The 5 Most Undervalued Specialty Chemical Stocks Right Now

Identifying undervalued stocks in the specialty chemical sector can be lucrative for investors seeking opportunities in a market that continues to go higher.

These undervalued gems may not always garner the same attention as tech giants or high-flying growth stocks, but they can offer significant potential for capital appreciation with so many tailwinds.

In this article, we will shine a spotlight on the top five undervalued specialty chemical stocks. We will provide insights into their intrinsic value, growth potential, and explain why they might present compelling investment opportunities in an ever-evolving industry.

Read on to find out more...

#1 UPL

The first stock on our list is UPL.

Formerly known as United Phosphorous, the company engages in both agro and non-agro activities.

It is the fifth largest agrochemical company and fourth largest seed manufacturing company in the world. UPL also has a presence in over 138 countries with access to over 90% of the world's food basket.

Currently, the stock is trading at a Price to Earnings (PE) ratio of 15.8x. This is well below the industry PE of 24.7x and its 10-year average PE of 18.15x.

UPL share price has continued to underperform for a long time. But the current downtrend in the stock comes after the company announced its results for the June 2023 quarter.

The company reported a 17% YoY decline in revenue due to a degrowth in the global crop protection market. Net profit also declined almost 90% YoY to Rs 1 bn.

The global agrochemical industry has been going through a challenging phase over the last two quarters as distributors prioritised destocking and focused on tactical purchases amid high channel inventories.

Additionally, the market is witnessing pricing pressure given the high base of previous year and aggressive price competition from Chinese post patent exporters.

Going forward, the company anticipates demand to remain subdued in the September 2023 quarter as well. However, it is optimistic of demand recovery in the second half of the financial year as the channel inventory approaches a new normalized level.

The company has also announced that its board of directors has approved to hive off the specialty chemical business, including active ingredients manufacturing, to a 100% owned entity, UPL Specialty Chemicals Limited (USCL) for a consideration of Rs 35.7 bn.

This re-arrangement, which will be subject to approval of shareholders and expected to be completed in 3-4 months.

As far as financials go, UPL's revenue has grown at a CAGR (compounded annual growth rate) of 15% in the last five years driven by volume and price. The company's net profit has also grown by a CAGR of 12%.

Its return ratios stand comfortable with return on equity (RoE) at 18.2% and return on capital employed (RoCE) at 15.7% as of the financial year 2023.

The company has also reduced its debt significantly. It's debt to equity ratio stands at 1x, lower from 1.8x in the financial year 2019.

UPL has grown through acquisitions in the last 25 years, and it plans to continue this in the future as well.

Promoters of the company seem to be making most of the opportunity and buying beaten down shares of UPL from the open market.

Look at the detailed shareholding pattern of UPL to find out more.

#2 Balaji Amines

The second stock on our list is Balaji Amines.

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) has helped the company diversify its business, further enhancing its potential for wealth creation.

The stock is currently trading at a trailing PE ratio of 28.3x, lower than the industry PE ratio of 34.11x.

The stock has been struggling since the beginning of the year, as high energy costs, rising freight expenses, and skyrocketing raw material prices, have impacted its margins.

However, the business has done well over the last five years, demonstrating the company's competency. The revenue has grown at a CAGR of 22% in the last five years while net profit has grown at a CAGR of 24%.

This robust growth has trickled down to the returns. The company's RoE stands at 28.9% and RoCE at 39% as of March 2023.

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

Going forward, the company plans to invest Rs 3.5 bn for the financial year 2024 for the installation of new plants. This will be geared towards high-value derivatives and specialty chemicals that will materialize into higher revenue and enhanced margins, offering revenue and profit visibility.

#3 Galaxy Surfactants

The third stock on our list is Galaxy Surfactants.

The company is a leading manufacturer of performance surfactants and speciality care products with over 205 product grades.

Being the largest manufacturer of oleo chemical-based surfactants, it is a preferred supplier to leading FMCG (fast-moving consumer goods) brands such as Unilever, Himalaya, Dabur, Henkel, and CavinKare.

Galaxy Surfactants PE ratio stands at 21.32x considerably lower than the industry PE of 55.54x.

The stock has been under pressure due to near term challenges faced by the company in terms of high raw material prices and low demand due to a decline in discretionary spending.

However, the company sees the situation slowly but steadily improving in the coming quarters.

Easing inflationary pressures and progressive improvement in macros should aid consumption in AMET and developed markets.

At present, the company is focussing on improving its share among existing customers and increasing its presence in emerging markets.

How do the company's financials fare?

In the last five years, revenue has grown at a CAGR of 13% on the back of new product launches and volume growth. The net profit has seen a growth of 19% during the same period.

Healthy earnings have translated into robust return ratios as well. The company's RoE stands at 22.04% while ROCE stands at 24.2%, respectively.

Steady cashflows have helped the company maintain its debt-to-equity ratio at 0.2x as of the financial year 2023.

Going forward, its expansion plans to penetrate new markets and product launches will help the company grow its revenue and profits.

#4 Gujarat Fluorochemicals

The fourth stock on our list is Gujarat Fluorochemicals.

The company is a part of the Inox group of companies and produces a wide range of chemicals to serve a variety of sectors.

Its complex chemical facility in Dahej, Gujarat, includes a caustic soda/chlorine plant, a chloromethane facility, and a captive power plant with a combined coal and gas capacity of around 90 megawatts.

With these cutting-edge plants in Dahej, Gujarat, it is also India's largest manufacturer of PTFE polymer.

Through INOX Leisure, it also runs a multiplex business. The company is further active in the global energy market through its subsidiary INOX Wind.

The stock of Gujarat Fluorochemicals is currently undervalued. Its PE ratio stands at 27.67x against the industry PE of 34.11x.

The share price of the company has taken a hit recently due to weak results for the June 2023 quarter. The company reported a 9% YoY decline in revenue with a 34% YoY decline in net profit.

However, going forward, the company expects the business environment to pick up from the December 2023 quarter and normalise by the end of the financial year.

Gujarat Fluorochemicals revenue has grown at a CAGR of 30% in the last three years, while net profit has grown at a CAGR of 87%.

Besides this the company has healthy return ratios with RoE and RoCE at 27.1% and 29.6%, respectively. Its debt-to-equity ratio also stands low at 0.27x.

In the long term, the strong focus of the governments on green hydrogen and hydrogen fuel cells is expected to boost the demand of PTFE and other fluoro-polymers.

Apart from this, the market for fluoropolymers is projected to grow with increasing demand for oil and gas, water treatment, electric appliances, electronics, healthcare and chemicals as drivers of growth for the short term and medium term.

#5 BASF India

The last stock on our list is BASF India.

The company's business consists of chemicals, industrial solutions, performance products, materials, surface technologies, and agricultural solutions.

Its products find use in agriculture, automotive, pharmaceuticals, construction, consumer durables, consumer care, paper, and paint sectors.

Being a subsidiary of a leading multinational company (MNC), BASF India gets strong technical, financial, and operational support from its parent company BASF SE.

The stock is also currently undervalued with its PE ratio at 35.65x against the industry PE of 38.6x.

The company has reported a fall in profit for four quarters in a row, with a constant increase in cost of materials consumed.

For the most recent quarter, it reported a 13% decline in revenue and 43% fall in net profit due to weak sales and higher input costs.

Weakness in demand due to inventory destocking and China's reopening resulted in high channel inventory, adding pressure on chemical companies.

However, this is expected to improve by the end of the financial year 2024 as the macro situation changes.

BASF has healthy financials. In the last five years, the company's revenue has grown at a compound annual growth rate (CAGR) of 20%, driven by price realisations and volume growth.

The net profit has also grown at a CAGR of 26% during the same period, driven by improved EBITDA (earnings before interest tax and depreciation).

The company's return ratios are robust with RoE at 16% and RoCE at 22.1% respectively. It also has negligible debt on its books.

BASF India has undertaken several capex projects to increase its manufacturing capacity in line with the 'Make in India' initiative. This will help the company's revenue growth in the medium term.

The company plans to continue expanding its presence and market share in India, with a focus on maximising opportunities in various segments.

Conclusion

In conclusion, the world of specialty chemical stocks offers a realm of potential for investors who are willing to seek out undervalued opportunities.

They are poised to benefit from the continuous demand for specialized chemical solutions across a myriad of industries, ranging from healthcare to manufacturing and agriculture.

However, as always, it's essential to conduct thorough research and consider your own investment goals and risk tolerance before making any financial decisions.

The undervalued nature of these stocks implies that the market may not have fully recognized their potential yet, offering investors a chance to acquire them at favourable prices.

But the market can be unpredictable, and there are inherent risks in any investment. Diversification and a long-term perspective remain valuable strategies in navigating the dynamic landscape of specialty chemical stocks.

If you're interested in undervalued specialty chemical stocks, check out Equitymaster's Screener on the Undervalued specialty chemical stocks in India.

Please note that these parameters can be changed according to your selection criteria.

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...