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Strong delivery yet again, capex guidance raised; maintain BUY

Chemicals business drives earnings growth

Earnings beat our estimates but valuation stretched; maintain Neutral???????

* SRF posted a strong 1QFY23 with revenue growing across all businesses, mainly driven by the Chemicals and Packaging segments.

* Healthy operating performance was primarily led by the Chemicals business (87% of total incremental EBIT YoY) followed by Packaging Film business (17% of total incremental EBIT YoY) in 1QFY23.

* Factoring in the 1QFY23 performance with higher-than-estimated EBIT across segments, we raise our FY23E/FY24E earnings by 10%/5%, respectively.

* We are encouraged by the long-term structural opportunity in the Chemicals sector. While we certainly believe the company can cash-in on these opportunities, we maintain our Neutral rating owing to its rich valuation, which has been priced into the near-term upside.

Chemicals segment margin aids operating performance

* SRF reported an overall revenue of INR38.95b (est. of INR34.8b) in 1QFY23, up 44% YoY. EBITDA margin expanded 160bp to 26.2% (est. of 26.1%), primarily led by margin expansion in Chemicals business. EBITDA was at INR10.2b (est. of INR9.1b), up 54% YoY. Adjusted PAT rose 63% YoY to INR6.3b (est. of INR5.7b) in 1QFY23.

* Chemicals revenue (44% of total sales in 1QFY23) grew 54% YoY to INR17.2b in 1QFY23, with EBIT growth of 2.3x YoY to INR5.2b. EBIT margin expanded 1,020bp YoY to 30.2% due to the strong performance of the Fluorochemicals business aided by better sales realizations across HFCs. The strong demand for flagship products and new agro product launch in this quarter augured well for the Specialty Chemicals business.

* Packaging Film revenue (38% of total sales in 1QFY23) grew 44% YoY to INR14.96b in 1QFY23 and EBIT was up 25% YoY to INR2.95b. However, margin contracted 300bp YoY to 19.7%. The demand of BOPP films remained buoyant. Improvement in revenue mix led by higher VAP sales aided the healthy quarterly performance.

* Technical Textiles revenue (15% of total sales in 1QFY23) grew 16% YoY to INR5.7b in 1QFY23; but EBIT margin contacted 680bp YoY to 20.4%. EBIT declined 13% YoY to INR1.16b. The segment witnessed strong export growth in the Belting Fabrics and the Nylon Tyre Cord Fabrics (NTCF) while domestic NTCF volumes were subdued with steady margins.

Highlights from the management commentary

Fluorochemicals business: Positive trend likely to continue with demand in the refrigerants segment likely to remain healthy in the near to medium term

Margins: Rising crude, logistics issues and global shortages of some key inputs are pushing up the raw material prices. However, a sudden drop in raw material prices will likely impact 2QFY23 for the Packaging Films business. 2HFY23 looks better.

Chemicals segment margin: Management anticipates the Chemicals EBIT margin in FY23 to be higher than FY22 levels.

Capex: Total FY23 capex will be in the range of INR31-33b (out of this total capex, INR23-25b will be in Chemicals segment). The company will be setting up a new and dedicated facility to produce 1,000 MT of an agrochemical intermediate per year at its Dahej plant at a projected cost of INR2.5b.

Valuation and view

* Specialty chemicals will maintain its growth momentum with robust demand for the flagship product as well as new product additions. Fluorochemicals would continue its positive trend with demand in the refrigerants segment expected to remain healthy in the near to medium term.

* Factoring in the 1QFY23 performance with higher-than-estimated EBIT across segments, we raise our FY23E/FY24E earnings by 10%/5%, respectively.

* We are encouraged by the long-term structural opportunity in the Chemicals sector. While we certainly believe the company can cash-in on these opportunities, we maintain our Neutral rating owing to its rich valuation, which has been priced into the near-term upside.

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