Time to be very selective in the Farm Inputs & Chemicals sector: IIFL Capital Services

3 Jan 2023 , 01:05 PM

The sector is amid the largest-ever capex execution, with rising concerns on earnings growth from these capex projects, given some delays. Moreover, Specialty Chemical companies are sitting on rich valuations, already factoring multi-year growth. Thus, analysts at IIFL Capital Services prefer Bulk Chemicals and Agri-inputs, for 2023.

 

Supply-led disruptions dominated 2022

Year 2022 was characterized by several supply-side challenges for the industry. This consisted of headwinds in securing raw materials, exorbitant power and freight costs. Analysts at IIFL Capital Services believe 2023 is a year of pricing reset across value chain. Chemical companies will find it difficult to earn steady margins, until feedstock prices stabilize.

Near-term challenges in exports demand

Companies exposed to discretionary applications like Dyes & Pigments, Automotive, Flavors & Fragrances and Polymers — would face several headwinds in near term. Analysts at IIFL Capital Services expect some slippages on commissioning and ramp-up of new capacities, considering aforementioned concerns. Nevertheless, Agchem and Pharma-based value chains would continue to remain resilient.

Competition is intensifying across the board

While Indian companies — until now — focused on their core capabilities and chemistries, most of them are now foraying into newer capabilities through forward integration/reverse engineering. For instance, Deepak Nitrite, Anupam Rasayan, Laxmi Organics, etc., are keen to enter into Fluorine chemistry. Even with enough opportunities to tap into, rising competitive intensity across capabilities would cap profitability in the long term. Hence, caution is advised.

Farm-inputs consumption should be resilient

Global AgriCommodity Price Index is trending above the long-term average. Remunerative Crop prices and tight Agri-inventory positions, will keep Agrochemical and Fertilizer consumption healthy. Indian Fertilizer players will benefit from subsidy disbursements and favorable Farm policies, from the FY24 (pre-election year) budget.

Prefer Bulk Chemicals and Agri-inputs

For 2023, analysts at IIFL Capital Services prefer bulk chemicals and value stocks like DFPC and CHEMPLAS, since risk-reward is favorable. They have upgraded CRIN to Buy, as key inputs costs continue to fall and valuations are attractive. Analysts at IIFL Capital Services have trimmed their target multiples across companies susceptible to the risks highlighted above. Hence, they have downgraded NFIL, ARTO, ATLP, ASTEL and SCHI to Reduce, and have lowered rating on SRF, DN and TTCH to Add.