The agrochemical cycle in India is at the cusp of a turnaround and the chemical sector is again poised for returns, analysts said.
“Early signs of a turnaround in agrochemicals, particularly supplies for innovators, are visible now which was hurt in FY24. Agrochemical inventory has fallen below normal which provides comfort, and the underlying demand remains steady. US agrochemical companies have been vocal about increasing outsourcing, and being asset-light, which benefits Indian specialty chemical companies with increased addressable market,” ICICI Securities’ analysts Sanjesh Jain and Ashvik Jain said in a report.
India chemical companies’ estimates have been downgraded significantly in the past 18 months, and are hitting easy base driving EPS growth of over 25% over the next three years (FY24- 27E) which makes the analysts believe that the sector is again poised for returns.
ICICI Securities’ stock picks in the chemical sector among direct beneficiaries are Navin Fluorine International, Chemplast Sanmar and SRF, and among indirect winners are Archean Chemical Industries and Tatva Chintan Pharma Chem.
Here are top chemical stocks to buy:
ICICI Securities has increased Navin Fluorine share price target to ₹4,135 from ₹3,960 earlier on slight increase in EPS by 1-4% over FY25-26E. The brokerage firm maintained its ‘Buy’ rating on Navin Fluorine shares and the stock remains its preferred pick in the agrochemicals intermediate segment.
Chemplast Sanmar is next in our pecking order, and we have increased our EPS estimates by 2-9% over FY25-26E as we factor in slightly higher spreads for PVC business on rising regulatory aids, ICICI Securities said.
The brokerage firm has downgraded Chemplast Sanmar’s rating by a notch to ‘Add’ from ‘Buy’ earlier but increased the target price ₹665 from ₹555. It increased EV/ EBITDA multiple for customer manufacturing to 25x (from 22x) in-line with peers, and standalone EV/EBITDA to 10x (from 9x) and S-PVC EBITDA to 8x (from 7x) with improving outlook.
SRF had best execution in the past in agrochemicals intermediate, and the aggression on product development has been intact despite the downcycle, which is impressive. It is also likely to resume capex intensity in H2FY25, ICICI Securities said.
However, SRF has headwinds in one key product from Chinese competition, which is 20-21% of specialty chemicals revenue. The brokerage maintains its ‘Add’ call and SRF share price target of ₹2,580.
ICICI Securities believes Archean Chemical Industries is well placed to benefit from higher volumes for the bromine domestic market as agrochemical cycle normalises. It has significant operating leverage, and higher revenue can drive strong EPS growth. The company has also commenced production of inorganic bromine derivatives, and is likely to re-start Oren Hydrocarbon business which will also likely boost earnings.
The brokerage firm maintained its ‘Buy’ rating on Archean Chemical shares.
Tatva Chintan Pharma Chem was most impacted during the downcycle as it had significant erosion in pricing and volumes across businesses. The company has commenced a large project (Dahej-2) which has added to cost. As volumes recover, Tatva may have higher revenue growth, and even higher profit growth as fixed cost gets absorbed, ICICI Securities said, while maintaining a ‘Buy’ call on Tatva Chintan Pharma shares.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
