Though the Covid-19 pandemic massively impacted the economy in one way or another, it also opened up opportunities. The chemical sector with huge potential is one of the fastest-growing sectors in India, behind IT and Pharmaceuticals. Many factors are contributing to the growth of this sector. The primary factor is the innovative research and development that encourages the adaption of new technologies and techniques in this sector. Supply chains across the world may have decided not to depend solely on one nation. Secondly, the Indian Government’s resolve to reduce imports and boost local manufacturing competence areas should push forward chemicals. Availability of skilled human resources, China-US trade war, agricultural economy, innovation, and India’s position as a preferred outsourcing destination are likely to fuel the chemical sector’s further growth.
A quick look at chemical stocks suggests that markets have handsomely rewarded them. As per the statistics provided by the Ministry of Chemicals and Fertilizers, India’s global share in the chemical industry has doubled to 6%. India ranks 6th in the world in terms of chemical sales. China at no.1 is roughly 15 times ahead of us. Low per capita chemical consumption for most chemicals offers good scope for higher domestic consumption in the future. Policy shift and favorable regulations to reduce investment risks in the chemical sector should augur well for chemical stocks ahead. After digging a dip in this space, we picked up three shares with the potential to generate solid returns.
J B Chemicals and Pharmaceuticals Ltd (NS:)
Known as Unique Pharmaceutical Laboratories in India and international markets, J B Chemicals manufactures affordable pharmaceutical products. The company’s wide range of specialty products includes multiple pharmaceutical dosage forms like tablets, injectable (vials, ampoules, form fill seal), ointments and creams, medicated lozenges, capsules, and herbal liquids. The company is among the world’s top 5 manufacturers of herbal and medicated lozenges. It has outperformed its peers in the domestic formulations business with a 35% share in 5 molecule categories. Domestic formulations contributed more than 42% of its total revenues in FY2021.
J B Chemical’s last 3-year revenue CAGR was 13%, while its EBITDA CAGR was an impressive 37.2%. Its operating expenses as a percentage of revenue declined to 21.5% in FY2021 from 28.8% in FY2018. This reduction gets reflected in its EBITDA margin, which almost doubled to 27.4% from 15.4% during the same period. Net income margin more than doubled to 22% in the last fiscal from 10% in FY2018. Market share gains, new product launches, robust improvement in operating margin should continue to fuel the stock upward. The share returned 151% in the last year and trading below 6.8% to its 52-week high.
Pidilite Industries Ltd. (NS:)
Pidilite Industries manufactures adhesives, sealants, waterproofing solutions, construction chemicals to arts and crafts, industrial resins, and polymers. The company’s diverse product portfolio includes renowned brands such as Fevicol, Fevikwik, Fevistick, Dr. Fixit, M-Seal, Araldite, Hobby Ideas, and Moto Max. The company has adopted alternate trade channels to accelerate its revenue growth. E-commerce sales were up four times in Q4FY2021 on a year-on-year basis. Other alternate sales channels such as Modern Trade and Pidilite ki Duniya witnessed 1.3 times rise in sales during the same period. Pidilite’s overseas subsidiaries registered substantial revenue and EBITDA growth in FY2021 compared with FY2020. Robust demand in rural and metro areas, diversified product portfolio, revival in real estate should drive the stock further. Promoters and FIIs/FPIs have slightly increased their holding in the company in the last two years. The share gained 64.6% in the previous year and is currently trading very close to its 52-week high.
Asian Paints manufactures a broad range of paints for decorative and industrial use. It also provides wall coverings, adhesives, and services under its portfolio. The domestic decorative paint segment constitutes around 84% of its total revenues. The international business operations segment contributes 11.5% of revenue. Analysts expect its domestic decorative volume growth to be in the 10%-12% range from Q2FY2022 onwards. In the last five years, the company’s revenue CAGR was 9.4%, while its EBITDA CAGR during the same period was 12.3%. Asian Paint’s EBITDA margins have consistently improved over the last five years. Gradual unlocking, increased vaccinations should drive its domestic decorative revenue growth in the future. Demand pick-up in the automotive sector should push the company’s industrial paint business. The company has the reach and product portfolio to subsidize the input cost rise by increased volumes. Margin improvement measures driven by cost rationalization have helped the bottom-line growth for Asian Paints (NS:). The stock delivered superb returns of 76.9% in a year and is poised to move ahead.