Order inflow to improve for manufacturers of specialty chemicals

Galaxy Surfactants, SRF, Aarti Industries among companies to benefit given supply of essential ingredients, alternative supply chain to China and weak crude oil prices

Stocks of specialty chemical companies have fared better than companies in other sectors. Since the start of CY20, even as the benchmark indices, Nifty and the Sensex have shed over 25 per cent, specialty chemical companies have posted gains of 3.5 per cent. The gains are largely due to strong demand from user industries in India, falling raw material costs and new orders expected from buyers looking for alternatives given the situation in China.

 

Rohan Gupta and Sneha Tareja of Edelweiss Research believe that specialty chemicals are better placed in the national lockdown to contain the coronavirus till May 3, as they have a diversified base of user industries and a resilient demand from hygiene and personal care, agrochemical and pharmaceutical sectors.

Given the essential nature of production, some of the plants are exempted from the lockdown. Companies such as Galaxy Surfactants (makes surfactants used in home, personal care products) and Fine Organics are expected to benefit from a surge in demand for hygiene-related products. Similarly, business segments of Aarti Industries, SRF and PI Industries which cater to the agrochemical and pharmaceutical sectors would also gain given linkages to the critical agricultural value chain and healthcare.

 

A trigger for specialty chemical players is the expected rise in importers looking for an alternative supply chain, especially in the context of the coronavirus outbreak. Surya Patra of Phillip Capital believes that the trend of de-risking of input procurement from China by global chemical leaders offers export sales opportunity for the Indian players. It is along these lines that Japan has earmarked a $2.2 billion to help its manufacturers to shift production out of China. Frequent supply disruptions in China (started with environmental issues and subsequently led by Covid 19) and disproportionate dependency of MNCs on Chinese supplies has already resulted in multiple early developments in shifting of manufacturing to India, he adds.

What should also help companies in this space is the depreciation of the rupee and the sharp correction in the price of crude oil, derivatives of which are key raw materials. This should help integrated players as lower input costs are expected to help on the working capital front. While the supplies are for essential products, the global slowdown could impact near term demand which is a negative for these export dependent companies.