Indian speciality chemicals stocks are in demand as prices continue to rise

Demand for speciality chemicals had continued to rise regularly in the past one year, driving prices up in the process. The easing of lockdown restrictions around the world has improved the outlook for the sector. The winter storm that disrupted chemical supplies from Texas, Louisiana and other parts of the US and rising crude prices, thereafter, also caused a surge in prices.

Indian manufacturers have also benefited from a rise in demand from global customers who aim to reduce dependence on China.

The recent spike in covid-19 cases in South China has led to strict containment measures and impacted port movement, analysts said. Yantian port, one of the largest container handling ports in China, has been facing congestion since early June, leading to a jump in container freight costs, said analysts at Emkay Global Financial Services Ltd.

Price increases in June for most of the chemical products were only in single digits, but continuing logistics issues are going to push the prices northward in the coming months, they said.

Among the chemicals that have seen major price increases during June are butadiene, ammonia and benzene. Some chemicals such as acetonitrile, aniline and acetone have also seen normalizations in prices.

Not surprisingly, stocks of most Indian speciality chemical manufacturers have rallied. Deepak Nitrite Ltd has seen its stock prices rise more than three-fold in one year, while Gujarat Fluorochemicals Ltd, Navin Fluorine International Ltd and Galaxy Surfactants Ltd have seen their stock prices almost double.

The Indian speciality chemicals industry is expected to deliver a compound annual growth rate (CAGR) of 12.4% over the next five years, on a higher base, reaching $64 billion by calendar year 2025, which is double the current level, analysts at Motilal Oswal Financial Services Ltd (MOFSL) said.

Apart from the global factors mentioned above, the industry in India is also being supported by strong domestic consumption being led by a young population. Favourable labour costs, which is one-third that of China and half that of Vietnam, and government impetus are few other favourable factors, said analysts at MOFSL.

Other growth drivers for Indian manufacturers include the capacity expansions being undertaken. Capex spends of ₹3,800 crore in the past three years and almost similar spends that are likely to be made over the next three years is a key growth driver, according to analysts.

A strong balance sheet that has continued to be supported by the rising free cash flows has also helped companies reduce their debt and many of them are now debt-free.