“Rapidly changing industries are the enemy of the investor.” Mohnish Pabrai

It continues to be a mixed picture for the chemicals sector. There are signs of pricing pressure easing, but volumes need to pick up as well. Till a couple of months back, most analysts were at best sounding neutral on the sector. The tone is now gradually turning positive.

Centrum analysts Rohit Nagraj and Kunal Pai are in the camp that is betting on a sharp rebound for the sector this year.

“With global issues alleviating, generally the consensus (including us) expects a sharp rebound in FY25E,” write the duo in their report.

In a nutshell, they say:

• Agrochemicals will see volume growth but pricing pressure will persist.

• Barring some exceptions specialty chemicals companies will see 15-20%

• YoY revenue growth this year. Margins will improve too.

• Prices are bottoming out, but growth will have to be driven by volumes.

• Domestic demand is good, but export growth will take time to pick up.

The fundamental picture is improving, and there is little doubt about the competitiveness of Indian chemical companies in the global market, players tracking the sector told Short Call. But any rerating from here could be a long-drawn process.

For one, valuations are not exactly cheap, and it could be a while before the companies regain the pricing power that they enjoyed till a couple of years back. Two, there is still a lot of over-ownership by individual investors, many of them who have been stuck for a while. At some point, their patience will run out, and the steady exit of old investors could keep stock prices in check.

Macro:

The jump in gross revenue in May was driven by strong income taxes. On the flip side, GST growth seems to have moved into a slow lane, write Nuvama analysts Kapil Gupta Prateek Parekh Yaswi Agarwal.

Growth in capex spend slowed to 16% (12-month moving average) from 32% while revenue spend was muted.

“The broader economy remains a mixed picture with loans, PMI and SUV sales strong, and MHCV, small cars, tractors sales and machinery imports weak. Tax buoyancy to moderate going ahead and fiscal spending to tilt towards consumption. Capex may have peaked out,” they write.

Oil and gas

The sequential decline in refining spreads and muted marketing margins are expected to drag oil market companies’ earnings in the June quarter, writes Emkay Global’s senior analyst Sabri Hazarika. He sees earnings of upstream companies being largely steady, with OIL at the head of the pack.

In the gas space, Petronet LNG’s earnings are expected to spurt on robust utilization at the Dahej terminal, GAIL is likely to be range-bound, and the recent tariff cut could dent GSPL’s earnings.

MGL and IGL will report double-digit volume growth on a low base, while margin weakness is expected drag Gujarat Gas sequentially, despite better volumes in Morbi.

IT

Sequential growth for IT companies is expected to improve, helped by seasonality and deal ramp-up, write Antique analysts Vikas Ahuja and Ashish Bansal.

“We expect discretionary spending to rebound and sector growth to improve as these have been under pressure for the past eight quarters. Overall, we may see some recovery during the quarter, while a rebound is likely to happen in 2H,” say the duo in their report.

Ask Automotive (Rs 392.4, 0.65%)

Shares of the auto ancillary company edged higher on robust growth prospects.

Bull Case: The company has rapidly scaled up in its venture into aluminum light-weighting precision solutions and is gaining market share despite being a late entrant in the space. A sustained ramp-up in aluminum die-casting, first mover advantage in 2W high-pressure die-cast alloy wheels, and foray into PV components bode well

Bear Case: It derives 50 percent of its revenue from its top three customers with its single-largest customer, HMSI, contributing more than 30 percent. Production loss of any of these customers, or a reduction in wallet share from any of them could adversely affect ASK’s business.

Polycab India (Rs 6,705, 1.16%)

Nuvama raised the target price of the stock to Rs 7,700 per share.

Bull Case: Polycab leads India's USD 9bn C&W sector with a 16-17% market share, double the nearest competitor. Its size offers advantages like rapid distribution, brand investment, and a pan-India network, supporting above-industry growth.

Bear Case: Deceleration in government and private capex spending, continued demand weakness in consumer markets hurting Polycab’s FMEG segment, and a significant fall in copper prices leading to reduced revenue growth.

ICICI Lombard (Rs 1,850.20, 2.35%)

Strong motor premium collections, new retail health product launch

Bull case: Given the rise in motor premiums by 31 percent YoY in 2 months of this fiscal year, the insurance firm is way ahead of the industry's average growth of 15 percent. This bodes well for the stock's near-term growth journey. Moreover, the premiumization of cars and benefits from the Motor Vehicle Act could also improve the prospects of ICICI Lombard against other insurers.

Bear case: A de-growth in the premium collection, muted trends of car sales, or regulatory action on insurance companies can hamper a stock's growth outlook. Though the company has launched a new retail health product in the market to ramp up its premiums in that segment, any tepid trends in this can also drive the stock down.

Wockhardt (Rs 885, 5.09%)

Soared 40 percent in five sessions.

Bull case: Earlier than expected approval of pneumonia drug Nafithromycin may help the company break even faster than anticipated. Clearance of phase 3 trials of urinary tract infection medication Zaynich to open up multi-million dollar opportunity in domestic and export markets.

Bear case: The company's biggest bet, urinary tract infection medication Zaynich is still under phase 3 trials. Despite showing positive signs, the risks of unsuccessful trials can derail the company's prospects, and cause serious damage to its profitability and breakeven timeline.