While companies have been expanding their capacity to tap demand over the last couple of years, analysts expect the capital expenditure (capex) in the 2018-19 to 2021 period to nearly double to about Rs 6,200 crore. Among the companies doubling their capex over the next few years is Aarti Industries, which is the country’s largest specialty chemicals player.
Similarly, SRF, which is a diversified chemicals player, is also expected to benefit from expansion and pickup in global agrochemicals and fluorochemicals.
While growth prospects remain robust, analysts believe that valuations have turned expensive. Analysts at Edelweiss Research believe that valuations already factor in the optimism and potential growth drivers. In addition to the hazardous manufacturing process, they cite regulatory risks like further tightening of pollution norms and compliance in India. These might increase capital spending, thereby impacting margins. Any slowdown in underlying sectors such as fast-moving consumer goods could also affect sales of chemical companies.
The top companies are trading at over 25x their one-year forward price-to-earnings estimate, which is at a 20 per cent-plus premium to the industry average. Given the sharp run-up, brokerages recommend adding players such as SRF, Aarti Industries, and PI Industries on dips.