PL Stock Report: SRF (SRF IN) - Q2FY24 Result Update – Growth expected FY25E onwards - HOLD

SRF (SRF IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs2,186 | TP: Rs2,156

Q2FY24 Result Update – Growth expected FY25E onwards

Quick Pointers:

♦ EBITDA at Rs6.3 bn (missed estimates by 11%), while bottom-line impacted by higher depreciation and tax expense.

♦ PTFE project commissioned and capitalized from Q2FY24; substantial revenues to come from FY25.

SRF reported weak performance with Revenue/EBITDA/PAT decline of 15%/19%/37% YoY & 5%/10%/16% QoQ amid drop in core business segments such as chemicals & packaging films. The company may witness near term headwinds across businesses due to subdued demand across agrochemicals and supply glut in packaging films business. However, management guided specialty chemicals to give better returns with commercialisation of PTFE, R32 and newer products. Furthermore, the board approved projects for setting up manufacturing facility (BOPP Film) and new dedicated facility to produce an agrochemical intermediate at projected cost of Rs 2.75bn & Rs 2.35bn in Indore & Dahej respectively. We expect Revenue/EBITDA/PAT CAGR of 6%/6%/2% over FY23-FY26E. Maintain ‘Hold’ rating with SOTP based TP revised to Rs2156 (Rs2143 earlier; implied consol FY25E EV/EBITDA of 11x and PE of 25x).

♦ Consolidated revenue at Rs31.7bn (-15% YoY/ -5% QoQ; PLe ~Rs34.6bn), declined majorly due to drop in chemicals segment (-22%/-14% YoY/QoQ). Technical textiles witnessed 9% growth YoY & QoQ. For H1FY24, topline dropped 15% on account of drop in major business segments such as packaging films and chemicals.

♦ Specialty chemicals business witnessed weak global demand owing to inventory rationalization, while fluorochemical business was impacted due to low demand for refrigerants. Packaging films business continued to face headwinds led by supply addition in both BOPET & BOPP.

♦ EBITDA margin declined to 19.7% (vs 20.6% in Q2FY23; PLe 20.5%), despite gross margins improvement. EBITDA stood at Rs6.26bn (-19% YoY/ -10% QoQ).

♦ PAT at Rs3bn (-37% YoY/ -16% QoQ; PLe Rs3.5 bn) was impacted by higher depreciation and interest expense (+16% YoY & +78% YoY respectively). PAT margins stood at 9.5% vs 10.8%/12.9% in Q1FY24/Q2FY23 respectively.

♦ Concall takeaways: (1) In chemicals business, Specialty chemicals business margins were down to 24% for Q2FY24, due to operating leverage and lower pricing (2) For FY24E, Specialty chemicals business to see single digit growth (double digit growth expected earlier) primarily led by volume pressure in agrochemicals portfolio (3) Capex of Rs 14bn done in H1FY24 while for FY24E overall Rs 30bn capex remains intact (4) R32 project addition to commission and capitalize by Dec-23. (5) By FY25E, management expects HFC portfolio to operate at 80-85% utilizations (6) Aluminum foil project to be commercialized by early Dec-23 (7) BOPP Capacitor grade project to be commercialized within 30 months, nominal capacity to be 4500 MTPA with IRR of 16-18% & payback period of 5 years (8) Management expects to get into specialty fluoropolymers such as FKM & FEP at earliest (9) PTFE: sales volumes to be ~100-150 tons per month for Q4FY24E (10) Technical textiles will see some uptick due to spike in caprolactum prices. (11) For FY24E, fluorochemicals segment too is expected to witness subdued performance. (12) Long term basis, specialty chemicals should give better returns than fluorochemicals business, according to management (13) 95% of specialty chemicals business remains contracted as of Q2FY24. (Click on the Link for Detailed Report)