SRF Ltd’s September quarter (Q2FY25) results drew a lukewarm response from the Street, with the underperformance in its core chemicals segment and muted growth in the packaging films business weighing on investor sentiment. Consolidated Ebitda came in at ₹538 crore, down 13% year-on-year, falling short of the consensus estimate of ₹631 crore.
SRF’s chemicals segment, which contributed nearly half of revenue and three-fourths of Ebit in FY24, remains a drag on the company’s earnings outlook. Segment revenue declined by around 5% year-on-year in Q2FY25, compounding the 11% fall recorded in Q1FY25. The decline was largely driven by inventory rationalization across consumer industries.
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The global agrochemical industry has remained under pressure due to elevated inventories and pricing challenges, exacerbated by surplus supply from China that has disrupted export markets. While SRF’s specialty chemicals business saw some traction from new products, overall volumes were constrained by inventory issues. Consequently, Ebit for this segment plunged nearly 30% year-on-year in Q2FY25, with margins contracting sharply.
The management expects specialty chemicals business performance to gradually pick-up in H2FY25 aided by a strong order book. However, it has refrained from providing revenue and margin guidance for FY25 amid a volatile demand environment.
According to JM Financial Institutional Securities, with prices bottoming out and chemicals Ebit margin similar to that in FY17-19, chemicals margin should improve hereon aided by positive operating leverage.
The packaging film business delivered a 27% increase in revenue, but Ebit growth was limited to 7% as margin pressure persisted due to oversupply in some of the sub-segments. Technical textiles also recorded similar performance with 6% revenue growth and 5% decline in Ebit.
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As a result, some brokerages have revised their earnings expectations downward. Nuvama Research, for example, cut its FY25/26/27 earnings per share estimates by 23%/11%/11%, reflecting weaker-than-expected recovery in the chemicals segment and soft H1FY25 performance.
On the positive side, SRF continues to focus on capital investment and has a comfortable net debt-to-equity ratio of 0.4x. The SRF board has approved an investment of ₹1,100 crore to build a fourth-generation refrigerant plant, aimed at reducing greenhouse gas emissions, scheduled for completion within 30 months. For FY25, SRF has outlined capital expenditure of ₹1,600-1,800 crore.
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But for now, negatives overshadow these potential long-term positives. In calendar year 2024 so far, SRF’s stock price has declined about 9.4%, against a 17% gain in the Nifty500 index. Bloomberg data shows that SRF’s valuations remain stretched at 42x FY25 earnings estimates. A meaningful turnaround in the chemicals business will be essential for reversing the stock’s fortunes.
