Dumping by Chinese producers and lower prices led to the fall as compared to gross margins of 39.7 per cent in the year ago quarter and 39.6 per cent in March quarter.
The stock of specialty chemicals maker Aarti Industries was down over 15.5 per cent in trade on Tuesday after its June quarter results and management commentary.
While the results were in line with Street expectations, the lack of margin guidance given multiple uncertainties and headwinds turned investors cautious.
It also led to a cut in earnings expectations for FY25 and FY26.
Prior to the price correction, the stock has been a major outperformer over the past year, gaining 61 per cent as compared to 34 per cent gains of BSE 500.
While the operating profit margin in Q1FY25 was the highest over the last six quarters, the company held back from issuing an outlook on profits/margins.
The earlier guidance was for an operating profit of Rs 1,450 crore to Rs 1,700 crore.
The reason for the cautious approach by the management was aggressive Chinese exports and dumping (70-80 per cent of Aarti's products) which is expected to derail the price recovery process and it is not clear how long this will last.
Furthermore, about 40 per cent of the company revenues are derived from the energy sector where margin volatility is high and long term growth potential may be hit by global trend towards electrification, says Kotak Institutional Equities.
Abhijit Akella and Sumit Kumar of the brokerage have a sell rating on the stock given limited visibility amid an uncertain demand environment (with spreading economic weakness worldwide), intense competition from China, low return on capital employed, high financial leverage and slippages on project ramp-up in the past.
Though there were pricing pressures and supply chain issues, revenues for the June quarter were strong and rose 31.2 per cent over the year ago quarter and were boosted by volume-led recovery in core products and those that were on contract.
There was a recovery in select export products with domestic volumes remaining stable.
Gross margins were under pressure and fell by 190 basis points on a sequential basis to 37.7 per cent.
Dumping by Chinese producers and lower prices led to the fall as compared to gross margins of 39.7 per cent in the year ago quarter and 39.6 per cent in March quarter.
Increases in the prices of key raw materials, such as benzene and aniline, also impacted profits at the gross level.
Anand Rathi Research has trimmed its operating profit considering multiple challenges and maintained its hold recommendation.
Bhawana Israni and Bhavin Soni of the brokerage identify margin trajectory, capex execution and timely recovery in the global agrochemical industry as key triggers in the near term.
The Street will thus keep an eye on the operating profit margins over the next couple of quarters.
Operating profit margins at 15.1 per cent were up 240 basis points over the year ago quarter and 70 basis points sequentially despite the competitive pricing environment due to aggressive supply from China.
While PhillipCapital Research has cut its FY25/26 operating profit estimates by 3-4 per cent, it believes that there would be an imminent price recovery in chemicals in the subsequent quarters and incremental sales from downstream products which could surprise estimates positively.
Surya Patra of the brokerage is optimistic about the outlook and has a 'buy' rating on the stock.
Feature Presentation: Ashish Narsale/Rediff.com
'Real growth is going to come from GLP-1'
Ola Electric's e-bike pricing sparks debate
Markets @ record high on buying in IT stocks
'Industry Bullish About Hiring Freshers'
Smooth ride for tyre exporter Balkrishna Industries