Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of SRF Limited (SRF).

 

The ratings continue to reflect a strong business risk profile driven by market leadership, diversified revenue and high operating efficiency, and a healthy financial risk profile. These strengths are partially offset by high capital intensity with continuous enhancement in capacities in the chemical business and packaging films business.

 

During fiscal 2021, operating income increased by 16.5% to Rs 8400 crore despite the impact of the COVID 19 pandemic. Earnings before interest, taxes, depreciation and amortisation (EBITDA) increased significantly to Rs 2147 crore (operating margin of 25.6%), as against Rs 1460 crore (20.3%) for the previous fiscal.

 

The packaging films business (PFB) forming around 39% of the revenue in fiscal 2021 led the growth with an increase in operating income of more than 25% to Rs 3292 crore. Earnings before interest and tax (EBIT) margins for the PFB also improved significantly to 27.3% in fiscal 2021 from 21.3% in fiscal 2020 led by the increased demand, higher margin and value added products during the COVID 19 pandemic. For three months ended June 2021, operating income in this segment grew 54% to Rs 1041 crore with healthy EBIT margin of 23%. EBIT margins in this segment are however expected to moderate in fiscal 2022 with increase in supply leading to pressure on margins.

 

The chemicals business (CB) continued to grow with fiscal 2021 recording revenue growth of 22% to Rs 3645 crore along with healthy EBIT margin of 20% driven by strong demand from both domestic and export markets. For three months ended June 2021, operating income grew by over 57% to Rs 1114 crore, the sharp increase is on account of low revenue in Q1 last year due to nationwide lockdowns and further  healthy demand and new products in current year quarter.

 

The technical textiles business (TTB) was the most impacted business by the lockdowns caused by the COVID 19 pandemic in the first six months of fiscal 2021, consequently operating income declined 9% to Rs 1240 crore in fiscal 2021. However, EBIT margins for the full year remained healthy at 14.3% driven by the rapid recovery in demand in the 2nd half of the year. For three months ended June 2021, operating income has grown significantly, albeit on a low base, to Rs 493 crore with strong EBIT margin of 27% driven by strong demand by end user industries. EBIT margins also benefitted from new contracts with the company’s customers at higher rates, accordingly the improved EBIT margins are expected to sustain over fiscal 2022.

 

In fiscal 2021, company did capex of Rs 1214 crore to increase its capacities and set up new facilities in the CB and PFB segments. Despite the debt funded capex in fiscal 2021, the total debt reduced to Rs 3469 crore from Rs 4135 crore driven by healthy accruals and QIP issuance of Rs 750 Cr. In fiscal 2022, as well the company has capex plan of Rs 1800-2000 crore to be funded through a mix of debt and internal accruals. As a result during fiscal 2022 total debt is expected to increase moderately.

Analytical Approach

For arriving at its ratings, CRISIL 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 Speciality 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 TTB segment, the company is the largest nylon tyre cord fabric manufacturer in India. The market position in the packaging films business (PFB) is supported by large capacities and high volume of value-added products. The company has enhanced PFB capacity by setting up plants in foreign geographies to cater to global markets. The healthy market position is likely to be sustained, given the leadership position, established track record, and R&D capability focused on Value added products.

 

• Diversified revenue and high operating efficiency: Revenue is diversified across TTB (15% of revenue in fiscal 2021), CB (43%), and PFB (39%) segments. The management has successfully diversified its geographical presence through investments in the PFB segment in South Africa, Thailand and Hungary, among other countries. The diversified revenue profile protects against downswing in any one business and keeps the operating margin steady. Furthermore, growing contribution from value added products in the PFB segments, strong R&D capability in Chemical Segment, and market leadership in most of its products have helped keep the margin higher than that of peers.

 

• Healthy financial risk profile: A robust tangible networth led to a comfortable gearing of 0.52 time as on March 31, 2021. Cash accrual was healthy at Rs 1,510 core in fiscal 2021, resulting in comfortable debt protection metrics, indicated by the interest coverage ratio of 16.16 times (7.46 times for the previous fiscal).

 

The financial risk profile is expected to remain healthy over the medium term, backed by substantial cash accrual, a comfortable gearing, and strong liquidity. The ability to sustain improvement in operations leading to better debt protection metrics will remain a key monitorable.

 

Weakness:

• High capital intensity: Operations are expected to remain capital intensive. Capex was Rs 1,214 crore during fiscal 2021. The company is continuously incurring capex mostly towards specialty chemicals in the CB segment while also expanding manufacturing facilities in the PFB segment abroad. During the period from fiscals 2018 to 2021, company has done a combined capex of over Rs 5500 crore, in fiscal 2022, as well company has a capex plan of Rs 1800-2000 crore. However, profitability of a molecule in the CB segment depends on successful commercialisation and acceptability, while cyclicality is inherent in the PFB segment. Therefore, the ability to maintain healthy revenue growth and sustain the operating margin will remain a key monitorable.

Liquidity: Strong

Cash equivalents/liquid investments stood at around Rs 695 crore at March 31, 2021. Liquidity is further supported by drawable unutilised bank lines of over Rs 400 crore as of March 2021. Cash accrual are expected at Rs 1400-1500 crore in fiscal 2022. The capex for fiscals 2022 is expected at around Rs 1800-2000 crore, and should be funded by a mix of internal accrual and debt. The available liquidity and cash accrual should be sufficient to meet repayment obligation of Rs 460 crore in fiscal 2021.

Outlook: Stable

CRISIL 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 3 times
• A sustained decline in the operating margin with stagnant revenue. leading to lower cash accrual

About the Company

Incorporated in 1970, SRF started operations with a nylon tyre cord plant in Manali, Tamil Nadu. It is currently present in the CB, PFB and TTB business verticals. In the CB segment, it manufactures fluoro-chemicals, fluoro-speciality chemicals, and chloromethane. SRF has 11 manufacturing units in India, one each in South Africa Thailand and Hungary, an upcoming unit for PFB in Thailand. Under the TTB segment, the company manufactures nylon tyre cord fabrics, belting fabrics, and industrial yarn. Its sales are spread across more than 75 countries, and it has a workforce of about 7,000 employees.

 

For the three months ended June 30, 2021, operating income and profit after tax (PAT) were Rs 2699 crore and Rs 395 crore, respectively, against Rs 1545 crore and Rs 177 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31	Unit	2021	2020
Revenue	Rs crore	8400	7209
PAT	Rs crore	1198	1019
PAT margin	%	14.3	14.1
Adjusted debt/adjusted networth	Times	0.52	0.86
Interest coverage	Times	16.16	7.46

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Working Capital Facility	NA	NA	NA	256.0	NA	CRISIL AA+/Stable
NA	Working Capital Facility^	NA	NA	NA	150.0	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	159.0	NA	CRISIL AA+/Stable
NA	External Commercial Borrowings	NA	NA	Oct-23	144.0	NA	CRISIL AA+/Stable
NA	Foreign Currency Term Loan	NA	NA	Mar-25	291.0	NA	CRISIL AA+/Stable
INE647A07041	Non-convertible debentures	17-Sep-20	3M T-BILL+188BPS	16-Sep-22	250	Simple	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	600.0	Simple	CRISIL A1+

 ^Interchangeable with Rs 10 crores of overdraft, Rs 50 crore of working capital demand loan, Rs 150 crore of letter of credit and Rs 50 crore of bank guarantee

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
SRF Holiday Home Limited	Fully consolidated	Strong business and financial linkages
SRF Global BV	Fully consolidated	Strong business and financial linkages
SRF Industries (Thailand) Limited	Fully consolidated	Strong business and financial linkages
SRF Industex Belting (Pty) Limited	Fully consolidated	Strong business and financial linkages
SRF Flexipak (South Africa) (Pty) Limited	Fully consolidated	Strong business and financial linkages
SRF Europe Kft	Fully consolidated	Strong business and financial linkages