Best 5 Specialty Ingredients Stocks To Buy Now: Research Report By Nirmal Bang

Little things that matter

Specialty ingredients are items that are added in very small quantities in various products across the end-user industries and add significant value in terms of the functionalities of the final products. Since there are multiple sub-categories in these additives, it is difficult to accurately estimate the size of this entire opportunity. But, we have elucidated key sub-segments of the specialty ingredients market that are expected to grow at ~5% CAGR globally over the next 5 years.

We believe that having created a niche in a particular end-user industry or a type of additive(s), Indian companies can easily grow in mid-teens on a consistent basis considering their size. Also, within the overall ingredients space, the premium ingredients portfolio should grow ahead of the base portfolio. Increasing preference for oleochemicals-based ingredients vis-à-vis petroleum-based products is expected to drive growth for select companies having adequate experience in oleochemicals and R&D expertise.

Industry leaders have set up aggressive targets to reduce reliance on fossil fuels and move towards plant-based options. Ingredients companies closely dealing with such companies stand to benefit significantly in our view. We believe that providing integrated solutions as against selling separate ingredients is the way forward for the specialty ingredients industry and there are very few global players who are moving towards this.

Indian companies like Fine Organics (FINORG), Rossari Biotech ROSSARI etc have been able to grow on account of this differentiated approach and we believe there is a long runway for growth for such companies. While MNC conglomerates cannot focus on customer-centric approach, even some global ingredients manufacturers will not be able to do that in all geographies. We believe that Indian companies are leveraging this opportunity whereby they deal with some global companies for sourcing ingredients and subsequently provide value-added solutions to clients based on their requirements.

We expect industry consolidation to continue wherein the global giants will divest their non-core operations, which include the ingredients business as well. We have discussed various ingredient types based on end-user industries like food, plastic, feed, surfactants etc. in detail.

While in the developed markets (DM), use of premium ingredients (mainly green chemicals) will continue its strong upward trajectory, there is large headroom for growth in India where growth would be a function of penetration and premiumisation. In majority of specialty ingredients segments, there are high entry barriers as it is entirely research-driven and involves long gestation periods before getting approvals from foreign regulatory bodies. We are positive on this space and believe that players having a differentiated business model, strong R&D focus, edge in terms of product quality and/or cost of operations and established client relationships can grow meaningfully over the next few years.

We initiate coverage on Fine Organic (FINEORG), Rossari Biotech (ROSSARI) and Camlin Fine Sciences (CFIN) with a Buy rating and Galaxy Surfactants (GALSURF) and Advanced Enzymes Technologies (ADVENZY) with an Accumulate rating. Valuation and outlook: Global players with oleochemicals presence and strong R&D expertise claim premium valuations as they are expected to be key beneficiaries of market development.

We highlight that operating margin of our coverage universe is broadly in-line with the global composite weighted average margin of relevant segments, as per our estimates.

We believe that players like FINEORG, ROSSARI and GALSURF will continue to trade at premium valuations due to innovation-led growth opportunities. CFIN and ADVENZY could re-rate further post consistent performance in the coming quarters.