IGI Logo

Beat on estimates led by Technical Textiles

* SRF reported a strong operating performance on a YoY basis in 1QFY22, on a lower base in 1QFY21, led by margin expansion in Technical Textiles and Chemicals, but offset by a contraction in Packaging Films. Margin in the Chemicals segment contracted QoQ due to higher raw material prices and export freight rates.

* SRF’s reported EBIT was higher v/s our estimate. The incremental EBIT of 60%/22% over our estimate was mainly contributed by Technical Textiles/Packaging Films, while the rest is from the Chemicals segment.

* Factoring in its 1QFY22 performance and margin improvement in the Technical Textiles segment, we have increased our earnings estimates for FY22E by 12% and maintained the same for FY23E.

* We are encouraged by the long term structural opportunity in the Chemicals sector. We maintain our Neutral stance on SRF owing to higher valuations, which seem to fully price in the near term upside.

Margin expands in the Chemicals and Technical Textiles segment

* SRF reported a revenue of INR27b (est. INR23.6b) in 1QFY22, up 75% YoY, with EBITDA margin expanding 50bp to 24.6% (est. 23.4%). EBITDA stood at INR6.6b (est. INR5.5b), up 78% YoY. Adjusted PAT grew 109% YoY to INR3.9b (est. INR3.1b) on account of lower interest cost (-36%) and higher other income (+36%), but was offset by a higher tax rate (26.5% v/s 21% in FY21) and depreciation (+18%).

* Revenue from Chemicals grew 58% YoY to INR11.1b, with a 740bp YoY EBIT margin expansion to 20% (EBIT grew 151% YoY to INR2.2b). In 1QFY22, the Specialty Chemicals performed well, owing to higher sales from export and domestic markets. The Fluorochemicals segment witnessed: i) higher sales volumes in the Refrigerants and Blends segment, especially from export markets, ii) an uptick in Auto sales, which led to a higher offtake in R-134a revenue, iii) healthy contribution from the Chloromethanes segment, and (iv) lower offtake in the domestic market in 1QFY22 on account of localized lockdowns.

* Revenue from Packaging Films grew 54% YoY to INR10.4b, with a 980bp YoY contraction in margin to 22.7% (EBIT grew 7% YoY to INR2.4b). On a QoQ basis, revenue/EBIT grew 6%/8%. EBIT margin expanded by 40bp QoQ. In 1QFY22, demand for BOPET films was subdued, while demand for BOPP films remained healthy. New capacities that came on stream in the past six months in Hungary and Thailand witnessed better traction and enhanced sales of VAPs, which contributed to the performance.

* Revenue from Technical Textiles grew 251% YoY (+23% QoQ) to INR4.9b, with EBIT margin of 27.1% v/s -10% last year (EBIT stood at INR1,337m v/s an EBIT loss of INR140m last year). Restructuring of its margin profile with long-term customers contributed to the overall performance.

Highlights from the management commentary

* Two dedicated facilities at Dahej have commenced operations, which will cater to the Agrochemicals segment.

* Capex: The board of directors has approved a project for integrated expansion of fluorocarbon-based Refrigerant capacity at Dahej, at a projected cost of INR5.5b, to meet the growing demand for Refrigerants in the domestic and export market. The same is expected to be completed in 24 months. To cater to the growing Power requirements of new and upcoming plants at Dahej, the board has approved installation of a 200KV grid at a cost of INR1,350m.

* Commercialization of new PTFE plant is expected to start from Nov’22.

Valuation and view

* SRF plans to spend ~INR20b on capex in FY22, of which 50-55% will be utilized in the Chemicals business. The company is deploying majority of its incremental capital in the Specialty Chemicals segments, which is growing at a faster pace and yielding a higher margin. We believe the move is in the right direction.

* SRF’s performance in the last three years has been robust, with revenue/EBITDA/PAT CAGR of 15%/33%/42%. The stock price over the same period have grown by ~40% CAGR.

* Earnings momentum is likely to slow down due to margin contraction in the Packaging Films segment (EBIT margin of 27.3% in FY21 v/s 20-21% in FY22-23E) and reduced growth momentum in Specialty Chemicals due to a high base (three years revenue CAGR of 60% v/s 26% for FY21-23E). Going forward, we expect SRF to post a revenue/EBITDA/PAT CAGR of 26%/22%/26% over FY21- 23E.

* On a one-year forward EV/EBITDA basis, SRF is currently trading at 18.4x (on FY22E), which is at a premium of ~50% each to its average trading multiple for the last three/five years. This in our view is rich when compared to earnings growth in the offing.

* Factoring in its 1QFY22 performance and margin improvement in the Technical Textiles segment, we have increased our earnings estimates for FY22E by 12% and maintained the same for FY23E.

* We are encouraged by the long term structural opportunity in the Chemicals sector. We maintain our Neutral stance on SRF owing to higher valuations.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer