Moneycontrol
Sep 11, 2014 11:32 AM IST | Source: CNBC-TV18

Like oil & gas; chemicals to give multi-baggers: HDFC Sec

The current fall in global crude oil prices is a big positive for this space as most companies use raw materials that are linked to crude, says Dipen Sheth, Head-Institutional Research, HDFC Securities.


In an interview to CNBC-TV18, Dipen Sheth, Head-Institutional Research, HDFC Securities shared his reading and outlook on the Indian stock market and stocks across various sectors.


He continues to be positive on the oil and gas sector and sees tremendous upside in stocks of oil marketing companies (OMCs) from current levels.


The second sector that Sheth is betting on is the Indian chemical industry. The current fall in global crude oil prices is a big positive for this space as most companies use raw materials that are linked to crude. Also, the environmental control restrictions in China have been good for this sector, he adds. These factors make him upbeat on chemical industry. He sees chemical industry having a strong potential to throw up multi-baggers. The chemical industry has been seen as an unexciting space, but it has proved its worth in the past few days, he adds. On specific stocks, he sees multi-year growth potential in Apcotex.


Futher he adds that pricing power of paint companies should increase in the time to come. He expects Asian Paints and Berger Paints to trade at higher multiples.


Below is the transcript of Dipen Sheth's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Latha: Dipen Sheth is at the sidelines of the HDFC Securities Conference where they are showcasing a lot of chemical companies. Why chemicals?


A: I would hate it if you would have called it just a conference. We have christened it as the Chemical Age. What we are trying to showcase here is the fact that the chemical industry is one industry, which has seen as a perennially uninteresting and boring industry with very poor growth or margin or returned dynamics. People might think that this industry does not have the potential to deliver equity returns to serious investors.


The events of the last two-three years have proved these naysayers completely wrong and as the country steps into better days for the next five or arguably ten more years, we suspect that this is one space, which still holds the potential of throwing up multibaggers.


So out of the eight companies -- there are only eight companies that we have called to this event -- only two of them are over a Rs 1,000 crore marketcap, six of them are below Rs 1,000 crore, five of them are below even Rs 500 crore marketcap and the reason why we have had this focus is to bring to investors the possibility that you might get multibagger returns from these smallcap and midcap stocks over the next few months and years.


Sonia: It is very exciting to see a whole host of perhaps undiscovered companies in your list. Let me start of with Apcotex, a stock that you are very bullish on. It is an Asian Paints promoter company, so just take us through what kind of potential you see in that name?


A: I will refrain from making specific comments on any of these companies because if we knew all that there was to be known about these companies from an investor perspective, we wouldn’t have needed to call them and highlight them or showcase them to investors.


Apcotex has seen a very smart run up which is trading at a trailing P/E of about Rs 26 or so. We think there is again multiyear growth potential here. It is a company that has been in various forums, it has been described as a dormant volcano of sorts but I am saying let us not take these opinions too seriously. We will wait till the end of the day and get a serious deep down look in to each of these companies. So what I am saying for Apcotex might be equally true for a Bodal Chemicals, which is coming out after two-three disastrous years where it almost went under.


There is the very respectable Tata Chemicals, which has close to USD 2 billion marketcap and where we see again the possibility of multiyear potential coming back to the company in terms of various growth and business dynamics at its various divisions.


So I will refrain from making a specific comment on any of these companies right now. Let me find out more.


Latha: What is going good now for the chemical lot now? Are some of them winners because of the stiff fall in crude prices and expectations that it is going to remain that way?


A: Yes, a lot of these companies do have raw material linkages with crude. The fact that crude prices are falling helps them. The fact that end product dynamics whether it is in the specialty chemicals space, which leads on to paints, varnishes, rubbers and so on, these markets are buoyant, some of these specialty chemicals get into pharmaceuticals, which is a story which I have highlighted time and again.


There is a lot of supply constraints coming up in active pharmaceutical ingredients (APIs) and you might be surprised at how much API upstream product manufacturers and even API manufactures might be able to deliver in this space.


This might well be the time to look at APIs and even pre-API manufacturers. So there are very interesting opportunities opening up as a result of the dynamics playing on both sides of the business in chemicals and specialty chemicals.

It is also driven by the fact that over the last two years, there has been a remarkable clamp down in terms of environmental controls and restrictions on what chemical companies in China, which were going bizarre and haywire in terms of the cost structures and the price points at which they were delivering these chemicals to the global markets. So some of that clamping down has had salutary effect on specialty chemical companies in India and the fact that we are on the cusp of bigger things as an economy in more general terms only adds to the expectations from these companies.

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