Chemical Sector Analysis

Hi All,

Apologies in advance.Was not sure which thread to start hence starting here.

Of late Chemicals sector stocks are going up. After doing some initial research found the below article

http://www.moneycontrol.com/news/market-outlook/like-oilgas-chemicals-to-give-multi-baggers-hdfc-sec_1176187.html

HDFC Sec is saying because Oil prices have come and since Chemical sector is dependent on them the stocks going up.They particularly highlighted Apcotex,Bodal chemicals and Tata chemicals.

My main doubt is that HDFC states that they don’t expect oil prices to go up anytime soon and hence Chemical sector is bound to have a good rally.Iam not sure if this analysis is right.

There are so many external factors which decides the oil prices to take this at face value.

Would be really helpful if experts in Chemicals help me put.

Thanks in Advance,

Hari

I’ve also observed an uptick in the earning of chemical sector companies led esp. by margin expansion which could be, as u suggested, because of low cost of RM or higher demand or both.

One needs to dig deeper as one can’t take any bet on Oil.

To understand why chemical cos are rising fast, and continue to rise for quite sometime (along with sector like textiles, engineering, manufacturing), one need to understand the global macro changes, that are happening.

Factor #1 - Slowing Dragon

Advantage china was based on 3 major pillar - cheap labor, cheap cost of capital (cheap loan), cheap chinese currency. Off late, all of these 3 advantages are slowly wearing out. There is labor shortage in china, wages are going up. Yuan is appreciating. Banking reform will move interest rate slowly up. This is giving a huge advantage for indian export cos in chemical/textile/manufacturing

Factor #2 - Stricter environmental

control in china

Excessive industrialization in china has resulted in excessive pollution. Now, chineese regulator have suddenly woken up, and started putting stringent env regulations (even directors/CXOs of polluting cos are being thrown into jail). So, as usual, chemical plants are being closed in china, and newer plants are being moved to countries like India

Factor #3 - Advantage india

We are pretty good at chemistry, is a fact that is ignored by many. Though we are poor in RnD, our chemical/api/pharma cos are quite good in process chemistry, and have developed skills to produce chemicals in bulk scale, and compete globally. We have good talent pool in chemical skill.

Factor #4 - The NaMo effect

With coming of NaMo, it is expected that the env/regulatory/red-tape terrorism of upa-2 regime will come to end. Make-in-India implies red-tapes will be replaced by red carpets. So many of govt-created illness of india inc will go away. More FDI/factories in india means more domestic consumption.

Sometime down the line interest rate will also come down.

For textile cos - there are other trigger like Bangladesh’s labour issue, Pakistan’s internal issues, and domestic availability of cotton - which implies more business for indian textile cos.

There are definitely multiple triggers, and stocks are well deservingly getting rerated.

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Good analysis Subhash. It will be of a immense help we we could identify companies from the sector which have the potential to go appreciate from current levels, as many of them have run up quite a bit. Some of the names that come to mind are Atul, Sudarshan, Aarti, Bodal, Bhageria, Asahi, Aksharchem, Alkyl. The list is endless…

Subash,

I will add a few more:

#5: Due to the seemingly permanent depreciation of the Rupee against the Dollar,the Import Substitution theme seems to be playing out for Chemicals.So,even if there is no incremental demand,this being the first year of Import Substitution,the delta will be large.

#6: Being a partly cyclical industry,the sector benefits from renewed demand from Autos,Paints,Industrials,etc.

Apart from this,some cos. have transformed themselves over the past few years & are continuously moving up the value chain.The most notable example would be: Adi Finechem,which continues to take advantage of its manufacturing capabilities to the fullest.Atul Ltd. is another pedigree name in the sector.Both warrant a ‘buy’ on 15-20%+ kind of declines.

Disc.: Invested in Adi.

Subash & Sagar,

Nice analysis. For the benefit of newbies (like me), any tips for sharpening our analysis skills?

Thanks,

Kiran

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An analyst’s thoughts on Sudarshan:

https://www.investing-notes.com/sudarshan-chemical-bse-506655-nse-sudarschem/

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Hi, Speciality chemical sectors seems to be growing and investor favorite sector considering plant shutdown in China. can someone list few of good speciality chemical companies along with the areas where their chemicals are used? Some of good speciality chemical companies could be Vinati organic, PI Industry, Atul Ltd, Aarti industries

I am overweight currently in chemical industry and since there are no chemical sector specific MF I have build sort of one for myself. It includes Pidilite, Aarti, Vinati, Deepak Nitrite, Alkyl Amine, Navin Fluorine, Atul, SRF, PI Industries and UPL. I am doing kind of monthly buy on dips in it as I feel it can be a growth sector for next 5-10 years. Do you think this approach is right. Moreso as around 10% of my equity investments is in it.

You can consider buying chemical small case too which has almost same stocks. I am considering it. But I haven’t bought it though.

Yeah I had seen that too…did not like the exact break up, but it has the option to customize…but if I customize and buy it, then better myself buy stocks directly to spare the expense.

HDFC Research Chemical Sector Update.pdf (688.8 KB)

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India’s Chemical Industry Outlook 2021:

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March - Chemical Sector News Letter

Chemicals - Monthly Update - 31 Mar 21.pdf (1.2 MB)

Hi, you can find the detailed analysis of the speciality chemicals industry in a very simple language below:

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