Vinati Organics To Deepak Nitrite: Why Analysts See Upside Despite Headwinds

Despite a disappointing second quarter driven by global headwinds, analysts expect upside for select specialty chemical stocks.

The success of the chemicals sector from FY19 to FY22 was largely attributed to catchphrases like "flow chemistry", as well as the China+1 factor, demand for specialty chemicals, and contract development and manufacturing organisation boost. However, destocking and "China dumping" have become the new norm over the past nine to 12 months, significantly undermining profitability.

"We have seen the discussion shifting from 'It's all good' to 'It's looking bad' and now to 'It's not all that bad'," Nirmal Bang said in their India Specialty Chemicals Report. Given the global commentary and guidance by Indian companies, times may be tough in the near-term, though players in select pockets can survive and thrive in the long-run, it said.

According to the brokerage, destocking in agrochemicals had started during April-June, unlike other end user industries such as dyes, pigments, and polymers where it started in January-March, owing to subdued demand and high interest rates.

Considering the historical cycles, it expects destocking to continue in generic agrochemicals and pharmaceuticals in the next one to two quarters. Other end user industries have bottomed out and are showing signs of revival. Novel molecules space in agrochemicals and pharma continued to witness robust demand during July-September.

Elara Capital said there is a relationship between world GDP cycle and chemical cycle. According to the brokerage report, world GDP cycle is of four years since the past 30 years and the global chemical firms valuation cycle bottom usually comes a year prior to the world's GDP cycle.

The brokerage expects the four-year global chemical valuation cycle to reach its bottom in second half ending March, and guidance of global chemical firms also hints that there will be return of revenue growth by quarter ended September, it said. This will indicate positive outlook for global and domestic chemical companies.

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• Nirmal Bang has a 'buy' call on Navin Fluorine International Ltd., with an upside potential of 10%.

• Elara Capital has a 'buy' call on Vinati Organics Ltd., with an upside potential of 39%; followed by Navin Fluorine, with an upside potential of 30%.

Here's how brokerages view the sector:

• Maintain structural positive stance on SRF Ltd., Navin Fluorine, Fine Organic Industries Ltd. and Neogen Chemicals Ltd.

• Destocking in generic agrochemicals space is likely to continue.

• Global demand remains weak; India is an outlier.

• Specialty capex continues towards projects yielding higher margin and ROCEs.

• Expects destocking to be over by Q3 FY24, with initial signs of sales growth from Q4 FY24.

• Concludes Navin Fluorine, Gujarat Fluorochemicals and Vinati Organics should be the leader on revenue growth among their coverage companies.

• H1 CY23 export market trend also favours Navin Fluorine International and Vinati Organics.

• Global chemicals four-year cycle: Expects H2 FY24 should be bottom.