IGI Logo

Dismal Q2; Pain to continue in near term

After a subdued Q1FY24, SRF yet again posted a dismal Q2FY24 with Revenues/ EBITDA/ PAT plummeting 14.8%/ 18.6%/ 37.5% YoY and 4.8%/ 10.1%/ 16.3% QoQ at Rs31.8bn/ Rs6.3bn/ Rs3.0bn. SRF’s Chemicals Business (CB) suffered the most with revenues declining 22.1% YoY and 14.1% QoQ at Rs14.3bn. EBIT margins too plummeted to 24.4% vs 28.3% YoY and 27.7% QoQ. Under CB, SpecChem suffered from global inventory destocking while Refgas suffered from both volume and pricing pressure. Packaging Films Business (PFB) though remained muted YoY, reported QoQ EBIT growth of 50.6%, nonetheless it is likely to remain under pressure in near to medium term. Technical Textiles Business (PFB) reported good performance backed by good demand with EBIT soaring 19.1% YoY and 23.6% QoQ at Rs750mn. Management guided 2HFY24 to be better than 1H for CB which remains the key growth driver for SRF. We believe SRF’s CB business to remain under pressure in near term impacting overall performance. Based on dismal 1H numbers, we have lowered our FY24E/ FY25E earnings estimates by 20.1%/ 17.89% while introducing FY26E estimates. Rolling over our SOTP valuation to 1HFY26E, we downgrade the stock to Reduce, with revised TP of Rs2,254 (earlier Rs2,356).

CB segment continues to feel pain, mgmt.. expects it to recover in 2H

In Q2, SRF’s CB segment continued its underperformance with 14.1% QoQ and 22.1% YoY decline in revenues at Rs14.3bn. SpecChem demand was impacted due to global inventory destocking while both demand and pricing environment remained muted for refgas. Consequently, EBIT margins further declined QoQ from 27.7% to 24.4% (28.3% YoY). Management indicated that CB segment to deliver single digit growth for FY24E while refgas demand to pick up from Q3FY24E.

PFB to reel under pressure for medium term

PFB segment reported good QoQ performance with EBIT up 50.6% QoQ at Rs773mn although down 23.8% YoY. Due to weak demand-supply situation the segment is expected to exert pressure in near to medium term.

Capex slightly delayed, new capex for capacitor grade BOPP film

Some of SRF’s projects have got delayed primarily due to technical reasons however the capex runrate remains intact with Rs28-30bn p.a. for FY24E/ FY25E each, out of which 80-85% would be invested in CB. The company announced capacitor grade BOPP film capex of Rs2.8bn for new energy applications which is an adjacency in PFB.

Earnings lowered, downgrade to Reduce

Due to SRF’s 1H lackluster performance, we have substantially downgraded our FY24E/ FY25E earnings estimates by 20.1%/ 17.9%. Management guided for single digit growth for CB with refgas recovery in 2H. Despite incorporating these optimistic numbers, considering margin improvement, and rolling over our valuations to 1HFY26E, we do not foresee any meaningful upside for the stock. Hence we downgrade the stock from Add to Reduce. The stock is currently trading at 23.6/ 18.8x FY24E/ FY25E EV/ EBITDA. We have rolled over our SOTP valuation to 1HFY26E with a revised TP of Rs2,254 (earlier Rs2,356).

Risks – Strong improvement in CB margins, sharper than expected demand recovery across business segments.

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331