SRF's poor Q4 results, weak management commentary leave analysts mixed; stock falls

SRF is a multi-business chemicals conglomerate engaged in the manufacturing of industrial and specialty intermediates.

Shares of Indian chemicals and polymers maker SRF extended the previous session's losses on May 8 after the company posted a drop in profit for the fifth quarter in a row, hurt by sustained weak demand in its mainstay chemicals business.

Analysts remain mixed on the stock after the earnings with Morgan Stanley having an 'overweight' rating on the stock and Jefferies putting a 'underperform' call on the stock.

SRF's Q4 consolidated net profit fell 24 percent on-year to Rs 422 crore, and its revenue from operations dipped 5 percent YoY to Rs 3,570 crore during the quarter under review.

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Notably, the company's chemical business, which consists of specialty chemicals, fluorochemicals and agrochemicals among others, contributes half the company's quarterly revenue.

Morgan Stanley is bullish on SRF and has put a target price of Rs 2,557 on the stock. The brokerage noted that while SRF's chemicals segment performed slightly ahead of expectations in Q4, the packaging and textiles segments missed forecasts. However, a lower tax rate supported a beat in the profit after tax (PAT).

Although there was an EBITDA miss, the beat in chemicals offset the challenges faced by the packaging and textiles divisions, making it a tough quarter overall, said analysts. Moreover, there was an increase in depreciation and interest expenses compared to the previous quarter, reflecting the commissioning of key projects.

Jefferies has put an 'underperform' call on SRF with a target of Rs 2,065 per share. In the fourth quarter, the company's EBITDA declined by 25 percent YoY and was 7 percent below the brokerage's estimates, primarily due to weakness in the packaging segment.

However, the chemicals segment's EBIT was 8 percent ahead of estimates, driven by a revival in refrigerant gas prices.

It is worth mentioning that the chemical industry has been struggling with high inventory and destocking for the past few quarters, leading to continuous pressure on volume and margins. SRF management said post earnings that besides inventory rationalization, prices were also under pressure in the March quarter due to low-priced products from China.

Its fluorochemicals business was hit by China's dumping of refrigerants in India and the international markets. Despite the challenges, SRF remains hopeful of a recovery in the second half of FY25.

Also Read | SRF reports 24% decline in Q4 net profit to Rs 422 crore, revenue down 5%

In a report ahead of SRF's Q4 results, InCred Equities stated that the stock is too expensive.

"SRF never traded this costly in its life span. The expectation of capital efficiency in the chemical business is purely based on FY22 and FY23, which was clearly a one-off," the brokerage noted, adding that revenue/capital employed in chemicals will fall below 60 percent in the coming quarters and ROCE at around 14-15 percent.

It retained its 'reduce' rating on SRF with a target price of Rs 1,540 per share.

SRF share price plunged 7.25 percent to 2,400.00 on NSE in the previous session pushing the stock into red for the year. In the last five sessions, the stock has tanked nearly 10 percent, underperforming benchmark Nifty 50 which has slipped 1.6 percent during this period.

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