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  • May 17, 2023 - Top 5 Chemical Stocks with Big Capex Plans. Worth a Look?

Top 5 Chemical Stocks with Big Capex Plans. Worth a Look?

May 17, 2023

Top 5 Chemical Stocks with Big Capex Plans. Worth a Look?

The chemical sector plays a significant role in India's economy, contributing around 3% to the GDP.

It has been on a steady growth trajectory. The market is expected to reach US$ 304 billion (bn) by 2025.

As several companies strive to expand their business operations to achieve this growth, there has been a new wave of substantial investments.

With a focus on capacity expansion, research and development (R&D), and innovative initiatives, Indian chemical companies aim to capitalise on the growing demand for chemicals across various sectors and countries.

This offers investors a great opportunity to potentially generate outsized returns over the long run.

We explore five Indian chemical stocks investing actively to fuel their growth and strengthen their market position.

These companies are spending big amount towards capital expenditure (capex).

#1 Neogen Chemicals

First on our list is Neogen Chemicals.

Neogen Chemicals is a leading manufacturer of Bromine and Lithium-based speciality chemicals.

The company boasts a strong portfolio of organic and inorganic products and caters to customers across multiple industries, including pharma, engineering, battery chemicals, and agrochemicals.

The company exports a large chunk of its sales (44% of sales in the financial year 2022) to the USA, Europe, Japan, and the Middle East.

Neogen Chemical is expanding its capacity across verticals. From inorganic chemicals to battery chemicals, it is spending close to Rs 4.5 billion (bn) on a slew of new and existing projects.

The expansion will be funded by a mix of debt and internal accruals.

While the debt levels will increase with this expansion, the debt-to-equity ratio is expected to remain below 1.25x.

Neogen Chemicals Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 46.61% 48.05% 27.82% 9.90% 45.10%
Operating Profit Margin (%) 18.08% 17.19% 16.73% 16.09% 15.54%
Net Profit Margin (%) 6.70% 8.20% 8.24% 7.82% 7.91%
Return on Equity(%) 23.78% 34.73% 25.31% 18.47% 14.34%
Source: Equitymaster

The ongoing expansion will contribute significantly to Neogen's earnings from the next financial year (2024). It aims to multiply its revenue stream (Rs 20 bn over 3-4 years) by more than 30% compounded annual growth rate (CAGR).

This compares to Rs 4.8 bn topline achieved in the financial year 2022.

The company's business has done well in the past 5 years with the sales and profits having nearly tripled.

The five year average return on equity (RoE) stands at 22.3%, and the debt-to-equity has been falling from 1.6x in the financial year 2018 to 0.5x in 2022.

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

#2 Navin Fluorine

Next on our list is Navin Fluorine.

Navin Fluorine is one of the largest integrated speciality chemical (fluorochemical) producers in the country. The company caters to the pharmaceutical and agro innovators sector.

It has developed three primary revenue streams. While inorganic fluorides & refrigerants account for 43% of the total revenues, speciality chemicals and CDMOs (Contract Development and Manufacturing Organisations) account for 36% and 21%, respectively.

Exports account for a large part of the business, with 67% of the revenue coming from exports.

The company has been expanding for some time now. While it is yet to commence operations at some of its newly built capacities, it has already announced a fresh round of expansion.

Recently, Navin Fluorine approved a capital expenditure of Rs 4.5 bn to set up a new hydrofluoric acid (HF) capacity at Dahej. The new facility will boast a capacity of 40,000 tonnes per annum, in addition to the existing HF capacity of 20,000 tonnes per annum in Surat.

This new project aims to address the growing demand for fluorochemicals in various sectors, including pharmaceuticals, agrochemicals and renewable energy. It will be financed through a combination of internal accruals and debt.

Navin Fluorine International Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 26.05% 2.50% 6.26% 14.94% 18.61%
Operating Profit Margin (%) 33.23% 25.38% 27.96% 32.93% 27.11%
Net Profit Margin (%) 19.72% 14.80% 37.81% 20.95% 18.10%
Return on Equity(%) 20.11% 14.37% 32.37% 16.25% 15.14%
Source: Equitymaster

The company's healthy balance sheet can withstand the cash outflow and the increasing debt levels.

Navin Fluorine enjoys a low debt to equity ratio of 0.1 times and a high interest coverage ratio of 182x, thanks to the strong performance of the business in the last 5 years.

While the sales have grown at a CAGR of 13.2%, the net profit has grown at 13.9% during the same time.

The 5-year average RoE stands at 19.6%.

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

#3 Dhanuka Agritech

Third on our list is Dhanuka Agritech.

Dhanuka Agritech is one of India's leading agri-input (pesticides and chemicals) companies.

The company's portfolio includes a wide range of crop protection products such as herbicides (accounting for 39% of the total revenues in 2023), insecticides (29%), fungicides (20%), and plant growth regulators (12%).

The company also provides specialised fertilizers and seeds to cater to the diverse needs of farmers and maximise crop yields.

The company enjoys a long-standing tie-up with global innovators such as Nissan Chemicals, FMC Corporation etc.

Dhanuka Agritech invested Rs 2.5 bn to set up a technical manufacturing plant at Dahej, aiming for backward integration and venturing into exports. This expansion will reduce the company's import dependence by 20% to 25%.

The project will commence in the next few months and has been funded by internal accruals. This is a function of the business performance in the last 5 years.

The sales and net profits have grown at a CAGR of 9.4% and 11.4% in the past five years.

Dhanuka Agritech Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 8.64% 4.94% 11.50% 24.10% 6.35%
Operating Profit Margin (%) 18.67% 16.64% 17.73% 20.15% 18.96%
Net Profit Margin (%) 12.92% 11.19% 12.62% 14.01% 13.32%
Return on Equity(%) 21.85% 17.65% 20.94% 28.00% 23.78%
Source: Equitymaster

Dhanuka Agritech boasts robust return ratios (RoE of 23.8% in the financial year 2022), backed by a debt-free cash-rich balance sheet.

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

#4 Diamines & Chemicals

Fourth on our list is Diamines & Chemicals.

Diamines & Chemicals is a key producer of ethylene amines in India. The product is used across industries, such as pharmaceuticals, agrochemicals, resins, water treatment chemicals, petroleum, additives etc.

Recently, the company commissioned a pilot plant to scale up the development of a new product. This project, which cost the company Rs 145 million (m), was entirely funded via internal accruals.

Diamines & Chemicals Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 11.05% 23.93% 47.85% -8.43% 3.91%
Operating Profit Margin (%) 30.42% 42.05% 53.85% 44.10% 36.09%
Net Profit Margin (%) 17.92% 27.75% 34.61% 33.48% 25.30%
Return on Equity(%) 17.68% 28.73% 42.08% 28.01% 18.05%
Source: Equitymaster

The company's business operates without any debt on the books. The reason behind that is the company's track record. The company's topline and bottomline have more than doubled in the past five years.

The reported RoE in the financial year 2022 stood at 18%.

The company has been generous to its investors by paying out consistent dividend in the past five years. It has an average dividend yield of 1% in the last 5 years.

To know more about the company, check out its financial fact sheet and quarterly results.

#5 DMCC Speciality Chemicals

Last on our list is DMCC Speciality Chemicals.

DMCC Specialty Chemicals is a prominent company that produces and distributes high-quality specialty chemicals.

The company specializes in sulphur, boron and ethanol chemistry. These products find application in a variety of end-use industries, such as pharmaceuticals, detergents, dyes, fertilizers, pigments, and cosmetics.

DMCC Specialty Chemicals is well underway with its capacity enhancement in value-added segments (specialty chemicals). It has invested over Rs 1 bn in this new capacity, funded by a mix of internal accruals and borrowings.

While a portion of the expansion came on stream in the financial year 2022, the other part will commence operations in the current financial year.

The strategic move aims to mitigate business risks and improve margins by balancing their presence in bulk and specialty chemicals.

DMCC Speciality Chemicals Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 1.97% 27.54% -15.19% 7.25% 59.82%
Operating Profit Margin (%) 13.17% 23.95% 18.14% 21.03% 13.79%
Net Profit Margin (%) 6.80% 20.27% 16.77% 15.83% 6.39%
Return on Equity(%) 18.54% 48.94% 24.14% 20.49% 11.64%
Source: Equitymaster

The company's balance sheet remains strong. However, the debt-to-equity ratio has slightly increased to 0.3x in the financial year 2022 compared to the previous years' 0.1x.

This is thanks to the strong performance reported by the business over the past 5 years. While the sales have grown at a 5-Yr CAGR of 12%, the net profit has grown by 4.5%.

The 5-year average RoE stands at 24.7%.

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

In conclusion

The robust investment strategies reflect their commitment to staying competitive and driving sustainable growth in the dynamic chemical industry landscape.

However, investors must keep a watchful eye on these stocks.

While it may seem like an opportunity for robust returns, it is crucial to adopt a comprehensive approach before making investment decisions.

Market conditions play a significant role in the performance of a company. Industry trends and other economic factors can impact a company's performance, especially in the expansion phase.

Therefore, it's imperative to carefully evaluate the fundamentals of each company before making any investment decisions that align with one's risk tolerance and investment goals.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Safe Stocks to Ride India's Lithium Megatrend

Lithium is the new oil. It is the key component of electric batteries.

There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.

So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.

If you're an investor, then you simply cannot ignore this opportunity.

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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...


FAQs

Which are the top chemical companies in India?

Based on marketcap, these are the top chemical companies in India:

You can see the full list of chemicals stocks here.

And for a fundamental analysis of the above companies, check out Equitymaster’s Indian stock screener which has a separate screen for best specialty chemicals stocks in India.

What are the top gainers and top losers within the chemicals sector today?

Within the Chemicals sector, the top gainers were BALAJI AMINES (up 10.1%) and LAFFANS PETR (up 5.7%). On the other hand, YASHO INDUSTRIES (down 12.5%) and PREMIER EXPL. (down 7.4%) were among the top losers.

How should you value chemicals companies?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

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