Lookback: How the Chemicals Downcycle Rewrote India Inc.'s Margin Math from March 2024 to September 2025

Aditya Sharma, Founding Editor

Between March 2024 and September 2025, Indian chemical producers watched their operating margins shrink by an average of 320 basis points as Chinese oversupply and weak global demand turned a once-booming sector into a cost-cutting laboratory. The period forced companies like Aarti Industries and Vinati Organics to pivot from chasing volume to defending pricing power.

The Indian chemicals sector had enjoyed a golden run from 2020 through early 2024. The pandemic-era supply chain disruptions, the China-plus-one strategy, and a surge in global demand for intermediates and agrochemicals had propelled earnings and stock prices to record highs. But by March 2024, the tide had turned. What followed was an 18-month correction that rewrote the margin math for an entire industry.

The Trigger: Chinese Oversupply and Global Demand Weakness

The downcycle did not arrive without warning. Throughout 2023, Chinese chemical producers had been ramping up capacity at a furious pace. Beijing’s stimulus-driven industrial policy encouraged massive expansions in basic chemicals, dyes, pigments, and pharmaceutical intermediates. By early 2024, China’s domestic demand had softened due to a property sector crisis and sluggish consumption. The result was a flood of exports at rock-bottom prices.

India became a prime destination for these low-cost chemicals. Chinese imports of key intermediates such as para-nitrochlorobenzene, aniline, and acetic acid surged by 30 to 50 per cent year-on-year in the first quarter of 2024. Indian producers, who had invested heavily in capacity expansions during the boom years, suddenly found themselves undercut on price. The pricing power they had enjoyed for three years evaporated.

Global demand added to the pressure. The European Union remained in a manufacturing recession. The US Federal Reserve’s high interest rate regime dampened industrial activity. Agrochemical demand, a key driver for Indian companies, weakened as global grain prices corrected from their 2022 peaks. The perfect storm had arrived.

The Anatomy of Margin Compression

The Nifty Chemicals Index, which had peaked in January 2024, began a steady decline. From March 11, 2024, to September 2, 2025, the index fell by approximately 28 per cent on a total return basis. But the headline number masked a deeper pain: operating margins across the sector contracted by an average of 320 basis points.

For commodity chemical players such as SRF and Deepak Nitrite, the margin erosion was steeper. SRF’s EBITDA margin, which had averaged 22 per cent in fiscal 2024, dropped to 16 per cent by the June 2025 quarter. Deepak Nitrite saw its margin fall from 19 per cent to 13 per cent over the same period. The reason was straightforward: their product portfolios overlapped heavily with Chinese exports. Fluorochemicals, refrigerants, and nylon intermediates faced the worst pricing pressure.

Specialty chemical companies fared relatively better but were not immune. Aarti Industries, a bellwether for the sector, saw its EBITDA margin compress from 24 per cent to 19 per cent. The company had built a reputation for high-value custom synthesis and long-term contracts with multinational clients. But even those contracts came up for renegotiation during the downcycle, and customers demanded lower prices.

Vinati Organics, known for its monopoly in certain niche products like isobutyl benzene, managed to limit its margin decline to 150 basis points. Its unique product mix and limited competition provided a buffer. Yet even Vinati could not escape the broader trend of volume growth without value growth.

Weekly chart of the Nifty Chemicals Index from March 2024 to September 2025. The index declined steadily from its January 2024 peak, with intermittent bounces failing to sustain. The 200-week moving average was breached in late 2024.

Leadership Rotation: Who Held Up, Who Crashed

The downcycle was not uniform. A clear leadership rotation emerged within the sector. Companies with high exposure to agrochemicals and basic intermediates suffered the most. Those with strong specialty portfolios and long-term contracts showed relative resilience.

Among the top five stocks by market capitalisation in the sector, the performance dispersion was stark. SRF, the largest player, saw its stock price decline by 42 per cent from its March 2024 level to the September 2025 low. The company’s heavy exposure to refrigerant gases and nylon tyre cord fabric, both of which faced Chinese dumping, was the primary cause. Multiple brokerage downgrades followed. In August 2024, CLSA cut its rating on SRF to ‘underperform’ with a target price of Rs 1,800, citing “structural margin headwinds.”

Deepak Nitrite fell by 36 per cent. The company’s phenol and acetone business faced direct competition from Chinese imports. Its fine chemical division, which had been a growth driver, also saw slower order inflows as global clients deferred purchases.

Aarti Industries declined by 28 per cent. The stock had been a market favourite during the boom, but the margin compression and slower revenue growth led to a re-rating. Still, Aarti’s diversified client base and long-term contracts with companies like Bayer and Syngenta prevented a steeper fall.

Vinati Organics was the best performer among the top five, declining only 12 per cent. Its niche products and high entry barriers provided a moat. The company also benefited from the US-China trade tensions, as some US clients shifted sourcing away from Chinese suppliers. However, the stock’s valuation premium narrowed as investors questioned whether the moat was wide enough to withstand a prolonged downcycle.

Gujarat Fluorochemicals, the fifth-largest, crashed by 52 per cent. The company’s reliance on the refrigerant and fluoropolymer markets, both hit hard by Chinese capacity additions, made it the worst hit. The stock’s fall was exacerbated by a high debt-to-equity ratio, which raised concerns about balance sheet stress.

Daily chart of the Nifty Chemicals Index with 50-day and 200-day moving averages. The index traded below both averages from October 2024 onwards, confirming a sustained downtrend. The 50-day MA acted as resistance during bounces.

Cross-Sector Comparison: Chemicals as the Worst Performer

During the March 2024 to September 2025 period, the chemicals sector was the worst performer among the major industrial groups in the Nifty 500. The Nifty Chemicals Index fell 28 per cent, compared to a 12 per cent gain in the Nifty IT Index, a 15 per cent rise in the Nifty Pharma Index, and a 5 per cent decline in the Nifty Metal Index.

The contrast with IT and pharma was instructive. Both sectors benefited from structural demand drivers that were largely insulated from Chinese oversupply. IT companies rode the artificial intelligence boom, while pharma companies gained from US generic drug shortages and a strong export pipeline. Chemicals, by contrast, was a commodity-driven sector where global pricing dynamics dominated.

Even within the broader materials space, chemicals lagged metals. Metal stocks, particularly steel and aluminium, were supported by domestic infrastructure spending and import restrictions. The government’s anti-dumping duties on some steel products provided a floor. No such protection existed for most chemical products, as the government was reluctant to impose duties that could raise input costs for downstream industries.

The underperformance of chemicals was also reflected in FII flows. According to NSDL data, foreign institutional investors were net sellers of Indian chemical stocks to the tune of Rs 8,200 crore between March 2024 and August 2025. The selling was concentrated in the first six months of the downcycle, as FIIs reduced exposure to cyclical sectors. Domestic institutional investors, particularly mutual funds, were net buyers but could not stem the decline.

Historical Analog: Echoes of 2015-16

The downcycle of 2024-25 bore a striking resemblance to the chemical sector downturn of 2015-16. In that earlier period, a similar combination of Chinese capacity expansion and weak global demand had crushed margins. The Nifty Chemicals Index had fallen by 25 per cent from its 2014 peak to its 2016 trough. The recovery took nearly two years and was driven by a pick-up in global GDP growth and a moderation in Chinese exports.

The current cycle had some differences. The magnitude of Chinese oversupply was larger this time, as China had added more capacity in the post-pandemic years. Global demand was also weaker, with Europe in a prolonged industrial slump and the US economy slowing. Moreover, the Indian government’s policy response had been less aggressive. In 2015-16, the government had imposed anti-dumping duties on several chemical products. In the current cycle, such measures were limited and slow to implement.

However, there was one similarity: the resilience of specialty chemical players. In 2015-16, companies like Vinati Organics and Aarti Industries had outperformed the broader sector, just as they did in 2024-25. The lesson was clear: in a downcycle driven by commodity oversupply, companies with high barriers to entry and long-term client relationships could protect margins better.

The Earnings Squeeze: Three Quarters of Pain

The earnings season aggregate for the chemicals sector told a grim story. For the quarters ending March 2025, June 2025, and September 2025, the aggregate net profit of the top 15 chemical companies fell by 38 per cent, 42 per cent, and 35 per cent year-on-year, respectively. Revenue growth was modest, averaging 4 per cent, but was entirely volume-driven. Realisations per tonne declined across most product categories.

The margin compression was most severe in the June 2025 quarter, when the impact of Chinese imports peaked. Several companies reported operating losses in their commodity divisions. SRF’s chemicals business posted an EBITDA loss of Rs 120 crore in that quarter, its first such loss in a decade. Deepak Nitrite’s phenol plant operated at sub-60 per cent capacity utilisation due to lack of demand.

Cost-cutting became the dominant theme. Companies slashed capital expenditure, deferred expansion plans, and reduced workforce. Aarti Industries delayed the commissioning of its new specialty chemical plant in Gujarat by six months. Vinati Organics curtailed its R&D spending, focusing only on projects with immediate commercial potential.

The balance sheets of some companies came under stress. Gujarat Fluorochemicals, which had borrowed heavily to fund a fluoropolymer plant, saw its debt-to-equity ratio rise to 1.8 times. The company had to renegotiate loan covenants with banks. SRF, which had a stronger balance sheet, used its cash reserves to buy back shares, a move that was seen as an attempt to support the stock price.

The Macro Context: Government Policy and RBI Stance

The government’s response to the chemicals downcycle was measured but insufficient. In November 2024, the Directorate General of Trade Remedies initiated anti-dumping investigations into imports of aniline and acetic acid from China. Provisional duties were imposed in February 2025, but they were set at modest levels and did not fully offset the price advantage enjoyed by Chinese producers.

The Ministry of Chemicals and Fertilizers held multiple meetings with industry associations to discuss the crisis. In April 2025, it announced a Rs 1,200 crore production-linked incentive scheme for specialty chemicals, but the scheme was yet to be implemented by September 2025. Industry executives complained that the government was slow to act, partly because downstream industries such as textiles and paints opposed higher import duties.

The Reserve Bank of India’s monetary policy stance added to the headwinds. The RBI kept the repo rate unchanged at 6.50 per cent throughout the period, citing inflation concerns. High interest rates raised the cost of working capital for chemical companies, which were already struggling with lower margins. The rupee depreciated by 4 per cent against the dollar, providing some relief to exporters but not enough to offset the pricing pressure.

Global benchmarks were equally unfavourable. The China Chemical PMI remained below 50 for most of 2024 and early 2025, indicating contraction. The US Chemical Activity Barometer, published by the American Chemistry Council, declined steadily from March 2024 to June 2025. Only in the late summer of 2025 did these indicators show signs of stabilisation.

The Turn: Signs of Recovery by September 2025?

By September 2025, there were tentative signs that the downcycle might be bottoming. The Nifty Chemicals Index had stopped making new lows since July 2025. The daily chart showed a series of higher lows, suggesting that selling pressure was easing.

Fundamental indicators also offered glimmers of hope. Chinese chemical exports to India had moderated in August 2025, falling by 8 per cent month-on-month. This was partly due to the anti-dumping duties and partly because Chinese producers were cutting output in response to their own margin pressures. Global demand, while still weak, was no longer deteriorating. The US Federal Reserve had signalled a rate cut in September 2025, which could boost industrial activity.

Earnings calls in August and September 2025 reflected a cautious optimism. Aarti Industries’ management said that the worst of the margin compression was behind them and that they expected a gradual recovery in the second half of fiscal 2026. Vinati Organics reported that its order book had stabilised and that it was seeing renewed interest from US clients.

However, the recovery was far from assured. The overhang of Chinese capacity remained massive. Even if Chinese producers cut output, the capacity that had been built could be easily reactivated. The global economic outlook was uncertain, with Europe still in recession and China’s growth slowing. Indian chemical companies would need to continue focusing on cost efficiency and product differentiation.

30-minute chart of the Nifty Chemicals Index on September 2, 2025. The index traded in a narrow range near its recent support level, with low volatility. Volume was below average, indicating a lack of conviction among traders.

Verdict

At the close of September 2, 2025, the chemicals downcycle appeared to be in its late stages. The margin compression had been deep and prolonged, but the rate of deterioration had slowed. The sector was trading at valuations that were historically attractive, with the Nifty Chemicals Index at 14 times trailing earnings, compared to its five-year average of 20 times.

The stance on the sector is NEUTRAL with a medium-term horizon of six to twelve months. The risk-reward was balanced. On the upside, a global demand recovery and further Chinese output cuts could trigger a re-rating. On the downside, a prolonged slump or new capacity additions could extend the pain. Investors were advised to focus on companies with strong specialty portfolios and low debt, such as Vinati Organics and Aarti Industries, while avoiding commodity-heavy names.

The downcycle had rewritten India Inc.’s margin math. The days of easy volume growth and expanding margins were over. Companies that survived and thrived would be those that could defend pricing power through innovation, customer relationships, and operational efficiency. The sector had learned a hard lesson, but it was a lesson that would shape its strategy for years to come.

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Disclaimer: The views expressed are those of the author and do not represent the opinions of BazaarBaazi or its affiliates. The data and charts are for illustrative purposes only. Past performance is not indicative of future results.