Strong tailwinds boost stocks of India specialty chemicals makers

Shares of specialty chemicals makers continue the steady climb that began last year as optimism about robust domestic consumption, rising import substitution and strong growth in exports attract investors.

The emergence of a potential China+1 strategy in global supply chains, availability of cost-effective and skilled manpower and India’s rapidly improving policy and regulatory environment have made the sector attractive to investors, analysts said.

Given the strong demand, these companies may maintain an Ebitda margin of 20% along with strong profitability and healthy return ratios, analysts said. Export opportunities are also likely to increase due to tightening of green norms in China and recent trade disputes between China and the US.

“We anticipate that India’s domestic demand can support the addition of one world-class cracker every year. In specialty and agrochemicals, we see a substantial opportunity for both exports as well as domestic sales. In exports, India is fast emerging as a destination of choice for the sourcing/contract manufacturing of specialty and agrochemical ingredients and intermediates. In the domestic market, the low levels of chemicals penetration across agriculture as well other end-markets, combined with the accelerated growth and shifting demand patterns in these markets, help create a favourable demand outlook for manufacturers," according to a report by Invest India, the national investment promotion and facilitation agency.

Eight speciality chemicals companies—Deepak Nitrite, Dharamsi Morarji, GHCL, Hikal Ltd, Balaji Amines, Navin Fluorine, Fineotex Chemicals and Rossari Biotech—have reported an aggregate FY21 net profit of ₹1,886.18 crore, against ₹1,715.26 crore a year ago, a rise of 10%. Profit before interest depreciation and tax has risen 20.61% from a year ago to ₹3,276.69 crore, while revenue for the year grew 5% year-on-year to ₹12,585.76 crore.

Since 1 April 2020, Deepak Nitrite, Dharamsi Morarji, GHCL, Hikal, Balaji Amines, Navin Fluorine and Fineotex have surged 204-1,034%, while year-to-date, they are up 35-240%.

Other chemical stocks such as GBL Industries, Continental Petroleums, Archit Organosys, Indo Borax & Chemicals, Vishnu Chemicals, Andhra Petrochemicals, Ritesh International and Kanoria Chemicals have gained 500-2,000% since 1 April 2020. So far this year, they have climbed 58-280%.

Given the strong tailwinds, many firms are planning to increase their capacity on expectations that India’s share in specialty chemicals will double over the next five years globally at a 12% CAGR to reach $64 billion by 2025.

Brokerage firm Motilal Oswal Securities expects the sector has made ₹3,800 crore capex in the past three years ended FY21, and would spend around ₹3,900 crore over the next three years ending FY24E. Along with an increase in the asset turnover rate, it estimated multiplicative growth in revenues (53% over FY21-24E).

“On the valuation front, speciality chemicals segment is still trading at realistic valuation compared to other industries. Selected speciality players that maintain strong fundamental strength and available at reasonable valuation can further move upside," said Satish Kumar, a research analyst at Choice Broking.

Tracking the gains of their listed peers, many private specialty chemical makers have made their stock market debut in the past one year, while others are planning to do so in the near future. Specialty chemicals maker Clean Science and Technology plans to raise ₹1,546.62 crore through an IPO that opens for subscription from 7 to 9 July. This will be the fifth mainboard issue by a specialty chemicals firm in the past 12 months.