Vinati Organics, NOCIL and Galaxy Surfactants could give over 20% return each, explains Siddhartha Khemka

We recently held a Specialty Chemicals Conference where 10 companies participated. The key takeaway from the conference was that there is an increased focus on cost-cutting and movement from batch to continuous process that helps reduce space requirement as well as OPEX drastically through a decline in usage of utilities and waste reduction.

Broadly, chemical companies follow two strategies: a)product and b)process.

Under the product strategy, the focus is on product development rather than on cost control or effective process technology.

At times, product may not have a ready market – the companies may have to approach consumers and demonstrate the effectiveness of their products towards whatever purposes they are intended for.

They safeguard knowledge about their products through in-house development/patents/ use of excipients/ lesser attrition.

A few examples are Fine Organics, Galaxy Surfactants, Sudarshan Chemicals, NOCIL, and Aether Industries.

Under the process strategy, the focus is on process optimization and continuous cost cutting on existing products. Attributes required are engineering skills and co-operation between R&D and production teams.

A few examples of such companies are Eternis, Jayant Agro, UPL, and Laxmi Organics. The gap between India and the West in terms of knowledge has narrowed significantly.

India has vast resources in terms of chemistry and chemical engineers. However, the risk-taking capabilities are not high.

Since technology development requires high risk appetite, most of the domestic companies have so far not ventured into that direction.

Capex is a key theme across board. Fine Organics is looking for a land in Gujarat for the next phase of expansion; their existing capacities would run out soon (by Mar’23). Aether Industries is planning a capex of INR4.5b. I G Petrochemicals is expanding its Phthalic and Maleic Anhydride capacities.

Vishnu Chemicals is increasing its capacity for a capex of INR1.8-2.0b. Rossari Biotech expects to add more modules at Dahej. Alkyl Amines is expanding its amine capacity. Yasho is more than doubling its capacity while Ami is adding a new line for electrolytes.

Import substitution theme is driving the product development across companies. Aether is expanding its current basket of 16 products primarily based on import substitution.

I G Petrochemicals’ expansion also takes into account the huge import substitution of Phthalic and Maleic Anhydrides. Vishnu’s expansion is also based on domestic demand-supply gap.

Further, the past few quarters have witnessed unseen volatility in freight and raw material costs. As a result, several suppliers have enforced force majeure.

However, companies such as Fine Organics battled the uncertainties and even serviced the consumers who were facing issues with other suppliers.

These would further help Indian companies establish themselves as reliable suppliers and take advantage of the China+1 strategy.

We prefer Vinati Organics, Nocil, and Galaxy Surfactants in this space with 12-month target:

Vinati Organics: Buy| LTP RS 2191| Target Rs 2680| Upside 22%

Veeral Organics Pvt. Ltd. (wholly owned subsidiary of VO) is also set to commence production of MEHQ, Guaiacol and Iso Amylene in 1HFY24E, which should propel VO into the next level of its growth story.

Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration.

NOCIL: Buy| LTP Rs 260| Target Rs 319| Upside 22%

Debottlenecking of its existing units is expected in the near term, even as NOCIL evaluates its plans for the next three-to-five years. Domestic Tyre companies are planning to ramp up production, with a planned capex of INR200b over the next three years.

Galaxy Surfactants: Buy| LTP Rs 3253| Target Rs 4000| Upside 22%

Capex guidance was at INR1.5b each for FY23/FY24, similar to that in FY22. Expansion of products is expected to be across the board, but the focus will mainly be on Specialty Care Products.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)