Buy SRF Ltd For Target Rs.3,245 - JM Financial Institutional Securities
Early signs of uptick in chemicals busines
Commentary from SRF’s key customers seems to be suggesting that i) channel destocking has been easing, and ii) patented agrochemicals demand will see an uptick in 2HFY23. In our view, this scenario is positive for SRF’s fluorospecialty business. Besides, commentaries from HVAC equipment producers indicate short supply for HFC blends. Our checks indicate that over the last couple of weeks SRF has started seeing good demand traction for HFC blends. In our last sector update (click here), we had highlighted that refrigerant price normalisation offers a good entry point. We reiterate our BUY stance on the name as we have started seeing signs of normalisation on the ref gas side even as we await green-shoots on the agrochem side. SRF remains one of our top picks with a Sep’24 TP of INR 3,245.
* SRF’s key customers have indicated demand uptick in 2HFY23 from patented portfolio: While volume has been under pressure, Bayer said in its recent concall that it expects insecticides and fungicides products to recover compared with the last year; these products were affected last year due to drought conditions in EMEA and LATAM and lower planted acres and licensing revenue in soybean and cotton in the US. Bayer is anticipating strong growth for the core crop-protection business (ex-glyphosate) led by strong growth in all regions primarily led by new hybrid additions in corn and seeds as well as introduction of new next generation soybean products in Brazil. Bayer’s recent investment of EUR 220mn in R&D for the crop-protection business gives further credence to its strong demand outlook for crop-protection products. Syngenta in their latest result update reiterated that, despite price increases, farmer profitability remains robust, which underscores the continued robust usage of patented agrochemicals.
* Channel destocking easing for SRF’s key customers: Higher interest rates had forced several channel distributors to move to a ‘Just-in-Time’ approach from producers. Bayer in its recent results has clearly suggested that inventory destocking by channel partners is easing and it doesn’t see an issue with channel inventory for any of its crop-protection products in any of the regions it operates in. Syngenta too in its latest result update (click here) reiterated that while channel destocking remains a concern currently it is expected to abate in the second half of CY23.
* Likely shortages of HFC blends bodes well for SRF: Imminent HFC production cuts in the US and the EU are likely to result in shortages, especially of various high-GWP refrigerant gases such as R-410a (blend of R-32 and R-125), R-404a (blend of R-125, R-143a, and R134a), based on the commentaries from heating, ventilation, and air conditioning (HVAC) equipment producers such as Johnson controls, Copeland, etc. Moreover, it was indicated that it will incrementally become difficult to obtain these HFCs as US indigenous producers will focus on filling the production quota with low-GWP HFCs. As per our checks, this phenomena seems to be playing out for SRF as its HFC blends supplies have started picking up pace over the last couple of weeks.
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