With the benchmark index trading at all-time high levels, investors don’t have a choice but to buy at elevated valuations. But domestic fund managers are normally a conservative lot, so what should investors take away when a reputed fund buys a stock that has risen more than 100 percent in the past 15 months?
On June 7, HDFC Mutual Fund bought a 1.4 percent stake or 10 lakh shares in Sudarshan Chemical Industries for an average price of Rs 778.10 per share. The stock has been on a steady climb since February 2023 when it was hovering close to Rs 350 levels. However, this isn't the first time HDFC MF grabbed a pie of Sudarshan Chemicals.
Before this, HDFC MF bought another 2.6 percent stake in the company for Rs 91.26 crore back in February, implying an average price of Rs 513.99.
Analysts feel that HDFC MF's stake increase in Sudarshan Chemicals is likely driven by expectations of an upturn in the chemicals industry, Sudarshan's improved position in the global pigments market, and its recent capacity expansion.
In fact, the recent shake-up in the global pigment industry after the world's biggest player filed for bankruptcy has opened gateways for Sudarshan Chemicals to fill the void and emerge to clench the second spot in the industry. Despite the steep rise in its stock price, the company's fair value may be still below the market price enticing HDFC Mutual Fund to increase its stake in the pigment manufacturer, analysts reckon.
Tailwinds for Sudarshan Chemical
Germany-based chemical player Heubach, which also happens to be the world's biggest pigment manufacturer, filed for bankruptcy in April 2024. Apart from Heubach, another Canada-based MNC pigment player shut its facility with pigment sales of over $100 million. Some other top players have also undergone mergers and acquisitions like BASF (with DIC Japan) and Clariant (with Heubach Group), which has triggered consolidation within the industry, said Sanjesh Jain, research analyst at ICICI Securities.
With an upheaval in the global pigments industry, Sandeep Abhange, research analyst at LKP Securities, sees new opportunities emerging for Sudarshan Chemicals, which was the third biggest player in the industry.
"The company has overlapping products, the right go-to-market strategy and the capacity to capitalise on the opportunity," Jain said.
Jain also highlighted that Sudarshan Chemical has an 80 percent portfolio overlap with that of troubled players, thereby expanding the opportunity to fill the demand void and gain market share for the company.
Further, Abhange also believes that Sudarshan Chem stands to gain meaningful market share in the export as well as domestic markets, especially with the help of its newly commissioned capacities in FY23 and an industry-leading 35 percent share in the domestic pigments industry.
He further adds that the stable and consistent nature of the pigment business will ensure lasting market share gains for the company.
Rebound in export markets to aid growth
After witnessing a downturn some quarters ago, demand seems to be recovering in export markets, albeit in patches. While the North American market has reported double-digit sequential and yearly growth in Q4FY24, the European Union region's demand remains subdued, although management anticipates improvement in the coming quarters.
A rebound in EU demand at a time when the pigment industry goes through a consolidation, will present a greater opportunity for Sudarshan Chem to seize.
"Recent recovery in pigment demand and softening of input costs along with lower freight cost bode well for revenue and margin recovery for Sudarshan Chem over FY25-26," Sharekhan stated.
Sharekhan also said that Sudarshan Chem's recently completed Rs 750 crore capex and the consequent ramp-up of new capacities and products will drive its medium-to-long-term growth and scale up the company's position in both domestic and global markets.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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