SRF crashes 8.6% as analysts turn cautious

Our Bureau Chennai | Updated on May 07, 2021

Sustaining earnings momentum will be tough, say analysts

Shares of SRF plunged over 9 per cent on Friday, as some analysts expect the earnings momentum to slow down going forward despite a strong Q4 performance. The stock, which crashed to a low of ₹6,226, closed at a slightly better level at ₹6,276, down 8.6 per cent over the previous day's close.

Analysts believe sustaining the current growth momentum will be difficult for the company given the higher base.

“We expect the earnings momentum to slow to a 21 per cent CAGR over FY21–23, primarily due to margin contraction in the packaging segment and reduced growth momentum in specialty chemicals, weighed by a high base,” said Motilal Oswal, which downgraded the stock to ‘Neutral’ from ‘Buy’ and set a target price of ₹6,336.

Net up 105%

The consolidated net profit of SRF rose 105 per cent to ₹380.92 crore in the quarter-ended March 2021 as against ₹185.75 crore during the previous quarter-ended March 2020. Total sales rose to ₹2,607.65 crore (₹1,857.83 crore).

On a one-year forward EV/EBITDA basis, SRF currently trades at 18.1x (on FY22), at a premium of about 50 per cent to its average trading multiples for 3 and 5 years, respectively. This is rich with respect to earnings growth, said Motilal Oswal.

ICICI Securities said SRF remains aggressive on capex in specialty chemicals and it has been strongly rewarded with growth, which may continue in the medium term too. “We raise our target price to ₹6,756 (from ₹5,644) on higher chemical segment multiple at 22x (from 18x),” the brokerage said. It maintains a ‘Hold’ rating on the stock.

Bullish bets

However, HDFC Securities retained its ‘Add’ rating on SRF with a target price of ₹7,300 on the back of continued healthy performance from speciality chemicals business and packaging films business, recovery in the technical textile segment, strong balance sheet, and deployment of capex towards high-growth Speciality Chemicals business over 3-4 years.

Domestic brokerage Sharekhan is even more bullish on SRF. The potential increase in the share of high-growth specialty chemicals business in overall business mix over the next few years would act as key rating catalyst for SRF. “In addition, we believe that structural high growth cycle for Indian specialty chemicals sector given favourable dynamics to support premium valuation for quality players like SRF. Hence, we maintain a ‘Buy’ on SRF with a revised price target of ₹8,100,” it said.

Key risks

However, slower offtake from user industries and concerns on a correction in product prices can impact revenue growth, Sharekhan said and added “Input cost price volatility might impact margins.”

Published on May 07, 2021

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