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Positive traction likely in the chemicals business

SRF’s 2QFY24 consolidated EBITDA miss of 5%/2% on JMFe/consensus was on account of tepid ref gas demand/pricing environment, and inventory destocking impact on the specialty chemicals business. Despite global inventory unwinding in the agrochemicals, for the fluorospecialty business the management has indicated a) single-digit growth in FY24 and b) majority of new product contributions (from INR 8.0-9.0bn capex for MPP and PIP) to come in FY25. Besides, the recently announced agro intermediate with a capex of ~INR 2.3bn could also start contributing to the topline in FY25. These new product contributions could help company achieve double-digit growth in the fluorospecialty business in FY25, in our view. Moreover, the company has also tied up HFC volumes for CY24 with its key customers in the US. In our view, these certainly are encouraging points accounting for which the company is guiding for a better 2HFY24 compared to 1HFY24. Hence, although our FY24E/25E/26E EBITDA estimates are cut by 18%/14%/11% to account for the weak performance in the chemicals business, we believe these cuts could be the last of the lot. Our revised Dec’24 TP stands at INR 3,040 (from INR Sep’24 TP of INR 3,245). 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 2QFY24 consolidated gross profit came in 3% below JMFe at INR 15.8bn (down 5%/12% QoQ/YoY) as revenues came in 3% below JMFe and stood at INR 31.8bn (down 5%/15% QoQ/YoY) while gross margins were slightly ahead of our expectations at 49.0% (vs. JMFe of 48.7% and 49.1% in 1QFY24). Other expenses (including power and fuel costs) were lower at INR 6.9bn (vs. JMFe of INR 7.0bn). As a result EBITDA was ~5%/2% below JMFe/consensus at INR 6.5bn (down 10%/20% QoQ/YoY) and PAT stood at INR 3.0bn (~12% below JMFe/consensus). Chemicals EBIT was 17% below JMFe and came in at INR 3.5bn (vs. JMFe of INR 4.2bn and INR 4.6bn in 1QFY24, down 24%/33% QoQ/YoY) as EBIT margins were lower at 24.4% (vs. JMFe of 27.0% and 27.7% in 1QFY24) and chemicals revenues were also lower at INR 14.2bn (vs. JMFe of INR 15.4bn) (down 14%/22% QoQ/YoY). Weakness in the chemicals business was on account of tepid ref gas demand and destocking and inventory rationalization in specialty chemicals. However, management indicated that they have started seeing positive traction in the chemicals business which should bode well for a better 2HFY24.

* Packaging films business saw some positive uptick: Packaging films EBIT was above our expectation and came in at INR 773mn (vs. JMFe of INR 670mn) as packaging films margin were higher at 6.9% (vs. JMFe of 6.0% and 4.7% in 1QFY24) and packaging films revenues were in-line at INR 11.2bn).

* Maintain BUY with Dec’24 TP of INR 3,040: To factor in 2QFY24 performance, inventory unwinding phenomena in agrochemicals, and no major improvement in packaging films business, we cut our FY24/25/26 EBITDA estimates by 18%/14%/11% and EPS estimates by ~22%/14%/11%. We maintain BUY with our SOTP-based Dec’24 TP of INR 3,040 (from Sep’24 TP of INR 3,245 earlier).

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