Fundamental Analysis of SRF: SRF Ltd. is one of the oldest and largest chemicals companies in India with a market capitalization crossing Rs 70,000 crore. Its stock has returned a whopping CAGR of 42% every year for the last five years, giving multi-bagger gains to its shareholders.
So what makes a giant like SRF deliver such blockbuster returns? Can investors hope for the same in the future? In this article, we’ll answer these and other questions by conducting a fundamental analysis of SRF.
Fundamental Analysis of SRF
We’ll start off our study of the company by reading about its multiple businesses and how they have grown in recent years. Next, we’ll learn about the sectors in which the company operates. After that, a few sections are devoted to analyzing the financial performance of the company. A highlight of the future plans and a summary conclude the article at the end.
Company Overview
SRF Ltd. was founded by industrialist and Padma Bhushan awardee Dr. Bharat Ram in 1970 as Shri Ram Fibres. Initially, the company was in the technical textiles business but slowly ventured into chemicals and other businesses over time.
As of the present date, SRF is a diversified chemicals company engaged in the production of fluorochemicals, specialty chemicals, packaging films, technical textiles, coated fabrics, and laminated fabrics.
The company supplies its products to a broad range of customers from different industries including pharmaceuticals, agrochemicals, mining, FMCG, advertising, electronics, manufacturing, automotive, and more.
SRF employs over 6,674 people and has operations in four countries primarily: India, Thailand, South Africa, and Hungary. Furthermore, it has a global presence with commercial interests spread across 90+ nations.
As for its manufacturing base, the chemicals maker runs 14 manufacturing sites for its various businesses out of which 11 are located in India.
The image below throws light on the diversified manufacturing base of SRF.
Source: SRF Ltd. Annual Report FY 2021-22
We now have a good understanding of what the company does. Let us learn in-depth about its product lines as part of our fundamental analysis of SRF.
Segment Analysis
We’ve bifurcated our segment analysis into the operating segments and geographical segments.
SRF classifies its business into the following four segments:
Technical textiles division produces synthetic fabrics and yarns which go into tires and conveyor belts and have other end uses.
The chemicals segment manufactures refrigerant gases, industrial chemicals, specialty chemicals, fluorochemicals, etc.
The packaging film business manufactures polyester films and polypropylene films.
SRF’s coated fabric and laminated fabric business comes under the ‘others’ segment.
Over the last six years, the chemicals division and packaging films division led the revenue growth for the stock. Their shares have grown as a percentage of the total revenue. At the same time, the contribution of the technical textiles division decreased as the segment saw negligible growth.
The table below shows how the share of revenue segments has changed for the last six years.
Segment revenue share
FY17
FY18
FY19
FY20
FY21
FY22
Technical textiles business
39
37
24
19
15
17
Chemicals business
33
32
34
41
43
42
Packaging films business
27
31
37
36
39
38
Others
0
0
4
4
3
3
(figures in %)
Furthermore, during the same period, the profitability of the divisions also improved. The table below presents the EBIT margin of the different segments of SRF.
EBIT margin (EBIT/revenue)
FY17
FY18
FY19
FY20
FY21
FY22
Technical textiles business
13
13
15
11
14
23
Chemicals business
19
16
16
17
20
27
Packaging films business
14
13
16
21
27
20
Others
NA
NA
8
11
11
6
(figures in %)
Geographical Segments
As for the geographical segregation, India brought 43% of the business for the company in FY22 followed by the USA (12%) and Switzerland (7%) respectively. Thus we can say that SRF’s customer base demonstrates good geographical diversity.
Geographic revenue share
FY21
FY22
India
43
42
USA
7
12
Switzerland
8
7
Others
42
39
(figures in %)
Industry Overview
In this section, we’ll learn about the various industries in which the company operates and try to get a rough idea of the future growth avenues.
Technical Textiles Industry
The technical textiles industry is very large and diversified catering to multiple industries. As for SRF, it makes products that find their end uses in tyres, seat belts, ropes, fire hoses, transmission belts, conveyor belts or belting fabrics, etc. across industries such as automotive, industrial goods, FMCG, and more.
Chemicals Industry
India has a small 4% market share in the $ 5,027 billion worth global chemicals market. China is the largest producer with a 39% share. The ‘commodity’ chemicals and ‘specialty’ chemicals account for 80% and 20% of the total chemicals market respectively.
These chemicals find their end uses across a multitude of industries like paints, pharma, textiles, etc.
Packaging Films
As for the global packaging films market, its value was pegged at $ 1,002.48 billion in 2021 with a large number of small and big companies operating in the industry across various sub-sectors such as glass, paper, carton/folding, PET bottles, etc.
Summing everything up, we can say that the SRF has a presence in multiple industries with huge total addressable markets giving it ample room to grow.
Recently, the prices and volumes of ex-China companies in these sectors have grown a lot. This happened as Chinese manufacturers decreased supply because of the government’s crackdown to control emissions.
The recent China +1 strategy further brightened prospects for non-Chinese producers such as India as companies globally started shifting their manufacturing and sourcing operations elsewhere.
Overall, the outlook remains strong for these industries with rising urbanization, higher income levels, increased non-discretionary spending, etc.
SRF – Financials
Revenue & Net Profit Growth
The revenues of the chemicals company have steadily grown at a CAGR of 15.87% from Rs 5,137 crore in FY17 to Rs 12,434 crore in FY22. During the same period, its net profit increased at an annualized rate of 24.18% to Rs 1,889 crore.
The table below shows rising the operating revenues and net profits of SRF Ltd. for the last six years.
Financial Year
Operating Revenue
Net Profit
2022
12,434
1,889
2021
8,400
1,198
2020
7,209
916
2019
7,100
592
2018
5,685
462
2017
5,137
515
6-Yr CAGR
15.87%
24.18%
(figures in Rs Cr except for CAGR)
Note: We’ve taken FY17 as the base year for our study as the company reported lesser profits in FY18 on account of higher expenses across multiple heads.
Operating & Net Profit Margins
Over the past five years, the profit margins of SRF have expanded considerably on a consolidated basis as well as for its various business units due to the reasons mentioned above. The operating profit margin (OPM) and net profit margin (NPM) stood at 21.72% and 15.19% at the end of FY22.
The table below highlights the improvement in the profit margins of SRF Ltd. over the past five fiscals.
Financial Year
OPM
NPM
2022
21.72
15.19
2021
20.79
14.26
2020
15.47
14.13
2019
13.61
9.03
2018
12.62
8.26
(figures in %)
Return Ratios: RoCE & RoE
The effect of higher profits because of volume growth and margin improvement is clearly visible in the two return ratios of SRF: return on capital employed (RoCE) and return on equity (RoE).
The table below highlights how the RoCE and RoE of the company have increased over the past five financial years.
Financial Year
RoCE
RoE
2022
23.83
22.05
2021
18.66
17.47
2020
14.73
20.65
2019
14.45
15.53
2018
12.10
12.95
(figures in %)
Debt / Equity & Interest Coverage Ratio
The overall debt-to-equity ratio of the company has come down as its equity base has expanded due to profits. In addition to this, the management has reinvested profits instead of relying on debt to fund its CAPEX plans.
The table below shows the reduction in debt to equity ratio and rise in the interest coverage ratio of SRF for the last five fiscals.
Financial Year
Debt / Equity
Interest Coverage
2022
0.41
27.8
2021
0.43
16.4
2020
0.66
5.6
2019
0.80
4.9
2018
0.77
5.7
Future Plans Of SRF
So far we looked at the previous fiscals data. In this section, we’ll try to get a sense of what lies ahead for the company and its investors.
During FY22, the management spent Rs 2,007 crore towards capital expenditure on a consolidated basis.
Nearly 65% of the CAPEX was done towards expanding the chemicals business for polytetrafluoroethylene (PTFE), chloromethane (CMS), etc.
The packaging films business accounted for Rs 637 crore or around 30% of the total CAPEX. Presently a new BOPP line is under construction as part of this segment.
Furthermore, the management has earmarked Rs 425 crore to construct an aluminum foil production site near Indore. It is expected to be commissioned in 20 months.
We are almost at the end of our fundamental analysis of SRF. Let us take a look at the key metrics of the stock.
CMP
₹2,380
Market Cap (Cr.)
₹70,500
EPS
₹74.4
Stock P/E
31.9
RoCE
23.83%
RoE
22.05%
Promoter Holding
50.5%
Book Value
₹311
Debt to Equity
0.41
Price to Book Value
7.69
Net Profit Margin
15.19%
Operating Profit Margin
21.72%
In Conclusion
As we end our fundamental analysis of SRF, we can conclude by saying that the external and internal factors brought growth to the company in the past. Going forward, it looks like the business is in a sweet position with its CAPEX plans. Investors should closely track the coming quarterly results for revenue growth and margin stability.
Do you think the company will be able to grow at the same pace in the future? What can be the probable hurdles? How about we continue this conversation in the comments below?
