Speciality chemicals firms see gains from coronavirus scare as orders rise

Supply disruption in China, new orders, and expansions are key positives

The speciality chemicals segment stands out in the current economic scenario — it is witnessing a rise in orders and expansion of capacities.

In addition to the regular order flows, trends in the global chemicals space are expected to lead to near-term opportunities for Indian companies. Given the expansions, tie-ups with foreign majors, and innovative product launches, analysts believe there could be further upside from the current levels.

Listed speciality chemical players have consistently generated wealth for investors, with the Street taking note of the improvement in the operational performance led by revenue growth and margin expansion. The quarter gone by was no different. Although revenues growth was slower because of the falling chemical prices, operating profit growth remained in double digits. 

Analysts at IIFL said speciality chemical players, such as SRF, Deepak Nitrite, Navin Fluorine, and Neogen, fared better. They expect the coronavirus outbreak to benefit upstream producers in Q4FY20.

Because of the outbreak of coronavirus in China, supplies from this region have come to a standstill. This has resulted in inching up of chemical prices, too, which is beneficial for Indian chemical players. Further, global agro and speciality chemical companies are eyeing India as a reliable partner, says Rishabh Bothra, analyst at Sharekhan. 

What makes Indian companies competitive as compared to China is the availability of skilled labour at a lower cost. Companies, such as Galaxy Surfactants and Fine Organics, catering for the fast-moving consumer goods, home and personal care, and food ingredient segments are also well placed. Their differentiated business models and a higher level of product customisation ensure strong entry barriers. 

Also, in terms of availability of raw material, these companies are in a sweet spot. Apart from domestic supplies, geographical advantage benefits them, given the proximity to Africa, West Asia and Southeast Asia which ensures competitive imports. 

The Street’s sentiment for speciality chemical companies got a boost recently from a Rs 2,900-crore order for Navin Fluorine from a multinational company to manufacture and supply a high-performance product in the fluorochemicals space. This could further strengthen the view of India being a favoured destination for long-term supply contracts related to niche chemicals. 

The prospects of the sector are also reflected in the aggressive capex plans announced by key players. This should act as a base for the next phase of growth. While Navin Fluorine is to take up capex worth Rs 450 crore given the large order it has received, Aarti Industries, SRF, PI industries, Vinati Organics, Deepak Nitrite, Alkyl Amines are also expanding capacities. Aarti Industries’ plan for FY20 envisages capex of Rs 1,000-1,200 crore. SRF after committing Rs 1,000 crore for FY20 will put in another Rs 700-800 crore in FY21, as well. Other players 

have capex commitments of up to Rs 500 crore. 

Among major players, Aarti Industries remains the top pick for analysts at Edelweiss Research, given attractive valuations. Investors can also look at SRF, Fine Organics, and Galaxy Surfactants post a correction.