After Specialty, Bulk Chemicals Too Turn Attractive, Says B&K Securities

The Indian chemical market may see its next boom in bulk chemicals due to attractive company valuations coupled with tailwinds that aid structural growth, according to B&K Securities.

"The recent supply disruption in China on the back of power outages and limited global capacity expansion provides enough levers to the segment now to deliver consistent earnings growth," said the report by the brokerage.

Bulk or commodity chemicals, which can be produced in large quantities by various manufacturers, were not favoured by investors "as these were deep cyclicals and earnings visibility was limited owing to lesser expansion and China's dominance", it said.

The recent supply disruptions are likely to cause windfall gains in the near-term for this segment, it said. And China's dual control policy—of carbon peak by 2030 and carbon neutralisation by 2060—announced last month will make it a structural opportunity as opposed to a one-off event, aiding sustainable earnings growth, the report said.

The valuations are attractive. Bulk chemicals makers are trading at 10 times their estimated earnings for FY23 compared with 40 times for specialty chemical companies.

And several other factors are likely to aid growth, according to B&K Securities. These include:

• Chlorine derivatives: Domestic demand for chlorine derivatives such as chloromethane, chlorinated polyvinyl chloride, epichlorohydrin is growing. Increasing investments will result in captive consumption of chlorine and aid electrochemical—a weighted average of caustic soda, chlorine and hydrogen—realisations.

• Hurricane Ida impact: The second-most intense hurricane to strike the US took down caustic-chlorine capacity of 330 crore million tonnes a year. It also affected vinyl chain plants, driving PVC prices higher.

• Rising coal prices: Costlier coal is affecting international caustic soda makers. Indian companies using captive power plants and domestic coal or natural gas at lower prices have benefited.

• China's dual control policy: Chloro-vinyl, an energy-intensive industry, would see a price impact due to supply pressures.

• Local procurement: Caustic soda was included as one of the 28 chemicals under the 'Make In India' scheme. Meaning, the minimum local procurement is targeted at 70% of domestic demand in FY 2021-23 and 80% in FY 2023-25.

• Anti-dumping duties: Anti-dumping duties on imports from China and South Korea and requirement to meet Bureau of Indian Standards has made imports expensive.

• New technology: As mercury-based caustic soda capacities causing harmful emissions are being phased out, domestic players that have moved to environment-friendly membrane cell technology may benefit.

• PLI Schemes To Boost Demand: Demand for caustic soda is expected to rise due to wide applications across sectors such as pharma, mobiles and auto, that are included under the production-linked incentive scheme of the government.

B&K Securities, in the first report on the bulk chemical series, picks caustic soda players DCM Shriram Ltd., Chemplast Sanmar Ltd., and Gujarat Alkalies and Chemicals Ltd.

DCM Shriram

• One of the largest domestic caustic soda and PVC compound manufacturers (accounted for 24.3% revenue in fiscal 2021).

• The company has announced capex of Rs 100 crore for chlorine downstream projects to set up facilities for epichlorohydrin, aluminum chloride and hydrogen peroxide.

• The caustic soda segment is expected to grow at 20% CAGR over fiscals 2021-24 and these plants will reduce the company's dependence on pricing volatility.

• Diversified business in six segments dilutes overall sensitivity.

• It is on track to benefit from rising caustic soda realisations in the near term, while medium- and long-term growth is likely to be driven by capacity expansion and higher usage of chlorine derivative.

• The company has the potential to report after-tax profit of Rs 940 crore by fiscal 2023 versus Rs 672 crore reported in financial year 2021.

• Every Rs 1 rise in caustic soda hiked to add incremental profit of Rs 53.1 crore.

Chemplast Sanmar

• Producer of specialty paste PVC resin and custom manufactured chemicals. Also makes caustic soda, chloromethane products, hydrogen peroxide and refrigerant gas.

• The second largest producer of suspension PVC in India.

• Most likely to benefit from the rising PVC prices internationally.

• The company is a play on rising PVC spreads and caustic soda realisations in the near term.

• Medium- to long-term growth is likely to be driven by import substitution of PVC, capacity expansion and higher usage of chlorine derivative.

• It is currently trading at 84.6 times its earnings at a market price of Rs 617 per share.

• The company has the potential to report after-tax profit of Rs 650 crore by FY 2023 compared with Rs 742-crore reported in FY 2021 (includes an extraordinary item of Rs 465 crore pre-tax).

• Every Rs 1 rise in caustic soda to add incremental profit of Rs 9.5 crore.

Gujarat Alkalies and Chemicals

• It has a product basket of more than 36 products largely comprising caustic soda and chlorine derivatives.

• It derived 36.7% of its revenues from caustic soda in FY 2021.

• The company is expanding chlorine derivative capacities to prevent chlorine disposal issues faced in the past.

• Rising caustic soda realisations driven by logistics disruption and plant shut in US to benefit in the near term.

• It is currently trading at 28.3 times its earnings at a market price of Rs 640 apiece.

• The company has the potential to report after-tax profit of Rs 590 crore by FY 2023, up from Rs 167 crore in FY 2021.

• Every Rs 1 rise in caustic soda to add incremental profits of Rs 33 crore.

B&K Securities said Meghmani Finechem Ltd., DCW Ltd., and TGV SRAAC Ltd. were the other caustic soda and derivatives companies expected to report profitable growth in the future.