From SRF to Tata Chemicals: Morgan Stanley downgrades chemicals stocks, foresees ongoing challenges

It issued respective ratings downgrades connected chemic stocks. The brokerage downgraded Tata Chemicals, Aarti Industries, and SRF owed to their anemic maturation outlook. SRF and Aarti Industries saw their ratings lowered from 'overweight' to 'equal-weight', portion Tata Chemicals was downgraded to 'underweight'.

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"Fiscal 2025 should spot India chemicals revert backmost to growth, aft a pugnacious reset from F23 highs. Easing destocking intensity, stabilization successful terms declines, pockets of restocking, accrued competitory pressures and monetisation were cardinal messages retired of earnings. Recovery acceleration is inactive pegged for the 2nd fractional of the adjacent fiscal, particularly for agrochemicals. We stay cautious connected specialty chemicals and similar refiners, state utilities, and prime commodity chemicals," said the brokerage.

Against this backdrop, investments totaling astir US$0.5 cardinal are acceptable to beryllium monetized during F25-26. MS anticipates that accrued volumes, driven by improved operating rates and capableness expansions, volition mostly thrust incremental EBITDA maturation by F27. Despite remaining partially derisked, renewed request crossed assorted extremity markets suggests imaginable for higher volumes. Currently, implied EBITDA per ton remains astir 20% beneath the levels seen successful F22-23. Potential for upside surprises lies successful favorable changes successful merchandise mix, caller merchandise launches, and improved pricing dynamics, contingent upon robust request and proviso concatenation adjustments, which are important for an net upgrade cycle, noted the brokerage.

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What's Priced In? As per the brokerage, year-to-date, the assemblage has lagged down the NIFTY by astir 10-12 percent points. Despite caller net reductions aft the 4th fourth of FY24, existent multiples bash not bespeak inexpensive valuations and already bespeak expectations of important normalization and sequential net betterment successful the abbreviated term. Caution is advised, with a selective attack recommended, it advised.

Downgrades and terms people changes

Morgan Stanley attributed the downgrade of Aarti Industries to its important terms summation since aboriginal November, astir doubling during that period. Despite the downgrade, the brokerage raised its terms people for Aarti Industries by implicit 6 percent to ₹613, suggesting a 9 percent downside from its CMP. The banal has jumped 20 percent successful the past 1 twelvemonth and implicit 10 percent conscionable successful June truthful far.

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Meanwhile, Morgan Stanley reduced the terms people for SRF by much than 17 percent to ₹2,115, citing uncertainties regarding recovery, competitory pressures, and prolonged challenges successful its packaging business. The revised people besides indicates a imaginable downside of 12 percent from the erstwhile closing price. In June truthful acold the banal has risen astir 9 percent portion successful the past 1 year, it has been up 1.5 percent.

Furthermore, the brokerage cited the oversupplied soda ash marketplace arsenic the superior crushed for downgrading Tata Chemicals. The steadfast besides reduced its terms people for the banal by astir 7 percent to ₹843. This people represents an implicit 24 percent diminution from its erstwhile closing terms according to Morgan Stanley. The banal has added implicit 15 percent successful the past 1 twelvemonth and 7 percent successful June truthful far.

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In summation to these downgrades, Morgan Stanley besides lowered its terms people for Navin Fluorine to ₹2,633 portion retaining its 'underweight' proposal connected the stock. Meanwhile, for PI industries, the brokerage has kept an underweight telephone but raised its people to ₹3,350 from ₹3,245.

Outlook

As the assemblage consolidates and anticipates a instrumentality to maturation successful F25, the brokerage has factored successful these uncertainties into our net estimates, terms targets, and ratings. While maturation prospects starring into F27 look promising, they are accompanied by inherent risks. Its revised forecasts and maturation projections chiefly hinge connected (i) Volume enlargement done caller capacities, expansions, and debottlenecking initiatives, contributing to implicit 80% of incremental net growth; (ii) Operational efficiencies arsenic monetization accelerates passim FY25-26, accounting for the remaining delta. Pricing dynamics oregon borderline improvements driven by request trends oregon proviso concatenation constraints are not important drivers successful its basal lawsuit scenario.

Disclaimer: The views and recommendations made supra are those of idiosyncratic analysts oregon broking companies, and not of Mint. We counsel investors to cheque with certified experts earlier taking immoderate concern decisions.

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Published: 15 Jun 2024, 01:25 PM IST