Shares of chemical companies have fallen sharply over the past couple of months. Given the returns these stocks have given over the last year, many are looking at the recent declines as an opportunity to load up on them. But are they good bargains after the recent decline? We try to answer some of the commonly asked questions.

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What has caused the steep fall in shares of chemical companies?

These stocks had run up significantly over the last year. The September quarter saw majority of the chemical companies reporting a decline in margins due to higher raw material prices. This came at a time when these stocks were already trading at expensive valuations. Recent listings like Tatva Chintan Pharma, and Clean Science were trading at 75-80 times estimated FY22 earnings, which was much higher than the sector average. So the correction in stock prices is largely a reaction to margin pressure in Q2 and high valuations for the stocks.

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What is the outlook for the various segments? Which ones look promising and which don’t?

Chemical sector has a lot of sub segments like agrochemicals, specialty chemicals, commodity chemicals, active pharmaceutical ingredients, petrochemicals etc. Commodity chemicals are seeing an upcycle after years of underperformance. Chlor alkali in particular is seeing an upswing and companies like GACL, Grasim expect it to continue. There is a lot of investment going into green chemistry—chemical products and processes that reduce or eliminate the generation of hazardous substances. Some companies are planning production of lithium/chemicals used in electric vehicles. Neogen Chemicals, Tatva Chintan, Clean Science are some of the companies which are working in these areas. Long term fundamentals of the sector remain strong.

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

Despite the sharp decline in prices, chemical stocks are still trading at valuations higher than long term averages. Most of them are promising growth but that is coming at high price. The fundamentals of the sector may be promising, but if you buy a stock at expensive valuations, it may take a while for it to deliver meaningful returns.