“The structural growth opportunity which we say for the speciality chemical players, especially in names like CDMO, China plus one, Europe’s energy crisis and Europe plus one, all those structural growth driver were there in last one year also and even right now also we see that they remain intact,” says Rohan Gupta, Nuvama Institutional Equities.

What is your sense? Has it bottomed out because for the longest time speciality chemicals have been dealing with one headwind or another. Finally, is there light at the end of the road?
Yes, first of all, you are absolutely right that the speciality chemical sector has been quite a lot of disappointment for their investors in last four to six quarters. The sector has not participated in the entire rally while we are seeing that the midcaps and smallcaps are making new highs. This sector has definitely not performed well. So, if you ask that is anything significantly changed for the sector? We say no, but yes, few things are definitely positive for the sector. Like we understand that the earnings have bottomed out in Q3 and from Q4 onward we should be seeing a sequential recovery in earnings for across the speciality chemical basket, maybe a couple of names here and there, but otherwise across the sector, we see that the earnings have bottomed out.

Second, from last two to three days, we are also seeing that many of the commodities names are also buzzing, also some of the positive data points are expected to come from China. That means the demand in China also is expected to pick up. And last year, we have seen that the Chinese players have dumped the material in the market and have pushed the prices downward.

So, all those things, those fear are now slightly getting off the markets and that is what we are seeing that the positive implication is there on even the chemical sector as well, so that is what my reading is right now that the earnings have bottomed out, the global commodity cycle has started reviving, that is also going to have some follow-up impact on the chemical sector that is what many of these stocks are reflecting right now.

When we talk about chemical companies, how are they actually seeing leveraging on that CDMO, CSM business side and that China plus one strategy, Europe plus one strategy, how will that play out for the Indian companies?
The structural growth opportunity which we say for the speciality chemical players, all those structural growth driver were there in last one year also and even right now also we see that they remain intact. But in shorter term, in last three to four quarters, the market was more impacted in chemical because of the low demand and also inventory destocking across the sector, so that has impacted the short-term demand, but the structural drivers whatever we are talking about they are very much in place with the economic recovery in global market, India demand still remains very solid, import replacement and also atmanirbhar Bharat, all these things are already driving the chemical manufacturing and companies investing in capex.So, I do not say that these structural drivers were missing. It is just about that the sector was out of the flavour from last four to five quarters because of the near-term headwinds. But now it looks like the headwinds are over and we should be seeing the sequential recovery in place while the structural driver are already in place.
So, we see that the sector is definitely going to drive 20% plus kind of earnings growth in future for a longer period of time.

But let us get stock specific. Who do you think would be the biggest beneficiary in terms of the export opportunity that Vinnii was also talking about? Aarti, Vinati, SRF, these were the stocks which of course have high exposure in terms of exports as well. So, apart from the import substitution that you are talking about, specifically from an export point of view, which stocks will stand to benefit the most?
If you see the chemical stories, both domestic as well as exports, most of the companies have balanced of both domestic as well as exports, almost 40% to 50% is catering to domestic and 50% goes in exports.
Right now, we are more bullish on the companies which have both opportunities, not only just domestic but in exports, but they should be also having the ready capacities.

I think that the company like Aarti, Jubilant Ingrevia, Gujarat Fluoro, Galaxy Surfactants, all these companies are already sitting on the ready capacities because they have never ever stopped on the capex even in a weak time last year.

And now this is the time for them to enjoy the operating leverage. We see that the companies like Aarti, Jubilant Ingrevia, they have done a lot of work in the last one, one-and-a-half year, but they have got neglected.
Like Jubilant Ingrevia has invested significantly in Diketene chemistry. They have already expanded the Pyridine -based product basket. So many of these companies have done all these things, but that was not noticed in the last one, one-and-a-half year. I think that now the time has come for these companies to deliver on a higher sales growth. So, my picks right now, I will be positive on like Aarti, Jubilant Ingrevia, Galaxy Surfactants, Gujarat Fluoro.

You did mention the names that are going to be the beneficiaries, but any particular companies that are facing major issues, one in terms of the Red Sea issue, anything in terms of that and as well as in terms of the inventory challenges that some of the companies were facing, any specific ones that would see a major impact, especially earnings is around the corner, so what do you expect there?
Yes, agrochemical scenario in global market is witnessing some improvement, but it still remains under challenges because inventory de-stocking in some of the markets are still not over and some of the companies have yet not seen earnings revival.

Red Sea challenges, that is across, some companies may see some more impact, but I think that is a short-term crisis, that is mainly getting reflected in an increasing logistics cost, some of the companies who are able to pass it on they are unlikely to be impacted much, companies like Galaxy Surfactants are all, definitely these companies are facing the Red Sea crisis, Fine Organics and all that.

Even the companies like Anupam Rasayan and all may see that earnings maybe in the current quarter remain muted and the recovery may start only from the Q1.