India's chemical companies delivered a stronger-than-expected performance in Q1FY27, helped by sharp price increases and lower-cost inventories. However, according to Abhijit Akella, Analyst at Kotak Institutional Equities, this boost may not be sustainable. As reported by CNBC TV18, Akella cautioned investors against extrapolating the unusually strong quarterly profits, noting that the combination of price inflation following the war outbreak and companies carrying lower-cost inventories resulted in unusually high profits across chemical and commodity businesses. Some gains could continue for another quarter or two due to supply disruptions, but earnings are expected to normalize thereafter.
The sharp divergence in chemical stocks this year reflects what investors are currently willing to pay for earnings visibility. According to CNBC TV18, stocks such as Anupam Rasayan India, Aether Industries and Navin Fluorine have performed well as the market has rewarded companies with visible near-term earnings, particularly those with strong contract manufacturing order books. However, some companies like Deepak Nitrite have not seen similar re-rating despite strong near-term earnings, as investors are concerned that current performance could become difficult to sustain beyond the next one or two quarters.
Navin Fluorine International has reported strong numbers supported by refrigerants and pharma CDMO businesses, with R32 refrigerant prices remaining firm and pharma CDMO benefiting from strong supplies of Darolutamide intermediates to Fermion. However, as reported by CNBC TV18, the concern is how long these earnings streams can support high valuations. R32 is expected to become capacity-capped under regulations from next year, limiting long-term growth potential, while Darolutamide is expected to go off patent in the early to mid-2030s, after which growth could slow and margins could come under pressure.
Rather than chase stocks that have already been rewarded for earnings visibility, Akella prefers companies where valuations are more reasonable and the risk-reward is attractive. According to CNBC TV18, his four recommended names are Jubilant Ingrevia, Godrej Agrovet, S H Kelkar and Company, and Clean Science and Technology. Jubilant Ingrevia stands out for its CDMO opportunity but trades at valuations closer to commodity chemical companies, creating a potential growth opportunity. Godrej Agrovet has valuations that have fallen sharply over the past few years even as the underlying business mix has improved, with the oil palm business potentially becoming a significant value driver.
For S H Kelkar and Company, the investment thesis is largely about margin recovery after aggressive growth investments have depressed margins. As reported by CNBC TV18, Akella expects margins to move closer to normal levels over the next two to three years as growth catches up, potentially driving sharp earnings improvement. Clean Science and Technology has corrected significantly and is beginning to show traction across its businesses, with new products starting to contribute. Akella believes its valuations have become more attractive and sees it as a stock worth tracking over a two- to three-year period.
