Sector Outlook: Neutral
Weak operational performance; Better recovery expected ahead
The company reported a revenue increase of 3.8% YoY but a 3.0% decline QoQ to Rs. 3,464 crores, slightly below expectations. This was due to an 11% YoY drop in the Chemicals business, affecting both fluoro-specialty and refrigerant gas segments. However, the Technical Textiles business and the Packaging Films business saw strong revenue growth of 13% and 22% YoY, respectively, driven by strong domestic demand. The Specialty Chemicals business struggled in Q1, with the agrochemicals segment facing low demand due to inventory adjustments by key customers. The Fluorochemicals business performed better with strong HFC volume growth in India, though US prices remained low. EBITDA dropped 13.3% YoY and QoQ to Rs. 603 crores, with a margin of 17.4%. Profit after Tax was Rs. 252 crores, down 29.8% YoY and 40.3% QoQ, but above expectations of Rs. 225 crores. The management expects the Chemicals business to grow by about 20% in FY25, especially in H2FY25.
Key Concall Highlights
Chemicals Business Outlook:
Specialty Chemicals:
- Hit by weak demand in agrochemicals.
- New product launches in pharma intermediates showed positive traction.
- Focus on ramping up projects, cost optimization, and efficiency improvements.
Fluorochemicals Business:
- Strong domestic performance due to higher volumes and stable pricing in key refrigerants.
- Reduced volumes and pricing of R125 in the US.
- Strong demand for Dymel (pharma propellant).
- Challenges in the chloromethanes business due to weak agrochemical demand and subdued pricing.
Packaging Films Business Outlook:
- Facing global oversupply and intense competition from Chinese players.
- Pricing improvements in BOPET films toward the end of June, but still challenged by oversupply.
- Stable demand and higher capacity utilisation in BOPP films.
- Aluminium foil facility in export sampling, aiming for optimal utilisation and production ramp-up in 2HFY25.
Technical Textiles Business Outlook:
- Healthy performance driven by strong domestic demand for NTCF and polyester industrial yarn.
- Focus on higher-margin value-added products.
- Expected stable performance in this segment.
Capex Plan:
- Strong capex momentum with ongoing projects.
- FY25 capex guidance is Rs. 1,500-1,900 crores, mostly for the chemicals segment.
Other Key Highlights:
- Targeting 70-75% capacity utilisation for expanded R-32 capacity in FY25.
- PTFE is gaining traction domestically, with export sampling underway.
- Record domestic sales in coated fabrics; full capacity utilisation in laminated fabrics but with margin pressure due to oversupply.
Valuation and Outlook
SRF had a weak performance in Q1FY25 due to issues in the Chemicals and Packaging Film businesses, despite strong results in Technical Textiles. Management expects a better FY25, with about 20% growth in the Chemicals segment driven by higher refrigerant gas volumes and specialty chemicals growth. The Packaging Films business is focusing on ramping up the aluminium plant, and improved capacity utilisation at the Hungary facility is expected to boost sales in Mainland Europe. The Technical Textiles business is expected to grow in the coming quarters. Management is optimistic about a revival in H2FY25, focusing on better capacity utilisation and an improved product mix. The chemical sector faced challenges like inventory destocking and Chinese dumping, affecting SRF. The company plans to invest Rs. 120-150 billion over five years, mainly in the chemical business. With new plants ramping up, SRF expects significant recovery in H2FY25 and improved margins. SRF is trading at a PE of 35.2x/31.2x on FY25e/26e EPS estimates and is valued at 36x FY26e EPS with a target price of Rs. 2,770, indicating a 15% upside.
