Domestic brokerage firm ICICI Securities, in its latest report, said that the agrochemicals sector is showing early signs of a turnaround, particularly supplies for innovators, which were hurt in FY24. The brokerage notes that agrochemical inventories have decreased to below-normal levels, providing a sense of reassurance, while demand fundamentals remain stable.
Additionally, it said that US agrochemical companies are increasingly opting for outsourcing and favoring asset-light models, which the brokerage believes benefits Indian specialty chemical companies with the increased addressable market.
It highlights that estimates for Indian chemical companies were significantly downgraded over the past 18 months, creating a favorable base effect that is expected to drive EPS growth of over 25% in the next three years (FY24–27E). This optimistic outlook leads them to believe that the sector is poised for a rebound and potential returns.
The brokerage believes the chemical sector has bottomed as prices have stabilised, albeit at lower levels. It anticipates a gradual recovery in chemicals, despite ongoing concerns about China's overcapacity. The destocking that significantly hurt the performance of Indian chemical companies in FY24 is expected to ease in FY25, creating a more favorable base and estimates, it noted.
Agrochemicals, particularly supplies to innovators, are likely to see volume growth soon, which could drive volume growth for Indian specialty chemicals and enhance EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) growth through operating leverage. The brokerage has identified four companies that directly benefit from volume growth in agrochemicals: SRF, Navin Fluorine, Chemplast Sanmar, and Atul.
Additionally, the brokerage lists out two other companies which it expects to benefit indirectly: Archean Chemical Industries and Tatva Chintan Pharma Chem.
The brokerage's preference order among these companies is NFIL, Chemplast, and SRF, while Atul is the least favored. Both Archean Chemical and Tatva Chintan are viewed positively.
ICICI Securities has raised the target price for the stock from ₹3,960 to ₹4,135, maintaining an unchanged multiple of 40x FY26E EPS due to a slight increase in EPS by 1-4% over FY25-26E. It continues to recommend the stock as the preferred pick in the agrochemicals intermediate segment with a ‘buy’ rating.
The brokerage ranks Chemplast next in its preference order. It has adjusted its EPS estimates upwards by 2-9% over FY25–26E to account for slightly higher spreads in the PVC business amid rising regulatory aid.
The target price has been raised from ₹555 to ₹665. The brokerage has also revised their EV/EBITDA multiples, with customer manufacturing set at 25x (up from 22x), standalone EV/EBITDA at 10x (up from 9x), and S-PVC EBITDA at 8x (up from 7x), aligning with an improved outlook. Despite the adjustments, ICICI Securities has downgraded Chemplast’s rating from 'buy' to 'add'.
ICICI Securities has maintained its estimates and target price for SRF amid concerns over potential downside risks, including pricing pressure from Chinese competition on one large specialty chemical product and lower HFC volumes to the US.
The target price remains unchanged at ₹2,580, and it recommends maintaining an 'add' rating, assigning a multiple of 24x on FY26E EBITDA to the chemical business.
The brokerage acknowledges the agrochemical sector’s positive outlook but retains cautious estimates due to ongoing pricing pressures on key products.
It has increased the target multiple to 28x (from 25x), resulting in a revised target price of ₹5,840, up from ₹5,220, maintaining 'reduce' rating.
ICICI Securities believes the company is well-positioned to benefit from higher volumes in the domestic bromine market as the agrochemical cycle normalises. It highlights Archean Chemical's significant operating leverage and potential earnings boost from the production of inorganic bromine derivatives and the likely restart of the Oren Hydrocarbon business.
ICICI Securities notes that the company was heavily impacted during the downcycle, experiencing significant erosion in pricing and volumes across its businesses. It highlights the commencement of the Dahej-2 project and anticipates revenue and profit growth as volumes recover and fixed costs are absorbed.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
