Foreign brokerage UBS believes stock investors might be ignoring Indian chemicals companies' strong niche positions and growth opportunities within the context of the worst global destocking cycle in chemicals over the past 30 years, as it sees signs of modest volume recovery ahead.
The brokerage has initiated coverage on two stocks: PI Industries Ltd and Navin Fluorine International Ltd, with Buy ratings. It recommended 'sell' on two others namely Aarti Industries and Gujarat Fluorochemicals Ltd.
"We believe there are specific opportunities with overall modest improvements in FY25E (versus FY24E) in cyclical scenarios, driven by company-specific factors such as long-term track records, capacity additions and new products. The global move towards supply chain diversification, the ecosystem development in India, cheaper costs (CAPEX, manufacturing, R&D) can all offer stronger-than-expected tailwinds," it said.
UBS said several indicators such as PMI, new orders and Brazilian chemical imports suggest modest improvements in volumes, though excess capacity (around 15 per cent built in the last three years) and continued demand weakness (particularly China) may limit upside. It expects a modest 5-10 per cent volume uptick with subdued prices and spreads in the near term. The brokerage suggested a target price of Rs 4,800 for PI Industries and Rs 4,250 for Navin.
It suggested price target of Rs 615 for Aarti Industries and Rs 3,000 or Gujarat Fluorochemicals.
"We prefer PI given its strong growth, management track record, less volatile business model and potential scale up of the pharma vertical. Navin is leveraging growth opportunities in agrochemicals, CDMO and 3rd/4th-gen refrigerants. Aarti is expanding capacity in existing and new chains, but its greater cyclical dependency and debt levels are coupled with high near-term EBITDA guidance," UBS said.
The foreign brokerage said GFL is exposed to Chinese overcapacity in fluoropolymers while its EV business fundamentals are still in nascent stage.
UBS said Indian chemicals companies have significantly scaled up their capex over the last few years in an attempt to leverage opportunities for custom manufacturing, gain a stronger foothold in global specialty chemicals and participate in ongoing supply chain diversification.
"While FY25E earnings have been cut by about 50 per cent since peaking in H2FY23 on the global chemicals cycle weakness, incremental capacity addition-driven volume growth, expectations of recovery and company-specific factors such as incremental contracts mean the growth outlook remains intact for a majority of stocks," it said.
Share prices, UBS said, have been flattish in a majority of cases but there are significant levels of underperformance relative to Indian midcaps, it added. Global majors' contract manufacturing has performed relatively better given price pass-through and stronger volumes compared to commodity-type open supplies in global markets.