Top 5 Specialty Chemical Stocks Poised for A Rebound

Indian chemical stocks have underperformed the market over the past year.

Despite a growing domestic business, most chemical stocks have been reeling under weak export demand and elevated input prices, leading to subdued quarterly profits.

The impact of weakening exports has been pronounced in the first nine months of the financial year 2024. However, now, there are early signs of a global recovery in the chemical industry.

Various challenges faced by the global chemical industry in 2023, including a recession in Europe, inflation in the United States, and a slower-than-expected rebound in demand from China, appear to be easing now.

European production is rising, global challenges are easing, and the American Chemistry Council (ACC) anticipates a modest rebound in US chemical output.

Globally, the ACC expects a 2.9% year-on-year increase in chemical output in 2024. As per ACC, the destocking of inventory, which began in 2022, has largely concluded. However, the commencement of inventory restocking, a significant signal of an upswing in production activity, is still pending.

Most companies, in their latest conference call, have acknowledged the challenging phase in the global agrochemicals industry is coming to an end.

While a revival is in sight, it is likely to be back-ended.

Considering the potential recovery, here are top 5 speciality chemical stocks with promising outlooks for the coming year.

#1 PI Industries

At the top of our list, we have PI Industries.

PI Industries is a prominent manufacturer of insecticides, fungicides, herbicides and specialty products. The company's produce is widely utilized in agricultural settings domestically and globally.

It enjoys a rich five decades of experience in the agrochemical sector, emerging as a leading producer of generic molecules within India.

PI operates in more than 30 countries worldwide and boasts an extensive distribution network comprising 10,000 active dealers/distributors and over 100,000 retailers nationwide.

This explains the massive expansion in the business between 2019-2023. While the sales have more than doubled the net profit has nearly tripled. The returns have been rangebound with the return on capital employed (RoCE) and return on equity (RoE) averaging at 21.9% and 17.9%, respectively.

PI Industries Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	24.47%	17.40%	37.67%	14.87%	23.15%
Operating Profit Margin (%)	21.15%	21.73%	23.81%	22.60%	25.25%
Net Profit Margin (%)	13.60%	12.91%	15.38%	15.29%	18.22%
Return on Capital Employed (%)	25.10%	23.13%	22.09%	17.40%	21.84%
Return on Equity (%)	19.57%	18.63%	18.52%	14.71%	18.45%

Data Source: Ace Equity

This performance has continued in 2024 as well. In the nine months ending December 2023, the sales and net profits have grown at 20% and 38%. Despite delivering strong performance, the stock price has fallen over the past few months.

The dip in share value is attributed to concerns surrounding product concentration risk, particularly regarding its product, pyroxasulfone.

However, the company is downplaying concerns about generic competition. It argues that while generics are coming, the overall market for this multi-billion-dollar product category (currently US$ 600-700 million) offers significant room for future growth.

Additionally, extended patent life for combination-formulation products in developed markets lessens the immediate genericization impact. Finally, PI's established presence as a leading supplier for nearly a decade positions them well to navigate this shift.

Despite a challenging macroeconomic backdrop, PI Industries is poised to meet its financial year 2024 revenue growth target of 18-20% in the export side of the business. However, the domestic business will continue to remain subdued, but is expected to recover soon.

Moreover, PI is making significant strides in diversification. In exports, a whopping 30-35% of new inquiries and projects are now from non- agrochemical areas, showcasing a strategic shift.

Furthermore, the expansion into pharma promises to balance business segmentation and fuel growth. Over the next 4-5 years, the company aims for non-agrochemical areas, including pharma and the existing CSM exports, to contribute a substantial 20-25% of the total revenue.

At present, the stock trades at a price to earnings ratio (PE ratio) of 36.8x, a discount of 27% to its 5-year median PE of 47x.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Balaji Amines

Next on our list is Balaji Amines.

Balaji Amines enjoys a dominant position in an oligopolistic industry. The company is a leading manufacturer of aliphatic amines and a leader in oligopolistic amines.

It is also the sole producer of certain speciality chemicals catering to the pharmaceuticals (51% of total revenues) and agrochemical sectors (26%) and others (23%), such as paints, oil and gas, etc.

This leadership status across an array of speciality chemicals catering to India and other countries (15% of revenues in FY23) helps Balaji Amine diversify the business.

Between 2019-23, the business did well. The sales and net profits grew steadily at 22% and 29.1%, respectively. This robust growth trickled down to the returns with a notable 5-year average RoE of 27.5% and RoCE of 33.6%.

Balaji Amines Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	8.75%	-0.54%	40.12%	76.71%	1.41%
Operating Profit Margin (%)	20.96%	19.85%	28.92%	27.40%	26.46%
Net Profit Margin (%)	12.42%	10.42%	18.57%	17.96%	17.19%
Return on Capital Employed (%)	25.09%	17.94%	35.58%	50.21%	39.08%
Return on Equity (%)	22.51%	15.83%	31.38%	38.98%	28.94%

Data Source: Ace Equity

The business has been generating cash, allowing the company to expand its business with negligible debt on its books.

Going forward, the company plans to invest Rs 3.5 billion (bn) for the financial year 2024 for installing new plants. This will be geared towards high-value derivatives and specialty chemicals that will materialise into higher revenue and enhanced margins.

Balaji Amines operates in an industry that is massively benefiting from China's plus-one strategy. Globally, the aliphatic amines industry is controlled by two-three producers and is expected to grow at a CAGR of 5-7% over the long term.

However, much like its peers, Balaji Amine's stock has also underperformed the markets significantly, falling by over 3% in the past year.

The stock's weakness mirrors industry trends and stems from weak volume offtake and pricing pressure. The aggressive inventory clearance, particularly in China, is causing short-term price drops.

However, this is expected to be temporary. Once stockpiles are depleted, pricing is likely to return to sustainable levels. Therefore, looking ahead, the company is confident of a price and margin recovery in the following 2-3 quarters, make it a compelling investment.

At present, the stock trades at a PE of 40.4x, a 60% premium to its 5-year median PE of 29x.

To know more about the company, check out its financial factsheet and latest quarterly results.

#3 Galaxy Surfactants

Third on our list is Galaxy Surfactants.

Galaxy Surfactants is a leading manufacturer of surfactants and other speciality chemicals in India.

Surfactants are speciality chemicals used in household and personal care, industrial, and institutional cleaning products.

The company caters to the domestic (43% of sales) and international markets (57%).

Over the years, it has become a preferred supplier to leading MNCs (54% of revenues), regional (12%), and local FMCG brands (34%).

Galaxy Surfactants Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	13.49%	-6.13%	7.39%	32.29%	20.46%
Operating Profit Margin (%)	12.96%	14.44%	16.51%	11.21%	13.01%
Net Profit Margin (%)	6.91%	8.87%	10.85%	7.13%	8.57%
Return on Capital Employed (%)	27.38%	23.92%	25.63%	19.50%	24.16%
Return on Equity (%)	23.94%	23.70%	25.51%	18.28%	22.04%

Data Source: Ace Equity

This status explains the solid track record of growth, with sales and profits nearly doubling in the past five years, between 2019-2023.

The returns have also been strong, with the return on equity (RoE) and return on capital employed (RoCE) averaging at 22% and 24%, respectively.

Despite its leadership status and robust growth, the stock has been trading at a price to earnings (PE ratio) of 28.4 times, a 15% discount to its 3-year historical median multiple of 33.6 times.

Over the last few quarters, the total sales and profits have been on a downward trend. This comes on the back of a weak demand sentiment from the company's international markets.

Despite a slump in sales, the profit margins have inched up, thanks to the increased focus on high-margin products.

Going forward, the company is confident of a strong recovery led by easing raw material prices, freight rates and recovery in developing markets and North America, a key market.

Home and personal care (HPC) manufacturers are taking action to address pricing concerns in North America. This includes price reductions or adjustments, a move aimed at stimulating demand in the region. Early signs suggest a potential revival in the North American HPC market.

This price-focused strategy is also being implemented domestically. HPC manufacturers are implementing similar price reductions to encourage buying activity in the home market.

The stock is trading at a PE ratio of 29x, close to its 5-year median of 29x.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Aarti Industries

Fourth on our list Aarti Industries.

Aarti Industries is one of India's leading manufacturers of speciality chemicals and pharmaceuticals.

The company has a diversified basket of products and enjoys a monopoly in manufacturing several chemicals and active pharmaceutical ingredients (API), intermediates, and xanthine derivatives.

It boasts a wide presence in the domestic (52% of revenue) and international markets (48%), catering to a host of different industries such as textiles and fabrics paints medicines air fresheners agrochemicals etc.

Between 2019-2023, the business has grown well. While the sales have surged at a 5-year CAGR of 11.7%, the net profits have moved by 9.5%. The returns have been admirable, with the RoCE and RoE averaging at 15.9% and 20.2%, over 5 years.

Aarti Industries Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	9.33%	0.61%	7.43%	35.05%	8.76%
Operating Profit Margin (%)	20.55%	21.34%	19.55%	25.05%	14.96%
Net Profit Margin (%)	10.71%	11.83%	10.65%	17.26%	7.49%
Return on Capital Employed (%)	18.51%	15.85%	13.15%	21.96%	10.48%
Return on Equity (%)	23.96%	19.50%	16.52%	29.58%	11.56%

Data Source: Ace Equity

The stock, much like its peers, hasn't been immune to the slump in the industry. It has also faced a recent period of sluggish growth, visible in the stock performance leading up to the December 2023 results.

However, the business is showcasing encouraging signs of a demand turnaround. Sales of discretionary product segments like dyes, pigments, and additives are rebounding, suggesting improving business conditions.

While these are early signals, the company projects a full recovery in the coming quarters.

But the non-discretionary segment, which includes essential products like agrochemicals and pharmaceuticals, continues to face headwinds. High carrying costs and moderate overall demand are prompting major customers to maintain lean inventories.

Aarti is observing steady demand for certain non-discretionary products and is proactively engaging with key clients to provide the best value propositions.

Presently, the stock is available at a PE of 61x, a 84% premium to its 5-year median PE of 33x.

To know more about the company, check out its financial factsheet and latest financial results.

#5 UPL

Last on our list is UPL.

UPL Limited, formerly United Phosphorous Limited, is an Indian multinational company.

It specializes in agrochemicals, industrial chemicals, intermediates and speciality chemicals intermediates. Apart from the UPL also focusses on sustainable agriculture solutions.

Between 2019-2023, the business has performed admirably, with the sales and net profit reporting a 5-year CAGR of 19.5% and 22.9%, respectively. The returns have been rangebound, with the RoCE and RoE averaging at 12.6% and 17.7% over five years.

UPL Financial Snapshot (2019-23)

	2018-19	2019-20	2020-21	2021-22	2022-23
Revenue Growth (%)	24.50%	62.49%	8.14%	19.47%	16.15%
Operating Profit Margin (%)	15.86%	16.78%	18.89%	17.92%	16.56%
Net Profit Margin (%)	6.11%	5.19%	7.67%	8.10%	6.85%
Return on Capital Employed (%)	9.29%	9.60%	13.47%	15.26%	15.70%
Return on Equity (%)	13.19%	14.05%	20.44%	22.43%	18.20%

Data Source: Ace Equity

The company's debt levels are a bit high. The debt to equity ratio in the financial year 2023 was at 1.1x with a dismal interest coverage ratio of 2.7x, suggesting limited breathing room for managing interest payments.

The company is well-aware of this and is focussing on debt reduction. To this effect, it has reduced its capex spend by 30% in 2024, guiding for a capex of Rs 20 bn.

Additionally, UPL has recently announced a rights issue of up to US$ 500 m (about Rs 41 bn) to raise fresh capital.

It's also exploring capital raising opportunities within their subsidiaries or business units. The proceeds from both these initiatives will be specifically used for debt repayment.

UPL investors are facing a tough year. The company's share price has dropped 30% in the past year, coinciding with a disappointing performance in the December 2023 quarter. UPL recorded a net loss of Rs 12.2 bn in Q3, a significant shift from the previous quarter's net profit of Rs 10.8 bn.

The company's December 2023 results fell below expectations due to factors such as price erosion, rebates, and high-cost raw material inventory.

The losses were exacerbated as Argentina's Peso significantly weakened after a new government took power, leading to a one-time loss of Rs 2.9 bn. Most of this loss (Rs 2.5 bn) occurred on the day of devaluation itself.

Despite the near-term challenges, UPL's management remains optimistic about the future. They project a gradual improvement in performance over the next two quarters.

Additionally, UPL boasts a robust product pipeline valued at US$ 8.5 bn, targeting diverse regions and crop combinations.

Based on this pipeline, the company is confident in boosting its innovation rate from 14% to 24% by the financial year 2027, ultimately aiming to achieve 50% of its revenue from differentiated and sustainable solutions within the same timeframe.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

While Indian chemical stocks have lagged the broader market, a potential turnaround is brewing.

Early signs of a global recovery in the chemical industry - rising European production, easing global challenges, and an anticipated rebound in US output - offer a glimmer of hope.

While the near-term might remain muted, these developments paint a promising picture for the speciality chemical sector in the coming year.

These speciality chemical stocks offer promising outlooks for the financial year 2025 and beyond. However, despite the positive odds, consider conducting your research before making any investment decisions.

That is what successful investing is all about.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...