Specialty Chemicals: Is the growth story over or a revival on the horizon?

[vc_row type="in_container" full_screen_row_position="middle" column_margin="default" column_direction="default" column_direction_tablet="default" column_direction_phone="default" scene_position="center" text_color="dark" text_align="left" row_border_radius="none" row_border_radius_applies="bg" overflow="visible" overlay_strength="0.3" gradient_direction="left_to_right" shape_divider_position="bottom" bg_image_animation="none"][vc_column column_padding="no-extra-padding" column_padding_tablet="inherit" column_padding_phone="inherit" column_padding_position="all" column_element_spacing="default" background_color_opacity="1" background_hover_color_opacity="1" column_shadow="none" column_border_radius="none" column_link_target="_self" column_position="default" gradient_direction="left_to_right" overlay_strength="0.3" width="1/1" tablet_width_inherit="default" tablet_text_alignment="default" phone_text_alignment="default" animation_type="default" bg_image_animation="none" border_type="simple" column_border_width="none" column_border_style="solid"][vc_column_text css=".vc_custom_1692877888991{margin-right: 16px !important;margin-left: 16px !important;border-right-width: 10px !important;border-left-width: 10px !important;}"]The specialty chemical industry in India has been thriving due to the global procurement policy of China +1 and decreasing production in the European Union over the last few years. India has been among the beneficiaries, with revenue growth of fluorochemistry companies outpacing their Chinese counterparts for the past five years. This acceleration occurred since the onset of the Covid-19 pandemic in early 2020.

Consequently, we have witnessed multibagger returns from many specialty chemical stocks in the last three years. Several specialty chemical companies made their debut on the stock exchanges due to high demand and expansion plans. Even larger players have formulated expansion plans, and many of these are currently underway.

However, over the past year, these stocks have disappointed investors with negative returns. Is the growth story for these stocks over, or is this a pause before resuming an upward journey?

Part of this can be attributed to excess supply from China and consequently a slowdown in orders for Indian companies. Higher raw material costs have also impacted the profitability of these companies. Most specialty chemical companies started showing signs of slowing down since Q3 FY23, with quarterly revenues falling in comparison on a YoY basis. Similarly, net profits also began declining on a YoY basis.

Take the case of SRF, which saw YoY net profits decline in Q4 FY23 but was able to maintain YoY revenue growth. In the next quarter, Q1 FY24, it experienced a decline in both revenues and net profits on a YoY basis.

SRF wasn’t the only one to report such a decline in numbers. Almost all the specialty chemical stocks have seen a fall in revenues and net profits in Q1 FY24 compared to Q1 FY23.

Gujarat Fluorochemicals also witnessed its revenues and net profits decline on a YoY basis in Q1 FY23 after several quarters of growth. In fact, Gujarat Fluorochemicals has been one of the specialty chemical players that has given the highest return to investors over the last three years, an impressive 5X return.

Vinati Organics also experienced a decline due to a drop in volumes and diminishing margins on its products. The management expects demand for their products to pick up in the second half of FY24.

Post the results this quarter, analysts remain optimistic about many of these stocks. Most of these companies have capex plans to enhance production capacities, and these plans are expected to come to fruition over the next two years. While demand for these products may have been muted this quarter, it is likely to pick up over the next few months.

Vinati Organics is expanding its ATBS capacity by 50% to 60,000 tonnes per annum and has planned a capex of Rs 260 crore for some other products.

As of Q1 FY24, SRF incurred a capex of over Rs 2,000 crore to set up seven specialty and three fluorochemical plants. It has earmarked a capex of Rs 1,200–1,300 crore for FY24.

Alkyl Amines plans to spend Rs 200 crore on capex in FY24/25E. The company is also looking to acquire a land parcel in Gujarat, and the capex will be announced once the company obtains land allotment. Currently, the company has enough unutilised land at Kurkumbh and Dahej to support medium-term growth.

Given the long-term prospects of this industry, the current slowdown appears to be a pause after a run-up in the last few years. With most players having expansion plans and a demand recovery expected in the second half of FY24, there is a likelihood that this sector could begin an uptrend soon.

 

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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