SRF Ltd – Better recovery expected ahead

Sector Outlook – Neutral

The company’s earnings dropped by 12% this year, mostly because its Chemicals and Packaging film businesses didn’t do as well as expected. However, its Technical Textiles business did see some growth thanks to strong demand in India. 

The Chemicals division was hit by less demand for refrigerants and slow growth in the agrochemical and pharmaceutical sectors. The Specialty Chemicals section also struggled with some big customers cutting back on orders. 

Overall, profits took a big hit, falling over 50% from last year, but the company is hopeful for a turnaround next quarter with new investments of Rs. 1,800 crores aiming to boost production and sales.

Concall Highlights

Chemicals Business Challenges: The business saw lower sales in specialty chemicals because customers were using up existing stock. Fluorochemicals also had low sales and profits.

• Specialty Chemicals Outlook: Sales weren’t great but are expected to pick up next quarter. Launched three new products in agriculture and started two big projects. Profits might be low due to new projects still starting up, but should improve next quarter.
• Fluorochemicals Outlook: Sales and profits were down, but there’s good potential for growth. Prices and demand should improve, especially in India, the Middle East, and Southeast Asia.

Packaging Films Business:

• Facing global challenges and too much supply.
• Focusing on improving efficiency and increasing contract sales.
• Introduced a new aluminium foil plant, expanding product range to include BOPET, BOPP, and aluminium foil.
• Project cost rose due to higher material prices and design changes for better products.

Technical Textiles Business:

• Saw good growth from domestic demand.
• Expecting more demand due to government spending on infrastructure.
• Predicting steady performance in this area.

Capex Plan:

• Planning to continue investing, especially in chemicals.
• FY25 budget is between Rs 2000-2200 crores, focusing 80% on chemicals.

Other Key Highlights

• SRF anticipates an uptick in HFC pricing, especially in key markets like India, the Middle East, Southeast Asia, and the US.
• The company’s coated fabrics reported all time high domestic sales and profits driven by strong demand for value added products such as blackout fabrics, high GSM fabrics and storage liners.
• The company has further diversified its raw material supply base to enhance the supply chain resilience in the current environment.

Valuation and Outlook

SRF faced a tough quarter mainly due to low demand for some of its key products like fluoro specialty chemicals and refrigerant gases, impacting its profit margins. The Packaging Films business also saw challenges due to excess supply, affecting its earnings. 

Despite these setbacks, the newly opened aluminium foil plant is expected to boost sales soon. The Technical Textiles business did well, thanks to strong domestic demand. 

Looking ahead, the company is anticipated to recover in the next quarters, especially as the market improves in FY25. SRF’s stock is seen as a stable long-term investment, with a target price suggesting a 15% growth potential.