3 factors to look at while picking specialty chemical stocks

“Despite the correction, the valuations of a lot of companies in speciality chemicals space are still high. So, be a little selective; focus on companies that are building capacities downstream and upstream, focussing on integration and spending on capex,” says Gurmeet Chadha, Complete Circle Consultants.


Given the way markets are behaving, have you started to tell your clients to temper their expectations that they are not going to be making as much money as they were perhaps a few months ago or are you advising them to leave some chips on the table?
I am a great believer in market cycles. Any good year, where you see very strong gains, is followed by some consolidation and that is healthy. It also brings rationality to the market. Some pockets where there was exuberance, there is some rationality being restored — whether it was the IPO market or the new-age companies. I would not paint everything with the same brush and starting next year, the focus will shift back to strong earnings, companies which are able to pass on the price hikes and able to manage the input inflation well. On the macro front, there are lots of central bankers meetings over the next one week and amid this new variant worries, the pace of tapering, which earlier seems to be a concern, could mellow down a bit. So one needs to be calibrated. Having reasonable expectations and a very balanced asset allocation is key. Some corrections are normal and actually healthy in the long run.

When it comes to the private sector lenders, what is your pecking order?
Bank Nifty, especially some of the private sector banks, have been relative underperformers. If you see from the peak of 42,000, Bank Nifty has come below 36,000. I continue to like the private sector banks. ICICI was very impressive in the analyst meet they did on their digital abilities. Just look at the activations they have done on the mobile banking app, a little more than four-and-a-half million from non-bank and NTB customers. If you see the credit card sourcing, they were the highest sourcing in the pandemic period led by their co-branded card with Amazon. Some 26% of their existing clients got the card in about 30 minutes. They have great solutions in the payment and the lending space.

This entire debate of versus private bank to me is a little overstretched. This will be an era of more adoption and collaboration. If you see , they have already invested in about more than 15 startups. Even HDFC Bank has been a relative underperformer. I think a lot of these private sector banks look relatively reasonable.

Have speciality chemical names, which was a strong story even pre-pandemic, fallen enough in the last quarter to be bought once again? And should they be bought at all now?
Everything from the specialty chemical went up but the market is differentiating now. While there has been a healthy correction across the board, there are only some names that are worth considering. For example, Deepak Nitrite has corrected around 20-25%; it has around Rs 1000 crore capex and Rs 700 crore in the core business while Rs 300 crore is toward speciality business and green tech. Also, their EBIT composition changed; Finolex made up of 61% of the EBIT which is a high volume less margin; the fine & speciality chemical proportion to the EBIT came down to about 17-18% which had an impact on the margins. But it is looking good for the long term. Aarti is another one of the finest in the benzene based derivative space. Then in the smaller ones, we have something like Vinati; it has almost 65% market share in ATBS and almost 60% worldwide market share in IBB. You need to go chemistry wise and not paint the entire sector with the same brush just because everything has fallen. For a lot of these names, despite the correction, the valuations are still high. So, be a little selective, focus on companies that are building capacities downstream and upstream, focusing on integration and spending on capex.

Have multiplexes, aviation stocks, QSR space fallen enough to be bought again?
My sense is that we are not at very reasonable valuations. IT to me, whether we reopen or not, is a structural transformation digitally playing out. The financialisation of savings again is more structural and secular. Revival in housing is more structural and secular. Those are the themes one should have the core portfolio in. But if you get bargain deals in some of the other names, then one can consider. One such stock, which I do track in the hotel business, is Indian Hotels. They have a great portfolio and they are now focussing on the asset-light model. You are getting the largest hotel chain at a very reasonable market cap and that may be considered. But, as I said, the core portfolio should be more secular in terms of earning support.