Morgan Stanley adopts a cautious stance on chemical sector; Deepak Nitrite remains preferred pick

Global investment bank Morgan Stanley has maintained a cautiously selective outlook on the Indian chemical sector, citing ongoing market challenges. The brokerage highlighted muted demand and pricing pressures as key headwinds impacting the sector's near-term performance.  

  
Deepak Nitrite has retained its "Overweight" rating despite Morgan Stanley lowering its target price to Rs 3,000 from Rs 3,295, reflecting reduced expectations amid sector-wide challenges. The firm acknowledged the company’s relative strength and potential for long-term recovery, making it a preferred stock in the segment.  

For PI Industries, the brokerage maintained an "Equal-weight" rating, marginally revising its target price to Rs 4,310 from Rs 4,300. The neutral stance reflects limited catalysts for a significant upside in the immediate term.  

Sector Performance in Q2
The chemical sector's Q2 earnings underscored several issues, including subdued pricing and margin pressures. Companies faced another round of earnings downgrades and guidance cuts, with no substantial improvement expected in the near future.  

Morgan Stanley emphasized the absence of meaningful levers to drive profitability, as companies continued to navigate demand disruptions and prioritize wallet share over near-term returns.  

Bright Spots in Non-Agrochemical Commodities 
The brokerage noted some recovery potential in non-agrochemical commodity chemicals, which it considers a relatively better-positioned segment than other categories within the sector.  
 
While Morgan Stanley acknowledged some early signs of stabilization in demand, it cautioned that the sector's earnings have not fully bottomed out, keeping confidence for 2025 moderate. Among its stock preferences, Deepak Nitrite remains a standout due to its ability to weather current market dynamics better and leverage future growth opportunities.  

The report reflects a balanced view, urging a selective approach for investors in the chemical sector while keeping an eye on evolving market conditions.