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Neutral SRF Ltd For Target Rs.8,075

Fluorochemicals to support growth in Chemicals in FY22 SRF’s FY21

Annual Report highlights its performance and outlook across key businesses. Additionally, the company has announced its vision – Aspirations 2025, on the back of which it aims to achieve: (i) Professional Reputation and Value System, (ii) Customer Advocacy, (iii) Innovation and Technology Leadership, and (iv) Operational Excellence. Here are the key highlights:

Focusing on developing complex non-fluorinated intermediates

* The Specialty Chemicals Business (SCB) maintained its growth momentum during the year despite COVID-related disruptions impacted 1QFY21. SCB reported stellar revenue growth of 47% YoY to INR23.9b in FY21 despite achieving revenue growth of 56% in FY20. In FY21, SCB formed 66% of the Chemicals segment revenue and 28% of the consol revenue.

* SRF remains focused on the Agrochemicals and Pharmaceuticals segments – wherein it collaborates with major global innovators on process development, commercialization, and producing complex newage molecules with downstream applications.

* Capacity increase: Three new MPPs were commissioned in FY21; it is also setting up a fourth MPP.

* Chemicals Technology Group (CTG): CTG is SRF’s in-house R&D center with 400+ employees, which is helping the company ride the technology curve for the Chemicals business. CTG has enabled growth in the Fluorinated Molecules business, in which SRF holds over three decades of manufacturing expertise. CTG is now increasingly developing complex non-fluorinated intermediates.

* The R&D spend in FY21 in terms of capital and revenue expenditure stood at more than INR1.1b (v/s INR1.3b last year). The R&D spend saw a 17% CAGR over FY12–21, and as a percentage of sales/EBITDA, it stood at 1.3%/5.2%.

* CTG worked on more than 50 molecules, and 80% of products successfully entered the process development stage. Around 15 molecules were taken up for scale-up studies and commercially produced in multipurpose/dedicated plants.

* CTG filed 36 patents in FY21, taking the total count to 309 patent filings thus far. 23 patents were granted in FY21, taking the total count of patents granted to the company to 93.

Fluorochemicals – multiple levers to drive growth

* Segmental revenue de-grew 4% YoY to INR8.9b in FY21, impacted by slowdown in the Refrigerants market globally – this was weighed by slowdown in the Auto and AC markets, coupled with pressure on prices. While some demand revival was seen only in the latter part of the year, international prices remained subdued throughout the year.

* However, the Industrial Chemicals market performed well, led by growth in the Pharma and Agrochemicals segments. The Industrial Chemicals business was able to maintain market share and launched a new product, Methyl Chloride, in the Chloromethane (CMS) portfolio.

* Outlook: Business is expected to do well on the back of higher demand in domestic A/C and an increase in refrigerator production capacities in light of various government policies and initiatives – such as the ban on pre-charged AC imports, PLI, Atmanirbhar Bharat, and an increase in personal mobility boosting the Auto sector.

* Overall, the overall business performance is expected to improve, led by (a) better capacity utilization and the commissioning of new plants such as CMS in 2HFY22, (b) sales ramp-up in Anhydrous Hydrogen Chloride, and (c) other cost improvement initiatives, including the stabilization of the supply chain.

Packaging Films: Volume growth to partly offset margin pressure

* In FY21, the Packaging Films Business (PFB) witnessed robust growth of 26% YoY (to INR32.9b), with EBIT margins of 27.3% (the highest in the last 10 years). This was largely attributable to higher spreads (between the final product and RMs such as PET chips, PTA, MEG, and PP chips) and operating leverage.

* VAP: SRF launched 14 new products (v/s 5 in FY20), and overall VAP sales grew >20% YoY in FY21.

* SRF commissioned a new BOPET film plant in Thailand, making it the first ever remote commissioning of a film line anywhere in the world. Additionally, it commissioned a new BOPET film line in Hungary and a resin plant in Thailand amid strict travel restrictions – which limited the availability of supplier personnel and field experts on site. With this, SRF now has a combined annual capacity of 270k MT of BOPET and BOPP films, making it one of the largest producers of both types of films. Additionally, in July’21, SRF commissioned its first BOPP film plant in Rayong, Thailand.

* On-going expansion: In India, civil work for its new BOPP line and metallizer at Indore is progressing as per schedule.

* Outlook: In recent times, several new film plant expansions have been announced across the world. As a result, the industry may witness an oversupplied market in the future, resulting in pressure on profitability. However, SRF’s primary focus would be on running its plants optimally, keeping costs in check, and continuing its work on VAPs. Efforts would also be directed towards achieving maximum utilization at the new BOPP facility in Thailand

Financials

* Revenue grew 17% YoY to INR84b in FY21, with EBITDA growth coming in at 46% (to INR21.3b) on margin expansion across segments. Adj PAT growth came in lower at 29% YoY (to INR11.9b), weighed by tax benefit during the base year.

* In FY21, SRF incurred capex of INR12.5b (down 25% YoY) – capex for the Packaging Films segment declined 50% YoY to INR5.5b, whereas it increased by 23% YoY to INR6.2b in the Chemicals segment.

* Net WC cycle days improved by 9 days in FY21 and stood at 45 days on the back of an increase in payables by 34 days. This was offset by an increase in inventory/receivable days by 14/10 days.

* SRF generated CFO of INR17.7b (up 36% YoY), whereas FCF generation stood at INR5.7b during the year as the company incurred capex of INR12.6b. SRF's fiveyear average CFO/EBITDA stood at 82% over FY16–20, which increased to 83% in FY21 (v/s 89% in FY20).

* FY21 RoE/RoCE stood at 20.1%/13.4% (flat YoY).

* Net debt declined by INR10.2b in FY21 and stood at INR27b, aided by INR7.5b capital raised through QIP.

Valuation and view

* SRF’s performance has been robust over the last three years, with a revenue/EBITDA/PAT CAGR of 15%/33%/42%. The stock price has seen a ~40% CAGR over this period.

* The earnings momentum is likely to slow due to (a) margin contraction in the Packaging Films segment (EBIT margin of 27.3% in FY21 v/s 20–21% over FY22– 23E) and (b) slower growth momentum in Specialty Chemicals due to a high base (three-year revenue CAGR of 61% v/s 26% over FY21–23E). Going forward, we expect SRF to post a revenue/EBITDA/PAT CAGR of 26%/22%/26% over FY21–23.

* On a one-year forward EV/EBITDA basis, SRF is currently trading at 20.5x (on FY22E) – this is at a premium of ~70% each to its average trading multiple for the last three/five years. This, in our view, is rich v/s the earnings growth expectation.

* We are encouraged by the long-term structural opportunity in the Chemicals sector and the company’s ability to participate in the same. We maintain our Neutral stance on SRF on higher valuations.

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