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For SRF, chemicals business to be a key growth driver

SRF’s management guided for a capex range of ₹2500- ₹2700 crore in FY23 with a significant portion allotted to the chemicals segment. (Bloomberg )

The company has guided for 20% revenue growth in FY23 for the specialty chemicals business which reported 30% year-on-year (y-o-y) revenue growth in FY22. In the fluorochemicals business, demand outlook for refrigerants and chloromethane segment is expected to remain strong. The plant capacity utilization in FY22 stood in the range of 70-75% which means there is headroom for more growth. Overall, for the chemical business segment, SRF expects Ebit (earnings before interest and tax) margin to be in the range of 29-30% in FY23.

In Q4, this segment, which constituted 44% of consolidated revenue from operations, was a driving force as revenue increased by 36% y-o-y to Rs1,572 crore. Specialty chemicals business and fluorochemicals business were on a strong footing. Further, segment Ebit increased by 83% y-o-y aided by cost reduction measures and optimization of asset utilization in both the sub-segments.

SRF’s other segments, technical textile business (TTB) and packaging film business (PFB), reported 26% growth in segment Ebit each. Going forward, in the PFB segment, the company expects pressure on margins due to fresh capacity addition, particularly in BOPET (biaxially-oriented polyethylene terephthalate). The belting segment in TTB would continue to see firm demand. Also, nylon tyre cord fabric which saw weak demand in Q4 is expected to revive.

“SRF has registered astonishing earnings growth in the past four years, with earnings per share (EPS) up 4 times to Rs64 over that timeframe, and the momentum is likely to continue into FY2023 as well," said analysts from Kotak Institutional Equities in a report on 10 May. They added, “Key drivers of earnings growth will be (1) increased capacity utilization in refrigerants along with higher realizations amid market tightness, (2) another year of 20%+ revenue growth in fluorospecialties (we estimate 25%), (3) margin expansion in the chemicals segment, consistent with the trajectory already witnessed in 2HFY22 and (4) commissioning of new capacities in packaging films."

The management guided for a capex range of 2500- 2700 crore in FY23 with a significant portion allotted to the chemicals segment. ICICI Securities has increased its EPS estimates by 6-20% over FY23E-FY24E and, accordingly, increased its target price to Rs2,310 (from Rs2,141). 

Currently, SRF shares are trading at around Rs2221 apiece. Notwithstanding the jump in share price on Wednesday, the stock is still 20% lower than its 52-week highs seen in April 2022