Capitalize on Specialty Chemical Boom with these Top 5 Mutual Funds

December 2, 2023 Mutual Fund

The chemical industry is a vast and multifaceted sector that plays a pivotal role in modern society. It encompasses the development, production, and distribution of a broad variety of chemicals, ranging from sophisticated pharmaceuticals and cutting-edge materials to everyday goods like plastics and fertilisers.

The industry’s products touch nearly every aspect of our lives, including the food we eat, the clothes we wear, and the medications that help us recover from illnesses.

In my previous article – Top 5 Mutual Funds with High Allocation to Chemical Stocks, I have provided an in-depth overview of the Indian chemical industry and its growth potential. Also, mentioned the list of mutual fund schemes holding a high exposure to leading chemical stocks.

The Indian chemical industry has a significant segment dedicated to specialty chemicals.

What are Specialty Chemicals?

Specialty chemicals are high-value-added chemicals with unique properties and applications in various industries, including pharmaceuticals, agrochemicals, personal care products, electronics, and construction.

Some of the types of specialty chemicals are adhesives, agrichemicals, cleaning supplies, colours, cosmetic additives, elastomers, industrial gases, flavours, food additives, perfumes, lubricants, paints, polymers, surfactants, and textile auxiliaries.

Specialty chemicals are known to be high-value and low-volume in nature. Additionally, they significantly boost the value of finished goods (advanced intermediate chemicals in active pharmaceutical ingredients, or UVA/UVB filters in sunscreen). Nonetheless, the specialty chemicals market in India is mostly focused on two sectors: agrochemicals and pharmaceuticals.

The demand for specialty chemicals in end-user sectors including food, automotive, real estate, apparel, and cosmetics, among others, has contributed to the growth of the specialty chemicals industry in India.

In addition, the government’s favourable policies, India’s strategic location, abundance of raw materials, and low labour costs, in the upcoming years, this is probably going to fuel the industry’s expansion in India, causing it to surpass that of the rest of the world.

[Read: Mutual Funds Are Betting Big on These Sectors: Are You Missing Out?]

The Indian Specialty Chemical Sector…

The market for specialty chemicals in India has grown to be an essential part of the country’s economic development.

A KPMG analysis states that the specialty chemicals market, which is estimated to be worth USD 32 billion and is predicted to increase at a compound annual growth rate (CAGR) of more than 12% from 2020 to 2025, accounts for 22% of India’s total chemicals and petrochemicals market.

More than half of all chemical exports are made up of speciality chemicals in terms of trade. Specialty chemical manufacture is increasingly being centred in India for international as well as domestic markets.

The specialty chemicals sector, which accounts for 20% of India’s overall chemicals market, has been essential to the expansion of the chemicals industry. Over the past five years, the revenue growth of fluor chemical majors in India has significantly exceeded that of Chinese majors, making India one of the beneficiaries.

Numerous factors, such as growing end-user demand, rising disposable incomes, and government programmes to support infrastructure development and manufacturing, serve as reasons for this expansion.

Specialty chemical manufacturers’ confidence to invest domestically has also been bolstered by government programmes including the production-linked incentive (PLI) programmes and the petroleum, chemicals, and petrochemicals investment region (PCPIR) policy.

[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]

Manufacturers are seeking to diversify their production capacities due to tightening pollution control requirements and rising labour expenses in foreign nations. As a result, businesses throughout the world are looking for alternatives. India, with its favourable ecology, is presenting itself as a strong contender and is expected to witness significant expansion in the specialty chemicals industry.

According to credit rating company CRISIL, the Indian specialty chemicals sector will grow by 6-7% in revenue in the fiscal year 2024. This growth will be driven by increased demand from domestic consumers, which will offset export declines caused by macroeconomic headwinds in the US and Europe.

Moreover, there is an Indian Speciality Chemical Manufacturers’ Association which is an all-India body representing manufacturers of Speciality chemicals. The association was established during the year 1952 and the Association’s members consist of large, medium & small-scale units.

The Indian specialty chemicals industry is home to several leading global and domestic players. To address the increasing demand from a variety of industries, these companies are making significant investments in research and development to create novel and inventive specialty chemicals.

Now, one may benefit from the specialty chemical sector’s growth potential by investing in mutual funds that are holding a significant allocation to the stocks of leading companies in this sector.

Here are the top 5 mutual funds with a high allocation to specialty chemical stocks:

#1 Tata Resources & Energy Fund (Sectoral Fund)

Tata Resources & Energy Fund invests in stocks of the companies under the Resources & Energy sectors in India. The scheme invests across market cap, and as of October 2023, it holds 58.62% allocation in large caps, 29.09% in mid-caps and 10.08% in small caps.

Tata Resources & Energy Fund – Allocation to Specialty Chemical Stocks

Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme holds a maximum exposure of 3.45% in stocks of PI Industries Ltd., which is a well-established agrochemical and speciality chemicals company (with a market cap of Rs 55,514.76 crores).

The scheme also carries a fair exposure to stocks of Sumitomo Chemical India Ltd., Navin Fluorine International Ltd., Aarti Industries Ltd. and UPL Ltd. Currently, the overall exposure to specialty chemicals stocks accounts for 9.24% of the scheme’s assets.

#2 ICICI Prudential Commodities Fund (Thematic Fund)

Launched in October 2019, ICICI Prudential Commodities Fund invests predominantly in Equity and Equity related securities of companies engaged in commodity and commodity-related sectors. The scheme’s AUM is Rs 1,466.88 crores and is benchmarked against Nifty 50 -TRI.

The fund holds a 47.78% allocation to large-cap stocks, 24.20% in mid-cap stocks and 20.48% in small-cap stocks as of October 2023.

ICICI Pru Commodities Fund – Allocation to Specialty Chemical Stocks

Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to specialty chemicals stocks is around 8.96%, and the highest is in stocks of UPL Ltd. an Indian multinational company that manufactures and markets agrochemicals, industrial chemicals, chemical intermediates, and specialty chemicals, and also offers pesticides. UPL Ltd. has around 43 manufacturing sites which includes nine in India four in France and two in Spain.

The scheme also holds fair exposure to other specialty chemicals market leaders like – Aarti Industries Ltd. (the company’s product line-up includes basic chemicals, agrochemicals, speciality chemicals and intermediates, which are extensively used in the manufacture of pharmaceuticals, Agri-products, polymers, additives, pigments and dyes), Navin Fluorine International Ltd., Atul Ltd. and Sumitomo Chemical India Ltd.

#3 Taurus Discovery Midcap Fund (Market Cap Fund)

Launched in 2013, Taurus Discovery Midcap Fund seeks to achieve long-term capital appreciation by investing in a portfolio consisting of equity and equity-related securities predominantly of mid-cap companies.

The fund holds a 65.49% allocation to mid-cap stocks and 34.08% in small-cap stocks, as of October 2023. Do note it has a higher allocation to mid and small-cap stocks, which are highly risky and sensitive to market fluctuations. One may consider their suitability for the fund before investing.

Taurus Discovery Midcap Fund – Allocation to Specialty Chemical Stocks

Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to specialty chemical stocks is around 8.72%. The scheme holds a high exposure of 6.30% in stocks of AMI Organics Ltd., which is an evolving player in providing pharmaceutical products following GMP standards as well as a chemical production facility to cater.

In addition, the scheme holds 2.42% of its assets in Sumitomo Chemical India Ltd. which manufactures and markets products like Agriculture Chemicals, Pesticides, Weedicides, and Crop Protection Chemicals.

#4 PGIM India Midcap Opportunities Fund (Market Cap Fund)

PGIM India Midcap Opportunities Fund invests in equity & equity-related instruments of mid-cap companies. Currently, the scheme holds an AUM of Rs 9,101.52 crore and is benchmarked against Nifty 50 TRI.

PGIM India Midcap Opportunities Fund – Allocation to Specialty Chemical Stocks

Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The overall allocation to specialty chemical stocks is around 5.52%, the scheme holds fair exposure to market leaders like -PI Industries Ltd. and Navin Fluorine International Ltd., it primarily focuses on fluorine chemistry – producing refrigeration gases chemicals, inorganic bulk fluorides and specialty organofluorides.

In addition, the scheme invests in Vinati Organics Ltd. and Sumitomo Chemical India Ltd. The fund holds a 19.31% allocation to large-cap stocks, 67.97% to mid-cap stocks and 7.82% to small-cap stocks, as of October 2023.

Since this is a midcap scheme, investors may consider their suitability before investing in it based on risk tolerance, investment horizon and goals.

#5 – Tata Ethical Fund (Thematic Fund)

Tata Ethical Fund aims to provide medium to long-term capital gains by investing in Shariah-compliant equity and equity-related instruments of well-researched value and growth-oriented companies. Currently, the scheme holds an AUM of Rs 1,882.67 crore.

As of October 2023, the fund has a 49.56% allocation in large-cap stocks and 38.62% in mid-cap stocks, whereas 7.45% in small-cap stocks.

Tata Ethical Fund – Allocation to Specialty Chemical Stocks

Data as of October 31, 2023
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme has an overall allocation of 4.96% to specialty chemical stocks. The scheme has significant exposure to PI Industries Ltd., Sumitomo Chemical India Ltd. and Navin Fluorine International Ltd.

Although sectoral mutual funds could be a good diversifier to your portfolio, it takes at least a few years to reach their potential. Hence, investors may consider taking a plunge into these mutual funds only after thorough market research and assessing their suitability.

[Read: The 4 Key Market Trends that Could Drive Mutual Fund Growth]

The Road Ahead for the Indian Specialty Chemical Sector

Specialty chemical manufacturers in India are expanding their operations to meet the growing domestic and international demand. Strong demand growth from both domestic and foreign markets would support Indian specialty chemical manufacturers’ revenue development in the future.

It is expected that the specialty chemicals industry in India would grow substantially. To achieve sustainable and revolutionary development in the long run, however, businesses will need to be nimble enough to quickly adjust to the changing macroeconomic and industrial landscape.

The macroeconomic growth levers-such as population growth, rising disposable income, and increased exports will provide the necessary tailwinds, but for the Indian specialty chemicals industry to truly take off, it will also need to make a conscious effort to focus on innovation, decarbonization, digitization, automation, and workforce skill development.

Overall, the future outlook of the Indian specialty chemicals industry looks positive. The Indian specialty chemicals industry stands at the cusp of a remarkable growth phase. With a strong domestic market, expanding export potential, supportive government policies, and a focus on innovation and sustainability, the industry is well-positioned to play a pivotal role in India’s economic growth and development in the years to come.

This article first appeared on PersonalFN here