Chronicles of SRF

SRF Limited, with an annual turnover of Rs 5100 crore (US$ 790 million), is a chemical based multi-business entity engaged in the manufacturing of industrial and specialty intermediates. It commenced operations as Sriram Fibres in 1970 as a wholly owned subsidiary of DCM Limited. The initial focus of the company was to manufacture nylon tyre cord fibres. The company’s diversified business portfolio covers technical textiles, fluorochemicals, specialty chemicals, packaging films and engineering plastics.

Equipped with state-of-the-art R&D facilities, the company has filed 114 patents for R&D and technology so far, of which nine have been granted. A winner of the prestigious Deming Prize for two of its businesses, namely Tyre Cord and Chemicals, SRF continues to redefine its work and corporate culture with total quality management (TQM) as its management way.

Today, anchored by our strong workforce of around 6500 of different nationalities working in 12 manufacturing plants in India, and two each in Thailand and South Africa, SRF has significant global presence in some of its businesses and exports to around 75 countries. The company’s business is divided into three divisions: technical textiles, chemical and polymers, and packaging films.

SRF has posted another disappointing quarter in the first quarter of 2018. It witnessed de-growth in the revenue to Rs 1290 crore, EBITDA to Rs 200 crore and profit after tax (PAT) to Rs 100 crore declining 6 per cent, 32 per cent, 37 per cent YoY, respectively, on poor performance by chemical segment.

The chemical segments have been subdued with revenue, at Rs 410 crore, declined 8 per cent YoY following fall in specialty chemical revenue due to continued slowdown in global agrochemical space, reduced off-take that is channel destocking in domestic refrigerants business ahead of GST implementation and rupee appreciation.

Margins under pressure

Margins in the first quarter plunged by 1,000 basis points (bps) YoY to 15.5 per cent in chemicals segment mainly owing to lower share of specialty chemicals business and got pulled down by negative operative leverage. The management believes poor performance was due to deferment of orders and expects segment to turnaround from the last quarter of 2018. 

Rupee appreciation and increased tax rate add to headwinds

During the quarter, SRF also highlighted that growth was impacted by rupee appreciation mainly because apart from specialty chemicals segment, 50 to 60 per cent of refrigerants and packaging business constitutes exports. Further, its Nylon Tyre Cord Fabrics (NTCF) business in technical textiles is also impacted by rupee appreciation. In 2018, the company is also anticipating higher tax rate of 28 to 29 per cent mainly on account of discontinuation of tax incentives like R&D expenditure and investment allowance.

Refrigerants boost chemical revenue

The decline in revenue was partially off-set by strong pick-up in sale of refrigerants in exports market, mainly of blends and 134a. For the 134a refrigerant, the company is seeing strong growth in the US market benefitting from anti-dumping duty being imposed on China.

In the first quarter, the company has sold 3,000MT of 134a and expects to strengthen these sales from third and fourth of 2018 as demand in the US starts picking up. Further, the company can enhance capacity by 25 to 30 per cent with existing facilities that will help it capture any uptick in demand.

Equipped with state-of-the-art production facilities, SRF is one of the largest manufacturers of a spectrum of standard and speciality Bi-axially Oriented Polyethylene Terephthalate (BOPET) and Bi-axially Oriented Polypropylene (BOPP) films. SRF exports packaging films to around 70 countries.

Car and refrigerator sales to spur fluorochems; R&D to drive specialty

Capacity utilisation in SRF’s fluorochemicals business is anticipated to surge, riding spurt in sales of refrigerators and cars and import substitution.

Moreover, R&D investments, cornerstone of SRF’s commendable success in high entry barrier specialty chemicals, have yielded handsome dividends—filed 30 process patents in fiscal 2017, taking the tally to 111 patents filed till date and commercialised more than 40 products—leading to 18 per cent revenue CAGR over 2012-17 period. With a strong products pipeline and focused capital investment of Rs 2500 crore to be incurred over next three to four years, the division is expected to post strong revenue growth, and catapult its revenue and EBITDA share going forward.

Technical textiles: A Cash Cow

Technical textile revenue of Rs 560 crore moved up 11 per cent YoY in line with estimates. Management highlighted that quarter performance was impacted by weak raw material prices in NTCF segment, rupee appreciation and competition from Chinese TBR (impacting volumes). The segment is expected to remain a steady cash generator.

The company has been channelizing technical textiles’ Rs 220 crore per year free cash flow to finance incremental capital investment in other divisions.

Packaging films: Consumption growth play

Packaging films reported revenues of Rs 410 crore jumped 19 per cent YoY. This was despite power supply issues leading to volume losses in new DTA line. The management has highlighted its new BOPET plant which is now operating at full utilisation that led to improvement in EBIT margin to 10.5 per cent in the first quarter of 2018.

Management expects to regain margins of 14-15 per cent in packaging films by the fourth quarter of 2018 as additional capacity four new lines which were added in last one year gets absorbed in the market. Further, it is on track to commission its BOPP plant by Feb 2018. It is estimated that the packaging films will witness 20 per cent revenue CAGR over the financial year 2017-19, led by capacity addition.

Margins of both segments – technical textiles and packaging films, are 11 per cent each, which was broadly in line with estimates. Both of the businesses have extended in-line performance.

Slower-than-expected revival in chemical business

A key trigger for the company is the pick-up in global agrochemical market. Presently, the global agrochemical market remains weak largely on account of deferment of orders and expects turnaround in the segment from the fourth quarter of 2018. The management is confident about the recovery by speaking to various global agrochemicals majors who expect market to rebound from the third and fourth quarter of 2018 and also is hopeful of recouping profitability.

Strong capex to continue

In the financial year 2017, the company incurred capital expenditure of Rs 700 crore, of which Rs 300 crore was expended towards BOPET plant that is in the packaging films segment and Rs 400 crore for chemicals division. For the financial year 2018, the management has guided for Rs 900 crore of revenues, of which Rs 270 crore will be spent on packaging films plant and the remaining Rs 630 crore would be on its chemicals division. In line with same, the company has also announced capex of Rs 850 towards specialty chemicals plant for agro industry.

Stance of SRF

Given the weakness in the chemicals segment and waiting for the demand to increase in this segment, there is muted stance for the company as it will have slower-than-expected revival in the chemical business. Monitoring the increase in the chemical business is a key metric and thereby factoring in the continued pressure in chemicals market, the earnings per share estimates for 2018 and 2019 financial year is reduced by 13 per cent and 5 per cent, respectively. However, a sharp correction may offer an entry opportunity. With increase in sales, SRF also expects to regain profitability by end of last quarter of 2018.

Key Risks

Limited product life cycle: There is a risk of early phase out of the molecule due to availability of a substitute or development of some other molecule in the other market.

Pace of launch of new molecules: SRF faces inventory risk as the timing of launch of a molecule is determined by client campaign. Also, this leads to volatility risk on quarterly basis as when a molecule is launched profitability shoots up significantly.

neha.seth@outlookindia.com