SRF   is part of one of India’s oldest industrialist groups, the Shriram Group, headed by Arun Bharat Ram. The company was incorporated in January 1970 under the name Shriram Fibres Ltd, and renamed SRF only later, in 1990. It has a diversified business portfolio that covers fluorochemicals, specialty chemicals, packaging films, technical textiles, and coated and laminated fabrics.

SRF’s chemicals business is a beneficiary of the surging demand for specialty chemicals and has seen its star rise alongside other specialty chemical companies like Deepak Nitrite, Vinati Organics, Navin Fluorine,  and Aarti Industries. The primary driving factor is the China+1 sourcing by international customers over the last two years. What sets SRF apart from other specialty chemical companies is its leadership within segments of the industry along with its strong R&D focus. Eleven new process patents were granted to SRF in H1FY22, taking the tally to a total of 104 global patents. Along with chemicals, SRF’s other diversified verticals are profitable and positive contributors to the company's top line.

Quick Takes

• New BOPP (Biaxially Oriented Polypropylene) film production line in Thailand was commissioned during Q2FY22
• BOPP capacity addition in India will be commercialized by Q3FY23 
• Capex of around Rs 4,500-5,000 crore would be spent on specialty chemicals and fluorochemicals business over the next 3-5 years 
• Consolidated revenues grew 35% YoY from Rs 2,101 crore to Rs 2,843 crore in Q2FY22
• Earnings before Interest and Tax (EBIT) increased 19% YoY from Rs 480 crore to Rs 570 crore in Q2FY22

Consistent growth in revenues over the last few years

SRF has been listed on the stock exchanges for more than two decades, and it traded below Rs 100 (adjusted for splits/bonus) until 2014. It now trades above Rs 2,300 per share. The stock has delivered stellar returns to its shareholders, with more than 7X returns in the last five years. Analysing the key metrics for the last five years, revenues grew at 14.6% CAGR and net profits at 23% CAGR.

While it is diversified, products in each vertical display a distinct competitive advantage. Under the chemicals vertical, it is the largest manufacturer of Difluoro & Trifluoro Alkyl intermediates globally. It is also one of the few manufacturers of Pharma grade HFA 134a/P in the world, which is used in metered-dose inhalers as a propellant. It also commands a 50% share of refrigerant chemicals in India.

It is a leading exporter of BOPP films from India under the packaged films vertical and, in the technical textiles vertical, it is the world's second-largest manufacturer of Nylon6 tyre fabrics and the world's third-largest manufacturer of conveyor belt fabrics.

A manufacturing business that beat the Covid-19 blues

The Covid-19 pandemic caused disruptions across industries in FY21, and while some industries like IT services were able to adapt swiftly by working from home, manufacturing companies were hit hard. SRF stands out for its performance even during FY21 where revenues increased consistently for every quarter from Q1FY21 till the latest quarter Q2FY22. The profits have followed the revenues, rising consistently for four quarters from Q1FY21 till Q1FY22,  but the trend broke in Q2FY22, due to rising raw material and transportation costs.

Though diversified into different verticals, the chemicals vertical is the largest revenue contributor followed closely by the packaging films vertical. The chemical vertical itself is split into two parts, the specialty chemicals, and the fluorochemicals businesses. The seeds of growth in the last few years were sown earlier with a strategy to build leadership in certain segments of specialty chemicals and fluorochemicals aided by a dedicated R&D team.

SRF’s management expects the specialty chemical business to grow steadily by 15-20% per annum in the next 3-5 years, while the fluorochemicals business would benefit from higher refrigerant prices and rising demand from the US. Multiple international customers in the agrochemical sector are looking to tap opportunities in the Indian market, which may prove to be a positive development going forward.

The board of SRF approved capacity expansion for a key product catering to the agrochemical industry at its Dahej facility at a capex of Rs 27.5 crore. The same is scheduled to be completed in Q1FY23. The company is also planning a capex of Rs 550 crore in the current financial year for the expansion. About 60% of planned capex will go towards the expansion of capacity in the chemicals business, which is growing at a faster pace and yielding a higher margin. The management has envisaged a capex of Rs 4,000-5,000 crore that could be spent on the chemicals business over the next 3-5 years.

In a conference call   with investors post its Q2FY22 results, the MD, Ashish Bharat Ram said that there was an increase in prices of key raw materials and logistic costs due to domestic and international factors. Despite various challenges linked to Covid-19 and supply chain disruptions, they were able to deliver good numbers.

Growth in the specialty chemical business in Q2FY22 was driven by the increase in sales in both domestic and international markets. This quarter also marked a temporary loss of production at one of the plants at Dahej on account of an accident at the plant.

The fluorochemical business saw large demand coming in from the US and pent-up demand from the domestic market leading to near-optimal utilization of HFC capacities. Pharma propellant, under the brand Dymel, witnessed a significant increase in its sales. Automotive refrigerant 134a is expected to have an impact in the short term due to the semiconductor shortage in the automotive industry, but the demand in domestic and international markets is positive.

In the packaging films business, new capacities in Hungary and Thailand have started showing traction. New products were also added in H1FY22 to the packaging films portfolio.

In the technical textile business, higher demand for Tyre Cord Fabric (TCF) was seen from the domestic tyre industry, while the opening of mines led to increased demand for belting fabric.

Along with the growth of the past few years, profitability metrics have shown a rising trend. It is credible that in a challenging FY21, the company registered its highest-ever annual EBITDA and net profit margins.

The company is expanding its presence in specialty chemicals and fluorochemicals over the next few years with a large capex plan in place. Going forward the chemicals vertical is likely to have a much larger pie of the revenues. The other verticals also have distinct competitive advantages and would be positive contributors to the company.

Despite increasing raw material and logistic costs, the company delivered favourable numbers in H1FY22. If this combination of growth and profitability across multiple verticals can continue, investors in this company can look forward to higher returns in the future