Why Shares Of UPL And Sumitomo Chemical India Are In Focus
Nirmal Bang expects healthy outlook for the Indian Crop Protection Chemical or CPC sector in 2HFY23.
Prices of key herbicides and freight rates have corrected, auguring well for the Indian crop protection chemical sector.
Prices of key herbicides glyphosate and glufosinate in China have fallen by 44% and 55% year-on-year, respectively, according to agribusinessglobal.com data.
Glyphosate prices in China will remain subdued as a result of the increased stocks, weakened resistance to prices, lack of confidence from the downstream industry, and the "wait-and-see" approach of international buyers, according to analysts.
Container rates have also fallen, and key freight indices are down 77–90% as per the latest trends. The global container shipping industry is facing excess capacity amid a slowdown in demand and could be forced to operate near marginal cost.
This decline in prices is positive for the crop protection chemical sector, which will benefit from rising demand as CPC prices are cut to pass on the fall in input prices. Also, gross margins could improve if the CPC industry is able to keep some of the money it saves from lower input costs.
The industry may pass on the lower costs to boost volume, which implies operating leverage gains, and is hence positive for topline and Ebitda growth for leaders, according to Nirmal Bang.
The top players in the segment include UPL Ltd. and Sumitomo Chemical India Ltd.
Nirmal Bang Institutional Equities have a 'buy' rating on UPL and Sumitomo Chemical India with target prices of Rs 1,154 and Rs 543 apiece, implying a potential upside of 38% and 12.5%, respectively.
Of the 28 analysts tracking UPL, 26 maintain 'buy', one each suggest 'hold' and 'sell', according to Bloomberg data. The average of 12-month target prices implies a potential upside of 42%.
Of the 13 analysts tracking Sumitomo Chemical India, 12 maintain 'buy' and suggests 'hold'. The average return potential stands at 18.8%.