SRF Stock Slides Most In Over A Year As Brokerages See Slowdown In Earnings Momentum
Packaging films facility at SRF Ltd. (Source: Company website)

SRF Stock Slides Most In Over A Year As Brokerages See Slowdown In Earnings Momentum

SRF Ltd. declined the most in more than a year after Motilal Oswal downgraded the stock anticipating a slowdown in earnings momentum.

The specialty chemicals maker reported a 96% year-on-year jump in consolidated net profit at Rs 381 crore in the quarter ended March, against a Bloomberg consensus estimate of Rs 334 crore. Its revenue from operations surged 40% to Rs 2,608 crore.

While Motilal Oswal acknowledged the “robust earnings”, it said the company’s specialty chemicals business may report slower growth on the back of high base created over the past three years, and its packaging segment is expected to see a contraction in the margin.

SRF clocked revenue growth of 42-45% in the specialty chemicals business in FY21. The management has guided for revenue growth of 10–15% in FY22 owing to the high base of last year.

In FY21, Specialty Chemicals revenue grew 42–45% (to INR23–23.5b), and the company has guided for revenue growth of 10–15% in FY22 owing to the high base of FY21.

SRF is trading at 18.1 times its one-year forward EV/Ebitda, a premium of 50% to average trading multiples for three and five years, Motilal Oswal said, adding that valuation looks rich compared to earnings growth.

The broking firm downgraded the stock to ‘neutral’ from earlier ‘buy’ with a target price of Rs 6,336 apiece.

Shares of the Gurugram-based company dropped as much as 9.3% to 628.15 apiece, the most since March 23, 2020, around noon on Friday. The stock, however, pared some of the losses thereafter.

Of the 26 analysts tracking SRF, 18 recommend ‘buy’, while four suggest ‘hold’ and four has a ‘sell’ rating, according to Bloomberg data. The stock is trading 7.7% above its average of 12-month price targets compiled by Bloomberg.

Here’s what some of the other brokerages had to say

Nirmal Bang

  • Downgraded to Accumulate from buy with an unchanged target price of Rs 6,600.
  • Strong demand from overseas markets and a higher volume of key products from European clients aided growth.
  • While the management has guided for ~10-15% growth in Specialty Chemicals in FY22, believe that the lower number is a function of base effect and we do not expect demand moderation.
  • Packaging growth would continue on the back of commissioning of new lines
  • Building in >500bps moderation in EBIT margin on account of normalization of spread in the next two years.

ICICI Securities

  • Maintain hold, price target revised to Rs 6,756
  • SRF its fresh capex may show result only in FY23E.
  • FY22E can see expansion in margins on operating leverage, but FY23E may see pressure on the same due to large planned launches.
  • SRF remains aggressive on capex in specialty chemicals and it has been strongly rewarded with growth, which may continue in the medium term too.
  • Raise EPS estimates by 11.5%/10% in FY22E/FY23E on higher packaging film margins.

Dolat Capital

  • Accumulate rating with a price target of Rs 7,179
  • Growth beyond FY22E would be capex led as capacity utilisations may hit their peak by FY22E.
  • With ~50-60 specialty chemical molecules under development SRF would need to expand its capacities in a timely manner to keep pace with the underlying demand.
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