SRF stock: Growth in margins will come from speciality chemicals segment

The SRF stock, up 4 per cent on Tuesday, continues to add to its gains in the last couple of weeks on expectations of a sales recovery in its speciality chemicals business segment.

The segment, which accounts for about 38 per cent of consolidated segment-level profits, was facing a slowdown on account of weak demand, delay in product launches and outsourcing orders because of global consolidation in the business.

Ongoing expansion, coupled with weak revenues, meant margins came down to 17 per cent in the third quarter (Q3) of FY18 from 28 per cent in Q3 FY16. Some of the recovery, expected to gather steam in FY19, began in Q3 FY18 as the company reported a 400-basis-point improvement in margins on a sequential basis.

Ritesh Gupta of Ambit Capital said reduced channel inventories at half of usual inventories had improved offtake schedule, besides order book for FY19.

Supply concerns after China’s anti-pollution curbs, coupled with hostility between China, the US, and Japan, are driving innovator companies from these countries to Indian vendors.

He expects SRF’s speciality chemicals business revenues to double by FY21 to ~10.9 billion on the back of sales recovery of old molecules and new capacity addition. Margins, too, are expected to hit the 25-per cent-level, last seen in FY16.

In the fluorochemicals business, the company, a domestic leader in refrigerant gases, will benefit from rising use of air conditioners and refrigerators.

Its other business segments are packaging films and technical textiles. Margins of the technical textiles improved in the December quarter to 15 per cent from 13 per cent in the September quarter, led by an increase in Customs duty on radial tyres and nylon fibre. This resulted in higher realisations and gains from inventory. The segment accounts for 36-38 per cent of revenues and operating profit. The demand-supply scenario in the packaging films segment, especially polyester film BoPET, is favourable. Pricing in the propylene film segment (BoPP) is, however, under pressure due to excess capacity, expected to be utilised over the next year and a half.

At the current price, the stock is trading at 18 times its FY19 earnings estimates. 

Given the expected improvement in chemicals business, most analysts have a ‘buy’ rating. Investors could look at the stock on correction.