China’s pollution crackdown to benefit Indian chemical stocks

China has tightened environmental standards, resulting in closure or shifting of capacities. Buyers are seeking other vendors, including Indian firms.

A sign warning local residents not to burn trash in order to reduce pollution stands in a field as emissions rise from cooling towers at a coal-fired power station in Tongling, Anhui province, China | Photographer: Qilai Shen | Bloomberg

Mumbai: Indian industrial chemical stocks are outperforming the benchmark Sensex this year as some analysts see them benefiting at the expense of their Chinese counterparts, which face a crackdown on pollution and the threat of U.S. tariffs.
Companies like Atul Ltd., Aarti Industries Ltd., Fine Organic Industries Ltd., Vinati Organics Ltd. have gained 15% to almost 30% so far this year, compared to an 8% advance in the S&P BSE Sensex 30 Index. SRF Ltd., which makes textiles, chemicals, films and plastics, has surged more than 51% in 2019. Additionally, these companies are expanding capacity to meet strong demand at home and abroad, analysts say.

“The opportunity is leading many of our local companies to plough back their entire cash into increasing capacities,” said Nav Bhardwaj, a Mumbai-based analyst at Anand Rathi Shares & Stock Brokers Ltd. “We expect the sector to gain advantage from this expansion over the next 3-4 years with an average yearly revenue growth of 12%-15% for top players.”

China, which accounts for about 20% of global specialty chemicals revenues, has tightened environmental standards, resulting in the closure or shifting of capacities in 50 chemical manufacturing clusters, rating agency Crisil Ltd. said in a report Tuesday.

This disruption has increased the cost for Chinese companies and is driving global users to seek other vendors, including Indian manufacturers, Crisil said. The rating agency expects Indian manufacturers to increase capital expenditure by 70% to 130 billion rupees ($1.9 billion) through 2020, compared with 75 billion rupees for fiscal years 2017 and 2018.

“Utilization rates of new capacities coming up will remain high over the medium term because of improving environmental compliance and cost competitiveness,” said Anuj Sethi, a senior director at Crisil. “As a result, the share of Indian specialty chemicals in the global supply chain is seen rising 100 basis points to 5.2% in fiscal 2022, from 4.2% last fiscal year.” – Bloomberg.