SRF Gets Downgraded To 'Sell' By UBS On Prolonged Growth Challenges, Market Headwinds

UBS has a 'sell' rating on SRF Ltd., a downgrade from the previous 'buy', owing to prolonged growth difficulties in the company’s key segments. The brokerage has also slashed the target price to Rs 2,100 per share from Rs 2,700 apiece. This implies a downside of 8.77% from the previous closing price.

Market expectations for a recovery in SRF’s chemical segment, which accounts for around 70% of its Ebitda, are likely to fall short, UBS said.

The agro-chemical sector, in particular, faces continued challenges due to weakening crop prices, driven by declining US farm incomes, soft demand from China's hog industry, and an emerging downcycle in Brazil’s agro chem imports.

Similar issues have emerged in the refrigerant gas segment, with the US market struggling with high inventories and rising competition from Chinese and Mexican producers. UBS predicts these challenges will likely result in earnings cuts of 20-22% for SRF in fiscal 2025 and fiscal 2026.

1. Agro-chemicals: US farm incomes are expected to decline by 10% in 2024, after already dropping 29% from their peak in 2022. This, along with weak feed demand from China's hog industry, is putting downward pressure on crop prices and agro-chemical demand.

2. Refrigerant gases: The US refrigerant gas market, where SRF has a significant presence, faces weak demand from high inventories and increased competition from subsidised Chinese and Mexican products.

Share price of SRF Ltd. closed down by 2.10% at Rs 2,302.00 per share on the NSE on Wednesday, compared to a 0.34% fall in the NSE Nifty 50. The stock has fallen 6.9% year-to-date.

Of the 33 analysts tracking the company, 14 maintain a 'buy' rating, 10 recommend a 'hold' and nine suggest a 'sell', according to Bloomberg data. The 12-month analysts' consensus price target implies a potential upside of 1.9%.