Over-supply and sustainability are key challenges for the industry
- Recently, several new manufacturing lines of BOPET have been commissioned, with many more expected to turn operational in the coming months (majorly in India and China). This may create a demand-supply imbalance, resulting in an oversupplied market, which, in turn, will exert pressure on profitability of industry players.
- Macro headwinds in Europe are also dampening demand, which is expected to be short-lived. With the easing of headwinds in Europe, the demand-supply imbalance is expected to normalize in the medium term, driving growth in the global Packaging Film industry.
- Also, certain headwinds such as high logistics cost and supply-chain constraints will continue to weigh over margin in the near-term.
- Poor waste collection and the nascent stage of recycling facilities globally can be a significant threat to the industry in the long run, considering the growing demand for sustainability.
Valuation and view
- SRF's Packaging business clocked a revenue/EBIDTA CAGR of 21%/39% over FY16-22 on the back of an aggressive capacity buildup and improvement in operating margin.
- Given the growing need for Packaging Films across Food, Electronics, and sustainable solutions, SRF's strong capability will enable it to capitalize on the growth opportunity.
- We expect 17% revenue CAGR from the Packaging Films business over FY22-24, with EBIT margins to decline to 18.2%/18% in FY23/FY24 from 19.8% in FY22, due to an expected pressure on BOPET margin, with new capacities coming on stream.
- Going forward, we expect SRF to register a revenue/EBITDA/PAT CAGR of 18%/16%/20% over FY22-24.
- While we expect the management to cash-in on these opportunities, we maintain our Neutral rating, given to its rich valuation, which has been priced into its near-term upside.
- Recently, several new manufacturing lines of BOPET have been commissioned, with many more expected to turn operational in the coming months (majorly in India and China). This may create a demand-supply imbalance, resulting in an oversupplied market, which, in turn, will exert pressure on profitability of industry players.
- Macro headwinds in Europe are also dampening demand, which is expected to be short-lived. With the easing of headwinds in Europe, the demand-supply imbalance is expected to normalize in the medium term, driving growth in the global Packaging Film industry.
- Also, certain headwinds such as high logistics cost and supply-chain constraints will continue to weigh over margin in the near-term.
- Poor waste collection and the nascent stage of recycling facilities globally can be a significant threat to the industry in the long run, considering the growing demand for sustainability.
Valuation and view
- SRF's Packaging business clocked a revenue/EBIDTA CAGR of 21%/39% over FY16-22 on the back of an aggressive capacity buildup and improvement in operating margin.
- Given the growing need for Packaging Films across Food, Electronics, and sustainable solutions, SRF's strong capability will enable it to capitalize on the growth opportunity.
- We expect 17% revenue CAGR from the Packaging Films business over FY22-24, with EBIT margins to decline to 18.2%/18% in FY23/FY24 from 19.8% in FY22, due to an expected pressure on BOPET margin, with new capacities coming on stream.
- Going forward, we expect SRF to register a revenue/EBITDA/PAT CAGR of 18%/16%/20% over FY22-24.
- While we expect the management to cash-in on these opportunities, we maintain our Neutral rating, given to its rich valuation, which has been priced into its near-term upside.
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