Due to the positive outlook for the next Rabi season, the brokerage firm Nirmal Bang Securities is positive on the chemical sector, especially the ones that deal in the fertilizer segment.
Healthy farm incomes, soil moisture and water storage levels augur well for the next Rabi season. There are signs of a decline in some chemical input prices, which the industry expects to support volume growth and margin expansion. Also, the shortage of containers and the bullish impact on freight rates may be abating, said the brokerage firm.
However, the brokerage firm highlighted some concerns too.
"The impact of volatile energy costs, raw material prices and product prices on gross margins, new products, working capital and channel inventory is weighing on the sector," said Nirmal Bang.
Periodic covid lockdowns in China and the drought along with high energy prices in Europe are hurting the energy-intensive sectors like fertilizers and other chemicals. This is posing worries for the chemical supply chain as well as demand, said the brokerage firm.
A mixed trend in Indian sowing for Kharif FY23 is marring the season’s crop outlook – with an aggregate area under main crop rice still down under 5%, as per the latest data. The total area under Kharif crops has seen a catch-up and is down only a tad YoY.
The brokerage firm has coverage on five stocks from the sector, out of which, it has given 'buy' calls on two and the rest are 'accumulate' calls.
UPL | Buy | Target price: ₹1,144
The brokerage firm has revised estimates for FY23E/FY24E and introduced FY25E, which still implies healthy earnings CAGR of 20.9% over FY23E-25E.
"We have raised the target price from ₹1,072 to ₹1,144 based on the higher September 24E earnings per share (EPS) post the rollover of PE multiple to 13.5 times. Growth, margin expansion from differentiated launches and cheap valuation are the key catalysts," said Nirmal Bang.
PI Industries | Buy | Target price: 3,979
"We have raised FY23E/FY24E estimates a tad and introduced FY25E. We have raised our SOTP-based target price from ₹3,626 to ₹3,979. This includes: (1) The value of the core CSM & CPC business using a PE multiple of 38.2 times on the higher Sept’24E EPS post the rollover – ₹3,724 and (2) The potential DCF value of a typical API asset (less 50% discount) of ₹255 that PI aims to acquire in the next few months," said Nirmal Bang.
Coromandel International | Accumulate | Target price: 1,126
"We have cut FY24E estimates a tad and introduced FY25E. We have raised the target price from ₹1,120 to ₹1,126 based on the higher Sept’24E EPS post the roll-over with reduced target PE of 16 times against the old PE of 16.5 times- interim concerns include volatile fertilizer input prices and impending NBS subsidy revision," said the brokerage firm.
Sumitomo Chemical | Accumulate | Target price: 529
The brokerage firm has cut FY23E/FY24E estimates by 7%/2.2% and introduced FY25E. It has raised the target price from ₹493 to ₹529 based on the higher Sept’24E EPS post the rollover with a PE multiple of 35 times.
"We have maintained an 'accumulate' on Sumitomo Chemical as rich valuation offsets healthy growth prospects and strong return profile," said Nirmal Bang.
Anupam Rasayan | Accumulate | Target price: ₹838
The brokerage firm has cut FY23E/FY24E estimates by 3.7%/1.8% and introduced FY25E. It has raised its SOTP-based target price from ₹774 to ₹838.
"Long-term growth from a healthy CSM pipeline is offset by stretched valuation. We await clarity on capital allocation, working capital worries and plans to monetize Tanfac asset," said the brokerage firm.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.