Buy SRF Ltd for the Target Rs.3,250 By Emkay Global Financial Services Ltd
SRF’s Q3 EBITDA at Rs7.8bn (+26% YoY/Flat QoQ) was in line with our estimate of Rs7.8bn and below consensus estimate of Rs8.2bn. Better margin performance YoY in chemicals business was led by higher volume and realization of refrigerants in domestic and exports markets, offset by subdued performance in the spec chem business due to deferred customer offtake and continued pricing pressure from Chinese competitors. Performance films reported stable performance, while Technical Textiles continues to be impacted. The management remains cautiously optimistic and expects lower growth in the spec chem business, while refrigerants continue to do well in global markets. SRF will incur all new capex, including HFOs, at its new land parcel in Odissa. We cut our FY26/FY27/FY28E EBITDA by 5-6% to factor in near-to-medium term headwinds in the spec chem business. Retain ADD and TP of Rs3,250.
Chemicals business (CB) poised for growth in Q4
CB revenue grew ~22% YoY to Rs18.2bn in Q3 (EBIT margin: 27.2% vs 24.3% in Q3FY25), on strong volume/realization for HFCs and steady industrial chemicals business. Prices for HFCs are steady globally. The focus will be to sweat the assets as SRF enters the last year of baseline. Its specialty chemicals business (SCB) was hit by slower customer offtake and continued pricing pressure. SCB is expected to post lower growth in FY26 than the overall growth guidance of 20% for CB. SRF expects strong demand from agro majors from Q4 on the back of existing POs and the start of a new season. PTFE is likely to see volume growth from Q1FY27, while advanced fluoropolymer capex is progressing as per plan. SRF announced a capex of Rs1.8bn for its pharma intermediate plant 2 at Dahej with commissioning expected by Sep-26.
Performance films and foil business (PFB) navigating through its challenges
PFB revenue de-grew marginally by 3% YoY/5% QoQ at Rs13.4bn in Q3. EBIT margin for PFB came in at 7.1% vs 8.4% QoQ. SRF observed lower volumes and rangebound pricing for BOPET and BOPP during the quarter as the Chinese dumping persists. Domestic demand was hurt in Q3 due to the GST-led disruption of resizing and reprinting. South Africa continues to deliver, while Thailand/Hungary are facing competition. SRF is temporarily routing US exports from Thailand to mitigate tariffs, bearing higher freight cost. The mgmt expects greenshoots for BOPET pricing/margins due to capacity rationalization in China (~20%) and a favorable demand-supply situation in India.
Technical textile business (TTB) reflects steady performance
SRF’s TTB revenue declined ~11% YoY (-4.4% QoQ) to Rs4.5bn in Q3, with a sequential improvement in EBIT margin (9.9% vs 8.9%). The company is facing pressure in belting fabrics (BF) owing to cheaper imports from China as well as lower exports to the US amid US tariffs. SRF has maintained its market share in NTCF. It expects the new dipping machine project to commission in Q4. We model 5% growth for TTB for FY27E.
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