India’s specialty chemical substances sector is anticipated to delight in huge tailwinds helped by macro drivers such as the China+1 approach, which has made domestic brokerage and investigation firm Kotak Securities initiate coverage of the sector in spite of wealthy valuations. “We expect India’s chemicals sector to get bigger and gain market share in global chemicals over the next decade. Global chemicals is a large market currently dominated by China and expected to grow at 5-6% CAGR,” Kotak Securities stated in a note. The brokerage firm has initiated coverage of 7 stocks in the sector, and has named 4 stocks as their best picks.
Industry outlook
The China+1 approach, import substitution, expanding fees inside China, and currency added benefits are seen as some of the motives that could enable the sector develop. Analysts think domestic specialty chemical organizations have possibilities emerging for them from ageing US/EU/Japan capacities, enhancing returns on capital as China’s green manufacturing mandate tends to make it more high-priced, and quicker innovation cycles. Government assistance applications such as the PLI scheme are seen as more enablers.
Valuations as well wealthy but earnings development could sustain
The specialty chemical substances sector has galloped larger considering that the middle of 2020 and has seen a huge re-rating. “ Investors need to be selective and look at companies that are preparing to make the most of the favourable macros. Indian companies would have to build multi-product offerings, drive M&As and build organization capabilities,” Kotak Securities stated. The brokerage firm has picked Aarti Industries, Vinati Organics, PI Industries, and SRF as their best picks from the sector.
Stocks to get
Aarti Industries – Buy
Fair worth – Rs 1,080
Kotak Securities has initiated the coverage of Aarti Industries with a get rating and conviction in its powerful development trajectory aided by the significant chance arising from import substitution and provide chain diversification by worldwide majors. “We find the business scalable, led by aggressive investments on capacity and capability (R&D, talent) and favourable macro factors. We see limited upside for our near-term growth estimates, but the company can surprise in the longer term, given its aggressive investments in new growth engines,” the report added. Currently, the stock is trading at Rs 935 per share, implying an upside prospective of 15%.
Vinati Organics – Buy
Fair worth – Rs 2,200
The stock has 56% so far this year but analysts think the rally could continue additional. The corporation has worldwide leadership in goods like ATBS and IBB and its focus on greener chemistries, which differentiates it from peers, Kotak Securities highlighted. The fair worth pinned on the stock implies 40X Sept 2023E EPS, nevertheless, the brokerage firm believes the premium valuations are justified provided its higher RoICs (~25%) driving wholesome FCF, powerful ESG compliance, nicely-defined succession preparing with steady management group, and verified track record of creating worldwide leadership across goods. Analysts see 15% upside.
SRF – Add
Fair worth – Rs 12,000
Kotak Securities believes that SRF’s strength lies in its capacity to incubate new companies at a worldwide scale by means of R&D-led superior solution grades and price efficiencies. “SRF is well-placed to leverage the growing applications of fluorine in existing (organic intermediates, refrigerants) and future opportunities (fluoropolymers, batter electrolytes) led by its strong R&D, business development and integrated manufacturing infrastructure at Dahej,” they added. The fair worth estimated by Kotak Securities implies an upside prospective of 7%.
PI Industries – Add
Fair worth – Rs 3,500
Analysts anticipate a sharp rise in PI Industries’ income going ahead. This is anticipated to come from the current R&D pipeline in the pharma organization, Ind-Swift labs’ personal plans to launch new APIs such as Lisdex, Ibrutinib, and so on. and introduce current API Fexofenadine into newer markets, cross-promoting to its client base in Europe and Japan who are significant pharma organizations apart from getting agri players, and improved asset utilization and improvement in high quality/solution yields supporting margin expansion. The fair worth of Rs 3,500 translated to an upside prospective of 11% from the present market place value.