From SRF to Tata Chemicals: Morgan Stanley downgrades chemicals stocks, foresees ongoing challenges

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Tata Chemicals, Aarti Industries, and SRF due to their weak growth outlook. SRF and Aarti Industries saw their ratings lowered from 'overweight' to 'equal-weight', while Tata Chemicals was downgraded to 'underweight'."Fiscal 2025 should see India chemicals revert back to growth, after a tough reset from F23 highs.

Easing destocking intensity, stabilization in price declines, pockets of restocking, increased competitive pressures and monetisation were key messages out of earnings. Recovery acceleration is still pegged for the second half of the next fiscal, especially for agrochemicals.

We remain cautious on specialty chemicals and prefer refiners, gas utilities, and select commodity chemicals," said the brokerage.Against this backdrop, investments totaling approximately US$0.5 billion are set to be monetized during F25-26. MS anticipates that increased volumes, driven by improved operating rates and capacity expansions, will largely drive incremental EBITDA growth by F27.

Despite remaining partially derisked, renewed demand across various end markets suggests potential for higher volumes. Currently, implied EBITDA per ton remains about 20% below the levels seen in F22-23.

Potential for upside surprises lies in favorable changes in product mix, new product launches, and improved pricing dynamics, contingent upon robust demand and supply chain adjustments, which are crucial for an earnings upgrade cycle, noted the brokerage.What's Priced In? As per the brokerage, year-to-date, the sector has lagged behind the NIFTY by approximately 10-12 percentage points. Despite recent earnings reductions after the fourth quarter of FY24, current multiples do not indicate cheap valuations and already reflect expectations of significant