Motilal Oswal sees up to 30% upside on these speciality chemical stocks

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Demand and prices of speciality chemicals have continued their upward trajectory in the past year. As lockdown restrictions eased around the world, an improved outlook has led to a further rise in prices. With speciality chemicals accounting for 20% of the $4 trillion chemicals industry globally, and India’s market is predicted to increase at a CAGR (compounded annual growth rate) of 12% to $64 billion by CY25 (calendar year). According to Motilal Oswal, a robust demand CAGR of 10–20% in the export/end-user industries will drive this rise.

“Indian speciality chemical industry is set to benefit most from this growth driven by strong domestic consumption-led by a young population (median age of 28 years), a high percentage (~67%) of which forms the working-age group, favourable labour cost (one third that of China/half that of Vietnam), and government impetus,” said a report released by Motilal Oswal.

The report further noted that China is the leading speciality chemicals exporter with an 18% market share in global exports. As nations look for alternatives away from China, India stands to benefit from lower labour costs and a large consumer base.

Citing these the brokerage firm has initiated coverage with a positive outlook on the Specialty Chemicals space. Deepak Nitrite, Vinati Organics, Galaxy Surfactants, and NOCIL.

Deepak Nitrite | Rating: Buy | Price target: Rs 2,300 | Upside: 31%

Deepak Nitrite aims to expand its footprint in high-value intermediates to capitalize and synergize with Deepak Phenolics, and has announced a new subsidiary called Deepak Clean Tech. Capex plans of Rs 400-600 crore likely each year, resulting in revenue growth of more than 60% over FY21–24E (CAGR of 17%).

The stock is trading at 21x FY23E EPS (earning per share) of Rs 82 and 14x FY23E EV/EBITDA (Enterprise Value/Earnings before interest tax depreciation and amortization), with return ratios of 29–31%. Motilal Oswal expects a 19% PAT (profit after tax) CAGR over FY21–24E and values the company at 28x FY23E EPS.

NOCIL | Rating: Buy | Price target: Rs 275 | Upside: 30%

NOCIL is the largest manufacturer of rubber chemicals in India, with a domestic market share of ~40%. Restrictions on tyre imports have benefited the operations of domestic tyre companies in FY21. NOCIL targets a sustainable EBITDAM (Earning before interest tax depreciation amortization margin) of 20–22%, which declined over FY20–21 due to higher dumping seen from China on the expiry of the Anti-Dumping Duty (ADD) in India. Furthermore, NOCIL is currently evaluating the next leg of its business expansion strategy.

The stock is trading at 17x FY23E P/E and 11x FY23E EV/EBITDA, with an asset turnover of ~0.7x in FY21 (set to increase to 1x over FY23–24E; this is similar to FY18 levels, when the company had achieved optimum utilization of its capacity).

Galaxy Surfactants | Rating: Buy | Price target: Rs 3,520 | Upside: 17%

Galaxy Surfactants is a leader in the Surfactants and Specialty Care Ingredients categories. It expects the company to post a 12% EBITDA and PAT CAGR over FY21–24E, with EBITDA/kg improving to Rs 20 (assuming 5% YoY growth in FY23E – as speciality products expansion at Jhagadia gets commissioned), led by new product launches on the back of strong R&D.

The company to deliver volumes CAGR of ~10% over FY21–24E, higher than the management guidance of ~8%. The stock is trading at 28x FY23E EPS of Rs 107 and 18x FY23E EV/EBITDA.

Vinati Organics | Rating: Buy | Price target: Rs 2,170 | Upside: 17%

Vinati Organics is currently the largest producer of Isobutyl Benzene (IBB) and 2-Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) in the world, with a dominant (~65%) domestic market share. The brokerage firm expects a 38% revenue CAGR over FY21–24E. In light of new capacity additions, with lower margin products, we expect the EBITDAM to normalize to ~34% (from ~37% in FY21), resulting in a 34% EBITDA CAGR. The amalgamation of Veeral Additives (VAL) with the company would result in further forward integration.

The stock is trading at 36x FY23E EPS of Rs 50.5 and 26x FY23E EV/EBITDA, with attractive return ratios of ~25% (+600bps v/s FY21). It has a fixed asset turnover of 1.3x, which is likely to double over the next three years. Motilal Oswal expects a 33% PAT CAGR during FY21-24E.

Apart from these stocks, the brokerage firm has assigned a neutral rating to Atul, Alkyl Amines, Navin Fluorine and Fine Organic with an upside of 5-12%.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)