IIFL Caravan-Ahmedabad day: Takeaways from Chemicals sector

5 Jul 2023 , 10:55 AM

Analysts of IIFL Capital Services hosted 8 companies from the Agriculture and Chemicals industries at IIFL’s Investors’ Conference in Ahmedabad on 30^th June. Common themes that emerged: 1) Bracing for near-term slowdown while structural story remains intact. 2) Gujarat-based PSUs meaningfully intensifying capex into Chemicals. 3) Capex plans largely intact; production ramp-up remains critical for growth.

Weak outlook for H1FY24:

Outlook for H1FY24 is weak, owing to declining price trend across Chemicals and Agrochemicals (post-patent portfolio), especially as Chinese supplies glut global markets. Management believes that at least a 2-quarter period is required to liquidate high-cost inventory in the channel. While volumes are likely to be steady, steep correction in product prices will create pressure on margins (inventory hit + negative operating leverage).

GSFC and GNFC getting aggressive: 

Gujarat-based PSUs viz. GSFC and GNFC are intensifying capex in Chemicals. While GSFC talked about investing Rs80bn capex over next few years (Rs40bn freezed+Rs40bn being evaluated), GNFC has embarked upon Rs20bn capex with another sizeable project under evaluation. Interestingly, most of these capital expenditures are aimed towards expanding and diversifying into Chemicals with a meagre amount going towards expanding Fertiliser capacities.

Capex programmes largely intact: 

Most of the companies are executing already announced capex programmes. However, given the near-term weakness, it would be interesting to see if incremental capex announcements continue. Also, scale-up of recently commissioned capacities remains critical for volume growth in FY24.

Interesting ideas from the conference: 

From the existing coverage, Analysts of IIFL Capital Services retain ADD on DN and GSFC. Other interesting ideas to emerge from the conference are Meghmani Finechem (contribution from downstream and value added products rising) and Gujarat Ambuja Exports (maize processing to drive growth).