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High ref gas prices to sustain, bolster chemicals margin

Investors have always been worried over how long high refrigerant gas prices will sustain. In that context, if the current price trend continues till end-FY23, our calculations indicate refrigerant gas will contribute over 60% to SRF’s chemicals EBIT in FY23E (compared to ~47- 48% during FY21-22). In that case, our FY23E chemicals EBIT assumption could also be revised upwards, by ~10-15%. Since refrigerant gas production is energy intensive, we believe prices will remain high in the near term. And, we had highlighted in our previous report (click here) how, in the long run, demand-supply mismatch will keep refrigerant gas prices high. Even if refrigerant gas price falls by 20-30% in FY24E, SRF’s chemicals EBIT could show ~8-10% growth in FY24E (on a revised FY23E base) assuming a) strong growth from specialty chemicals, b) additional HFC volumes coming in from Sep’23, and c) ramp-up of PTFE. We continue to be positive on the long-term opportunities for SRF and maintain BUY with an unchanged Sep’23 TP of INR 3,000/share (SOTP based).

Refrigerant gas production is energy intensive; should keep ref gas prices elevated: To manufacture 1 tonne of refrigerant gas, 926kWh of power and 2.57MT of steam are required (refer Exhibit 1). A large amount of caustic soda, chlorine, and chloromethane are also needed. To produce 1 tonne of chloromethane, 359kWh of power and 1.35MT of steam are required. With the current power crisis in Europe and increase in electricity prices for energy intensive industries in China (click here), we believe refrigerant gas prices will remain elevated in the near term.

Refrigerant gas gross profit set to soar…: Basis our calculations, SRF’s per kg gross profit on a majority of the refrigerant gases (R-134a, R-32) jumped by ~40-60% in FY22 (compared to FY21) despite the steep increase in raw material costs. If the current price trend continues, per kg gross profit for R-134a/R-32/R-125 could jump by ~35%/6%/250% respectively in FY23E (refer Exhibit 2 and 3). This coupled with additional volumes could result in a more than 80% YoY jump in refrigerant gas gross profit in FY23E. Despite factoring in higher power and fuel costs, refrigerant gas EBITDA/EBIT margin could reach ~49%/43% in FY23E (vs. a likely 43%/37% in FY22, assuming 6% depreciation as % of sales). (Refer Exhibit 4)

which, in turn, will lift overall chemicals EBIT: Plugging the above into the chemicals EBIT, SRF’s specialty chemicals EBIT margin works out to 16%/24% for FY21/FY22. Hence, assuming SRF’s specialty chemicals margin is 20% in FY23E, its overall chemicals EBIT could surge by ~40% YoY in FY23E (compared to our current assumption of 26%). Assuming that SRF achieves this in FY23E and refrigerant gas prices correct by ~20-30% in FY24E, it could still clock 8-10% chemicals EBIT growth in FY24E factoring in i) 20% EBIT margin and higher contribution from newer molecules in specialty chemicals, ii) ~25% refrigerants volume growth from upcoming capacities, and iii) ramp-up of PTFE capacities. Beyond FY24, we believe the recent chemicals capex announcement of INR 25bn should more than offset any subsequent decline in HFC prices, although we believe the probability of a fall in HFC price is very low (refer Exhibit 5). Barring this concern, in our view, SRF’s fluoro specialty chemicals outlook remains bright (click here). We maintain BUY.

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