Ru­pee fall, China curbs put spe­cialty chem­i­cals on a bet­ter foot­ing

Mint Asia ST - - Mark To Market -

The

steep cor­rec­tion in the eq­uity mar­kets notwith­stand­ing, shares of spe­cialty chem­i­cal pro­duc­ers, Aarti In­dus­tries Ltd and SRF Ltd, con­tinue to hold above the year-ago lev­els.

Aarti In­dus­tries is up 42% over the past year com­pared with a 2% fall in the BSE 500 in­dex. SRF is up about 5%. Shares of spe­cialty chem­i­cals firm Vi­nati Or­gan­ics Ltd also held up rather well—up 25% from a year ago.

The out­per­for­mance re­flects the im­prov­ing busi­ness en­vi­ron­ment.

San­jeev Hota, as­so­ciate vice pres­i­dent (re­search) at Sharekhan Ltd, says In­dian com­pa­nies are gain­ing mar­ket share af­ter China’s im­po­si­tion of stricter en­vi­ron­men­tal rules curbed sup­plies, trig­ger­ing ven­dor di­ver­si­fi­ca­tion.

Ac­cord­ing to Edel­weiss Se­cu­ri­ties Ltd, the tighter en­vi­ron­men­tal rules have raised pro­duc­tion costs in China, lead­ing to cost com­pet­i­tive­ness and in­creas­ing out­sourc­ing op­por­tu­ni­ties for In­dian man­u­fac­tur­ers. “Though there are no suf­fi­cient data points to sub­stan­ti­ate this, man­age­ment com­men­taries, in­dus­try ar­ti­cles, etc., cor­rob­o­rate our view,” an­a­lysts at Edel­weiss said in a note.

While the sharp ru­pee de­pre­ci­a­tion should aid the do­mes­tic in­dus­try’s ex­port com­pet­i­tive­ness, Hota of Sharekhan warns that all com­pa­nies will not ben­e­fit uni­formly from ven­dor re­or­ga­ni­za­tion.

Com­pa­nies such as Aarti In­dus­tries, which have greater ex­po­sure to the ex­port busi­ness, are seen to be bet­ter placed.

Com­pared with SRF, Aarti In­dus­tries also de­rives a large por­tion of its rev­enues from the chem­i­cals busi­ness—85% com­pared to 32% at SRF.

Apart from ven­dor con­sol­i­da­tion due to pro­duc­tion curbs in China, the re­cov­ery in the global agro­chem­i­cals mar­ket is an­other op­por­tu­nity. Af­ter years of stag­na­tion, the global agro­chem­i­cals mar­ket is on the path to re­cov­ery. “Things have started perk­ing up dur­ing the lat­ter part of FY18. Ini­tial signs of the slow­down cy­cle bot­tom­ing out are ap­par­ent— global com­mod­ity prices are strength­en­ing, agro­chem­i­cal ex­ports from China have dipped and the INR has weak­ened. More­over, in­ven­tory lev­els are low,” add an­a­lysts at Edel­weiss.

The man­age­ment com­men­taries too have been al­lud­ing to re­cov­ery in the global agro­chem­i­cals mar­ket. Af­ter re­leas­ing its firstquar­ter re­sults, SRF said it ex­pects the spe­cialty chem­i­cals busi­ness to re­bound in the sec­ond half of the fis­cal year, track­ing the re­cov­ery in global agro­chem­i­cals. A dif­fer­ence of a per­cent­age point or two in val­u­a­tion may not be a ma­jor de­ter­rent for in­vestors. What mat­ters more is busi­ness and earn­ings mo­men­tum.

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