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Stocks of chemicals under pressure;  Are they good deals at these prices?

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Stocks of chemicals under pressure; Are they good deals at these prices?

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Shares of chemical companies have fallen sharply in the past two months. Considering the returns these stocks have given over the past year, many see the recent declines as an opportunity to top them up. But are these good deals after the recent drop? We try to answer some of the frequently asked questions.

What caused the stocks of chemical companies to fall sharply?

These stocks had increased considerably over the past year. During the September quarter, the majority of chemical companies reported declining margins due to higher commodity prices. This came at a time when these stocks were already trading at high valuations. Recent quotes such as Tatva Chintan Pharma and Clean Science were trading at 75 to 80 times estimated FY22 earnings, which was well above the industry average. So the correction in equity prices is largely a reaction to the pressure on margins in the second quarter and high valuations of equities.

What are the prospects for the different segments? Which ones look promising and which aren’t?

The chemical sector has many sub-segments such as agrochemicals, specialty chemicals, basic chemicals, active pharmaceutical ingredients, petrochemicals, etc. Basic chemicals are experiencing a recovery after years of underperformance. Alkaline chlorine in particular is seeing a recovery and companies like GACL, Grasim expect this to continue. There is a lot of investment in green chemistry, chemicals and processes that reduce or eliminate the generation of hazardous substances. Some companies are planning to produce lithium / chemicals used in electric vehicles. Neogen Chemicals, Tatva Chintan, Clean Science are some of the companies working in these fields. The long-term fundamentals of the sector remain strong.

Does it make sense to buy stocks of chemical companies at these levels?

Despite the steep decline in prices, chemical stocks are still trading at valuations above long-term averages. Most of them have promising growth, but it is expensive. The fundamentals of the sector can be promising, but if you buy a stock at high valuations it may take some time for it to generate significant returns.

Stocks of chemicals under pressure; Are they good deals at these prices?

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