Analysts have said the earnings momentum is likely to slow to a 21% CAGR over FY21-FY23, primarily due to margin contraction in the packaging segment and reduced growth momentum in specialty chemicals, weighed by a high base
Shares of SRF Ltd declined as much as 9% on the National Stock Exchange on Friday, a day when the benchmark Nifty 50 index was marginally up. SRF is a chemicals firm engaged in the manufacturing of industrial and specialty intermediates. It is worth noting here that the SRF stock had touched a 52-week high on Wednesday and as such, the stock had already run-up quite a bit ahead of its March quarter results, which were rather strong.
Consolidated operating revenues increased robustly by 40% over the same period last year to Rs2,607 crore, better than analysts’ expectations. In fact, revenues have increased by 21.5% compared with the December quarter as well. SRF derives nearly all of its revenues from three businesses—packaging film business (PFB), chemicals business (CB) and technical textiles business (TTB). The chemicals business includes specialty chemicals as well.
In a post results note, analysts from Edelweiss Securities Ltd said, “Though we are confident that the company’s chemical segment will clock 20-22% revenue growth, management remained cautious—10-15% FY22 growth guidance in specialty chemicals." For financial year 2021, the specialty chemicals business had increased by around 43%.
To be sure, in the past few years, SRF has delivered on the overall growth. However, analysts expect the pace to slow down, going ahead. Analysts from Motilal Oswal Financial Services Ltd said in a report on 7 May, “SRF’s performance over the last three years has been robust, with an earnings CAGR of 42% and stock price CAGR of around 43%." CAGR is compound annual growth rate. The brokerage firm added, “We expect the earnings momentum to slow to a 21% CAGR over FY21-FY23, primarily due to margin contraction in the packaging segment and reduced growth momentum in specialty chemicals, weighed by a high base."
Coming back to the March quarter, revenue growth in the PFB segment was the fastest at 63% year-on-year (y-o-y), followed by CB (up 31% y-o-y) and TTB (up 26% y-o-y). These three businesses contributed 37.5%, 44.2% and 15% of SRF’s revenues, respectively, last quarter. While revenue growth in the PFB segment was strong, note thathe segment is facing margin pressure and this trend is expected to continue.
Meanwhile, even after accounting for Friday’s fall in the stock price, SRF shares are up around 12% so far this calendar year. "The stock was building in too much optimism already," said an analyst requesting anonymity.