Q4FY23 Review: SRF: Confident outlook amid global challenges

11 May 2023 , 12:02 PM

Chemicals business was positioned at very high levels of margins during FY23, especially in Q4FY23. Management provided a confident outlook and has guided for a 20% growth in Chemicals business for FY24. However, with subdued domestic demand for refrigerants in 1Q, fresh R32 capacities and commissioning of new projects in fluorospecialties, margins are likely to moderate in FY24. Analysts of IIFL Capital Services cut FY24-25 EPS by 6-12%, to factor subdued margin in PFB, partially offset by upgrades to Chemical business earnings post strong Q4 performance.

Chemicals business at lifetime-high margins: 

SRF delivered yet another resilient quarterly performance, despite a significantly high yearago base. Earnings were modestly above estimates, largely driven by continuing strong momentum within Chemicals business. Fluorospecialties reported Rs42bn in FY23, implying ~35% YoY growth. Technical Textiles (TTB) reported better-than-expected margins during Q4. Packaging Films (PFB) margins softened further and are now in low-single digits. SRF incurred capex of Rs28.5bn during FY23.

FY24 may witness some margin moderation: 

Management provided a cautious outlook for Q1FY24 for refrigerants, as domestic volumes are impacted owing to lower intensity of summer heat. Nevertheless, exports will remain buoyant, irrespective of 30% HFC production cut applicable in the US from Jan’24. On-boarding of new capacities within the Chemicals business may lower operating leverage and reduce ROCE. PFB business is yet to witness any meaningful turnaround for margin recovery.

Limited upside, remain sideways: 

While management has provided guidance of 20% growth in the Chemicals business (more than 20% for fluorospecialties) in FY24, SRF’s consolidated numbers would merely clock an Ebitda growth of ~4% (based on our estimates). This is on the back of margin moderation amid new capacities within fluorospecialties and HFCs, along with significant increase in depreciation and finance costs for FY24. Hence, net profit is likely to remain flat YoY and the stock offers an earnings Cagr of merely ~12% during FY23-26. Hence, analysts of IIFL Capital Services would wait for a better entry point amid challenging environment.