Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of SRF Ltd (SRF).

 

The ratings continue to reflect a strong business risk profile driven by market leadership, diversified revenue, high operating efficiency, and a healthy financial risk profile. These strengths are partially offset by high capex intensity with continuous enhancement in capacities in the specialty chemicals and packaging films segments.

 

During fiscal 2022, operating income increased by 48% to Rs. 12,434 crore driven by higher prices of 25-30% and increase in volume of an estimated 15-20%. Operating profit before depreciation, interest, and tax (OPBDIT) increased significantly to Rs 3,187 crore (operating margin of 25.6%), as against Rs 2,147 crore (25.6%) for the previous fiscal.

 

The chemical business (CB) segment led the growth in FY 22 with a 44% growth backed by sustained volumes & improvement of 600-700 bps in margins. For three months ended June 2022, CB segment saw a healthy performance driven by robust demand for flagship products posting an operating income growth of 55% year-on-year to Rs 1,722 crore. The 4growth in the CB segment is expected to continue this fiscal with similar trends in revenue growth and margin.

 

The packaging films business (PFB) forming around 40% of the total revenue in FY22 posted an increase in operating income of 45% to Rs 4,780 crore. Margins for the PFB was impacted during the fiscal and came down by 700-800 bps in the last fiscal majorly due to increase in raw material prices and certain logistics and supply chain issues. For three months ended June 2022, operating income in this segment grew by 44% year-on-year to Rs 1,496 crore with margins sustaining at levels of previous fiscal. Fiscal 2023 though may see some headwinds in the BOPET segment and increasing energy prices in Europe posing a challenge for SRF’s Hungarian facility.

 

The technical textiles business (TTB) posted a significant growth of 68% with operating income of Rs 2,085 crore and improved margins by 800-900 bps FY22. The growth was backed by volumes in nylon tyre cord with steady margins and significant growth in the belting fabrics & the polyester industrial yarn segments. For three months ended June 2022, operating income saw a slowdown with only a 16% growth year-on-year at Rs 571 crore and margins cooling down by 200-300 bps from last fiscal. Moving ahead, the growth in the operating revenue maybe lower than last fiscal due to prevailing economic scenario. However, this segment should see the margins sustain at current levels. Belting fabric market is witnessing large opportunities and renegotiated prices with tyre OEMs at higher margins. The board has approved a capex plan for capacity expansion and upgradation of belting fabrics operations at Viralimalai facility.

 

In fiscal 2022, the company did capex of ~Rs. 2,000 crores for capacity expansion and setting up new facilities in the CB and PFB segments. SRF has invested around Rs. 1,500 crs p.a. on average on capex building in the last 5 years and the company has further capex plan of Rs. 3,000-3,300 crs for FY23 which will be funded through a mix of internal accruals and debt. Majority of the planned capex will go into chemical business segment for further capacity and product portfolio expansion.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SRF and all its subsidiaries, as all the entities (together referred to herein as SRF) have the same management and operate in similar businesses.

 

Notch up: No notch up/down

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Market leadership: The company is the market leader in most of its business segments. Due to extensive experience in handling fluorine, it is the sole producer of some key refrigerants in India. In the specialty chemical segment, continuous investment in research and development (R&D), and improved manufacturing capability have made it a one-of-its-kind player, exporting products that find application in pharmaceutical and agro-based products. In the technical textile business (TTB), the company is the largest nylon tyre cord fabric manufacturer in India, and continued addition of new value-added products in the belting fabric segment (part of the TTB) should further enhance the market position. The market position in the packaging films business (PFB) is supported by large capacity and high volume of value-added products. The healthy market position is likely to be sustained, given the leadership position, established track record, and large R&D capability leading to technical expertise.

 

• Diversified revenue and high operating efficiency: SRF has a diversified revenue profile with presence across CB (42%), PFB (38.4%) and TTB (17%) segments in terms of revenue in fiscal 2022. The management has successfully diversified its geographical presence through investments in the PFB segment in South Africa, Thailand, and Hungary. The diversified revenue profile protects against downswing in any one business and keeps the operating margin steady. Furthermore, cost efficiency measures in the TTB and PFB segments, strong R&D capability in specialty chemicals, and market leadership in refrigerants have helped in keeping the margin higher than that of peers.

 

• Strong financial risk profile: The financial risk profile remains strong backed by robust tangible networth leading to a comfortable gearing of 0.42 time as on March 31, 2022. Cash accrual was healthy at Rs 2,194 core in fiscal 2022, resulting in comfortable debt protection metrics, indicated by net cash accruals to adjusted debt at 0.61 times (0.45 times previous fiscal). The financial robustness is also explained by interest coverage ratio which stands at 27.77 times (16.2 times previous fiscal) and is expected to continue with net cash accruals estimated at around Rs 2,500 crore for FY 23 which will be used to fund the capex requirements along with mix of some debt.

 

Weakness:

• High capex intensity: The company is continuously incurring capex in specialty chemicals of the CB segment and is also expanding manufacturing facilities other segments. Capex was around Rs 2000 crore during fiscal 2022. SRF has invested around 1500 crs every year on capex building in the last 5 years and the company has further capex plan of 3000-3300 crs for fiscal 2023 out of which majority will go into chemical business segment. However, profitability of a molecule in the CB segment depends on successful commercialization and acceptability, while cyclicality is inherent in the PFB and TTB segments. Therefore, the ability to maintain strong revenue growth and sustain the operating margin will remain a key monitorable.

Liquidity: Strong

The liquidity profile of the company continues to remain strong, with healthy cash accruals of Rs 2,194 crores along with cash equivalents of Rs 603 crores as of March 2022 against term debt repayments of Rs 744 crs in FY23. Liquidity is further supported by unutilized bank lines with an average 34% fund-based utilisation in the last 15 months. Also, financial flexibility continues to remain robust as company has access to capital markets through CPs as well as NCDs. The combined capex for FY23 and FY24 is expected at Rs 5,500-6000 crore and should be funded largely by internal accrual and some through debt.

Outlook Stable

CRISIL Ratings believes SRF will continue to benefit from its market leadership and healthy operating efficiency, while the financial risk profile should remain comfortable due to adequate cash accrual, over the medium term.

Rating Sensitivity factors

Upward factors

• Sustenance of the gross debt/EBITDA ratio at below 1.0 time
• Strong revenue growth, with sustained improvement in the operating margin, leading to higher cash accrual

 

Downward factors

• A sustained increase in the gross debt/EBITDA ratio to more than 3 times
• A sustained decline in the operating margin with stagnant revenue leading to lower cash accrual

 

ESG analysis

ESG profile of SRF Supports its strong credit risk profile

The chemical manufacturers can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s social impact is characterized by health hazards, leading to higher focus on employee safety and well-being and the impact on local community, given the nature of its operations. SRF has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• SRF has a total of 18.95 MW installed capacity of renewable energy, which includes an onsite 5 MW solar power plant and an offsite 13.95 MW wind power plant.
• SRF incorporates ESG aspects related to health and safety, human rights, labor laws, environment etc. within the supplier agreements and follows a code of conduct to assess the ESG performance of suppliers.
• SRF is committed towards fostering a diverse and inclusive workplace, free from any sort of harassment and/or discrimination based on gender identity, age, ethnicity, sexual orientation, disability, faith, or marital status.
• The governance structure is characterized by 55% of the board comprising independent directors, presence of an investor grievance redressal mechanism and extensive disclosures.
• There is a growing importance of ESG among investors and lenders. The commitment of SRF to the ESG principle will play a key role in enhancing stakeholder confidence given shareholding foreign portfolio investors and access to both domestic and foreign capital markets.

About the Company

SRF is a multi-business chemicals conglomerate engaged in the manufacturing of industrial and specialty intermediates. Incorporated in 1970, SRF started operations with a nylon tyre cord plant in Manali, Tamilnadu. It is currently present in CB, PFB and TTB business verticals with a revenue contribution of 42%, 38% and 17% respectively in the last fiscal. Under the CB segment, the company manufactures fluro-chemicals (including blends, chloromethanes, and refrigerant gases) and specialty chemicals. In the PFB segment it manufactures biaxally oriented polypropylene (BOPP) and biaxally oriented polypropylene terephthalate (BOPET) used in flexible package covers and labels. In the TTB segment, it manufactures nylon cord fabrics, belting fabrics, and industrial yarn. SRF has 11 manufacturing units in India and one each in South Africa, Thailand, and Hungary. Its sales are spread across more than 90 countries, and it has a workforce of more than 7000 employees. Presently India accounts for 42% of revenues followed by USA (12%), Switzerland (7%), South Africa (5%), Belgium (4%), Germany (4%), Thailand (3%) and rest of the world (24%). The parent company Kama Holdings Ltd. holds 51% stake while the other 49% is held by the public.

 

For the three months ended June 30, 2022, operating income, and profit after tax (PAT) were Rs 3,895 crore and Rs 608 crore, respectively, against Rs 2,699 crore and Rs 395 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Working Capital Facility	NA	NA	NA	366.0	NA	CRISIL A1+
NA	Working Capital Facility	NA	NA	NA	50	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	200.0	NA	CRISIL AA+/Stable
NA	External Commercial Borrowings	NA	NA	Oct-23	95.0	NA	CRISIL AA+/Stable
NA	Foreign Currency Term Loan	NA	NA	Mar-25	289.0	NA	CRISIL AA+/Stable
INE647A07041	Non-convertible debentures^	17-Sep-20	3M T- BILL+188BPS	16-Sep-22	250	Simple	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	600.0	Simple	CRISIL A1+

^ This will be in September 2022 till maturity