Buy SRF Ltd for the Target Rs. 3,650 by Motilal Oswal Financial Services Ltd
Chemical and PFF continue to support operating performance
In-line 2QFY26
* SRF delivered a strong 2QFY26, with EBIT surging 55% YoY, fueled by a robust 96%/44% YoY jump in the chemicals/performance films & foil (PFF) businesses, despite ongoing global headwinds. However, the technical textiles business EBIT declined 41% YoY in 2Q.
* The chemical business (specialty chemicals and fluorochemicals segments) is expected to deliver a stronger 2H performance due to seasonality, new product traction, and a stable-to-better pricing outlook for refrigerants. The company expects its chemical revenue growth to surpass 20% in FY26.
* We broadly retain our FY26/FY27/FY28 EBITDA estimates and reiterate our BUY rating. We value the stock on an SoTP basis to arrive at our TP of INR3,650.
Operating efficiency and better product mix fuel margin expansion
* SRF reported an overall revenue of INR36.4b (est. INR38.8b) in 2QFY26, up ~6% YoY. EBITDA margin expanded 570bp YoY to 22.1% (est. of 21.2%). EBITDA stood at INR8b (est. in line), up 44% YoY. Adj. PAT grew 87% YoY to INR4.2b (est. in line), adjusted for a forex loss of INR306m in 2QFY26.
* The chemical segment's revenue (46%/74% of total sales/EBIT in 2Q) grew 23% YoY to INR16.7b, while EBIT grew 96% YoY to INR4.8b. EBIT margin was 28.9% (vs. 18.1% in 2QFY25). The fluorochemicals business achieved record refrigerant sales and benefited from higher prices, while the specialty chemicals business saw volume growth and positive traction from new product launches. Efficiency measures across both segments improved overall margins.
* PFF revenue (39%/18% of total sales/EBIT in 2QFY26) declined marginally by 1% YoY to INR14.b, while EBIT grew ~44% YoY to INR1.2b. Margin expanded 260bp YoY to 8.4% during the quarter. The packaging films business achieved margin growth in its value-added product segment while SRF maintained its status as the leading exporter of BOPET films in India.
* Technical textiles' revenue (13%/7% of total sales/EBIT in 2QFY26) was down 11% YoY to INR4.7b. EBIT dipped 41% YoY to INR423m. EBIT margin contracted 440bp YoY to 8.9%. The technical textiles business faced significant headwinds due to aggressive import pricing of nylon tyre cord fabrics and belting fabrics from China and low demand for polyester industrial yarn.
* In 1HFY26, SRF’s revenue/EBITDA/adj. PAT grew 8%/38%/71% YoY to INR74.6b/INR16.3b/INR8.4b. while EBITDA margin expanded 460bp to 21.8%. Gross debt stood at INR45.3b vs. INR46.4b in Mar’25. SRF generated operating cash flow of ~INR10b.
Highlights from the management commentary
* Guidance: SRF guided over 20% revenue growth for the chemicals business in FY26, driven by a strong 1H. This is despite some order deferment (for older products) from large global agro players to the later part of 2HFY26.
* Fluorochemicals: SRF entered into strategic agreements with The Chemours Company for manufacturing, supply, and distribution of select fluoropolymers and fluoroelastomers. A notable portion of production will cater to Chemours’ requirements, generating substantial revenue for SRF. The project will be commissioned in phases, with final completion expected by Dec’26.
* Capex: SRF will be incurring ~INR22-23b of capex in FY26. The Board also enhanced its capex outflow for fluoropolymers to INR7.45b from INR5.95b to accommodate the expanded project scope. Of this, ~INR4b will be for nonChemours products, and the balance of INR2.95b will be for two products of Chemours.
Valuation and view
* We expect the chemicals business (fluorochemicals and specialty chemicals) to witness higher growth momentum in 2HFY26 (vs. 1HFY26), fueled by 1) the ramp-up of recently commissioned plants, 2) the launch of new products, 3) a strong R&D and innovation pipeline, 4) stable demand for refrigerant gases, and 5) a diversified portfolio.
* The packaging business is also likely to report better margins driven by higher realizations of BOPP, a strong portfolio of high-impact, value-added products, and the anti-dumping duty on Chinese aluminum foil imports to India.
* We build in a revenue/EBITDA/Adj. PAT CAGR of 14%/24%/32% over FY25-28E. We broadly maintain our FY26/FY27/FY28 EBITDA estimates and reiterate our BUY rating. We value the stock on an SoTP basis to arrive at our TP of INR3,650.
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