Chemicals - The dark horse - Q4FY20 Results Preview - HDFC Securities

Given the B2B nature of their business, the coronavirus outbreak has had a limited impact on the earnings of chemical companies in our coverage universe. However, owing to logistical challenges for man/materials, plant shutdowns, shortage of manpower and plunge in demand in FY21, we have cut our earnings estimates by 10-39%.

Chemical companies are directly/indirectly cater to essential sectors such as pharma, agrochemicals, foods, edible oils. Despite having obtained the permission to resume manufacturing in Q1FY21, lack of demand and logistics challenges, particularly supply of finished goods (within India and internationally), force these companies to either keep their plants under shut down or operate at lower utilizatio.

Most of these chemical companies have piled up inventory over the period of the lockdown that can be used to fulfil demand post the lockdown. This is because management fear that the labor will visit their families as soon as the lockdown is lifted, which would adversely impact operations. They are also of the view that lockdowns in Europe and US will be extended, thus impacting exports in FY21.

Alkyl Amines (AACL) and Balaji Amines (BLA): Revenues were affected given (1) Fall in Acetonitrile prices in first half of Q4FY20, (2) Lower sales volumes due to the lockdown. Non-pharma demand declined due to the plant shutdown. Moreover, companies faced logistics issues in product supply.

Galaxy Surfactants (GSL): We expect a blended volume de-growth of 10/ 5% YoY/QoQ owing to 15/12.5% lower vols in specialty care segment while the decline was merely 8/1% YoY/QoQ in performance surfactants vols. Nonavailability of containers accounted for lower Specialty care vols, despite strong demand. Domestic demand spiked with the outbreak of Covid-19 but restricted movement of trucks capped Performance surfactants sales vols.

Disruption in supply chain will impact GSL's Q1FY21 vols as well. Global outbreak of the virus will spur demand for hygiene products, particularly in Europe and US, triggering higher consumption of personal care products such as hand wash. Hence, we expect a sharp pick up in vols in 2HFY21 and FY22.

Vinati organics (VO): Q4 Earnings were impacted as (1) ~70% of revenue are from exports, especially ATBS, (2) Demand of ATBS by the Oil and Gas industry falls as oil prices fall. The industry forms 25-30% of the global ATBS demand. Thus, we cut VO's earnings for FY21/22E by 15/22%. Our TP falls to Rs 825, giving downside of 7% on CMP. Downgrade to SELL from ADD.

Navin Fluorine (NFIL): CRAMS revenues are expected to fall YoY/QoQ led by a lower offtake. Inorganic and refrigerant gases segments are expected to remain muted YoY while speciality chemicals should demonstrate strong growth YoY. Exports (particularly to, Europe and US) form ~45% of NFIL's revenue. As both these regions are severely hit by coronavirus, short-term earnings will be muted. Refrigerant gases will continue to be affected by slowdown in the automotive segment. But NFIL is focusing to expand its exposure towards pharma/agrochemicals through high margin, contract manufacturing. This will supports its margins and earnings in near term.

Source : Equity Bulls

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