Chemical stocks: here’s why Rajesh Kothari remains bullish on chemical companies


A 9-10% correction from the top is a healthy sign for the market. The bad part of macros, whether it’s a supply chain disruption, slowly fades away. Investors are now more positive than two or three months ago, says Rajesh Kothari, CIO, Alfaaccurate Advisors

What kind of questions have you received from your investor fraternity in this corrective phase?

Our point of view is clear that there will be a correction at some point, no one can time the market. So in a way this 9-10% correction from the top is a very healthy sign for the market. We are seeing good inflows, additions from our existing investors. The fear of the second wave is gone and there are no major concerns about the Omicron variant so far. So the bad part of macros, whether it’s a supply chain disruption, slowly fades away. Investors are now more positive than two or three months ago.

Are you reloading or have you reloaded previous favorites in your wallets? What areas are you looking closely at?

We spent a lot of time after the second quarter analyzing what is going on with Indian companies. How well it has performed in terms of pricing power and cost mitigation. Most of the companies in our portfolio have done brilliantly on two counts: absolute revenue growth, absolute EBITDA growth, absolute net profit growth, and second, relative to their peers, their performance in terms of profitability. growth in prices and margins. Companies in our portfolio reported compounded nearly 30% net profit growth compared to a normal second quarter of the pre-Covid year. So an index 100 became 160. The economy didn’t go from 100 to 120, forget about 160. So that shows the underlying resilience of our portfolio companies.

And in all sectors, whether it is the building materials segment, the basket of automotive accessories. Our exposure to capital goods has not been as positive over the past 5 to 9 years, but over the past six months we have invested more money in this sector.

We focus on more tech-oriented companies, multinational companies with subsidiaries in India. These are the areas in which we are gradually investing. We remain very bullish on specialty chemicals, and there are two types of chemical companies: commodity companies and specialty chemicals companies. The commodity companies have done well because the prices of finished goods have increased by almost 200-500%, but the specialty chemicals have not done so well because of hyperinflation. But starting this quarter, we expect specialty chemicals to gain more as commodity prices cool and pass more of those price increases on to their consumers.


What does the image look like for the strategies you are executing?

We have three strategies: AAA India opportunity plans, targeted plans and small and mid cap plans and the three portfolios, probably for FY 22 and FY 23, are looking at 22-23% growth. In many companies, we will even see growth of 25-30% for fiscal years 22 and 23.

What is the composition of these strategies? Where does the strongest growth in earnings come from? Which themes offer the best prospects for earnings growth?

One is the space of specialty chemical companies, as they do a lot of the capital spending. This block will give us 20-30% compound earnings growth over the next two to three years.

The second is the building materials space. We only buy companies that are monopolies or oligopolies. They are big companies in the building materials business, and they are gaining market share disproportionately.

Improving real estate demand, consolidating market share, unorganized to organized, within organizations closer to many small players, all of this adds to their revenue growth, margins are resilient and they will also generate strong earnings growth.

The third important segment is that of capital goods. Profits are a bit backend, plus order backlog growth, and this segment is also going to do very well as they also shift the revenue mix into short-term order fulfillment rather than backlog fulfillment on three years, five years. So this segment is also going to do very well.

Banking and finance are also a good part of our portfolio. Even this segment will register good growth. I think the next 12 months won’t be going down. It will be more of a stock picking approach that will be more rewarding for investors. There could be a consolidation or correction in the market, but the overall trends remain positive. But the bottom-up approach will be more rewarding than the top-down approach since we have already seen a significant gain in the last 12-18 months.

Is it safe for investors to moderate return expectations as it will not be a widespread bull market?

The equity market as an asset class will give 10, 12, 15% compound returns over the next three, four, five, seven years. On a compound basis, the wait is not a major change. It can’t be said that we’ll see a 50% increase in Nifty over the next 12 months, it would be foolish to assume. The moderation of the wait is to make it more realistic. The market will remain volatile, but don’t worry too much or try to time the market as you may not be doing well every time. Invest in good quality stocks with good profit growth. Many companies haven’t seen earnings growth so what’s important is stock picking from here if you want to make money and build wealth in the medium to long term.

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