Best 4 Specialty Chemicals Stocks To Buy Now (ICICI-Direct Research Report)

Specialty chemicals- Opportunities galore for Indian players …

The global chemical industry size is estimated to be around €3.7 trillion ($4 trillion), which has grown at a CAGR of ~4% over 2004-18. In terms of the geographic break up, China is one of the leading players in the global chemical industry with a share of ~35% followed by Europe ~20% and US ~15%. India constitutes ~3% of the global chemical market. Over the years, there has been a shift in the overall market share from matured markets such as Europe and the US to China. Going ahead, we expect China plus one strategy along with increase in intermediate capacity in India, recent corporate tax cuts to be a few key positives to capture the potential deal flows for Indian chemical manufacturers.

We also believe that since many domestic speciality chemical companies have invested heavily in capacity expansion in the past few years along with higher spending into R&D this has helped them become prominent players across different chemistries. In turn, this is expected to translate into many Indian companies garnering CRAMS opportunities for intermediates along with few domestic companies garnering export market share for finished products on account of many global companies diversifying their supplier base from China to offset any supply side challenges. We identified a few speciality chemical companies, which are likely to emerge as potential winners from this transformation. We initiate coverage with BUY rating on Navin Fluorine, PI Industries, Sudarshan Chemical and Aarti Industries.

Indian speciality players well poised to outpace global growth

The India chemical industry size is estimated at ~$163 billion in FY18 (~3% share in the global chemical industry). It is expected to reach ~ $300 billion by FY25E with an anticipated growth of 9% CAGR. Going ahead, we expect an increase in intermediate capacity along with China plus one strategy to translate into Indian speciality chemical industry growing at double digits. This industry is currently valued at $32 billion. It is expected to reach $65 billion by FY25E (CAGR of ~12% vs. global growth in mid-single digits).

Growth from the domestic speciality chemical industry would largely be catered to by sub sectors like agrochemical, surfactants, aroma chemicals, plastic additives, water treatment chemicals, etc. Further, we also expect that since China constitutes ~20% of the global speciality chemical industry ($800 billion), even ~5% shift in market share from China to India can translate into an $8-billion opportunity for the Indian speciality chemical companies. Further, assuming gross margins for speciality chemical companies are ~50%, an increase in capabilities to provide intermediates of finished products (~$400 billion market size) can transform the Indian speciality chemical industry to the next phase of growth

Initiate Navin fluorine – BUY – TP Rs 2550

 Higher consumption of fluorine molecules to assist better growth for Navin fluorine (NFIL)
 Speciality business revenue to inch up operating margins

Initiate PI Industries – BUY – TP Rs 2450,

 Robust order book in CSM bodes well for future growth
 New venture into pharma value chain likely to diversify revenue stream ahead

Initiate Sudarshan Chemical– BUY – TP Rs 550

 We like company’s focused approach, dominating market share, strong past record and technical capabilities
 It is a prime beneficiary to tap opportunities panning out from global consolidation and China plus one strategy
 Strong track record, with favourable macro factors, strong domestic demand key catalyst for stock

Initiate Aarti industries – BUY – TP Rs 1200

 We like Aarti’s leadership position, strong visibility and order book
 Company also key beneficiary of China plus one strategy, improving domestic demand