SRF Limited (503806) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SRF Update on Refrigerant Segment. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ranjit Cirumalla. Thank you, and over to you, sir.

Thank you, Sagar. Good afternoon, everyone, and thank you for joining us today. We at IIFL Capital Services Limited are pleased to host SRF Limited's Update on Refrigerant Segment Conference Call. We have with us today Mr. Prashant Yadav, President and CEO of Fluorochemicals; and Mr. Rahul Jain, President and CFO of SRF Limited. In this session, Prashant will share his perspective on the outlook of the HFCs amidst the evolving regulatory environment. And we request participants to strictly restrict their questions on the HFC segment. I would now like to invite Mr. Rahul Jain, President and CFO to initiate the proceedings for the call. Thank you, and over to you, sir.

Thank you, Ranjit. Good afternoon, everyone. Thank you for joining us today on this investor call focused on the regulatory framework governing hydrofluorocarbons, HFC. As indicated during our Q1 FY '26 results call on July 24, 2025, we are pleased to host this dedicated session to share our insights and strategic positioning. I am joined by Mr. Prashant Yadav, CEO of our Fluorochemicals business, who will walk us through the global regulatory landscape and its implications for SRF. Before we begin this call, I would also like to point out that some statements made in this call may be forward-looking, and a disclaimer to this effect is a part of our earnings presentation and is applicable to this call as well. Prashant, over to you.

Thank you, Rahul. Good afternoon all, and thank you for joining. Since we are focused on the refrigerant side, what I'll do is I'll begin with sharing the regulatory landscape of our industry, and it is on the global HFC Kigali Amendment framework. It is based on the Kigali Amendment framework, which I'm confident that a lot of people would be aware of this. Just to give a backdrop, this framework is kind of divided into two large groups, which is the non-A5 countries, which is basically the U.S., Europe, Japan and that kind of developed countries. And then there is an A5 group, which is divided into two subgroups, which is the Group 1 and Group 2. Group 1 comprises of China, Southeast Asia, Latin America and South Africa. And there's a Group 2 were India, GCC countries and Pakistan is a part of the Group 2. So these are the three broad categorization in the Kigali framework on HFC. And just to give one broad perspective, we have always talked about phased down, but one change in the HFC side is it is a phased down, which means that in the end, 15% of the whatever is the baseline consumption and the production allowed forever, which is broadly -- there are different years, but 2045 beyond 15% will be allowed to be produced and consumed forever. Our perspective is most of it is more for the essential applications. For example, there is pharma inhalers, MDIs, so that they can continue to be used in the essential applications. Just to give a perspective, each group has a unique baseline period, defined schedule for reducing the HFC usage over a long period of time. I think non-A5 countries, everybody would be aware, it is average of 2011 and '13 -- '11, '12, '13, three years, and 15% of the HCFC of the baseline. A5 Group 1, which is average of 2020, '21, '22, plus 65% of HCFC. And in the Group 1, the freeze year is 2024. So basically, if you look at China, China's baseline years are over 2020 to '21, '22, and the freeze year of 2024 is also over. So they are in 2025. A5 Group 2, where India is also -- India is a part of this group 2. Average of 2024, '25, '26 will form the baseline. So right now, we are in the middle of this baseline formation year. And 65% of the HCFC will be added. And for the Group 2, the freeze year starts from 2028. And when I say '28, they are all calendar year in the HFC regulation. The more important and -- the other one aspect is if you look at in the past and also in this case, so China actually 31st December 2019, all the capacities were set up. Generally, this is before the start of the baseline. And that is more so because if any future benefit comes, that is for the capacities which are set up before the start of the baseline period. The other important aspect of the regulation is it is production and consumption quotas, and both are treated entirely differently. So production -- entitlement of production does not automatically guarantee consumption and vice versa. So that's the other key aspect of the regulation. Non-A5 countries are already in the phase-down phase. But obviously, in the medium term, some blends might see growth coming in the non-A5 countries. And I think more or less we know there are some blends which are -- also HFC blends, which will see some growth in the medium-term period. Entitlements are generally on the global warming potential terms, and each product in the HFC has a GWP, which is multiplied and tonnes CO2 equivalent is defined during this period of baseline. Generally, in the past, we have seen U.S. and China has gone ahead and implemented it. As things stand today, our understanding is they have not used the HCFC component, which is allowed in the regulation. India currently is in the middle of the 36 months period. And India has implemented one aspect of regulation, is the import and export licensing has been implemented in India. So right now, it is under -- if you import, you need license; if you export, you need license from the country right now. Just to give a broad perspective of how the market will look like in the HFC. Obviously, if you look at what I've explained, Asia will be the growth driver for HFCs in medium term to long-term period. Non-A5 countries basically are in the phase of process of transitioning to the lower GWP alternatives, and some of them are being the HFC blend. So overall, if you will see globally, flat to medium growth, Asia will obviously grow at a higher rate than the non-A5 countries. So growth driver surely will be Asia. And obviously, Asia is also seeing one transition, which is happening, which is the existing HCFCs are moving to the HFCs in Asia. So HFCs will see some growth for medium to long term from this aspect also. Indian HFC market, obviously, if I look at the current scenario, obviously, current scenario with a mild summer will look like more like a 6%, 7%, but if I just put a perspective, medium to long term, I see going forward, a healthy growth rate coming in the Indian HFC market. Globally, fourth generation or the new generation are growing at a reasonably healthy rate, driven by the Western world right now, where most of the OEMs have moved to the new generation refrigerant or the blend of the HFOs and HFCs. Generally, if you look at how SRF is placed on the refrigerant space, we have -- we are fully backward integrated, very few players in the world, which are backward integrated. We have our own technology. We have very strong robust supply chains in place, a strong brand and distribution. And I think we are one of the few ones which have a strong brand and distribution of our own in India. Obviously, we know about it, but we have a strong brand and distribution of our own in Thailand, in Middle East. And we are also exporting to a lot of geographies beyond these three home markets, which I've talked about. Generally, if you look at how we are -- apart from HFCs, I think we all are aware that some time back, we have also announced our entry into the fourth generation capacities, which will come up in the near future. And hence, we will strengthen our position in the new generation refrigerant as we go forward. Broadly, we are very competitive, and we do have a leadership position in refrigerants. We do efficient capital allocation, we have our own technology for the next-generation and we will leverage our brand and distribution of the current refrigerant, which will be used -- which will be helpful in ramping up the fourth generation refrigerants of the future. So we are confident that our integrated model, regulatory alignment, market agilities continue to deliver value to all our stakeholders. Thank you, and we look forward to your questions.

[Operator Instructions] Our first question comes from the line of Sanjesh Jain from ICICI Securities.

First question on the overall -- what is the potential quota as in India as a whole for R32 you're seeing? If I go by simple mathematics, what you explained, HCFC quota for India was what, 27,000, 28,000 metric tonnes or close to 30,000 metric tonnes. And we have sold almost -- between us and Navin, who have sold during the quota. It appears that the total India quota will be upwards of 100,000 metric tons. Will that be a fair assumption for us to look at India as a whole quota?

Sanjesh, I think let me -- so I'll just -- I'll put in simple terms, and I think then everybody can do their math on this. So one is still we are right now in the mid of the baseline formation. So I think what we should wait for is how '24, '25 and '26 goes for the HFCs. Whenever -- and right now, 18 months are left in this baseline formation. So I think it will be very important, what next 18 months happens in the HFC space in India, whether it is from production or the consumption point of view. So I think once we'll have this baseline, then simple terms, it is not about 32, but what will happen is all the products will be converted to a GWP terms. And then based on the GWP term, the '24, '25, '26 HFC baseline will form. Now on top of it, 65% of the HCFC is to be done. Now if you go back in time, so HCFC baseline will be 2009, '10, because the baseline period was 2009, '10. So it is not about what happened after that. Whatever happened in HCFC in 2009 and '10, that average of 2 years formed the baseline of HCFC, 65% of that for all the components of HCFC. And then the GWP of that will be added to this baseline. And I think that's what will form the actual numbers. It's very difficult to tell whether it will be 100,000 or not because still there are 18 months where the HFC baseline has to be formed. So I think the real number will come once we get closer to the end of the baseline formation of HFC.

No, that's fair. But any understanding on how India will go because I think U.S. went with the GWP quota and China went through a product-wise quota. Any understanding here on how India is looking, that will be helpful, whether we will get a GWP quota, which is fully fungible between the product or we are looking at a quota based on the HFC products?

So if you look from a regulation point of view, it is actually in GWP term. Now countries can decide to implement GWP or countries can decide to convert that GWP into the product. But whenever they will be converted to product, it will also be dependent on how much of the product is required. So if you look at in India, there is a 134 where the consumption is quite significant. And then there is a blend, which has got a significant consumption. So I think most probably it is -- so regulation says GWP and its reduction over a period of time. And it will depend upon -- I think policy framework still has to be made from the country's point of view. But if I look at it, there is a large consumption of all -- some of the other HFCs also in the country. So the GWP might be a better thing for India.

Got it. Just one last question. I will fall back on the queue post that. From an India perspective, assuming that we have certain GWP and...

Sanjesh, can you be a bit louder?

Am I audible now, sir?

Yes. Much better, Sanjesh.

So just from an India perspective, assuming that we have x amount of quota because we get some quota from R22, will government be open to providing GWP quota if there is excess in their hand to a newer entrant who otherwise didn't have any quota from '22 or being sold during the quota determination period?

Sanjesh, I will leave that for governments to decide. But if you look at it, what has happened in U.S. and China, actually, not even in China, even in Southeast Asia and other countries, actually, governments have only stuck to the HFC baseline. So because the regulation also has a commitment to comply with the environmental commitments, which each country has ratified. So if you look at U.S. or you look at China, I think let's look at China, which is recent. So they have actually limited themselves only to the HFC side. Having said so, I think anybody can calculate how much is the HCFC baseline and India was a small consumption at that point of time in 2009 and '10. I think we can all calculate how much is the HCFC will come. And I think even if it comes, I think it might be -- everybody who is the holder of that HCFC might be also entitled to use it for their own purpose because it will be beneficial to people who are already in the game. But I think that still is to be kind of finalized and the regulation is to be put in place.

Our next question comes from the line of Arjun Khanna from Kotak Mutual Funds.

Sir, the first question is just on the allocation of quota. So you did talk about that we aren't certain at this point in time. But like you mentioned, the regulation is GWP for country quota. Now in terms of allocation of that quota, is it completely on the discretion of the government? Or are there some regulations around that also? That would be the first question. The second question would be around production and consumption quota. So if you could just touch about that in terms of importers, exporters, how that would actually flow through?

Thanks, Arjun. If you look at -- if I look at U.S. and China and if you look at how they have given the allocation and if you look at in the past, when in the HCFC space in India, the quota was given based on each company's baseline formation. And each -- if you look at U.S., it is company-wise, the whole list, it is public. I think anybody can see how much each company has got. And same in China. There are 30, 35 players in China, but each 35 players have got their own allocation based on what they did during the baseline period. So I think -- and in India also HCFC, the same philosophy was followed. So there is a consistency in the implementation of the philosophy over a long period of time in the Montreal protocol. And I think same principles are followed and will be followed going forward. So I think that's the -- I think that answers the first question. On the second part of the question where production and consumption, it is again -- these are two different things. The X amount you produce, whatever is the average of that X amount is produced, you get entitlement for that X amount. Whatever you sell is, again, a separate thing. And whatever you sell, it is measured -- calculated separately. And for that, the average of that sales is the average consumption for that company.

Sure. So just as a follow-up on this. So potentially, if India does have surplus quota, given that the consumption quota is frozen, in terms of production quota, would that be the surplus one? How does one understand production and consumption quota for the country?

So production is for the total production. So what you produce, which is, say, domestic plus exports put together, is the production. Whatever you do sales in domestic is the consumption. So I think production is on a total level. So each -- somebody can have less domestic, more exports; more exports, less domestic. So based on how much you do in domestic is consumption and whatever actually you produce is total production.

Sir, this was more in the context of Indian players potentially or India, given that our consumption is not to that -- given that a lot of players, including us, have a number of home bases and exports to U.S. markets, et cetera, that our consumption may not be as high as our production quota and given that we have baseline addition. So could units come to fulfill this production quota even post the baseline determination here? I think I was trying to understand that, sir.

If you can just put on a piece of -- calculate this, this will happen. Whatever is the average, it's actually documented and very black and white mathematical model, which is there. Anybody can calculate their own numbers. '24, '25, '26, what you have produced at HFC production, average of that becomes your HFC baseline. You can convert that into GWP term. And plus whatever is -- the HCFC 65% can be added to that. Each company can add theirs or on the production side or the consumption side. That just forms the baseline year. After that, if you don't have a baseline and if you don't have an entitlement, then you can't do anything afterwards. Because if you look at it, what happens, one is the -- so after '25 -- '24, '25, '26 of the baseline, '28 is a freeze year. So which means whatever is your baseline average from 2028 onwards, you are only -- you are capped by that. So you have to have a baseline to actually go ahead and start continuing operations beyond 2028. So if you -- in freeze year, you need to have your entitlement. And based on the entitlement, you are allowed to produce or sell that much quantity.

Sure. Very helpful. Just a final question, sir. If SRF sees demand for export markets to be stronger, is it possible for SRF to set up an HFC plant or say, an R32 plant in the future post even this determination year, given that we have a baseline of 2009, '10, '11 for HCFCs and given the fact that R125 sales will incrementally come off and the GWP level is significantly higher than R32. So does the regulation allow us to set up a plant even post the determination years?

So if you look at -- if I look at how U.S. and China have done it and how in HCFC India has done it. So China, actually, if you look at 31st December 2019, which was the start of the baseline, which means that any future benefits are only eligible to plants which are set up before the baseline period. That is how the past has been in the CFC and HCFC era, and that is how China has implemented it. And that is how the regulation also understands this. So this is part number one. The second is please understand there is -- if you go to 2032, there is a 10% cut, which is to come. So you have to have a baseline to do anything. If you don't have a baseline and you don't have an entitlement, which will only come if you have your own HFC production during the period of '24, '25, '26, I think it is going to be difficult. Now if you ask me, is there a regulation or not, I think India is in the midst of forming the final policy framework for this. But you have to have an entitlement to run your operations. Otherwise, it's going to be very difficult or next to impossible.

Our next question comes from the line of Meet Vora from Emkay Global.

Just wanted to understand this time line for setting up the plant before the baseline, also includes retrofitting the plant. Why I'm asking this is after December '23, we have already seen brownfield expansions in India by converting existing plants. And wanted to check by what time can one retrofit a plant from a high GWP to low GWP gas should need arise?

Thanks for the question. But I think retrofit -- see, you can do retrofit, you can do production, you can do all that stuff. Baseline -- basic framework is you need to have your entitlement to do anything else. If you don't have that basic base entitlement -- and just to give an example, just to, maybe one more way to answer this. Today, we have an HCFC baseline. We have a quota implemented. And suppose somebody has got 100 metric tonnes equivalent of quota of HCFC today. Now if somebody walks in tomorrow from, say, outside and wants -- say somebody comes from outside as a customer and says, give me 200 tonnes. Anybody cannot produce 200 tonnes because 100 tonnes is capped. Now under that 100-tonne cap or baseline which you have, you can do various things is one thing. But you cannot cross the line. And I think that's very, very sacrosanct. It is measured. It is -- there is a quarterly return, it is audited. So it is very, very tightly controlled and regulated and monitored from a government's point of view in future. So you'll see more and more tighter regulations and more audits and more things will start coming in from 2028 onwards. And just to see what has happened is, India has already started import and export licenses for HFCs. So I think that's one small step, which is in this direction.

Sure. So just in that case, if someone sets up a plant, say, next year, then probably based on your understanding, you will get quota only for 6 months or 1 year of production that he has done during that year? That's correct, right?

So very -- so you set up next year. So '24 is gone, '25 is gone, and '26 you set up. At least one can actually do a simple calculation and actually derive to a number that if you produce in 5 months and you produce 500 tonnes, you have to divide by 3; you convert into GWP terms, divide by 3, and that becomes your HFC baseline, correct? Now -- that is what you get as an entitlement on HFC. Now if you see what China and U.S. have done, they have not touched the HCFC baseline, and they have only kept themselves focused on the HFC side. But regulation has a formula of 65%. And there are a lot of players who are also HCFC players are in the HFC side. So I'm sure that's how the complication will start. So you have to -- you can calculate yourself very in simple term. One heads up, you divide by 3, it happens your average baseline, and that is your basic entitlement. Now what happens to HCFCs, I think that still has to be decided. But if you look by what China has done and they have taken a higher position, they have not used the HCFC baseline till date.

Sir, but in that case, maybe in the last 1 or 2 years, what we have seen is that Chinese government gives additional gas quota, whether it is for R32 or any other gas. So is it that they have government level extra quota, which they allocate to existing players and that kind of thing can happen in India in 2028 or '29 kind of thing?

There's no extra quota. It is mathematically derived. There's no right -- so you derive it based on math, the formula, which is black and white. Actually, it is public document. So anybody can read that and derive that number by themselves. What U.S. has done is they have given GWP terms. So you have talked about China giving 32, but you also see what China has done to 134. They have reduced the 134 significantly. So they have swapped. So in GWP terms, so all the regulation is on GWP. And obviously, you can decide based on how you want to play it as a country. So U.S. does it on GWP terms, Chinese also do it on GWP terms, but then they convert it into -- because China has got 35 players -- 30, 35 players. So they have to regulate it much more tighter way than -- because they have to regulate 35 people there. But China is very strict implementation.

We have the last question coming from the line of Abhijit Akella from KIE.

So first question is simply, in your estimate, what is the world demand for R32 at present in tonnes? And where do you see it going over the next 5 years or so, by 2030 or so?

So let me see, I'll answer you from a total HFC perspective more. I think if I -- total HFC globally would be about 700,000 metric tonnes today. Asia will be the driver of growth to a large extent on a total HFC level. And let me tell you, there is -- it's not only about 32. There are a couple of more HFCs, which are equally important in the HFC game than only 32 and 134 is also a bigger HFC, which is there in the -- and there is 32 and there is a lot of blends, which is consumed in the world. And -- so globally, I think it is marginal growth. Asia will certainly see some growth in the medium to long-term period. And I think we see some long -- medium term is maybe 5 years, long term is 10 years. I don't see anything happening to the overall global growth because if you look at what is going to happen in Asia is, a lot of HCFCs will move to HFCs. Some HFCs will also move to the next fourth generation. And all the HCFCs are today consumed in Asia or produced in Asia. So Asia will see growth. Obviously, there's a shift from HFCs to fourth generation or next generation which will happen in the Western world. And hence, globally, it will be marginal growth. Asia will see a growth.

Okay. And just the last question from my side was, with regard to R32, what is China's total quota? Would you have a sense for that? Are they producing already at the full quota entitlement? Or are they a little bit below that just to support the prices? And a related question, the U.S. has antidumping duties on imports of Chinese R32, which was implemented in early 2021. The 5-year period for that is expiring early next calendar year '26. Would you expect that, that ADD could be removed on Chinese exports of R32 to the U.S.?

See, it's very difficult to answer whether Chinese ADD will be removed or not. But if you look at how things are and how it has happened, and I think ADD is not only on 134 -- 132, but ADD is also there on 134A. It is also there on 125. So most of the HFCs coming from China to U.S. are under ADD. And 134A was before 32, and it still continues. So 134 was the first product where the ADD was put against China, and it has continued. It has always kind of got extended. So I hope and I expect that the same will happen to 32. China data, I think it is more or less now since they have already -- they do calendar year announcements, I think it is in public domain for what China's production or consumption is for 32. But yes, China's consumption for 32 is growing. And I think that is something good. My expectation is that I think the -- it will lead to a more balanced demand-supply situation in medium term to long term in the HFCs as a whole. So I think that's what will play out in the medium to long term on demand supply for the HFCs.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Thank you, everyone, for joining us on the call. I hope some of the questions that you had with Prashant here have been answered. We thank you for your support, as always, and look forward to future engagement. Thank you.

Thank you. On behalf of SRF, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.