High raw material costs and logistic challenges have impacted the operating performance of the specialty chemical companies, said in an interview with MintGenie. Israni added that the challenges related to macro headwinds would impact short-term performance but the long-term outlook on the specialty chemical industry remains robust. Edited Excerpts:
After a stellar performance in the last few years, specialty chemical stocks have recently seen some correction in the last 6 months-1 year. What do you think are the key reasons behind that?
Higher raw material and fuel costs, non-availability of key raw materials and logistic challenges impacted the operating performance of the specialty chemical companies which has been reflected in the prices.
A recent CRISIL report forecasted that the specialty chemical segment is expected to see better growth than polymers and agrochemicals. do you agree and why?
Agreed. Major specialty chemical companies are focusing on capex to add to their existing capacity and create niche high-value products with a focus on import substitution opportunities/backward integration so the demand is clearly there. Moreover, in FY21, OCF to Capex ratio for top 20 chemical companies is 70 percent indicating their ability to internally fund their capex requirements. Few of the companies in their recently guided for large capex outlay (Aarti Industries - ₹12-15 billion annual for coming years), Navin ( ₹7.5 billion over FY22-FY23), SRF ( ₹15-20 billion annual for coming years), Atul ( ₹15 billion).
How do you see these firms performing in FY23? What are your revenue profit estimates for specialty chemicals firms?
H1FY23 would be challenging due to higher input prices, lower demand and industrial slowdown, however, expected pick-up in demand and normalising costs in H2FY23 would counterbalance the first half's performance keeping earnings growth positive for FY23.
What are the key factors that will determine the future growth of these firms?
Focus on green chemistry with R&D, Capex acceleration, Sustainable business model and Positioning in the Industry are key factors that will determine the growth of specialty chemical firms in the coming future.
What are your top stock picks in the sector?
Our top picks in the sector are SRF and PI Industries
Amid the current market volatility, do you suggest investors buy specialty chemical stocks or move away from them?
There has been a sharp correction in specialty chemical stock prices in recent times due to various macro headwinds. However, with strong demand, pricing power and expected improvement in input costs, earnings are expected to be strong in the medium to long term. Current volatility provides a good window of opportunity to invest in some of the quality stocks in the sector.
Do you believe the China +1 strategy is working for them?
Global players prefer the China + 1 offshore strategy, with manufacturing capacities shifting to cost-efficient markets with strong technology capabilities like India. Stringent environmental regulations and increased cost of labour have already stifled growth in China. The outbreak of Covid-19 compounded the situation further as companies across the world are looking for alternate supply solutions. India's chemical export is growing at a higher rate than China's. Further, Japan's announcement to offer incentives to companies shifting base from China to India further proves the strong desires of certain countries to reduce dependence on China and develop alternative supply chains.
How do you see specialty stocks performing in the near term? Should investors buy them for small-term, medium-term or long term?
Challenges related to macro headwinds would impact short-term performance. The long-term outlook on the specialty chemical industry remains robust and would suggest investing for LT in quality stocks.
The latest specialty chemicals firm Aether Ind to launch IPO has not received robust subscriptions? Do you believe this is because of a lack of demand in IPOs, in general, post a weak listing by LIC, or do you think there is another reason behind the poor subscription?
That is not specific to the specialty chemical sector but due to tough market conditions and fair valuations.
Disclaimer: The views and recommendations made above are those of Anand Rathi and not of MintGenie.