Top-performing Indian funds make winning bets on chemical firms stocks

India’s best-performing stock funds have one thing in common: they’ve bet on companies that make the chemical substances used in items ranging from lip balms to crop-boosting fertilizers.

Chemicals producers make up at least 14% of the portfolio for three funds that have delivered the biggest returns this year among those with at least $500 million in total assets, according to Bloomberg-compiled data. Those bets have paid off thanks to rising global appetite for specialty chemicals in industries such as automobiles and cosmetics amid a recovery from the pandemic.

India is emerging as a hub for specialty chemicals, helped by favorable policy measures that include decisions such as imposing anti-dumping duty on some imports and a proposal for production-linked incentives. Producers have also benefited from a ‘China-plus-one’ strategy that has made companies around the world diversify their supply chains from the Asian superpower amid geopolitical concerns.

“We continue to be very optimistic on the long-term prospects of the chemical industry in India,” as it becomes an important player in the global supply chain, said Samir Rachh, who helps manage the nearly $2 billion Nippon India Small Cap Fund, the best performer with a 42% return year-to-date.

A gauge of 10 chemical stocks owned by funds has beaten BSE Small Cap Index

The biggest holding in Rachh’s fund is Deepak Nitrite Ltd., a maker of phenol and acetone used in numerous applications including mouthwash and nail-polish remover. He initiated that position in 2017 and increased it in 2019.

Shares of the firm based in India’s western Gujarat state have risen 88% so far this year, taking their surge over the last five years to nearly 2,000%. Its revenue has more than tripled in the period to 43.6 billion rupees ($595 million) for the fiscal year ended March.

Fund name YTD performance Chemical sector allocation Chemical sector picks
Nippon India Small Cap Fund 42% 14.90% Deepak Nitrite Ltd

Navin Fluorine International Ltd
Kotak Small Cap Fund 40.50% 14.20% Laxmi Organic Industries Ltd

Atul Ltd
L&T Emerging Businesses Fund 39.10% 15.80% Deepak Nitrite Ltd

Alkyl Amines Chemicals Ltd

The country’s chemicals companies are ramping up capex investments to produce high-value goods and expand their share of the global market, said Venugopal Manghat, who manages the $894 million L&T Emerging Businesses Fund.

Four of the top five funds in India this year are those that focus on small-cap stocks, an asset class that has handily beaten the benchmark index. The S&P BSE Smallcap index has surged almost 40% in 2021, versus nearly 11% for the S&P BSE Sensex Index.

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