5 beaten down specialty chemical stocks poised to make a comeback soon

Notwithstanding the recent fall in the Indian stock market after the benchmark indices Sensex and Nifty scaled fresh peaks, the specialty chemical sector is still struggling to snap the long streak of underperformance.

Despite overall growth across segments of the Indian market, certain chemical and specialty chemical stocks have faced big downturns.

In today’s article, we’ll look at five such players from the chemical industry and examine whether they’re poised for a potential comeback.

#1 Paushak

Paushak is India’s leading Phosgene-based specialty chemical manufacturer.

The company has a rich history dating back to 1972. It navigated through various phases, adapting to changing financial conditions in the chemical industry.

Over the years, Paushak has diversified its product portfolio and specialised in Isocyanates, Chloroformates, Carbamoyl Chlorides, Carbamates, and protecting agents, among others.

In the past one year, Paushak shares have fallen around 30%. The fall is more severe if you compare it with its peak of ₹12,000 touched in 2022.

The downtrend started in 2022 when the company’s management guided that the high profit experienced in the previous years was not sustainable and it’s expected to come down.

Sure enough, concerned investors questioned Paushak’s ability to sustain such rapid growth in the future. This tempered outlook disappointed investors.

However, the company shows promising growth outlook to diversify its customer base and product portfolio.

The company has also undertaken various debottlenecking exercises and capacity expansion in the past two years. This capex investment could come to fruition soon.

In the first quarter of FY24, Paushak’s net margins dropped to the lowest in years, but the company has since then staged a recovery and its operating margin in Q3 stood at 36%.

Apart from improving demand scenario, one must also note that Paushak has a strong backing from its parent company Nirayu.

#2 Clean Science & Technology

Clean Science stands out as it has a unique focus on clean and eco-friendly manufacturing processes.

The company has three manufacturing facilities consisting of 16 plants with a total capacity of 44 thousand million tonnes per annum (MTPA).

In 2023, the company invested ₹1.9 billion (bn) in capex, the highest since its inception, primarily to expand its manufacturing capacity by 2,000 MTPA in one of its plants.

In FY23, the company reported an impressive ROE of 34% and an ROCE of 45.4% reflecting effective utilisation of resources.

The growth was aided by low raw material costs and a better product mix.

The graph below shows the 3-year stock price performance of Clean Science. In the past three years, its share price has fallen approximately 40%.

Usually, after an Initial Public Offering (IPO), investors may choose to take short-term profits by selling shares.

The decline in shares in FY22 was due to profit booking by investors following the company’s successful IPO.

The current decline, however, is attributed to weak Q3 results.

Clean Science and Technology reported an 18% YoY decrease in revenue for the December 2023 quarter on account of lower volumes and lower pricing.

Revenue contribution from performance chemicals, pharma, and agro intermediates and FMCG stood at 67%, 19%, and 13% respectively.

Due to the decline in revenue, the company's operating profit fell 20% YoY. Operating profit margins also fell 1.1% YoY to 44.5%, even as raw material, fuel and other expense fell.

The management said that it hopes to increase margins despite pricing pressure and new investments.

Overall, the company is working on adding more products in its business portfolio to regain its profit margins.

For FY24, it has guided for a total capex of ₹3.8 bn for developing and manufacturing hindered amine light stabilisers (HALS) and new performance chemicals.

Despite investing heavily in capex, the company has remained debt-free as it is funding its capex through internal cash accruals.

As the world is looking for alternatives toChina to de-risk their supply chain, India is considered a reliable supplier of speciality chemicals.

This bodes well for Clean Science and Technology as it is focussing on import substitution and adding export customers across geographies by expanding its product portfolio and developing new products.

#3 Alkyl Amines Chemicals

Alkyl Amines Chemicals is a global leader in the production of aliphatic amines, speciality amines, and amine derivatives.

Its diverse portfolio includes DEHA, DMAHCL, synthetic acetonitrile, and triethylamine which positions the company as a key player in the specialty chemicals market.

Over two years, shares of the company have experienced a decline of approximately 40%.

The decline could be attributed to the reduced consumption of existing inventories in storage units and unfavourable market conditions starting FY22.

The company saw peak profit margins in the financial year 2021. Due to high inflation, the input prices increased, and the margins contracted in the next two financial years.

However, the company is responding to the current surging demand from FY23 by investing INR heavily 4 Bn to expand its Aliphatic Amines capacity at its Kurumba site in Maharashtra.

With inflation falling, the input prices are expected to stabilise, and profit margins are expected to improve.

Alkyl Amines also pays consistent dividends.

It has a leadership position in several product categories, giving it an edge over its competitors. It is currently focussing on the speciality chemicals segment and setting up two new plants for the same.

Moreover, it is also expanding capacities across all its product categories to remain competitive and capture the demand for chemicals.

#4 Transpek Industry

The fourth on this list is Transpek Industries which has evolved into a prominent player in the chemical manufacturing industry.

The company is based in Gujarat and specializes in producing inorganic and speciality chemicals.

It caters to industries such as textiles, agrochemicals, pharmaceuticals, advanced polymers, and paper.

In terms of financials, Transpek Industries has maintained a solid performance, with an ROE of 15.6% and ROCE of 20.7% in FY23.

From a peak of ₹2,500 touched in 2021, shares of the company have underperformed big time ever since.

The company is embarking on an expansion of its global presence forming partnerships with new clients in South America, Eurasia, and Japan.

The company is currently working on the pipeline of new products in chlorine and non-chlorine chemistry. It sees a strong opportunity in multi synthesis products.

Transpek has undertaken a capex of ₹300 m to replace an old plant to accommodate new products for which the demand is expected to be higher. Along with the focus on new products, there is good visibility in growth.

Overall, the company’s solid financial performance and a conservative capital structure provides a promising outlook with expansion plans in place. Transpek's products even find applications in electric vehicles (EV) and defence applications.

#5 Meghmani Organics Ltd.

The last on the list is Meghmani Organics, a leading agro-chemical-based in Gujarat, which has three state-of-the-art pigment manufacturing facilities in Vatva, Dahej SEZ, and Panoli.

Meghmani Organics is renowned for its global footprint, as 75% of pigment revenues stem from exports, reaching over 75 countries worldwide.

Meghmani's stock price witnessed a peak of ₹130 in 2022 before undergoing a decline, hitting its lowest point at ₹77 per share. The fall represents around a 35% decrease.

The company’s shares experienced a decline in 2023 because it disclosed that a fire occurred at its finished goods warehouse of its pigment plant located at Panoli.

The stock is currently trading at ₹85 per share, indicating a modest recovery from its previous low.

Underlining its commitment to innovation, Meghmani Organics via its subsidiary Meghmani Crop Nutrition (MCNL), entered a licensing agreement with a leading domestic fertilizer manufacturer, leveraging their patented technology for the production of Nano urea (liquid) fertiliser.

A state-of-the-art plant located in Gujarat, has been commissioned with an annual capacity of 50 million Nano urea bottles (500 ml), poised to meet the escalating demand both domestically and internationally.

This strategic initiative is expected to enhance the company’s revenue generation.

Notably, the company is venturing into international markets by establishing a subsidiary in Brazil and a representative office in China, aligning with its goal to cater to diverse markets.

In 2023, Meghmani Organics also entered the competitive landscape with a multi-purpose product plant, positioning itself against multinational corporations (MNCs) and securing a first-mover advantage.

Looking forward, the company remains committed to expansion plans, further enhancing its presence in the global market and solidifying its position as a key player in the agricultural solutions industry.

Snapshot of Best Specialty Chemical Stocks on Equitymaster Stock Screener

Here’s a table showing the above companies on various important parameters –

Investment Takeaway

The five stocks explored in this article show promise for a potential rebound.

Despite recent stock price declines, these companies exhibit strong fundamentals, efficient operations, and growth prospects.

Note that, fundamentally strong stocks may experience fluctuations, but history shows they often reward shareholders in the long run.

Keep your focus sharp.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com