SRF Ltd. quarterly results

SRF Ltd. – Q4FY24 Result Update

Sector Outlook: Neutral

Better recovery expected in Chemicals business ahead

SRF’s revenue fell by 5.7% from last year but increased by 17.1% from the previous quarter, totaling Rs. 3,570 crores, slightly exceeding expectations. The drop in annual revenue was mainly because the Chemicals division underperformed by 14%, particularly in fluoro-specialty and refrigerant gases. On the other hand, Technical Textiles and Packaging Films businesses grew by 9% and 3% respectively, thanks to strong domestic demand. The Chemicals sector, however, did see a 30% rise in revenue from the last quarter, signalling a potential turnaround despite current challenges like reduced demand for refrigerants and slow growth in markets like agrochemicals. EBITDA, a measure of profits, decreased by 25.3% over the year but rose by 22.9% from the last quarter to Rs. 696 crores. Profits after tax were down 24.9% from last year but jumped 66.4% from the last quarter to Rs. 422 crores, beating expectations. The company is optimistic about the Chemicals division, expecting about 20% growth next year, particularly in the second half, and predicts improved profit margins due to better operating efficiency.

Key Concall Highlights

Chemicals Business Outlook:

The Chemicals division of the company has faced challenges recently due to falling prices for refrigerant gases and a slowdown in the specialty chemicals market. Despite these issues, there’s a positive outlook for the division. It is expected to bounce back strongly with a 20% growth rate over the next year. This anticipated growth will be driven by increased sales volumes of refrigerant gases, improved prices, and a recovery in the specialty chemicals sector during the second half of the fiscal year.

(a) Specialty Chemicals:

The company’s Specialty Chemicals division faced challenges due to reduced stock levels and increased competition from Chinese manufacturers, who have expanded their production capabilities. This competition particularly affected one of the company’s major products. Despite these difficulties, management is confident that they will regain market share and significantly boost profits. They are optimistic about the business’s future and expect a revenue increase of over 20% in the next fiscal year. The company also plans to introduce 5-6 new products in the agricultural chemicals sector in the coming year. While profit margins in this sector faced slight pressure this year, they are projected to improve next year.

(b) Fluorochemicals Business:

The company’s Fluorochemicals division didn’t perform well due to low demand and increased competition from China in international markets. The management anticipates that demand for refrigerants in the US will decrease due to new regulations reducing use. However, they expect this decrease to be balanced by a rise in demand from India, Southeast Asia, and the Middle East.

Packaging Films Business Outlook:

The company had a tough year with profit margins squeezed due to the addition of new production capacities. Its BOPET films business is going through a low phase, expected to last for two years before slowly starting to recover. However, its BOPP films.

Technical Textiles Business Outlook:

The company reported healthy performance during the period under review, driven by an uptick in domestic demand for NTCF and an improved performance in belting fabrics and polyester industrial yarn. The company will continue to focus on sales of high-end value-added products. Overall, the management expects a stable performance from this segment.

Capex Plan:

The company’s capex momentum will likely remain strong, with multiple ongoing projects on track and are anticipated to be operational in the upcoming quarters. The capex guidance for FY25 is Rs. 2,000- 2,100 crores.

Other Key Highlights:

  1. SRF Fluorochemicals’ primary goal is to increase sales volumes in the next two years as the production freeze timeline approaches.
  2. The pharma industry accounts for ~4% of Specialty Chemicals business revenues, while the rest comes from agrochemicals.

Valuation and Outlook

SRF faced challenges in the last quarter with its Chemicals and Packaging Film businesses performing weakly, overshadowing strong results from the Technical Textiles business. The company, impacted by stiff competition from China, anticipates delayed recovery. For FY25, management is optimistic, projecting a 20% growth in the Chemicals business due to increased sales in refrigerant gases and specialty chemicals. They also plan to expand their aluminum plant and enhance the product mix in the Packaging Films business to drive sales. Despite these growth plans, profit margins are expected to remain under pressure, though the Technical Textiles business should continue to grow. Challenges such as inventory reductions and competition from Chinese products have affected the company, but a turnaround is expected from the first half of FY25, supported by significant investments. SRF projects stable long-term revenues and is currently valued at a future earnings multiple. The company’s revised target price is Rs 2,626, representing a potential upside of 15%, reflecting an optimistic outlook for its stock.

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