COVID-19 has brought an opportunity through low labour costs to compete with China in exports of speciality chemicals, believe experts.
For long, China has been dominating specialty chemicals export market, and currently it sells about 2.7 times that of India.
However, factors like shutdown of capacities amid environmental deterioration, the rising cost of labour and trade-related supply disruption are threatening China, which is seen as an opportunity for India.
The Indian chemicals sector has built up world-class capabilities over the past few years and has been moving up the value chain at a rapid pace.
There has already been a shift in production from China to India over the past few years due to increasing costs and environmental issues in China.
Jyoti Roy, DVP-Equity Strategist, Angel Broking, expects an acceleration in the trend of global companies diversifying their supply chain away from China post-COVID-19, with the Indian chemicals industry uniquely placed to capture a significant part of the opportunity.
Vinod Nair, Head of Research at Geojit Financial Services points out in the last few years the Indian chemicals sector is benefitted hugely from high sourcing from India by shifting from China due to regulatory restrictions for pollution, cost optimisation and diversification.
As per brokerage firm KRChoksey Shares and Securities, India has a strong base in the top three export segments in specialty chemicals – agrochemicals (nearly 27 percent of India’s specialty exports), dyes and
pigments (nearly 19 percent) and intermediates for active pharmaceutical ingredients (APIs about 18 percent).
Overall, while India exported specialty chemicals worth $23.8 billion in FY19, China exports stood at $173 billion, indicative of the huge opportunity that lies ahead for Indian specialty players.
"Our analysis show that Indian specialty names operate at better ROE/EBITDA margin profile than international peers (although at a lower scale of operation) indicating enough headroom to compete effectively," said KRChoksey.
The brokerage sees idle installed capacities available across chemicals sub-segments which can be utilised to ramp-up production and fulfill immediate requirements of incremental demand without incurring
additional CAPEX in the near term which is cash flow positive.
Runjhun Jain, AVP - Equity Research (Retail) at Nirmal Bang, also believes the current trend would bring the Indian chemical sector into the limelight, as global giants across the world are looking for a second source to de-risk their businesses.
"Many companies in the sector have done the CAPEX in recent past to further increase their capabilities, capacities and to integrate backward to reduce their dependence on Chinese sources," Jain added.
Deepak Jasani, Head Retail Research, HDFC Securities said Indian companies need to be backward integrated and have diversity in raw material sources.
"They need to grow in areas apart from agrichem and pharma and invest monies in building own proprietary technologies which may involve large CAPEX and outgo. Hence capital allocation policies would be key," he said.
In views of Siddharth Sedani, Vice President- Equity Advisory at Anand Rathi Shares and Stock Brokers, key factors of Indian chemicals companies’ long-term growth include operations in key markets, established lines of communication with the big chemicals companies globally, strong client relationships, niche chemistry capabilities, integrated operations (backward & forward) and focus on product and process R&D. Indian chemical companies have most of these in varying proportions.
Stocks to buy
Brokerage: KRChoksey Shares and Securities
The brokerage said it continues to have a positive outlook on the long-term performance of this stock.
"We believe that further streamlining and improving the integration of the combined entities (Arysta) along with resulting larger global presence and a greater portfolio will help enhance the company’s performance," said the brokerage.
The brokerage has a 'buy' on the stock with a target price of Rs 614, lower than the previous target price of Rs 667.
The brokerage continues to remain positive on Aarti Industries in the light of shifting of manufacturing bases outside of China and recent capacity expansion.
The company’s CAPEX plans for both its segments (specialty chemicals and pharmaceuticals), well- established backward integration facilities, focus on a rising share of high-value products show strong earnings visibility over the next 2-3 years, the brokerage said.
"We maintain a 'buy' call on the stock with a target price of Rs 1,194. We do not envisage any material impact of the recent termination of one long-term supply contract on our forecast period," said the brokerage.
Analyst: Jyoti Roy, DVP Equity Strategist, Angel Broking
PI Industries is a leading player in providing custom synthesis and manufacturing solutions (CSM) to global agrochemical players.
The CSM business accounted for 66 percent of the company’s revenues in FY19 and is expected to be the key growth driver for the company in the future.
The company has posted a decent set of numbers for Q4FY2020 despite COVID-19 related supply chain issues and has also given a more than 20 percent revenue growth guidance for FY2021.
The analyst has a 'buy' call on the stock with a target price of Rs 1,784.
Galaxy Surfactants is the market leader in chemical-based surfactants, which is used in personal and home care products.
The company has been increasing its share of high margin specialty care products in its portfolio which now accounts for nearly 40 percent of its revenues.
The company has a very strong relationship with MNC clients like Unilever, P&G, Henkel, Colgate-Palmolive and supplies raw materials to them not only in India but also globally.
The analyst has a 'buy' call on the stock with a target price of Rs 1,610.
Analyst: Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers
The company has a leadership position in the amines market for some of the products. The Indian amines industry broadly oligopolistic and AACL is one of the leading players with over 100 products.
As per the analyst, the company planned to incur CAPEX of about Rs 80 crore in FY20E and about Rs 100 crore in FY21E to further add capacities in its Dahej plant and augment capacities at other locations.
The company is expected to generate revenues of around Rs 250 to Rs 300 crore out of these capital expenditure programs in the coming years.
"With the sustained improvement in performance owing to favourable raw material pricing, lower threat of dumping through imports and increased visibility of revenues going ahead we believe Alkyl Amines should continue to report better performance reiterate our coverage with a 'buy' rating and a target price of Rs 2,650," said the analyst.
The analyst has a 'buy' call on the stock with a target price of Rs 1,350.
The company's revenue in Q4 declined 18.7 percent year-on-year (YoY), but quarter-on-quarter (QoQ) was up 2.9 percent, to Rs 245 crore.
Despite 363 bps YoY and 509 bps QoQ expansion in the gross margin, the EBITDA margin was 41.4 percent (the same as a year ago, up 664 bps QoQ).
Higher employee cost (up 216 bps YoY to 6.5 percent) and higher other expenses (up 147 bps YoY to 11.7 percent) partially hurt the operating performance.
On the other hand, the analyst highlighted that despite an 18.7 percent contraction in the top-line and EBITDA, PAT declined only 9.6 percent YoY to Rs 74.6 crore, supported by higher other income and lower tax expenses though partially impacted by higher depreciation expenses.
The analyst has a 'buy' call on the stock with a target price of Rs 1,800.
Navin’s diversified businesses, strong customer relations, large CAPEX of Rs 450 crore in 3-4 years and multi-year contract of Rs 2,900 crore would be triggers for future growth, said the analyst.
The analyst expects a continued strong performance in the coming years. Further, the rising percentage of specialty chemical products and CRAMS would support margins.
Brokerage: Edelweiss Broking
The brokerage has a 'buy' recommendation on the stock with a target price of Rs 500, valuing the company nearly 11 times FY22E EPS.
Balaji Amines (BAL) is a leading player in aliphatic amines in India. It has a product portfolio of over 25 products, with a leadership position in several of them.
It is the sole domestic manufacturer for a few of these products. The aliphatic amines industry is oligopolistic in nature as there are considerable entry barriers in terms of technological know-how, the ability to handle hazardous chemicals, among others.
As per the brokerage, the management had embarked on capacity expansion, which would result in considerable growth in top- and bottom-line, along with an expansion in a product portfolio that would be import substitutes.
"We expect FY21 to be a strong year as utilisation of the newly added capacity of BAL/BSC improves. But keeping in view the delay that was experienced in starting new capacities and the current low pricing environment for chemicals, we have revised our FY21E/FY22E EPS to Rs 39/45, respectively," said the brokerage.
The brokerage has a 'buy' rating on the stock with a target price of Rs 570, valuing the company at 12.5 times FY22E EPS compared to its current market valuation of 11 times.
As per the brokerage, the company will continue to remain resilient given its focus on forwarding integration (it has acquired land for future expansions at most locations that it operates from, with CAPEX plans in
pipeline) and a diversified business mix.
Agrochemicals remains a key end-user industry for the company, which is a bright spot in the current scenario and will aid the FSC segment.
The brokerage has a 'buy' recommendation on the stock with a target price of Rs 4,007, valuing the company at 21 times its FY22E EPS.
SRF is a leading fluorochemicals player in India, with a business interest in packaging films and technical textiles. Its chemical business (CB) operates in the fluorochemical industry, which is fast-growing, particularly the fluorospecialty segment.
CB also houses the refrigerant gas business. The packaging film business (PFB) manufactures BOPP (biaxially oriented polypropylene) and BOPET (biaxially-oriented polyethylene terephthalate) films while the technical textiles business (TTB) manufactures nylon and polyester tyre cord fabrics, belting fabrics, industrial yarns, among others.
As per the brokerage, speciality CB will be a key value creator for SRF’s shareholders given its R&D capabilities in the fluorination space, product development and customer relationships, resulting in a larger contribution to its revenue and profits.
"Growth in the PFB segment will be driven by overseas expansions. Weak demand may persist in FCB and TTB in the near term. Factoring these, a reduction in debt, consistent CAPEX and lower tax rate, we estimate FY21/FY22 EPS to be at Rs 144/191, respectively," said the brokerage.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
