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Indian industrial chemical stocks are outperforming the benchmark Sensex this year, as some analysts see them benefiting at the expense of their Chinese counterparts which face a crackdown on pollution and the threat of US tariffs.
Companies such as Atul Ltd, Aarti Industries Ltd, Fine Organic Industries Ltd, and Vinati Organics Ltd have gained 15-30 per cent so far this year, compared to an 8 per cent advance in the S&P BSE Sensex 30 Index.
SRF Ltd, which makes textiles, chemicals, films and plastics, has surged more than 51 per cent in 2019.
Additionally, these companies are expanding capacity to meet strong demand at home and abroad, according to analysts.
“The opportunity is leading many of our local companies to plough back their entire cash into increasing capacities,” said Nav Bhardwaj, an analyst at Anand Rathi Shares & Stock Brokers Ltd. “We expect the sector to gain advantage from this expansion over the next 3-4 years with an average yearly revenue growth of 12-15 per cent for top players,” Bhardwaj added.
China, which accounts for about 20 per cent of global specialty chemicals revenues, has tightened environmental standards, resulting in the closure or shifting of capacities in 50 chemical manufacturing clusters, rating agency Crisil Ltd. said in a report recently.
This disruption has increased the cost for Chinese companies and is driving global users to seek other vendors, including Indian manufacturers, Crisil said. The rating agency expects Indian manufacturers to increase capital expenditure by 70 per cent to ₹130 billion rupees ($1.9 billion) through 2020, compared with ₹75 billion for fiscal years 2017 and 2018.
Utilisation rates of new capacities coming up will remain high over the medium term, because of improving environmental compliance and cost competitiveness, said Anuj Sethi, a senior director at Crisil. As a result, the share of Indian specialty chemicals in the global supply chain is seen rising 100 basis points to 5.2 per cent in fiscal 2022, from 4.2 per cent last fiscal year.
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