Published on 8/09/2022 2:26:31 PM | Source: JM Financial Institutional Securities Ltd

Buy SRF Ltd For Target Rs.3,000 - JM Financial Institutional Securities

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Strong delivery yet again, capex guidance raised; maintain BUY

SRF’s 1QFY23 consolidated EBITDA came in ~6%/9% ahead of JMFe/consensus primarily on account of a strong beat in the technical textiles and packaging films businesses while the high-value chemicals business performance was largely in line. Going forward, the management has guided for a) chemicals EBIT margin expansion for FY23, b) some margin pressure in BOPET films, c) robust margin trajectory for FY23 overall due to certain operating cost savings (from the thermal power plant), and d) ~ INR 6.0bn higher capex guidance (vs. earlier) for FY23. With upcoming capacities of i) chloromethanes from 2QFY23, ii) PTFE from end-3QFY23, iii) BOPP line in Indore from 2QFY23, iv) HFC-32 from 1QFY24, and v) ongoing ramp up of MPP unit of fluoro specialties, we believe SRF’s strong growth momentum is likely to continue. We have raised our FY23 EBITDA/PAT estimates by ~7% to account for higher margins in the Chemicals business while our FY24 EBITDA/PAT estimates have been revised upwards by 4% to factor in contribution from additional capex announcements. We maintain BUY with a Sep’23 TP of INR 3,000 (vs. Mar’23 TP of INR 2,765 earlier) as we believe SRF remains at the forefront of capturing growth in the fluorochemicals space.

Chemicals EBIT in line with expectation: SRF’s 1QFY23 consolidated gross profit came in 5% above JMFe, at INR 20.4bn as a) revenue was 5%/10% above JMFe/QoQ and stood at INR 38.9bn (up 10%/44% QoQ/YoY) and b) gross margin was in line with our expectations at 52.3% (vs. JMFe of 52.3% and 53.1% in 4QFY22). As a result, EBITDA was ~6%/9% ahead of JMFe/consensus at INR 10.2bn (vs. JMFe/consensus of INR 9.6bn/9.4bn) and PAT stood at INR 6.1bn (~2%/6% above JMFe/consensus). Chemicals EBIT was in line with our expectation and came in at INR 5.2bn (vs. JMFe of INR 5.2bn and INR 5.0bn in 4QFY22, up 3%/134% QoQ/YoY) as revenue was 3% ahead of JMFe and stood at INR 17.2bn (vs. JMFe of INR 16.7bn and INR 15.7bn in 4QFY22, up 10%/55% QoQ/YoY) while EBIT margin was slightly lower at 30% (vs. JMFe of 31% and 32% in 4QFY22).

Packaging films EBIT slightly ahead of expectation: Packaging films (PF) EBIT was ~6% ahead of JMFe and stood at INR 2.95bn (vs. JMFe of INR 2.8bn and INR 2.8bn in 4QFY22) as PF revenue was 2% ahead of JMFe at INR 15.0bn (up 8%/44% QoQ/YoY) and EBIT margin was higher at 19.7% (vs. JMFe of 19.0% and 19.8% in 4QFY22). Technical textiles (TT) EBIT was higher at INR 1,162mn (37% above JMFe, up 27% QoQ albeit down 13% YoY) as TT revenue was 21% above JMFe at INR 5.7bn (up 15%/16% QoQ/YoY) likely on account of strong demand for nylon tyre cord fabrics. Further, TT EBIT margin was also higher than anticipated at 20.4% (vs. JMFe of 18% and 18.4% in 4QFY22).

Capex announcements for various fluoro speciality intermediates: In Chemicals, the Board has approved cumulative capex of INR 4.0bn consisting of a) INR 2.5bn for setting up a new and dedicated facility to produce 1,000MTPA of an agrochemical intermediate at Dahej, b) INR 0.72bn for an intermediate that finds applications in both agro and pharma intermediates, and c) INR 0.78bn for creating two technical structures for new plant buildings for certain agrochemical products. In technical textiles, it has approved capex of INR 1.62bn for capacity expansion and modernisation of belting fabrics operations from 1,100 to 1,800 MTPM (metric tonne per month).

FY23/24 estimates raised by ~7%/4% – maintain BUY: We have raised our FY23 EBITDA/PAT estimates by ~7% and FY24 estimates by ~4% to factor in i) guidance of chemicals EBIT margin expansion in FY23 despite reporting strong margin in FY22 and ii) higher capex guidance for FY23 resulting in ~4% higher EBITDA for FY24. We maintain BUY with a Sep’23 TP (SOTP based) of INR 3,000/share from Mar’23 TP of INR 2,765/share earlier. Going forward, as highlighted in our recent report (Unravelling the HFC mystery), SRF would benefit from HFCs’ supply-demand mismatch given no capacity additions from China amidst rising demand.


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