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SRF Limited - Chemical biz's good performance may continue - ICICI Securities

Posted On: 2021-01-22 22:52:27 (Time Zone: Arizona, USA)

SRF Ltd's chemical business revenue and EBIT came below expectations in Q3FY21, but some of it was offset by higher margins in textiles and packaging films business. The company remains confident of achieving >25% revenue growth in specialty chemicals in FY21, and also seeing hardening of prices in HFC (ref-gas) which should start benefiting chemical business revenue and EBIT from next quarter. The company remains confident of executing guided capex of Rs15-18bn in FY22 as it already has a pipeline of Rs12-13bn capex, and expects more capex announcements of Rs3-4bn in specialty chemicals in coming quarters. This gives visibility to specialty chemicals revenue growth in FY22 and beyond. We maintain our estimates, but increase our SoTP valuations to Rs5,644 (from Rs4,652) as we rollover our valuations to FY23E. Maintain HOLD.

- Flat revenue in ref-gas hits chemical business growth. SRF's revenue rose 16% YoY to Rs21.5bn driven by strong performance in packaging film business. Chemical business revenue increased 11.6% YoY to Rs9bn on higher growth in specialty chemicals, while ref-gas revenue was flat. Packaging film revenue rose 25.7% YoY to Rs8bn on ramp-up in Thailand and Hungary. Technical textile revenue rose 9.3% YoY on faster-than-expected recovery in domestic tyre industry.

- EBITDA rose 41% YoY to Rs5.7bn. Gross profit rose 23% YoY to Rs11.3bn and margin expanded 295bps YoY to 52.5% on higher margins in packaging films. EBITDA rose 41% YoY to Rs5.7bn due to operating leverage and lower other expenses. EBIT was up 49% YoY to Rs4.5bn. PAT dipped 5.5% YoY to Rs3.2bn on negative ETR in Q3FY20. EPS dipped 6.1% YoY to Rs56.4.

- Packaging business EBIT margin started normalising to 26.5% (down 300bps QoQ) while EBIT rose to Rs2.1bn, up 42% YoY. Chemical business EBIT rose 32.8% YoY to Rs1.9bn. EBIT margin rose 330bps YoY to 21% on higher contribution from specialty chemicals and operating leverage. Technical textile segment EBIT came in at Rs679mn, up 86% on low base in Q3FY20 due to inventory loss and weak demand.

- Call highlights: 1) Specialty chemical plant utilisation are high and SRF expects new capacity addition to help future growth; 2) it continues to run campaign for 5-6 products in specialty chemicals which is limited by capacity in multipurpose plant; 3) gloss block for specialty chemical is Rs21bn; 4) HFC prices are hardening which should benefit revenue and EBITDA growth in next two quarters; 5) ref-gas demand from OEMs has recovered, and SRF is also seeing recovery in replacement demand. It has created ref-gas inventory for next two quarters and HFC plant utilisation has reached peak at exit; 6) though fluorspar prices have increased, but the company expects the prices to be manageable and are no risk to margins; and 7) packaging films margin has dipped due to the commissioning for 1 plant each in BOPET and BOPP.

Shares of SRF LTD. was last trading in BSE at Rs.5406.3 as compared to the previous close of Rs. 5774.2. The total number of shares traded during the day was 27515 in over 6557 trades.

The stock hit an intraday high of Rs. 5715 and intraday low of 5347.45. The net turnover during the day was Rs. 150313945.

Source: Equity Bulls

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