While the extension of the lockdown deadline to May 3 is likely to impact operations, Rohan Gupta and Sneha Tareja of Edelweiss Research believe that speciality chemical firms are better placed, given their diversified base of user industries, resilient demand from sectors, such as hygiene and personal care, agrochemicals, and pharmaceuticals.
Given the essential nature of production, some plants are exempted from the lockdown. Companies, such as Galaxy Surfactants
(makes surfactants used at home, personal care products) and Fine Organics, are expected to benefit from the surge in demand for hygiene-related products. Similarly, the business segments of Aarti Industries, SRF, and PI Industries, which cater for the agrochemical and pharmaceutical sectors, will likely gain, given their linkages to the critical agricultural value chain and health care.
A trigger for speciality 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 the trend of de-risking of input procurement from China by global chemical leaders offers export sales opportunity for Indian players. It is along these lines that Japan has earmarked a $2.2 billion to help its manufacturers shift production out of China. Frequent supply disruptions in China (started with environmental issues and subsequently by Covid-19) and disproportionate dependency of multinational chemical giants on Chinese supplies have 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.
Within the chemicals space, Ambit Capital prefers exporters like PI Industries, SRF, Aarti Industries, and Navin Fluorine over domestic-focused players, such as Dhanuka Agritech or Insecticides India, or consumer ingredient players, which include SH Kelkar and Fairchem Specialty. The preference for exporters is due to their process capabilities resulting in limited competition and ability to grow in new avenues. To back their point, they highlight that exporters have grown at 15-22 per cent annually over the FY14-19 period as compared to consumer chemical companies, which have registered 0-10 per cent growth over the same period.
Investors, however, have to be cautious in the near term as disruptions because of Covid-19 will lead to a delay in expansions and decision-making, a fall in demand, and lower capacity utilisation and order flow. While these companies are suppliers of essential products be it chemicals, agrochemicals or pharmaceuticals, growth in the short term will be at risk, both for domestic, as well as export-dependent companies.