2 Chemical Stocks Where Morgan Stanley Maintains an ‘Underweight’ Rating, Citing Potential Risks

SYNOPSIS: Morgan Stanley maintains an ‘Underweight’ rating on two chemical stocks, citing rising R-32 capacity, potential 25 percent price correction, and earnings sensitivity to refrigerant margin volatility despite improving demand outlook.

FY26 is expected to be relatively stronger for both the global and Indian economies compared to FY25. In India, the air conditioning (AC) industry is projected to grow steadily, which in turn should support higher demand for refrigerants. While the US market is anticipated to remain soft, improving economic conditions in the Middle East could provide incremental demand support. Additionally, expectations of more stable pricing in the refrigerant gases (RG) segment may help improve margins over the coming year.

However, global brokerage firm Morgan Stanley takes a more cautious stance on the sector. Despite broader demand optimism, the brokerage has reiterated its ‘underweight’ rating on two chemical players.

Brokerage Outlook

Morgan Stanley has maintained its ‘underweight’ recommendation on Navin Fluorine International Limited and SRF Limited, citing concerns around refrigerant pricing dynamics.

According to the brokerage, India’s R-32 production footprint is expected to more than double this year. This significant capacity expansion could create supply pressure and weigh on pricing. Morgan Stanley estimates that R-32 prices may decline by nearly 25 percent from last year’s peak levels, although prices are likely to stay above marginal cash cost levels.

Given that both Navin Fluorine and SRF derive nearly one-third of their earnings from refrigerant gases, they remain particularly sensitive to price fluctuations. The brokerage estimates that a $1 per kg reduction in refrigerant margins could impact earnings per share (EPS) by approximately 8 to 13 percent. While lower tariffs may offer some partial relief, Morgan Stanley believes earnings visibility remains vulnerable, justifying its cautious outlook.

Company Overview & Stock Movement:

With a market cap of Rs. 76,548 crores, shares of SRF Limited tumbled nearly 4 percent on BSE to hit a fresh 52-week low at Rs. 2,554 on Tuesday. SRF Limited is primarily engaged in the business of manufacturing, purchasing, and selling technical textiles, chemicals, packaging films and other polymers.

Its chemicals segment comprises Specialty Chemicals and Fluorochemicals. Under Specialty Chemicals, SRF manufactures intermediates for agrochemicals, pharmaceuticals, and specialty applications, along with offering contract development and manufacturing services. The Fluorochemicals portfolio includes refrigerants, industrial chemicals, pharmaceutical inputs, propellants, and fluoropolymers.

Meanwhile, shares of Navin Fluorine International Limited moved down by nearly 6 percent on BSE to hit an intraday low at Rs. 6,284.85, with a market cap of Rs. 32,478.5 crores.

Navin Fluorine International Limited has one of the largest integrated fluorochemicals complexes in India. It primarily focuses on fluorine chemistry – producing refrigeration gases, inorganic fluorides, specialty organofluorines and offers contract research and manufacturing services.

Financial Performance

For Q3 FY26, SRF reported a consolidated revenue from operations of Rs. 3,713 crores, reflecting a marginal growth of around 2 percent QoQ compared to Rs. 3,640 crores in Q2 FY26, as well as a year-on-year increase of over 6 percent from Rs. 3,491 crores recorded in Q3 FY25.

Net profit stood at Rs. 433 crore, indicating an increase of about 12 percent QoQ from Rs. 388 crores in Q2 FY26, while on a year-on-year basis, the profit jumped by nearly 60 percent from Rs. 271 crores reported in Q3 FY25.

Meanwhile, Navin Fluorine posted a consolidated revenue from operations of Rs. 892 crores in Q3 FY26, reflecting about 18 percent QoQ growth compared to Rs. 758 crores in Q2 FY26, and a year-on-year increase of over 47 percent from Rs. 606 crores recorded in Q3 FY25.

Net profit stood at Rs. 185 crore, indicating an increase of about 25 percent QoQ from Rs. 148 crores in Q2 FY26, while on a year-on-year basis, the profit jumped sharply by nearly 120 percent from Rs. 84 crores reported in Q3 FY25.

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