Following SRF's June quarter performance, domestic brokerage firms maintained their positive outlook on the stock despite the company's Q1 numbers falling short of their estimates.
SRF is a chemical-based multi-business entity engaged in the manufacturing of industrial and specialty intermediates. The company’s diversified business portfolio covers Fluorochemicals, Specialty Chemicals, Packaging Films, Technical Textiles, Coated and Laminated Fabrics. At current levels, the company's shares are trading close to their 52-week low of ₹2,040 apiece.
During the first quarter of current fiscal year, the company reported a weak performance across all its business segments. The consolidated revenue from operations declined 14% to ₹3,338 crore from ₹3,895 crore when compared with the corresponding period last year.
Its chemical business, which accounted for over 40% of revenues, posted a 4% YoY drop to ₹1,661 crore, while the packaging films business (PFB) reported a 27% YoY drop in revenue to ₹1,095 crore.
The Technical Textiles Business (TTB) reported a decline of 19% YoY to ₹465 crore. The Other Businesses reported an increase of 12% YoY in revenue to ₹119 crore in Q1FY24.
The company's Earnings Before Interest and Tax (EBIT) decreased by 37% YoY to ₹595 crore and the Profit after Tax (PAT) dropped by 41% YoY to ₹359 crore.
Brokerage firm Nuvama Professional Clients Group said the company’s weak operating performance during the quarter was due to margin pressures in the packaging films business (PFB). This was due to significant oversupply and a weak macroeconomic environment, while the demand for fluorochemicals was impacted by a weak summer season and dumping from China, it said.
The brokerage expects the near-term headwinds to prevail at least for the next two-to-three quarters amid weak demand from the end-user industry, a down cycle in PFB, and dumping from China.
However, the brokerage remains positive on the long-term story for SRF due to a strong capex pipeline of ₹2,800–2,900 crore in FY24 across business segments, the ramp-up in speciality active intermediates (from MPP-4 and the chloromethane facility), the recovery in demand for ref-gas and fluoropolymers, especially in the US and the Middle East, and volume growth with the commencement of production at PTFE plants. However, the brokerage anticipates that the growth in TTB and PFB will moderate in subsequent quarters.
Nuvama cuts its FY24/FY25 earnings estimate by 13%/11%, factoring in a revenue/PAT CAGR of 12%/9% over FY23–25. As a result, the brokerage's SoTP-based target price has been adjusted to ₹2,570 (from ₹2,856), implying a P/E ratio of 30x FY25E EPS. Despite these revisions, the firm maintains a 'buy' rating on the stock.
"Although the global situation is dynamic, we believe the inventory rationalization is transitory in nature, and once the situation normalises, SRF is well poised to capitalise on solid growth in the chemical segment," said brokerage firm IDBI Capital.
The brokerage also continued with its 'buy' rating on the stock with a SOTP target price of ₹2,913, which implies an upside of 35% from the stock's previous closing price of ₹2,162.
25 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
