Dalal Street doesn’t seem to be abuzz currently with the markets being directionless in the last couple of months. Maybe because of global cues and the earning season past us, but also we have the general elections coming up, so it seems the markets are going to stay this way with volatility plays being the flavour of the season. The markets are range bound and going forward they are going to remain this way with spurts of volatility every now and then. Domestically there is a credit squeeze plus the factor of oil prices. Corporate performance after this earnings season looks very interesting in terms of raw material, commodity traders have shown good results however their margins have been squeezed which is a very interesting scenario.
I do not feel there is much upside from our current position as Emerging Markets valuations seem steep and India looks to be a tad on the expensive side, there are opportunities among a few sectors and this is a stock pickers market right now. Pricing power does not seem to be there currently because of which margins have been squeezed but with good monsoons expected demand should set in causing pricing power to rise and cost of goods would go down which would result in an increase in customer contribution to the corporate sectors performance. So Logistics seems to be a good sector to look at as there is a lot of e-commerce business happening, speciality chemicals and housing segment could be something to watch out for.
A lot of HNI’s have been betting on the chemical sector and within the speciality chemical sector, there are a few companies which may have a dominant role globally in manufacturing chemicals. So to Identify stocks within this sector look really lucrative.
Speciality chemicals are specific items that are used in low quantities for the production of high-value goods.
- Indian middle class is leading a dramatic change in demand for items like food, clothing and transportation, which is primarily driving demand for speciality chemicals
- For example, caramel manufactured from sugar is a commercially produced speciality chemical. Caramel colouring is extensively used to manufacture soft drinks and confectionery items
- Production of speciality chemicals allows customer stickiness and leads to high revenue predictability
- Since the price of speciality chemicals is determined through negotiations, increase in raw material costs can also be passed on to protect margins
Right from the moment, we wake up in the morning until the end of the day, we deal with hundreds and thousands of chemicals on a daily basis. Toothpaste, soaps & shower gels, deodorants, clothes, various kinds of packages, processed food, automobiles, buildings we live in – speciality chemicals are used in making each one of them.
Speciality chemicals are specific products providing a wide range of effects on which various industries rely on. They are recognized for what they do and the kind of solution they provide to meet customer application needs. For example, caramel manufactured from sugar is a commercially produced speciality chemical. Caramel colouring is extensively used in the manufacturing of soft drinks and confectionery items.
The size of the industry is pegged at $25.0 billion. The industry has multiple sub-segments, the largest one is paints and coatings, which accounts for about 20% of the industry size. Speciality polymers are the next biggest segment and contribute 13% of the industry size.
Speciality chemicals industry is expected to grow at a compounded annual growth rate of 13% over the FY15-FY20 period leading to a market size of USD 52 billion by 2020, which is primarily driven by domestic consumption. Growth drivers for the industry are:
- India’s middle class is fast expanding, leading to a dramatic change in demand for items like food, clothing and transportation. This growth in end-user industry has been primarily driving demand for speciality chemicals
- Apart from allowing 100% FDI into the sector, Government’s “Make in India” initiative is expected to provide impetus to infrastructure creation and facilitate rapid flow of FDI into the sector
- National Chemical Policy is expected to be released soon, the policy is expected to promote research & development in the industry as well as provide enabling environment and infrastructure for the industry.
- A technology up-gradation fund of $100 million will be set up during the 12th five-year plan (2012-2017), in order to allow companies to undertake modernization programmes
- Plans are afoot to set up specifically delineated zones as Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR). A 453 square kilometre area in South Gujarat has already been developed as PCPIR. 3 other such areas have been approved in Andhra Pradesh, Odisha and Tamil Nadu. Kerala, Karnataka and Maharashtra are new applicants for PCPIR. This is expected to give a major boost to manufacturing chemicals locally
Other factors that make speciality chemicals industry attractive are:
- Speciality chemical industry is an oligopoly that is knowledge driven. Companies that manufacture such chemicals need to have process expertise as well as research and development capability. The industry is also capital intensive. Combination of these factors act as entry barriers, allowing incumbents to retain competitive advantage
- These chemicals are high-value specialized products used in specific proportions by manufacturing industries. Manufacturing industry approves the product after a lot of testing and then accordingly designs its production process. Hence, customer stickiness is very high, leading to the predictability of revenue
- End product price is decided through negotiation. Thus, increase in the cost of raw materials is passed onto the end user. This allows companies to maintain their margins
The Few scripts according to me worth having a look at and investigating in for lucrative long-term gain –
- Atul Ltd
- Pidilite industries
- Navin Fluorine Internationa LTD
- Galaxy Surfactants LTD
- Balaji Amines LTD
- Aarti Industries LTD
- Asian Paints LTD