
For SRF, there’s no light at the end of tunnel yet

Summary
- SRF’s management recently told Nuvama Research’s analysts that Q3 may still not be particularly exhilarating, but Q4 continues to look promising.
The growth catalyst for SRF Ltd would be missing in the December quarter (Q3FY25) even after a dismal H1FY25 earnings show. Revenue from the chemicals business, which contributed 41% to H1 revenue, fell 8% year-on-year.
The segment continues to suffer from the global agrochemical market slowdown due to elevated inventory levels at customers' end. Refrigerant gas exports were weak. Plus, the cheaper agrochemical supply from China continued to create pricing pressure.
Remember, in the Q2 earnings call, the company's management withdrew FY25 growth guidance, adding that recovery in H2FY25 will be gradual, at best. Two of SRF's crucial products—the active ingredient (AI) supplied to BASF Ltd and P-17—grapple with the weak demand.
H2 expectations
Recently, SRF’s management told Nuvama Research’s analysts that Q3 may still not be particularly exhilarating, but Q4 continues to look promising.
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Despite intensifying competition for P-17, SRF's management remains confident that the industry’s overall volume growth would be substantial, offering significant benefits for the company in the mid-to-long term, said the Nuvama report dated 19 December. Following a brief pause in AI sales (to BASF), the situation began to improve in December, it added.
To fuel its next leg of growth in the speciality chemicals segment, SRF aims to launch seven to eight AIs and sales from these are expected to begin in FY26. In H1FY25, it launched three pharma intermediates and three agrochemical intermediates.
Also, to boost margin, SRF is looking to backward integrate a few AIs. Domestic sales now form 25-30% of chemicals business versus 5% three years ago, the management said in Q2FY25 earnings call.
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Export blues
Despite rising exposure to the domestic market, weak exports pose a hurdle for SRF. In fact, data compiled by PhillipCapital (India) in a report dated 15 November showed that speciality chemicals exports stood at ₹167.6 crore quarter-to-date in November, registering a 17.3% sequential drop and almost 24% year-on-year fall. This, along with weak refrigerant gas exports, dragged SRF's total exports in the said span.
These factors have kept the stock under pressure as further earnings downgrades cannot be ruled out. Meanwhile, FY25 capex guidance is ₹1,600-1,800 crore, which will largely be toward three new fluoropolymers coming on-stream by Q3FY26.
That said, the company’s capex momentum has been falling, highlighting the challenging industry dynamics. Besides, sustaining earnings growth in the packaging film and technical textiles segment would be crucial. So far in 2024, SRF’s shares are down 8%, far below the Nifty Midcap 50 index's 23% returns.
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Its FY26 price-to-earnings multiple at 38 times, according to Bloomberg, has moderated but is still pricey.