Q2FY24 Review: SRF: Spec chem to see single digit growth in FY24

31 Oct 2023 , 03:23 PM

Chemicals segment continued to drag SRF’s Q2FY24 earnings with Specialty chemicals business witnessing decline on the back of deferment of orders (global de-stocking) while Fluorochemicals continued to grapple with weal demand and benign pricing due to Chinese dumping. The situation is expected to improve gradually with recovery now seen in FY25. While Technical Textiles (TTB) reported better-than-expected margins, Packaging Films (PFB) margins were in mid-single digits. While analysts of IIFL Securities remain positive on the medium-term growth prospects, they expect near-term to remain challenging as some of the key businesses are facing cyclical downturn. They therefore, cut their FY24-25 EPS estimates by 12- 16% on headwinds in the Chemicals and PFB segments. Analysts of IIFL Securities revised SOTP-based TP, rolled over from Sep’25 to Dec’25, comes down to Rs2,330 (from Rs2,490). Maintain ADD. 

Weak performance by chemicals segment: 

Chemicals segment revenue declined 22% YoY; while EBIT margins came in at 24.4% (28.3% in Q2FY23). Specialty Chemicals Business witnessed weak global demand owing to the ongoing inventory rationalization by certain key customers. The performance of the Fluorochemicals Business was adversely impacted due to low demand for refrigerants and resultant pressure on margins. 

Guides for a single digit growth: 

The management has guided for a single digit growth in Specialty chemicals business and expect Fluorochemicals volumes to decline in FY24 due to dumping from China. It remained optimistic and expects performance to improve gradually from Q3 onwards with recovery to reflect in FY25. ~Rs11.0bn capex is slated to get commissioned during H2’24 which will drive growth in FY25.

Stock to remain range bound: 

Chemicals business – the core earnings and value drier for SRF is facing challenges due to inventory rationalisation and orders getting deferred in the near term. However, despite slowdown the management sounded optimistic on its medium term capex plans worth Rs28-30bn each for FY24 and FY25. It intends to spend ~80% of this capex in chemicals segment. Analysts of IIFL Securities expect stock to remain range bound, till signs of sustainable global demand recovery is visible.