5 Stocks To Buy From The Agri & Chemicals Sector As Suggested By Sharekhan

Sharekhan has a buy call on some stocks from the agri and chemicals sector and remains positive on the sector ahead of quarterly numbers.

Stocks to buy from the agri and chemical sector

Among the stocks that the brokerage has a buy call on are Coromandal International, Aarti Industries, PI Industries, Sumitomo and Vinati Organics.

According to the brokerage in the agri sector there is a muted domestic growth due to delayed monsoon, while export-oriented players are well placed.

"Delayed onset of the monsoon season would impact crop plantation. This coupled with higher channel inventories could push agri-input demand to Q2FY2023 for domestic companies. However, high global crop price would mean buoyant export demand and improved ability to implement price hikes for export-oriented and MNC-backed companies. Moreover, higher subsidy support would lead to revenue growth for fertiliser companies. Pricing action is likely to support margins of large companies despite elevated energy cost and logistic challenges. In terms of specific companies, we expect robust PAT growth for Sumitomo Chemical India, Coromandel, and PI Industries; however, UPL is expected to post PAT decline (despite healthy revenue/margin performance) as Q1FY2022 has tax write-back benefit and forex impact in the current quarter," the brokerage has said.

Specialty chemicals: Margin pressure to persist amid elevated raw-material cost.

Q1FY2023 would witness the full impact of elevated raw-material cost amid rise in crude derivative price along with rupee depreciation. "Thus, we expect the current quarter to be a challenging one from margin perspective (high input cost), while revenue growth would be largely driven by price hikes and a handful of companies (such as SRF and Vinati Organics) would see good volume growth. SRF is expected to outperform with the only company likely to report margin expansion, led by strong pricing for ref-gas; we expect robust 55% y-o-y PAT growth for the company. On the other hand, companies such as Aarti Industries, Atul Ltd., Sudarshan Chemical, and NOCIL are expected to post steep y-o-y margin contraction. Overall, we expect specialty chemical companies under our coverage to post 36.4% y-o-y revenue growth, 162 bps y-o-y margin contraction, and 28.7% y-o-y PAT growth in Q1FY2023," the brokerage has said.

Valuations and view on the sector

The Indian specialty chemicals sector is well poised to capitalise on global tailwinds and expand its global market share to 7-8% in the next few years from 4% currently, supported by structural drivers, including China Plus One strategy, import substitution, and opportunities emerging from the recent supply chain disruption in China. "Agri-input companies are also well poised to reap benefits of normal monsoon (which would drive agro-chemical demand in domestic market) and buoyant international demand. Thus, the recent correction in the stock price of agro and specialty chemical companies provides good opportunity to invest in quality stocks as we see structural earnings growth tailwinds remaining intact," the brokerage has said.