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Chemicals business outlook to remain weak for FY25

SRF’s chemicals business (CB) has again been weak in Q2FY25 (revenue lower by 8% QoQ/5% YoY) with lower margins (EBIT margin of 18% vs 24%/21% in Q2FY24/Q1FY25), on slowdown in agrochemical market and pressure due to inventory adjustments as well as volume/pricing pressure in the US refrigerant gas business (domestic market volumes have been strong). Packaging Films business’ (PFB) demand-supply imbalance persists and is likely to continue in the short to mid-term. The management expects gradual recovery from H2FY25; however, there is bleak visibility on 20% growth guidance for CB due to the dynamic macro environment. We have built in flat YoY numbers for chemicals business in FY25 and cut our FY25E/26E/27E EPS by 22%/12%/6% to factor in the same; maintain ADD on SRF with our SoTP-based TP of Rs2,600.

Chemicals business outlook remains muted for FY25

CB revenue de-grew 5% YoY to Rs13.6bn in Q2 (EBIT margin was 18.1% vs 24.4% YoY) on prolonged slowdown in the agrochemical market, coupled with lower offtake of certain key products due to high inventory levels at the customer’s end. Ref gas export volumes/pricing remained muted in Q2, impacting margins due to seasonality and high inventory. On the contrary, the company gained domestic market share in ref gases recording highest-ever volume sales in H1 (as they have to gain more quota during the baseline period). The management has guided for gradual recovery from Q3 on the back of strong order book and contribution from new molecules. SRF announced for capex in 4th gen. ref gases (HFO) of Rs11bn with expected commissioning within 30 months. Overall capex guidance for chemicals businesses in FY25 stands at Rs16-18bn.

Packaging films business to focus on value added products (VAP)

PFB revenue grew 27% YoY to Rs14.2bn in Q2 (+6% QoQ), with a nominal decline in EBIT margins to 5.8% (6.9% YoY/6.5% QoQ). EBIT margins fell due to stiff competition in south-east Asian markets impacting Thailand performance (ocean freights and container unavailability impacted exports). BOPET pricing improved in the domestic market while BOPP remained stable. However, BOPET supply still exceeds demand and imbalance will continue in the short to mid-term. Aluminium foil facility is now stabilized and expected to contribute in H2. SRF announced a capex of Rs4.45bn to set up a hybrid BOPP-BOPE film line with a capacity of 60KT. (timeline: 25 months).v

Technical textile business to explore newer geographies and focus on VAPs
TTB revenue improved 6% YoY to Rs5.4bn (+2% QoQ), on healthy volume in the nylon tire cord fabric (NTCF) segment. Healthy demand was witnessed in polyester industrial yarn (PIY) segment, whereas lower demand/margins were reported in Belting Fabric (BF) which had some impact on the overall performance. EBIT margin improved to 15.2% vs 14.8% YoY/12.9% QoQ, on higher operating leverage and focus on high-end VAPs in BF (8 new VAPs in H1) with entry in newer geographies.

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