In 2022, stock prices of chemical and specialty chemical companies have fallen 20-30%. All chemical stocks rallied till December 2021 as the China plus one factor played out and companies improved their balance sheets.
Now, the market is taking note of the froth in valuations.
There are other reasons too for the fall in chemical stocks.
Among the stocks, one such stock which is under pressure these days is SRF.
SRF share price has declined 12% in last 5 trading sessions.
Fluorochemicals, specialty chemicals, packaging films, technical textiles, coated and laminated fabrics, and other products are all part of the company’s business portfolio.
The company seems to have decent financial figures and an appreciable growth rate.
But the company has fallen prey to the turbulent pattern of the market and volatility in global trends.
Let’s try to understand the probable causes behind the fall.
#1 US Rolling Back Tariffs on China
There are rumours that President Joe Biden could announce a rollback of some US tariffs on Chinese consumer goods as soon as this week to fight inflation in the country.
The market is now concerned that any removal or reduction in anti-dumping measures on HFC (High-florocarbons) will have a negative impact on HFC prices, which is reflected in SRF’s chemical margins.
This news has brought shivers for SRF shareholders.
However, the management of the company claims that even if this reduction in tariff occurs, it would only impact one gas – R-25 gas, which accounts for a very small portion of the total exports.
According to media reports, even if the gas price decreases by Rs 100, the impact on the company’s EBITDA would be as low as Rs 400 m which makes 1% of the EBITDA the company earned in fiscal 2022.
Company’s management also said that its volume won’t be impacted even if the anti-dumping duties are lifted, while adding that the financial numbers for the first quarter of fiscal 2023 are going to paint a good picture.
So this could be a temporary setback for SRF, but overall, the health of the company seems good.
#2 Input Cost Pressure
The changes in the price of gas and oil influence the price of everything else.
However, for the power-hungry chemical industry, fossil fuels are not only a source of energy but also a raw material feedstock for production. This means that the chemical manufacturing industry is the most affected sector by fluctuations in gas and crude oil prices.
The worst impact of the latest energy price crisis on chemical companies is uncertainty.
With crude oil prices rising for most of the quarter, SRF’s packaging films and textiles businesses suffers big time. But this could be a temporary blip as crude oil prices are falling and have started to come down.
If chemical manufacturers knew how long the current price volatility would last, plans could be put in place to offset excessive charges.
This energy crisis has affected all the raw materials of chemical and packaging sector.
This has been experienced not only by SRF but also by its peers.
What do SRF’s Financials Say?
In its latest quarterly results, the company reported a revenue of Rs 2,700 crore which stood at Rs 2,100 crore a year ago in the same period.
The net profit of the company increased to Rs 500 crore which was Rs 310 crore a year in the same period.
The company’s board also approved Rs 676 crore capex for the establishment of an aluminium foil manufacturing facility, a new pharma intermediates plant, and a dedicated facility to produce 300 million tonnes (MT) per year of a key agrochemical product.
For the financial year 2022, SRF has declared a dividend amounting to Rs 16.8 per share.
At the current price of Rs 2,018.8, SRF trades at a PE ratio of 31.68 while its PB ratio stands at 7.55.
Let’s have a look at SRF’s performance in the last year.
Equitymaster’s View on the Chemical Sector
Here’s what Aditya Vora, research analyst at Equitymaster, wrote about chemical stocks in one of his editorials:
I believe the best is behind these Stocks
In the chemical sector we see the following.
1. Too much price volatility and the dependence on global and Chinese prices. This gives it the characteristics of a commodity. Hence, it’s cyclical in nature.
2. Margins are at a peak. Tailwinds in the form of chemical prices and operating leverage have played out.
3. Raw material cost has started to increase. This is evident over the past 2 quarters.
4. These are B2B business with very little or no pricing power.
In a nutshell, most of re-rating in the stocks of chemical companies has already happened.
We are in a scenario where bulk commodities are available at 3-4 times above their mean valuations.
Niche chemical companies do deserve some premium, but the way their stock prices have risen, the margin of safety is very limited.
As we can observe, even a company with strong fundamentals is facing headwinds from Mr Market.
The global markets have such a deep impact on the Indian stock market that even with the news of a small disturbance, the share prices are reacting.
SRF is backed up with good technologies and positive cash flows.
Even being fundamentally strong, it has fallen prey to this volatility.
However, it will be a matter of observation when the share price recovers from the fall.
We understand that the stock market and fundamentally strong stocks falling is not fun. The best investors out there know that controlling emotions in these moments is of utmost important.
So be wary of the market trends and what’s happening globally. Indian benchmarks follow global market trends, so it’s better to stay updated on how global markets are performing.
You can also look at SRF 2021-22 annual report analysis.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)