China's Pain Is India's Gain as Chemical Stocks Surge to Record

(Bloomberg) -- Makers of specialty chemicals in India have become the darling of investors this year. Analysts are proving harder to please.

A custom index of five stocks -- Aarti Industries Ltd., Fine Organic Industries Ltd., Galaxy Surfactants, PI Industries Ltd. and SRF Ltd -- has risen 30% to a record as Indian manufacturers step in to meet shortages due to shutdowns in China. In comparison, only 13 of 19 sector gauges compiled by the BSE Ltd. are in the green, with an index of consumer appliances posting a year-to-date return of 25%.

The valuations reflect strong optimism but haven’t adequately factored in risks inherent to the chemicals industry, Rohan Gupta and Sneha Talreja, Mumbai-based analysts at Edelweiss Securities Ltd. said in a report. The brokerage has a hold recommendation on all but one of the five stocks in the custom index; it has a buy rating on Galaxy.

“Though structurally positive on the sector, we remain cognizant of its frothy valuations and await a better price opportunity,” the analysts wrote. The sector also faces risks like further tightening of environmental norms in India, which may require companies to accelerate capital spending.

Value of India’s specialty chemicals sector is likely to rise almost two-and-a-half times to $87 billion by March 2025, driven by robust 10%-15% growth in end-user industries and emerging export opportunities to the West and China clampdown, the analysts said.

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