The undercurrents of Ukraine-Russia war are being felt across economies. From oil to wheat to chemicals, every commodity is seeing a spurt in its price amid clogged supply chains.
Chemical sector, for one, had just begun to see a turnaround, gaining ground from Covid-19 induced increased logistics and freight charges and China-plant shutdowns.
The Ukrainian crisis, however, has sprung up worries for the sector yet again as analysts say margins of related companies will be impacted in the near-term.
Concerns arise as crude oil is a key raw material for many players, the prices of which are inching towards record high levels.
That apart, depreciation of the Indian rupee versus Chinese Renminbi also implies higher competitiveness of chemical exporters who are in direct competition with Chinese players.
These concerns have also dented the stocks’ performance on the bourses. Stocks of Deepak Nitrite, NOCIL and Alkyl Amines have tumbled up to 26% on a year-to-date basis.
In comparison, the Sensex benchmark has fallen 6%, while the BSE mid-and small-caps indices have shed around 10% each.
But, should investors lap up shares after this correction?
According to AK Prabhakar, despite the cool off in prices, the sector will not be able to deliver good performance at least in the short-to-medium term.
That said, not all is bad for the sector. Analysts say, companies that use substitutes of oil derivatives such as India Glycol will benefit from rising oil prices as they use renewable energy.
Specialty chemicals, too, look attractive at this point in time as valuations are inexpensive and companies look better placed to handle the current increase in crude prices.
That apart, chemical companies involved in backward integration, and those offering niche products such as Ami Organics and Clean Science Technologies are great long-term bets.
According to Kotak Institutional Equities, Indian specialty companies are better equipped today to handle raw material volatility given presence in more downstream and specialised products, increased scale and growing dependency of global customers on Indian players.
The brokerage expects companies with low dependence on crude such as Naveen Fluorine, SRF, Aarti Industries and PI Industries to be least impacted as they have the ability to pass higher input costs.
Apart from chemicals, other oil-linked stocks will continue to be in focus on Thursday as energy prices remain volatile.
Moreover, developments around Russia-Ukraine conflict, US inflation data, the European Central Bank’s monetary policy meeting and assembly election results back home will guide the indices today.