SRF Ltd. Quarterly Results Update

SRF Ltd. reported a revenue decline of 11.6% QoQ / down 14.3% YoY to Rs. 3,278 crores and was below market expectations, due to weakness in Chemical and Packaging Films businesses. The Chemicals business reported a decline of 3.6% YoY in segment revenue to Rs. 1,661 crores during Q1FY24, as the Fluorochemicals business was impacted due to mild summers in India, resulting in sluggish demand for refrigerant gases. 

The Specialty Chemicals business performed well despite weak global demand. EBITDA declined 25.3% QoQ / down 30.0% QoQ to Rs. 696 crores, while EBITDA margin stood at 20.9% (down 469 bps YoY / down 381 bps QoQ) in Q1FY24, led by a contraction in gross margins by 324 bps YoY to 49.1%. Profit after Tax stood at Rs. 359 crores (down 40.9% YoY / down 36.1% QoQ) in Q1FY24, below market expectations of Rs. 365 crores. PAT margin came at 10.8% versus 14.9% in the previous quarter. Management has toned down its outlook for the Specialty Chemicals business, guiding to some impact on the business in the next couple of quarters amid a lot of inventory slowdown going on globally.

Key Concall Highlights

Chemicals Business Outlook: The Chemicals business has been affected by lower sales in Fluorochemicals business due to a very mild summer and general weakness in the industrial chemicals segment. While the demand momentum for fluorochemicals is likely to improve in coming quarters, the company continues to develop and launch new products within specialty chemicals.

(a) Specialty Chemicals: The Specialty Chemicals business delivered healthy growth in margins compared to last year. There were no price pressures witnessed with raw material prices coming down but some order re-schedules happened by customers. The company continues to expand its new product portfolio and launched two new products, each in the agrochem and pharma space in Q1FY24.

(b) Fluorochemicals business: The Fluorochemicals business sales volumes dropped due to weak domestic summer prices owing to Chinese dumping across key geographies. Price drops in R-32 have been visible in India due to Chinese imports. Further, demand for chloromethanes is also sluggish globally due to weakness in the pharma and agrochemical industries. 

Packaging Films Business Outlook: The business continues to face headwinds amid the global economic slowdown and oversupply. Management believes the pressure on margins to continue in the medium term. We expect significant margin pressure on falling commodity prices leading to inventory corrections. 

Technical Textiles Business Outlook: The management indicated that Nylon Tyre Cord Fabric business witnessed pressure on margins and volumes amid demand weakness, while the decline in prices of caprolactam impacted revenues. Overall, the management expects a stable performance from this segment. 

Capex Plan: The company’s Capex momentum remains strong. With the progress of multiple ongoing projects on track, the company anticipates it to be operational in the upcoming quarters.

Valuation & Outlook:

SRF reported a weak set of numbers as expected, with all three major segments impacted by demand weakness and oversupply. The Chemicals business reported weak segment revenue during Q1FY24, as the Fluorochemicals business was impacted due to mild summers in India, resulting in sluggish demand for refrigerant gases. However, Packaging Films business continued to face strong headwinds due to significant supply addition in the BOPET and BOPP film segments and the global economic slowdown. 

We, thus, expect disappointment in the near term from the Chemical and Packaging Films business. Further, we expect management growth guidance of 20% for the Chemicals business in FY24 to be revised lower due to a decline in the demand environment. However, FY25 should see a renewal in growth momentum for the company. We, thus, expect SRF to generate stable revenues over the long term and is trading at a PE of 24.7x/19.9x on FY24e/25e EPS estimates. We value the company at 23x FY25e EPS and have downward revised the target price of SRF to Rs 2,484 (implying an upside of 16%).