Chemicals as a sector gained popularity since 2014 owing to the return of global growth, supply constraints arising due to China’s environmental concerns, higher price realizations etc. Over the last 4 years, any company with the word ‘chemical’ or ‘organics’ in its name has moved up, irrespective of its product portfolio.
Dyes, Pigments, Chlor Alkalis, fluorine and other products/chemicals gained importance and companies which manufacture these were plentiful in India. Naturally, all the micro cap companies utilized their existing capacities, did new capex, increased price realizations, which resulted in them becoming small & midcap companies.
Most of the companies gave good to excellent returns to most investors picking any stock in this sector between 2014 – 2017 end.
Then came Jan 2018, with various issues on the horizon, the stock market volatility caused many investors to shun small & midcap stocks like they were a plague. At the same time, one has to remember that people had to sell to take these huge profits made in a short time. This caused the stocks to crack – companies like Meghmani, Rain, Fineotex, Akshar, Thirumalali etc saw lower investor interest to get back into them.
At the same time, the rotation of the chemicals gave rise to a new breed of companies – Sadhana Nitro, Mangalam Organics, India Glycols Punjab Alkalies, IOL Chemicals etc gave excellent returns in the last 1 year.
Given above are all the stocks which have given more than 100% returns in the time when previous companies were making losses for fresh investors.
Chemicals as a sector is quite large, with varied products, applications, companies, manufacturing capacities, price realizations etc. If we look at the Jun quarterly results of some companies in this sector, the performance is very good. Agro Chemicals, Basic Chemicals, Specialty Chemicals etc have been part of many of the companies and the sales growth for the sector has been around 16.8%, with profit growth of 35%. This is strong going for the sector as a whole.
However, the valuations are a cause of concern for some companies.
Conclusion: It is difficult to expect the same chemical companies to be in vogue for many years to come as, depending on the growth of sectors & with changing applications, the demand for different chemicals will change too. Hence, it is important to keep an eye on the trends and check periodically on the demand cycle of these chemical companies.
Currently, fluorine chemicals seem to be in vogue. 6 months ago, it was Chlor-Alkalis. During monsoon season, it is agrochemicals, Hence, the product demands keep shifting from time to time and so will investor interest.
Looking at the larger picture, after registering stock returns of more than 1000% in a short span of time, who wouldn’t want to book profits. Hence, going forward, choose wisely and do read on the emerging trends, applications etc in various parts of the world to pick the next multi-bagger from this sector.
Financial data & source credits: Equitymaster, Screener, & author’s own understanding of the sector along with personal data collated over various time periods.
