In its latest quarterly results, SRF reported revenue of Rs 2,700 crore.
In 2022, the stock price of chemicals and specialized chemical companies has fallen by 20-30%. All chemical stocks remained bullish till December 2021 as the China plus one factor eroded and companies improved their balance sheets.
Now the market is focusing on the fall in valuations.
There are other reasons for the decline in chemical stocks.
Among stocks, one such stock that is under pressure these days is SRF.
The share price of SRF is down 12% in the last 5 trading sessions.
Fluorochemicals, specialty chemicals, packaging films, technical textiles, coated and laminated fabrics and other products are part of the company’s business portfolio.
The company seems to have good financial figures and an appreciable growth rate.
But the company has fallen prey to turbulent market patterns and volatility in global trends.
Let us try to understand the possible reasons behind the decline.
#1 US Rolling Back Tariffs on China
There are rumors that President Joe Biden may announce the withdrawal of some US tariffs on Chinese consumer goods as soon as this week to fight inflation in the country.
The market is now concerned that the removal or reduction of anti-dumping measures on HFCs (high fluorocarbons) will have a negative impact on HFC prices, which is reflected in SRF’s chemical margins.
This news has brought shudder to SRF shareholders.
However, the company’s management claims that if the tariffs come down, it will affect only one gas – R-25 gas, which is a very small part of the total exports.
According to media reports, even if there is a reduction of Rs 100 in the price of gas, then it affects the Company’s EBITDA 400 million, which makes up 1% of the EBITDA earned by the company in FY22.
The company’s management also said that its volumes will not be affected even if the anti-dumping duty is removed, while the financial figures for the first quarter of FY 2023 paint a good picture.
So this may be a temporary setback for SRF, but overall, the company’s health seems to be good.
#2 Input Cost Pressure
Changes in the price of gas and oil affect the price of everything.
However, for the power-hungry chemical industry, fossil fuels are not only a source of energy, but also a feedstock of raw materials for production. This means that the chemical manufacturing industry is the most affected sector by fluctuating gas and crude oil prices.
One of the worst effects of the latest energy price crisis on chemical companies is uncertainty.
With crude oil prices rising for most of the quarter, SRF’s packaging films and textiles business suffered major losses. But this may be a temporary blip because Crude oil prices are falling and started coming down.
If chemical manufacturers knew how long the current price volatility would last, plans could be put in place to compensate for the exorbitant fees.
This energy crisis has affected all raw materials in the chemical and packaging sector.
This has been experienced not only by the SRF but also by its peers.
What is the financial position of SRF?
In its latest quarterly results, the company reported revenue of Rs 2,700 crore, up from Rs 2,100 crore in the same period a year ago.
The company’s net profit increased to Rs 500 crore from Rs 310 crore annually in the same period.
The company’s board also approved capital expenditure of Rs 676 crore for setting up an aluminum foil manufacturing facility, a new pharma intermediate plant, and a dedicated facility to produce 300 million tonnes (MT) per year of a key agrochemical product. Approved.
For the financial year 2022, SRF has declared a dividend of Rs 16.8 per share.
At the current price of Rs 2,018.8, SRF trades at a PE ratio of 31.68 while its PB ratio is 7.55.
Let’s take a look at the last year’s performance of SRF.
Equitymaster’s perspective on the chemical sector
In one of his editorials, Aditya Vora, Research Analyst, Equitymaster, wrote about the chemical stock:
I Believe The Best Behind These Stocks
In the chemical field we see the following.
1. High price volatility and dependence on global and Chinese prices. This gives it the characteristics of an object. Hence, it is cyclic in nature.
2. Margins are at the peak. Tailwinds have run out in the form of chemical prices and operating leverage.
3. The cost of raw materials has started rising. This is evident in the last 2 quarters.
4. These are B2B businesses with little or no pricing power.
In short, most of the re-ratings have already taken place in the shares of chemical companies.
We are in a scenario where bulk goods are available at 3-4 times their average valuation.
Niche chemical companies deserve some premium, but given the way their stock prices have risen, the margin of safety is very limited.
investment takeaway
As we can see, even a company with strong fundamentals is facing the odds from Mr Markets.
The global markets have such a profound effect on the Indian stock market that even the news of a minor disturbance is causing a reaction on the stock prices.
SRF is backed with good technologies and positive cash flow.
While fundamentally strong, it has fallen victim to this volatility.
However, it will be a matter of observation when the stock price recovers from the fall.
We understand that the stock market and fundamentally strong stock Falling isn’t fun. The best investors know that controlling emotions is of the utmost importance in these moments.
So be careful with the market trends and what is happening globally. Indian benchmarks follow global market trends, so it is better to stay updated about the performance of global markets.
you can also see SRF 2021-22 Annual Report Analysis,
Happy investment.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)