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Nirmal Bang Report
Key Points
The trend in chemical prices has seen an uptick of late, reversing the YoY decline we had seen in H2 FY23 and Q1 FY24. This in part is due to the recent increase in oil/gas prices – Brent is up 7.57% month-on-month in July 2023/August 2023. Given the uncertainty as to when the excess supply from China will abate and the subdued global demand outlook for crop protection chemical, this uptick in chemical prices could be transient, and may not sustain.
On a positive note, the key freight indices are down 77-90% as per the latest trends. This is likely to partly offset the headwinds caused by carryover of high-cost inventory and the muted pre-season booking of pesticides. Further, the 21.9% YoY decline in Q2-to-date FY24 oil price could imply lower energy costs. Overall, we believe that the custom synthesis manufacturing/contract research and manufacturing services companies with healthy balance sheets, visible order book/growth and new growth engines offer a better risk-reward over the next six months to one year compared to CPC companies.
Agrochem CSM leader, PI Industries Ltd. (our top Buy with target price of Rs 4,534) offers new product launches, visible growth in CSM and potential for upside from the scale-up in the newly purchased pharma business. Risks: Delay in CSM order execution, uncertain chemical pricing and China supply and adverse weather due to El Nino.
CPC sector biding time for a sustained revival: Healthy progress in monsoon and sowing (especially in rice) besides good soil moisture augur well for the Kharif season, as per the earnings calls of CPS stocks we tracked post Q1 FY24 results.
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