 "Chemical business to aid SRF's sales, margin growth")
The stock price of SRF is up 24 per cent over the fortnight and has touched a lifetime high after the government extended the anti-dumping duty provision on import of nylon tyre cord fabric from China for another five years. The product is used as an input in automotive tyre manufacturing. SRF is one of the largest makers of the product in the world, which is part of a segment that contributes 45 per cent of consolidated revenues.
In addition to this trigger, the stock got re-rated as analysts bet higher on the growth prospects of the company’s speciality chemicals business. Given the high entry barriers and demand, this segment is expected to grow faster than its other segments of technical textiles (which includes the nylon tyre cord business) and packaging.
Although the chemicals business contributes to 28 per cent of its revenues, given its higher profitability, it accounts for 55 per cent of the firm’s earnings before interest and taxes (Ebit). The flourine-based speciality chemicals business, which has been growing upwards of 40-45 per cent annually over the past five years, is expected to clock a revenue growth of 35 per cent over the next couple of years. This is expected to come on the back of increasing business from global clients such as Bayer, Syngenta, BASF and Pfizer, among others. Analysts at Edelweiss say the speciality chemicals market in India has the potential to grow at the rate of 16 per cent annually, to reach $42 million by FY18. Global innovators are increasing the share of outsourcing from Indian companies due to process development expertise, competitive cost vis-a-vis China and intellectual property safeguards.
Most analysts have a ‘buy’ on the company, with a target price of Rs 1,225 a share. However, the recent spurt has meant that the stock at Rs 1,293 reflects positives from news flow and re-rating. Investors should await further correction to take exposure to the stock.
In addition to this trigger, the stock got re-rated as analysts bet higher on the growth prospects of the company’s speciality chemicals business. Given the high entry barriers and demand, this segment is expected to grow faster than its other segments of technical textiles (which includes the nylon tyre cord business) and packaging.
Although the chemicals business contributes to 28 per cent of its revenues, given its higher profitability, it accounts for 55 per cent of the firm’s earnings before interest and taxes (Ebit). The flourine-based speciality chemicals business, which has been growing upwards of 40-45 per cent annually over the past five years, is expected to clock a revenue growth of 35 per cent over the next couple of years. This is expected to come on the back of increasing business from global clients such as Bayer, Syngenta, BASF and Pfizer, among others. Analysts at Edelweiss say the speciality chemicals market in India has the potential to grow at the rate of 16 per cent annually, to reach $42 million by FY18. Global innovators are increasing the share of outsourcing from Indian companies due to process development expertise, competitive cost vis-a-vis China and intellectual property safeguards.
Most analysts have a ‘buy’ on the company, with a target price of Rs 1,225 a share. However, the recent spurt has meant that the stock at Rs 1,293 reflects positives from news flow and re-rating. Investors should await further correction to take exposure to the stock.