SRF: Heading into near-term challenges

8 Jun 2023 , 11:12 AM

Analysts of IIFL Capital Services meeting with SRF highlights near-term headwinds across segments owing to global recessionary pressures, early signs of cyclical slowdown and supply glut. However, the management was confident that the businesses would sail through these challenges and create significant value in the medium to long term as capex remains largely on track. Though analysts of IIFL Capital Services maintain FY24-26 EPS, they do see downside risks to FY24 EPS in the event of prolonged slowdown. They look for a better entry point.

Early signs of weakness in fluorospecialties: 

Fluorospecialties business is encountering some early signs of weakness. However, the medium term prospects remain healthy driven by healthy order book and investments into new projects, for next 3-4 years. SRF maintained its 20%+ growth guidance for FY24. The company has announced capex plans totalling to ~Rs10bn over the last two quarters and are expected to be commissioned over next 10-12 months.

Erratic summer impacts India Refrigerant business: 

The elevated pricing for refrigerants has seen corrections in domestic market as demand remained weak owing to lower intensity of summer heat. Management expects global regulations around phase down of refrigerants to help in firm pricing in exports as supplies get curtailed. Capex of Rs5.5bn for 15Ktpa R32 including new AHF capacity is on track to get commissioned by Jul/Aug’23.

PFB remains weak: 

Packaging Films margins remain weak, owing to oversupply situation. Nevertheless, SRF expects to do better than industry as it has higher exposure to value added products.

Margin to moderate in FY24: 

Management provided a cautious outlook for Q1FY24 for refrigerants, as domestic volumes are impacted owing to lower intensity of summer heat. On-boarding of new capacities within the Chemicals business is also likely to limit operating leverage and reduce ROCE. Recovery in PFB margins seems to be getting delayed too.

Domestic refrigerant gas prices face pricing pressure

Management pointed out that demand for refrigerants faced headwinds owing to less intense summer this year. However, it remained optimistic as delayed onset of monsoons and emergence of El Nino is likely to result into hotter and dryer conditions thereby driving demand for refrigerant gases from Q2 onwards. It pointed out that prices of key refrigerants have declined in last couple of months and therefore would have a bearing on its Q1FY24 performance. Q1 is typically heavy for domestic business and contributes ~60% of refrigerant sales. On an annual basis the contribution is around 45%. R32 prices have fallen from Rs 550/kg and are currently at around Rs 350-360/kg. Despite competition intensifying in R32 in India, management remained confident on its growth trajectory for R32.

USA will phase-down HFC to 60% from existing 90% of MMTCO2 from Jan’24 onwards. This will include both consumption and production levels. However, as per the management replacement demand will remain strong in the US and is likely to take around two to three years for demand to shift from HFC’s to HFO’s. Hence US will continue to remain key market for SRF. Out of the expanded capacity, the company intends to export ~60% of R-32 to the US and Middle-East and expects to fully utilize capacity by CY24. The company is facing fierce competition from China in the Middle-East market. Domestic demand for R32 is likely to see robust growth on the back of increasing penetration of air-conditioners. SRF expects its R32 domestic sales to rise to 60-70% over the next few years.