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Growth signs after two years of pain

SRF (SRF IN) has run up 25% in the past three months and outperformed the benchmark Nifty Index (down 4%), due to initial signs of demand recovery in Q3FY25 (as evidenced in Chemicals plays that have reported results so far). Per SRF, there is high possibility that Q4 would be better than Q3 and the worst is behind. However, do remain cautious as regards full demand and price recovery in FY26. So, we raise FY26E/27E EPS estimates by 8%/18% as also TP to INR 3,071 (from INR 2,232). We revise SRF to Accumulate from Reduce due to signs of recovery after two years of a drop in earnings, but risk-reward is not very favorable. The stock is trading at 35.4x FY27E P/E (45% PAT CAGR in FY25E27E).

Chemicals segment drives earnings:

SRF reported EBITDA of INR 6.2bn (Elara: INR 4.7bn), up 9%/15% YoY/QoQ, mainly due to growth in Chemicals (specialty chemicals and refrigerants) and Packaging Films. Consequently, PAT was up 7%/35% YoY/QoQ to INR 2.7bn (Elara: INR 1.7bn). In Q3, the Chemicals and Packaging Films segments witnessed a growth in revenue

Chemicals – Refrigerants and Specialty Chemicals witnessed recovery:

Chemicals segment (comprising 43% of revenue and 69% of EBIT) witnessed a revenue growth of 7%/10% YoY/QoQ to INR 15.0bn, though still 29% lower than the segment’s peak revenue in Q4FY23. The segment’s EBIT margin increased to 24.3% from 23.1% YoY and 18.1% QoQ. While the Specialty Chemicals business saw some impact of inventory build-up, overall improvement QoQ was seen, with partial recovery in the Agrochem segment. Refrigerants demand from OEMs in the domestic market boosted the segment’s performance. SRF expects better Q4 performance for the segment with refrigerant gas pricing expected to sustain and recovery in agrochem intermediates.

Packaging Films and Technical Textiles – YoY volume recovery:

SRF’s Technical Textiles segment (comprising 15% of revenue and 11% of EBIT) saw a margin dip to 11.6% (versus 15.0% YoY) in Q3FY25. The segment was hit by weak demand and margins in belting fabrics. EBIT margin for the Packaging Films business (comprising 40% of revenue and 17% of EBIT) expanded by 241bps/70bps YoY/QoQ to 6.5% (Elara: 6.0%). BOPET and BOPP segments saw improved performance with some demand growth.

Revise to Accumulate from Reduce; TP raised to INR 3,071 from INR 2,232:

We raise FY26E/27E EPS by 8%/18% due to better demand and pricing environment after Q3FY25 management commentary. However, we still await commentary from global major chemical players as regards CY25 demand outlook.

We raise TP to INR 3,071 from INR 2,232. We value SRF on DCF, assuming a 5.0% terminal growth rate and a 9.8% WACC (unchanged), average EBITDA margin of 19.8% (from 19.2%) in FY25E-27E and 22.6% in FY27E-30E (from 21.3%)

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