Buy This Diversified Sector Stock For Target Price Rs 2,960: Sharekhan

Sharekhan has given buy call to this diversified sector stock SRF Ltd for a target price of Rs 2,960 apiece with a potential gain of 16%. SRF's management has guided for five-year capex plan of Rs. 15,000 crore (~83% or Rs. 12,500 crore to be spent on chemical) and indicated import substitution in fluoropolymers and industrial chemical to drive growth.

SRF Ltd Stock Outlook

The current market price of the stock is Rs 2603 apiece with a decline of 2.35% intraday. According to Sharekhan, if you invest in the stock now, it has the potential to surge to Rs 2960 with a potential gain of 16%. The 52-week high is RS 2773 apiece and 52-week low is Rs 1975 apiece.

SRF Ltd Market Capitalization And Return In 5 Years

The market capitalization of the company is Rs 77,159.38 crore. The stock has given multibagger return. In the last 5 years, it has given a return of
756%. It has given a return of 369% in last 3 years, 27% in 1 year, and 9% in 3 months.

Massive chemical Capex Plan To Drive Growth In Specialty Chemical

Management has guided for a massive capex plan of Rs. 15,000 crore over the next five years with majority of capex (Rs. 12,500 crore) aligned towards the chemical business (for specialty chemical and flurochemicals). SRF activated two AI technologies (targets to develop 8-9 AIs), which are under implementation stage and is also working on electronic and battery chemicals. Management expects capex to provide sustainable growth of 20%+ annually and healthy RoE of 20%+ for specialty chemical.

Fluoropolymers - Import Substation Opportunity

The company expects huge growth opportunities in fluoropolymers as global customers are looking for alternative suppliers and there is a import substitution opportunity in India. Polytetrafluoroethylene (PTFE) plant, although intentionally delayed by one year, is nearing completion by Q3FY2023 and will focus on import substitution, as India is importing PTFE.

Packaging Film

The company is seeing packaging film business from a global perspective and has recently added capacity in BOPP (commissioned Rs. 446 crore OPP Film Line and Metallizer at Indore in August 2022). BOPP's global size is at 10-12 million tonne (3-4x of BOPET) and, thus, its spreads are less volatile. However, addition of new capacities would put pressure on BOPET margin.

Valuation

According to Sharekhan, "Maintain Buy on SRF with a revised PT of Rs. 2,960: High growth in the chemical business supported by high capex intensity, sustained strong margin for the technical textiles business, and focus on value-added products (VAP) in the packaging film business would drive strong revenue/EBITDA/PAT CAGR of 16%/16%/19% over FY2022-FY2024E and healthy RoE/RoCE of 22%/23%. Investment in the right areas of the specialty chemical business would improve earnings quality and safeguard from cyclical packaging film margins. Superior earnings growth outlook, strong FCF generation, and robust balance sheet keep us constructive on SRF and justify its premium valuations. Hence, we maintain our Buy rating on SRF with a revised price target (PT) of Rs. 2,960 (valued at 33x its FY2024E EPS; the increase in PT reflects higher PE multiple, given focus on the high-growth specialty chemical business). At the CMP, the stock is trading at 34.1x its FY2023E EPS and 28.6x its FY2024E EPS."

About SRF Ltd

Since SRF's incorporation in 1970 and the subsequent establishment of its first plant in Manali, near Chennai, India in 1974, it has grown from being a single unit tyre cord manufacturer into a leading, professionally-managed, diversified chemicals conglomerate, according to its official website.

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.