Jefferies says weakness likely to continue in specialty chemicals; check its ratings on SRF, PI Industries and more

The specialty chemicals sector is currently grappling with challenges stemming from weak demand and heightened Chinese exports. Jefferies anticipates a potential upswing in demand during the second half of fiscal year 2025 (2HFY25E), with a particular focus on the recovery of crop protection demand during the same period.

As per the brokerage, recent industry insights suggest that inventory rationalisation is expected to persist until the first half of the calendar year 2024, with growth normalising towards historical averages by the end of CY24. Despite these expectations, Latin America, the European Union, and Asia continue to face market weakness, it cautioned.

Chinese exports of crop protection products have surged by 40 percent year on year in Oct Nov, albeit with volumes lower than the September peak, potentially impacting global pricing until domestic demand rebounds in China. Further, major crop prices, including wheat, corn, and soybean, have moderated by 20 percent, 30 percent, and 15 percent, respectively, in CY2023, nearing a 7 year average due to eased supply concerns and reduced farm profitability, it noted.

Jefferies also pointed out that the specialty chemicals industry faces additional challenges in the packaging films segment, particularly with BOPET (biaxially oriented polyethylene terephthalate) films constituting 65% of 's capacity. Oversupply issues have left BOPET films in a more precarious state compared to BOPP (Biaxially Oriented PolyPropylene Films).

With capacity utilisation at 70 percent, margins in the packaging films sector are projected to remain below the cycle average in FY25E, it said, highlighting the near term headwinds. Stock Picks The brokerage's top pick in the sector remains PI Industries. PI Industries stands out with a promising outlook for healthy volume growth and an attractive valuation, it said.

Meanwhile, it downgraded SRF to Underperform, anticipating a slower business recovery that may not align with the recent surge in the stock's value, resulting in an unfavorable risk reward proposition. As for Navin Fluorine, it maintained a cautious stance, choosing to observe developments such as the onboarding of the new managing director, clarification of growth objectives, and resolution of concerns related to high leadership turnover before actively engaging in the stock.

: PI is better placed than its peers in the destocking cycle with healthy volume growth likely in FY25E. US patent expiry on key products in CY2025 applies to only 15 percent of the use (solo product), with the balance (combinations) under patent till 2030. Pharma CDMO diversification reduces agro chem concentration risks and surplus cash presents inorganic opportunities to grow which positions the company well for long term growth, said Jefferies.

It expects a 12 percent EPS growth in FY25E. Valuation is reasonable (30x fwd PE), said Jefferies. PI is its Top Pick with a target price of 4,290, implying a potential upside of 24 percent. : Jefferies noted that SRF stock has rallied 15 percent in the past two months on the expectation of a recovery in business fundamentals in 2HFY24.

It sees weakness in specialty chemicals and ref gas persisting in 2HFY24E and lower FY24/25E EPS 18 percent/12 percent, respectively. SRF's wider product portfolio compared to the previous agrochem downturn has failed to cushion the impact of the current destocking cycle. Normalisation in channel inventory is expected over the next 6 18 months across various products.

It expects a recovery in the specialty segment to remain on a slow pace with a decline in FY24E followed by a back ended recovery in FY25E. While Jefferies likes the company given the large opportunity, top notch management, industry leading execution, and chemistry expertise, it downgraded the stock to Underperform with a target price of 2,140, implying a 14 percent downside.

: The growth trajectory will be laid out once the new MD is on board. Currently, the business faces weak demand in specialty chem and pharma verticals and execution challenges in HPP. Articulation of growth strategy and stemming the high attrition among business leaders are key to watch out for, noted the brokerage.

It prefers to stay on the sidelines for now. Jefferies cut FY24/25E EPS 9 percent/7 percent on slower than expected recovery in chemicals demand and builds in y/y decline in CDMO in FY24E and builds in a 39 percent/28% Ebitda growth in FY25/26E. Valuation remains at a premium to PI/SRF despite the uncertainties on growth, noted the brokerage and awaits a better entry point to potentially turn more constructive.

It maintains Hold with a target price of 3,425, implying a 2 percent downside. : Jefferies expects ANURAS to deliver 27 percent revenue, and 30 percent PAT growth in FY25E on the back of existing LoI converting into firm contracts and new contract wins in fluorination. It also sees inventories and receivables to improve freeing cashflows and lowering interest costs but maintains an Underperform rating as the recent stock run up has turned risk reward unfavorable.

It awaits an improvement in the balance sheet without compromising growth to potentially turn more constructive. It has a target price of 960 for the stock, implying a muted upside. Livemint tops charts as the fastest growing news website in the world to know more. Unlock a world of Benefits! From insightful newsletters to real time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away!.