IGI Logo

Chemicals and packaging segments aid operating performance

Operating performance in line

* SRF delivered a strong start to FY26, with EBIT surging 41% YoY in 1QFY26. This growth in EBIT was driven by a robust growth of 64%/62% YoY in the chemicals/packaging films businesses, despite a weak summer and ongoing global uncertainties. The technical textiles business declined 44% YoY in 1Q.

* We expect this momentum to continue, with the agrochemicals segment likely to pick up, fueled by a robust product pipeline and volume growth in key intermediates. Further, the Fluorochemicals business is anticipated to see increased traction in PTFE sales and stable global demand for refrigerant gases.

* We broadly maintain our FY26/FY27 EBITDA estimates and reiterate our BUY rating. We value the stock on an SoTP basis to arrive at our TP of INR3,650.

Chemicals segment continues as a key driver of revenue growth

* SRF reported an overall revenue of INR38.2b (est. INR41.6b) in 1QFY26, up ~10% YoY. EBITDA margin expanded 360bp YoY to 21.5% (est. of 20%). EBITDA stood at INR8.2b (est. in line), up 32% YoY. Adj. PAT grew 57% YoY to INR4.2b (est. in line), adjusted for a forex gain of INR87m in 1QFY26.

* Chemicals segment's revenue (48%/72% of total sales/EBIT in 1QFY26) grew 24% YoY to INR18.3b, while EBIT grew 64% YoY to INR5b. EBIT margin expanded 670bp YoY to 27.3%. The specialty chemicals business demonstrated strong performance, driven by rising agrochemical intermediate demand, strategic pricing, and export strength. The fluorochemicals business also reported a robust performance, aided by higher refrigerant gas prices and increased exports, offsetting domestic market weakness.

* Packaging film's revenue (37%/20% of total sales/EBIT in 1QFY26) grew 6% YoY to INR14.2b, while EBIT grew ~62% YoY to INR1.4b. Margin expanded 340bp YoY to 9.9% during the quarter. The packaging films business achieved a record production, supported by better efficiency and focus on high-impact value-added products.

* Technical textiles' revenue (12%/5% of total sales/EBIT in 1QFY26) was down 11% YoY to INR4.7b. EBIT dipped 44% YoY to INR376m. EBIT margin contracted 480bp YoY to 8.1%. The technical textiles business underperformed because of continued weak domestic demand for nylon tyre cord fabric, and the belting fabrics segment faced pricing pressure from the continued Chinese dumping.

Highlights from the management commentary

* Guidance: Management retains its target of 20% revenue growth for the chemicals business while aiming for an RoCE of over 25% in FY26.

* Packaging film business: BOPP faced a supply shortage in the Indian market, leading to price increases and higher capacity utilization. Management expects this pricing environment to remain favorable given the current market developments.

* Capacity expansion: To support future growth, the Board of Directors has approved two new projects: 1) a BOPP film manufacturing facility in Indore, Madhya Pradesh, with a capex of INR4.9b, and 2) an agrochemical production facility in Dahej, Gujarat, at a capex of INR2.5b.

Valuation and view

* The chemicals business (fluorochemicals and specialty chemicals) is expected to continue its growth momentum in FY26, fueled by 1) the ramp-up of recently commissioned plants, 2) a strong order book, 3) stable demand for refrigerant gases, and 4) improved sales of PTFE. The packaging business is likely to report better margins driven by higher realizations of BOPP and a strong portfolio of high-impact, value-added products.

* We build in a revenue/EBITDA/Adj. PAT CAGR of 16%/30%/42% over FY25-27E. We broadly maintain our FY26/FY27 EBITDA estimates and reiterate our BUY rating. We value the stock on an SoTP basis to arrive at our TP of INR3,650.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412