Indian companies with exposure to pharma, agro-chemicals to benefit from China+1 theme, say experts

Stocks in the speciality chemical sector have been buzzing of late. One of the biggest gainers this calendar year is Balaji Amines, which is up nearly 340 percent, followed by Hikal which is up nearly 285 percent, then Gujarat Flouro, which is up 250 percent. Vinati Organics Navin Fluorine and SRF are up anywhere between 50 and 150 percent.

There have been many new listings as well this year. Clean Science listed at 98 percent premium, Tatva Chintan listing was at 121 percent premium, while Chemplast Sanmar saw a flat listing.

In the first quarter commentary, companies said that they are getting in more and more demand due to the China+1 factor. The consolidation in chemical companies still continues in China and this is expected to result in a growing call for alternate suppliers of key chemicals. Other reasons include protection to Indian industry in the form of anti-dumping duty. There are policy initiatives taking place like PLF a key starting materials API's, more capacity is being added.

However, stocks are not trading cheap and so to know whether there is more upside left in them, and on what could lead to the upside and to talk about growth triggers for the sector, CNBC-TV18 spoke with Vinati Saraf Mutreja, MD at Vinati Organics, and Nilesh Ghuge, institutional analyst at HDFC Securities.

Elaborating on the China+1 theme and other factors, Mutreja said speaking from her personal experience, about 15 years back, China was a much more formidable competitor in most chemicals. They always were front running excess capacity for most chemicals but in the past five years, China's mood has shifted out of chemicals towards maybe more technology-oriented sectors, AI. It started with the Beijing Olympics, and the environmental clampdown etc., so they definitely are not expanding capacity as far as most chemicals are concerned. So India certainly has a lot to gain and benefit from this attitude that China is displaying now.

“In the last three years, Vietnam has been a bigger beneficiary than India. And that's simply because as an Indian company, there are a lot of other challenges like lack of infrastructure, lack of basic raw materials, India still imports a lot - a huge chunk of basic chemicals, we still depend on China for imports, even getting government approvals takes time, crude is important. Those are some of the reasons why we haven't benefited as much as we should have.”

However, she further said, “I do see the government taking proactive initiatives such as the PLI scheme and various others, which will benefit the industry in the coming years.”

When asked if investments were happening in the sector and about supply issues, Vinati said most companies are announcing investments and capital is available companies are also generating profits.

“Prices of a lot of chemicals have gone up over the last one year so their profitability has increased and at the moment, the demand is more than the supply. So they are going in for investments. And I think this trend will continue in the near future. Because even America, Europe, they're all looking at India as an alternate supplier. So both from a specialty chemical as well as bulk chemicals. You will see more capacity enhancement and expansion coming in the coming years,” she added.

When asked what should a retail investor chose from this chemical space, which is vast, Ghuge said there are tailwinds available for the chemical companies but valuations are currently high. “In the current scenario from the chemical companies, I prefer the companies who focus on supplying the raw material to pharma, agrochemical, because it is a secular story, and steady growth rate companies and then there is an entry barrier as well for those companies because there is a stringent compliance issue, regulations and after that, the pharma and agrochemical choose those company as a supplier, so, there is a credibility with these companies.”

Secondly, one should look at companies that have a focus on environmental safety or those who can tackle those problems because that is the critical thing in the chemical space, Ghuge added.