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Chemicals and Packaging business drags overall profitability

Operating profitability in line with estimate

* SRF reported subdued operating performance for the second consecutive quarter in 2QFY24 (EBIT declined 27% YoY), led by continuing weakness in Chemical/Packaging Film business (EBIT dipped 33%/24% YoY), offsetting recovery in the Technical textile business (EBIT up 19% YoY).

* We maintain our FY24/FY25 EBITDA estimates and value the stock at SoTPbased TP of INR2,000. We reiterate our NEUTRAL rating on the stock.

Weak demand and lower realization impact revenue

* SRF reported overall revenue of INR31.7b (est. of INR33.2) in 2QFY24, down 15% YoY. EBITDA margins contracted 130bp YoY to 20.3% (est. of 19.5%). EBITDA stood at INR6.5b (in line with est.), down 20% YoY. Adj. PAT declined 38% YoY to INR3.2b (est. of INR3.4b).

* Chemicals’ revenue (45%/65% of total sales/EBIT in 2QFY24) dropped 22% YoY to INR14.3b; while EBIT declined 33% YoY to INR3.5b. EBIT margin contracted 390bp YoY to 24.4%. The Chemicals business was hit by low demand for refrigerant and inventory rationalization in specialty chemicals. Further, sluggish growth in the pharmaceuticals and agrochemical industries adversely impacted the demand for industrial chemicals.

* Packaging Film’s revenue (35%/15% of total sales/EBIT in 2QFY24) declined 16% YoY to INR11.2b and EBIT was down 24% YoY to INR773m. Margin contracted 70bp YoY to 6.9%. The packaging film business continues to face headwinds due to substantial supply additions in both BOPET and BOPP film segments. This has led to margin pressures and an overall global demand slowdown.

* Technical Textiles’ revenue (16%/14% of total sales/EBIT in 2QFY24) grew 9% YoY to INR5.1b; EBIT margin expanded 130bp YoY to 14.8%. EBIT grew 19% YoY to INR750m. The segment performed well on the back of higher sales volume in Nylon Tyre Cord Fabric.

* For 1HFY24, SRF’s revenue/EBITDA/Adj. PAT declined 15%/25%/39% YoY to INR65.2b/INR13.7b/INR7b.

Highlights from the management commentary

* Inventory rationalization within the Specialty Chemicals segment is expected to be transitory as orders are getting postponed and not cancelled. Management expects single-digit growth in the specialty chemical segment for FY24.

* Fluorochemicals segment witnessed subdued performance as the Chinese dumping led to low demand and weak prices for the key refrigerants. The traction in demand is expected to be much stronger in 2HFY24.

* Capex: Management plans to incur ~INR29-30b/INR28-30b of capex in FY24/FY25, with ~80% of capex to be incurred within the chemicals segment

Valuation and view

* The Chemicals and Packaging business margins are expected to remain under pressure in FY24, led by weak demand scenario and lower realization. However, we expect the packaging performance to improve from FY25.

* We maintain our FY24/FY25 EBITDA estimates and value the stock at SoTPbased TP of INR2,000. We reiterate our NEUTRAL rating on the stock.

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