SRF gets a boost from US anti-dumping move

Duty on Chinese exports of R134a gas should improve SRF's capacity utilisation and margins

Chemicals manufacturer SRF is expected to benefit from the 150% anti-dumping duty imposed by the US government over the last fortnight on Chinese exports of refrigerant gas R134a to the US. SRF is the domestic market leader in refrigerant gases. Ritesh Gupta of Ambit Capital says the imposition of the duty will make SRF significantly competitive in the US market. 

The move is expected to lead to an increase in SRF’s volumes, currently at 8,500 million tonnes (mt) for R134a. The US market size for the gas is pegged at 100,000 mt. SRF recently set up a new facility to manufacture 12,500 tonnes of R134a at an investment of Rs 400 crore and the higher duties on Chinese imports will help leverage this capacity. Additional volumes and the benefits of scale are expected to lead to net profit growth of 5-6% by FY19, according to Ambit Capital. 

While the company operates in three segments of chemicals and polymers, packaging films and technical textiles, growth and margins are expected to come from the chemicals segment. Though refrigerant gases, specialty chemicals and engineering plastics which form the chemicals segment account for 34% of revenues, they account for 51% of operating profit margins and about 60% of the net profit. 

Further, the launch of new-age gasses such as R32/R1234yf, capacity expansion of fluorinated solvents and pharma grade R134a is expected to drive operating profit growth of 20% of the refrigerant business over the next few years. 

Analysts at IIFL believe SRF’s specialty chemicals business will be the company’s key earnings growth driver as the company leverages its strengths of low-cost manufacturing, R&D capabilities and good relationships with global customers. The company has been able to scale up revenues in specialty chemicals from a small base to over $100 million in FY16 over the last few years. 

At the current price, the stock, which is up 24.5% over the last year and has multiplied eight times from 2014 levels, is trading at 19 times its FY18 earnings estimates and 15.7 times its FY19 estimates. While prospects, especially for the chemicals business, are strong given target price of Rs 1,800, investors will gain about 11% from these levels. Given the run-up, investors should await correction and a lower entry point to enter into the stock.