For speciality chemicals stocks, near-term catalyst is missing
2 min read . Updated: 23 Feb 2023, 12:45 PM IST
Premium- While the sector's long-term growth prospects are bright, investors in the stock would watch out for short-term hiccups on demand front, which could weigh on volumes
The December quarter earnings (Q3FY23) of speciality chemicals companies were decent and largely on expected lines.
For companies under Nuvama Research's coverage, aggregate year-on-year (y-o-y) revenue growth of 12% was led by softening raw material prices and met expectations . Sequentially, however, revenue fell 6%. Aggregate Ebidta also grew 12% as operating margin remained stable at 21.6%.
The Nuvama report said that, though volume growth remained healthy, chemical companies with a higher exposure to commodity prices, such as Deepak Nitrite Ltd and Aarti Industries Ltd, faced some duress due to subdued demand, moderation in product prices and pinched margins.
But the good part is that the industry's margin outlook is largely comforting as companies expected to benefit from price increases and better mix. Analysts at ICICI Direct Research note that most cost headwinds were addressed by chemical companies under their coverage using a better product mix with higher proportion of CRAMs execution and value-added products.
However, the near-term commentary is cautious and points to some moderation in growth. Chemical companies focused on industries such as the textiles and automobile sector are seeing some demand pressure. Firms catering to industries like textiles, dyes, paints endured a double whammy of weak demand and lower realisations, said the Nuvama report.
According to analysts at Jefferies India Pvt Ltd, despite the strong showing in Q3, consensus FY24 earnings estimates for key chemical companies such as Navin Fluorine Ltd and SRF Ltd have seen cuts indicating stretched growth expectations. "Valuations prevail at premiums to 5-year average possibly on optimistic earnings estimates. We would consider becoming more constructive were valuations to turn more reasonable," added the Jefferies report.
Meanwhile, with the recent correction in stock prices of speciality chemicals companies, valuations have cooled off. While the sector's long-term growth prospects are bright, investors in the stock would watch out for short-term hiccups on demand front, which could weigh on volumes.