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Capturing benefits of economic recovery; maintain Buy

* Reported EBIT/PAT in Q3 were above our estimates by 130%/103%, aided by a sales beat and superior operating delivery in certain segments. Significant growth in Materials, Chemicals and Industrial divisions (35%, 25% & 66%) was driven by pent-up demand and quicker-thanexpected recovery in key end-user industries such as Auto, Consumer Durables, Paints, etc.

* The company delivered the best-in-class reported EBITDA of Rs2.3bn in Q3, led by enhanced segment performance, further aided by lower employee and other costs (as % of sales). Interest costs too have trended lower by 27%, sequentially.

* Robust recovery was seen in operating margins in Materials (12.7% vs. -1% yoy) and Industrial solutions (12.8% vs. 2.6% yoy) after almost 8-10 quarters and was imperative to the overall positive performance. OPM of the Nutrition & Care division too improved significantly to 8.3% vs. -4.9% yoy.

* We remain positive on the overall growth trajectory of the business and believe that sustaining the positive performance in Materials and Industrial solutions is crucial to long-term growth prospects. Factoring in margin improvement of 80-110bps on operational improvement, we raise our EPS estimates for FY22/23 by 19-23% and arrive at a revised TP of Rs1,940 (28x FY23E) from Rs1,630 earlier. We maintain Buy, with EW stance in EAP.

Growth across most segments:

Overall, revenues grew 20.4% yoy to Rs24.24bn, driven by healthy demand for Materials (up 35% yoy; better pricing environment and demand for automotive/consumer durables), Industrial Solutions (up 25% yoy; strong demand in polymers/packaging and other industries), Nutrition & Care (up 24.9% yoy; healthy consumer expenditure on home/personal care accentuated by Covid-19 concerns) and Agriculture (up 8% yoy; much better placed including product additions). Chemicals segments delivered substantial growth of 66% on a yoy basis, led by pent-up demand in key end-user industries. Surface Technologies, although down 58% yoy, was up 18.5% sequentially, led by recovery in automotive and construction industry.

Enormous margin improvement led by favorable operating environment:

Reported EBITDA (up 6x yoy to Rs2.3bn) was the best in class operating performance delivered by the company, led by enhanced segment performance, further aided by lower employee and other costs (as % of sales). Large part of margin gains came in from divisions such as Materials (12.7% vs. -1% CPLY), Industrial Solutions (12.8% vs. 2.6%) and Nutrition & Care (8.3% vs. -4.9%). We believe that such gains are predominantly driven by lower feedstock costs witnessed in early to mid FY21 due to Covid-19, allowing inventory benefits in the recent quarter, as per our understanding. This was further aided by a better product mix and internal costs control initiatives. However, we believe that margin benefits arising from low cost inventory are temporary in nature and likely to normalize going ahead.

Margin sustenance remains crucial; maintain Buy:

We remain positive on the overall growth trajectory of the business and believe that sustaining the positive performance in Materials and Industrial Solutions is crucial to the long-term growth prospects. Factoring in margin improvement of 80-110bps on operational improvement, we raise our EPS estimates for FY22/23 by 19-23% and arrive at a revised TP of Rs1,940 (28x FY23E) from Rs1,630 earlier. We maintain Buy, with EW stance in EAP. Key risks: Downturn in Materials and Industrial Solutions businesses; slowdown in economic revival.

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