Global brokerage firm, JM Financial maintains its bullish outlook on chemical stocks despite the recent slowdown in the sector. The brokerage believes that the current downturn does not undermine India's trajectory of becoming a prominent chemicals manufacturing hub.
While acknowledging the potential risk of earnings downgrades, particularly for non-contracted businesses, JM Financial emphasizes that these corrections should be viewed as buying opportunities.
The brokerage continued with its bullish outlook on Navin Fluorine, SRF, and Deepak Nitrite, citing that these companies are in a sweet spot due to the acceleration of Europe+1 for fluorination players and the continuation of basic chemicals’ import substitution.
Navin Fluorine and SRF are brokerage structural top picks as it anticipates that imminent production cuts of Hydrofluorocarbons (HFCs) in the European Union and the United States will generate cascading benefits for India's fluorine-based complex specialty chemicals players.
Further, the brokerage pointed out that Deepak Nitrite is well-positioned to take advantage of favorable market conditions, including lifetime-low phenol spreads and upcoming capacities for bisphenol-a and other basic chemicals. As a result, JM Financial suggests that Deepak Nitrite presents a compelling buying opportunity.
As per various industry reports, China produces roughly 50,000 MT of aromatic fluorinated intermediates, 10,000 MT of aliphatic fluorinated intermediates, and 2,000 MT of heterocyclic fluorinated intermediates.
The brokerage calculations indicate that India’s production of fluorinated intermediates could be around 17,000–20,000 MT, which is 30–35% of China’s fluorospecialty chemicals’ production. Thus, the brokerage believes that since India’s players have started supporting MNCs with their R&D and have supplied without major disruptions, India’s fluorinated players are in a sweet spot compared to their Chinese counterparts.
According to JM Financial, India’s fluorination players (especially Navin Fluorine and SRF) are unlikely to face tough domestic competition in fluorospecialty chemicals, primarily in the agro and pharma segments.
In order to be competitive against existing players, new players will have to find off-take avenues for the indigenous HF. That, according to the brokerage, is going to be next to impossible, given they will have to either invest in refrigerant gas capacity or in fluoropolymers.
Meanwhile, Deepak Nitrite had announced that it was going in for fluorination to manufacture one of the fluorinated intermediates (BTF from BTC and HF). The key rationale for this investment is that Deepak has been supplying TFMAP (a key intermediate of Trifloxystrobin, forward integration of BTF) for the last 7-8 years, as per the brokerage estimates.
Navin has also started manufacturing this product, as Bayer seems to have completely shut its own capacity. Hence, Deepak might import HF and make BTF in-house in order to protect its supply of TFMAP, it said.
According to brokerage Deepak is already supplying one particular product, importing HF would not hurt that much for that product. However, finding a competitive edge for other HF-based products might be difficult for Deepak. Hence, the brokerage said it doesn’t see this as a material threat to existing fluorination players.
JM Financial maintained its 'buy' rating on Deepak Nitrite, setting a target price of ₹2,660, indicating a potential upside of approximately 38%. Similarly, it maintained a 'buy' call on Navin Fluorine and SRF, with target prices of ₹5,495 and ₹3,380, respectively, reflecting potential upside rallies of 55.5% and 27%.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
