12/8/2017 Specialty chemicals can be a big theme in FY17; 6 stocks to bet on - The Economic Times

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Specialty chemicals can be a big theme in FY17; 6 stocks to

bet on
BY KSHITIJ ANAND, ET ONLINE | UPDATED: APR 01, 2016, 12.49 PM IST Post a Comment

NEW DELHI: India's specialty chemicals industry, which is valued at $25 billion, could well Big Change:
be the next big theme on Dalal Street in FY17, say analysts. The end of Five-Year Plans: All you need to know

The industry delivered 13 per cent growth over the past five years led by domestic
consumption. Going ahead, India's large population base with lower per-capita
consumption of chemicals and a relatively strong GDP growth outlook will sustain healthy domestic growth.

Investors looking for big upsides over the next 12 months can look at investing in the specialty chemicals theme, which includes stocks
like SRF, Aarti Industries, Vinati Organic, Camlin Fine Sciences, Navin Flourine and Bodal Chemicals, among others.

"We like SRF because the company has a mix of many businesses and among them their chemical business is doing very well. That will
say offset the losses in the commodity businesses," Parag Thakkar, HDFC Securities said in an interview with ET Now.

"Navin Fluorine is completely focused on speciality chemicals, and we are tilted more towards this stock," he said.

Analysts say going forward the government's 'Make in India' initiative will facilitate growth in the industry and the consequent flow of
foreign direct investment (FDI) to this sector will accelerate growth.

The industry has growth at a 30 per cent CAGR over FY13-15 to $ 2.67 billion. Going forward, lower commodity prices will provide the
much-needed support to margins and rising demand will facilitate volume growth. Crude oil is one of the basic raw materials for the
sector.

"A sharp correction in crude prices to $40 per barrel from over $100 in mid-2014 has certainly improved margins of the specialty
chemicals players," brokerage Phillip Capital said in a report co-authored by Surya Patra, and Mehul Sheth.

"Lower crude has already led to a re-rating of the Indian specialty chemicals sectorsince mid-2014, but we believe current valuations still
do not capture a visible growth uptrend in the domestic market. More importantly, there is a huge export potential from softening
Chinese exports," it said.

Here is a list of stocks from various analysts under speciality chemicals theme that investors can look at:

SRF: Target price Rs 1,700

Rapid progress which has been made in the high-margin fluoro-speciality and refrigerant gases will drive value growth. Steady free cash
flow from technical textiles will also supplement capacity expansion in fluoro-speciality.

Phillip Capital estimates SRF to deliver revenue and profit CAGRs of 14% and 22% respectively over FY16-FY18. Its specialty
chemicalsoperations would be the growth engine in this period with sales and profit CAGR of 24% and 35% respectively.

Aarti Industries: Target price Rs 700

Aarti is the largest producers of benzene derivatives in India and has emerged as one of the leading manufacturers globally. Its global
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12/8/2017 Specialty chemicals can be a big theme in FY17; 6 stocks to bet on - The Economic Times

market share in this segment is 25-40% in various products.

Phillip Capital estimates Aarti to deliver 16 per cent and 21 per cent CAGR respectively in revenues and profit over FY16-18 to Rs 36.2
billion and 3.72 billion respectively in FY18.

Additionally, it believes that company's successful track record in execution of expansion projects over the last five years and its on-
going capex can surprise growth positively.

Vinati Organics: Target price Rs 495

Vinati Organics (VO) is the most efficiently integrated player will gain from integrated downstream products. The company is a global
leader of 2-acrylamido 2-methylpropanesulfonic acid in the world with a capacity of 26,000TPA and ~45% market share.

Phillip Capital estimates Vinati Organics to deliver 16 per cent and 21 per cent revenue and profit CAGRs over FY16-FY18 to touch Rs
8.21 billion and 11.45 billion in FY18. To further its growth plans, VO is undertaking capital expenditure of Rs 2bn over FY16-17 for
backward integration and introduction of new downstream products.

Camlin Fine Sciences: Target price Rs 135

The company is one of the few global leaders of food-grade anti-oxidants will gain from forward-integrated antioxidant blends and
vanillin manufacturing. It is an established global leader of food-grade synthetic antioxidants.

Phillip Capital estimates Camlin Fine (CFIL) to deliver revenue and profit CAGR of 15 per cent and 22 per cent over FY16-FY18.
Currently, the company trades at 11x FY18 EPS and 7x FY18E EV/EBITDA.

Considering CFIL's forward move into high-margin antioxidant blends and vanillin and its strong operating/financial efficiency (with 30
per cent ROE, and 26 per cent ROCE).

Atul: Target price Rs 1,650

The company has the most diversified business model but seems struggling for growth due to lack of any major expansion plan and the
adverse impact of economic slowdown on colours and agro-businesses.

Atul trades at 13x FY18 EPS and 7x FY18 EV/EBITDA. "While we consider Atul's strong historical track record of steady growth and
cash generation positive, its visible muted growth - both on revenues and profits - make us pessimistic," Phillip Capital said in a report.

Bodal Chemicals: Potential for higher growth

It is India's largest manufacture of dye intermediates and one of largest manufacture of dye stuff. Industry structure has tilted in favour of
large Indian players due to many plants in China which are set down due to environmental issues and this favours industry structure.

"Bodal's profitability has improved significantly in last two years. It has repaid all its long-term debt and has entered into strong free cash
flow generation period," Vipul Shah, Head of Research, Monarch Networth said.

"It is trading at significant discount to its peer group companies from speciality textile chemical companies and because it is available at
a huge discount to the peer group, we like the idea," he said.

(Views and recommendations given in this section are the analysts' own and do not represent those of EconomicTimes.com. Please
consult your financial adviser before taking any position in the stock/s mentioned.)

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