Higher chemical prices, ongoing expansion and demand to support SRF stock

While medium term prospects remain strong, the upsides after recent rally are limited

The stock of India's largest specialty chemicals company SRF hit its all-time highs on Thursday on expectations of strong March quarter results, higher realisations from price hikes and  ongoing expansion which should help sustain revenue growth going ahead. The stock, which has nearly doubled in value over the last year, is also one of the probables to be included in the MSCI Standard index in the upcoming semi-annual review in May.

Higher prices of chemicals on account of supply disruptions as well as end user demand is positive for the specialty chemicals and packaging segments. Rohit Sinha of Emkay Research expects that increasing need of hygienic food and pharma packaging will support demand for SRF’s BoPET and BoPP products. This should also help mitigate the impact of rising PET prices.

In the refrigerant gas segment, the automotive recovery has been encouraging and should support R-gas volumes in the domestic market. The prices of refrigerant gases (R-22) have increased in the March quarter from their lows last year and could help margins in Q4.

Sales growth in packaging and chemicals (40 per cent contribution each to overall revenues) should help the company post a 20 per cent y-o-y growth in revenues in the quarter. Analysts at Sharekhan expect margins to improve by 394 basis points YoY to 24.9 per cent aided by healthy spread for packaging films and price hike for specialty chemicals.

Going ahead, there are multiple triggers and favourable tailwinds for the company. Analysts at Investec Securities believe that the rising use of halogens in agrochem and pharma molecules, China+1 sourcing strategy and higher outsourcing are positive for the company.

Moreover, higher allocation of Rs 3,500 crore capex over the next two years towards the specialty chemicals space would be beneficial for overall growth. While the company is expected to grow at 19 per cent in the FY21-23, revenue and operating profit growth for specialty chemicals is pegged at 25-30 per cent.

While medium term prospects are strong and revenue/net profit growth is pegged to grow at 19 per cent each in the FY21-23 period, the stock which is up 10 per cent over the last four trading sessions factors in these gains. Given the limited upside from current levels, investors should await price correction to accumulate the stock.