Slowdown in chemicals sector opens entry point to select bright spots, says JM Financial

The brokerage firm is bullish on SRF and Navin Fluorine, but also maintains a positive view for Deepak Nitrite.

Plagued by sluggish global demand and elevated channel inventory globally, the chemicals sector is expected to remain under pressure in the coming quarters. Regardless of that, brokerage firm JM Financial believes that the slowdown does not bring an end to India’s journey of becoming the next chemicals manufacturing hub.

The brokerage firm even went ahead to say that the recent slowdown may instead be the time to place the right bets within the sector. "Although we agree that there is imminent risk of earnings downgrades, especially for noncontracted businesses, we highlight that these corrections should be treated as buying opportunities," the firm highlighted in its report.

The brokerage vouches for two prominent themes within the entire chemicals space, the first being the acceleration of a Europe+1 sentiment for fluorination players and the second, continuation of basic chemicals’ import substitution.

Factoring that in, JM Financial chose Navin Fluorine and SRF as its top structural picks. The firm is of the view that imminent HFC (Hydrofluorocarbons) production cuts in the EU and the US will have a cascading benefit for India’s fluorine-based complex specialty chemicals players like Navin Fluorine and SRF.

The firm sees an incremental opportunity size for fluorospecialty agrochemicals which stands north of $11-12 billion and over $25 billion for recently launched key fluorospecialty APIs, which is likely to lift orders that come the way of India’s fluorination players.

Additionally, lifetime-low phenol spreads and upcoming capacities for bisphenol-a and other basic chemicals make Deepak Nitrite a good 'buy' candidate, the firm believes.

Companies like Deepak Nitrite and Deepak Fertilizers are also on the move to curb imports of basic chemicals by presenting themselves as an alternative for catering to domestic demand. "Deepak Nitrite has had success on the phenol imports front, while Deepak Fertilisers is likely to help curb nitric acid imports," the brokerage pointed out.

Meanwhile, other differentiated chemicals companies, which are facing demand headwinds at the current juncture are also expected to witness a recovery from the second half of the current fiscal, the firm believes. "The first signs of demand recovery in these names will act as a positive trigger for them. We also like PI Industries which is the only name where there is earnings upgrade possibility even in such a slowdown scenario. However, the near-term upside in the name is likely to be limited, in our view," JM Financial said.

In conclusion, even though the market seems to be fretting over the current slowdown within the chemicals sector, a closer glance may present bright spots with a golden long-term opportunity, only if you know where to look.

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