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Sunny days ahead for Indian chemicals industry; experts bullish on these stocksqrcode

−− The Indian chemicals sector has built up world-class capabilities over the past few years and been moving up the value chain at a rapid pace.

Jun. 22, 2020

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Jun. 22, 2020

Sunny days ahead for Indian chemicals industry; experts bullish on these stocks

COVID-19 has brought an opportunity through low labour costs to compete with China in exports of speciality chemicals, believe experts.


For long, China has been dominating specialty chemicals export market, and currently it sells about 2.7 times that of India.


However, factors like shutdown of capacities amid environmental deterioration, the rising cost of labour and trade-related supply disruption are threatening China, which is seen as an opportunity for India.


The Indian chemicals sector has built up world-class capabilities over the past few years and has been moving up the value chain at a rapid pace.


There has already been a shift in production from China to India over the past few years due to increasing costs and environmental issues in China.


Jyoti Roy, DVP-Equity Strategist, Angel Broking, expects an acceleration in the trend of global companies diversifying their supply chain away from China post-COVID-19, with the Indian chemicals industry uniquely placed to capture a significant part of the opportunity.


Vinod Nair, Head of Research at Geojit Financial Services points out in the last few years the Indian chemicals sector is benefitted hugely from high sourcing from India by shifting from China due to regulatory restrictions for pollution, cost optimisation and diversification.


As per brokerage firm KRChoksey Shares and Securities, India has a strong base in the top three export segments in specialty chemicals – agrochemicals (nearly 27 percent of India’s specialty exports), dyes and

pigments (nearly 19 percent) and intermediates for active pharmaceutical ingredients (APIs about 18 percent).


Overall, while India exported specialty chemicals worth $23.8 billion in FY19, China exports stood at $173 billion, indicative of the huge opportunity that lies ahead for Indian specialty players.


"Our analysis show that Indian specialty names operate at better ROE/EBITDA margin profile than international peers (although at a lower scale of operation) indicating enough headroom to compete effectively," said KRChoksey.


The brokerage sees idle installed capacities available across chemicals sub-segments which can be utilised to ramp-up production and fulfill immediate requirements of incremental demand without incurring

additional CAPEX in the near term which is cash flow positive.


Runjhun Jain, AVP - Equity Research (Retail) at Nirmal Bang, also believes the current trend would bring the Indian chemical sector into the limelight, as global giants across the world are looking for a second source to de-risk their businesses.


"Many companies in the sector have done the CAPEX in recent past to further increase their capabilities, capacities and to integrate backward to reduce their dependence on Chinese sources," Jain added.


Deepak Jasani, Head Retail Research, HDFC Securities said Indian companies need to be backward integrated and have diversity in raw material sources.


"They need to grow in areas apart from agrichem and pharma and invest monies in building own proprietary technologies which may involve large CAPEX and outgo. Hence capital allocation policies would be key," he said.


In views of Siddharth Sedani, Vice President- Equity Advisory at Anand Rathi Shares and Stock Brokers, key factors of Indian chemicals companies’ long-term growth include operations in key markets, established lines of communication with the big chemicals companies globally, strong client relationships, niche chemistry capabilities, integrated operations (backward & forward) and focus on product and process R&D. Indian chemical companies have most of these in varying proportions.


Stocks to buy


Brokerage: KRChoksey Shares and Securities


UPL


The brokerage said it continues to have a positive outlook on the long-term performance of this stock.


"We believe that further streamlining and improving the integration of the combined entities (Arysta) along with resulting larger global presence and a greater portfolio will help enhance the company’s performance," said the brokerage.


The brokerage has a 'buy' on the stock with a target price of Rs 614, lower than the previous target price of Rs 667.


Aarti Industries


The brokerage continues to remain positive on Aarti Industries in the light of shifting of manufacturing bases outside of China and recent capacity expansion.


The company’s CAPEX plans for both its segments (specialty chemicals and pharmaceuticals), well- established backward integration facilities, focus on a rising share of high-value products show strong earnings visibility over the next 2-3 years, the brokerage said.


"We maintain a 'buy' call on the stock with a target price of Rs 1,194. We do not envisage any material impact of the recent termination of one long-term supply contract on our forecast period," said the brokerage.


Analyst: Jyoti Roy, DVP Equity Strategist, Angel Broking


PI Industries


PI Industries is a leading player in providing custom synthesis and manufacturing solutions (CSM) to global agrochemical players.


The CSM business accounted for 66 percent of the company’s revenues in FY19 and is expected to be the key growth driver for the company in the future.


The company has posted a decent set of numbers for Q4FY2020 despite COVID-19 related supply chain issues and has also given a more than 20 percent revenue growth guidance for FY2021.


The analyst has a 'buy' call on the stock with a target price of Rs 1,784.


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