Morgan Stanley Cautions on Chemical Stocks: Downgrades SRF and Tata Chemicals

Morgan Stanley has issued a cautious outlook on chemical stocks in its latest report, highlighting ongoing challenges for the sector in the near future. The brokerage believes that despite some recovery signs, the chemicals industry still faces uncertainties, prompting it to advise a wait-and-watch approach until there’s a clear improvement in earnings.

The report specifically downgraded Tata Chemicals, Aarti Industries, and SRF due to their weaker growth prospects. SRF and Aarti Industries were both shifted from ‘overweight’ to ‘equal-weight’, while Tata Chemicals received an ‘underweight’ rating.

Sector Analysis and Recommendations

The brokerage pointed out that fiscal 2025 could see growth returning to the Indian chemicals sector after a tough period since fiscal 2023. It noted easing inventory reductions, stabilization in price declines, and some signs of restocking, especially in agrochemicals. Despite these positive signals, Morgan Stanley remains cautious on specialty chemicals and prefers investments in refiners, gas utilities, and selected commodity chemicals.

Regarding stock specifics, Morgan Stanley raised its price target for Aarti Industries marginally, despite downgrading its rating, citing a significant rise in its stock price recently. For SRF, the brokerage reduced its price target due to uncertainties in its recovery path and competitive pressures. Tata Chemicals faced a downgrade primarily due to challenges in the oversupplied soda ash market.

Investment Strategy

Looking ahead, while the sector anticipates growth in fiscal 2025, Morgan Stanley cautioned that uncertainties remain and recommended a selective investment approach. The brokerage advised that current valuations do not reflect cheap prices, suggesting potential risks despite some expected improvement in earnings in the short term.