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On Thursday, Ambit Capital began coverage on SRF (NS:SRFL) Ltd (SRF:IN) stock, a chemical major, with a Buy rating and a price target of INR 3,025.00. SRF has undergone a significant transformation over the past decade, achieving a 48% revenue share in the chemical sector, primarily driven by its expertise in agrochemicals, which accounts for over 80% of its specialty segment. The company has also expanded its portfolio in refrigerants and achieved backward integration.
The upcoming decade is expected to see SRF focusing on Active Pharmaceutical (TADAWUL:2070) Ingredient (API) starting materials, which are projected to represent 20% of the specialty segment by fiscal year 2027. Additionally, the development of fluoropolymers capabilities is anticipated to open up new market opportunities in electric vehicles (EVs) and electronics.
Ambit Capital highlighted SRF's complementary chemistry, a new business development team, and strategies for import substitution as key factors that will contribute to scaling up its Polytetrafluoroethylene (PTFE) business.
SRF's strong cash flow, with approximately 75% operating cash flow to EBITDA ratio, is seen as a solid foundation for future investments, including a planned capital expenditure of INR 58 billion between fiscal years 2025-27. The company's Return on Invested Capital (RoIC) post-tax improved by 700 basis points from fiscal years 2020-22 to 17%, which supported a re-rating from 20 times to 40 times one-year forward Price to Earnings (P/E). Ambit Capital expects the RoIC to expand further over fiscal years 2025-27.
The financial institution's analysis includes a forecast of a 16% Compound Annual Growth Rate (CAGR) in revenue from fiscal years 2024-37, which is slightly higher than the 15% CAGR currently factored into the valuation. This projection leads to a price target of INR 3,025, implying a 34 times FY27 P/E ratio. However, Ambit Capital also notes key risks, such as a potential extended slowdown in agrochemicals and delays in the ramp-up of new capacities.
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