Sector Update: Chemicals

Sector Update: Chemicals
by Nikita Bhoota 29/05/2020

Chemicals industry in India is highly diversified, covering more than 80,000 commercial products. It is broadly classified into Bulk chemicals, Specialty chemicals, Agrochemicals, Petrochemicals, Polymers and Fertilizers. India is a strong global dye supplier, accounting for approximately 16% of the world’s production of dyestuff and dye intermediates. Indian ranks 14th in export and 8th in the import of chemicals (Excluding Pharmaceuticals products) globally. As per IBEF, India is the sixth-largest producer of chemicals globally and the third-largest producer in Asia in terms of output. The country ranks third globally in the production of agrochemicals.

Currently, Indian chemical industry operations are severely disrupted due to coronavirus (covid19) pandemic. Manpower shortages and logistical constraints are likely to exist at least for 2-3 months. Demand pressures will also probably pull down FY21 earnings. However, in longer-term, there are definite opportunities, given a desire among multinationals to shift sourcing away from China. But, India’s gains may be limited, owing to the country’s poor infrastructure, high corruption levels, restrictive labour laws and environmental activism.

The covid-19 perspective can be divided into two horizons the short-term (i.e. the next couple of months until Jun-2020) and the medium-to-longer term (Jul-2020 to Mar-2021).

Short-Term Challenges

Manufacturing in major cities are more severely impacted

 Major manufacturing cities such as Mumbai, Pune and Vadodara are all classified as red zone areas, leading to relatively more severe disruption. Migrant workers are finding it difficult to rejoin workplaces in these cities. In contrast, smaller towns that have a high concentration of chemical units are witnessing relatively more limited impact on operations as it has been possible to transport workers from nearby towns. Thus, the shutdown or limited access to manufacturing units in red zones will impact the production activity of the chemical companies.

Manpower availability is the biggest constraint

Government restrictions currently cap headcount at 30-40% of normal levels, except in the case of manufacturing units catering to the pharma/food sectors (agrochemicals are not exempt: industry experts indicate that headcount here is capped at 40% of normal) and a shortage of skilled personnel and contract labour (often migrants) is the key constraint on production.

Logistic bottlenecks

Logistics is another key hurdle, with ports operating at 25-30% of normal levels and tankers in short supply for effluent discharge. As per the market experts, transport costs have spiked by up to 40%. However, companies are focused primarily on resuming production; profitability concerns have taken a back seat.

Medium and Long-term challenges

Cash Flow Management

Cash flow management is a major issue, as either collections from customers may take longer or, in some cases, suppliers are demanding advance payment. Companies do have orders in hand for a couple of months but production constraints are forcing them to prioritize manufacturing of key products. While, customer enquiries are ongoing, but customers are not committing on price. Meanwhile, Chinese producers have resumed production and are cutting prices, leading to further uncertainty around pricing. Given all these pressures, revenues and profits are likely to be impacted in FY21.

Industry is likely to rationalise headcount

Some companies have started using reduced manpower and this trend is expected to continue, potentially backed by greater automation. Even after capacity utilization ramps up, there will be a need to practice social distancing in the workplace, demanding for headcount reductions.

Definite opportunities in the medium to long term:

There are definite chances that the global chemical industry begins to shift its sourcing away from China, but a key question is the speed at which Indian companies can respond. Larger Indian companies are relatively better-placed to capitalise on the opportunity as smaller ones may not have the resources. However, India’s gains may be limited, owing to the country’s poor infrastructure, high corruption levels, restrictive labour laws and environmental activism.  Similarly, India’s long lockdown is likely to hurt the country’s prospects of gaining market share and damaged the country’s credibility as a reliable supplier.

Facts and figures: China is too large to completely bypass

The global chemical industry is worth ~US$4 trillion, of which China holds 38% share, while India is only at US$160bn. Similarly, in the specialty chemicals industry, China is several-fold larger than India. Certain basic chemicals required for downstream applications are still not produced in India and are imported, e.g. methanol, styrene, and acetic acid. Hence, the world will continue to buy from China for at least the next few years.

Conclusion and Recommendations

Opportunities are emerging for Indian chemical companies. However, we also believe that given the likely deep economic recession ahead, the industry faces a weak near-term demand outlook. Given the likely pressure on earnings, valuations seem too high for most leading companies. We would be cautious on richly-valued names and would instead favour those with relatively attractive valuations, such as Deepak Nitrite (DNL) and Tata Chemicals.  DNL and Tata Chemicals are trading at 15.0x, 6.6x FY21EPS respectively.

Stock Performance

Company Name

25-Mar-20

28-May-20

Loss/Gain

Aarti Industries

704.1

982.6

39.6%

Atul Ltd

3,713.7

4,401.6

18.5%

Deepak Nitrite

361.8

505.9

39.8%

Navin Fluorine Intl

1,109.0

1,488.1

34.2%

SRF

2,793.3

3,409.6

22.1%

Sudarshan Chemical

339.4

395.3

16.5%

Tata Chemicals

211.2

304.3

44.1%

Source: BSE

We have considered the performance of chemical stocks during the lockdown period. The chemical stocks have rallied as midcap and smallcap index has outperformed the benchmark index from March 25, 2020- May 28, 2020. Smallcap and midcap index jumped 18.0% and 13.8% respectively whereas, Sensex gained 12.8% in the same period.  Markets have corrected sharply in March 2020 in the fear that the pandemic will result in heavy loss to the economy. Mid-and-small-cap stocks have seen a significant impact of Covid19 and thus, the fall has given a good opportunity to add good quality stocks in the portfolio. Aarti Industries jumped 39.6% from March 25, 2020- May 28, 2020 as the company announced that in 4Q FY20 it has commissioned and commercialized the initial phase of its upcoming unit/ project at Dahej SEZ and had also exported few shipments to the global customers. Deepak Nitrate rallied 39.8% in the same period as its wholly-owned subsidiary Deepak Phenolics commenced commercial production of Isopropyl Alcohol (‘IPA’) at its manufacturing facility situated at Dahej. IPA product is a solvent and majorly used by pharma companies and is also used for manufacturing sanitizer.

 

Next Article

Yes Bank Sets Off Contagion Selling in the Stock Markets

Yes Bank Sets Off Contagion Selling in the Stock Markets
03/06/2020

The news flows that came from Yes Bank on the morning of 05th March were drastically different from the news flows in late evening. In the morning, the Yes Bank stock rallied by over 25% after it was reported that SBI was expected to come in and support the bank with capital infusion. However, things took a turn when the RBI imposed a moratorium on Yes Bank at 8 pm on 05th March. Under the moratorium order, the Yes Bank board was superseded by an RBI appointed administrator and there were limits of Rs.50,000 withdrawal placed till April 03rd.

Why this move is impacting the stock markets?

Yes Bank is still a part of the Nifty 50 and also a player in the futures segment. The pressure is visible from the fact that as of 10.40 am there are more than 24 crore shares on offer but volumes have been just 1.30 crore shares as there are no buyers even at lower levels. Here is the impact.

  • UBS, a leading brokerage, has pegged the fair value of Yes Bank at around Rs.1, which effectively means it is worth nothing. That explains why there are no buyers in the counter despite the stock being nearly 45% down on 06th March.
  • Most people are worried about the impact that Yes Bank could cause to the markets considering the size of its balance sheet. As of March 2019, Yes Bank had total deposits of Rs.228,000 crore and now all that comes under moratorium. Yes Bank has borrowings of Rs.108,000 crore and that also creates a systemic risk.
  • The next problem could be at a brokerage level. Brokers and other investors who have borrowed against Yes Bank shares could face immediate margin calls. In addition, brokers have already been instructed to close out all outstanding positions in Yes Bank to avoid any market panic.
  • Then there is the collateral damage at two levels. Depositors may be forced to sell out other assets and shares to make up for the deposit locking of Yes Bank. This maybe evident in the next few days. Secondly, borrowers with loan sanctions fromYes Bank may have to look for alternative sources of finance.
  • The moratorium on Yes Bank raises some questions over other private banks that have been facing NPA problems in the past. For example IndusInd Bank, RBL Bank and Bandhan Bank have taken deep cuts in trading on 06th March. Other banks in the midst of a liquidity crunch like Lakshmi Vilas Bank are also on lower circuit.
  • Yes Bank was quite active in funding real estate projects and even NBFCs. Both these sectors will immediately feel the crunch as the funding sources dry up and that could also have a cascading effect. That is also evident in the stock prices.
  • Lastly, don’t forget the retail borrowing effect. As per the RBI announcement, any deposit made by an individual will only be paid after adjusting against the loans outstanding. This could create a major liquidity crunch among retail investors. In fact, the weak consumption that has been a major bugbear for the Indian economy could get worse if the situation is not handled quickly and effectively.

Yes Bank has already lost over 90% of its market value in the last one year and the sharp fall on 06th March only exacerbates the problem. The impact of Yes Bank on the Indian economy is likely to be much deeper than originally anticipated. A lot will depend on how quickly the administrator is able to put the house in order, infuse capital and bring stability back to the markets. The crisis is in the open; it is now about how it is handled!

Next Article

Top 5 Options Trading Strategies

Top 5 Options Trading Strategies
03/06/2020

Options strategies combine different stock market positions with a view to managing risk or enhancing returns. Why are options unique? Unlike futures, options are asymmetric. For example, when one person buys futures and another sells futures, the risk of price fluctuation is equal for both. However, in an option the buyer has limited risk and unlimited return potential while the seller has unlimited risk potential and limited returns. This makes options strategies possible. Here are five popular options strategies.

Protective Put strategy

If you bought Reliance Industries at Rs.1485, how do you protect from a price fall. Create a protective put strategy by purchasing a put option of lower strike. So you can buy a 1480 strike put option at Rs.8. A put option is a right to sell and the premium is a sunk cost. If the price goes above Rs.1493 (1485 + 8), you profits are unlimited. On the downside, your maximum loss is cannot exceed Rs.13 {(1485-1480) + 8}. In short, you limit your loss by paying a small premium of Rs.8.

Covered Call strategy

A covered call strategy is normally used when you want to reduce the cost of holding a stock. If you bought SBI at Rs.340 for long term, but the stock falls to Rs.328; what do you do?. You are confident of the long term prospects of SBI, but in the next 3 months you don’t expect the stock to cross Rs.350. You can start by selling the near month 350 call at Rs.20 and repeat for 3 months. Here is how the returns table will look like.

Details

First Month

Second Month

Third Month

SBI 350 call sold at

Rs.20

Rs.21

Rs.20

Position closed at

Rs.5

Rs.25

Rs.4

Net Profit / Loss

Rs.15

Rs.(-5)

Rs.16

You have booked a net profit of Rs.26 on SBI calls in 3 months. At the end of 3 months, your effective cost of holding SBI has come down to Rs.314 (340 – 26). The only risk is if the stock falls sharply, you don’t have protection on the downside. That is where a butterfly comes in.

Butterfly strategy

Butterfly combines a protective put and covered call. Here, the premium received on the higher call sold, reduces the net cost of the put option purchased. This increases chances of profits. Butterfly is a multi-leg transaction, so watch out for transaction costs.

Bull call spread strategy

This option strategy is generally used when you are moderately bullish on a stock. You buy a call option of a lower strike and sell the call option of the same stock of a higher strike. For example, Tata Motors is currently quoting at Rs.153 and you expect the stock to touch Rs.170 at best in March 2020. You can create bull call spread by buying 150 March call option at Rs.12 and selling 170 call option at Rs.5. Your net cost of Rs.7 (12-5) will be the maximum loss on this strategy. Maximum profit on this strategy will be made at Rs.170. Beyond that, whatever you make on the 150 call, you lose on the 170 call. Hence, this strategy should only be used when you are moderately bullish.

Long strangle strategy

Normally, Infosys is very volatile on the day of the results but it has generally been hard to estimate the direction. Here, you can use volatile strategy like a Long Strangle. It entails buying a higher strike call and a lower strike put on the same stock. For example if you are expecting major volatility in Infy next month, you can create a Strangle by buying 820 March call at Rs.12 and also an 800 March put at Rs.16. Total cost of the Strangle and also maximum loss will  be Rs.28 (16+12). You will be profitable above 848 (820+28) or below 772 (800-28). This is a high cost strategy so you must only use it when you are confident of a large move either ways.

Go ahead and make the best of these options strategies. You can manage your risk and your returns better.

Next Article

Best Index Funds to Invest in 2020

Best Index Funds to Invest in 2020
03/06/2020

Did you know that between 1979 and 2019, the Sensex moved from 100 to 42,000? In other words, your investment has compounded annually at 16.3% for 40 years. This is just the capital appreciation part. If you add the average dividend yield of 1.5%, the Sensex has compounded at 17.8% annually for the last 40 years. But, how do you invest in the Sensex?

That is where an index fund comes in handy

An index fund is a mutual fund that mirrors the portfolio of the index. Unlike an active fund, there is no stock selection. When you buy an index fund, just look at which index the fund is benchmarked to? The portfolio of the fund will mirror the stocks in the index in approximately the same proportion. You can buy and sell index funds from your existing mutual funds online platform. Index funds offer you a smart and efficient method of participating in the stock market without taking on too much of stock specific risk.

Best performing index funds for 2020

As a mutual fund investor, you have a wide choice of index funds. Every large fund house has an index fund of its own and there are funds pegged to different indices. How do you make a choice? The first rule is to stick to diversified indices like the Sensex or the Nifty. Secondly, since we do not know about future returns, we can use past returns on index funds to select the best fund to invest in. Here is the list of best index funds ranked on historical returns over last 5 years. We have only considered the growth option of Regular Plans of these index funds.

Fund Name

1-Year Returns

3-Year Returns

5-Year Returns

HDFC Index Sensex Fund (G)

15.813%

13.629%

8.133%

ICICI Pru Nifty Next 50 Fund (G)

11.686%

5.827%

8.011%

Tata Index Fund Sensex (G)

15.584%

13.387%

7.567%

UTI Nifty Index Fund (G)

13.666%

11.914%

7.488%

HDFC Index Nifty 50 (G)

13.379%

11.775%

7.406%

Data Source: Morningstar | Returns calculated as on 20th Feb 2020


How to select the best index fund from the list?

There is a risk in taking a futuristic view based on past data but here are five basic rules you can follow to zero in on the best index fund.

  • Look for consistency of returns. If you are wondering why we are looking at 1-year returns for index funds (these are long term products), the idea is to check for consistency. The returns across various time frames should be consistent with the group. That makes the index fund more predictable.
  • Index funds do not have to spend on fund managers to find multi-baggers. Indexing is a passive approach and hence the lower cost gets passed on to you in the form of lower total expense ratio (TER). That helps to enhance returns. You can even opt for Direct Plans to reduce costs further.
  • One unique parameter you must consider in index funds is the tracking error. It measures the extent to which the index fund deviates from the index. Normally, an index fund should have low tracking error.
  • Given a choice, prefer the index fund with the larger AUM as small AUMs can come in the way of effectively replicating the index.
  • Take a long term view when you invest in an index fund. Markets tend to be cyclical and hence you must keep an investment horizon of at least 8-10 years for an index fund.

Index funds save you cost and the risk of stock selection. A bit of homework on your part can leave you with a satisfying and profitable journey investing in index funds.


Next Article

IPO performance in FY20

IPO performance in FY20
by Nikita Bhoota 05/06/2020

Financial Year 2020 was a mixed bag for investors who have invested in IPOs (initial public offerings). Only 14 IPOs entered the market in FY20. Of these 14 IPOs, 9 IPO’s have given positive returns while the remaining struggled to reach its issue price (except Rail Vikas Nigam). IRCTC tops the list of best IPO of the year with magnificent returns of 101%. The worst performing IPO of the year was SBI Card down 12.8% to the issue price on the listing date.

SBI Cards, Sterling and Wilson, Polycab India Metropolis Healthcare were the IPOs with an issue size of more than Rs 1000 crore. Spandana Sphoorty Financial, Ujjivan Small Finance Bank, Indian Railway Catering & Tourism Corpn (IRCTC) IPO Size was more than Rs. 500 crores. Whereas, Neogen Chemicals Ltd and Vishwaraj Sugar Industries Ltd had an IPO size of less than Rs 100 crore

Company Name

IPO Issue Size (Rs Crore)

SBI Cards and Payment Services Ltd.

7,571.10

Sterling and Wilson Solar Ltd.

1,729.84

Polycab India Ltd.

1,349.94

Metropolis Healthcare Ltd.

1,204.29

Spandana Sphoorty Financial Ltd.

840.79

Ujjivan Small Finance Bank Ltd.

750.00

Indian Railway Catering & Tourism Corpn. Ltd.

645.12

Rail Vikas Nigam Ltd.

481.57

Indiamart Intermesh Ltd.

475.59

CSB Bank Ltd.

409.68

Prince Pipes & Fittings Ltd.

351.98

Affle (India) Ltd.

278.48

Neogen Chemicals Ltd.

93.07

Vishwaraj Sugar Industries Ltd.

60.00

Source: Ace Equity

List of IPOs that either got a positive response from investors or were listed on the exchanges at a discounted price.

Company Name

IPO Issue price

IPO List price

Close as on 31st March 2020

Gain/ Loss on listing date

Indian Railway Catering & Tourism Corpn. Ltd. (IRCTC)

320.00

644.00

982.40

101.3%

Ujjivan Small Finance Bank Ltd.

37.00

58.00

27.40

56.8%

CSB Bank Ltd.

195.00

275.00

118.50

41.0%

Affle (India) Ltd.

745.00

929.90

1,014.25

24.8%

Indiamart Intermesh Ltd.

973.00

1,180.00

1,935.90

21.3%

Polycab India Ltd.

538.00

633.00

741.90

17.7%

Neogen Chemicals Ltd.

215.00

251.00

351.10

16.7%

Metropolis Healthcare Ltd.

880.00

960.00

1,286.25

9.1%

Vishwaraj Sugar Industries Ltd.

60.00

61.20

65.00

2.0%

Rail Vikas Nigam Ltd.

19.00

19.00

12.90

0.0%

Spandana Sphoorty Financial Ltd.

856.00

824.00

587.15

-3.7%

Prince Pipes & Fittings Ltd.

178.00

160.00

102.25

-10.1%

Sterling and Wilson Solar Ltd.

780.00

700.00

76.90

-10.3%

SBI Cards And Payment Services Ltd.

755.00

658.00

618.40

-12.8%

Source: Ace Equity

Going forward, FY21E is expected to be the toughest when it comes to raising money through IPOs. Global, as well as the Indian market is in downward trend due to the spread of Coronavirus epidemic. The shutdown of economic activity (lockdown) to curb the disease spread will affect the GDP numbers. The investors are preferring capital protection over risk. This will adversely affect the money inflow in the equity market. Therefore, only those companies that have very robust balance sheets will be preferred by investors.

Next Article

5 Well Known Stocks that Outperformed Benchmarks in FY20

Growth Stocks
by Nikita Bhoota 08/06/2020

From the general election to the slowing economy to coronavirus pandemic, FY20 witnessed it all. Share markets have been is under pressure since the coronavirus (COVID-19) pandemic broke in the country and all over the world. Domestic stock market benchmarks Sensex and Nifty slumped 24% and 26% respectively from 1st April 2019- 31st March 2020, posting their worst performance in over a decade. In 2008-09, the Sensex had declined 37.9%, while the Nifty50 cracked 36.2% on account of global financial crisis. Apart from these, factors such as massive corporate tax rate cuts, tussle between the RBI and the government, Union Budget, repo rate cuts, Ayodhya verdict, abrogation of Article 370, US-China trade deal were among the major triggers in FY20. However, even during this fall in markets, there are certain shares that not only outperformed the benchmark, but also gave investors stellar returns during the year. 5paisa have picked five such stocks that have outperformed the Nifty50 in the past financial year and have been strong despite tough economic conditions.

Company Name

1-Apr-19

31-Mar-20

Gain

Abbott India Ltd.

7,256.2

15,455.5

113.0%

Gujarat Gas Ltd.

147.1

232.6

58.1%

Berger Paints India Ltd.

329.6

497.4

50.9%

Nestlé India Ltd.

10,895.6

16,302.4

49.6%

Avenue Supermarts Ltd. (DMart)

1,493.9

2,200.7

47.3%

Source: Ace Equity

Abbott India

Abbott India has given stellar returns, gained 113% in FY20.  This stock is not deterred by the current pandemic. The Pharma MNC stood strong despite the crash in markets. The company’s 9 out of top 10 brands are leaders in their respective participating markets and their rigorous restructuring measures have aided to achieve this market-beating performance. Over the years, the company has also operated with a net debt-free structure having more than sufficient cushion of cash.

Gujarat Gas

Gujarat Gas share price gained 58.1% in FY20. Gujarat Gas (GGL) is an amalgamation of Gujarat Gas Company and GSPC Gas. Gujarat Gas is India's largest city gas distribution player, with a total sales volume of 6.2mmscmd and presence across 24 districts in the states of Gujarat and Maharashtra and the Union Territory of Dadra Nagar Haveli. It has a network of a 15,000 km-long gas pipeline and 291 CNG stations, constituting 25% of all CNG stations in the country.

Berger Paints

The stock gave magnificent return of 50.9% in FY20. It has not only managed to outperform Nifty 50 but also the country’s largest paint company Asian Paints. Berger has presence in the decorative paints and industrial coatings segments in domestic and international markets. Further, it has a presence in external insulation finishing systems. In the industrial coatings segment, Berger caters for the protective coatings, automotive (primarily two-wheeler and three-wheeler, and commercial vehicles) and general industrial segments. In the international segment, Berger has a presence in the decorative paints segment in Nepal and has presence in the external insulation system in Poland (where it is the second largest player, with 11-12% market share through Bolix SA, which it acquired in 2008 for US$39m. It has the second-largest distribution network, with more than 23,000 dealers.

Nestlé India Ltd

Nestlé India, the Maggi maker, has also gained over 49.6% in FY20. The company primarily operates in four segments, viz. Milk Foods & Nutrition, Chocolates & Confectionery, Prepared Dishes & Beverages.

Nestlé India has strong brands like Cerelac, Lactogen Nestlé Dahi and Slim milk (Milk food and nutrition), Maggi (Prepared dishes), KitKat (Chocolates) and Nescafé (Beverages) under its fold. Company has seen strong growth in its Maggi and chocolate brands during the CY19.

Avenue Supermart (DMart)

Avenue Supermarts (DMart) shares were up 47.3% in FY 20. DMart is an emerging supermarket chain, with major presence is in the states of Maharashtra, Gujarat, Telangana and Karnataka. DMart operates most of its stores in densely located areas and focuses on customers in the lower and middle class segments of society. DMart provides lower prices for its products across various categories and sub-categories, which is appealing to the price-sensitive customers. In order to minimise operational costs, the company follows an ownership model (including long-term lease contracts, where lease period is over 30 years), rather than a rental model.