SRF Limited plans to step up investments in its specialty chemicals business, given the opportunities in that space. In an interview with CNBC-TV18's Sonal Bhutra , the company's CFO Rahul Jain discussed business outlook, plans and sustainability initiatives.

Share Market Live

NSE

Excerpts from the interview:

FY21 has ended on a stellar note, despite it being a very challenging one. What are the growth plans for the company, and what do you see as the main triggers? Is the second wave hampering the business in any way?

SRF delivered a robust performance in FY21. The chemicals and packaging film businesses have done exceedingly well and were ably supported by our other businesses. If we talk about the segmental performance, in FY21, our chemicals business demonstrated robust growth of 23 percent Y-o-Y to achieve record revenues of Rs 3,645 crore.

Packaging films business too registered an exceptional performance with both the domestic and international facilities delivering strong results. In FY21, the packaging films business demonstrated robust growth of 26 percent Y-o-Y to achieve record revenues of Rs 3,292 crore.

The second wave of COVID-19 has hit India hard and hopefully, the situation will begin to plateau out from June ’21 onwards, both from individual well-being and an economic sustainability perspective, which should augur well for the overall business environment. As far as the SRF business segments are concerned, in our fluorochemicals business, the impact of mini lockdowns imposed by certain states is impacting production volumes and the secondary market. Though currently not significant, these restrictions may have an adverse impact on business performance in the short term. COVID-19 pandemic also continues to disrupt supply chains in our specialty chemicals business.

Having said that, we are continuously investing in capital expenditure, which over the next three-to-four-year period, should be in the range of R 4,500-5,500 crore, and we believe will provide further impetus to our businesses. We view this as the growth trigger for our future success.

The chemical business will continue to focus on moving up the value chain by accelerating the qualifications of new molecules in both agrochemicals and pharmaceuticals sectors, capacity utilization of newly commissioned plants will remain our focus. The company will also undertake projects that are not only ROI (Return on Investment) accretive but also deliver the benefits of more complex chemicals and specialty products to our global customers.

The packaging film business will focus on increasing the pace of R&D efforts, sustainability initiatives, efficient cost structures, enhanced capabilities, and expanding the value-added product portfolio.

Overall, in FY21, SRF sustained liquidity across term facilities, money market activities, and various other debt management opportunities, while ensuring a healthy balance sheet position. Our net debt position was lower by around Rs 1,000 crore, when compared with FY20, despite continued investment in capex and a higher working capital requirement on account of the new plant start-up.

The balance sheet saw a 33 percent reduction in the interest cost at a consolidated level on account of lower volumes as well as better rate negotiations. During the year, volatility in exchange rates especially in emerging markets was high. However, prudent hedging and risk management strategies have been put in place to minimize the impact. The liquidity position of the company remains strong and recently ratings of the company have been reaffirmed by India Ratings.

SRF has been expanding in the specialty chemicals space, this is one space where we have seen a lot of external factors at play, be it China plus one factor, higher demand, higher outsourcing, do you think this is here to stay for some years? Where does SRF see itself in the global chemical industry?

We plan to continue our investments in the specialty chemicals business to sustain healthy growth rates over the next few years. We believe this is commendable owing to notably higher revenues of the specialty chemicals business. In this regard, the board of directors has approved the setting up of a fourth Multi-Purpose Plant (MPP) at a cost of Rs 375 crore.

Dahej site comprises three existing multi-purpose facilities that have enabled us to launch new products successfully. However, these facilities have approached almost full capacity utilization and a need was being felt to add a higher capacity multipurpose facility that could cater to both technically superior products and higher commercial quantities. With an expanding product portfolio, a new MPP facility will further support our endeavors to tap emerging business opportunities and ensure a robust pipeline of new products in the future.

Aside from the large capex investment that is announced, we also keep investing in various cost-improvement and operational excellence measures at our dedicated plants, which help in keeping a robust margin profile.

Over the years, the product portfolio of the specialty chemicals business has increased considerably and so has the customer base. We believe that there is no dearth of opportunities, both in terms of serving our existing customer base as well as growing our business with new and prospective customers.

Investments alongside improved efficiencies, and optimum utilization of capacities, should enable us to deliver robust performance, going forward.

You have done a sizeable expansion in the packaging films business as well, it’s a commodity business but you have been able to create a niche here. How do you time the cycle in this business and is this level of margin sustainable?

Volume growth, better cost efficiencies, and higher customer-centricity have resulted in the business establishing itself as a global major in the packaging films industry. From being a 3,000 tons per year player in 2003 to a ~275k tons per year player in 2020, SRF’s packaging films business has come a long way in its journey.

The packaging films business’ prides itself on its USP of being an ‘Easy To Do Business With’ (ETDBW) business partner. What makes ETDBW work for SRF’s packaging films business is the fact that every team member is aligned with the overall business objective of delivering superior value to the customer.

As this business progresses on this journey of nurturing our relationships with global FMCG/packaging giants across continents, our customers are now looking for packaging as a ‘brand differentiator’ to edge out competition in the marketplace. As a business, we will continue to find new solutions every day that are sustainable and keep us ahead of the curve.

While the commoditized business is cyclical , our cost competitiveness, customer centricity and state-of-the-art plants help us in maintaining industry-leading margins. We will continue to focus on these tenets and hopefully ensure the business’ leadership in the marketplace.

The legacy technical textiles business, sales contribution has come down to 14 percent in FY21 vs 54 percent in FY14, will we see a further decline in overall contribution from this segment? It’s the cash cow of the company but growth is limited here, do you have any plans to demerge this business or any business for that matter?

SRF attributes its success to efficient capital allocation, long-term thinking, and the benefits of a diversified model. Each of the three main businesses help the company tide over cycles and hence there are no current plans to demerge the technical textiles business and we would remain a multi-business conglomerate.

From a business standpoint, the technical textiles business (TTB) has been delivering consistent margin improvements over the years and further strengthened its ability to generate cash. Our strategy of running our TTB plants all out has resulted in greater efficiencies and lower costs. TTB’s key sub-segments, namely belting fabrics and polyester industrial yarn have also been performing well and we will continue to invest in modernization and de-bottlenecking projects in the future.

Pharmaceutical CRAMS has been a big buzz word lately, what is the momentum that you are seeing here? How big is this opportunity, - will you start with more complex generic products and then move to innovator products? Who can be the potential clients for the company?

At the specialty chemicals business, we believe that we are only at the beginning of our journey.

The Business is well-known for introducing novel and cutting-edge processes to its customers, with a strong emphasis on intellectual property creation and protection, both – our own and our customers. In the innovation space, this has instilled huge confidence in our global customers.

SRF has a dedicated cGMP pharmaceutical manufacturing facility. Our business offerings include developing intermediates for the Agrochemical and Pharmaceutical industry for Active Ingredients (AIs) and Active Pharmaceutical Ingredients (APIs).

Contract research and synthesis for intermediates for both the agrochemical and pharma innovators as well as contract manufacturing of AIs are our current strengths and with our 400+ R&D team, we will grow and strengthen the same significantly in the future.

SRF recently raised funds via QIP, where will that be used? Also, any further fund-raising plans for the company? And is the current level of debt comfortable?

There is a strong momentum for the overall chemicals sector and SRF has emerged as a reliable, responsive, innovative, and ethical supplier of specialty and fine chemicals, by demonstrating transparency and a strong adherence to environmentally and socially responsible practices. The specialty chemicals business is a ‘Preferred Partner’ with most of its global customers.

The recent QIP raise was a step to ensure our balance sheet strength and our ability to capitalize on future opportunities in all our businesses.

The company manages its cash flows based on requirements of capital investment, working capital requirements, and the overall debt profile. While there are no large debt-raising plans based on future capex and cash flow generated, debt would be the balancing requirement.

At this point, the company is comfortable with the debt-to-EBIDTA of 1.5 - 2 times, against the present 1.2 times, which allows effective servicing of debt and ensures balance sheet strength and the company’s rating by external rating agencies.

Therefore, we believe that this level is comfortable.

There is a lot of talk about ESG, responsible manufacturing, we have ESG committees being formed in different companies, what is SRF’s take on this?

Sustainability is an integral part of SRF’s heritage, of its long-term commitment to its people and communities. While it is now one of the primary yardsticks to gauge a company’s performance, I have seen the ever-increasing significance of sustainability, which we have incorporated across our operations.

On a voluntary basis, we report our sustainability initiatives in our chemicals and packaging films businesses on the three pillars of environment, enterprise, and engagement.

In the chemicals business, water management remains a key focus area for us. While recyclability and reuse of wastewater remain a focus, quality of water discharge and effluent treatment is also a high priority area for us. Our Bhiwadi operations have successfully maintained a water positive status since 2008-09.

Moreover, Bhiwadi plant continues to have zero liquid discharge.

In the packaging films business, we follow a three-pronged approach, focused on: recyclable solutions; biodegradable solutions, and monolayer solutions.

We have already established 90 percent post-consumer recycled (PCR) based BOPET films, helping the industry contribute towards the attainment of a ‘circular economy'.

First Published:May 11, 2021 12:27 PM IST