SRF's persistent pain point hampers investors' confidence on earnings outlook

Revenue in the chemicals business grew 25%, driven by a robust performance in fluorochemicals, which was backed by higher volumes and improved realizations. However, specialty chemicals remained subdued. The films & foil and technical textiles businesses fared relatively better with 51% and 25% year-on-year revenue growth, respectively. Ebitda at ₹945 crore missed consensus estimate by 9% and the Ebitda margin contracted sequentially and annually to about 21%.

In the chemicals segment, operating Ebit increased only 10%, considerably slower than its revenue growth. Despite the pass-through of elevated input costs, there was a sharp margin contraction. This reflects pressure from specialty-chemical pricing, Chinese oversupply and higher input costs. “Factoring in the weaker-than-expected Q2 performance and lower margin expectations for the chemicals business, we broadly maintain our FY27 Ebitda estimates while cutting our FY28E EBITDA estimates by 6%,” said Motilal Oswal Financial Services.

The specialty chemicals business is expected to recover in H2. The management reiterated its 15-20% revenue growth guidance for the chemicals business and expects to deliver at the higher end of the range in FY27. “While refrigerants remained strong, specialty chemicals disappointed and we believe the challenges could persist longer than anticipated, warranting a de-rating of the chemicals business to 20x EV/EBITDA from 25x,” said Nuvama Research.

Meanwhile, the films & foil business held the fort for SRF. Its operating Ebit rose 73% to ₹206 crore, lifting its margin to 9.7% from 8.4%. Record production, value-added products and demand for aluminium foil supported performance. That said, SRF indicated that demand moderated after customers built inventory in the first quarter, suggesting that the pace of growth may not continue at the same level every quarter.

Technical textiles delivered a more encouraging profit outcome: operating Ebit rose 71% to ₹72 crore. Exports of belting fabrics and new customers supported the business, while its margin improved to 12.1% from 8.9%. SRF has approved a ₹600 crore investment in a new aluminium foil facility at Jetapur in Madhya Pradesh, with a planned annual capacity of 12,000 tonnes. The first phase involves ₹300 crore, and implementation is expected to take 23 months.

The facility is intended to serve applications including batteries, sodium-ion technology and high-end packaging. This is a longer-term capacity opportunity, not an immediate solution to margins. Overall, SRF’s earnings outlook depends on the pace of recovery in the specialty chemicals business in H2. Revival in selected agrochemical products and progress in the pharmaceutical-intermediates pipeline could help. But the improvement in earnings will depend on whether better volumes and realizations outpace input and freight costs.