Here's why brokerages are gung-ho on Indian specialty chemicals

Brokerages are optimistic about the specialty chemicals sector in India, terming it as one of the most promising sectors and a decadal growth opportunity for long-term investors.

The sector is rapidly growing, offering a strong opportunity to investors.

India is emerging as a fast-growing specialty chemicals hub amid a rise in competitiveness, driven by the availability of low-cost labour and lower regulatory costs, brokerage firm JM Financial pointed out.

The rising availability of low-cost feedstock for Indian players and India’s strong IP protection and improving R&D expertise are also the factors that are facilitating the sector's growth.

India’s specialty chemicals market has posted an 11.7 percent CAGR over CY14-19 against a 5.7 percent CAGR across the globe. At a valuation of $32 billion in CY19, the sector constitutes about 4 percent of the global specialty chemicals market. China still leads the $805 billion, with a 25 percent market share.

The brokerage firm believes India’s accelerated growth may continue with a 12.4 percent CAGR over CY19-25 versus a 6.4 percent CAGR globally.

"India’s specialty market is likely to reach $64 billion supported by robust growth in specialty chemicals exports, robust domestic consumption growth, and rising import substitution," JM Financial said.

However, the sharp run-up in the specialty chemicals space over the last 1-2 years has capped the near-term upside.

JM Financial believes that India’s specialty chemicals industry is a decadal growth opportunity and it is still not too late to participate in the value creation process.

The brokerage firm has a buy call on UPL, PI Industries, SRF and Navin Fluorine.

Globally, the specialty chemicals business accounts for about 20 percent of the $4 trillion chemicals industry. From having an insignificant presence (4.5 percent) in this segment, India’s share in specialty chemicals is expected to double over the next five years at a nearly 12 percent CAGR to $64b by CY25, Motilal Oswal Financial Services underscored.

Strong domestic consumption, led by a young population, a high percentage (about 67 percent) of which forms the working-age group, favorable labour cost, and government impetus are the key positives for the sector, Motilal added.

Motilal Oswal has initiated coverage on the sector with a positive outlook with Deepak Nitrite as its top pick. It has assigned a buy rating to Deepak Nitrite, Vinati Organics, Galaxy Surfactants, and NOCIL and a neutral rating to Atul, Alkyl Amines, Navin Fluorine, and Fine Organics.