Published on 14/01/2020 9:05:29 AM | Source: ICICI Securities Ltd

Chemicals Sector SRF’s robust chemical biz EBIT to offset weakness in others By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Chemicals Sector #Sector Report #ICICI Securities

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SRF’s robust chemical biz EBIT to offset weakness in others

Despite margin pressure in SRF’s technical textile and packaging film businesses, we expect the company’s EBITDA to grow 15.9% YoY on the back of likely higher revenue growth of 50% in the chemical business. We expect EBIT of the chemical business to grow by a strong 146% YoY on robust performance in fluoro-specialty chemicals. Navin Fluorine’s (NFIL) EBITDA and net profit is likely to show strong growth of 35% and 22% YoY respectively on low base. Galaxy Surfactants’ volume growth is likely to remain stable at 9.2% YoY while EBITDA may rise by 9.8% on recovery in AMET though India market remains subdued. We expect Galaxy’s net profit to grow 26.5% YoY on lower effective tax rate.

R-22 prices dipped slightly QoQ while fluorspar prices rose. R-22 export prices declined 2.4% QoQ (Oct-Nov’19 vs Q2FY19) to Rs185/kg; we are yet to see any spike ahead of the phase-out of 25% of production from the baseline w.e.f. 1st Jan’20. Fluorspar import prices remained sticky and rose 3.5% QoQ to Rs34/kg, which means slightly lower margin in R-22 for SRF/NFIL. R-22 export spread in Q3FY20 is likely at Rs95 vs Rs101 in Q2FY20 indicating lower profitability.

*Technical textiles and packaging films to see margin pressure. Calculated NTCF-caprolactam spread for Oct-Nov’19 fell 28.3% from Q2FY20 level to Rs62/kg. However, stable caprolactam prices indicate lower inventory losses. BOPET-PET spread has shrunk 10.9% QoQ to Rs42/kg, which should put pressure on SRF’s nonchemical EBIT. SRF’s revenues are likely to be low as NTCF and BOPET prices have contracted 13.8% and 9.2% QoQ respectively, while the company has been operating at optimal utilisation with limited scope for volume growth.

SRF’s consolidated EBITDA likely to grow 15.9% YoY to Rs4bn. We expect SRF’s revenues to be down 4.4% YoY at Rs18.8bn even as chemical business revenues will likely jump 50% YoY to Rs8.8bn. Chemical business EBIT is estimated to rise 146% YoY to Rs1.9bn on better sales in the specialty segment. We estimate technical textile EBIT to dip 57% YoY while that of packaging film is likely to grow 34%. We expect the company’s net profit to increase 24% YoY to Rs2bn (QoQ drop in profit is due to exceptional gain of Rs1bn in Q2FY20 and negligible tax in base).

NFIL’s EBITDA to rise 35% YoY to Rs708mn on low base. We estimate NFIL’s CRAMS revenues to rise 20% YoY to Rs588mn. CRAMS revenue from long-term contract is likely to start from Q4FY20. We also estimate specialty chemical revenues to rise 35% to Rs986mn and ref-gas and inorganic fluoride revenues to grow 5% and 3% YoY respectively. We expect EBITDA to increase 35% YoY to Rs708mn and net profit to rise 22% YoY to Rs474mn.

* Galaxy Surfactants’ EBITDA to grow 9.8% YoY to Rs905mn. We forecast volume growth of 9.2% YoY due to recovery in AMET on low base. India volumes remained subdued. We expect volume growth in specialty care products at 8% YoY on higher base. Realisation is likely to remain stable on flat lauryl alcohol prices. We estimate EBITDA to grow 9.8% YoY to Rs905mn and net profit to rise 26.5% YoY to Rs530mn (QoQ dip in profit is on account of negligible tax in base).


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