Review of 9 Specialty Chemical Stocks And 3 Stock Recommendations by Axis Securities

Multiple Headwinds Troubling Most of the Chemical Pack; Guidance Turning Cautiously Positive!

 Most companies missing our and street estimates: The chemical pack for H1FY24 posted weak results overall, with most companies
missing our and street estimates. The agrochemical pack continues to expect inventory destocking to continue in the coming quarters.
This and weaker domestic demand in China, which is leading to higher Chinese exports at reduced prices, continue to affect realisations
in some segments. High interest rates have led to inventory rationalization and global geopolitical turmoil has impacted demand in
Western economies and put pressure on the export market. However, most of the companies in our coverage are confident that demand
for Indian chemical companies will remain strong in the medium to long term.

 Chemistry Plays – Fluorine Players saw low volume and weaker prices for Ref gases, affecting margins drastically. Fluorine-based
specialty chemicals continued to suffer from a slowdown in agro end-user markets and overall inventory destocking globally. Rubber
Chemicals, Dyes & Pigments players were affected the most as Chinese oversupply and weak demand affected the realisation
drastically. Benzene players started to see a certain amount of price recovery and expect the momentum to continue in H2FY24.
Agrochemicals have reported mixed set of results with few players getting drastically affected by dry spell and irregular rainfall, impacting
insecticide and herbicide sales in certain geographies

 Outlook and Guidance: Inventory pain from the export market may start to subdue for certain chemistries from Q3FY24 onwards. With H2FY24 being slightly better than the first half, we expect the broader demand scenario to normalize from FY25 onwards considering the
current pace of recovery. Chemical players are witnessing that high-cost inventories were exhausted and stabilizing RM & operational
costs will start reflecting in the financial performance moving ahead.

Sequential Performance Lower Than Expected

Financial Performance Chemicals

 Dhanuka Agritech Ltd: Dhanuka Agritech posted its strongest numbers in Q2FY24. The company beat our and industry estimates on all
fronts despite the macro headwinds. Revenues from Operations stood at Rs 618 Cr in Q2FY24, up 14%/67% YoY/QoQ. EBITDA Margins
elevated due to better operating performance to 23% against 18%/12% YoY/QoQ. This led to overall growth in the company’s PAT which
came in at Rs 102 Cr, up 39%/208% YoY/QoQ, beating our estimates by 86%.

 PI Industries Ltd: PI Industries’ Q2FY24 numbers were largely in line with our estimates. Consolidated Revenue came in line with our
estimates, up 20%/11% YoY/QoQ. EBITDA beat our estimates by 3.5% as gross margins improved by 135bps YoY on account of better
mix. This resulted in an EBITDA margin of 26% v/s 24%/25% in Q2FY23/Q1FY24. The company’s PAT stood at Rs 481 Cr, up 44%/23%
YoY/QoQ, beating our estimate by 11.5% on account of lower tax expenses.

 Navin Fluorine International Ltd: NFIL numbers for Q2FY24 missed our estimates on all fronts as HPP and the shutdown of the specialty
chemical plant affected production. The company reported revenue of 472 Cr against our estimate of 520 Cr and was up 12.5%/-3.9%
YoY/QoQ. EBITDA halved from the last quarter due to negative operating leverage (up 4.8% but down 13.9% QoQ). EBITDA Margin fell to
20.84% (from 23%/22% in Q1FY24/Q2FY23). The company’s PAT stood at Rs 61Cr, up 4.8%/(1.5)% YoY/QoQ, led by higher depreciation
and interest expense from the recent Capex.

• Camlin Fine Science Ltd: Consolidated revenue was up 2.2% from our estimates (down 16%/3.3% YoY/QoQ). EBITDA declined significantly
by 35% QoQ and missed our estimate by 46.5%. EBITDA Margin declined to 6.2% (from 11.4%/9.2% in Q2FY23/Q1FY24). The company’s
PAT stood at Rs (20.8) Cr due to lacklustre overall performance. CFS numbers for Q2FY24 were a major miss (except revenue) with our
estimates on an adjusted basis (forex).

• Aarti Industries Ltd: Consolidated revenue beat our estimates by 6% (-14%/3% YoY/QoQ). EBITDA stood higher QoQ (-12%/16% YoY/QoQ)
on account of volume expansion with stable-to-better realization for some products. It also beat our estimates by 33% as we expected lower
gross margins. EBITDA margins increased to 16.1%, up 24/180bps YoY/QoQ. The company’s PAT stood at Rs 91 Cr, posting growth of –
26%/30% YoY/QoQ.

• Apcotex Industries Ltd: Falling prices and lower realizations continued to affect the numbers. However, volumes have increased.
Consolidated Revenue was down 1.4% YoY but up 0.5% QoQ. EBITDA beat our estimate, up 33% YoY as gross margins hardened in the
current quarter. The company’s PAT declined by 50% YoY but was up 26% QoQ due to higher depreciation and interest expense of newly
incurred capital expenditures.

• NOCIL Ltd: NOCIL’s Q2FY24 topline declined with our expectations but there was a beat on gross margins which were higher by 218bps.
Consolidated Revenue missed our estimates by 9% (down 10% YoY and 12% QoQ). EBITDA also shrunk by 18% QoQ on account of lower
realisation and missed our estimate by 6%. EBITDA Margin came in at 12.9% (from 16%/14% in Q2FY23/Q1FY24). Its PAT stood at Rs 27 Cr,
reporting a de-growth of 24% YoY and 21% QoQ.

Most Chemical companies expect situation to improve from H2FY24 onward as inventory levels normalize from FY25

FY23 has been a tough period for entire most of the chemical space with multiple headwinds resulting into excess supply and bleak
demand marked by several external issues, but the structural story of Indian Chemical industry remains strong with strategic portfolio
composition to gain export market share, and strong domestic demand we expect revenue growth to gain momentum from FY25
onward. Given the changing landscape and growing reliance on India by international customers, we expect rapid growth in this sector
over the coming period as conditions stabilize.