Why HDFC is Buying Lots of Sudarshan Chemical: Here's Why

On June 7, HDFC Mutual Fund acquired a 1.4% stake, amounting to 10 lakh shares, in Sudarshan Chemical Industries at an average price of ₹778.10 per share. The stock has been steadily increasing since February 2023 when it was around ₹350. This, however, is not the first instance of HDFC MF investing in Sudarshan Chemicals.

Prior to this, in February, HDFC MF acquired an additional 2.6% stake in the company for ₹91.26 crore, which indicates an average price of ₹513.99 per share.

Analysts believe that HDFC MF's decision to increase its stake in Sudarshan Chemicals is likely motivated by anticipated growth in the chemicals industry, Sudarshan's strengthened position in the global pigments market, and its recent capacity expansion.

In fact, the recent upheaval in the global pigment industry, following the bankruptcy of the world's largest player, has created opportunities for Sudarshan Chemicals to step in and secure the second position in the industry. Despite the significant rise in its stock price, analysts suggest that the company's fair value may still be below the market price, making it an attractive investment for HDFC Mutual Fund to increase its stake in the pigment manufacturer.

Germany-based chemical company Heubach, the world's largest pigment manufacturer, filed for bankruptcy in April 2024. In addition to Heubach, a Canada-based multinational pigment company also closed its facility, which had annual pigment sales exceeding $100 million. Furthermore, the industry has seen significant consolidation, with major players undergoing mergers and acquisitions, such as BASF merging with DIC Japan and Clariant merging with the Heubach Group. This consolidation trend has been noted by Sanjesh Jain, a research analyst at ICICI Securities.

"The company has overlapping products, the right go-to-market strategy and the capacity to capitalise on the opportunity," Jain said. 

Amid the upheaval in the global pigments industry, Sandeep Abhange, a research analyst at LKP Securities, perceives new opportunities for Sudarshan Chemicals, previously the third-largest player in the industry.

Jain further noted that Sudarshan Chemical has an 80% portfolio overlap with the troubled players, which enhances its opportunity to fill the demand gap and increase its market share.

Additionally, Abhange believes that Sudarshan Chem is poised to capture significant market share in both export and domestic markets, particularly leveraging its newly commissioned capacities in FY23 and its industry-leading 35% share in the domestic pigments sector. He also mentions that the stable and consistent nature of the pigment business will ensure sustained market share gains for the company.

"Recent recovery in pigment demand and softening of input costs along with lower freight cost bode well for revenue and margin recovery for Sudarshan Chem over FY25-26," Sharekhan stated. Sharekhan also stated that Sudarshan Chem's recently completed ₹750 crore capital expenditure and the subsequent ramp-up of new capacities and products will propel its medium-to-long-term growth and enhance the company's standing in both domestic and global markets.