SRF Ltd.-Quarterly Result Update

Sector Outlook – Neutral

SRF’s revenue dropped by 4.8% compared to the previous quarter and by 14.8% compared to the same period last year, totalling Rs 3,177 crores. This decline was unexpected and was mainly due to problems in the Chemicals and Packaging Films divisions. In the Chemicals division, the segment’s revenue decreased by 22.1% compared to the previous year, reaching Rs 1,426 crores in Q2FY24. This was because the Fluorochemicals business suffered from low demand for refrigerants, which affected profit margins. Additionally, slow growth in the pharmaceutical and agrochemical industries reduced the demand for certain industrial chemicals. The Specialty Chemicals business also faced weak global demand because some key customers were reducing their inventory.

The company’s EBITDA declined by 10.1% compared to the previous quarter and by 18.6% compared to the same period last year, amounting to Rs. 626 crores in Q2FY24. The company’s Profit after Tax (PAT) was Rs. 301 crores in Q2FY24, which was a 37.5% decrease compared to the same period last year and a 16.3% decrease compared to the previous quarter. This result was lower than the expected Rs. 365 crores. The company’s management has lowered its expectations for the Specialty Chemicals business, citing potential challenges due to destocking and inventory rationalisation. However, they anticipate a recovery in the overall business, which should lead to a better second half of FY24.

Key Concall Highlights

Chemicals Business Outlook: The Chemicals business has been affected by lower sales in the specialty chemicals business due to subdued demand owing to ongoing destocking and inventory rationalisation by customers for certain key products.

Specialty Chemicals: The Specialty Chemicals business delivered muted growth in revenue compared to last year. Management expects an improvement in H2FY24, leading to single-digit revenue growth in the specialty chemicals business for FY24. There were some order reschedules by customers, but no cancellations. The company expects positive traction from these newly launched molecules in the next two quarters but expects a significant contribution to revenues from these only starting in FY25.

Fluorochemicals Business: The Fluorochemicals business sales volume dropped due to the seasonally weak domestic market and prices falling due to Chinese dumping across key geographies. However, the division is expected to perform better in H2FY24 due to up stocking for the Indian season and, later, the seasonal uptick in US demand. SRF has confirmed orders from key US-based customers for CY2024 and CY2025 involving both volumes and price ranges.

Packaging Films Business Outlook: The business continues to face headwinds amid the global scenario and oversupply situation in the industry. Management believes that pressure on margins will continue in the medium term. However, with the ongoing challenge owing to the oversupply situation, the business is actively focused on improving profitability through operational efficiency and expansion of value added products in both BOPET and BOPP.

Technical Textiles Business Outlook: The management expects improved demand for belting fabrics and polyester industrial yarn due to the government’s focus on infrastructure development. Market trends indicate consistent growth in various retail segments, ensuring continued demand for nylon tyre cord fabric. Overall, the management expects a stable performance from this segment.

Capex Plan: The company’s capex momentum is likely to remain strong with multiple ongoing projects on track and anticipated to be operational in the upcoming quarters. The capex guidance for FY24 is Rs 2,900 crores, with 85% of capex expected to be towards the Chemicals business segment.

Valuation and Outlook

As anticipated, SRF has reported disappointing financial results, with all three major segments affected by weak demand and oversupply. In Q2FY24, the Chemicals business faced challenges as the Fluorochemicals segment experienced lower sales volumes and prices in a seasonally slow domestic market. Moreover, demand for certain industrial chemicals remained low due to sluggish growth in the agrochemical and pharmaceutical industries. Meanwhile, the Packaging Films business continued to struggle due to lower prices of key raw materials and oversupply in the industry. Therefore, we expect short-term difficulties for both the Chemicals and Packaging Films segments.

The management had previously forecasted a 20% growth rate for the Chemicals business in FY24, but due to the declining demand, we anticipate a downward revision of this guidance. However, we expect a revival in growth momentum for the company in FY25.

Overall, we anticipate SRF to maintain steady revenues in the long run. Currently, the company is trading at a price-to-earnings (PE) ratio of 37.3x/38.9x based on FY24e/25e earnings per share (EPS) estimates. We value the company at a PE ratio of 41x FY25e EPS and have lowered the target price for SRF to Rs 2,512, indicating a potential upside of 16%.

Key Takeaway:

• SRF anticipates an uptick in HFC pricing, especially in key markets like India, the Middle East, Southeast Asia, and the US.
• Dymel also delivered steady performance and is now serving customers across 27 countries with strong future growth potential. 
• The aluminium foil project is in the trial phase, with commercial production expected soon.