Edelweiss maintains 'BUY' on Aarti Industries, SRF and Galaxy Surfactants, while maintaining a positive view on the speciality chemical sector

Specialty chemical companies posted strong numbers in Q3FY21 riding pick in utilisation levels led by robust domestic demand as the economy revives from covid-19 challenges. However, surge in input prices (edible, crude oil derivatives) led to margin pressure. While Fine Organics battled margin headwinds, Galaxy Surfactants and Aarti Industries benefited from an improved product basket.

With resilient growth in global agrochem, Edelweiss expects PI Industries (HOLD) and SRF (BUY) to continue to post strong top-line growth. Aarti Industries (BUY) and Galaxy Surfactants (BUY) are envisaged to benefit from value additions. Edelweiss expects Fine Organics (HOLD) to suffer from poor margins in Q4 FY21.

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Robust demand recovery:

Specialty chemical players have seen a sharp recovery post lockdown. Given the strong demand revival across domestic markets, most players have returned to precovid-19 production levels with facilities operating at above 90% utilisation. Burgeoning demand for hygiene-based products along with innovators’ focus on China plus one strategy has been a key driving factor benefiting Galaxy, AIL and SRF.

However, delay in new product launches as well as spurt in input prices (edible oils and crude based derivatives) impacted Fine Organics performance during the quarter. Overall, we expect momentum in the sector to remain positive over subsequent quarters with end-user industries returning to normalcy.

Increase in capital outlay driven by China plus one factor:

Management commentaries by specialty chemical players highlight a rising number of order enquiries by global innovators, primarily in creating an alternate supply source to China. As a measure to tap these growth opportunities, majority players have increased their overall capital expenditure for FY 22-23 (AIL’s capex: INR12bn, SRF: INR13bn). Going forward, we expect higher capital outlay driven by increased visibility on demand is likely to keep growth engines intact for our coverage space. However, slow pick up in the discretionary segment could impact near-term growth.

Outlook: Strong growth visibility overshadows covid-19 challenges

Edelweiss remains positive on the specialty chemical sector owing to strong growth visibility and a faster-than-expected recovery across end-user industries in the domestic market. While the exports market is picking up gradually, we expect growth in the discretionary segment to remain muted in the near term. Rise in the number of order enquiries along with increase in capital spending aligns with our view on long-term growth prospects of the specialty chemical space. Hence, Edelweiss maintains ‘BUY’ on Aarti Industries, SRF and Galaxy Surfactants, while maintaining a positive view on the sector.