SRF Ltd - Stock Valuation and Financial Performance

About the Company: 

SRF is a diversified conglomerate with a history dating back to 1970. The company is a prominent player in the manufacturing of industrial and specialty intermediates. As of FY2023, its business segments include chemicals (CB), packaging films (PF), technical textiles (TT) and others. For FY23, the chemicals business segment contributed 49.8% of the revenue, while the packaging films, technical textiles and others segments contributed 34.8%, 12.7% and 2.7% respectively.

The CB segment involves the production of fluoro-chemicals (including refrigerant gases, blends, and chloromethanes) and specialty chemicals for agricultural and pharmaceutical markets. In the PF segment, SRF manufactures biaxially oriented polypropylene (BOPP) and biaxially oriented polypropylene terephthalate (BOPET) used in flexible package covers and labels. The TT segment focuses on manufacturing nylon cord fabrics, belting fabrics, and industrial yarn.

SRF boasts a widespread operational footprint with 11 manufacturing units in India and additional units in South Africa, Thailand, and Hungary. The company's sales extend across more than 90 countries, and it employs over 7000 people. Geographically, India contributes 40% to the revenues, followed by USA (15%), Switzerland (6%), Belgium (6%), South Africa (4%), Thailand (4%), Germany (3%), and the rest of the world (22%). This global presence highlights SRF's standing as a significant player in the chemical industry.

What is the historical performance of the overall business?

The business has witnessed tremendous growth over the last 9 years. While the company earned below its cost of capital in 2014, the company has turned around due to its increased focus on chemicals and packaging films, allowing it to command high ROCEs. This has led to significant value creation for investors as the company has given a 49.4% return CAGR over the previous 9 years while the EPS and book value have increased by 32.4% and 19.3% respectively.

What is the financial performance of the various business segments?

• Chemical Segment

Benefiting from extensive expertise in fluorine chemistry, SRF stands as the exclusive producer of key refrigerants in India. Fluorine is used in air conditioners, refrigerators, sprays, etc. due to its ability to efficiently transfer heat without being corrosive. In the specialty chemical sector, the company's sustained investment in research and development (R&D) and enhanced manufacturing capabilities set it apart, making it a unique player. This specialization extends to the export of products widely applied in pharmaceutical and agro-based industries. 

The chemical segment is largely responsible for the growth of SRF over the past 6 years. The chemical division is responsible for more than 70% of the company’s EBIT, while it only contributes around 50% to the revenue. The disproportionate impact of the chemical segment makes it the most important division.

(Values in Rs. Crores)

FY24 has been a difficult year for SRF’s chemical division as the company has witnessed revenue and margin degrowth. The specialty chemical division continues to witness inventory destocking and geopolitical uncertainty which has impacted the supply chain. Raw material prices have stabilised and the company has capitalized ~ Rs. 1100 crores in capex during 9M and ~ Rs. 700 crores worth of projects are scheduled for commissioning in Q4 FY24. The company has launched 3 new products in the agrochemicals vertical while maintaining a robust pipeline for new and complex products. 

The fluorochemical division has been impacted due to lower demand for refrigerants. Additionally, the agrochemical and pharmaceutical markets have witnessed sluggish growth which has impacted sales of this segment. PTFE (polytetrafluoroethylene) and R32 plants were capitalized in Q3, with scale up in process. Furthermore, in January 2024, China initiated a freeze on HFC capacity as per the Montreal Protocol. These moves should further stabilise and grow the fluorochemical business.

Improvements in margin are guided from Q4FY24 onwards, and are in line with the general expectation of various chemical companies.

• Technical Textile Segment

In the technical textile business (TT), SRF claims the title of the largest manufacturer of nylon tyre cord fabric in India, which is used in tyres to improve strength and durability. The company additionally manufactures belting fabrics for conveyor belts and polyester industrial yarn which is used in seatbelts. The continuous addition of new value-added products in belting fabrics and polyester industrial yarn within the TT segment is poised to strengthen its market position further.

The technical textiles business acts as the cash cow that has helped the company fund its growth initiatives. This division does not have any incremental investment with stable revenue and margins in the same range.

(Values in Rs. Crores)

The margins and return on capital employed for this segment are largely range-bound, barring short-term changes in the macroeconomic environment.

• Packaging Films Business

In the packaging films business (PFB), SRF's substantial capacity and production of high-value-added products contribute to a robust market position. This advantageous position is anticipated to endure, supported by the company's leadership, established track record, and substantial R&D capabilities, which translate into technical expertise.

(Values in Rs. Crores)

BOPET and BOPP markets continued to witness an over-supply situation which has led to margin pressure. The company commenced its Aluminium Foil facility on January 1, 2024 at a cost of ~Rs. 536 crore. This facility will be gradually ramped up.