However, the boost may not last, according to Abhijit Akella, Analyst at Kotak Institutional Equities, who cautioned investors against extrapolating the unusually strong quarterly profits.
Akella said the combination of price inflation following the outbreak of the war and companies carrying lower-cost inventories resulted in unusually high profits across a wide range of chemical and commodity businesses. “That, of course, is not sustainable from a medium to longer term perspective,” he said.
Some of these gains could continue for another quarter or two because supply disruptions are still affecting certain products, but Akella expects earnings to normalise thereafter.
Deepak Nitrite is one example of why investors need to look beyond the headline Q1 numbers. Phenol spreads, which were around ₹20-30 per kg before the war, briefly surged to as high as ₹180 per kg in April. They have since fallen sharply to around ₹60 per kg. While that is still roughly twice the pre-war level, Akella does not expect the elevated spreads to continue for several quarters. “We should expect some level of normalisation going forward,” he said.
Navin Fluorine International has reported strong numbers in recent quarters, supported by two key businesses — refrigerants and pharma contract development and manufacturing organisation (CDMO). R32 refrigerant prices have remained firm, while the company has expanded capacity. Its pharma CDMO business has also benefited from a strong ramp-up in supplies of Darolutamide intermediates to Fermion.
The concern, however, is how long these earnings streams can support high valuations. R32 is expected to become capacity-capped under regulations from next year, limiting its long-term growth potential. Meanwhile, Darolutamide is expected to go off patent in the early to mid-2030s, after which growth could slow and margins could come under pressure. As a result, Akella said Kotak is not comfortable with Navin Fluorine’s valuation at this stage.
The sharp divergence in chemical stocks this year reflects what investors are currently willing to pay for earnings visibility. Stocks such as Anupam Rasayan India, Aether Industries and Navin Fluorine have performed well as the market has rewarded companies with visible near-term earnings, particularly those with strong contract manufacturing order books.
Deepak Nitrite, despite strong near-term earnings, has not seen a similar re-rating because investors are concerned that the current earnings performance could become difficult to sustain beyond the next one or two quarters. SRF faces a different set of concerns. Its specialty chemicals business has remained weak, while the agrochemical CDMO segment has been under pressure across the industry. The refrigerant business has supported growth, but rising R32 capacity in India could put pressure on margins over the next few quarters.
Rather than chase stocks that have already been rewarded for earnings visibility, Akella said he prefers companies where valuations are more reasonable and the risk-reward is attractive. His four names to consider are Jubilant Ingrevia, Godrej Agrovet, S H Kelkar and Company and Clean Science and Technology.
Jubilant Ingrevia stands out for its CDMO opportunity but continues to trade at valuations closer to commodity chemical companies, according to Akella. He sees that mismatch as a potential growth opportunity. Godrej Agrovet is another stock he finds interesting, with valuations having fallen sharply over the past few years even as the underlying business mix has improved. The oil palm business, in particular, could become a significant value driver.
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For S H Kelkar and Company, the thesis is largely about margin recovery. The company has made aggressive investments to pursue growth, which has depressed margins. As growth catches up over the next two to three years, Akella expects margins to move closer to normal levels, potentially driving a sharp improvement in earnings.
Clean Science and Technology, meanwhile, has corrected significantly and is beginning to show traction across its businesses, with new products starting to contribute. Akella believes its valuations have become more attractive and sees it as a stock worth tracking over a two- to three-year period.
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