Top 4 India Specialty Chemicals Stocks – Giants in the making: Nirmal Bang Research Report

Giants in the making

India specialty chemicals industry (US$32bn) forms ~4% of the global pie and is expected to grow at ~12% CAGR over 2019-2025. We highlight that India’s Chemicals sector has disproportionately rewarded shareholders over multiple time horizons and consistently outperformed leading indices (both domestic and global).

We believe that this outperformance has been the function of revenue & earnings growth, margin expansion and multiple re-rating. Players who have been able to carve out a niche in complex chemistries, adopted environment friendly processes and established themselves at the global level stand to gain significantly over the next decade.

‘Plus One’ is imperative and not a buzzword in our view as reducing dependency on China is a structural shift, which is happening, especially after the environment crackdown in China. The US-China trade war and the Covid-19 pandemic would accelerate the pace of this shift as global supply chains would want to completely hedge themselves from supply disruptions. India is emerging as a more significant player in the global chemicals supply chain with its scalable lowcost manufacturing ecosystem, improving infrastructure and established VHS compliance framework.

We initiate coverage on SRF Ltd (SRF), Navin Fluorine International (NFIL), Aarti Industries (ARTO) and Vinati Organics (VO), which are established players in respective chemistries at a global level.

All these companies are not dependent on China for raw materials. We are structurally positive on all the 4 names, but from 1-year stand point we have an Accumulate rating on NFIL and VO as future growth has been largely priced in as per our opinion. SRF and ARTO are our top picks with ~25% and ~28% potential upside from CMP.

Our report focusses more on specific companies as specialty chemicals is an ocean and each chemistry undergoes different dynamics with regards to the demand-supply, competitive intensity, raw material dependence etc.

Valuation and outlook: All of these companies have got re-rated over the last 1-2 years, however, we believe these multiples are sustainable as there has been a significant shift in the product mix towards high-value products and acceleration in capex intensity with greater visibility about future growth opportunities.

These companies used to trade in low to- mid single digit PE multiples 10 years back. All these businesses have come a long way and have gained trust of the global majors over the last decade in our view. We believe that the next 10 years could be a dream run for these companies as India strengthens its position in the global chemicals universe.

We believe that these companies will not be materially impacted by Covid-19 on account of higher salience towards Pharmaceuticals and Agrochemicals, which are doing well. So far there has been no major delay with regards to future capex plans or execution of long-term contracts. We expect SRF, NFIL and ARTO to nearly double their earnings over FY20-23E despite the challenging FY21.