improvement from the second quarter. The delayed pickup in Kharif sowing is expected to support sales growth, while the sector will also benefit from an easier year-ago base, as growth was affected by erratic rainfall last year.

The brokerage retained a cautious view on the chemical sector, citing the possibility of slower demand due to higher prices and macroeconomic uncertainty, along with elevated valuations across several large companies.

It said the outlook would remain uneven as the impact of higher prices and supply disruptions plays out across different chemical segments.

Overall, Kotak expects the sector to move from the unusually favourable conditions seen in the first quarter towards a more normal earnings environment, with demand and input costs becoming more important factors for chemical companies in the coming quarters. (ANI)