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Within our coverage, agrochemicals-focused contracted specialty chemicals players are relatively better placed to weather the global slowdown storm. This is because, in our view, agrochemicals demand is likely to remain buoyant on account of robust growth in world oilseed production (as per USDA). At the same time, per our channel checks, ex-agrochemicals demand is likely to remain tepid over the next couple of months and is likely to recover with increase in global discretionary spend. The only silver lining for all chemicals players currently is the continued decline in freight rates and reintroduction of export incentives from mid-Dec’22. This could help improve margins in both 4QFY23 and 1QFY24. Amid such an uncertain environment, we continue to prefer SRF in large caps and Navin Fluorine in midcaps.

* Agrochemicals demand likely to remain buoyant: As per US Department of Agriculture (USDA) reports, world oilseed production in CY23 is likely to grow at a robust 4% YoY; this level of growth was last seen in CY21 on account of pandemic-led disruptions (Exhibit 1 and 2). At the same time, IGC expects world grain production to moderate only a little in CY23 and sees strong growth in CY24. Moreover, in case of India, oilseed production growth in CY23 is likely to taper to 1.2% vs. ~4-5% growth over the last 3-4 years (Exhibit 3). Hence, in our view, agrochemicals demand in the exports market is likely to remain buoyant while domestic agrochemicals demand could be flat compared to CY22. This bodes well specifically for contracted agrochemicals focused players such as Navin, PI, SRF, and Anupam.

* Ex-agrochemicals demand weakness to persist over next couple of months: Basis our channel checks, demand for non-agrochemicals, especially personal care, flavours and fragrances, and cleaning chemicals remains weak. As a result, we believe nonagrochemicals focused players are likely to face challenges in volume off-take in 4QFY23. In some cases, end-customers have excess inventories lying idle for these chemicals. In our view, demand recovery for these chemicals is contingent on inventory drawdowns, which is likely with the increase in global discretionary spend

* Increase in basic chemicals prices unlikely to dent margins: Over the last couple of months, prices of most basic chemicals have risen marginally after falling 20-30% over the last 12 months (Exhibit 4). In our view, this increase in basic chemicals prices is unlikely to hinder the margin for a majority of the specialty chemicals companies under our coverage given that all chemical companies will benefit from the revised export incentives scheme (~0.8-1.2% across different chemicals) that came into effect from 16th Dec’22.

* Freight rates continue their downward trajectory: On account of decongestion at major ports and waning demand, India–North America and India–Europe freight rates have been on a continuous decline since May’22 (Exhibit 7 and 8). In our view, this downward trajectory is likely to continue as the current freight rates are still 50-60% higher compared to the stable pre-Covid levels. This decline in freight rates was one of the contributors for the margin improvement of Indian chemicals players in 3QFY23. We expect this trend to continue in 4QFY23 as well.

* Target prices cut across companies owing to uncertainty: To account for 3QFY23 results, and demand weakness across end-user industries barring agrochemicals, we lower our FY24/25 EBITDA/PAT estimates for a majority of our coverage companies. Moreover, in the wake of the global slowdown and the rising interest rate scenario, leading to higher cost of equity, we cut our target multiples across companies. We roll forward our target prices to Mar’24. We expect contracted players to be better placed to weather the storm of the uncertain macro environment. Our top picks – SRF in large caps and Navin Fluorine in mid-caps.

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