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All-time high spreads aid strong margin performance

The manmade yarn market has been characterised by strong demand and supply constraint within the industry, which has been beneficial for Filatex. After a strong performance in Q3, Filatex India (FIL) reported yet another robust quarter, driven by sustained enhancement in yarn spreads. Revenue for the quarter grew 18% QoQ (28% YoY) to | 852.8 crore, mainly driven by blended realisations increasing 32% QoQ (36.4% YoY). Gross spreads (including inventory gain) increased substantially by 49% QoQ (111% YoY) to | 37.3/kg, with gross margins expanding ~400 bps QoQ (1200 bps YoY) to 30.0%.

Commencement of additional DTY capacity has also contributed to higher margins. Subsequently, EBITDA margins expanded significantly by 550 bps QoQ (1280 bps YoY) to 22.1%, with absolute EBITDA increasing by 57% YoY to | 188.7 crore (EBITDA/kg: | 24.3 vs. | 14 in Q3FY21). Ensuing PAT came in at | 118.5 crore vs. | 66 crore in Q3FY21. We expect EBITDA margins for FY22E-FY23E to stay at 15-16% driven by robust demand in both domestic, export markets and capacity constraint due to 5-6% of industry capacity being not functional owing to fire at one of major manufacturer’s production facility (expected to restart only by mid CY22).

However, in the near term, demand may be negatively impacted owing to re-imposition of lockdown in certain states. Also the management indicated the spreads have declined in April but they expect demand to pick up once lockdown restrictions are removed while spreads should also start trending upwards.

Capex to focus on capacity expansion of high margin products

FIL is planning a capex of | 360 crore in FY22E-23E. In FY22, it is planning a capex of ~ | 175 crore and aiming to add 100 TPD capacity of POY and DTY (expected to be commissioned in Q1FY23). Further, it is planning a capex of | 130-150 crore in FY23 to add 100 TPD of recycled chips (that have significantly higher realisation and margin than the normal polyester chips). The company is constantly focussing on enhancing the share of value added products as they yield higher margin. We expect the share of value added products to increase from 64% in FY20 to ~ 82% in FY23E, which would provide a fillip to the margin profile of the company.

Valuation & Outlook

Enhanced government support for polyester sector through production linked incentive (PLI) scheme and withdrawal of anti-dumping duty on PTA (raw material for polyester) augur well for the profitable growth of polyester players. The strong performance in FY21 has enabled the company to generate healthy cash flows, which has enabled it to reduce debt by ~ | 140 crore (D/E: 0.8x in FY21 vs. 1.2x in FY20).

We expect further deleveraging to result in D/E of ~0.2x in FY23E. Factoring in better-than-expected earnings performance in H2FY21 and improved product margins, we revise upwards our earnings estimates for FY22E and introduce FY23E estimates. Subsequently, we expect RoCE to get enhanced by 600 bps to 28% over FY21-23E. We reiterate our BUY recommendation on the stock with a revised target price of | 90 (6.0x FY23E EPS, earlier target price: | 85).

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