SRF, Aarti share prices rise 11-18% from October lows as Morgan Stanley gives a thumbs-up
- Indian Stock market- Underappreciated counter-cyclical investments amid a steep global destocking cycle can drive steady earnings recovery from first half troughs, said a recent Morgan Stanley report. Morgan Stanley had upgraded SRF and Aarti to Over Weight. Their Preferred Pick remains SRF
SRF and Aarti Industries have seen 11-18 % rise in their share prices since their October Lows. The outlook for the specialty chemical manufacturers is improving and they are expected to have seen earnings to have bottomed out.
The weak demand from developed markets led to increased concerns about specialty chemical manufacturers during the first half of FY24. The global destocking cycle in chemicals further had an impact on earnings for Specialty chemical manufacturers. The declining chemical prices and increased competition from China post opening of the Chinese economy put pressure on their margins. The weaker than expected economic recovery in China had meant that China’s internal demand remained low leading to higher exports. The manufacturers carrying high-cost inventory even had to make provisions for them leading to further impact on earnings starting first quarter FY24.
Thus, overall, there are multiple factors that lead to a cautious near-term outlook for many companies, though analysts maintain a structurally positive view on the sector looking at long-term prospects.
India specialty chemical earnings have reset 35-50% from F23 highs, following nearly two years of super-normal earnings, said a Morgan Stanley report. Global channel inventories are rapidly threading lower, transitioning to a new, post-Covid normal in a new, higher interest rate regime. Global crop care and chemical majors expect this reset to play out into the first half 2024 before clarity emerges on the new inventory normal, with a synchronized demand recovery likely in second half 2024. In this backdrop, India chemicals are set to commission multiple counter-cyclical organic capacity expansions and growth project, said the Morgan Stanley report.
Morgan Stanley estimates $1.2 billion of growth investments will be monetized over 2024-25, within their coverage. This is in contrast to global peers, which are either pushing out capex, rationalising capacity or lowering operating rates. These investments will complement India as it incrementally takes market share in the global chemicals pie, especially from Europe. Morgan Stanley estimates 10% volume CAGR for its coverage (50% of which is non-agrochem related) and underpins 25% earnings CAGR into FY26. The growth, while in-line with global peers, Morgan Stanley believes is relatively derisked, is more levered to a commodity repair cycle and will incrementally filter in from the second half of fiscal 2024.
Underappreciated counter-cyclical investments amid a steep global destocking cycle can drive steady earnings recovery from first half troughs, said analysts at Morgan Stanley. Companies with diversified portfolios and clear organic volume triggers set to outperform. Morgan Stanley had upgrade SRF Aarti to Over Weight. their Preferred Pick remains SRF
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