Indian Chemical Sector Recovery Begins, Capital Returns Lag
Equirus report suggests India's chemical sector is recovering, but capital returns may take 2-3 years to stabilize due to capacity utilization.
The Indian chemical industry has finally begun to emerge from a challenging downturn that has plagued the sector for several years. However, investors and industry players may need to exercise patience, as a recent report suggests that the return on capital is not expected to fully bounce back for another two to three years.
According to a sector report titled “Indian Chemicals: The Reset” by Equirus Capital, while the signs of a turnaround are becoming increasingly visible in corporate earnings, the industry is currently navigating a complex transition phase. The recovery is characterized by improving profit margins, even as the utilization of massive new production capacities remains a significant hurdle.
The Gap Between Profits and Asset Utilization
The report highlights a curious disconnect in the current market: profitability is improving faster than the actual usage of industrial assets. Equirus noted that while margin recovery is underway, the return on capital will inevitably lag behind. This delay is primarily due to the heavy investments made during previous cycles, which are yet to translate into meaningful earnings.
The recovery became particularly evident during the first quarter of FY27. An analysis of 72 listed Indian chemical companies revealed significant growth metrics:
- Revenue Growth: Median revenue grew by 22 per cent year-on-year.
- Company Performance: 83 per cent of the surveyed companies reported revenue growth.
- Margin Expansion: The aggregate sector margin rose to 17.4 per cent, up from 15.5 per cent in the preceding quarter.
However, the report offered a word of caution, noting that this margin improvement was partially driven by higher realizations linked to fluctuations in freight costs and crude oil prices, rather than a pure surge in sales volumes.
The Capacity Challenge: New Plants Struggling to Scale
A major bottleneck for the sector is the massive amount of capacity built during the recent investment boom. Currently, there is a stark divide between established players and new entrants:
- Established Specialty Chemical Plants: Operating at utilization levels of approximately 60-75 per cent.
- Newly Commissioned Facilities: Running at much lower levels, between 20-30 per cent.
Equirus suggests that the speed at which these new plants can scale up and fill their production pipelines will be the single most important factor in determining how quickly the sector's returns recover.
Cyclical Downturn vs. Structural Strength
The recent slump between 2023 and 2025 is viewed by analysts as a cyclical issue rather than a permanent structural decline in India's chemical capabilities. The industry faced a "perfect storm" of challenges, including aggressive pricing from China, excess Chinese production capacity, sluggish global demand, and widespread customer destocking.
Despite these headwinds, the long-term outlook for India remains robust. The specialty chemicals market in India, valued at approximately USD 36 billion in 2025, is projected to expand at an annual rate of 11 per cent, potentially reaching nearly USD 61 billion by 2030. This growth rate is expected to outpace both the broader domestic chemical industry and the global specialty chemicals market.
As the sector "finds its footing," the heavy lifting of capital expenditure appears to be largely behind it. Moving forward, the industry is expected to be driven by improved capacity utilization, rising domestic demand, increased import substitution, and the development of more differentiated chemical products.