Home / Markets / Mark To Market /  Chemicals business props up SRF amid deepening slowdown

Shares of SRF Ltd have surged 73% in the past year, with the firm maintaining earnings momentum despite the slowdown in a key business segment. Revenues of the technical textiles division, which caters largely to the auto sector, dropped 19% in first half of the current fiscal year. This was simply because tyre makers cut production, tracking the auto sector slowdown.

Revenues at the other key business segment—packaging films—grew a mere 2.8% in the first half. But the slowdown is more than offset by the 25% jump in revenues at the chemical business, which now constitutes about 36% of SRF’s sales. Further, profitability of the packaging films business improved, thanks to a better product mix.

Graphics by Sarvesh Kumar Sharma/Mint
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Graphics by Sarvesh Kumar Sharma/Mint

This, coupled with the robust growth in the chemicals business, more than made up for the weakness in the technical textiles business. Operating profit of the company rose 12% in the first half of the year.

The good news for investors is that the specialty chemicals business is seeing good traction, especially in the farm and pharma products segments.

Demand from the agrochemicals industry is showing signs of recovery after several weak seasons. “SRF is expected to deliver healthy growth in Q3FY20 because of robust performance in the chemicals business," Sharekhan Ltd said in a 1 January note.

Raw material prices on the other hand are easing, thanks to an improvement in supplies from China, point out analysts at Emkay Global Financial Services Ltd. This should aid profitability of the chemical business. “We expect better margin performance in SRF due to lower fluorspar prices," Emkay said in a note in December. Of course, the gains will be limited to the extent of price cuts offered to customers.

Besides, the pressured in the technical textiles and packing business are expected to continue. The sluggish auto market can also impact the firm’s refrigerant sales to the auto sector. Consequently, a deepening of the slowdown in these segments will be hard to overcome. While SRF continues to make investments in the chemicals business, it is important the market scenario do not turn for worse, especially given that the stock valuations at 20 times the FY21 earnings estimate leaves little room for error.

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