On the cusp of turnaround? Axis Securities decodes strategy for chemical majors; picks Aarti Industries, Praj, Mold-tek Packaging as top picks

Dalal Street is all set to kick start the earnings season for the quarter ended March 2024. In its recent report on chemical sector, brokerage firm Axis Securities said that the meaningful recovery for chemical companies will likely take another 2 quarters.

It noted that the agrochemicals demand continues to be under pressure, but there are green shoots in certain end-user industries such as dyes, pigments, and polymers, which have witnessed growth in demand and minor improvement in prices of final products.

The brokerage firm said that the Red Sea issue has extended the timeframe, leading to higher costs. Although the issue of inventory for end users in India has not had a significant impact, Europe continues to face headwinds.

It believes Chinese slowdown leading to dumping across the globe has led to inventory pressure in the chemical & agrochemical sector. Agrochemicals companies are expecting the inventory of agrochemicals to remain a challenge for some time yet, and it will take a few more quarters to normalize completely.

It has picked Aarti Industries, Praj Industries and Mold-tek Packaging as top picks. Axis Securities anticipates that the performance of Aarti Industries Ltd in the fourth quarter of FY24 will improve sequentially, driven by increased volumes and growing demand for discretionary applications. However, agrochemicals demand will remain under pressure.

For Praj, it said that the company is anticipated to sustain its growth trajectory in Q4FY24 driven by a robust focus on its Engineering Business, offering solutions across CPES, ZLD, and ETP segments catering to a growing ETCA industry.

The company's focus on export markets like Brazil and the USA, along with government initiatives to promote CBG adoption, further bolster its prospects. However, the brokerage firm anticipates a yearly decline in topline due to government caps on sugar diversion in Dec '23. The EBITDA is expected to improve over the last quarter, with margins projected to remain stable sequentially.

"Mold-Tek Packaging is projected to report double-digit growth in topline in Q4FY24 sequentially, driven by increased paint volumes from the ABG plant, a boost in pharma volume, and the scaling up of Q-pack demand," Axis Securities said.

Additionally, client additions in the F&F segment, a robust new product development pipeline, customer additions in new segments, and improvements in profitability/margin profile, along with broader economic prospects, are expected to impact demand in the coming quarters," it added.

It further added that the EBITDA margins are forecasted to improve due to stable PP prices, a strong product pipeline, and better margins from ABG. The Profit after Tax (PAT) is anticipated to increase marginally in line with the overall operational performance.

Shares of Aarti Industries, Praj Industries and Mold-tek Packaging have delivered 33%, 54% and (-10%) return respectively in the last 12 months.

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