Speciality chemical stocks: Speciality chemical companies face a tough quarter on weak demand

Mumbai: Speciality chemical stocks will likely remain under pressure in the near-to-medium term as the sector grapples with substantial hurdles erected by rising global interest rates and output glut.

Most stocks have underperformed in the past six months as they saw earnings downgrades from analysts.

Stocks such as Aarti Industries, Atul, Fine Organic Industries, Sumitomo Chemical, and Vinati Organics have fallen 10-20% so far this year compared with a 9.5% gain in the Nifty index. Shares of Gujarat Fluorochemicals, Navin Fluorine, and Clean Science declined about 9% so far this year. “Although the impact of Chinese dumping and inventory destocking would be felt across sectors, the agrochem industry has suffered the most,” said Rohan Gupta, analyst at Nuvama Research. “Players dependent on agrochem like SRF, Anupam Rasayan, Aether Industries, may suffer in the near term while fluoropolymers players like GFL, Navin Fluorine, may see lower demand and margin pressure. However, PI is likely to witness continued volume growth while niche players such as Galaxy Surfactants and Fine Organics may see stable growth.”

Except for PI Industries, most chemical companies have seen a downgrade in the earnings estimate in the last three months. For instance, the estimated EPS of Gujarat Fluorochemicals for FY24 has been reduced by 24% in the last three months, whereas that of Deepak Nitrite, SRF, Aarti Industries, and Sumitomo have been downgraded by over 17%.

Due to continued pricing pressure and low demand, analysts expect chemical companies to deliver a drop in year-on-year profits for the September 2023 quarter of 10% to 20%.

“We expect companies with exposure to crop protection and agrochemicals to witness margin pressure while base chemical prices are moderating, the demand environment continues to be weak, particularly in discretionary end-user industries,” said Swarnendu Bhushan, analyst at Prabhudas Lilladher. “Also, companies exposed to refrigerants and fluoropolymers see pricing pressure due to demand slowdown.”

With channel inventory around seven to eight months, the September 2023 quarter may be worse as global players aim to reduce purchases and trim inventories for a stronger year-end (December) balance sheet, according to Nuvama Research.While current valuations may appear high, Indian chemical companies are expected to benefit in the long run, said analysts. “Current premium valuation limits near-term upside,” said Anil R, analyst at Geojit Financial Services. “However, in the long term, the industry benefits from robust domestic demand, global production diversification, and high-growth segments like pharmaceuticals nd speciality chemicals.”

A recent Kotak Securities report also said that the valuations of speciality chemical stocks remain elevated despite a corrective phase. “We note that any recovery is coming off a very depressed base, earnings estimates already factor in a recovery in the second half of FY24, and valuations are now even more stretched for most stocks,” said the note.

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