SRF’s Q4FY23 print for chemical business (EBIT up 47% YoY) benefited from strong ref-gas and fluorospecialty business. Despite the risk of pricing in ref-gas and down-cycle in agrochemicals, company has guided for chemical segment revenue growth of 20%+, and EBIT margin improvement in FY24 (vs FY23).

SRF is pursuing continuous product addition, and success in new categories (fluoropolymers and aluminum foils).

It is already seeding in new business including pharma-CDMO and basic chemicals to capture import substitution opportunities. Though ICICI Securities likes SRF’s ability to drive earnings growth and succeed in new categories, near-term risk from potential drop in blended realisation in ref-gas and down-cycle in agrochemicals makes us remain cautious.

Arithmetically, chemical business margin appears to be at risk from change in product mix from ref-gas and rise in cost from commissioning of new plants.

Chemical business guidance at 20%+ in FY24.

Ref-gas: Company to commission 15ktpa capacity in R-32 by end-Q2FY24 which will take total capacity to 29ktpa. It had benefit of strong pricing in the US; SRF believes prices will sustain as demand-supply mismatch may continue. India’s near-term weakness is on milder summer and it is building Middle East geography. SRF is developing HFO without patent infringement. R-134a/p sales were 1.4ktpa vs capacity of R2.5ktpa in FY23 which will grow;

fluoropolymers: SRF expects PTFE plant to commission in Q2FY24, and start with standard grades with focus on ramp up. It expects specialty grade introduction in 12months. It is using non-PFOA route and does not see regulatory risk to fluoropolymers;

fluoro-specialty: SRF is working on 6-7 AIs with innovators which is under process for signing contracts. FY23 revenue was Rs42bn, up 35% YoY with AI contribution at 12-14%. Fluoro-specialty revenue is also expected to grow at 20%+ in FY24, notwithstanding the fall in prices for generic and inventory issues which the company believes is more for generic products. SRF’s 85% revenue came from innovators.

Chemicals business EBIT margin can slightly improve in FY24

In FY23, chemicals business EBIT was 31.2% and it was 35.2% in Q4FY23. SRF believe its chemicals business EBIT margin can slightly improve in FY24 vs FY23, but does not see Q4FY23 as a representative quarter. We see risk to guidance as sub-segment mix may shift from ref-gas to fluoro-specialty / CMS business which we estimate has relatively lower margins. However, lower power prices and falling raw-material prices could partly aid margins. It believes worst in packaging films is behind with exit EBIT margin at 3.6%. SRF sees significant stress for smaller players; the ones that may delay new line commissioning due to unfavourable pricing, will aid recovery. Further, lower energy cost and ramp up of utilisation in Hungary to benefit international packaging films business. SRF is working on expanding its textiles business into non-NTCF and cost optimisation. 

Chemicals business revenue up 33.7% YoY (19.6% QoQ)

SRF’s revenue rose 6.4% YoY to Rs38bn driven by strong performance in chemicals business. Revenue from the segment was up 33.7% YoY to Rs21bn. This was aided by higher ref-gas (particularly HFCs) volumes / prices and continued strong performance in specialty. Packaging film revenue dipped 17.1% YoY (4.1% QoQ) to Rs12bn due to drop in prices for BOPET and BOPP and slightly lower volumes in international market. Textile revenue dipped 13.3% YoY / up 1.1% QoQ to Rs4.3bn. Gross profit increased 0.2% YoY (6.4% QoQ) to Rs18.9bn, but margin dipped 120bps QoQ to 50% on decline in performance of packaging film business. EBITDA was down 1.7% YoY (up 11.8% QoQ) to Rs9.3bn and net profit was down 7.1% YoY at Rs5.6bn which was impacted by 85% rise in finance cost from rise in interest rates.

Chemical business EBIT grew 46.6% YoY to Rs7.4bn, and EBITDA margin improved to 35.2%, up 310bps QoQ. We believe margins benefited from higher contribution of HFCs, lower freight and power cost and higher operating leverage. Packaging films business EBIT dipped 85% YoY to Rs410mn and EBIT margin was meagre 3.6%. Technical textiles EBIT dipped 47% YoY to Rs484mn and EBIT margin was 11.2%.

Conference call highlights:

* SRF intends to enter pharmaceutical CDMO either through organic or inorganic route;

* Under chemicals business segment, SRF is working on other basic chemicals to address import substitution opportunities;

* It is looking for land close to the existing Dahej chemical complex for future expansion;

* Debottlenecking of packaging films plant in South Africa to add 3500tpa capacity;

* Aluminium foil plant to be commissioned in Q2FY24 with capex of Rs5.3bn and better operating metrics. SRF will be among the few packaging films companies globally with all three products – BOPP, BOPET and foil; and

* Capex guidance of Rs25bn for FY24.

Risks. Upside: 1) Higher-than-expected revenue growth in fluoro-specialty business and 2) EBIT margin in chemical business remains stable at >30%. Downside: 1) Sharp drop in HFC prices, particularly in US market.