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Chemical businesses mar operating performance

Operating performance in line.

* SRF posted muted 1QFY25, with a material decline in operating profitability (EBIT down 20% YoY), due to the continuing weakness in the Chemical businesses (EBIT dipped 33% YoY), which offset the strong performance in the Packaging Film/Technical Textile businesses (EBIT grew 69%/12% YoY).

* We maintain our FY25/FY26 EBITDA estimates. We value the stock on an SoTP-basis to arrive at our TP of INR2,130. Reiterate NEUTRAL.

Inventory rationalization/plant ramp ups hit chemical business margins

* SRF reported overall revenue of INR34.6b (est. of INR32.9b) in 1QFY25, up ~4% YoY. EBITDA margin contracted 360bp YoY to 17.9% (est. of 19.7%). EBITDA stood at INR6.2b (est. of INR6.5b), down 14% YoY. Adj. PAT declined 30% YoY to INR2.7b (est. of INR3.1b).

* Chemicals’ revenue (43%/63% of total sales/EBIT in 1QFY25) dropped 11% YoY to INR14.8b, while EBIT declined 33% YoY to INR3.1b. EBIT margin contracted 700bp YoY to 20.7%. The specialty chemicals business continued to face headwinds due to inventory rationalization by certain key customers, while the Fluorochemicals business was affected by low margins in the Chloromethane segment. However, the domestic refrigerant gasses business witnessed an improved performance in 1QFY25.

* Packaging Film’s revenue (39%/18% of total sales/EBIT in 1QFY25) grew 22% YoY to INR13.4b, while EBIT grew 69% YoY to INR868m. Margin expanded 180bp YoY to 6.5%. The BOPP films segment performed well while, the BOPET films segment continued to witness an oversupply situation.

* Technical Textiles’ revenue (15%/14% of total sales/EBIT in 1QFY25) grew 13% YoY to INR5.3b. EBIT grew 12% YoY to INR677m. EBIT margin contracted 20bp YoY to 12.9%. The segment performed well, led by healthy volumes in Nylon Tyre Cord Fabrics (NTCF) and Polyester Industrial Yarn (PIY).

Highlights from the management commentary

* The Chemical business is likely to witness a revival in 2HFY25. Despite weak 1Q, it is confident of achieving ~20% revenue growth within chemicals business in FY25. FY25 margins to be plus or minus 2% of FY24.

* Packaging business: The BOPET films segment continued to witness an oversupplied market. The business also had tough competition from the Chinese players in the Southeast Asian markets. Aluminum foil export sampling is under way, and production is expected to ramp-up from 2HFY25.

* Capex: SRF plans to incur a total capex of ~INR15-19b in FY25 (including INR6b towards the commissioning of three new fluoropolymer facilities).

Valuation and view

* The chemicals business (fluorochemicals and specialty chemicals) is expected to achieve major improvement from 2HFY25 onwards. The packaging business is likely to remain under pressure in the medium term, while the technical textile business is likely to continue the current growth momentum.

* We maintain our FY25/FY26 EBITDA estimates. We value the stock on an SoTP basis to arrive at our TP of INR2,130. Reiterate NEUTRAL.

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