Growth in refrigerants, entry into new geographies to support SRF stock

Q3 performance was led by strong demand/realisations in the chemicals business

The country’s largest specialty chemical company SRF is benefiting from the twin triggers of increased demand and higher pricing. This was reflected in the December quarter performance which beat estimates on all parametres. Led by a 58 per cent rise each in sales of chemicals and polymer and packaging segments, consolidated revenues grew 56 per cent y-o-y.

The incremental gains from the chemicals business, which accounts for 43 per cent of revenues, came from both exports and domestic markets and an expanding product portfolio. Growth in the business was led by refrigerants, specialty chemicals and chloromethanes, with refrigerants benefiting from higher volumes and realisations.

Ritesh Gupta and Prasenjit Bhuiya of Kotak Institutional Equities believe that growth in refrigerants going ahead would be led by volumes from higher domestic AC manufacturing with a strong season expected after two consecutive years of lockdowns and entry into geographies like the US. Realisations are expected to improve due to imposition of anti dumping duty by India and the US (Chinese imports) and higher product demand in export markets.

The beat on the operating performance was also led by the chemicals business which accounted for half of the operating profit. Segment margins for the chemicals business were up 839 basis points y-o-y and 706 basis points q-o-q to 29.4 per cent. Higher prices in refrigerant gases and chloromethane boosted overall margins in the chemical business, according to analysts at Edelweiss Securities.

In the packaging business (38 per cent contribution to revenues), volume growth was led by additional capacities in Hungary and Thailand which came on stream. Strong demand for BOPP films helped expand margins in the segment on a sequential basis by 317 basis points to 19.9 per cent.

Technical textiles business too, posted good growth led by belting fabrics and polyester industrial yarn though nylon tyre cord fabric segment disappointed. The company indicated that demand from auto makers continues to be weak due to degrowth in the automobile industry. Margins for this business fell on a sequential basis.

Given the Q3 performance and strong near term outlook for key segments, most brokerages have raised their FY22 earnings by upto 13 per cent. Analysts at JM Financial have a buy rating and believe that higher contribution from the chemicals business is likely to improve overall earnings growth. Moreover, addition of pharma products in the specialty chemicals division should help offset the cyclicality of agrochemicals, they add. Investors can consider the stock on dips.