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Buy SRF, target price Rs 3,361: ICICI Securities

The brokerage cut EPS estimate by 22 per cent / 8 per cent for FY21 / FY22.

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Last Updated: Mar 31, 2020, 10.32 AM IST
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ICICI Securities has upgraded SRF rating from “hold” to “buy” but cut the SoTP-based target price to Rs 3,361 (from Rs 3,539 earlier).

Since India has gone under 21-days lockdown to fight COVID-19, chemical companies have shut their facilities impacting FY21 estimates, and also a small blip in Q4FY20. Further downside is possible, if demand pick-up elongates, and also due to inventory losses on dip in crude derivative products’ prices. This is partly offset by the rupee depreciation.

The company’s share price moved down by -0.13 per cent from its previous close of Rs 2797.50. The last traded price is Rs 2794. Incorporated in 1970, SRF has a market cap of Rs 16070.11 crore.

Investment Rationale

The brokerage sees demand risk for SRF from 1) RAC ref-gas getting impacted as lockdown during a seasonally strong quarter, and slowed in auto to hurt R-134a demand; 2) nylon tyre cord fiber demand also is derived from auto sector; and 3) packaging films demand is directly linked to general economic activities. Agro-chemical demand is more resilient and should help in otherwise challenging times. The brokerage cut EPS estimate by 22 per cent / 8 per cent for FY21 / FY22, and accordingly cut SoTP-based target price to Rs 3,361 (from Rs 3,539) while upgrading the rating to buy (from hold).

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1807.45 crore, up 6.19 per cent from last quarter sales of Rs 1702.17 crore and down -5.23 per cent from last year same quarter sales of Rs 1907.21 crore. The company reported net profit after tax of Rs 342.99 crore in the latest quarter.
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