Crude awakening: Chemical companies face margin pressure as oil-linked costs surge amid geopolitical tensions

High crude oil prices are beginning to weigh on the chemicals sector amid rising feedstock and energy costs. With input costs moving up, concerns around margin pressure have come to the forefront, affecting near-term sentiment. However, the impact is not uniform as segments like commodity chemicals, specialty players, agrochemicals, and intermediates are likely to feel the pinch differently, depending on their ability to pass on costs and their reliance on raw materials.

Despite pressures, the sector has shown resilience. The Nifty Chemicals index is up a modest 0.8% so far in 2026, but it continues to comfortably outperform the broader Nifty 50 index, which lost 9.6%. Nearly 16 out of 20 constituent stocks of the index outperformed the Nifty 50 index suggesting selective optimism in the space despite the challenging cost environment. The analysis is based on 15 May 2026 closing values.

Margin pressure

The prices of key raw materials such as benzene, phenol, propylene, styrene and ethylene which form the backbone of several downstream chemical products have risen 16-80% from the pre-war (US-Israel and Iran) levels. Besides, the disruption in production and trade flow of energy sources, increase in freight and insurance charges, and packaging materials are also headwinds for the chemical sector.


Analysts believe not all companies will be able to fully pass on rising operating costs, putting pressure on margins. An HDFC Securities report estimates EBITDA (earnings before interest, taxes, depreciation and amortisation) margins for its chemicals coverage universe may decline by 100-600 basis points in 2026-27 versus 2025-26. Segment-wise, commodity chemicals remain under pressure due to high crude-linked input costs and persistent Chinese oversupply, limiting pricing recovery. Specialty chemicals, however, are relatively better placed because of stronger customer stickiness and value-based pricing.

Also read: How gold ETFs, tax changes, and recycling incentives can reduce India’s dependence on gold imports

Earnings outlook

For the March 2026 quarter, the earnings picture remains mixed. Companies with differentiated products and long-term customer contracts have performed relatively better, particularly those in fluorochemicals and CDMO (contract development and manufacturing organisation) segments. Additionally, the presence of low-cost raw material inventories has provided a buffer during the quarter, as most chemical companies typically maintain around three months of inventory.

A recent report by 360 One Capital notes that this inventory advantage is likely to partially cushion companies even in the June 2026 quarter. However, the full impact of rising raw material costs, higher domestic logistics expenses, and demand-side pressures is expected to start reflecting from the September 2026 quarter onward.

Anil R., Senior Research Analyst at Geojit Investments, echoes a similar view. He notes that the complete effect of elevated crude prices and freight costs is likely to be visible from the first quarter of 2026-27, with earnings volatility expected to persist in the near term until crude prices stabilise and freight costs ease. Despite near-term challenges, analysts remain constructive on the long-term outlook for the chemicals sector. Structural drivers such as increasing global interest in sourcing from India to diversify supply chains, a rising share of speciality chemicals in product portfolios, operating leverage benefits, and significant capacity expansions undertaken by companies are expected to support future growth.

Karan Kamdar, Research Analyst – Small & Midcaps at Choice Institutional Equities, believes the sector is well-positioned for structural growth. He maintains a positive stance on segments such as fertilisers, insecticides, fluorochemicals, and textile specialty chemicals. Key tailwinds, according to him, include the China plus one strategy, global strategic stockpiling, emerging demand for battery chemicals, and the potential easing of US tariffs.

Input costs climb

Investor approach

Analysts are increasingly favouring companies with relatively lower exposure to volatile feedstocks (for example, fluorine remains relatively less linked to the crude oil cycle, whereas rising prices of crude-linked feedstocks such as ethylene and propylene can pressure margins for companies manufacturing downstream chemicals, plastics and polymers), and stronger underlying fundamentals.

Also read: Weakening currency: RBI weighs measures including rate hike to stabilise rupee

Firms with robust balance sheets, clear revenue visibility, and a higher share of domestic business are seen as better placed to navigate the current environment. In addition, companies moving up the value chain—enhancing scale, complexity, and product mix—are expected to be better positioned for long-term growth.

Against this backdrop, Anil advocates a selective approach rather than a broadbased sector allocation, with a clear preference for specialty chemicals over commodity- oriented plays. He recommends a gradual accumulation strategy, suggesting that investors build exposure through smaller, staggered investments.

At the same time, several risks remain on the radar. A sustained rise in crude oil prices, weak demand across downstream industries, persistent supply constraints in petrochemicals and natural gas, high logistics costs, and potential rupee depreciation could weigh on sector performance. Here is how the three companies of the Nifty Chemicals Index with highest buy ratings on Bloomberg are placed:

Navin Fluorine International

• Reported robust results in the March 2026 quarter, with adjusted earnings per share beating Bloomberg consensus by 22%
• Healthy growth across all segments, supported by margin expansion
• Earnings visibility remains strong due to improved execution, and ongoing capacity additions
• Continued efforts to expand product portfolio and global partnerships
• High-Performance Products (HPP) segments’ growth led by ramp-up of R-32 (refrigerant gas)
• Specialty chemicals & CDMO segments’ improvement driven by debottlenecking of multipurpose plants

SRF

• Delivered solid results in the March 2026 quarter
• Healthy performance across key segments—Chemicals, Performance
• Films & Foils, and Technical Textiles
• Fluorochemicals’ growth supported by high domestic and export volumes
• Performance films & foils’ growth aided by volume expansion
• Specialty chemicals segment continues to face pricing pressure due to competition from China, but market share has been defended through cost control and process improvements
• Future growth levers are backed by diversification and a strong capex pipeline
• Tailwinds include ramp-up of newly commissioned plants

Aarti Industries

• Strong operating performance in the March 2026 quarter
• Focus on product portfolio expansion and higher capacity utilisation, supported by selective backward integration initiatives
• Risk management measures include redirecting volumes to the US, EU, and other markets
• Well-placed to benefit from operating leverage, improved utilisation, and progress in high-value chemistries.