Chemicals division spurs bull run at SRF

Will SRF Ltd continue with its winning streak on the bourses as it prepares to announce its results on May 11 is a question investors as well as analysts are asking.

Reaping the benefits of years of research and development (R&D) and capital expenditure, the company saw its share price almost triple and market capitalisation crossing the $1 billion mark between March 2014 and April 2015.

SRF, which calls itself a multi-business company, has three major segments of operations — industrial textiles, chemicals and packaging films. But it’s the chemicals business that has caught the eye of Dalal Street.

Analysts say the surge has been driven by SRF’s intellectual property rights in the chemicals business, which has been built through its investment in R&D. Another trigger is that the company is coming to the end of its capex cycle at a time when its businesses are expected to see revenue growth.

“SRF’s highest growth opportunity lies in the specialty chemicals segment. It has commercialised almost 20 molecules and has another 50 in the pipeline. It is emerging as a preferred supplier in this segment among the global agro chemical majors,” said Saurabh Kumar, Associate at JP Morgan India.

Unforeseen developments have also helped the company. The US’ imposition of an anti-dumping duty on Chinese manufacturers of fluorochemicals has helped SRF boost its exports and capture market share.

Around a fifth of all drugs sold globally use a fluorine substituent. Analysts say the company has already created a brand name for quality in this market and a third of its revenue comes from export which is expected to grow much larger.

“SRF has developed a niche for itself in the specialty chemicals business. The business is highly IPR and knowledge-oriented and which gives SRF a unique advantage over low-cost manufacturers from China. Going forward, we expect revenues to grow at 35 per cent compounded annual growth rate over fiscal 2014-15 to fiscal 2016-17,” said Raj Gala, Research Analyst, Edelweiss Capital. He added that the high entry barriers for the business make SRF almost unmatched in India.

Specialty chemicals are also the business where the company has enhanced its capacities. At its plant in Dahej, Gujarat, it has 293 acres of which it is developing 126 acres.

Having spent ₹1,350 crore out of its total capex plan of ₹1,550 crore, the company is expected to tone down its spending. Analysts say, in the coming years its capex is unlikely to go beyond ₹250 to ₹300 crore.

“SRF appears to be in a sweet spot thanks to factors such as — secular growth drivers, tough sector entry barriers, sturdy revenue growth and capacity expansion in specialty chemicals — which would lead to a strong earnings growth,” Gala of Edelweiss said.

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