Favourable outlook across segments to keep earnings growth robust for SRF

Gains from multiple triggers are factored in valuations which limits upsides

The stock of the country’s largest specialty chemicals maker, SRF was up 4.6 per cent in trade on Tuesday after the management indicated a strong second half in the current financial year for each of its key segments of chemicals, packaging films and technical textiles.

The outlook comes amid strong September quarter results; the company reported a consolidated revenue growth of 35.1 per cent with growth broad based across segments. While the stock gave up some of the gains in Wednesday’s session, most brokerages remain positive about its earnings trajectory over the next two years. The other trigger for the stock is its inclusion in the MSCI India Index with effect from December 1; rebalancing of the India index would lead to higher inflows in the stock.

Among key segments, the chemicals business is the largest accounting for 40 per cent of its revenues. Within the segment, the refrigerant business is the beneficiary of higher volumes and improved realisations. The company had recorded higher sales from the international segment in the September quarter. Given its expertise in newer generation refrigerants, backward integration to chloromethanes gives it a cost advantage which will be difficult to match, according to IIFL Research.

Given the robust demand, volumes are expected to be higher in the second half of FY22 as compared to the first half. This coupled with capacity additions would lead to higher growth over the next 2-3 years. Half of the Rs 2,000 crore capital expenditure in FY22 is expected to be deployed in the refrigerant business.

In the specialty chemicals business (agrochemicals and pharmaceutical intermediates) the company expects growth to be in the 15-20 per cent range over next few years with the share of the pharma business rising in the mix. The overall chemical business had posted a 28 per cent growth in revenues in Q2 with margins expanding 250 basis points y-o-y.

While the packaging business (37 per cent of revenues) saw strong growth in Q2 with revenues rising by 28.7 per cent, margins came under pressure declining by a sharp 1,290 basis points y-o-y. This was due to capacity additions and weak demand in BOPET (polyester) films which are used in printing and coating applications. While demand has picked up in the December quarter, given significant capacity additions, the street will keep an eye on the impact of the same on growth.

In technical textiles, which is the smallest of its key segments, increased demand from the tyre sector and reopening of the mining sector led to higher sales of products such as nylon tyre cord and belting fabrics. The segment saw a growth 68 per cent y-o-y in Q2. Closure of capacities in China and lower prices currently offer legroom to the company to hike prices and thus boost realisations.

Analysts at Sharekhan Research, who have maintained their FY22-24 earnings estimates expect earnings growth for the company to be driven by chemical and technical textiles while volume growth in packaging film is expected to offset lower margins. While earnings growth is expected to be strong at over 30 per each for FY22 and FY23, the 67 per cent rise in the stock over the last six months factors in the gains. Investors can look at the stock on dips.