Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper of SRF Ltd (SRF).

 

The ratings continue to reflect a strong financial risk profile, which is expected to sustain over the medium term. The rating also factors in the business risk profile, which is driven by market leadership and a diversified revenue stream. These strengths are partially offset by moderation in operating profitability over the last and current fiscals and the significant capex capitalized over the last fiscal due to continuous enhancement of capacities in the specialty chemicals and packaging films segments, leading to a moderation in ROCE (Return on Capital Employed).

 

The EBITDA (earnings before interest, taxes, depreciation and amortization) margins of the company witnessed a decline to 19.6% in FY24 from 23.6% in FY23. The moderation in margins is on account of specialty chemicals division facing competition from Chinese players and inventory rationalization measures by key customers. In FY24, the demand for fluorochemicals business was weak in the domestic market. There was stress on refrigerants’ prices and volumes due to oversupply from China and other international markets. Further, customers in the US continued to destock HFC inventory. The PFB segment has been facing issues due to oversupply of BOPP and BOPET, since fiscal 2023, however slight improvement in margins may be expected. Lower margins, along with high capex led to a decline in ROCE to ~12% in fiscal 2024 from earlier levels of ~17-22%. The recovery in margins is expected Q4 FY25 onwards and margins are expected to be in the range of 20-22% in FY26 and FY27.

 

The revenue is expected to increase over the medium term with improvement anticipated from Q4 of this fiscal, after a decline of ~12% witnessed in FY24. The company is involved in both specialty chemicals and fluorochemicals. The specialty chemicals segment is expected to witness increase in revenues with capitalization of Rs. 1800 crores in FY24 and ramp up of these facilities in the current fiscal. With positive expected demand coming from the agrochemical sector, the revenue is anticipated to improve in Q4 of this fiscal. The company has also launched new pharmaceutical ingredients, which have garnered positive traction in Q1 FY25. The demand in the fluorochemicals segment is expected to remain muted in the US, with growth being driven from the domestic market.

 

In the packaging films business (PFB) segment, some of the key industry players have witnessed recovery in Q1 FY25, with improving BOPP margins. SRF’s revenue in the PFB segment increased ~22% y-o-y in the PFB segment to Rs.1,336 crores. With sustenance of demand, the revenue is expected to increase for this fiscal as well. However, the margins in the segment still remain under pressure due to an oversupply situation. SRF has also recently commissioned an aluminium packaging facility, which is expected to contribute the revenue from Q4 fiscal 2025 onwards.

 

The technical textiles business (TTB) segment remains healthy with steady contributions from NTCF (nylon tyre cord fabrics) and PIY (polyester industrial yarn). The revenue in the segment is projected to grow moderately in the medium term.

 

In fiscal 2024, the company completed capex of ~Rs 2,347 crores for capacity expansion and setting up new facilities in the CB (chemicals business) and PFB segments. SRF has invested around Rs 2,000 crore p.a. on average on capex in the past 5 years and the company has further capex plan of Rs. 1,600-1700 crore for FY25 and FY26 (lower than previous estimates, thus leading to lower debt availment in the medium term), which will be funded through a mix of internal accruals and debt. The majority of the planned capex will go into the chemical business segment for further capacity and product portfolio expansion. Consequently, the debt/ebitda is expected to improve to ~1.2 to 1.6 times over the medium term (as against 1.9 times in fiscal 2024), despite a moderation in EBITDA margins.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of SRF and all its subsidiaries, as all the entities (together referred to herein as SRF) have the same management and operate in similar businesses.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• 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. 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 fabrics and polyester industrial yarn segment (part of the TTB) should further enhance the market position. The market position in the packaging films business (PFB) is supported by large capacity and high volume of value-added products. The healthy market position is likely to be sustained, given the leadership position, established track record, and large R&D capability leading to technical expertise.

 

• Diversified revenue and high operating efficiency: SRF has a diversified revenue profile with presence across CB (48%), PFB (34%) and TTB (14%) segments in terms of revenue in fiscal 2024. The management has 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.

 

• Strong financial risk profile: The financial risk profile remains strong backed by robust tangible networth leading to a comfortable gearing of 0.43 time as on March 31, 2024. Cash accrual was healthy at Rs 1,795 core in fiscal 2024, resulting in comfortable debt protection metrics, indicated by net cash accruals to adjusted debt at 0.36 times. The financial robustness is also explained by interest coverage ratio which stands at 8.7 times (17.5 times previous fiscal) and is expected to continue with net cash accruals estimated at around Rs 1,800 crore for fiscal 2025 which will be used to fund the capex requirements along with mix of some debt.

 

Weaknesses:

• High capex intensity: The company is continuously incurring capex in specialty chemicals of the CB segment and is also expanding manufacturing facilities of other segments. Capex was around Rs 2347 crore in fiscal 2024. SRF has invested around Rs 2000 crore every year on capex building in the last 5 years and the company has further capex plan of Rs 1600-1700 crore for fiscal 2025 and fiscal 2026, 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.

 

• Down cycle in the chemicals and packaging industry: Most of the revenue (>80%) of the company comes from CB and PFB. The chemicals industry has been facing issues since, Q2 FY24 due to China dumping and inventory rationalization measures by key customers. Also, the packaging films industry has been facing issues since fiscal 2023 due to oversupply of BOPP and BOPET. The recovery in both these industries is yet to be seen, though it is expected from Q4 FY25 onwards

Liquidity: Strong

SRF Ltd enjoys strong liquidity driven by expected cash accruals of more than Rs. 1700 crores per annum in FY25 and FY26 and cash and cash equivalents of Rs.735 crores as on March 31, 2024. SRF also has access to fund based limits of Rs. 2627 crores, utilized to the tune of 39% on an average (including commercial paper issued) over the 12 months ended March 2024. The company has long term repayment obligations around Rs. 700-800 crores each in FY25 and FY26 with capex of around Rs. 1600 crores per annum. The company can partly fund its repayment obligations and capex requirements through internal accruals. It is expected to refinance balance debt obligations.

Outlook: Stable

CRISIL Ratings believes SRF will continue to benefit from its market leadership and healthy operating efficiency, while the financial risk profile should remain comfortable due to adequate cash accrual, over the medium term.

Rating sensitivity factors

Upward factors:

• Sustenance of the gross debt/EBITDA ratio at below 1.0 time
• Strong revenue growth, with sustained improvement in the operating margin, leading to higher cash accrual.

 

Downward factors

• A sustained increase in the gross debt/EBITDA ratio to more than 2 times
• A sustained decline in the operating margin with stagnant revenue leading to lower cash accrual

 

ESG analysis

ESG profile of SRF Supports its strong credit risk profile

 

The chemical manufacturers can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s social impact is characterized by health hazards, leading to higher focus on employee safety and well-being and the impact on local community, given the nature of its operations. SRF has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• SRF has a total of 18.95 MW installed capacity of renewable energy, which includes an onsite 5 MW solar power plant and an offsite 13.95 MW wind power plant.
• SRF incorporates ESG aspects related to health and safety, human rights, labor laws, environment etc. within the supplier agreements and follows a code of conduct to assess the ESG performance of suppliers.
• SRF is committed towards fostering a diverse and inclusive workplace, free from any sort of harassment and/or discrimination based on gender identity, age, ethnicity, sexual orientation, disability, faith, or marital status.
• The governance structure is characterized by 60% of the board comprising independent directors, presence of an investor grievance redressal mechanism and extensive disclosures.

 

There is a growing importance of ESG among investors and lenders. The commitment of SRF to the ESG principle will play a key role in enhancing stakeholder confidence given shareholding foreign portfolio investors and access to both domestic and foreign capital markets.

About the Company

SRF is a multi-business chemicals conglomerate engaged in the manufacturing of industrial and specialty intermediates. Incorporated in 1970, SRF started operations with a Nylon Tyre Cord plant in Manali, Tamilnadu. It is currently present in CB, PFB and TTB and Others business verticals with a revenue contribution of 48%, 34% and 14% and 4% respectively in fiscal 2024. Under the CB segment, the company manufactures fluoro-chemicals (including refrigerant gases, blends and chloromethanes) and specialty chemicals. In the PFB segment it manufactures biaxally oriented polypropylene (BOPP) and biaxally oriented polypropylene terephthalate (BOPET) used in flexible package covers and labels and has established an aluminium foil facility in the previous fiscal. In the TTB segment, it manufactures nylon cord fabrics, belting fabrics, and industrial yarn. SRF has 13 manufacturing units in India and one each in South Africa, Thailand and Hungary. Its sales are spread across more than 100 countries, and it has a workforce of about 9000 employees. Presently India accounts for 45% of revenues followed by USA (11%), Belgium (6%), Switzerland (5%), South Africa (4%), Thailand (4%), Germany (3%), and rest of the world (22%). The parent company Kama Holdings Ltd. holds 50.21% stake while the other 49.74% is held by the public as on March 2024.

 

For the three months ended June 30, 2024, operating income and profit after tax (PAT) were Rs 3,464 crore and Rs 252 crore, respectively, against Rs 3,338 crore and Rs 359 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable