SRF share price slides over 4% to 4-month low after UBS downgrades rating to ’sell’, cuts target price

SRF shares dropped 4.4% in early morning trade on Thursday, October 17, to a four-month low of ₹2,206 after global brokerage firm UBS downgraded the stock from ‘buy’ to ‘sell’. It also lowered its price target on SRF from ₹2,700 to ₹2,100 apiece.

The brokerage downgraded the rating due to concerns over a challenging demand environment in SRF’s chemical segment, including agrochemical and refrigerant gas, which contributes about 70% to the company's EBITDA.

UBS believes the agrochemical demand environment will remain weak due to declining crop prices, reduced farm income in the US, sluggish feed demand in China’s hog industry, and a potential downcycle in Brazil’s agrochemical imports.

To add to the difficulties, UBS pointed out increased market share for Chinese manufacturers in agrochemical molecules, along with heightened competition from Chinese and Mexican manufacturers in the refrigerant gases segment, both of which are expected to impact SRF's earnings negatively.

The brokerage's analysis of key agrochemical molecules suggests that Indian manufacturers have lost US export share to Chinese suppliers in 2024 after gaining for three years. The market share loss has aggravated a difficult agrochemical market.

Chinese manufacturers gaining market share

UBS highlighted the pressure on SRF’s refrigerant gas segment, especially as Chinese manufacturers gain market share. The brokerage notes that the US refrigerant gas market, a crucial export destination for SRF, is currently grappling with two significant issues: weakened demand stemming from last year’s high stockpiling in anticipation of quota implementations and intensified competition from Chinese manufacturers, who can subsidise their export prices thanks to strong domestic profitability.

Notably, China saw a 26-95% rise in refrigerant gas prices in the first half of 2024, but experts predict stable pricing in the second half, signalling that Chinese firms may sustain export subsidies.

According to UBS, US import data reveals that Indian suppliers like SRF are losing ground to Chinese and Mexican competitors. For instance, India’s exports of HFC134a to the US dropped by 39% year-over-year (YoY) through July 2024, compared to only an 8% decline for Japanese exports, while exports from both China and Mexico grew during the same period.

The data also shows a steeper decline in India’s exports of HFC125/143/134a versus China’s, reinforcing concerns about SRF's diminishing share in key markets.

Declining chemical business ROIC

The muted performance of the chemical business and meaningful investment by management into the segment has led its return on invested capital (ROIC) to decline.

Despite significant investment, the chemical segment's ROIC has diminished over the past two years, while SRF's valuation remains high. UBS warned that this lower ROIC could weigh on the stock's valuation, which has not been fully factored into current prices.

For its sum-of-the-parts (SOTP) analysis, UBS applied lower EV/EBITDA multiples for the chemical segment, reducing them from 22x to 20x and forecasting challenges in agrochemicals and refrigerant gases due to market share shifts to Chinese manufacturers.

This anticipated demand weakness and a potential valuation de-rating prompted UBS to revise SRF’s price target down to ₹2,100, implying a 33x FY26E PE, aligned with its five-year average.

SRF is a diversified, multi-product manufacturing company. It has transformed from its legacy fibre business to high-growth specialty chemicals. Its segments consist of a technical textile division; chemicals and refrigerant gases; and packaging film.

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