SRF Ltd. has seen a significant drop in its share price after UBS downgraded its rating from 'buy' to 'sell'. The downgrade is due to concerns about a challenging demand environment in SRF's chemical segment, which includes agrochemicals and refrigerant gases.
UBS has highlighted factors such as declining crop prices and reduced farm income in the United States, sluggish feed demand in China's hog industry, and a potential downcycle in Brazil's agrochemical imports as contributing to the weakened demand in the agrochemical sector. The brokerage also noted that Indian manufacturers, including SRF, have lost market share to Chinese suppliers in key agrochemical molecules.
In the refrigerant gas segment, Chinese manufacturers are gaining market share, posing a threat to SRF's earnings. The US refrigerant gas market is facing weakened demand and intensified competition from Chinese manufacturers. Chinese firms may continue to offer export subsidies, which is reflected in US import data showing Indian suppliers losing ground to Chinese and Mexican counterparts.
SRF has experienced a decline in return on invested capital over the past two years, which raises concerns about the stock's valuation. UBS has adjusted its analysis, applying lower EV/EBITDA multiples for the chemical segment. Due to these challenges and market share shifts to Chinese manufacturers, UBS has revised SRF's price target down. Investors are advised to remain cautious and consider the implications of these developments on the company's future performance.