SRF Limited (503806) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Results Conference Call of SRF Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Sinha of Emkay Global. Thank you, and over to you.

Good evening, everyone. I would like to welcome Mr. Rahul Jain, President and CFO of SRF Limited, and thank him for giving us this opportunity. I would now hand over the call to him for the opening remarks. Over to you, sir.

Good afternoon, everyone, and thank you all for joining us on SRF Limited Quarter 3 and 9 months FY '20 results conference call. We will begin this call with brief opening remarks from our President and CFO, Mr. Rahul Jain, following which we will open the forum for an interactive question-and-answer session. Before we begin this call, I would like to point out that some statements made in this call may be forward-looking and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Jain to make his opening remarks.

Good afternoon, everyone, and a warm welcome to everybody present on today's call. I will initiate the call by vis-a-vis taking you through the quarter's key operational highlights, following which we will be happy to have a detailed Q&A session. I am pleased to share that we have registered a healthy performance for the quarter under review. In Q3 FY '20, consolidated revenues increased to INR 1,850 crores, by about 2%. EBITDA increased by 24% to INR 396 crores and PAT increased 125% to INR 345 crores. During September 2019, the ordinance to allow corporates to exercise an option for lower tax rates was effective. Due to the same, our deferred tax balances have had to be restated, which has had to a one -- which has led to a onetime credit of INR 123.4 crores. This will lead to a lower effective tax rate going forward. The company has, however, not exercised the option available under the act. The PAT number also excludes discontinued business operation numbers. Despite current subdued domestic and global environment, we have delivered an encouraging operating and financial performance. The growth was primarily on account of strong performance reported in the Chemicals business and the Packaging Films business. I am glad to put forth that the Board of Directors have approved a second interim dividend at 70%, amounting to INR 7 per share. This will lead to a cash outflow of INR 48.5 crores including tax. Let me share an update on the segmental performance, beginning with our Chemicals business, which comprises of Fluorochemicals and Specialty Chemicals businesses. The Specialty Chemicals segment has been a key growth driver for us during this quarter. As discussed in previous calls, we have been witnessing a healthy uptick in global demand for our products in agrochemical space, especially from the overseas markets. This emanates largely out of positive optics experienced by our customers in the LATAM market. The pharma market continues to grow at a consistent pace. We remain optimistic to deliver growth on overall revenue in the current financial year in excess of the guidance earlier. As we expand our capacities and launch new products, we are driving volumes on the back of strong demand that we are witnessing in the space, and are fairly confident of maintaining the growth momentum in the next fiscal as well. Given the management's confidence in the business and its long-term growth outlook, the Board has approved the proposal to set up a series of dedicated facilities to produce intermediates, which will get implemented in the next 8 to 12 months, catering to the agrochemicals segment at an aggregate cost of INR 238 crores. Coming to the Fluorochemicals segment. Performance was subdued, owing to slowdown in the auto sector, as well as a drop in global prices of refrigerants on account of weak demand. Further, weak prices of certain chloromethane products normalized during the third quarter, thereby impacting overall revenues and profitability. The recently commissioned HFC capacities at a cost of INR 477 crores, led to a negative impact on the quarterly margin profile. As we expect to gradually ramp-up volumes over the next few quarters, the operating leverage will play out, so as to lead to an expansion in the overall margins. The Board also approved a CapEx of INR 65.5 crore for HFC as Phase 1 for future incremental capacities. This has been necessitated as certain equipment have long lead times and we would like to plan our future growth in the refrigerant space. Over the years, SRF has proven to be a leading global player in the segment. We have made astute investments in innovation and technology, making us one of the world's very few backward-integrated players. We are well placed to further enhance our market leadership as demand scenario strengthens, which will enable us to optimally utilize our newly commissioned facility. Moving to the Packaging Films business. We have delivered strong performance in both BOPET and BOPP segments during the quarter on the back of healthy demand, better plant efficiencies and improved margins. EBIT margins remained strong, at 23% in Q3, as we continue to focus on improving efficiency, expanding new product offerings and increasing contribution from value-added products. With 3 new BOPET lines coming onstream, 2 in Indonesia and 1 in India, we do expect normalization in margins in the ensuing quarters. Our Hungary and Thailand project sites are progressing well, and should be commissioned as per schedule. I am delighted to share that Packaging Films business, both the DTA and SEZ sites in Indore, have been awarded the prestigious Sword of Honour by British Safety Council on November 22, 2019, in London. Each year, British Safety Council presents the award, the Sword of Honour, to companies around the world for excellence in health and safety measures. SRF is proud to have demonstrated to an independent adjudication panel a proven track record of excellence in managing risks to worker's health and safety and to the environment. It is a testament that SRF is leading the global efforts to our -- to make our workplace safe, healthy and sustainable. Now on to the Technical Textiles business. Performance in Tyre Cord Fabric segment was subdued, owing to a drop in the automotive sector sales. But by the end of December, we have witnessed a slight recovery due to the festive season. In Belting Fabrics, the performance was in line with expectations. Also, sales from value-added products and new products in Belting Fabrics and Polyester Industrial Yarn segment have contributed to the overall performance. We believe that the business performance will drive GDP growth and as volumes ramp-up, operating leverages play out and results of our past restructuring come into effect, these will lead to better margins in the future. Under Others businesses, both Coated and Laminated Fabric, we continued to record healthy performance in terms of sales, with several new products added to the portfolio. Giving back to the community is one of our core values, and building on this belief, SRF Foundation, our corporate social responsibility arm, is doing their bit in empowering students by providing them quality education through various CSR programs. Consequent to that, SRF has been conferred the 4th ICSI Institute Award -- CSR Excellence Award 2019 in Best Corporate category. Additionally, SRF Foundation has been conferred Best Partner in Digital Citizenship Award by Capgemini India, second time in a row. It is a matter of great pride when our initiatives in the CSR space are recognized by our partners. To conclude, we have established a solid multi-business entity and believe it will help us manage challenges as well as leverage opportunities effectively in the respective businesses. With major investments in place, superior R&D capabilities and a diversified business model, we are confident of creating sustained value for all its stakeholders over the coming years. On that note, I will conclude my remarks and would be happy to discuss any questions, comments or suggestions that you may have. I would now like to ask the moderator to open the line for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Ankit Gor from Systematix.

First of all, congrats for good set of numbers. Sir, my first question with regards to Chemical business, I just wanted to know one thing, sir, barring impact of new HFC capacity, which has impacted our margin EBIT, was the margin in line with our quarterly run rate -- recent quarterly run rate?

When you look at it, Ankit, the fact is that two things have played out during the quarter with respect to the Fluorochemicals business. The overall position is that two things have hit us. The depreciation impact of the recently capitalized plants on HFC as well as the fixed costs that are related to that plant till that point of capitalization were being capitalized in that sense. Yes, to that extent, there is some reduction in overall contribution margin because of the overall lower prices of refrigerant gases and certain chloromethane, but it has not been very significant. Other than these two elements, if that would not have been there, we would have been probably flattish.

Okay. And within that -- no, my next question is, after the cut of R22 in first gen, has the prices kind of moved downwards or the prices are still steep for R22? I believe R134a is mainly for auto, so prices must have gone down on volume-wise always. But I'm just trying to understand about R22, what's the current situation, sir?

Again, the cut comes into effect January 1. The quarter's numbers don't take that into account. So that is one. Also, the fact is that we've seen this to play out in a manner where, if you are able to produce R22 for your other requirements, which we propose to do in the short to the medium term, we will still be able to sell R22. And typically, in these situations, we have seen prices to harden rather than soften.

Okay. So that must have helped in some sort of margin profile?

Also helps in the sense that some of these players, which will have to take that cut, will probably be stocking some of R22 -- some of the R22 for their future requirements as well.

Right. Sir, with regards to CapEx and Chemical business, sir, there is backward indication. So the -- I believe this is for capital purpose, right, intermediate plan for capital purpose? Is it right to assume that with -- INR 238 crores?

What are you talking about, the INR 65.5 crores?

No. Sir, INR 238 crore, or whatever CapEx we announced, I can't say [indiscernible].

CapEx for -- that INR 238 crores is not with respect to the Fluorochemicals business. It is with respect to the Specialty Chemicals business.

Absolutely, sir. I am talking about --

And to that extent, these are all for new products that we will be launching or already have launched the products, which are, let's say, supplied from our multipurpose plants to our customers. So this is essentially existing products that will be ramped up.

Okay. So this will be the final product probably from our plant, right? It's not for a captive purpose, which will be [indiscernible] ...

No, no. These are not captive.

Okay. Okay. And my next question is regards to Packaging Films. Sir, we have seen a substantial profitability there, expansion of profitability. I believe this is mainly because the spread expansion since the BOPET prices have moved downwards 10% -- BOPP prices, I'm just talking about polypropylene. And even PTA and MEG prices have moved downwards in quarter. So has it played out that way or some inventory gain is also there?

What you are saying is right because you would see that the impact is that there has been overall sale value is lower. So because of which, what has happened is that my sales -- because the key raw material price has come down, my sales value has come down. But that does not mean that my margin has come down. My margin has, in fact, gone up because of that from a mathematical perspective as well as the fact that demand and supply situation has prevailed like that.

Right. And sir, would you...

No. One-time inventory gains that have been recorded here.

Okay. Sir, my -- related to that question only, would you mind giving us some volume growth there? What was the volume growth in top Packaging Films business, so we will get some idea there? Just percentage will do.

So again, you have to understand, I have not put up any new capacities. So there was no large volume growth. Whatever higher efficiencies I am talking about are incremental in nature because they have come through being able to utilize my plants more effectively and at a higher speed. There are no new incremental capacities that have kicked in.

[Operator Instructions] The next question is from the line of Atul Tiwari from Citigroup.

Sir, you mentioned to the deferred tax benefits in this quarter. And at the same time, if I got you right, you said that you have decided to stay back in the earlier tax regime and not move to the new corporate tax. So the two questions then, can you just throw some more light at why then you will have a benefit on the deferred tax account? And what should be the normalized full year tax rate we should be working with going ahead? That's my first question.

So should I first answer your first question or do you want to ask the second question also?

And the second one was, if we can have gross and -- consolidated gross debt and cash?

Okay. Let me first answer your first question. See, essentially what happened is that because of the fact that the rates have come into play from September, and this is an option -- onetime option that has been given to corporates to be exercised, some of the deferred tax liabilities that I was carrying in my books will unwind in a period where I would have switched to the new tax rate. And because I would have had to then recognize those liabilities at a lower tax rate, that accounting guidance, or the Ind AS Transition Facilitation Group provides a guidance, that, that recognition has to happen now. Based on certain projections that I have in terms of how are my deferred tax liabilities and my deferred tax assets will play out. So to that extent, I have had to recognize that gain in my current quarter, despite not having opted for the lower rate. Had I opted for the lower rate, the guidance prescribes that the MAT credits that are available will have to be written off, which I'm not doing.

Okay. Okay. So sir, what is the effective corporate tax rate we should be working with for, say, next year roughly?

Atul, my sense is [Technical Difficulty] see 4 to -- let's say, 26% to 28% should be our ETR.

Okay. And sir, debt numbers?

I have not got that number readily available, Atul. I will give it to you separately, because we don't declare our balance sheet numbers on a quarterly basis, but that number is transparent, I will be able to give it to you next time on our personal call.

The next question is from the line of Umesh Patel from TCG Asset Management.

Just a couple of questions related to Packaging segment. Sir, do you think that this ADD abolishment on PTA will benefit industry as well as you as the company will value now PTA at competitive price. And what is the pricing difference between imported and domestic products as of now?

Yes. Anti-dumping duty was roughly about $25. And to that extent, very low impact. But for us, it was no impact in any case because the PTA that we were using was in an SEZ and we were in a duty-free environment. For the industry as a whole, there will be a small positive, marginal.

Okay. And sir, related to BOPP and BOPET market, what is the market condition? Do you see any oversupply as of now? And what is the sustainable EBITDA margin do we see in FY '21?

Again, I can't give you the EBITDA margin number. What I can tell you is that, given the fact that as of now, the demand/supply scenario seems to be well managed, the demand is kind of outstripping -- so supply still outstrips demand, but -- and this is what I'm talking about from a BOPET segment perspective. But given the fact that new capacities have got added, we believe that there will be some tapering in the margin. Again, I would like to inform you that we have a value-added product profile, which is much larger than some of our competitors. And to that extent, we should continue to deliver superior margins. That's something that I can guide you on. But I cannot give you a number in terms of a sustainable margin.

The next question is from the line of [ Atishay Malan from Drone Capital ].

Just 2 questions from my side. The first one, I just want to clarify, has the production of HFO-1234yf and R-467 started?

So again, for 1234yf, we have not started commercial production. We have already indicated that for 1234yf, we have established technology and a pilot. There are no commercial requirements for 1234yf and, therefore, not doing any commercial supplies. R-467 is a blend. And to that extent, whenever there is a requirement, there is supplies that match that. Now, those are very low.

Okay. And my second one is, I guess, the growth of the Specialty Chemicals business is indicative of the ingenuity of the R&D team. But in your own words, can you explain the competitive advantage that SRF has over, let's say, like another Chinese or a European solution provider that a client would pick SRF over these other companies?

If I start explaining that USP, that will take an hour to give you the explanation. Probably not the right thing to do on the call. Maybe on a separate thing, we can do this. Because if I start doing that, then this entire call will go into the USP only.

The next question is from the line of Rohan Gupta from Edelweiss.

Yes. Sir, first question on this CapEx that you mentioned of INR 238 crores for one of the existing products you are increasing the capacity. Is this the order which you have got? Is that a diversion from some of the existing supplier to your customer, which you have got? Or it's the increase in end-product demand which the customer is sensing?

Rohan, could you just repeat? I didn't hear it clearly.

Sir, the CapEx that you're doing for the existing product in agrochemical, INR 238 crores, the new CapEx which you're talking, I just want to understand that whether this CapEx -- the order which you have got, it's from moved -- it has been moved from some other supplier to your end customer to you? Or it is increasing end-product demand from your customer end?

So it is -- I don't know whether my customer is buying it from me other than from someone else, that I don't know. What I can tell you is we've seen traction on certain products. It is not a single CapEx. It's a series of dedicated plants that we are putting up. And there are about 3 or 4, 5 different products that we can produce in the series of plants. These are products that we've already supplied batch quantities and certain quantities from our multipurpose plants, and those are now getting into contracts and being supplied to the customers.

Okay. So this is not a single product? You can make 4, 5 or multiple products on this plant?

Not a single plant, it is not a single product.

Okay. And with keeping in mind asset turns [ seem ] to 1.5x to 2x for this opportunity?

I am never giving you asset turns on Specialty Chemical business. You make your own judgment on asset turns.

Okay. Sir, second question on the China impact of the virus. So we are getting into season now for our fluorspar purchase [ for X gas ]. Do you see that there can be any implication or rising question on availability of fluorspar, rising prices of fluorspar? How you see that?

Okay. So the answer to that is that fluorspar is not only Chinese fluorspar that we use. So there is no restriction in our products to be using only Chinese fluorspar. So we have other sources of fluorspar available. Fluorspar availability is from South Africa, Russia, Kenya, a couple of other locations as well. So we are not restricted to Chinese. So we don't see the threat on coronavirus impacting our supplies of fluorspar. That's one. And second, the impact on the U.S. season for coronavirus, it's too early to predict in that sense.

Okay. And sir, just third related only from the fluorspar [ only event ] gas. So when the season started, we have seen that China has been dumping a lot of gas in India and so the production getting impacted there in the current scenario. Do you see that there's an opportunity to increase the gas prices when the season starts for us in March onward in India?

The season has already begun. So what happens is the season is probably 1 quarter prior to the summer months, right? So as I said, our new capacities are in place well in time. We should be in a position to ramp them up over the next 3, 4, 5 quarters, whatever that means. Also, the fact is while there was some gas that was being imported from China, I think there is an impact in terms of whether they will stop the dumping. It will still continue. We have good cost structures in place. We will be able to manage the domestic market and be able to compete with the Chinese in the international market as well.

The next question is from the line of Ayush B from Aequitas Investment.

Sir, I just wanted to understand on the Packaging business, you mentioned that BOPET segment, you might see some reduction in margins. And so what is the situation on the BOPP side?

BOPP is slightly better off. I don't see a significant impact on the margins because in any case, BOPP, for a long time, has been suffering because of the negative demand/supply situation. That seems to be bettering off as of now and we believe it will continue the way it is as of now.

Okay. And any kind of impact of the whole virus situation in China that might affect the Packaging sector because I believe there are significant packaging film capacities in China that get exported, right? So yes, I don't see if we could get out of it.

It is not possible to comment on the impact of coronavirus today. It's not possible, please.

The next question is from the line of Ritesh Gupta from AMBIT Capital.

Just on refrigerant business, what you were telling to the previous participant. I just wanted to check if -- so you said that this quarter, there was a demand/supply impact on the refrigerant side, which had margins kind of getting impacted because of that? And then you also say that next 3 to 5 quarters, you expect the refrigerant capacity to ramp-up meaningfully over the next 3 to 5 quarters. So where is the difference? And I think earlier also, you said that the doubling of capacity could get fully utilized in the next 18 to 24 months. So why there is a oversupply situation? And why do you believe that this is more of an intermittent thing in 1 or 2 quarters? So just some clarification there?

I never said that there was an oversupply situation. I never said that there was an oversupply situation. I said...

No. You said demand/supply -- demand has been weak is what you said, right? So...

Demand has been weak because of the 134a -- demand has been weak because of the auto suppliers. There is no weakness in demand on the refrigerant side on 32 and blends, right? So that is one. And the second question that you asked was?

The second question is the same thing. Your R-134a capacity has increased by 50%. Let's say, at least 50% is what your R-134a capacity is increased by. So then like what's the outlook for R-134a volume growth rate? Do you see it to mimic how the auto volumes pan out? Or you -- I'm sure you would have been looking to gain market share from somewhere. So to that extent, what's the guidance for the next 3 to 4 quarters? I mean what is the outlook from the next 4 quarters point of view?

Again, the R-134a demand, from our perspective, last quarter, there were some delays in the U.S. orders. Some of those are now being executed. To that extent, there should be better volumes in the next quarter. But again, when we look at it, I think one of the key things that we need to watch is how, obviously, the auto sector pans out. And to that extent, 134a will be directly linked to that one. As there is more, let's say, order months that come through, the demand on the secondary market also ramps up significantly. We believe we are well positioned to leverage that, given our distribution network.

And just on the margin side, on the Chemicals margin side, if I understand correctly, most of the impact in the quarter is primarily because of refrigerant business and Specialty Chemical ramp-up because of operating EBIT has been as per plan. I mean there is no drop in gross margins of Specialty Chemicals per se?

No. There has been no drop in gross margins. But again, as I said, the impact on the overall Chemicals business is because of the fact that we had capitalized our HFC product in October. To that extent, some of the fixed cost impact and the depreciation impact has to be, let's say, taken up over a period of time, which will give us better margins.

And that -- yes, just last one. So because I was looking at your gross profit growth of only 17%, now it also means that somewhere gross profit -- I mean is it that the new capacity also means that there could be some raw material wastages, et cetera, because you -- when you start new capacity, there could be some issues because of that. Because gross profit growth was 17% actually, and it shows that [ apart from ] which also gives us a -- because I think most of our like chemical specialties has grown really well. So I believe the gross profit growth could have been a bit higher at a consol level. So is there some impact because of new plant and the -- maybe some raw material wastage, et cetera, which also have...?

Not really. Not very significant. There could be some, but not significant. And I don't know where you are calculating the gross profit from. The numbers probably only give you the EBIT margins.

No, no, no. I'm looking at overall gross profit growth of 17%. So if specialties have grown really well and if Chemicals and Packaging EBITDA is growing really well, I believe gross profit -- I mean gross profit...

It is [ pretty ] diversified. So it is not a single component of that business that I can give you gross profit details of.

The next question is from the line of Ankur Periwal from Axis Capital.

Now clarifying on this INR 238 crore CapEx for the agro intermediary, that segment that we are doing, and combining it with your comment earlier in the call where you mentioned that for FY '20, our Specialty Chemical business growth guidance remains intact, and the same will continue going ahead as well. From a capacity availability point of view...

Let me just caution you here. When I said that, it doesn't mean that it will grow again at 40% to 50%. I'm saying the growth guidance remains. The number on the growth guidance, I will come back to you only in May. So let me just caution you and clarify that.

Sure, sure. So this INR 238 crore CapEx, we will see the revenue contribution coming in starting FY '22 only, largely or maybe Q4 of next financial year?

Yes. It should get completed in FY '21. So FY '22 is probably when the ramp-up will happen.

Sure. And any incremental thoughts on the CapEx for the Specialty business perspective that you mentioned will be only in the month of May, is it?

Yes. We will be able to give you more clarity on both guidance, CapEx for the next year only in the next call.

Sure. And sir, second question on the margin, although it partially got addressed, but just clarifying, now given that specialty growth -- Specialty Chemical growth would have been much faster, given the slowdown in fluorochem, and operating leverage also playing out there, the margin expansion should have been there, but it got nullified or probably negated because of the depreciation, et cetera, the cost and the onetime cost for the fixed cost that you mentioned coming into the quarter.

Correct.

So the -- so which I -- what I wanted to clarify was the chemical margin, specifically expansion here, would have been healthy enough, given their top line revenue growth. It's just the other part of the business which got impact -- which led to the margin decline?

That's what I said earlier also.

The next question is from the line of Mittal Dikshit from Subhkam Ventures.

Sir, just a clarification on this. You mentioned that there'll be series of these plants. So can we assume that every quarter you'll be announcing or maybe every 6 months you will be announcing this kind of CapEx for this?

I can't assume that. How will you assume it? I don't think that, that is a fair assumption to make.

No, just working on the time frame in which you plan to actually put up these plants?

So Mittal, just hear me out. The fact is that as we get more clarity, as we get more ability on newer molecules that will be developed over a period of time, we will keep putting up new plants is the standard guidance that we have. And as that happens, we will be communicating that to you. Today, assuming that we will keep putting up INR 250 crores of new plants each quarter is pretty much very far-fetched.

Okay, okay. And secondly, sir, you mentioned in your initial remarks that you'll be exceeding the guidance this year. So any -- can you quantify that?

Yes. Happy with what I've told you. That's it.

The next question is from the line of Surya Patra from PhillipCapital.

Sir, just one clarification on the fluoro specialty mix -- business mix. Sir, the agri intermediate business, whenever that we mentioned, whether it is significantly different from the fluoro compound, what we talk about, our fluoro facility that we talk about?

I'm not able to figure your question, Mr. Patra.

Yes. So this agri intermediate, when we mention, is it away from the fluoro compound that we developed at the -- customized compound that we developed for the clients?

Again?

Or both are same that you mean to say?

I still don't understand your question, Mr. Surya. Maybe you can ask it separately. I'm not able to figure out.

Sir, basically, what I'm trying to understand, again, this quarter, see this fluoro specialty should be the -- one of the best-ever quarter possibly, fluoro specialty revenue mix, percentage-wise in the Chemical business. And since the refrigerant business is relatively weaker, so sequentially, there should have been kind of -- there should have been some improvement in the gross margin level? See, on the overall margin level or EBIT level, that would be, obviously, the impact of the depreciation, all that would be there, but...

Mr. Surya, you don't look at it on a quarter-on-quarter perspective. You are comparing Q2 versus Q3, that is other challenge. If you take it from a last Q3 perspective and Q3 last year -- this year perspective, you will find even there the margin expansion. I have also told you in no less words that the amount of impact of the capitalization of new plant, due to fixed cost and depreciation, is something that has led to lower margins in the Fluorochemicals business, which should correct over a period of time. What more I can tell you, I don't understand.