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Chemicals and packaging businesses continue to drag operating performance

Operating performance in line

* SRF reported another subdued operating performance in 4QFY24 with a significant decline in operating profitability (EBIT down 34% YoY), due to the continuing weakness in the Chemical/Packaging Film businesses (EBIT dipped 33%/19% YoY), which offset the strong performance in the Technical Textile business (EBIT jumped 44% YoY).

* Factoring in the sub-par performance of the chemicals and packaging businesses in 4QFY24 and the weak medium-term outlook, we cut our FY25/FY26 EBITDA estimates by 12%/10%. We value the stock on an SoTPbasis to arrive at our TP of INR2,100. Reiterate NEUTRAL.

Weak demand-supply scenario hampers profitability

* SRF reported an overall revenue of INR35.7b (est. of INR34.8b) in 4QFY24, down ~6% YoY. EBITDA margin contracted 550bp YoY to 19.9% (est. of 19.7%). EBITDA stood at INR7.1b (est. of INR6.8b), down 26% YoY. Adj. PAT declined 26% YoY to INR4.4b (est. of INR3.6b).

* Chemicals’ revenue (51%/81% of total sales/EBIT in 4QFY24) dropped 14% YoY to INR18.2b, while EBIT declined 33% YoY to INR5b. EBIT margin contracted 780bp YoY to 27.4%. The specialty chemicals business continued to face headwinds due to inventory rationalization by certain key customers, while the Fluorochemicals business was hit by Chinese dumping of refrigerants in India and the international markets.

* Packaging Film’s revenue (33%/5% of total sales/EBIT in 4QFY24) grew 3% YoY to INR11.8b, while EBIT was down 19% YoY to INR331m. Margin contracted 80bp YoY to 2.8%. Substantial supply additions in both the BOPET and BOPP film segments continue to hamper the business, resulting in significant pressure on margins.

* Technical Textiles’ revenue (13%/11% of total sales/EBIT in 4QFY24) grew 9% YoY to INR4.7b. EBIT grew 44% YoY to INR698m. EBIT margin expanded 370bp YoY to 14.9%. The segment performed well aided by volume growth in the Nylon Tyre Cord Fabrics and the Polyester Industrial Yarn segments.

* For FY24, SRF’s revenue/EBITDA/Adj. PAT declined 12%/27%/38% YoY to INR131.4b/INR26.6b/INR14.1b. Net debt as of Mar’24 stood at INR41.1b vs. INR32.5b as of Mar’23.

Valuation and view

* The chemicals business (fluorochemicals and specialty chemicals) is expected to witness major improvement from 2HFY25 onwards. The packaging business is expected to remain under pressure in the medium term.

* Factoring in the sub-par performance of the chemicals and packaging businesses in 4QFY24 and the weak medium-term outlook, we reduce our FY25/FY26E EBITDA by 12%/10%. We value the stock on an SoTP-basis to arrive at our TP of INR2,100. Reiterate NEUTRAL.

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