Now's the time to bond with beaten-down chemical stocks

Mumbai: Chemical producers may post moderate profits in the June quarter, but investors could consider buying some of the beaten-down names in the sector. SRF, Gujarat Fluorochemicals, Deepak Nitrite, Galaxy Surfactants, PI Industries, Vinati organics, Aarti Industries, and Tata Chemicals are among analysts' top picks in the sector.

Shares of various chemical companies have been under pressure in recent months on account of a rise in raw material prices and supply disruptions. While shares of Aarti Industries, Alkyl Amines, and Deepak Nitrite have declined 28% each since January 1, Clean Science and Fine Organics plunged 34% and 39%, respectively, during this period.

Analysts said the April-June results are unlikely to provide respite to these companies, but their share valuations have turned attractive.

"We believe the recent 15-25% correction in speciality chemicals' stocks offers an opportunity to accumulate them," said Rohan Gupta, analyst, Edelweiss Securities. "SRF on refrigerant gases and fluoropolymers players like Gujarat Fluorochemicals will continue to reap the benefit of a strong pricing environment in FY23. Aarti Industries and Deepak Nitrite may have to contend with some volatility due to large capex commissioning."

Analysts said demand from FMCG, textiles, and autos may shrink due to elevated prices. They said demand remains firm from agrochemicals, fluoropolymers, and pharma. Companies like Navin Fluorine and SRF have high exposure to agrochemicals and pharma sectors. "For chemical companies, where the end-user industries are non-agrochemicals and pharma, there could be demand challenges due to overall high inflationary environment globally and continued supply-chain pressures," said Abhishek Navalgund, analyst, Nirmal Bang Equities. "Demand pressure would further restrict the ability of select companies to pass on the cost impact to clients entirely."

"Though we maintain a positive view on the sector in the long-term, we may see some downgrade in earnings and moderation in valuation in the near term. Our top picks are PI Industries, Vinati organics, Aarti Industries, and Tata Chemicals," said Anil R, analyst at Geojit Financial.