Catalysts for growth in place for Chemicals stocks. Seven stocks to buy: HDFC Securities

Catalysts for growth in place

The Indian chemical industry continues to be an attractive hub of opportunities, even in an environment of global uncertainty. The uniqueness of the chemical industry is that it requires both the creation of tangible assets and technical manpower. We believe domestic chemical companies have abundant opportunities to partner in technology. Chemical companies may be able to take advantage of a variety of opportunities by strategically investing in research & development (R&D). New opportunities in the form of collaboration with technically advanced global companies could emerge in the industry.

Instead of being sold based on their chemical identity, specialty chemicals are frequently sold based on how well they perform in the intended application. Therefore, the business requires significant application development and R&D investments to stay relevant.

The chemical industry’s growth is not hostage to any one economic parameter or any one end-user industry. Rising domestic demand and the need to evolve have forced domestic chemical companies to expand their capacities to remain competitive. Our positive stance on the sector is backed by its strong growth, aided by diversity in terms of chemistries and/or technologies. We maintain BUY on Aether Industries, Neogen Chemicals, Navin Fluorine, Galaxy Surfactants, NOCIL, Aarti Industries, ADD on SRF, Fine Organics, Sudarshan Chemical, while maintain SELL on Deepak Nitrite, Vinati Organics and Alkyl Amines. We are also initiating coverage on Ami Organics Ltd (TP: INR 1,160) with a BUY and Clean Science and Technology Ltd (TP: INR 1,230) with a SELL recommendation.

Investing in building capabilities and capacities

Indian chemical companies have aggressive future plans for Capex as they are backward integrating and/or moving up value chains, moving towards highmargin products (Refer page 6). The aggregate Capex incurred by 30 leading Indian chemical companies considered by us has grown at a 10% CAGR over FY10-22. For our coverage universe, we expect Capex to grow at a 17% CAGR over FY22-24E. The aggregate Capex to gross profit ratio (capital intensity ratio) for 28 listed Indian chemical companies, which has increased from 13% in FY15 to 20% in FY22. In our coverage universe, we expect a Capex to gross profit ratio of 27% in FY24E. Most of the speciality chemical companies are looking to diversify their portfolio and introduce innovative products that garner better realisations and margins.

Unlocking the value of knowledge

Indian chemical companies have consistently invested in R&D and have reaped the benefits in terms of innovative, more efficient, and value-added products. Owing to their consistent investments in building R&D infrastructure, Indian chemical companies have reaped benefits in terms of value-added products, efficient processes, foray into newer chemistries and global recognition. We believe this trend to continue in the future, which will allow them to grab import substitution and export opportunities and sustain growth.