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SRF’s 1QFY24 consolidated EBITDA miss of 16%/9% on JMFe/consensus was on account of tepid ref gas demand/pricing environment, and sustained weakness in the packaging films business. The silver lining in the earnings print was the robust specialty chemicals performance. In the wake of global inventory unwinding in the agrochemicals, management has refrained from giving out the full year guidance for fluorospecialty business till end 2QFY24. We believe SRF should be able to achieve ~18-20% revenue growth in the fluorospecialty business in FY24 (vs. 37% revenue CAGR over FY20-23) given i) most of its agrochemicals intermediates offering is for the patented products where the inventory drawdown impact might be limited; and ii) no announcement on postponing new product launches. In our view, given most of SRF’s upcoming projects are going to be dedicated (currently ~80-85% of fluorospecialty revenue), even if spec-chem growth tapers down to ~15% in FY24, some of the volumes could be deferred to FY25 given there is no underlying demand concern indicated by its customers. Moreover, there will also be large contribution from pharma intermediates and the PTFE plant in FY25 and beyond. Hence, in our view, FY24 should be considered as a base reset year and a good opportunity to BUY the name.

* Weak Chemicals EBIT owing to tepid ref gas demand/pricing: SRF’s 1QFY24 consolidated gross profit came in 8%/3% below JMFe/consensus at INR 16.4bn (down 13%/20% QoQ/YoY) as revenues came in 6%/7% below JMFe/consensus and stood at INR 33.4bn (down 12%/14% QoQ/YoY) and gross margins being lower than expectations at 49.1% (vs. JMFe of 50.0% and 50.0% in 4QFY23). Other expenses (including power and fuel costs) were in-line at INR 7.0bn. As a result EBITDA was ~16%/9% below JMFe/consensus at INR 7.2bn (down 25%/29% QoQ/YoY) and PAT stood at INR 3.6bn (~24%/18% below JMFe/consensus). Chemicals EBIT was 21% below JMFe and came in at INR 4.6bn (vs. JMFe of INR 5.8bn and INR 7.4bn in 4QFY23, down 38%/12% QoQ/YoY) as EBIT margins were lower at 27.7% (vs. JMFe of 32.4% and 35.2% in 4QFY23) and chemicals revenues were also lower at INR 16.6bn (vs. JMFe of INR 17.9bn) (down 21%/4% QoQ/YoY). Weakness in the chemicals business was on account of tepid ref gas demand and pricing environment while the specialty chemicals business performed well.

* Packaging films business continues to be under pressure: Packaging films EBIT was below our expectation and came in at INR 513mn (vs. JMFe of INR 826bn) as packaging films margin were lower at 4.7% (vs. JMFe of 7.0% and 3.6% in 4QFY23) and packaging films revenues were also lower at INR 10.9bn (vs. JMFe of INR 11.8bn and INR 11.5bn in 4QFY23).

* FY24/25/26 estimates cute by ~8%/5%/4%; maintain BUY with Sep’24 TP of INR 3,245: To factor in 1QFY24 performance, inventory unwinding phenomena in agrochemicals, and sustained weakness in packaging films business, we cut our FY24/25/26 EBITDA and EPS estimates by ~8%/5%/4%. We maintain BUY with our SOTP-based Sep’24 TP of INR 3,245 (from Jun’24 TP of INR 3,380 earlier).

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