In-Focus: Specialty Chemical maker

The COVID-19 pandemic has proved to be a blessing in disguise for specialty chemical makers. While they have reaped rich rewards in terms of both, the sales volume and market valuations, their premium valuations derived from underlying fundamentals are expected to remain stretched for some time. However, these companies may face resistance in stock prices.
Gains over the last year for most of the specialty chemical companies have come on the back of the China strategy adopted by global multinationals.

Investor interest in specialty chemical companies continues to be strong given the stellar listing gains for Clean Science and Technology and the subscription for Tatva Chintan Pharma Chem. Clean Science, which develops eco-friendly technologies and operates in performance chemicals and pharmaceutical intermediates, is up 78% on debut. Tatva Chintan, another specialty chemical company, has seen a 14 times oversubscription for its initial primary offering which closes on Tuesday.
Among the larger listed players, Deepak Nitrite has been a major outperformer, nearly doubling in value over the last six months. Even over a three year period while most large specialty chemicals companies have generated returns over 200%, Deepak Nitrite has been an outlier enriching investor wealth by a whopping 782%.
The Nifty 50 on the other hand trails behind over this period with returns of 43%.

Post Covid-19, several downstream MNCs that used to import bulk of their chemical requirements from China are now contemplating to supplement this supply from elsewhere to reduce dependence on China. This has been a positive trigger for Indian specialty chemical industry.
In addition to the export opportunity, strong domestic consumption, low cost labour compared to China, lower regulatory costs, strong intellectual property protection and government policies (import substitution) are the other factors which benefit Indian companies. Innovation led by progress on the research and development front and new product launches could add to incremental growth for the sector.
These triggers are expected to help the sector grow at over 12.4% over CY20-25 to hit $64 billion. The growth is on a higher base of $32 billion; the domestic specialty sector has grown 11.7% which is double the global growth rate over CY15-20.

While sales are expected to rise as India accounts for under 5% of global specialty chemicals market but is registering double the global growth rates, valuations are now in the premium zone.
Most brokerages believe that valuations are in the premium zone with most specialty companies trading at 30-40 times FY23 earnings.

Most of the companies getting listed are operating in niche segments, have global leadership and a consistent track record of growth and profits.
Here are some top picks among specialty chemicals: Navin Fluorine, Aarti Industries, PI Industries and SRF.

While the long-term growth trajectory appears robust and there are multiple tailwinds, given the sharp rise in stock prices, the sector has priced itself to perfection ignoring risks such as supply disruptions/manufacturing delays.
Near-term upsides are therefore capped. Investors should await meaningful correction before considering these stocks.

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