speciality chemical companies: Under-pressure speciality chemical companies rally on positive MS report

Mumbai: Shares of speciality chemical companies, which remained under pressure in recent months, saw a rally on Monday following a positive Morgan Stanley report. The brokerage said investors could experience positive surprises in select stocks, particularly companies with diversified portfolios and clearly defined organic volume strategies.

“We believe 2024 will beckon a shift in investment direction away from agrochemicals. Incumbents will explore new products and markets as the industry retools beyond crop solutions, including, but not limited to, opportunities within the clean energy ecosystem,” said the brokerage.

While upgrading SRF and Aarti Industries to overweight from equal weight, Morgan Stanley said earnings are bottoming in the first half of calendar year 2024, and the current multiples are seen as more in line with three-year averages, making the stocks appear more reasonably valued.

Aarti Industries saw its shares surge 11%, and Deepak Nitrate also experienced a 6% gain. Additionally, SRF, Navin Fluorine, Clean Science, Neogen Chemicals, PCBL, and others registered gains exceeding 3%.

However, the brokerage has downgraded Navin Fluorine to equal weight and issued a double downgrade for PI Industries, now rating it as relative underweight.

Earnings in India’s speciality chemical sector have recalibrated, dropping by 35-50% from their FY23 peaks after enjoying nearly two years of exceptionally high earnings.

In the current year, the Indian chemicals sector has trailed the Nifty index by 12-15 percentage points and has experienced a 25-30% reduction in Street estimates. Speciality chemical stocks continue to face challenges due to the impact of rising global interest rates and an oversupply in production.Stocks such as Aarti Industries, Atul, Fine Organic Industries, Sumitomo Chemical, and Gujarat Fluorochemicals fell 10-25% this year compared with a 7% gain in the Nifty index.

Except for PI industries, most chemical companies have seen a downgrade in the earnings estimate in the last three months. For instance, the estimated EPS of Gujarat Fluorochemicals for FY24 has been reduced by 34% in the last three months. In contrast, Deepak Nitrite, SRF, Aarti Industries, and Sumitomo Chemical EPS have been downgraded by over 17%.

Due to continued pricing pressure and low demand, analysts expect chemical companies to deliver a drop in year-on-year profits for the September 2023 quarter by 10% to 20%.

While current valuations may appear high, Indian chemical companies are expected to benefit in the long run, said analysts.

“In the long term, the industry benefits from robust domestic demand, global production diversification, and high-growth segments like pharmaceuticals and speciality chemicals,” said Anil R, analyst at Geojit Financial Services.

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