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Chemicals continue to deliver amid challenges in others…

About the stock: Incorporated in 1970, SRF started with nylon cord tyres and thereafter diversified into refrigerant gases, speciality chemicals and packaging film to name a few over time.

* Chemical division forms 43% of overall revenue followed by packaging film (39%), technical textile (15%) and others (3%)

* The company exports to more than 90+ countries. Revenue from international market constitutes 57% of overall revenue while rest is from the domestic market segment

Q2FY23 Results: Sales growth was in line with estimates led by chemicals while margins were below expectations due to cost pressure in packaging and technical textiles divisions.

* Reported revenue growth was 31% YoY to | 3727.8 crore, led by chemical (up 62% YoY), technical textile (down 16% YoY), packaging film (up 24% YoY) and other segment (up 16% YoY)

* Gross margins contracted 200bps YoY to 47.6% while EBITDA margin fell 310 bps YoY to 20.6%. Absolute EBITDA was up 14% YoY to | 769.1 crore.

* PAT increased 26% YoY to | 481 crore

What should investors do? The stock appreciated at 62% CAGR in last three years.

* We retain BUY rating on SRF on the back of 1) Sustained efforts to ride on increasing opportunities for fluoro chemicals across key industries, 2) entering into new segment of fluoropolymer PTFE and 3) visibility capex in specialty chemical segment

Target Price and Valuation: We value SRF on an SOTP basis to arrive at a target price of | 2900/share (earlier | 2735/share).

Key triggers for future price performance:

* Continuous capex towards speciality chemical on the back of higher consumption of fluoro compounds across agrochemical and pharma to support strong business performance in years to come

* Venturing into PTFE through backward integration of R22 diversifies business risk, to a certain extent

* Control over working capital along with better operational performance to improve FCF generation

Alternate Stock Idea: Apart from SRF, in our chemical coverage, we also like Neogen Chemical.

* Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity

* BUY with a target price of | 1645

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SEBI Registration number INZ000183631

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