Sharekhan, a leading brokerage is positive on a number of sectors based on the Q1Fy22 earnings review and likewise has listed out specialty chemicals stock on which it is bullish on together with the rationale for the same:
Financials of the Specialty chemicals space:
"Companies in the speciality chemical space, also witnessed sharp contraction in margins (down 125 bps q-o-q) due to high logistic and RM cost although revenue growth of 18.8% q-o-q was slightly better-than-expected as strong export demand offset weakness in domestic demand due to second wave of COVID-19", said the brokerage firm.
Near term volatility likely:
The agri-input and specialty chemical sectors would witness near term volatility in margins given elevated export freight costs, adds the brokerage. "Rising domestic demand, contract manufacturing opportunities and import substitution are likely to present a massive revenue opportunity for the specialty chemicals space. High double-digit earnings growth outlook supported high capex intensity and favourable government policies would support premium valuation of quality companies in the sector", views the broking house.
The stocks from the space covered by the brokerage house witnessed a mixed financial quarter with revenue growth better than expected for companies such as SRF, Aarti as well as Vinati Organics, while some others including Sudarshan Chemical and Atul Limited posted weak performance eas second wave of Covid-19 impacted domestic demand.
"Also, a sharp jump in input costs and higher freight cost led to miss in OPM for most companies in this space. The highlighting factor was recovery in demand for majority of products to pre-COVID levels in the specialty chemicals. Management commentary was also positive and most companies maintained their double-digit revenue growth guidance and high capex plan for the specialty chemical business.
However, for companies like Sudarshan Chemicals, margin pressure will stay in the upcoming quarters due to rise in input cost", adds the company in its report.
Outlook bullish for medium to long term:
"We remain bullish on medium to long-term growth prospects for the Indian specialty chemical sector (expect a 9% CAGR over 2019-2025 and reach $304 billion by 2025), given a massive revenue opportunity both from the perspective of import substitution (India's total specialty chemical imports is estimated at $56 billion), potential increase in exports given the China Plus One strategy by global customers, and favourable government policies (such as tax incentives and production-linked incentive scheme similar to that of the pharmaceutical sector).
"Conducive government policies, product innovation, a massive export opportunity (CRAMS) would help the sector witness sustained, high double-digit growth over the next 2-3 years. Structural revenue growth drivers (higher domestic demand, rising exports and import substitution) and potential for margin expansion (rise in share of high-margin value-added products) would help sustain high valuations of quality companies (like PI Industries, Sumitomo Chemical India and SRF) in the sector.
Moreover, capacity expansion and inorganic growth would further aid to earnings growth in the coming years. Hence, we stay positive on the sector", adds the brokerage.
Stocks given a buy from chemicals space with their price target
Leaders for Q1FY22: Coromandel International, Sumitomo Chemical India, SRF and Aarti Industries.
Laggards for Q1FY22: Sudarshan Chemical and Vinati Organics
Stocks given a buy from chemicals space: Aarti Industries, Atul Limited, SRF, Sudarshan Chemical, Vinati Organics.
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Stocks listed out here are taken from the brokerage report of Sharekhan and is just for informational use.