09 Mar , 2022 By : Kanchan Joshi
Domestic brokerage Kotak Institutional Equities believes fundamentals of specialty chemicals companies continue to be strong. Growth for most of the companies in its specialty chemicals coverage is driven by volumes as they continue to invest for long-term opportunities, it said.
Aarti continues to be among its top stock picks in the specialty chemical space, given visibility on volume led growth and multiples closer to pre-Covid levels. Meanwhile, the brokerage continues to like SRF and any meaningful correction may provide good entry points. Vinati Organics is also its preferred stock pick.
Its Buy tag on specialty chemical stock Aarti Industries comes with revised FV of Rs1,000 (from Rs1,150 earlier). Whereas, the brokerage has maintained Add rating on SRF shares with FV of Rs2,325.
Kotak has reiterated in its thematic note that re-rating of the sector multiple in the past one year has been driven by low cost of equity led by lower risk-free rates and improved investor comfort on the long-term longevity of earnings.
"Valuations may see some correction as CoE reverts closer to pre-Covid levels. Companies are better placed to handle the current increase in crude prices (last seen in FY2013-14) given presence in more downstream products, volume-led growth and improved competitiveness versus Chinese peers," the note stated.
The Russia-Ukraine conflict has resulted in higher crude prices. Companies with low dependence on crude (NFIL, SRF) and ability to pass higher input costs will be least impacted, as per Kotak.
“Our analysis indicates that while the correlation between gross margin and crude oil prices are high but correlation between absolute gross profit and crude oil prices is very low. This indicates that companies like Aarti and contract manufacturers like PI, SRF and NFIL are able to transfer RM increases with some delay," it added.
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