If you peep into the portfolio of any of the ace investors, you will find big chunks of one or two specialty chemical stocks therein.
For instance, we saw a few days ago how Ashish Kacholia and Rahul Saraogi of Atyant Capital are making merry at the massive gains that has come their way due to Navin Fluorine.
Similarly, Vijay Kedia has a big smile on his face due to Sudarshan Chemicals.
Dolly Khanna is not far behind. She is also sitting pretty with a massive chunk of Nocil in her portfolio of glittering multibaggers.
Some other specialty chemicals stocks that are in demand amongst the stock wizards include Vishnu Chemicals, Camlin Fine Sciences, Vidhi Dyestuffs etc.
Dia Rekhi of ET has explained that the reason the ace investors are making a beeline for specialty chemicals stocks is because there is a massive opportunity brewing in that space for these companies.
The salient points made by Dia Rekhi in her report can be summed up as follows:
(i) The specialty chemicals sector has huge potential. These chemicals are used to improve product quality in various industries such as electronics, paints, coatings, plastics, and automobiles;
(ii) The global specialty chemicals market is likely to expand by 5.2% on a compounded basis from 2013-2018, and is estimated to jump to $761 billion by 2018 from $619 billion in 2014;
(iii) The Indian market is very small, barely 1-2% of the global market, but is growing at a rapid pace. Business is shifting to India from China mainly on account of stringent effluent norms and increasing wage costs in China. India is only one-eighth, or one-tenth, the size of Chinese specialty chemicals market, which throws up a huge opportunity for Indian companies with the potential to scale up and grow on a sustained basis;
(iv) Global agrochemical innovators are looking to outsource their manufacturing processes to India on account of compliance, cost, and capacity issues. This creates an opportunity for Indian firms over the next 5-10 years;
(v) What makes the specialty chemicals sector a good investment bet is the fact that it is a very highly skilled segment, thus, providing a natural entry barrier. Unlike the Pharma sector, high-quality players in emerging markets which can deliver on innovators’ quality and safety parameters are limited;
(vi) Specialty chemical companies will prosper in India because of its chemistry, R&D skill-set and economies of scales achieved by the country. This is supported by a paradigm shift in Chinese markets towards urgency of reducing pollution and investing in labour cost across industries. India has an established ecosystem of basic chemicals, a key input of specialty and pharmaceutical industry;
(vii) One of the specialty chemical businesses that will do well is “ABS”, a basic chemical used in consumer durables, toys, electrical circuits, interiors of cars. The applications for ABS are endless. There will be a shift in consumption pattern and that will trigger the consumption of ABS;
(viii) While valuations of specialty chemicals stocks have run up in the recent past, they are still quoting at 15-20x one-year forward earnings multiple, which is reasonable given the growth profile and high RoCEs that these companies enjoy. “Don’t be blinded only by valuation, address the opportunity as well”.
The experts cautioned that while there is a “huge play” at work, we have to be careful with the stock selection. These are “very niche businesses” and the managements’ capabilities to continue reinventing the businesses over a period of time holds the key to success and failure. It is better if we confine our investment circle to top-quality stocks such as PI Industries, SRF, Navin Flurochemicals, Godrej Industries, Balaji Amines, Aarti Industries etc and stay away from junkyard stocks, the experts opined.