Expectations that China’s power crisis could prove to be a “structural growth driver”, and not just a one-off event, have been driving chemical stocks higher.
According to reports, widening power shortages in China have halted production at numerous factories, including many chemical manufacturers. The development, analysts say, could impact chemical output by as much as 25 per cent in the country, which in turn could benefit Indian speciality chemical makers.
Over the past two weeks, shares such as Gujarat Alkalies and Chemicals, India Glycols, Meghmani Finechem, Chemplast Sanmar, and Solar Industries have surged between 25 to 56 per cent on the BSE as against a 2.4-per cent gain in the BSE 500 index and 1.4 per cent in the S&P BSE Sensex, ACE Equity data show.
Even on Tuesday, these shares were up in the range of 2-5 per cent relative to the Sensex’s muted trade.
According to Ranjit Cirumalla, research analyst at B&K Securities, the recent supply disruption in China on the back of power outages and limited global supply expansion provides enough levers to the segment to deliver consistent returns and earnings growth.
“Though, most of the recent disruptions are likely to provide windfall in the near-term, there is a potential possibility of these events turning into structural drivers,” he said in a co-authored note with Parth Adhiya and Viral Shah.
Meanwhile, shortage of coal supplies coupled with toughening emissions standards and strong demand from manufacturers and industry have pushed coal prices to record highs and triggered widespread curbs on usage in China.
“As many large manufacturers were already looking to diversify their supply chains by moving some Chinese-based sourcing to other countries due to rising labour costs, stricter implementation of pollution-control measures, and withdrawal of subsidies, the recent events can act as a catalyst for India,” said a report by KRChoksey Securities.
At the global level, China has emerged as the most dominant player in the $4-trillion global chemicals industry, with nearly 36 per cent market share. However, this slowdown in China provides an opportunity to India to enhance its share in the global export market, it said.
At the same time, India’s chemical industry has grown by 12 per cent over the last five years and even a 1-2 per cent incremental market share gain from China can result in a growth rate that is in high-teens, said a report by White Oak Capital Management.
India’s chemical market stood at $178 billion (4 per cent global market share) of which the specialty chemicals market constituted 17 per cent market share with $31.1 billion market size in FY20.
Stay selective
According to Manoj Garg, director (investments) at White Oak Capital Management, companies with strong track record of execution, R&D capabilities, sustainable manufacturing practices, and presence in sustainable chemistries will be long term beneficiaries and investors should spot attractive opportunities on a relative basis.
Kotak Institutional Equities, meanwhile, notes that there could be significant divergence in the earnings and RoCE (return on capital employed) profiles of chemical companies in the medium-to-long term as current valuations are painting all chemical companies with the same euphoria.
“This will moderate as it becomes apparent that many companies will not be able to scale up, and continue to operate as pocket players,” the brokerage said.
It added: Given rich valuations, investors are better off picking up 1-2 players from each basket depending on the number of stocks they want to hold in the sector. Valuations apart, PI/SRF/Navin Fluorine are the best bets in contract manufacturing; Aarti Industries/Atul in catalogue manufacturers, and Vinati Organics/Clean Sciences in niche specialty additive/IP-based manufacturers.
Abhishek Navalgund, research analyst at Nirmal Bang Securities maintains ‘Accumulate’ on SRF, Aarti Industries and Vinati Organics, and ‘Buy’ on Navin Fluorine from a 1-year perspective.
Source: Business Standard
