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    Rupee depreciation brings speciality chemicals space in focus: Galaxy Surfactants, Vinati Organics top picks

    Synopsis

    Rupee depreciation brings speciality chemicals space in focus: Galaxy Surfactants, Vinati Organics top picks. The opportunity for exports owing to global demand in the backdrop of the China+1 strategy has driven the Indian specialty chemical companies to expand aggressively over the past three years with companies having expansion plans in place for the next three years too.

    Rupee depreciation brings speciality chemicals space in focus: Galaxy Surfactants, Vinati Organics top picksAgencies
    Specialty chemicals have witnessed a decent correction in the last year, which has led to valuation turning comfortable in many stocks.

    The sector is coming back in focus with the revival of global demand and depreciation of the rupee as most of them are export-oriented.

    The opportunity for exports owing to global demand in the backdrop of the China+1 strategy has driven the Indian specialty chemical companies to expand aggressively over the past three years with companies having expansion plans in place for the next three years too.

    The China+1 story is not new to the specialty chemical industry and has been in place since 2016 when the Chinese government initiated a series of shutdowns on the chemical factories in their country due to environmental concerns.

    This has led to increased confidence of global customers demanding more from the Indian manufacturers, which in turn has led to a never-seen-before CAPEX cycle in the Indian chemical industry in the past six years.

    Relatively speaking, even if the margins have tapered from the all-time highs during the pandemic era, we have not seen the revenue slowing down with volumes remaining strong throughout and no demand cut back observed.

    Many of the specialty chemical companies are legacy businesses dating back to more than four decades and run by promoter families. These businesses form the cornerstone of the identity of these companies.

    Various companies are getting into new and cross chemistries to de-risk and diversify their product portfolios from the legacy businesses; many of these depend on crude derivatives as a feedstock or do not deal in complex chemistries.

    Chemcon Speciality, Vidhi Specialty, Navin Fluorine, Vinati Organics, Chemplast Sanmar, and the likes are getting into new product categories while Laxmi Organic, Deepak Nitrite, Atul, Meghmani Finechem et al. are entering into new chemistries that would help them leverage their core competencies against the competition.

    The companies under MOSL Universe have spent a cumulative INR44b in capex during FY20-22 and are expected to spend another INR54b during FY23-24, setting the stage for the next leg of growth of our coverage universe in particular.

    Galaxy Surfactants, Vinati Organics and NOCIL remain our preferred picks in the space for the next 12 months:

    Galaxy Surfactants: Buy| LTP Rs 3,035| Target Rs 3,536| Upside 16

    Expansion in products will be across the board, but the focus will mainly be on Specialty Care products. Continued focus on R&D with an annual outlay of INR400-500m and increased wallet share of existing customers are likely to drive volume growth and expand EBITDA margin.

    Galaxy reported volume growth of ~6 per cent CAGR over the last five years and we build in a similar growth over FY22-24E as well.

    Vinati Organics: Buy| LTP Rs 2,078| Target Rs 2,387| Upside 15%

    The demand outlook for the Acrylamide tertiary butyl sulfonic acid (ATBS) segment remains positive going forward, after a temporary blip in FY22. Butyl Phenol is expected to generate INR5b in revenue over the next two years, with Vinati set to start production of an Agrochemical intermediate through Veeral Organics in FY24E.

    Post amalgamation, Vinati will emerge as the largest and only doubly-integrated manufacturer of AOs. The latter is right now imported into India and the domestic market is seeing huge demand for Polypropylene, linear low-density polyethylene, etc.

    The management expects AOs to contribute ~25 per cent to total sales, two-to-three years down the line. We forecast a revenue CAGR of ~27 per cent over FY22-24, translating in an EBITDA/EPS CAGR of 35/33 per cent over the same period.

    (Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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