Neutral SRF For Target Rs.2,220 - Motilal Oswal Financial Services Ltd
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Capex guidance intact; expects improvement in chemical business
We met with the management team of SRF at an analyst group meeting hosted by the company. The management team was represented by: Mr. Ashish Bharat Ram (CMD), Mr. Prashant Yadav (CEO – Fluorochemicals and Technical Textiles), Mr. Anurag Jain (CEO – Specialty Chemicals), Mr. Prashant Mehra (CEO – Packaging films), and Mr. Rahul Jain (CFO). Here are the key highlights from the interaction:
Chemicals business
? In the medium term, the HFC (Hydrofluorocarbons) market is poised for healthy growth as the supply is being capped in China (a major producer) and the demand outlook is strong as a big chunk of HCFCs (Hydrochlorofluorocarbons) demand is moving to HFCs.
? However, in the short term, the company has faced headwinds in the form of lower volumes while prices remained firm.
? The management expects the overall scenario to improve going ahead and can be witnessed from 4QFY24 as global customers are diversifying away from in-house manufacturing and also from China, so the demand is flowing to India (next best destination). SRF is one of the key beneficiaries of this shift.
? China's ref gas production is correcting and some of the correction is due to plant closures (regulatory reasons).
? The management expects further reduction of HFC production in China by ~30% (i.e., production will come down to 70% from 100%).
? US HFCs production is also expected to go down (For instance: if current production is at 80% levels, then it will come down to 60%).
? There is more of replacement demand (secondary market) for HFCs in the US. The company is not seeing any immediate impact of step down as there is always a lag effect. R410 will still be used in the US.
? The company has been diversifying its raw material sourcing across countries and is also still procuring from China.
? Specialty Chemicals
? The company is witnessing Herbicides gaining momentum in the market and also in the SRF portfolio.
? In terms of the demand scenario, SRF is constantly receiving queries and negotiations from customers and witnessing no demand pressures.
? Demand from farmers remains strong for the company’s products.
? The company is gradually building up its Active Ingredients (AIs) portfolio and is making good progress in all six to seven AIs that it is currently working on. All AIs are in different stages of the process.
? These are all agro AIs with global potential of INR35-50b. ? For AIs, registration in India is to be done by SRF only, while globally it is done by the customer.
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