SRF shares have declined over 12% in the last 5 trading sessions, with the stock falling 16% on a year-to-date basis. According to reports from Equitymaster, the specialty chemical company is among the chemical stocks that have fallen 20-30% in 2022. The decline reflects broader market concerns about froth in valuations after chemical stocks rallied until December 2021 due to the China plus one factor and improved balance sheets.
Market concerns center around potential rollback of US tariffs on Chinese consumer goods, which could impact high-florocarbons (HFC) prices and affect SRF's chemical margins. As reported by Equitymaster, the company's management claims that any reduction in anti-dumping measures would only impact R-25 gas, which accounts for a very small portion of total exports. Even if gas prices decrease by ₹100, the impact on EBITDA would be as low as ₹400 million, representing just 1% of the company's fiscal 2022 EBITDA. Management expects volume to remain unaffected and anticipates positive Q1 FY2023 financial results.
The chemical industry faces significant pressure from rising crude oil prices, which affect both energy costs and raw material feedstock for production. According to Equitymaster, SRF's packaging films and textiles businesses suffer significantly during periods of high crude oil prices. However, the energy crisis impact may be temporary as crude oil prices are falling and beginning to decline. The uncertainty around energy costs creates challenges for chemical manufacturers who need predictability to plan production and pricing strategies.
In its latest quarterly results, SRF reported revenue of ₹2,700 crore, compared to ₹2,100 crore in the same period last year. The company's net profit increased to ₹500 crore from ₹310 crore year-over-year. The board approved ₹676 crore capex for establishing an aluminium foil manufacturing facility, new pharma intermediates plant, and a dedicated facility for 300 million tonnes per year of key agrochemical production. For FY2022, SRF declared a dividend of ₹16.8 per share. At the current price of ₹2,018.8, the stock trades at a PE ratio of 31.68 and PB ratio of 7.55.
According to Equitymaster's analysis by research analyst Aditya Vora, the chemical sector faces challenges including price volatility dependence on global and Chinese prices, cyclical nature, and limited pricing power in B2B businesses. The report suggests that most re-rating in chemical company stocks has already occurred, with bulk commodities trading at 3-4 times above their mean valuations. Despite SRF's strong fundamentals including good technologies and positive cash flows, the company has fallen victim to market volatility and global trends, though it remains backed by solid fundamentals for potential recovery.
