SRF Ltd: Is this Stock Worth looking for?

SRF Ltd is a chemical based multi-business entity engaged in the manufacturing of industrial and specialty intermediates.

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• About SRF Ltd
• Journey since inception
• Executive Management of the company
• Shareholding Pattern
• Business Segment of the company
• Revenue segmentation of the company
• Manufacturing Facilities
• Cost Structure
• Competitors
• Financial Parameters
• Management discussion and Concall highlights
• Strengths and Weaknesses

(A) About

The company's diversified business portfolio covers Technical Textiles, Fluorochemicals, Specialty Chemicals and Packaging Films.

In 1970, DCM group decided to set up a separate entity to manufacture nylon tyre cord fibers and this separate entity was Shri Ram Fibers which later on become SRF.

The company is run by Mr. Arun Bharat Ram who is Grandson of Lala Shri Ram (Founder of DCM Group). Arun Bharat Ram’s sons, Ashish Bharat Ram and Kartik Bharat Ram are also completely active in the management of the company.

(B) Journey

(C) About the Executive Management

(i) Mr. Ashish Bharat Ram - Chairman & Managing Director

Mr. Ashish is the son of Mr. Arun Bharat Ram. He holds a degree in Economics from Delhi University & also an MBA from The Johnson Graduate School of Management, Cornell University. He took over as Managing Director of SRF Ltd. in January 2007. Prior to joining SRF Ltd. Mr. Ashish had successful stints at DCM Toyota Ltd., SRF Finance Ltd. & SRF Overseas Ltd. Moreover, now he serves as the Regional Chair for South Asia for the Young Presidents Organization (YPO) & is a member of the Northern Region Executive Committee of the Confederation of Indian Industry (CII).

In FY22, Mr. Ashish Bharat Ram Received a remuneration of Rs 12.76 Crore which is 0.10% of sales and 0.67% of profit.

(ii) Mr. Kartik Bharat Ram - Joint Managing Director

Mr. Kartik is son of Mr. Arun Bharat Ram & younger brother of Mr. Ashish Bharat Ram. He is a graduate from Santa Clara University, California and also done his MBA from Cornell University, New York. Mr. Kartik also holds the position of Chairman in KAMA Holdings, a company that holds a majority shares in SRF Ltd. He also served as Chairman of the Confederation of Indian Industry (CII) Delhi State Council for the year 2007-08.

In FY22, Mr. Kartik Bharat Ram Received a remuneration of Rs 12.47 Crore which is 0.10% of sales and 0.66% of profit.

(iv) Mr. Vellayan Subbiah - Non-Executive Director

Vellayan Subbiah is the Managing Director of Tube Investments of India since August 2018. He holds a B. Tech in Civil Engineering from IIT Madras and also earned a Master’s in Business Administration from the University of Michigan. Furthermore h has rich experience of over 23 years in consulting, technology and financial services in different positions across various industries. He was earlier the Managing Director of Cholamandalam Investment & Finance Company Limited.

In FY22, Mr. Vellayan Subbiah Received a remuneration of Rs 0.19 Crore which is 0.00% of sales and 0.01% of profit.

(v) Other Members

Name	Designation	Business Category	Remuneration
Prashant Mehra	CEO	Packing Films	5.68 Cr
Prashant Yadav	CEO	Flurochemical	5.66 Cr
Anurag Jain	CEO	Specialty Chemical	5.61 Cr
Sanjay Chatrath	CEO	Technical textile	2.43 Cr

(D) Shareholding Pattern

(E) Business Segmentation

(i) Chemical Business

The Chemicals Business segment comprises two product verticals, namely Fluorochemicals & Specialty Chemicals.

a) Fluorochemicals

SRF is a domestic leader in fluorochemicals business. Fluorochemicals Business (FCB) also drives its business through the sale of refrigerants, pharma propellants & industrial chemicals. Meanwhile this business serves reputed OEMs manufacturing air-conditioners, refrigerators, pharmaceuticals, chillers and automobiles.

(i) Refrigerants

The applications are room air-conditioners, automobile air-conditioners, refrigerators and chillers. Refrigerants are marketed under the FLORON brand. SRF manufactures ozone friendly refrigerants such as F 134a, F 32 & HFC blends such as F 410A, F 407C & F22. Meanwhile SRF recently launched Superton AC Air Pure for reducing the indoor air pollution problem caused by poorly maintained AC systems. Supertron AC Air Pure is a self-use product for purifying the AC ducts, coils and also other passages. Thus, it can be use in both car & split room ACs.

(ii) Pharma Propellants

SRF produce HFA 134a/P as per European Monograph / BP standards. SRF acquired the pharmaceutical propellant brand Dymel HFA 134a/P from DuPont. The technical knowhow was also acquired to convert technical grade of F 134a to the propellant grade. Pharma Propellants are also used in the medical treatments of diseases like asthma, chronic obstructive pulmonary disease, diabetes, angina pectoris & many others.

(iii) Industrial Chemicals

SRF manufactures a wide range of industrial chemicals that are use for diverse applications such as feedstock for pharma & agrochemicals, metal de-greasing, foam blowing & dry-cleaning. Moreover SRF’s main products in the Chloromethane space are Methylene Chloride, Chloroform & Carbon Tetra Chloride, which are use by the pharma & agrochemical customers.
Other products in this segment are Trichloroethylene, Perchloroethylene & Dilute Hydrofluoric Acid. Additionally, CLEAN SHAKTI, a brand of quality cleaning chemicals for toilet bowl, hard surface/floor & glass is market in India by SRF Ltd.

b) Specialty Chemicals

Specialty Chemicals Business remains focused on the agrochemical & pharmaceutical industry. SRF has been in the fluorination chemistry. also the company has an extensive experience in handling fluorine. In addition, the company is planning to expand it in the non-fluorinated chemistry as well. SRF is now manufacturing Active Ingredient (AI) for a major agro customer.

Specialty chemical industry is growing at a CAGR of 9.3%.

(ii) Packaging Films Business

SRF Packaging Films are used in food & non-food packaging, labeling, industrial and also various other end applications. Two kinds of packaging film produced by company are:

a) Bi-axially Oriented Polyethylene Terephthalate (BOPET):

BOPET is produced from Polyethylene terephthalate (PET) resin. Moreover PET is a plastic material produced by biaxial orientation of PET resin which has found increasing applications within the packaging field. Meanwhile SRF offers its products under PETLAR brand for the entire range of BOPET films.

b) Biaxially Oriented PolyPropylene Films (BOPP):

BOPP (Biaxially-oriented Polypropylene) is a plastic material made from stretched polypropylene resin and is used for its barrier properties for converting and also for various other industrial applications. Meanwhile BOPP films are sold under ‘OPLAR’ brand by the company.

Moreover the non-industrial application of packaging films is for packaging of confectionery, dairy, pet food, ready to eat food. Secondly the industrial packaging includes Electric cables, Air ducting, Solar panels, Electronics, Flat screen display etc.

Company has also foray into the Aluminum foil segment in Q1 of FY23.

Packaging Industry is expected to grow at a CAGR of 26.7%.

(iii) Technical Textiles Business

SRF is also the largest manufacturer of technical textiles in India. Moreover in some products it enjoys global leadership. The products under this category are:

a) Tyre Cord Fabrics (TCF)

Nylon Tyre Cord Fabrics (NTCF), Polyester Tyre Cord Fabrics (PTCF), Cycle Tyre Cord Fabrics and Chafer Fabrics are the products provided by company under this category. SRF is also the largest NTCF manufacturer in India.

b) Belting Fabrics

SRF manufactures belting fabrics used as reinforcement material inside the conveyor belts. SRF is also the second largest manufacturer of conveyor belting Fabrics in the world. Moreover, serves customers in countries across Europe, Asia, USA and Latin America. The company offers belting fabrics made of the fibres like Polyester, Nylon 6, Nylon 66, Monofilament, Aramid and Steel.

c) Polyester Industrial Yarn

Company also makes industrial yarns & twines to meet specific requirements of customers for diverse applications such as industrial sewing threads, fishnet twines, webbings etc.

Technical textile industry is growing at a CAGR of 13%.

(iv) Other Business

a) Coated Fabric

A laminated fabric is a two (or more) layer construction with a polymer film bonded to fabric. Meanwhile its application is for Awnings, Tents, Pagodas, Customized tarpaulin, Static covers etc.

b) Laminated Fabric

SRF coated fabrics are use in making Print banners, Hoardings, Billboards, Tent dome covers, Pandal covers etc.

(F) Revenue from Operations

(i) Revenue Segmentation

Segments are same as how the product is categorized into four categories. Thus, the revenue is into the four categories on the basis of products; Technical textiles business (TTB), Chemicals business (CB), Packaging films business (PFB) & Others.

(ii) Geographical wise revenue

SRF is not only providing its products in India but exporting in more than 90+ countries. So its revenue comes from different sources. Meanwhile South Africa, Germany, USA, Belgium, Switzerland and Thailand are the main markets for the products of the company.

(G) Manufacturing Facilities

SRF has 11 facilities in India and 3 facilities overseas in South Africa, Thailand and Hungary.

In FY22 company has a 95000MTPA capacity of Chloromethane, ~72500MTPA capacity of Ref Gas, 3,10,000MTPA capacity of Packaging Films and 140500MTPA capacity of Technical textile

(H) Cost Structure

Raw Material contribute more the half of the cost of production in which Liquid Chlorine, Sulphuric Acid, PET chips and Caprolactam are among the major raw material used in manufacturing.

SRF believes in backward integration which could be another area of growth. It significantly cut its dependence on China, which now contributes just 15-17% to its chemical business. This will help them to reduce the raw material cost as % of Net Sales in the last 10 years.

(I) Competitors

SRF is facing competition from different competitors in different fields. There are various private players in many field. Major competitors of SRF Ltd:

(J) Financials

(i) Financial Trend

Company's revenue has increased at a CAGR of 13.48% while its profit after tax increase at a CAGR of 54.44% in the past 10 years. Moreover its ROCE & ROC has also improved from FY21 to FY22.

Company has also reduced its debt to equity in the past 10 years.

(ii) Du Pont Analysis

Company has reduced its debt from FY13 to FY22 which improves its leverage from 2.32 to 1.84. Meanwhile improved its PATM% from 6.69% to 15.19% in the past 10 years.

(K) Management Discussion & Concalls

Outlook

• Positive outlook for the Indian economy, infrastructure development, agricultural growth and also growth in auto sector is likely to have a positive affect on the performance of the Technical Textiles Business.
• Despite disrupted recovery, higher inflation, rise in energy and raw material prices, supply chain bottlenecks, Company anticipate an increase in demand on account of pent-up refrigerants requirement in the domestic market and in the industrial chemicals segment.
• Meanwhile in Specialty Chemicals Business company's main focus is on agrochemical and pharmaceutical segments.
• Moreover in recent times, several new film(wrapper) lines have been announced in India and globally. Moreover in future, company might witness an oversupplied market resulting in pressure on profitability. For this company's primary focus will be on running its plants optimally and also keeping costs under control.

Q1 FY23 Concall Highlights

Chemical Business

• Chemical revenue grew 54% YoY to 1720 Cr in Q1 FY23.
• Meanwhile, its EBIT margin expanded by 1020 bps to 30.2% YoY due to strong performance of fluorochemicals business aided by better sales realization across HFCs.
• Further this growth was bought up by strong demand of company flagship product and launch of new agrochemical product in Q1FY23.
• Further, its MPP4 (Multi Purpose) plant at Dahej has been commissioned.
• Moreover company's current refrigerants gas utilization is at 70-75%.
• Company is targeting 20% margin in its agrochemical segment as its products are selling well.

Technical Textiles

• Technical textile revenue grew 16% YoY to 570 Cr in Q1 FY23.
• Moreover, company has witnessed strong export growth in belting fabrics and Nylon Tyre chord fabrics.
• Its domestic demand of technical textile is subdue with steady margins.

Packaging Films

• Packaging film revenue grew 44% YoY to 1496 Cr in Q1 FY23.
• Further, demand of BOPP film remain strong backed by increase sales from value added products.
• Meanwhile, rising crude, logistics issues and global shortages, however company expects a sudden drop of raw material prices will likely impact Q2 FY23. However company is in better position in H2 FY23.
• Company's EBIT margin falls by 300 bps due to oversupply of BOPP and BOPET.

Capex

• A project of an agrochemical intermediate of 1000 MTPA at Dahej at a projected cost of Rs 250 Cr.
• It is also expanding its capacity of intermediate product that finds application in both agrochemical and pharma intermediates at Rs 72 Cr.
• It is also expanding its belting fabric capacity at Viralimalai from 13200 MTPA to 21600 MTPA at a cost of Rs 162 Cr over the period of 3 years.

(L) Strengths & Weaknesses

Strengths

(i) Market leadership

The company is the market leader in most of its business segments. Due to extensive experience in handling fluorine, it is the sole producer of some key refrigerants in India. Meanwhile in the specialty chemical segment, continuous investment in research and development (R&D), and improved manufacturing capability have made it a one-of-its-kind player, exporting products that find application in pharmaceutical and agro-based products. In the technical textile business (TTB), the company is the largest nylon tyre cord fabric manufacturer in India, and continued addition of new value-added products in the belting fabric segment (part of the TTB) should further enhance the market position.

(ii) Diversified revenue and high operating efficiency

SRF has a diversified revenue profile with presence across CB (42%), PFB (38.4%) and TTB (17%) segments in terms of revenue in fiscal 2022. The management has also successfully diversified its geographical presence through investments in the PFB segment in South Africa, Thailand, and Hungary. The diversified revenue profile protects against downswing in any one business and keeps the operating margin steady. Furthermore, cost efficiency measures in the TTB and PFB segments, strong R&D capability in specialty chemicals, and market leadership in refrigerants have helped in keeping the margin higher than that of peers.

(iii) Strong financial risk profile

The financial risk profile remains strong backed by robust tangible net-worth leading to a comfortable gearing of 0.42 time as on March 31, 2022. Moreover its cash accrual was healthy at Rs 2,194 core in fiscal 2022, resulting in comfortable debt protection metrics, indicated by net cash accruals to adjusted debt at 0.61 times (0.45 times previous fiscal).

Weaknesses

(i) High capex intensity

The company is continuously incurring capex in specialty chemicals of the CB segment and is also expanding manufacturing facilities other segments. Capex was around Rs 2000 crore during fiscal 2022. SRF has invested around 1500 crs every year on capex building in the last 5 years and the company has further capex plan of 3000-3300 crs for fiscal 2023 out of which majority will go into chemical business segment.  However, profitability of a molecule in the CB segment depends on successful commercialization and acceptability, while cyclicality is inherent in the PFB and TTB segments. Therefore, the ability to maintain strong revenue growth and sustain the operating margin will remain a key monitorable.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry Publications.

Disclaimer: The report only represents the personal opinions and views of the author. No part of the report should be considered a recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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