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Opportunity looms on potential cycle reversal

The agrochemical destocking phenomena had caught manufacturers off guard in FY24. Recent commentaries by global agrochemical majors and ag-chem retailers have been somewhat positive (click here for our FY25 outlook for agrochemicals) indicating that the destocking is nearing its end. In our view, restocking and normalcy will come unannounced, just like the destocking. SRF stands to gain from the cycle reversal on the back of its product pipeline of active ingredients, offering it an opportunity size of USD 400mn-500mn. Its specialty chemicals sales in FY24 clocked ~USD 445mn. Our current estimates have baked in incremental USD 370mn sales over FY24-27E. Moreover, our margin estimate for the chemicals division is not factoring in benefit from forward integration and positive operating leverage. Hence, there is unlikely to be downward revisions to our specialty chemicals estimates. In fact, there remains an upside risk if the reversal is as profound as the downcycle. We reiterate BUY with unchanged estimates and Sep’25 TP of INR 2,795 (SoTP based).

* New AI pipeline has the potential to double SRF’s specialty chemicals sales over the next 3 years: We believe SRF’s specialty chemicals growth (owing to its strong product pipeline) has been clouded by concerns such as inventory destocking, pricing pressures, etc. We highlight that SRF has the potential to double its current specialty chemicals sales over FY24-27E on the back of new product launches. Basis our calculations, opportunity size for SRF’s upcoming active ingredients (AI) could be USD 400-500mn (while the final formulations market could be USD 2.6-2.8bn) (refer Exhibit 1).

* Forward integration in some of its existing intermediate offerings augurs well: We had highlighted in our deep dive report (click here) that SRF has been supplying intermediates for several patented AIs such as Tetraniliprole, Pinoxaden, Cyclobutrifluram, etc. We believe SRF could forward integrate and supply final AI to its customers, in certain cases. Its export registration for Tetraniliprole (refer Exhibit 2) indicates a possibility towards supplying that to Bayer. Tetraniliprole was registered by Bayer in various geographies in CY21-22 and has a peak sales potential of EUR 300mn. This could translate to USD 60mn-80mn opportunity for SRF. Besides this, SRF also has the potential to manufacture Mefentrifluconazole (peak sales of > EUR 1bn) using its own intermediate (TFMAP) (Note: recently, Deccan has started supplying this AI to BASF; Deccan isn’t backward integrated for TFMAP).

* Maintain BUY with Sep’25 TP of INR 2,795: Besides specialty chemicals, PTFE sales would start contributing meaningfully from 2HFY25. On the ref gas front, as we had highlighted in our earlier report (click here) that the domestic R32 gas pricing has been robust, which should be able to offset the weakness in the export markets. Overall, SRF should benefit from forward integration and positive operating leverage. This should help lift its margins. However, margin improvement for its chemicals business isn’t our base case scenario. Hence, there remains an upside risk to our estimates. We continue to maintain BUY with unchanged estimates and a SoTP-based Sep’25 TP of INR 2,795.

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