UBS gives Buy rating to PI, Navin; initiates coverage on 4 chemical stocks

Switzerland based global brokerage firm, UBS in a recent note said that  investors may be ignoring Indian chemicals companies' strong niche positions and growth opportunities amid the worst global destocking cycle in chemicals over the past 30 years. However, the brokerage said that it  sees signs of modest volume recovery. 

Owing to the growth potential in the Indian chemical companies UBS has initiated coverage on four firms including PI Industries and Navin Fluorine International with ‘Buy’ ratings. Others, subsuming Gujarat Fluorochemicals (GFL) and Aarti Industries received ‘Sell’ call from the brokerage.

Analysts at UBS noted that the chemical firms are witnessing structural growth on capability enhancement and supply chain diversification. Indian chemicals companies scaled up their Capex 4 times in FY16-23 leveraging opportunities in specialty chemicals. Further, ongoing supply chain diversification and increased capacity is set to drive structural growth. 

 

“Two years of underperformance reflects the sector's negative earnings momentum. This backdrop may drive stronger-than-expected performance given the modest cyclical uptick,” analysts wrote in a report. 

Several indicators including PMI, new orders, and Brazilian chemical imports suggest modest improvements in volumes. Though excess capacity of around 15 per cent built in the last three years and continued demand weakness mainly in China may limit upside. 

Hence, the brokerage expects a modest 5-10 per cent volume uptick with subdued prices and spreads in the near term. 

“Initiating coverage in order of preference: PI, Navin, Aarti, GFL We initiate on PI Industries (Buy, Rs 4,800), Navin (Buy, Rs4,250), Aarti (Sell, Rs615) and Gujarat Fluorochemicals (Sell, Rs3,000),” Lokesh Garg, Lavanya Tottala, Geoff Haire and Amily Guo of UBS wrote in a recent report. 

Analysts said they preferred PI given its strong growth, management track record, less volatile business model and potential scale up of the pharma vertical. Navin is leveraging growth opportunities in agrochemicals, CDMO and 3rd/4th-gen refrigerants.

Aarti Industries too is expanding capacity in existing and new chains, but its greater cyclical dependency and debt levels are coupled with high near-term Ebitda guidance. Further, Gujarat Fluorochemicals is exposed to Chinese overcapacity in fluoropolymers while its EV business fundamentals are still in nascent stage, the brokerage said.