Brokerage firm Motilal Oswal Financial Services believes Indian chemical companies may face strong challenges in the future and they and need to evolve in order to battle the great migration expected globally.
"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, over the next few years. Over a longer period, Africa is also likely to emerge as a key manufacturing hub for petrochemicals and chemicals," said Motilal Oswal Financial Services.
"Indian chemical companies face severe challenges and need to evolve in order to battle the great migration expected globally," said the brokerage firm.
There are several challenges for the sector. The lack of key raw materials and experience in multiple chemistry platforms remain key challenges for the sector.
The absence of significant expenditure on R&D is also a factor which can hit the sector in the long term.
"There appears a great opportunity for Indian chemical manufacturers in light of the increased uncertainty over China and rising production costs in Europe. However, a look at the companies under our coverage suggests that there is hardly any significant expenditure on R&D -a key toward long-term sustainable growth," said the brokerage firm.
Due to these concerns, high valuation multiples do raise concerns. Motilal has a neutral rating on Atul, Alkyl Amines, Clean Science, Deepak Nitrite, Fine Organics, and Navin Fluorine.
Motilal, however, highlighted that India fares better than China in terms of cheaper manpower. Indian labour cost is now as low as one-third of China's. It remains competitive with that other emerging production hubs such as Malaysia, Thailand, and Indonesia, said Motilal Oswal.
"Under our coverage universe, process heavy companies such as Atul, NOCIL, Alkyl, Clean, Vinati, and Deepak Nitrite incur as much as 6-11% electricity cost as a percentage of sales," said Motilal Oswal.
"We reiterate our buy on NOCIL, Vinati Organics and Galaxy Surfactants," Motilal Oswal said.
The brokerage firm also highlighted that the government has taken several initiatives such as Production Linked Incentives (PLI), Atmanirbhar Bharat, Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs), and National Logistics Policy to boost domestic production.
"The government aims to redraft PCPIR guidelines, which may raise investments and provide the basic raw materials for the chemical industry in India. Logistics cost in India stands at 16% of the GDP. The government aims to reduce it to the global average of 8% by 2030," said Motilal Oswal.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.