SRF is down nearly 13% in a month — should you buy now?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The ₹68,260-crore (over $8 billion) chemicals and polymers maker SRF Ltd. has lost over 12.9% in the last month. The sell-off accelerated after the latest quarterly earnings showed a 14% drop in revenue and a 25% fall in profit. 

The street’s divided. Here’s a look at the target price for SRF shares: 

The Gurugram-based projected a 20% growth in overall revenue, and the stock lost 10% of its value in the last year when the Nifty 50 gained over 20%. 

What’s working for SRF: 

Global investment bank UBS believes the business can’t get any worse for SRF, and the stock price already reflects all the pain. 

UBS peer Morgan Stanley believes the company may start getting better prices for its specialty chemicals as sales volumes recover. 

However, the management said it expects a 26% operating profit margin in the current financial year ending March 2025, compared to 27% in the year earlier.

Fresh supply from new capacities, expected in the second half of the year, may help the company increase production, UBS argued in its report. 

What’s not working for SRF:

On the other hand, analysts at Jefferies cut the estimated profit for the current financial year by 3%, saying the pain in the overall chemicals sector —  hit by rampant dumping of cheap imports from China —  is far from over. 

Chemicals made up 58% of the company’s consolidated revenue. 

While the management said that refrigerant gas’s pricing and sales volume will improve, analysts at Jefferies aren’t convinced. They believe the company’s exports to the US may fall. 

Due to the rising supply of cheaper alternatives from China, the demand for Indian specialty chemicals has dwindled worldwide. 

Indian chemical exports to North America grew at a measly 2% in the last two years ending December 2023, compared to 21% growth between 2019 and 2021, according to a Fortune report citing research by consulting firm McKinsey. 

Similar trends were also visible in India’s chemical exports to other regions too.

Source: McKinsey, Fortune

India’s chemical industry has not been able to sustain the stellar export growth right after the pandemic. At the same time, chemical imports into India rose by a billion dollars more in the last two years to $62 billion in 2023. 

Analysts at Mumbai-based Kotak Institutional Equities have told analysts that the valuation of specialty chemicals players, not just SRF, needs to be reviewed due to the intensity of China’s competition. 

“..the fact remains that valuations are demanding, particularly off a larger base of earnings, even as the competitive environment has turned far more vicious in recent quarters,” the Kotak report said while cutting the earnings estimate by 14% to 18% for the next two years. 

The estimated market size of specialty chemicals —  products like adhesives, antioxidants, flavours, and fragrances to name a few —  in India was about $60 billion, according to EY in June 2023.

The company admitted that the packaging business, which made up a third of its FY24, will continue to see margin squeeze for at least another year. 

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow