Edelweiss Research maintains bullish outlook on speciality chemical sector, lists top 5 triggers - picks 7 best stocks from segment

Anticipating the favourable demand environment and incurring aggressive capital expenditure, a domestic brokerage firm Edelweiss Research maintained a bullish outlook on the speciality chemicals sector, while listing five important triggers to catalyse growth.

The brokerage believes speciality chemical companies would be able to protect margins despite rising input costs as they pass them on to end consumers. While, commodity chemicals players are benefiting from a cyclical upturn and would generate solid cash flows, Edelweiss Research added.

The top five key triggers or takeaways for speciality chemical companies are:

Speciality chemicals seeing solid demand/market share gain: Players such as Galaxy Surfactants, Rossari and Fineotex Chemicals are seeing solid demand from user industries (textile, FMCG, etc) along with market share gains in the global market.

Cyclical upturn in commodity chemicals driven by supply constraint: Players such as Tata Chemicals and GHCL (with presence in soda ash) are reaping the benefit of commodity upcycle amid strong demand and supply constraints.

Well placed to pass on rising input cost: The industry is braving the sharp rise in input cost, including fuel cost, and facing logistical challenges emerging from China. However, speciality chemical players have been able to pass on these increases to end consumers with some lag, and they are confident of maintaining margins.

China remains a blackbox, driving uncertainty: Given lockdowns and the supply and logistics challenges emerging from China, uncertainty is keeping global market on the edge. However, most of players have been reducing their dependency on China and focusing on backward integration.

Capex to support growth: As players remain confident of logging strong growth and generating free cash flows, they are aggressively incurring capex or actively pursuing inorganic growth opportunities.

Chemical stocks such as Fineotex Chemical, Galaxy Surfactants, GHCL, Meghmani Organic, Rossari Biotech, Tata Chemicals, and Yasho Industries are the best pick according to the brokerage firm.