SRF and Aarti Industries Witness 11-18% Share Price Rise Since October Lows After Morgan Stanley Upgrade

Specialty chemical manufacturers SRF and Aarti Industries have experienced an 11-18% increase in their share prices since hitting October lows. The upgraded outlook for these companies suggests that their earnings may have bottomed out.

The first half of FY24 saw concerns about specialty chemical manufacturers due to weak demand from developed markets and the global destocking cycle in chemicals. This impacted earnings, with declining chemical prices and increased competition from China affecting margins. The cautious near-term outlook was influenced by multiple factors, including weaker-than-expected economic recovery in China.

Despite these challenges, analysts maintain a structurally positive view on the sector, considering long-term prospects. According to a Morgan Stanley report, India’s specialty chemical earnings have reset 35-50% from F23 highs after two years of super-normal earnings. Global channel inventories are transitioning to a new post-Covid normal in a higher interest rate regime.

Morgan Stanley estimates $1.2 billion of growth investments will be monetized over 2024-25, particularly in India. These investments, unlike global peers, are seen as counter-cyclical amid a steep global destocking cycle. The report suggests that steady earnings recovery can be expected from first-half troughs, with diversified portfolios and clear organic volume triggers indicating outperformance.

Analysts at Morgan Stanley upgraded SRF and Aarti to Overweight, with SRF being their preferred pick. The growth, in line with global peers, is viewed as relatively derisked and more leveraged to a commodity repair cycle, expected to filter in from the second half of fiscal 2024.