On Friday, Investec has revised its price target for SRF Ltd (SRF:IN), a chemical manufacturing company, to INR1,500.00 from the previous INR1,900.00. Despite this reduction, the firm maintains a Sell rating on the stock. The adjustment follows a review of the company's future earnings potential and current business challenges.
The analyst from Investec provided insights into the rationale behind the decision, noting that the uncertainty surrounding SRF's recovery remains consistent with the previous few quarters. The firm had anticipated downward revisions to both its own below-consensus estimates and the broader market's expectations following the first-quarter review for the fiscal year 2025. After the second-quarter results for fiscal year 2025, Investec proceeded to downgrade its earnings per share (EPS) estimates for SRF for fiscal years 2025 and 2026 by more than 20% each.
Investec also highlighted concerns about SRF's management guidance for a recovery in the second half of the year, stating that the blueprint for this recovery is not clear. A significant contraction in the EBITDA of the company's Chemicals business was observed, which fell to 18% compared to over 32% in fiscal year 2023 and 26% in the second quarter of fiscal year 2024. This decline is seen as a factor contributing to the devaluation of the company's specialized chemicals segment.
The sales growth in the Specialized Chemicals division, which was previously guided to be 20% in the first quarter of fiscal year 2025, was notably weak, with a 4% year-over-year decrease in the first half of fiscal year 2025. No specific growth guidance was provided subsequently. Further adding to the uncertainty, SRF has reduced its capital expenditure plans, cutting the budget to INR 15 billion for fiscal year 2025 from the previously guided range of INR 25-30 billion.
The revised price target is based on a roll-forward to September 2026, valuing SRF Ltd at 40 times the projected EPS for September of fiscal year 2026.
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