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Save the Ozone Layer, and Get Rich Too 💸

Back in the 1990s, the hole in the Earth’s ozone layer was a pressing global crisis. Any 90s kid (or older) would remember reading or hearing about this.

Research findings indicated the hole had been caused by chlorofluorocarbons (CFCs), which were commonly used in aerosols and refrigeration devices.

Come 2022, the ozone hole still exists. But it now forms every year over Antarctica in the spring and then closes up again over the summer. There is evidence that the hole is starting to disappear, and is expected to return to pre-1980 levels around the middle of the century.

This is a story of something humans created (or destroyed) but also helped reverse. Quick action and global consensus on policy led to keeping the worst at bay.

But, here’s a listed Indian company, very closely related to the ozone layer damage control, which you can make money investing in. Read on to find out which one!

Saving the Ozone Layer

  1. Destruction - In the mid-1980s scientists discovered that the thickness of the ozone layer above Antarctica had reduced by a third compared to previous decades. This came to be known as the ozone hole and sparked public fear to the extent that global policy aligned towards solving this crisis.

  2. Crackdown - The depletion of the ozone layer was linked to the use of CFCs. After research findings, something known as the Montreal Protocol came into existence. This policy phased out the use of CFCs in a staggered manner. After being introduced in 1987, the Montreal Protocol led to a complete halt in the production and consumption of CFCs by the early 2000s globally.

  3. Migration - Per the treaty, the world first phased out CFCs, and moved to use hydrochlorofluorocarbons (HCFCs), and then to using hydrofluorocarbons (HFCs).

To date, the Montreal Protocol is the only treaty signed by every country on the planet, effectively saving the ozone layer, and saving us from increased cases of skin cancer, cataract, and other issues.

But Harming the Climate?

While HCFCs and HFCs are not harmful to the ozone layer, turns out they aren't great for the climate. The global warming damage potential by HCFCs and HFCs is multifold when compared to CO2.

In the early 2000s, auto manufacturers started evaluating options for refrigeration. After several years of evaluation, the industry decided to transition to HFO-1234yf, which is significantly more environmentally preferable than other options.

The Kigali Amendment to the Montreal Protocol agrees to decrease the production and consumption of HFCs by more than 80% over the next 30 years.

Replacement options? HFO!

Here’s the Stock Idea

SRF has been a pioneer in the Indian fluorine industry. It has been a leader in fluorochemicals, since the 1990s, and makes HFCs (HFC-125, HFC-134a, HFC-32, HFC-125, HFC-410A, HFC-407C).

Its success story so far has hinged on the movement from CFCs to HFCs. But the future success story will be based on the movement from HFCs to HFOs.

It recently set up a pilot plant to manufacture HFO-1234yf, which will make SRF one of the few developers in the world to manufacture the gas using indigenous technology.

This will also allow SRF to manufacture, brand and sell the new-age refrigerant in India and across the world.

Why SRF?

SRF is not just a chemical company. It also makes packaging films and technical textiles. Along with this, it is also rapidly expanding into coated fabrics and laminated fabrics, further widening the portfolio.

Chemicals - But the bulk of SRF’s revenue (42%) and much of its profit (63%) comes from chemicals. And the chemicals business has been a rocket ship! So much so that in 1QFY23, its revenue grew by 55%, and EBIT by 134%, compared to last year.

What’s working in the chemical business?

  • Strong demand for its HFC products

  • Efforts to downstream

  • New specialised product launches in agriculture and pharmaceuticals

  • Backward integration

  • New capacities ramping up

Others - SRF also saw strong growth in Packaging Films and Technical Textiles. However, both these businesses have been a drag on overall margins lately. Raw material prices have been extremely volatile, resulting in challenges around maintaining manufacturing costs and inventories.

Outlook - SRF is a multi-year story, not just as a play on the ever-evolving fluorochemicals space, but also because of its (i) participation and value-add in speciality chemicals, (ii) R&D initiatives to stay ahead of the curve, (iii) leadership in other businesses like BOPP, BOPET and technical textiles.

Want a Piece of the Action?

With multiple engines for growth and a bright environmentally-conscious future ahead in fluorine chemicals, SRF is one of our favourites.

SRF is also part of our Socially Responsible Investing portfolio, which is built on strong ESG fundamentals.

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