SRF: chemicals offset slackness in textile unit


Shares of SRF Ltd gained 3% last week after Motilal Oswal Securities Ltd raised the company’s earnings estimates citing the addition of new clients in the agrochemicals part of the specialty chemicals business. With the latest gain, the stock is up by one-third in the last one year, compared with the S&P BSE Sensex’s 10% loss.

According to Motilal Oswal, the business from the new clients will fully reflect in SRF’s revenue from 2017-18. That is why it raised the 2017-18 earnings estimates, while leaving the next fiscal’s unchanged. Against the earlier estimate of 25%, the broking firm now expects the SRF’s specialty chemicals revenue to grow 34% in 2017-18.

The strong prospects should cushion SRF from the vagaries of its other two businesses—technical textiles and packaging films. The laminated and PVC-coated fabrics units are running at sub-optimal levels because of low advertisement spends and a business slowdown. A plant in Chennai is yet to fully recoup from the damages caused by floods. As a result, revenue from the textile business dropped 13% in the first nine months of the current fiscal year.

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The packing films division is weighed down by the slump in crude oil prices and low realizations. Revenue increased just 6% in the nine months till December though the division’s profitability was boosted by low input costs. Comparatively, revenue at the chemicals division increased almost 19% in the first nine months of the current fiscal.

Further, the chemicals division is expected to be the key growth driver for SRF. Commercialization of new molecules is expected to drive revenue growth. From 27% a year ago, the contribution of revenue from the chemicals division increased 4.8 percentage points to 32% in the current fiscal (during the first nine months).

As the accompanying chart shows, Motilal Oswal estimates the chemicals division’s share of revenue to rise to 38% next fiscal and further to 41% in 2017-18, making up for the weakness in the textile business revenue. SRF’s total revenue during the period (2016-17 and 2017-18) are estimated to expand in the range of 13-15%. While valuations at 13 times one-year forward earnings are not demanding, it is crucial the chemicals division delivers on the revenue growth.