SRF Bloomberg Ticker SRF in Chemical | India BUY Market Cap

Institutional Equity Research CMP* (Rs) 10,229 Upside/ (Downside) (%) 36 SRF Bloomberg Ticker SRF IN Chemical | India BUY Market Cap. (Rs bn) 616 2 Year Target Price: Rs13,900 Free Float (%) 49 Company Update | 7 September 2021 Shares O/S (mn) 60

Robust Operating Performance to Continue

Key Triggers:  Diversified portfolio – comprising of Technical Textiles, Specialty Chemicals, Packaging Films and Others – augurs well Click Image for Video  Higher-margin business segments i.e. Specialty Chemicals and Packaging Films are Presentation  expected to contribute 42%/40% to FY24E EBIT  Earnings expected to clock 26% CAGR over FY21-FY24E, led by 22% CAGR in revenue

1. SRF has a diversified business portfolio, which comprises of technical textiles, chemicals, packaging films and others. Revenue contribution of chemical, packaging, technical textile and others is likely to change to 43%, 40%, 13% and 4% in FY24E, Research Analyst: respectively (from the current level of 42%, 38%, 15% and 5%). Yogesh Patil 2. The management expects specialty chemical business revenue to clock ~20% CAGR Contact : (022) 41681371 / 9763153797 over the next 2-3 years aided by agrochemical and pharma molecules. Email : [email protected] 3. Recently, SRF commissioned new capacities in Hungary and Thailand. The company is completely focusing on sales mix of both Thailand and Hungary BOPET facilities Research Associate: and vertical start-up of recently commissioned BOPP film line in Thailand. New BOPP film line in India is on track and likely to come up by Jul’22. We expect the packaging Pratik Oza segment revenue to clock 23% CAGR over FY21-FY24E. Contact : (022) 41681371 / 9960358990 4. The replacement market (which accounts for ~60% of technical textiles market) is Email : [email protected] expected to do well with the economy witnessing steady revival. Looking ahead, we expect technical textile business revenue to clock 18% CAGR over FY21-FY24E. 5. We expect SRF’s FCF generation to remain strong at ~Rs5.4bn, Rs6.9bn and Rs14.2bn Share Price (%) 1 mth 3 mth 12 mth in FY22E, FY23E and FY24E, respectively. While RoCE is expected to improve to 18.5% in Absolute Performance 14.4 57.0 146.1 FY24E (from 14.3% in FY21), RoIC is seen at 21.6% in FY24E (from 16.1% in FY21). Relative to Nifty 7.4 10.4 52.9 ESG Analysis: Analyzing SRF on 20 key criteria (10 points each) under ESG Matrix, we have assigned an overall score of 60% to the company. Under “Environmental Head”, we have assigned 46% score, as it produces HFCs, which are more dangerous for the environment. Shareholding Pattern (%) Jun'21 Mar'21 Under “Social Head”, we have assigned 66% score considering its data policy and employee Promoter 50.8 50.8 and labour engagement, while under “Governance Head”, we have assigned 68% score, based on its overall governance structure (please refer to page no 6 for detailed ESG analysis). Public 49.2 49.2 Outlook & Valuation Looking ahead, we expect SRF’s earnings to clock 26% CAGR over FY21-FY24E led by 22% CAGR 1 Year Stock Price Performance in revenue during the same period. The revenue growth is expected to be driven primarily by 22% CAGR and 23% CAGR in chemicals and packaging films segments, respectively over 12,060 FY21-FY24E, while the technical textiles business is expected to clock 18% CAGR over the same 10,060 period. We expect the EBIT margin of chemicals segment to expand to 21.5% in FY24E from 20% in FY21 led by operating leverage playing out on HFC capacity addition. Amid disruptions 8,060 in demand-supply dynamics led by global capacity addition of BOPET in next few quarters, we 6,060 expect EBIT margin of packaging films business to soften to 22% in FY24E from 27% in FY21. EBIT margin of technical textile is likely to remain >23% in FY24E. The industry is witnessing 4,060 up-tick in EBIT margin of technical textile business, mainly due to capacity closures in China, 2,060 which led to a shift in demand towards Indian players. We value SRF’s chemicals business at 29x of FY24E EBITDA, packaging films and technical textiles business at 15x of FY24E EBITDA. 60 We have compared SRF’s chemical business with Navin Fluorine (NFIL) and observed that our 11-2020 11-2020 01-2021 01-2021 07-2021 10-2020 12-2020 02-2021 03-2021 03-2021 04-2021 05-2021 06-2021 06-2021 08-2021 08-2021 target multiple is at 20% discount to NFIL. Hence, we are comfortable with our 22x target EV/ 09-2020 09-2020 EBITDA multiple for SRF. We have increased our revenue and EBITDA estimate by 41%/44% and Note: * CMP as on 6 September 2021 63%/60%, respectively for FY22E/FY23E and introducing our estimates for FY24E. Rolling over our estimates to FY24E, we maintain BUY on SRF with an upwardly revised SOTP-based Target Price of Rs13,900 (from Rs4,386 earlier). Key Financials Y/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E Net Sales 72,094 84,000 1,07,467 1,28,411 1,54,003 EBITDA 14,549 21,334 26,291 31,427 38,599 Net profit 9,159 11,983 14,964 18,525 23,757 EPS (Rs) 156.6 198.8 248.3 307.4 394.2 PE (x) 65.3 51.4 41.2 33.3 25.9 EBITDA Margin (%) 20.2 25.4 24.5 24.5 25.1 PAT Margin (%) 12.7 14.3 13.9 14.4 15.4 Source: RSec Research Estimates We have made changes to our Recommendation and Target Price. Please refer to Page no. 18 at the end of the report. 1 Our Thesis

SRF (Revenue - Rs84bn - FY21)

Segment Technical Textiles Chemicals & Polymers Packaging Films Others

Revenue (Rs mn: FY21) 12,401 36,449 32,917 2,233

Revenue Mix (%) 15 43 39 3

CAGR (FY18-FY21) (%) (12) 31 23 (20)

CAGR (FY21-FY24E) (%) 18 22 23 43

f Capacity expansion and heavy investment by specialty chemicals on R&D front and backward integration have provided a boost to the specialty segment. Indian specialty chemicals space predominantly comprises of products that meet the demand of pharmaceutical and agrochemical industries. Whilst COVID-19 was a dampener in terms of capex, the companies revived aggressively their capex plan post 1QFY22 to meet the incremental demand from these industries. Key Sectoral Theme f Higher discretionary consumption has led to a steep rise in the demand for specialty chemicals in Asian geographies like China and India. Specialty chemicals such as agrochemicals, surfactants, specialty polymers, textiles and dyes continue to maintain their dominance in India. However, cosmetic chemicals, adhesives/sealants, flavours/ fragrances, printing inks, food additives and water management chemicals are set to grow at a much faster pace.

f Chemical Biz – The Key Long-term Growth Driver: Within the chemical segment, Refgas, specialty chemical, industrial chemical and others contribute ~25%, 65%, 9% and 1%, respectively to total segmental revenue in FY21. The management expects specialty chemical business revenue to clock ~20% CAGR in the next 2-3 years, aided by agrochemical and pharma molecules. Within the agrochemicals market, SRF operates mainly in new class molecules with market size of US$2-3bn. As SRF is a preferred partner for global agro majors, we expect the company to steadily increase its asset turnover to achieve high double- digit RoCE, going forward. Refrigerant gas is well-placed to sustain its market dominance on the back of first-mover advantage with investment ahead of others and backward integration to Chloro-methanes. Further, there has been surge in domestic AC and refrigerator production capacities after the launch of several government initiatives like ban on pre-charged ACs imports, PLI and Atmanirbhar Bharat etc. Key Investment Themes Furthermore, with higher spending on healthcare and favourable government policies, the pharma and agrochemical segments will also witness continued growth. Exports are also likely to remain firm with positive outlook on the US economy, where the company already enjoys a reasonable business share. We expect SRF’s chemical segment revenue to clock 22% CAGR over FY21-FY24E. f Demand-Supply Mismatch Continues to Boost Packaging Biz: Though the packaging is a cyclical business both from the supply and demand perspective, the top players have disproportionate control over the supply in domestic BOPET market. Barring few quarters of supply-demand mismatch, we believe discipline in adding new supply by existing players would result in a stable market with EBIT margin of ~22% for SRF. Recently, SRF commissioned new capacities in Hungary and Thailand. The company is completely focusing on sales mix of both Thailand and Hungary BOPET facilities and vertical start-up of recently commissioned BOPP film line in Thailand. New BOPP film line in India is on track and likely to come up by Jul’22. We expect the packaging segment revenue to clock 23% CAGR over FY21-FY24E.

f Volatility in key raw material prices i.e. Caprolactam & MEG (crude-derivatives) Key Risks f Increased competition in commodity businesses i.e. technical textiles and packaging films

2 EPS & SOTP-based Target Price at Implied PE Valuation

450.0 13,900 16,000 400.0 14,000 10,838 350.0 394.2 12,000 300.0 8,755 10,000 250.0 7,011 307.4 8,000 (Rs) 200.0 5,520 248.3 (Rs) 150.0 3,566 198.8 6,000 2,504 100.0 156.6 4,000 50.0 71.0 101.1 2,000 - - FY18 (- 3) FY19 (- 2) FY20 (-1) FY21 FY22E FY23E FY24E (Base (Year 1) (Year 2) (Year 3) Year) EPS Target Price (RHS)

Source: RSec Research

EPS & Price Sensitivity EPS (Rs) Growth (%) P/E 34.3 35.3 36.3 37.3 38.3 FY18 (-3) 71.0 (19.0) 144.1 2,433 2,504 2,575 2,646 2,717 FY19 (-2) 101.1 42.4 101.2 3,464 3,566 3,667 3,768 3,869 FY20 (-1) 156.6 54.8 65.3 5,364 5,520 5,677 5,833 5,990 FY21 (Base Year) 198.8 27.0 51.4 6,812 7,011 7,210 7,409 7,607 FY22E (Year 1) 248.3 24.9 41.2 8,507 8,755 9,004 9,252 9,500 FY23E (Year 2) 307.4 23.8 33.3 10,531 10,838 11,146 11,453 11,761 FY24E (Year 3) 394.2 28.2 25.9 13,505 13,900 14,294 14,688 15,082 Source: RSec Research

1-Yr Forward EV/EBITDA 1-Yr Forward PE

16 28

14 23 12 18 10

13 8

6 8 Jul-19 Jan-17 Jan-18 Jan-19 Jan-21 Oct-15 Sep-17 Jun-17 Jan-17 Sep-16 Sep-18 Sep-19 Apr-18 Feb-19 Jan-20 Sep-18 Oct-20 Dec-19 Nov-17 Sep-20 May-17 Mar-16 Mar-21 Aug-16 Aug-21 May-18 May-19 May-21 May-15 May-20 May-20

BEST_EV/EBITDA_12M_BF AVG STDEV+1 STDEV-1 BEST_PE_12M_BF AVG STDEV+1 STDEV-1

Source: Bloomberg, RSec Research Source: Bloomberg, RSec Research

Revised vs. Old Estimates Y/E Mar FY22E FY23E (Rs mn) Old Revised Change (%) Old Revised Change (%) Revenue 76,221 1,07,467 41.0 89,311 1,28,411 43.8 EBITDA 16,138 26,291 62.9 19,656 31,427 59.9 EBITDA Margin (%) 21.2 24.5 329bps 22.0 24.5 246bps Net Profit 7,978 14,964 88.0 10,524 18,525 76.0 Net Profit Margin (%) 10.5 13.9 345bps 11.8 14.4 264bps Source: RSec Research

3 Scenario Analysis Base Case: In Base Case scenario, we expect the company’s earnings to clock 26% CAGR over FY21-FY24E, based on which we arrive at an SOTP-based 2-Year Target Price of Rs13,900. (Rs bn) FY22E FY23E FY24E Growth Assumption (%) 27.9 19.5 19.9 Net sales 107.5 128.4 154.0 EBITDA 26.3 31.4 38.6 Net Profit 15.0 18.5 23.8 EPS (Rs) 248.3 307.4 394.2 SOTP Valuation (Rs/sh) 13,900 Implied P/E multiple (x) 35.3 Source: RSec Research

Bull Case: In Bull Case scenario, we expect the company’s earnings to clock 43% CAGR over FY21-FY24E, based on which we arrive at an SOTP-based 2-Year Target Price of Rs16,544.

(Rs bn) FY22E FY23E FY24E Growth Assumption (%) 33.5 27.8 28.7 Net sales 112.2 143.3 184.5 EBITDA 28.6 38.6 52.9 Net Profit 16.7 24.1 35.0 EPS (Rs) 277.8 399.9 581.2 SOTP Valuation (Rs/sh) 16,544 Implied P/E multiple (x) 28.5 Source: RSec Research

Bear Case: In Bear Case scenario, we expect the company’s earnings to clock 4% CAGR over FY21-FY24E, based on which we arrive at an SOTP-based 2-Year Target Price of Rs11,292.

(Rs bn) FY22E FY23E FY24E Growth Assumption (%) 19.8 11.5 11.6 Net sales 100.6 112.2 125.2 EBITDA 22.9 23.6 25.1 Net Profit 12.4 12.4 13.1 EPS (Rs) 205.2 206.2 216.7 SOTP Valuation (Rs/sh) 11,292 Implied P/E multiple (x) 52.1 Source: RSec Research

4 Investment Decision Matrix (IDM)

Key Criteria Score Risk Comments The management is of high quality, it has been able to deliver on guided lines; it is investor-friendly with timely updates on developments within the Management Quality 6 Low company Arun Bharat Ram & Kama Holdings Ltd. (promoter) holds ~50.7% stake in SRF; zero share pledging by the promoter as of 30th June, 2021, offers Promoter's Holding Pledge 7 Low comfort; there is no stake sale plan promoter’s side either It is a perfect blend of experience and professionalism, which gives comfort; out of 11 board members, 6 members are independent directors; none of them were disqualified; independent directors are also on the board of other leading companies like HDFC Life Insurance, Dalmia Bharat, Havells India, Board of Directors Profile 7 Low Gujarat Pipavav Port and IEX; average experience of the directors is ~20 years with significant experience in manufacturing industries, accounting and finance, strategic planning and operations management Indian technical textile market size is pegged at US$20bn; National Technical Textiles Mission has been set up, which aims at an average growth rate of 15-20% to increase the domestic market size of technical textiles to US$40-50bn by the year 2024; global BOPP films market size is projected to grow Industry Growth 8 Low from US$24.2bn in 2020 to US$31.4bn by 2025 with 5.3% CAGR over CY20-CY25E; BOPET film market is expected to reach US$28.4bn by FY25E, with 5-7% CAGR over the same period; specialty chemicals business is expected to grow by 12-14% until CY24E As the specialty chemical and packaging film business is global in nature, there is no direct regulator for the industry; however, end-use products can Regulatory Environment / Risk 2 High be banned like ban on the single-use of plastic in India and likelihood of ban on certain agrochemical molecules posing indirect regulatory risk to SRF Leading manufacturer of R-134A gas in India; backward integration is in place to produce critical raw materials; unlike its peer it is less dependent on Entry Barriers / Competition 6 Low China for raw materials In case of packaging business, opening of Thailand plant would cater to new geographies i.e. South East Asian Market, while opening up of Hungary New Business/Client Potential 6 Low plant will cater to European markets SRF operates across 4 lines of business i.e. technical textiles, chemicals, packaging films and other business, which includes coated and laminated Business Diversification 7 Low fabrics

In technical textile segment, renewed contract negotiations with clients could lead to increase in the market share to ~50% in FY23E from the current Market Share Potential 7 Low level of ~45%

PAT margin is expected to expand to 15.4% in FY24E from 14.3% in FY21; expansion in margin is expected to be supported by technical textile and Margin Expansion Potential 6 Low specialty chemical segment

Earning Growth 8 Low SRF’s EPS is expected to clock ~25.6% CAGR over FY21-24E compared to 22% CAGR over FY18-FY21

Balance Sheet Strength 5 Medium Net debt stood at Rs23bn as of Mar’21; it is likely to reduce to Rs4bn by FY24E on the back of strong operating cash flow Net debt to equity ratio, which stood at 0.3x in FY21, is seen at ~0.1x in FY24E; interest coverage ratio, which stood at ~12.5x in FY21, is set to improve to Debt Profile 5 Medium ~34.4x in FY24E

FCF Generation/NWC 7 Low FCF generation is seen at Rs26.5bn over FY22E-FY24E

Dividend Policy 2 High Dividend yield could be lower than 1%, as the company is in expansion mode; average dividend payout is seen at ~8.9% over FY21-FY24E

Total Score Out of 150 89

Average Score (%) 59 Low 5 Environment, Social & Governance Matrix (ESGM)

Key Criteria Score Risk Comments Environment SRF manufactures HFC (Hydrofluorocarbons -R22); HFCs are the greenhouse gases that can be hundreds to thousands of times more potent than carbon dioxide Climate Change and Carbon Emission 2 High (CO2) in terms of climate change per unit of mass; CFCs and HFCs are a subset of a larger group of climate changing gases, which are expected to warm the planet by 2.5-8 degree F by the end of century

Harmful HFCs lead to increased formation of ground-level smog, which leads to poor air quality; specialty chemical companies are energy-intensive and are Air & Water Pollution 2 High amongst the highest carbon emitter; usage of water is the highest, most of the liquid discharge for specialty chemical companies are released in water thereby causing water pollution; we believe the company’s manufacturing operation involves substantial damage to the environment (air pollution and water pollution)

As SRF is in business of chemical manufacturing, the company might be directly/indirectly damaging the variety of plant/animal life adjacent to its manufacturing Biodiversity 3 High plants; we have not found the company’s efforts to maintain biodiversity in the Annual Report of FY21

SRF has developed two ‘My Gardens’ in the periphery of the Technical Textile Business’s plant in Thiruvallur district in Tamil Nadu; to implement this initiative, the Deforestation 7 Low employees are proactively engaged to spread awareness and participated in the plantation of saplings; so far, 500 fruit trees and 400 rose saplings have been planted

Apart from sourcing of energy through wind power, solar power and biomass fuel, the company has undertaken an initiative to convert its lighting to energy- Energy Efficiency 6 Low efficient LED lights, usage of energy-efficient motors, transformers etc. for various drives and reusing of waste heat; about 7,745 MWH of energy savings were recorded in FY21 through energy efficiency measures, while 792 TJ energy was consumed from biomass/renewable sources

In Mar’19, Gujarat Pollution Control Board (PCB) ordered SRF to shut down its Dahej unit for violating the industrial waste disposal norms and for installing a Waste Management 2 High calcium chloride plant without seeking the regulator’s permission; however, as per Annual Report FY21, the company disposes of its hazardous wastes through authorized agencies as identified by the PCB; as of now, there is no pending case with the PCB

Defence / Arms / Ammunition Exposure 10 Low No exposure towards defence/arms/ammunition Social Customer satisfaction is regularly monitored based on “customer vendor rating and feedback” periodically provided by the customers; SRF provides its customers Customer Satisfaction 7 Low with a feedback form to assess their satisfaction on technical and operational aspects; it has an SOP relating to customer satisfaction; customer feedback assessment is conducted annually to understand the level of customer satisfaction

SRF maintains high level of data protection and privacy of the customers’ data; it follows strict confidentiality policy; disaster recovery of key systems is set up in Data Protection & Privacy 8 Low Cloud to ensure continuity in the event of disruptive events at the main data centres as a part of business continuity plan; adequate identity and data protection solutions are deployed to ensure safe and secured working of employees from anywhere while protecting the intellectual property

Gender & Diversity 2 High Gender is skewed towards men as the ratio is abysmally low; as of March 31, 2021, the ratio of women to men stood at 1:24

The company has a long-term retention pay plan, which covers employees selected based on their current band and their long-term value to the company; the incentive is payable in three-year blocks subject to achievement of certain performance ratings; the company also has a scheme for talent retention of certain Employee Engagement 9 Low identified employees, under which incentive is paid for three years. ~18,739 man-hours of EHS training imparted to the permanent employees in FY21 with an employee engagement survey score of above 90

6 In FY21, SRF spent ~Rs102mn (1% of PAT) for promoting healthcare/education/employment enhancing vocational skills/environment/art and culture/rural development Community Relations / Service 6 Low etc.

Human Rights 7 Low The company has a code of conduct in place for protecting human rights, which is applicable to all stakeholders (both internal and external)

The company has established employee associations to provide a platform for dialogue between the management and employees, which helps in seeking Labour Standard 7 Low suggestions and resolve issues in a fair manner on a continuous basis; about 17% of the permanent employees are members of the employee association, which is slightly higher compared with peers

Key Criteria Score Risk Comments Governance

As on March 31, 2021, SRF’s audit committee comprised of three independent directors; the committee met four times in FY21 and two directors were present in all Audit Committee Structure 8 Low meetings, while one director was present in all three meetings.; all members of the committee have requisite expertise in financial management domain

Bribery & Corruption 8 Low SRF has a code of conduct, applicable to all employees including the employees of subsidiaries, which prohibits bribery and corruption

In FY20, remuneration of key managerial personnel was 44x of average salary of the employees; On the other hand, Aarti Industries paid 52x of average salary of Executive Compensation 7 Low the employees to key managerial remuneration in FY20

Lobbying 5 Medium We maintain a neutral stand in the absence of any credible information in this regard

Political Contribution 5 Medium We maintain a neutral stand in the absence of any credible information in this regard

Whistleblower Scheme 8 Low Whistleblower policy is in place and the policy applies to the directors and employees, who make a protected disclosure under this policy

Total Score Out of 200 119

Total Score (%) 60 Low

Score For < 5 Red High Risk For 5 Blue Medium Risk For > 5 Green Low Risk

Total Score (%) For < 50 Red High Risk For 50 Blue Medium Risk For > 50 Green Low Risk 7 Key Channel Check Takeaways f Fluorochemicals Business: Demand and production volume in the Air Conditioner (AC) market witnessed a spike in 1QFY22 compared to 1QFY21 (due to lower base). While the first two months of 2QFY22 (Jul’21 & Aug’21) were the lean period for cooling products, the market is expected to witness spurt in demand in the beginning of the festive season from Sept’21. China Fluorspar prices decreased by 3% MoM in Jul’21. f The Government of India has extended the validity of existing US$1.22/kg anti- dumping duty on R-134a (an inert gas) import from China by 6 months. f Packaging Films Business: In Jul’21, raw material prices of PET and PP saw rise to the tune of 4.5% and 3.2%, respectively on MoM basis on account of rise in crude prices to 2-year high of US$75/bbl. Export freight cost across geographies is witnessing an upward trend in 2QFY22TD. f Technical Textiles Business: In 1QFY22, farm-tyre (tractor/agri vehicle) segment witnessed robust demand due to normal monsoon forecast. Continual strong demand is observed in 2W/3W segment due to rise in personal mobility. In Jul’21, mining sector witnessed strong demand for belting fabrics. China caprolactam prices increased by 8% MoM in Jul’21. f In Jul’21, the prices of MEG and Sulphuric acid inched up in range of 1-6% MoM.

8 1QFY22 Earnings Conference Call – Key Takeaways f Opening Remarks: In addition to the lower base, there was a substantial increase in volume and price realisation seen across all the business segments in 1QFY22. The increase in export freight cost was negative in 1QFY22, however management believes that this cost would stabilize gradually. f Specialty Chemicals: Momentum of Specialty chemicals business remained intact due to increased volume of key products and favourable demand from exports. The pipeline of key molecules remains robust both in agrochemicals and pharmaceuticals. Two new dedicated facilities are opened in Dahej for agrochemicals segment. f Fluorochemicals Segment: As compared with last year, volumes are increased in both the markets of exports and domestic. Revival in the Auto market led to an increase in the sales of R-134A revenue. The company introduced HFC and hydrogen fluoride for industrial applications. The business was impacted due to 2nd lockdown however gradual easing of lockdown helped in volume recovery in the domestic market. Prices of refrigerants have seen an uptrend and the trend is likely to continue. Exports is already in good shape, while domestic markets have started to perform better recently. Both the markets are likely to perform better in coming quarters. Integrated fluorochemicals’ expansion project worth Rs5.5bn was undertaken at Dahej to be expected to complete in next ~24 months. f Packaging Segment: Despite lockdown, packaging segment continued to perform well in the domestic market. With continuous focus on the value-added products, the company had launched two new products in 1QFY22. Post commencement of second BOPET line in Thailand, exports market has performed well. The newly commissioned facility in Hungary also ramped up its capacity. In exports, Asian markets like Thailand, Indonesia and Vietnam have shown moderation because of a surge in COVID-19 caseload. Riots in South Africa also hindered the production process for the South African subsidiary. f Technical Textile: Business performed exceedingly well across NTCF, polyester yarn and belting fabrics. The revival was because of structural changes in the contracts with its key customers. f Capex for FY22E & FY23E: The company plans capex of ~Rs22bn and ~Rs16bn in FY22E and FY23E respectively. f NTCF (Technical Textiles): Volume expansion and price realisation coupled with structural changes in the contracts with the customer have led to superlative performance. Demand for local products increasing on the back of higher import prices. Market share increased by ~100bps and the trend is likely to continue over the medium-long term. No major capacity expansion is on cards, while maintenance capex will continue as usual. f BOPP & BOPET: There might be short term blip in terms of demand and supply. f Specialty chemical Guidance: The management guided for ~15-20% growth in specialty chemicals for FY22E. f Pharmaceuticals: Currently, the share of pharmaceuticals is ~10-15% (in Specialty chemical) and likely to grow by ~25-30% in the medium term. f Specialty chemical Margin: Margin improvement is likely as the raw material prices are expected to taper off in short term. Besides, new capacity addition, negotiations with the suppliers would help bringing down raw material prices further.

9 Exhibit 1: 1QFY22 Result Summary Table Y/E March (Rs mn) 1QFY22 1QFY21 YoY(%) 4QFY21 QoQ (%) Net Sales 26,994 15,452 74.7 26,077 3.5 Raw Material Cost 13,317 7,415 79.6 13,038 2.1 Employee Expenses 1,820 1,375 32.4 1,753 3.8 Power and fuel cost 2,318 1,233 88.0 2,097 10.5 Other Expenses 2,823 1,796 57.2 2,755 2.5 EBITDA 6,716 3,633 84.9 6,433 4.4 Interest 275 432 (36.4) 262 5.0 Depreciation 1,230 1,040 18.2 1,185 3.8 Other Income 138 101 36.4 130 6.3 Pre-tax income 5,349 2,262 136.5 5,117 4.5 Taxation 1,396 493 183.2 1,302 7.2 Net Income 3,953 1,769 123.5 3,815 3.6 Source: Company, RSec Research

10 Comparative Analysis

SRF (SRF) Navin Fluorine (NFIL) Investment View

SRF is engaged in chemicals, packaging and Navin Fluorine is one of the leading manufacturers Business technical textiles business. of specialty fluorochemicals in India.

f Technical Textile: ~19% f Refrigerant Gas: ~25% Revenue Break up f Chemicals & Polymers: ~41% f Inorganic Fluorides: ~20% (FY21) f Packaging Films: ~36% f Specialty Chemicals: ~35% f Others: ~4% f CRAMS: ~20% SRF has 2 specialty chemical plants, 4 Technical NFL has chemical complex in Surat, Gujarat spread Infrastructure textiles plants, 6 packaging plants and 1 each across ~135 acress. laminated & coated fabrics plant.

Major customers are agrochemical ,pharmaceuticals Major customers are agrochemical & Consumer details FMCG, construction, HVAC and tyres industries. pharmaceuticals industries

Specialty chemicals is on a multi-year growth Usage of fluorine is increasing not only in Growth story trajectory, Share of pharma business is increasing, agrochemicals & Pharma industries but also in other new value added products introduced in packaging industries; CRAMS segment to witness significant segment seen good traction, technical textile growth backed by huge opportunities in CRO & segment continues to be cash cow for SRF. CDMO Markets.

Financials (Rs mn) FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E Net Revenue 84,000 1,07,467 1,28,411 1,54,003 11.33 13.99 19.89 24.87 EBITDA 21,334 26,291 31,427 38,599 3.11 3.74 5.67 7.11 PAT 11,983 14,964 18,525 23,757 3.10 2.78 4.16 5.20 Growth (%) Net Revenue 16.5 27.9 19.5 19.9 (5.3) 23.4 42.2 25.0 EBITDA 46.6 23.2 19.5 22.8 (15.8) 20.2 51.6 25.5 PAT 30.8 24.9 23.8 28.2 (40.5) (10.5) 49.7 25.2 Margin (%) EBITDA Margin (%) 25.4 24.5 24.5 25.1 27.4 26.7 28.5 28.6 PAT Margin (%) 14.3 13.9 14.4 15.4 27.4 19.8 20.9 20.9 Per share (Rs) EPS 198.8 248.3 307.4 394.2 47.9 57.9 84.0 105.1 Book Value 1137.7 1362.0 1645.4 2015.7 322.1 372.0 439.0 527.1 DPS 24.0 24.0 24.0 24.0 12.5 12.7 17.4 17.9 Valuation (X) P/E 51.4 41.2 33.3 25.9 77.7 64.3 44.3 35.4 EV/EBITDA 30.2 24.3 20.2 16.1 57.3 47.5 31.3 24.9 P/BV 9.0 7.5 6.2 5.1 11.6 10.0 8.5 7.1 Return Ratio (%) RoCE (%) 14.3 15.2 16.5 18.5 11.1 13.0 16.3 15.3 RoE (%) 20.3 19.9 20.4 21.5 15.0 15.9 20.6 21.2 Source: Company; RSec Research

11 Key Investment Rationale

Our investment thesis is based on the following premises: I. Chemical Biz – The Key Long-term Growth Driver II. Demand-Supply Mismatch Continues to Boost Packaging Biz III. Replacement Demand & Revival of Auto Sector – Positive for Technical Textiles Biz IV. Operating Cash Flow Remains Strong – Enough to Fund Capex

I. Chemical Biz – The Key Long-term Growth Driver Within the chemical segment, Refgas, specialty chemical, industrial chemical and others contribute ~25%, 65%, 9% and 1%, respectively to total segmental revenue in FY21. The management expects specialty chemical business revenue to clock ~20% CAGR in the next 2-3 years, aided by agrochemical and pharma molecules. Within the agrochemicals market, SRF operates mainly in new class molecules with market size of US$2-3bn. As SRF is a preferred partner for global agro majors, we expect the company to steadily increase its asset turnover to achieve high double-digit RoCE, going forward. Refrigerant gas is well-placed to sustain its market dominance on the back of first-mover advantage with investment ahead of others and backward integration to Chloro-methanes. Further, there has been surge in domestic AC and refrigerator production capacities after the launch of several government initiatives like ban on pre-charged ACs imports, PLI and Atmanirbhar Bharat etc. Furthermore, with higher spending on healthcare and favourable government policies, the pharma and agrochemical segments will also witness continued growth. Exports are also likely to remain firm with positive outlook on the US economy, where the company already enjoys a reasonable business share. We expect SRF’s chemical segment revenue to clock 22% CAGR over FY21-FY24E. II. Demand-Supply Mismatch Continues to Boost Packaging Biz Though the packaging is a cyclical business both from the supply and demand perspective, the top players have disproportionate control over the supply in domestic BOPET market. Barring few quarters of supply-demand mismatch, we believe discipline in adding new supply by existing players would result in a stable market with EBIT margin of ~22% for SRF. Recently, SRF commissioned new capacities in Hungary and Thailand. The company is completely focusing on sales mix of both Thailand and Hungary BOPET facilities and vertical start-up of recently commissioned BOPP film line in Thailand. New BOPP film line in India is on track and likely to come up by Jul’22. We expect the packaging segment revenue to clock 23% CAGR over FY21-FY24E. III. Replacement Demand & Revival of Auto Sector – Positive for Technical Textiles Biz In 1QFY22, technical textile performed exceedingly well across NTCF, polyester yarn and belting fabrics, led by structural changes in the contracts with its key customers. Contracts, for which negotiation took place, were prospective in nature, out of which few would start from Apr’21, Aug’21 and Oct’21. About 90% of the sales are through long-term contracts. There are three players in the NTCF segment with SRF having ~45-50% market share. Competition from imports in this segment has sharply decreased, as the customers prefer domestic suppliers. The management expects healthy replacement demand in the coming years. Going ahead, the company will debottleneck its synthetic yarn capacity by adding 400-tonne capacity. Further, faster-than-expected recovery in the auto sector is expected to enhance operating performance of the company. With the economy witnessing steady revival, the replacement market (which accounts for ~60% of technical textiles market) is also likely do well. Looking ahead, we expect technical textile segment revenue to clock 18% CAGR over FY21-FY24E. IV. Operating Cash Flow Remains Strong – Enough to Fund Capex SRF is planning to incur ~Rs16bn capex per annum in the next 2-3 years. Operating cash flow, which remains in the range of ~Rs26bn/annum, is sufficient to fund the capex. We expect SRF’s FCF generation to remain strong at ~Rs5.4bn, Rs6.9bn and Rs14.2bn in FY22E, FY23E and FY24E, respectively. While RoCE is expected to improve to 18.5% in FY24E (from 14.3% in FY21), RoIC is seen at 21.6% in FY24E (from 16.1% in FY21).

12 Outlook & Valuation

Looking ahead, we expect SRF’s earnings to clock 26% CAGR over FY21-FY24E led by 22% CAGR in revenue during the same period. The revenue growth is expected to be driven primarily by 22% CAGR and 23% CAGR in chemicals and packaging films segments, respectively over FY21-FY24E, while the technical textiles business is expected to clock 18% CAGR over the same period. We expect the EBIT margin of chemicals segment to expand to 21.5% in FY24E from 20% in FY21 led by operating leverage playing out on HFC capacity addition. Amid disruptions in demand-supply dynamics led by global capacity addition of BOPET in next few quarters, we expect EBIT margin of packaging films business to soften to 22% in FY24E from 27% in FY21. EBIT margin of technical textile is likely to remain >23% in FY24E. The industry is witnessing up-tick in EBIT margin of technical textile business, mainly due to capacity closures in China, which led to a shift in demand towards Indian players. We value SRF’s chemicals business at 29x of FY24E EBITDA, packaging films and technical textiles business at 15x of FY24E EBITDA. We have compared SRF’s chemical business with Navin Fluorine (NFIL) and observed that our target multiple is at 20% discount to NFIL. Hence, we are comfortable with our 22x target EV/EBITDA multiple for SRF. We have increased our revenue and EBITDA estimate by 41%/44% and 63%/60%, respectively for FY22E/FY23E and introducing our estimates for FY24E. Rolling over our estimates to FY24E, we maintain BUY on SRF with an upwardly revised SOTP-based Target Price of Rs13,900 (from Rs4,386 earlier).

SOTP Valuation EV/EBITDA (Rs bn) FY24 EBITDA Multiple (x) EV

Technical Textiles 5.5 15.0 82.0 Chemicals & Polymers 17.5 29.0 506.2 Packaging Films 16.3 15.0 245.0 Others 0.6 9.0 8.6 Total EV 841.7 Less: Debt 18.1 Add: Cash & Cash Equivalents 14 Target Mcap (Rs bn) 838 Outstanding share (mn) 60.3 Target Price (Rs) 13,900 CMP (Rs) 10,229 Upside (%) 36% Target EV/EBITDA (x) 21.8 Implied P/E (x) 35.3 Source: RSec Research

13 Story in Charts

Exhibit 2: Revenue-mix Exhibit 3: EBIT-mix

100 100 8 4 4 3 6 5 4 6 2 3 1 3 3 3 90 90 80 36 39 80 29 31 37 38 39 40 38 40 39 40 44 49 70 70 60 60 50 (%) 28 50 (%) 34 40 34 41 43 41 42 40 36 43 40 41 42 30 41 30 40 20 32 20 10 24 19 32 15 15 14 13 24 10 17 17 0 12 10 15 0 FY18 FY19 FY21 FY20 FY22E FY23E FY24E FY18 FY19 FY21 FY20 FY22E FY23E FY24E Technical Textiles Chemicals Packaging Film Others Technical Textiles Chemicals Packaging Film Others

Source: Company, RSec Research Source: Company, RSec Research

Exhibit 4: Expect revenue CAGR of 22% over FY21-FY24E Exhibit 5: Expect PAT CAGR of 26% over FY21-FY24E

180 30% 25 23.8 60% 27% 154.0 160 55% 50% 28% 25% 20 18.5 140 128.4 40% 19% 20% 42% 120 107.5 20% 15.0 30% 16% 17% 15 31% 28% 20% 100 12.0 25% 24% 84.0 15% 72.1 bn)(Rs (Rs bn)(Rs 80 71.0 10% 10 9.2 55.9 60 10% 0% 5.9 40 5 4.2 -10% 5% 20 2% -20% -19% 0 0% 0 -30% FY18 FY19 FY21 FY20 FY18 FY19 FY21 FY20 FY22E FY23E FY24E FY22E FY23E FY24E

Revenue Growth (RHS) Adj. PAT Growth (RHS)

Source: Company, RSec Research Source: Company, RSec Research

Exhibit 6: Return ratios to stabalise Exhibit 7: Expect strong FCF generation

25 20,000

20 15,000

15 10,000 (%) 5,000 10 (Rs mn)

- 5 FY18 FY19 FY20 FY21 FY22E FY23E FY24E (5,000) 0 FY18 FY19 FY21 FY20 (10,000) FY22E FY23E FY24E RoE RoCE FCF

Source: Company, RSec Research Source: Company, RSec Research

14 Exhibit 8: Revenue mix (domestic/export) Exhibit 9: Segmental capital expenditure break-up

100 100 2 1 1

22 17 80 80 43 44 47 49 44 57 48 65 60 60 (%) (%) 77 40 40 73 49 57 56 53 51 43 47 20 20 30

6 0 0 2 4 5 4 FY17 FY17 FY17 FY18 FY18 FY19 FY21 FY18 FY19 FY21 FY20 FY20

Within India (% of Revenue) Outside India (% of Revenue) Technical Textile Chemical Business Packaging Film Business Others Unallocated

Source: Company, RSec Research Source: Company, RSec Research

15 Key Financials

Profit & Loss Statement (Consolidated) Y/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E Total Income from Operations 72,094 84,000 1,07,467 1,28,411 1,54,003 Change (%) 1.5 16.5 27.9 19.5 19.9 Raw Materials 36,870 40,189 53,234 62,955 72,437 Employee Cost 5,419 6,214 7,523 8,989 11,088 Power and fuel Cost 6,726 7,173 8,597 10,915 14,630 Other Expenses 8,530 9,090 11,821 14,125 17,248 Total Expenditure 57,545 62,667 81,175 96,984 1,15,404 % of Sales 79.8 74.6 75.5 75.5 74.9 EBITDA 14,549 21,334 26,291 31,427 38,599 Margin (%) 20.2 25.4 24.5 24.5 25.1 Depreciation 3,886 4,531 5,322 5,954 6,585 EBIT 10,663 16,803 20,969 25,472 32,014 Int. and Finance Charges 2,007 1,340 1,224 1,140 930 Other Income 491 664 208 368 592 PBT bef. EO Exp. 9,147 16,127 19,953 24,700 31,676 PBT after EO Exp. 9,147 16,127 19,953 24,700 31,676 Total Tax (12) 4,144 4,988 6,175 7,919 Tax Rate (%) (0.1) 25.7 25.0 25.0 25.0 Reported PAT 9,159 11,983 14,964 18,525 23,757 Change (%) 54.8 30.8 24.9 23.8 28.2 Margin (%) 12.7 14.3 13.9 14.4 15.4

Balance Sheet (Consolidated) Y/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E Equity Share Capital 585 603 603 603 603 Total Reserves 48,748 67,962 81,480 98,558 1,20,869 Net Worth 49,333 68,564 82,082 99,161 1,21,471 Total Loans 33,548 30,083 28,083 26,083 18,083 Deferred Tax Liabilities 1,755 3,862 3,862 3,862 3,862 Capital Employed 84,636 1,02,509 1,14,027 1,29,105 1,43,416 Gross Block 1,06,300 1,25,465 1,40,643 1,57,079 1,72,166 Less: Accum. Deprn. 43,795 48,325 53,648 59,602 66,187 Net Fixed Assets 62,505 77,140 86,996 97,477 1,05,979 Goodwill on Consolidation 1,171 1,130 1,130 1,130 1,130 Capital WIP 13,933 7,723 10,545 10,109 9,022 Current Investments 2,027 4,167 4,167 4,167 4,167 Total Investments 2,027 4,167 4,167 4,167 4,167 Curr. Assets, Loans&Adv. 29,132 39,135 44,489 55,797 69,572 Inventory 12,012 14,658 16,043 18,973 21,830 Account Receivables 8,911 12,746 13,838 16,535 19,831 Cash and Bank Balance 1,255 2,820 4,936 8,732 14,051 Loans and Advances 6,955 8,911 9,672 11,557 13,860 Curr. Liability & Prov. 24,132 26,785 33,299 39,574 46,453 Account Payables 11,117 15,852 17,502 20,698 23,815 Other Current Liabilities 12,573 10,411 15,045 17,978 21,560 Provisions 442 522 752 899 1,078 Net Current Assets 5,000 12,350 11,190 16,223 23,118 Appl. of Funds 84,636 1,02,509 1,14,027 1,29,105 1,43,416

16 Cash Flow Statement (Consolidated) Y/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E OP/(Loss) before Tax 10,706 16,099 19,953 24,700 31,676 Depreciation 3,929 4,531 5,322 5,954 6,585 Interest & Finance Charges 2,016 1,340 1,224 1,140 930 Direct Taxes Paid (1,427) (2,553) (4,988) (6,175) (7,919) (Inc)/Dec in WC (239) (1,236) 3,276 (1,237) (1,577) CF from Operations 14,984 18,181 24,787 24,383 29,695 Others (1,926) 892 - - - CF from Operating incl EO 13,058 19,073 24,787 24,383 29,695 (Inc)/Dec in FA (13,730) (12,144) (18,000) (16,000) (14,000) Free Cash Flow (671) 6,930 6,787 8,383 15,695 (Pur)/Sale of Investments 2,174 (1,887) - - - Others (248) (966) - - - CF from Investments (11,803) (14,997) (18,000) (16,000) (14,000) Issue of Shares - 7,500 - - - Inc/(Dec) in Debt 1,207 (6,708) (2,000) (2,000) (8,000) Interest Paid (2,040) (1,574) (1,224) (1,140) (930) Dividend Paid (969) (1,408) (1,446) (1,446) (1,446) Others (189) (322) - - - CF from Fin. Activity (1,990) (2,511) (4,671) (4,587) (10,376) Inc/Dec of Cash (735) 1,565 2,116 3,796 5,318 Opening Balance 1,989 1,254 2,820 4,936 8,732 Closing Balance 1,254 2,820 4,936 8,732 14,051

Key Ratios (Consolidated) Y/E Mar FY20 FY21 FY22E FY23E FY24E Basic (INR) EPS 156.6 198.8 248.3 307.4 394.2 Cash EPS 223.0 274.0 336.6 406.2 503.5 BV/Share 843.3 1,137.7 1,362.0 1,645.4 2,015.7 DPS 14.0 24.0 24.0 24.0 24.0 Payout (%) 10.4 12.1 9.7 7.8 6.1 Valuation (x) P/E 65.3 51.4 41.2 33.3 25.9 Cash P/E 45.9 37.3 30.4 25.2 20.3 P/BV 12.1 9.0 7.5 6.2 5.1 EV/Sales 8.7 7.7 6.0 4.9 4.0 EV/EBITDA 43.3 30.2 24.3 20.2 16.1 Dividend Yield (%) 0.1 0.2 0.2 0.2 0.2 FCF per share (11.5) 115.0 112.6 139.1 260.4 Return Ratios (%) RoE 20.2 20.3 19.9 20.4 21.5 RoCE 14.2 14.3 15.2 16.5 18.5 RoIC 15.9 16.1 17.3 19.1 21.6 Working Capital Ratios Fixed Asset Turnover (x) 0.7 0.7 0.8 0.8 0.9 Asset Turnover (x) 0.9 0.8 0.9 1.0 1.1 Inventory (Days) 118.9 133.1 110.0 110.0 110.0 Debtor (Days) 45.1 55.4 47.0 47.0 47.0 Creditor (Days) 110.1 144.0 120.0 120.0 120.0 Leverage Ratio (x) Current Ratio 1.2 1.5 1.3 1.4 1.5 Interest Cover Ratio 5.3 12.5 17.1 22.3 34.4 Net Debt/Equity 0.6 0.3 0.3 0.2 0.0

17 Company Overview

SRF is engaged in manufacturing of chemicals and polymers, technical textiles and packaging films. Its segments include: (1) Technical Textiles Business (TTB), which includes nylon tire cord fabric, belting fabric, coated fabric, polyester tire cord fabric and industrial yarns and its research and development; (2) Chemicals and Polymers Business (CPB), which includes refrigerant gases, pharmaceuticals and allied products, engineering plastics business and its research and development; and (3) Packaging Films Business (PFB), which includes polyester films. The CPB/PFB/TTB/other segments contributed 43%/39%/15%/3% to the company’s consolidated revenue in FY21.

Shareholding Pattern Key Institutional Shareholders Institution Holding (%) 0.01% 0.17% Kotak Equity Opportunities Fund 4.51 18.95% SBI Equity Hybrid Fund 1.31

Promoter Amansa Holding Pvt Ltd 5.56 Mutual Funds Kotak Funds - India Midcap fund 1.17 Foreign Portfolio Investors 50.77% Any Other Mirae Asset Emerging Bluechip fund 1.23 18.39% Financial Institutions/Banks Source: bseindia.com Insurance Companies

11.72%

Source: Company, RSec Research

Rating History

Date Rating CMP (Rs) TP (Rs) 30th Sept 2019 HOLD 2,751 2,710 5th Nov 2019 HOLD 2,957 2,908 4th Feb 2020 HOLD 3,741 3,725 15th June 2020 BUY 3,683 4,368

18 Change in Ratings

We have now only BUY and SELL Recommendation and have discontinued HOLD Recommendation. We now have 2 Year Target Price and have discontinued with 1 year Target Price.

Score For < 5 Red High Risk For 5 Blue Medium Risk For > 5 Green Low Risk

Total Score (%) For < 50 Red High Risk For 50 Blue Medium Risk For > 50 Green Low Risk

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