HDFC Securities initiates coverage of these two chemical stocks, expects over 20% upside

After being hit by the coronavirus aided pandemic and an economic slowdown, India’s chemical industry was hit severely in the previous year. However, now as the economy recovers and normalcy resumes, chemical space is among the first to recover. “We have assessed the current situation of the industry and our analysis compels us to uphold our positive stance on our specialty chemicals universe,” said domestic brokerage and research firm HDFC Securities. Now, post lockdown, capital expenditure seems to be on the cards for a number of chemical sector firms.

During the lockdown phase, the demand for chemicals from some sectors continued to be resilient while others pockets went silent. However, as unlocking picked up pace the demand has been robust. With a bullish view on the space, HDFC Securities has initiated the coverage of two chemical sector players expecting hefty gains.

Fine Organic

Target price: Rs 2,905

The brokerage firm said that Fine Organics’ business is highly knowledge-intensive. “The products are largely customised; thus, continuous R&D and innovation are the pillars of growth for the company,” they said. The firm has developed in-house process design expertise to construct production facilities, helping them cater to market needs while reducing Capex costs. Fine Organics is the largest manufacturer of Oleo-chemical based additives in India and is a key producer globally.

Fine Organics plans to expand production to 111.3ktpa by the next fiscal year. “We believe that this capacity will be adequate to take care of volume growth until FY24. Thus, we foresee no major Capex to augment the capacity being undertaken by the company over, at least, the next three years,” HDFC Securities said. Over the current fiscal and the next two the company is expected to generate free cash flow of Rs 5 crore. From the current levels, the stock is expected to jump 23%

NOCIL

Target price: Rs 185

The largest domestic manufacturer of rubber chemicals, NOCIL has manufacturing facilities in Navi Mumbai and Dahej. HDFC Securities expects the company to double its capacity, experience robust volume growth on the back of pick-up in demand of the tyre industry, and expansion of margin with focus on specialised rubber chemicals. NOCIL has a 40-45% share in the domestic market while the rest controlled by Chinese firms. 

The automotive industry has shown a strong pick-up in demand post the lockdown. Driven by personal mobility trend automotive production is picking up, according to HDFC Securities. “Apart from these fundamental factors, the policy initiatives will support the current growth momentum for the tyre industry,” they added. Placed in an industry with high entry barriers, the company is well-placed to benefit from tailwinds. From the current levels, the stock could surge another 20% to reach the target price.

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