4/19/2020 Up to 34,500% return in 15 years!

This industry offers the right mix of wealth creators - The Economic Times

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Up to 34,500% return in 15 years! This industry offers the

right mix of wealth creators
BY RAHUL OBEROI, ETMARKETS.COM | UPDATED: FEB 26, 2020, 10.36 AM IST Post a Comment

Chemical stocks continue to buzz on Dalal Street thanks to a structural shift in China’s
chemicals industry due to stricter environmental norms, tighter financing and Big Change:
The end of Five-Year Plans: All you need to know
consolidation.

Stocks from the sector have already delivered manifold returns to investors in last 15
years, with Vinati Organics rallying the most at 34,514 per cent to trade at Rs 1,014 on
February 20 against Rs 2.90 on February 21, 2005. Alkyl Amines and Bodal Chemicals has jumped over 10,000 per cent in this period.

Analysts are bullish on select chemicals players on rising domestic demand.

“The demand for chemical products is expected to grow over the next decade, driven by rising population, increase in disposable
income and a gradual shift towards middle-class society,” brokerage William O’Neil India said.

History suggests the chemical industry has managed to stand strong amid a turmoil in the domestic economy. For instance, between
2006 and 2019, the compounded annual growth rate (CAGR) in terms of total returns to shareholders by domestic chemical companies
stood at 15 per cent, much higher than the 8 per cent CAGR returns delivered by the global chemicals industry and 6 per cent CAGR
returns delivered by equities globally.

Even between 2016 and 2019, when both the domestic economy and domestic market faced headwinds, the chemical industry
maintained a CAGR return of 17 per cent.

Cumulative net sales of nearly 100 top listed chemical players have jumped to over Rs 93,000 crore as of March 31, 2019 from Rs
19,789 crore as of March-end, 2005. Likewise, cumulative net profit jumped 752 per cent to Rs 9,145 crore during this period.

“From a long-term perspective, India has averaged annual GDP growth of 7 per cent for last 30 years. The country is also working on
becoming a $5 trillion economy. This long-term optimistic scenario bodes well for chemicals firms, especially in the light of a long

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4/19/2020 Up to 34,500% return in 15 years! This industry offers the right mix of wealth creators - The Economic Times

investment cycle. Chemicals companies can also benefit from rising domestic demand for chemical end-use sectors, India’s
attractiveness as a manufacturing destination and its improved ease of doing business,” McKinsey & Company said.

The consultancy firm says rising domestic demand in chemicals end-use sectors such as agriculture, consumer and retail, infrastructure,
auto and electronics and healthcare could spur around 50 per cent of incremental growth in chemicals as the economy grows.

Shares of Jyoti Resins, Atul Industries, Deepak Nitrite, Oriental Carbon and Ganesh Benzoplast have rallied between 5,000 per cent
and 10,000 per cent since February 2005. Overall, 92 per cent of the companies from the sector have delivered positive returns during
this period.

Specialty chemicals are a leading chemical export segment, making up more than half (55 per cent) of total chemicals export value in
2018. Yet, they are just 3 per cent of the total export value of specialty chemicals worldwide, compared with 13 per cent for China, 11 per
cent for Germany and 5 per cent for Japan. Clearly, there is room for growth.

These are characterised by relatively high-value, low-volume chemicals used in specific end-user performance-enhancing applications.
These broadly cover polymer additives, personal care ingredients, water treatment chemicals, construction chemicals, paints and
coatings, colorants, among others.

The segment reported decent financial results in Q3FY20. “Despite a tepid 2 per cent YoY revenue growth (affected by falling input
prices), sectoral Ebitda grew 11 per cent and PAT 57 per cent due to the benefit of tax credit in SRF and reduction in tax rate.
Management commentaries remained positive, as rising enquiries from customers and strong growth visibility are driving optimism in the
sector, reflecting increased capex outlays,” Edelweiss Securities said.

The brokerage is bullish on the specialty chemicals sector thanks to strong growth visibility. It has also raised target multiple for SRF
(Target price Rs 4,167) and Aarti Industries (Rs 1,138) on the back of strong growth visibility. Edelweiss has a ‘hold’ call on Galaxy
Surfactants and Fine Organics with a price targets of Rs 1,542 and Rs 2,142, respectively.

“The impact of coronavirus on specialty chemicals companies is likely to be mixed,” said Edelweiss.

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