Specialty Chemical companies' earnings may surge with capacity addition

Mumbai: Top specialty chemical companies such as SRF, Gujarat Fluorochemicals (GFL) and Deepak Nitrite are expected to report robust earnings expansion amid a broad-based addition to capacities in the industry that is set to benefit from a global supply-chain de-risking strategy built around alternative sourcing destinations beyond China. Management commentaries remain upbeat and Aarti Industries, NOCIL, Vinati Organics, Galaxy Surfactants, Tata Chemicals and Anupam Rasayan are also expected to benefit from the work-in-progress global supply-chain recast, according to analysts. Although valuations are at a premium, recent corrections in stock prices have burnished their appeal.

"We remain positive on the specialty chemicals sector owing to strong growth visibility on the back of new capacities along with the thrust by global chemicals majors de-risking their supply chains away from China - and now Europe," said Rohan Gupta, analyst, Nuvama Wealth Management. "While moderation in raw material prices and energy costs is positive for end-user industries, it may have an adverse impact on near-term earnings."

Specialty chemical companies have witnessed a smart recovery in manufacturing operations in the past one year, after the Covid-led disruptions. Supply-chain disruptions and uncertainty in China have created a significant opportunity for domestic chemical companies. Outsourcing will strengthen further as not only the supply chain shifts away from China but also from Europe on account of higher costs, said analysts.

"Currently, domestic chemical companies' focus is on the introduction of new molecules and processes, backward integration, expanding capacities and import substitution products, leading to winning large long-term supply contracts," said Vinod Nair, head of research, Geojit Financial Services. "Valuation has more than doubled in the last 5 to 7 years, but the recent correction led by an increase in raw material cost and a slowdown in demand has moderated valuations."

SRF, Deepak Nitrite, Aarti Industries, Clean Science and Alkyl Amines Chemicals, among others have declined between 20% and 40% from their yearly high. Almost all stocks are currently trading above their five-year average one-year forward price-to-earnings.

According to Vinod Nair, a long-term investor can consider buying stocks such as Vinati Organics, PI Industries, Tata Chemicals and Pidilite Industries on dips.

Fluorine players SRF and Gujarat Fluoro benefited from sustained strength in refrigerant gas and fluoropolymers prices, keeping profitability intact. PI Industries delivered strong results driven by top-line growth. FMCG and personal care products players such as Galaxy and Fine Organic continue to witness solid margins, widely beating street estimates. Players with value-added commodities like Deepak Nitrite, Aarti Industries and Jubilant Ingrevia witnessed some margin pressure.

The government has taken several initiatives such as Aatmanirbhar Bharat, production-linked incentives (PLI), national logistics policy, and Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) to boost domestic production.

However, some analysts said Indian players face severe challenges and need to evolve. "Since natural gas (or coal) is the key genesis for most chemicals, it appears likely that manufacturing of chemicals would also drift to those regions, especially the US and the Middle East," said Swarnendu Bhushan, analyst at Motilal Oswal Financial Services.