Deepak Nitrite, Atul, Vinati Organics, Aarti: Stay cautious on specialty chemical stocks, says Kotak

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Deepak Nitrite, Atul, Vinati Organics, Aarti: Stay cautious on specialty chemical stocks, says Kotak

Kotak has downgraded Deepak Nitrite to 'Reduce' rating, saying the stock has run up 18 per cent since it initiated coverage on July 23 and now trades at 36 times FY24 and 30 times FY25 EPS.

Kotak has downgraded Vinati Organics to 'Sell'. Kotak finds Vinati Organics' valuations at 47 times FY24 EPS too steep, given looming competitive pressures.

SUMMARY

Indian chemical stocks recently run up on rising prices of many basic chemicals in China
China is expected to continue to add substantial new capacities in the coming quarters.
Chinese oversupply may well persist for a year or two, depressing realisations.

Several specialty chemical stocks have seen a smart upmove amid rising prices of basic chemicals in China, but Kotak Institutional Equities is not amused. It has maintained its cautious stance on the sector, citing stretched valuations. The firmness in prices appears to be related more to short-term and seasonal factors than to a structural improvement in demand-supply, which seems likely to remain challenged for the next few quarters, the domestic brokerage said.

Kotak has downgraded Deepak Nitrite to 'Reduce' rating, saying the stock has run up 18 per cent since it initiated coverage on July 23 and now trades at 36 times FY24 and 30 times FY25 EPS. It also downgraded Vinati Organics to 'Sell'. Kotak finds Vinati Organics' valuations at 47 times FY24 EPS too steep, given looming competitive pressures.

"Indian chemical stocks recently run up on rising prices of many basic chemicals in China, which the markets are interpreting as an indication of recovering demand. Commentary by certain companies that demand has picked up QoQ in 2QFY24 may also have played a role in the run-up in stock prices," Kotak said.

For example, Aarti Industries’ management said on August 31 in a media interview that Q2FY24 demand is on average up 10 per cent against the levels of Q1FY24. Kotak said stocks under our coverage are up 4-15 per cent over the past two weeks. "However, we note that any recovery is coming off a very depressed base, earnings estimates already factor in a recovery in H2FY24 and valuations are now even more stretched for most stocks. Besides, the outlook for end-demand remains unclear for Calendar 2024 and the supply overhang from China continues to loom," it said.

Kotak said doubts remain regarding the adequacy of China’s stimulus measures in reviving the construction sector. The country is expected to continue to add substantial new capacities in the coming quarters, which could put the chemicals market under pressure, even as the seasonal boost to demand fades away post-October 2023.

“We expect customer destocking to fade in the next couple of quarters, but have less confidence in a strong recovery in end-demand, given there are still uncertain macroeconomic conditions in key regions worldwide. Additionally, the Chinese oversupply may well persist for a year or two, depressing realisations across much of the industry. Hence, we remain cautious on the sector; we roll forward our Fair Values by a quarter to September 2024,” Kotak said.

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