Even as the Indian chemical industry set to benefit from various tailwinds in the current fiscal, Morgan Stanley has downgraded its rating for shares of some specialty chemical companies due to the cautious commentary from their management after the financial results.
The brokerage prefers refiners, gas utilities and select commodity chemicals over agrochemicals and other specialty chemicals.
The current financial year should see India chemicals revert back to growth after a tough reset from fiscal 2023 highs, it said. "Easing destocking intensity, stabilisation in price declines, pockets of restocking, increased competitive pressures and monetisation were key messages out of earnings."
The brokerage estimates volumes from stronger operating rates and capacity expansions to underpin bulk of incremental Ebitda growth over the fiscal 2027. "While not entirely derisked, restocking traction witnessed in multiple end markets should drive higher volumes," it said.
The brokerage remains on the sidelines until an earnings upgrade cycle. The upside surprises from favourable mix changes or new product launches and improved pricing (better demand uptick, supply-chain dislocations) remains a 'show-me story' and is key, it said.
"We incorporate the learnings over the past year as we look forward to FY25," Morgan Stanley said, while noting three factors for the material 50–60% cuts to the Street's forward estimates — the highest in the past decade. These include global destocking, which was significantly worse than feared, customers pushing out product offtakes and material unwinding of pricing power.
Following another round of earnings cuts after the quarter ended March 2024, multiples are not inexpensive and do price in a meaningful normalisation and sequential earnings traction near term, it said, recommending investors to stay selective.
The chemical sector has underperformed the Nifty by 10-12 percentage points.
SRF, Aarti Industries, Tata Chemicals Downgraded
The brokerage has downgraded SRF Ltd., Tata Chemicals Ltd. and Aarti Industries Ltd. to 'equal weight' from 'overweight' earlier.
For the shares of SRF, the brokerage has also reduced its target price to Rs 2,115 apiece from Rs 2,557 earlier.
The street estimates for fiscal 2026 and 2027 are baking in meaningful improvement over the previous fiscal. Downside risks to these estimates include margin pressure, especially in specialty chemicals amid ongoing demand headwinds and partially due to rising competitive intensity. "Supply pressure across SRF's segments, risks of duty cutbacks in the US for refrigerant gas exports also skew risks to the downside," it said.
The financial services firm also highlighted multiple positives but awaits clear evidence for an earnings upgrade cycle to turn positive. It said that the worst of the destocking cycle was getting behin. Bottoming in refrigerant gas prices, packaging margin trough and monetisation of Rs 20-billion of growth investments over fiscal 2025 appear priced in.
For Aarti Industries, however, the brokerage firm has increased the target price to Rs 613 from Rs 575 apiece earlier. It believes that the stock is adequately reflecting Aarti's recent contracts, volume upside from expanded capacities and gradual improvement in industry demand at current levels.
"Any significant upside from current levels will likely hinge on increased clarity on demand, greater confidence in achieving the upper end of Aarti's guidance range and winning new, multi-year contracts, which is not part of the base case," it said.
Tata Chemicals' target price has also been lowered to Rs 843 per share from Rs 904 per share. It said that the company's earnings in fiscal 2025 will likely reflect new and lower priced contracts in 2024, especially in the UK and US. Significantly lower spot prices were offset by volume growth from expanded capacities.
"With limited evidence of significant capacity rationalisation in the near term and supply growth expected in North America in 2H24-25, we see pricing pressures sustaining, in the absence of a material turn in demand," it said.
The brokerage firm has also lowered its target for Navin Fluorine to Rs 2,633 compared from Rs 2,817 share earlier. "Our revised PT reflects our more conservative recovery expectations in specialty chemicals and CDMO amid risks of further customer push outs as the recovery cycle remains volatile," it said.
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