WHAT SO SPECIAL ABOUT SPECIALITY CHEMICAL COMPANIES ? WHAT FUELING RALLY IN STOCK PRICES

  • Why Chemical Stocks are rising ?
  • How to analyze Chemical Stocks results ?
  • Mutual Funds having highest exposure to Chemical Sector
  • Chemical Companies with highest mutual fund holdings.

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Why Chemical Stocks are rising ?

1. Low base earnings when comparing March-20 with March-21.

2. PAT growth estimated to increase by 44% to 70% on YoY basis due to strong recovery in paints, auto, construction, pharmaceutical. Ex- Fineotex Chemial has posted strong results in Q4

3. Improved product mix : Most of Indian specialty chemical peers have either integrated their product portfolio or added downstream products in the recent past. This coupled with the scenario of the low exports base of last year strengthens margins and hence profits in Q4.

4. Due to strong demand recovery, the input prices are on the rise led by spurt crude oil prices (+15% yoy,+30% qoq), for example – Benzene (35.4% qoq, 0.9% yoy), Toluene (13.2% qoq, -24.6% yoy),Phenol (10.7% qoq, -16.9% yoy), etc. Rise in inout price leading to rise in chemical prices and led to increased margins on production from current inventory.

5. Indian Specialty chemical industry witnessed a steady recovery in operations as well as demand(exports & domestic) in Q4 from the lows Covid ledlockdowns. Industrial activity reaching pre Covid levels.

6. China + 1 theme is again getting traction as virus concerns rises.

7. Many chemical companies have been working on new products through R&D and these products are now in commercial phase leading to higher margins and more revenue stream.

8. Various chemical companies had done expansion which is showing now results.

10. US lifted ban on key raw material used for vaccine manufacturing which will give boost to amine stocks as amine also used as raw materials.

11. 18+ vaccination drive will further increase vaccine consumption and demand for amine.

12. Openning vaccine procurement  for Private & State Govt will increase vaccine consumption and demand for amine.

13. 2nd wave of virus created lot of uncertainty and has hurt logistic and supply chain management which makes importing chemical a tougher job and hence domestic chemical manufacturer are preferred by chemical consumers in India.

14. Favorable currency to supplement: INR depreciated against key currencies (USD +0.6%, EURO +10.0%, GBP +8.3% & CHF +7.6%) over last year and that Indian chemicals cheeper for importers in global markets.

15. Corporate action like dividend and stock split.

BUT MAJOR RISK IS 2ND WAVE OF VIRUS WHICH WILL DENT OVERALL DEMAND OF CHEMICAL AND THEIR EARNINGS IN Q1FY22.

How to analyze Q4 results so as to screen out fundamentally good stocks

1. Analyze results on Q-o-Q basis rather than Y-o-Y basis as last year March-20 was hit by pandemic and that quarter has low base of earnings while QE Dec-20 has shown strong business. So if companies are doing good business in Q4 when comparing with Q3 then there performance are actually consistent rather than cyclical.

2. EBITDA margin is most important factor along with volumes.

3. Product Mix needs to be analyzed that whether high margin products are giving higher volumes and revenue. Also whether high volume products has seen margin improvement as promised by management.

4. Tracking management commentaries like promise made and guidance given are actually achieved.

5. Whether capacity expansion are done or going on management guided timelines.

6. Companies with export volumes will perform better when domestic demand has taken back seat. Also these companies will be beneficiary of PLI scheme.

7. New product development which can reduce reliance on import is a potential revenue stream to look for

8. Valuations in terms of PE ratio and PB ratio.

9. Consumers to which chemical companies supply are performing well or not. Ex- companies having pharma as their consumers will perform better when compared with auto, paint industry serving companies.

10. Last but not least companies having high liquidity with low debt will be able to outpace peers. But debt reduction couldn’t be appreciated with curtailing business volumes and expansion.

Mutual Funds with highest exposure to chemical sector

Unfortunately we don’t have thematic funds or sectoral funds for chemicals but surely everybody wants to ride on rally. Just like last year we saw, NFOs of pharma mutual funds or ETF, we hope same for chemicals too this year.

Nevertheless, below are funds with highest exposure to this sector

Axis Small Cap Fund, Nippon India Small Cap Fund and Franklin India Smaller Companies Fund are three MFs which fit in both criteria.

Chemical Stocks with highest MF holdings

~By CA Sudarshan Bhandari , Beat The Street

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