Recovery in sight for SRF’s chemicals biz

SRF plans to enter the market for the more environment-friendly HFO refrigerant as several patents are set to expire over the next 2-3 years. (Bloomberg )
SRF plans to enter the market for the more environment-friendly HFO refrigerant as several patents are set to expire over the next 2-3 years. (Bloomberg )

Summary

  • The specialty chemicals firm expects the worst to be over in the agrochemical space, but growth in its overall primary business is expected to be in single digits this financial year

SRF Ltd is expected to face short-term challenges, but for the long-term, recovery is in sight.

The specialty chemicals company’s management indicated in a recent meeting with analysts that the worst seemed to be behind in terms of destocking globally in the agrochemical space. SRF, which has a few active ingredients for agrochemicals in the pipeline, expects demand to pick up in H2FY24.

Growth in SRF’s specialty chemicals business, which includes manufacturing of agrochemical and pharmaceutical intermediates, is expected to be in single digits in FY24, improving to 15-20% in FY25.

The chemicals business contributed 47% of SRF’s consolidated segment revenue in H1FY24. The segment also comprises fluorochemicals, which includes manufacturing of refrigerants including hydrofluorocarbons (HFC) and the more environment-friendly hydrofluoroolefins (HFOs).

The management sees global HFC demand remaining stable over the next few years. Moreover, with China producing 15% less year-on-year in the September quarter, HFC prices have been rising over the past two months. This bodes well for the recovery in refrigerant prices, which saw weakness recently due to Chinese dumping. 

Plus, SRF plans to enter the HFO market as several patents are set to expire over the next 2-3 years. Developed countries are shifting to HFOs from hydrochlorofluorocarbon (HCFCs), while developing nations are moving to HCFCs from HFCs.  

“SRF’s focus on fluoropolymers space, HFOs, and new active ingredients (6-7 for agrochemical), ramp-up of pharma business, and introduction of VAP (value-added products) in packaging film, would provide platform for sustainable strong growth over medium-to-long term," Sharekhan by BNP Paribas said in a report. 

That said, SRF’s packaging film business (which accounted for 37% of H1FY24 revenue) continues to face margin pressure due to weak demand and supply glut. Revival of this business could be a trigger for the stock, which has gained 5% in 2023 till now, but has sharply underperformed the 15% surge in the Nifty 200 index. 

Investors should track refrigerant pricing trends, demand in agrochemicals, and expansion of the pharma business, said Swarnendu Bhushan, an analyst at Prabhudas Lilladher. The near-term pain appears to be largely factored in the SRF stock price, and any signs of recovery would be a positive catalyst, he added.

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