SRF Ltd is a large cap chemical company engaged in manufacturing industrial and specialty intermediates. The share price has increased by 141.84 percent in the last year, from Rs 1080.45 on March 30, 2021, to Rs 2,613 on March 29, 2022, 3:30 p.m. IST, representing a 141.84 per cent return. This implies that the stock has doubled investors' money in the last 12 months and even the brokerage firm ICICI Securities sees more upside. The stock has been given a buy call rating for a target price of Rs 3065 in a time frame of 12 months by the brokerage.
Key investment rationale for SRF Ltd according to ICICI Securities
- Focused capex towards speciality chemicals keeping in mind higher consumption of fluoro-compounds across agrochemical and pharma besides general themes of vertical integration and higher operating leverage.
- Maiden foray into polytetrafluoroethylene (PTFE) through backward integration of R22 to diversify business risk, to a certain extent. Prudent and measured strategy to increase presence across other fluoropolymers is likely to enhance revenue visibility over the medium to long run.
- In packaging, the company has earmarked a capex of Rs 425 crore towards aluminium foils to tap the import substitution theme (domestic import aluminium foil Rs ~4500 crore) with an expected asset turn of 1.75-2x. The company is targeting import market share of mid-teens initially. Going ahead, we expect strong incremental traction from existing customers.
- Control over working capital along with better operational performance to improve FCF generation. Prudent capital allocation towards high RoCE generating businesses to improve return ratios further.
Buy for a target price of Rs 3065
The brokerage has noted that "SRF's share price has grown at 76% CAGR over the past three years. With sustained visibility capex (Rs 6000 crore in FY16-21 and another Rs ~6000 crore earmarked in FY21-24E) we believe the company is well poised to expand into newer and more complex areas (such fluoro-chemicals) by leveraging on its strong pedigree."
ICICI Securities has also highlighted that "We initiate coverage under Stock Tales format with a BUY rating and target price of Rs 3065. We value SRF on SOTP to arrive at a target price of Rs 3065/share."
Adverse agriculture season may impact speciality chemical growth and lower spread in packaging film to impact operational growth are the key risks of the stock, says ICICI Securities.
The stock has been picked from the brokerage report of ICICI Securities. 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.