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Motilal Oswal
2025-01-16 11:28:02 am | Source: Motilal Oswal Financial Services Ltd
Chemicals Sector Update : Short term uptick in chemical prices unsustainable by Motilal Oswal Financial Services

Short-term uptick in chemical prices unsustainable

* Most of the chemical stocks on 9th Jan'25 gained to the tune of 2-14% in anticipation of an increase in chemical prices (owing to Chinese New Year) and some specific news items (increase in Ref Gas price by a large US supplier).

* Prices of major chemicals that we track have been subdued for the past few months, indicating persistent pricing pressure in the sector. Export realization has also seen a meaningful double-digit decline for most companies in 3Q.

* We remain largely negative to neutral on the sector, with only pockets of growth being seen in our coverage universe as of now. We have a BUY rating on ATLP, GALSURF, PI and VO and a Sell rating on FINEORG

 

Stock run-up unsustainable in short to medium term

* Most chemical stocks moved up 2-14% on 9th Jan'25, mainly due to the anticipation that chemical prices would rise in the coming month because of the Chinese New Year holidays starting later in Jan’25. Every year during these holidays, there are some capacity shutdowns in January, due to which chemical prices see an uptrend until the Chinese capacities are back and running.

* Stock prices of SRF/NFIL were up ~14%/~9% as a large US supplier said it is going to increase prices with immediate effect. This player is said to have the largest import quota for Ref Gas in the US, because of which it is anticipated that other players would also increase their prices, including SRF and NFIL. The companies in their last concalls said that they were seeing a gradual recovery in the Ref Gas market, including in prices.

* SRF has a capacity of ~30ktpa of R32 and NFIL has a capacity of ~4.5ktpa. NFIL is expected to double its capacity in FY26. In a late-night press release on 9th Jan'25, SRF said that the news of the price hike is in context of the US market. Changes in prices of Ref Gas for SRF would depend on demand-supply dynamics. Our conversation with NFIL also suggests the same.

* Amine stocks, BLA (Balaji Amines) and AACL, were also up ~10%/~8% on the same day. Acetic Acid/Ammonia prices are up 5%/2% MoM in Jan’25 to date, in anticipation that there could be an increase in selling prices. In our interaction with the management, it was indicated that nothing unusual has taken place, except for the Chinese New Year, which would slow down imports and it happens every year.

 

Prices remain subdued with no significant demand improvement

* Prices of major chemicals that we track are subdued in Jan’25 so far, with Phenol/ IPA/ Isobutanol/ Caustic Soda flakes/ Sulphuric Acid down 4%/3%/1%/8%/12% MoM. Blended Phenol + Acetone spread is down 4% MoM. ACN and Acetone prices are flat MoM. Prices of Toluene (Korea)/Propylene (Korea) decreased 9%/1% YoY in Dec’24.

* A steady increase in demand has also not materialized over the past few quarters, further contributing to the lack of price movement. Geopolitical tensions, including the Red Sea crisis, have been driving container and freight rates higher in the near term. Managements of various companies have earlier said that a meaningful recovery could be seen in 2HFY25, which looks unlikely.

* Though there was a YoY uptick in export volumes in the first two months of 3QFY25, export realization witnessed a meaningful double-digit decline for most companies. This indicates that pricing pressure persists in the sector. Some managements have hinted at possible pricing pressures in CY25. Subsequently, capacity expansions have also been delayed by various companies.

 

Valuation and view

* Vinati Organics (VO): The stock is trading at ~33x FY26E EPS of INR51.9 and ~24x FY26E EV/EBITDA. It had a fixed asset turnover of 1.5x as of FY24. We continue to believe that VO’s long-term growth outlook is healthy. We value VO at 45x Dec’26E EPS to arrive at our TP of INR2,655. We reiterate our BUY rating on the stock.

* Galaxy Surfactants (GALSURF): We estimate a volume CAGR of 9% over FY24- 27, fueled by robust volumes in the domestic market and a recovery in the specialty care product volumes in the developed markets, which have already started growing. The stock is currently trading at ~21x FY26E EPS of INR118.3 and ~13x FY26E EV/EBITDA. We value the company at 25x Dec’26E EPS to arrive at a TP of INR3,350. We reiterate our BUY rating on the stock..

             

 

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