Last Updated: Saturday, September 10, 2022

SRF: A Solid long term bet

SRF makes larger bets on chemicals to replicate its recent success

The company plans to invest Rs 3,000 crore per annum on an average in the next five years, up from Rs 2,000 crore in FY22
SRF share latest news, srf-multibagger-stock

SRF has done phenomenally well by expanding into chemicals and packaging films businesses. Consolidated revenue grew by about 19 percent per annum in the last five years on an average. And as Ashish Bharat Ram, credited for transformation of SRF, assumes the role of chairman and managing director, the company is scaling up its bets on the chemicals business.

The company plans to invest Rs 15,000 crore in the next five years. About three-fourth of this or Rs 12,500 crore is committed towards the chemicals business. “As we grow our revenues, we will continue to invest in this business to sustain healthy growth rates over the next few years,” Ashish Bharat Ram said in SRF’s latest annual report, referring to chemicals segment.

The Rs 15,000 crore investment plan implies an average annual capex of Rs 3,000 crore in the next five years. It is a major step-up from recent years and illustrates growing confidence at SRF in the chemicals business, which generated 42 percent of the company’s sales in FY22.
The company was investing Rs 1,000-1,200 crore per annum till a few years back, point out analysts at ICICI Securities. This increased to Rs 1,800 crore at the standalone unit and Rs 2,000 crore at the consolidated level last year. A large portion of FY22 capex is invested in chemicals.
According to analysts, SRF aims to grow its chemicals business at around 20 percent annum in the next five years. The investments are primarily targeted at agrochemicals, pharmaceuticals and fluoropolymers. The company plans to gain technical capabilities and aims to produce more value-added products. In agrochemicals, for instance, SRF currently exports one active ingredient. It has 8-9 active ingredients in the pipeline, which are likely to be commercialised over the next 1-3 years. Similarly, it plans to increase focus on the pharmaceutical intermediary products.

Apart from chemicals, SRF also plans to invest in the packaging films business, though in a more gradual manner. Of the Rs 15,000 crore, Rs 2,500 crore is estimated to be invested in this business.

The investments will further transform SRF. Analysts estimate the share of chemical business to SRF’s total revenue to cross 50 percent by FY25. The contribution from technical textiles which constitutes tyre cord fabrics is projected to decline further.

Readers may note that SRF was predominantly a nylon tyre cord fabrics manufacturer till about a decade back, which generated about 47 percent of the company’s sales in FY12. As SRF expanded in chemicals business, tyre cord fabrics’ contribution to revenue declined to 16 percent in FY22.

The demand drivers are not hard to find. Import substitution, contract manufacturing and diversification of sourcing from global innovators away from China are expected to aid SRF’s growth in chemicals business. While this hold SRF in good stead, investors should watch out for risks.

One is the volatility in commodity prices. A prolonged slowdown in the global economy can weigh on demand and chemical prices. This can crimp profit margins of manufacturers such as SRF. The profitability and business growth of the refrigerant business is contingent on favourable global market dynamics. The refrigerant business worldwide is seeing a change in regulations due to pollution concerns. Excess supply or adverse market developments can hit prices.

Also, investors should note the expensive valuations of the stock. At about 26 times the FY24 earnings estimates, the stock is not cheap to own, however, compelling the growth story may be.

No comments:

Post a Comment