SRF stocks shines on import curbs, growth prospects, but valuations pricey

While there are multiple positives across SRF's key segments, investors should await for a better opportunity to enter the stock

The stock of the largest specialty chemicals player in the country is up 25 per cent from the first week of March. Regulatory measures, incremental gains from new products and healthy growth prospects in its fluorochemicals space are the key positives for the stock. 

The immediate trigger has been the government’s decision to put the import of hydrofluorocarbons on the restricted list. The March 9 order, aimed at boosting domestic manufacturing (40 per cent of requirement in the segment is imported), will be beneficial for the company. This is expected to aid volumes, boost capacity utilisation and enhance realisations. 

Lower impact of the sharp rise in crude oil prices and pricing power is another positive. Ritesh Gupta and Prasenjit Bhuiya of Kotak Institutional Equities say that the company’s chemicals (43 per cent of sales) and polymers business has low dependence on crude oil derivatives as the key raw materials are fluorspar and sulphuric acid. The key raw material in technical textiles (15 per cent of revenues) is caprolactum which is a crude oil derivative and thus will see some impact.  The impact of higher input costs may be transient given the ability of the company to pass on these costs but with a lag. 

New product launches by the specialty chemicals maker could be a key driver of growth going ahead. JM Financial believes that SRF’s new molecules will target higher addressable markets (agrochemicals/pesticides) and could replace Chinese competition thus gaining market share. They expect SRF’s fluoro specialty chemicals revenue to demonstrate 22 per cent annual growth over the FY22-25 period. JM Financial has also raised its operating and net profit estimates for FY23 and FY24 by 4-7 per cent due to above mentioned triggers.

Highlighting the trend, ICICI Securities too believes that a key trigger for the stock is the focused capex towards speciality chemicals keeping in mind higher consumption of fluoro-compounds across agrochemical and pharma besides general themes of vertical integration and higher operating leverage.

Given the recent stock gains, the stock is trading at over 38 times its FY23 earnings estimates. While there are multiple positives across its key segments, investors should await for a better opportunity to enter the stock.