SRF Limited - Capex guidance upped; revenues should follow? - ICICI Securities

SRF's specialty chemical and packaging film segments yet again delivered strong EBIT growth. Company has raised its revenue growth guidance for specialty chemicals to >25% for FY21 (from 20-25%) on strong H1FY21. Post the Rs7.5bn fund raised via QIP and significant rise in FCF, the company has also increased its capex guidance to Rs15bn-18bn p.a. (from Rs8bn-10bn) for the next three years, which significantly increases revenue growth visibility. Further, it sees deployment of 50-60% of capex in the chemical business; this, along with Rs7.5bn capex execution in specialty chemicals over 12-18 months is positive. We raise our EPS estimates by 19% / 10% for FY21E / FY22E factoring-in the better outlook and equity dilution. We increase target price to Rs4,652 (from Rs3,687) as we increase chemical business EBITDA multiple to 18x (from 15x). Reiterate HOLD.

- Firing on all cylinders. SRF's revenues rose 21% YoY to Rs21.0bn driven by strong performance in the chemical and packaging film businesses. Chemical business revenues increased 30% YoY to Rs8.8bn on higher growth in specialty chemicals, while ref-gas revenue growth was muted. Packaging film revenues rose 25.7% YoY to Rs8.3bn on ramp-up in Thailand. Technical textile revenues rose 2.8% YoY on faster than expected recovery in domestic tyre industry. NTCF volumes were up ~25% YoY.

- EBITDA rose 73% YoY to Rs5.7bn. Gross profit rose 34.1% YoY to Rs11.5bn and margin expanded 540bps YoY to 54.5% on higher margins in packaging films. EBITDA rose 73% YoY to Rs5.7bn due to operating leverage and lower selling and other expenses. EBIT was up 92.6% YoY to Rs4.6bn. PAT grew only 4.8% YoY to Rs3.2bn on lower ETR of just 2% and profit from discontinued operations in Q2FY20.

- Packaging business EBIT margin sticky at 30% while EBIT rose to Rs2.4bn, up 90% YoY. Standalone (domestic) EBIT margin was at 33.5% with international EBIT margin at 24%. India EBIT margin is unsustainable and we expect it to normalise in the ensuing quarters. Chemical business EBIT rose 33.3% YoY to Rs1.7bn. EBIT margin rose 50bps YoY to 19.8% on higher contribution from specialty chemicals. Technical textile segment EBIT came in at Rs502mn vs loss of Rs140mn in Q1FY21.

- Capex guidance increased to Rs15bn-18bn p.a. for next three years. The earlier guidance was at Rs8bn-10bn, hence the increase significantly improves revenue growth visibility. The capex will be skewed (50-60%) toward the chemical business, packaging films will get 20-30% and the rest will go into textiles and utilities. SRF does not foresee need for greenfield capex in the near term and has enough land available in Dahej. It will use the Rs7.5bn fund raised via QIP for specialty chemical capex over the next 12-18 months and, accordingly, will seek Board approval for multiple project capex in H2FY21. SRF has already raised specialty chemicals revenue growth guidance for FY21 to >25% from 20-25%, but has maintained the long-term guidance for now.

Shares of SRF LTD. was last trading in BSE at Rs.4863 as compared to the previous close of Rs. 4439.75. The total number of shares traded during the day was 42416 in over 8105 trades.

The stock hit an intraday high of Rs. 4883.7 and intraday low of 4491.25. The net turnover during the day was Rs. 202431455.

Source : Equity Bulls

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