Why Chemicals Maker SRF’s Shares Fell To A Seven-Month Low

Shares of SRF Ltd. fell to their seven-month low amid concerns over speciality chemicals maker's slowing revenue growth and rising debt.

The stock has fallen more than 30 percent from its last peak in May. That came after the Arun Ram-promoted company's earnings for the quarter ended March showed that its high-margin chemicals business is slowing down.

The correction came at a time small- and mid-cap counters have seen a selloff, aggravated by a higher margin requirement in some of the scrips under additional surveillance. BSE's small and mid-cap indices have fallen 14.5 percent and 11.5 percent, respectively, so far this year compared to a 4 percent gain in the benchmark S&P BSE Sensex.

Lower Margins

For SRF, revenue rose 13.8 percent year-on-year to Rs 1,612 crore in January-March, driven by the strong performance in its packaging and films business. As a result, share of high-margin chemicals and polymers business fell from 35.7 percent a year ago to 34.8 percent. Its overall margins fell to a five-year low of 17.69 percent for the full year through March.

Rising Debt

Higher interest costs ate into the company's profit that fell 4 percent year-on-year in the fourth quarter. That stems from the company's Rs 800 core capital expenditure in the speciality chemicals business. As a result, interest costs nearly doubled over the year-ago period to Rs 42.5 crore in the March quarter. Investments to boost capacity come at a time its agrochemicals industry business is slowing down.

Mixed Commentary

The management projected a 40-50 percent growth in the speciality chemicals business in the next financial year ending March 2019. But expects agrochemicals demand to recover at a slower-than-anticipated pace, with a rebound seen only in the second half of 2018-19.

‘Long-Term Story Intact'

Twelve out of 17 analysts tracked by Bloomberg have a ‘Buy' rating on SRF. The consensus target price of Rs 2,154 implies an upside of nearly 30 percent.

The long-term prospects for the company are intact, brokerage Emkay Global said. The management's outlook for growth in the speciality chemicals business and planned capex across the key verticals should position SRF to grow well, the brokerage said in its report.