Why Credit Suisse Prefers Only These Two Chemical Makers

Credit Suisse is bullish on India’s specialty chemicals business on account of a rise in per capita consumption, import substitution and higher exports.

The Indian chemicals market was pegged at about $190 billion in the financial year ended March 2018, of which, a third would be specialty chemicals (including pharma and agrochem), the global brokerage said in a report. It now expects the specialty chemicals sector to show double-digit growth for multiple years.

Here are the reasons why Credit Suisse is upbeat on the sector:

Rise In Per Capita Consumption

India’s per capita consumption of chemicals, excluding pharma, was $100 in 2017, according to Credit Suisse. That was significantly lower compared to the global average of $500. Over the next decade, however, it expects the per capita consumption of chemicals in India to grow at a faster pace than per capital income. As income rises, consumers would demand better products, boosting consumption of higher value chemicals, it said. Also, the large size of India’s market makes it an attractive opportunity for end-user industries to set up their manufacturing base here.

Import Substitution

India imports about 45 percent of its chemical requirement. The nation’s chemical imports, excluding fertilisers and pharma, stood at $55 billion in 2017-18, with bulk chemicals and intermediates constituting a large part, the report said.

But now there are initial signs of import substitution, with capex on chemicals starting to pick up, it said. A large end-user market, surplus capacity in refining and availability of feedstock will help to develop petrochemicals and organic intermediates locally, the report said, citing Deepak Nitrite’s 200,000-tonne phenol-acetone plant which is expected to meet nearly 80 percent of domestic demand.

Rising Share Of Exports

China and the European Union are the largest chemical exporters with a global market share of nearly 20 percent each. India’s share, too, increased from 3.5 percent in 2015 to 4.6 percent in 2018, the report said.

Also, the ability of domestic companies to manufacture custom complex solutions at a lower cost, increasing end use and higher prices of chemicals due to their lack of availability on account of shutdown of polluting industries in China have forced global producers to look at India as an alternative sourcing hub, according to the report.

Credit Suisse’s Top Picks

The global brokerage prefers chemical producers with strong volume growth rather than pricing as some of the pricing benefit could reverse once China capacities come back on stream, and those that operate within a stable margin variance band, according to the report.

Aarti Industries

• Initiated ‘Outperform’ with a price target of Rs 2,000 apiece.
• To benefit from the structural upcycle underway in Indian chemicals industry.
• Strong track record makes it a preferred partner for clients.
• Higher volumes from several capex initiatives to drive EBIT.

PI Industries

• Initiated ‘Outperform’ with a price target of Rs 1,300 apiece.
• Order backlog unwinding to be a key driver.
• Increased R&D activity to result into revenue.
• Tailwinds for a key product Pyroxasulfone.