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Chemical business to spearhead growth trajectory

SRF’s Chemical business was the top performer in FY23 with 41% growth, whereas its Packaging Film and Technical Textile businesses remained under pressure. Going forward as well, the chemical business is expected to drive growth as the company has allocated a higher share of capex (~83% of total guided capex) to the business over the next five years.

* The Chemical business is expected to maintain robust growth (~20% CAGR over FY23-25E) on the back of a resilient capex plan (~10 plants to be commissioned in FY24) and upcoming launches. The sustainability of margins will be the key monitorable.

* SRF has guided for ~INR25b of capex in FY24 and ~INR150b over CY24-28. The majority of the capex (INR22-23b for FY24; INR120-130b for FY24-28) is allocated to the chemical business as the company plans to enter fluoropolymers and other refrigerants.

* The Packaging Film segment is expected to witness moderate growth going ahead as margin pressure is likely to continue for the near term. Increasing share of value-added products and operational efficiency will aid profitability.

* The Technical Textile business is expected to recover on the back of improving NTCF demand and capacity addition in the belting fabrics segment. Margins are likely to stay under pressure due to cheap imports from China.

Ramp-up of upcoming plants to drive Chemical business

*  Chemical business maintained robust growth in FY23, accounting for ~50%/73% of consolidated sales/EBIT in FY23. Revenue grew 41% YoY to ~INR74.1b, aided by higher sales volumes, enhanced realizations in refrigerants and strong demand for its specialty chemical business.

* In the Fluorochemicals business (~36% of chemical segment revenue in FY23), HFC is expected to remain the key product for the next 3-4 years. However, HFO is likely to play a major role thereafter, thanks to its zero ozone depletion potential and low global warming potential (GWP).

* SRF’s upcoming R32 plant (HFC variant with lower GWP) with capacity of ~15,000 MTPA (at capex of ~INR5.5b) is likely to be commissioned in Aug’23. The company expects to ramp up the production in CY23, with a majority of the products likely to be sold in the Middle East, the US and Southeast Asia markets.

* Further, it is likely to commission its new Polytetrafluoroethylene (PTFE) plant at Dahej in FY24 with capacity of ~5,000 MTPA (~INR5.2b capex). The rising demand for electronic devices, automobiles, and industrial equipment is likely to drive growth for PTFE.

* Specialty chemical business has been the key growth driver for the company, with a ~49% revenue CAGR over FY18-23. It accounts for ~56% of chemical segment revenue in FY23, up from ~35% in FY18.

* SRF expects to sustain a high growth rate for the segment (guided for over 20% growth in FY24) on the back of commercialization of seven new specialty chemical plants in FY24, coupled with the enhancement of a new product portfolio and the strengthening of its customer base.

* It continues to focus on the Agrochemical and Pharmaceutical segments, where it will collaborate with major global innovators for process development, commercialization, and production of complex new age molecules.

* Overall, we expect SRF’s Chemical business to see high growth (~20% CAGR over FY23-25E) on the back of a resilient capex plan (~10 plants to be commissioned in FY24), the launch of new products (~7-8 AI in next couple of years) and a ramp-up in adjacent categories such as Pharma.

* In the chemical business, EBITDA margin has increased by ~8.6pp over FY21-23 to 36.1%, aided by strong demand for specialty chemical in the international market and better realizations of fluorochemicals. The sustainability of margin will be a key monitorable in the near to mid-term. We expect EBITDA margins of ~36%/33% in FY24/25 for the segment.

Strong capex pipeline to support robust growth

* SRF expects to continue its growth trajectory in the Chemical business (revenue CAGR of ~36% FY18-23) and has guided for over 20% growth for the business in FY24

* In order to accommodate the growth pace, SRF has begun major expansion plans and has CWIP of ~INR20b as of Apr’23.

* The company expects to sustain the capex intensity going ahead and expects a capex of ~INR22-23b in FY24 for its chemical business (out of ~INR25b of capex on consolidated level), including ~INR7b for its specialty chemical segment, ~INR8b for the Fluorochemicals segment and the rest for land acquisition and other capex plans within the segment (yet to be announced).

* SRF is looking forward to further improving its capital allocation toward the chemical business. Over FY24-28, SRF has guided for a cumulative capex plan of INR150b on the consolidated basis. Out of this, INR120-130b will be directed toward the chemicals business as the company plans to enter areas such as fluoropolymers and other refrigerants.

* Over the last ten years (FY14-23), incremental revenue/EBIT in the Chemicals business stood at INR63.8b/INR19.9b. SRF incurred capex of INR53.6b over FY12-21 (assuming lag effect of 2 years due to asset monetization). Accordingly, the incremental revenue/EBIT-to-capex ratios translate to ~1.19x/0.37x.

* Assuming similar capex-to-revenue/EBIT ratios and considering capex guidance of ~INR120b over the next five years (up to FY28), SRF can generate incremental revenue/EBIT of INR142.8b/INR44.6b (1.9x FY23 revenue and EBIT).

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