Over the past year, Indian chemical stocks have not kept pace with the broader market, underperforming the Nifty 50 index, which has climbed nearly 20%. Key chemical companies such as SRF saw a modest gain of around 7%, while UPL Ltd and Navin Fluorine International Ltd fell around 27% and 15%, respectively. This decline is in stark contrast to their impressive performance in 2022, when gains for these stocks ranged from 30% to 120%.
This underperformance is the combination of weak export demand and high input costs, which weakened quarterly earnings. Companies like UPL, SRF and Navin Flourine, which generate a significant portion of their revenue from exports (82%, 51% and 66% respectively in FY23), have been particularly affected.
The first half of the fiscal year 2023-24 saw a pronounced impact of weak exports, and expectations for the December quarter (Q3FY24) remain low. Typically, Q3 is a seasonally weak quarter, given the holiday season in Europe and the US.
According to Centrum Broking, UPL is expected to report a year-on-year decline in sales and Ebitda. SRF would follow suit with a year-on-year and consecutive drop in sales, hurt by sluggish exports. Navin Flourine is expected to report a year-over-year decline in revenue and Ebitda, but should see growth sequentially. Ebitda means earnings before interest, tax, depreciation and amortization.
However, there are emerging signs of recovery in exports. European chemical production saw a slight increase of 0.5% in the third quarter of calendar year 2023 (Q3CY23), the first positive movement in six quarters, despite a significant 10.6% year-on-year fall in the first nine months of CY23.
The many challenges facing the global chemical industry in 2023, including a European recession, US inflation and a slow recovery in China’s demand, are showing signs of easing. The American Chemistry Council forecasts a modest 1.5% increase in US chemical production in 2024 after a 1% decline in 2023, with global production expected to grow by 2.9% year over year. According to the Council, destocking that started in Q3CY22 has largely ended, but restocking is still starting.
Specialty chemical stocks such as Navin Flourine and SRF, however, may continue to face pressure from the removal of some refrigerant gases in the United States, which may curb export earnings. In addition, recent attacks on commercial carriers in the Red Sea have led to higher freight and insurance costs, with extended journey times affecting supply chains and profitability.
While a recovery appears on the horizon, it is expected to be gradual, with Q3FY24 likely to show muted activity. UPL, in its Q2FY24 earnings call, acknowledged the difficult phase in the global agrochemicals industry, marked by significant price and distributor cuts in key regions such as Brazil, North America and Europe.
Despite these short-term challenges, Indian chemical stocks may be poised for a rebound. Early indicators of a global recovery in the chemicals sector suggest a possible revival for Indian companies, with Centrum Broking predicting sharp growth in FY25E followed by a normalization in FY26E. While the immediate future looks quiet, long-term investors may find attractive opportunities in these currently undervalued stocks, with their price-to-earnings multiples now in the range of 12-44 times, compared to 21-77 times in January 2022.
(tagsTo Translate)chemical stocks