The stock of chemical company SRF Ltd hit a new 52-week high of ₹2,895 on Friday, reacting to better-than-anticipated December quarter (Q3FY25) results. This performance prompted earnings and ratings upgrades by various brokerages.
Among the key highlights, consolidated Ebitda at ₹6,196 crore was ahead of the consensus estimate, led by chemicals business that comprises fluorochemicals and specialty chemicals. This business has been in doldrums lately, marred by global agrochemical market slowdown due to elevated inventory levels at customer’s end, weak refrigerant gas exports and cheaper agrochemical supply from China creating pricing pressure.
After falling year-on-year over the last six quarters, chemicals Ebit returned to growth in Q3FY25. Ebitda is earnings before interest, tax, depreciation and amortization; Ebit is earnings before interest and tax. These are important metrics of profitability for companies.
“Q4FY25 generally has higher margins on seasonality, which will likely continue (more than 30% Ebit margin). Our EPS estimates are increased by 2-3% each for FY25/FY26 with 11-13% increase in Ebit for chemicals business,” said an ICICI Securities Ltd report dated 31 January.
Further, the management’s upbeat outlook suggests that the worst may be behind. In the Q3 earnings call, SRF said the speciality chemicals segment is seeing demand recovery and pricing improvement, and the fluorochemicals business is showing strong traction in the domestic market, with the ramp-up of export volumes.
SRF management expects Q4 to be better sequentially for its specialty chemicals business led by new launches, restocking activity and some improvement in pricing. SRF has received registrations for some of its future active ingredients, and it expects domestic demand for refrigerants to remain strong.
While peers are still indicating weak agrochemical demand, SRF is seeing early signs of improvement. If the trend persists, its growth trajectory could improve from FY26. Besides the chemicals business, sustaining earnings growth in the packaging film and technical textiles segment is also a key monitorable. The management is cautiously optimistic about the packaging films business, expecting the demand-supply imbalance to ease going ahead.
For FY25, SRF plans to incur a capital expenditure (capex) of around ₹1,500 crore which will be largely toward three new fluoropolymers that will come on-stream by 2025-end. For FY26, capex is pegged at ₹1,500–2,000 crore. The company anticipates more traction in the investment cycle from next year onwards.
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Meanwhile, the muted earnings performance in earlier quarters had been a worry for stock investors. Recall that in the Q2FY25 earnings call, the management had withdrawn FY25 growth guidance which further soured investor sentiment.
“SRF has underperformed the overall indices during the last three years (SRF’s share price CAGR has been 3.6% versus Nifty/Sensex CAGRs of about 10.2%/10.6%),” said the Motilal Oswal Financial Services report dated 30 January. The brokerage had downgraded SRF following its Q4FY21 results, anticipating a slowdown in overall business momentum, but it has now upgraded the rating on the stock to ‘buy’ from ‘neutral’.
The tide seems to be turning in favour of SRF, and in anticipation, the stock has rallied by 27% in the last one month, beating the Nifty Midcap index’s negative returns. Investors will await chemical business growth guidance for FY26 which the management is expected to share, while announcing Q4FY25 results. Meaningful gains in the stock from current level would depend on whether earnings growth sustains.
Also Read: For SRF, there’s no light at the end of tunnel yet