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Analysts betting big on chemical companies post Covid-19qrcode

−− But will these firms capitalise on this golden opportunity?

Apr. 30, 2020

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Apr. 30, 2020

Despite the Covid-19-induced shutdown, one sector that remains resilient in the stock market is chemicals. Shares of most companies from the sector have witnessed a turnaround in the last few days ― after an initial blip due to the bearish sentiments in the global and domestic markets ― as analysts expect a promising future.
 
Most analysts see chemical makers including Navin Fluorine International, SRF, PI Industries, Aarti Industries, Galaxy Surfactants, Camlin Fine Chemicals, Sudarshan Chemicals, Rallis India, UPL and Vinati Organics remaining in focus. That, of course, is provided these players handle the opportunity well.
 
Besides, most of them have already either fully or partially restarted their operations, signalling they would be less impacted due to the slowdown.
 
This decade for chemicals?
 
According to Ambit Capital Research, Indian chemicals players will benefit from the expanding specialty chemicals market globally led by growing new applications alongside manufacturing shifts from China ― which has been battered by reliability and transparency woes; and EU, due to its ageing workforce; focus on innovation, and M&As.
 
“Specialised engineering/chemistry talent availability in India would drive replication of IT/pharma (unlike textiles) in chemicals. Managements investing in building product capabilities like chemistry platforms, process engineering; manufacturing infrastructure like compliances on QSHE and accreditations; and superior client engagement, while entering multiple application areas will help recreate Infy/TCS/Sun/Divi’s in the next decade,” said Ambit.
 
PI and SRF outscore peers on management capability, capital allocation and ability to handle scale. Aarti and Navin Fluorine are promising as they upgrade on organisational capabilities, it added.
 
McKinsey’s dossier
 
In its “The Indian chemical industry: Unleashing the next wave of growth”, report by McKinsey in February 2020, it said worldwide trends affecting the global chemical industry could lead to near-term opportunities for chemical companies in India. How chemical players prioritise and tap this value-creating potential could shape the future of the industry in India as well as the country’s trade performance.
 
Today, India has a chemical trade deficit of $15 billion. Analysis of India’s chemical exports and imports, coupled with a review of opportunities emerging from global trends, suggests two investible themes: Building self-sufficiency in petrochemicals to plug the domestic supply shortfall of 52 per cent (by volume) in petrochemical intermediates ― Six value chains make up around 77 per cent of this shortfall, creating an opportunity worth about $11 billion; and ramping up exports in select areas, such as specialty chemicals, to obtain a larger share of global value, McKinsey said.
 
The chemical industry already contributes significantly to India’s trade volume. Capturing emerging opportunities in the near term could make a positive difference to Indian chemical companies and to the industry overall.
 
“Loss of China (25 per cent share) as a reliable partner and continued shifts from EU/Japan (17 per cent/7 per cent share) mean share of India (3 per cent) will rise meaningfully. Availability of talent in chemistry and engineering will act to India’s advantage,” Ambit Capital said.
 
The lockdowns in India and many parts of the world have resulted in supply chain disruptions despite stable order flows. Major chemical and allied manufacturing companies in India are sitting on healthy order books from their customers across the globe but supplying the products remains a challenge. Vinati Organics, Advanzed Enzyme, SRF and Navin Fluorine have high export dependency in their overall revenue profile.
 
Dolat Capital said chemicals being the basic building blocks of end-user applications such as pharmaceuticals, agro-chemicals, paints, construction material, automobile parts, textiles, and packaging, among others, are most likely to feel the jerk of the demand recoil from these sectors. However, “be it specialty or a commodity, chemicals will most likely see loss in demand”, it said in a research report, and added “but demand for pharmaceuticals and agro-chemicals may not sharply be impacted, though others may feel the pain”.
 
Shares of SRF, Aarti Industries, Navin Fluorine, Tata Chemicals, UPL, Vinati Organics, Sudarshan Chemicals and PI Industries gained between 2 and 8 per cent in early trade on Monday. After pharma stocks, year-to-date and monthly returns for this sector is praiseworthy.

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