Chemical sector stocks: The possibilities of strong performance of chemical sector stocks with great growth prospects are visible. This is also important because their valuations have come down due to the recent turmoil. In mid-December, fears arose for the first time about the sector, which has been giving excellent returns for the past several years. The chemicals sector, which earns most of the investors, suddenly started making losses.
Shares break 30-50% from record high
Concerns over rising input costs, good valuations and doubts over rising product prices had led to stocks of companies such as Camlin Fine Science, Balaji Amines and Chemplast Sanmar plunging 30-50 per cent from their record highs.
Before the sell-off period, the sector delivered an annualized return of 17 per cent during 2016-19, outperforming the Indian market at 5 per cent and global equities at 6 per cent in the same period.
However, over the past two weeks, investors have been turning to these stocks after the sector’s valuations softened. In the last two weeks, out of 78 listed chemical sector stocks, 58 have given positive returns, of which Jubilant Industries, India Glycols and Valiant Organics have given 20-30% returns.
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long term growth
According to Yes Securities, short-term challenges are unlikely to deter the industry’s continued long-term growth. The brokerage said, “The growth in the domestic consumer base, decent disposable income, lifestyle changes and supportive policies of the government are expected to enter the next phase of growth of the industry, which will lead to an industry growth of $300 billion (in size) by FY25. Estimated to reach
Earnings expected to grow at 38%
Philips Capital’s Surya Patra said in a note last week that the chemical stocks in his coverage are poised to deliver strong earnings growth in the December quarter “against fears of margin contraction due to increase in input prices”. Philips Capital expects earnings growth of 38 per cent for specialty chemical companies on the back of 43 per cent year-on-year growth in sales.
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However, relief on raw material cost and freight charges is unlikely as the Omicron variant could lead to supply chain shortfalls. Media reports suggest that global container freight rates have increased in January.
Product prices expected to rise
Nirmal Bang Equities said chemical producers will get relief from higher raw material prices as the prices of products are expected to rise in the coming months due to pressure in the global chemical market.
“In our opinion, sustainable and efficient value creation will be largely dependent on the chemical company’s capacity to scale and scale up operations, control over operations and capex allocation,” Yes Securities said.
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