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Chemical segment grows despite challenging macro

Our View:

SRF’s 2QFY23 Ebitda at Rs 7.7bn (+14% YoY; ?23%), missed our and street estimates on weaker than estimated earnings in Technical Textiles Business (TTB) & Packaging films Business (PFB), even as Chemical Business (CB) stood better than expectations. CB revenue at Rs 18.3bn registered a growth of 62% YoY and 6% QoQ driven by growing demand for existing and new products. However, weaker demand for nylon tyre chord fabric impacted TTB revenue leading to a 16%YoY & 18% QoQ decline to Rs 4.7bn and start of new BOPET lines globally led to a 5%QoQ  drop in PFB revenue to 13.3bn. In addition, inventory loss of ~Rs 130?140mn, impacted segment margins as well. With a spend of Rs 12.5bn in the 1HFY23, SRF has already commissioned MMP4, and a captive power plant, and remains on track for investment of Rs 30bn in FY23. The outlook for CB remains robust, while prospects TTB is likely to improve going ahead, even as PFB might remain under duress for some time. Maintain BUY.  

Result Highlights

* Revenue: The consolidated net?revenue during the quarter stood at Rs 37.3bn (+31% YoY; ?4% QoQ).  

* Consolidated Ebitda & PAT: Consolidated Ebitda at Rs 7.7bn (14%YoY;  ?23% QoQ).  Consol. PAT at Rs 4.8bn (+25% YoY; ?21% QoQ)  

* Chemicals Business: Revenue stood higher by 62% YoY and 6% QoQ at Rs 18.3bn. Ebit stood at Rs 5.17bn (+106% YoY and ?1% QoQ); driven by higher sales volume and better realization across Fluorochemicals and Specialty chemicals.   

* Technical Textile Business: Revenue stood at Rs 4.66bn (?16% YoY; ?18% QoQ) and EBIT stood at Rs 629mn (?53% YoY; ?46% QoQ). Subdued demand for Nylon Tyre Cord Fabrics negatively impacted the business. However, Belting Fabrics and Polyester Industrial Yarn segments witnessed healthy growth during the quarter.  

* Packaging Film Business: Revenue stood at Rs 13.3bn (+24% YoY; ?11% QoQ), ; EBIT stood at Rs 1.01bn (?43% YoY; ?66% QoQ; sharp contraction was observed in Ebit margin to 7.6% (from 19.7% in 1Q). Margins of BOPET films were under pressure owing to excessive supply. In addition, high energy costs due to the prevailing geopolitical scenario significantly impacted operations in Hungary

* The SRF Board has approved capex aggregating Rs 6040mn for four new plants in the agrochemical space and capacity enhancement of an existing plant at Dahej, India. The capex is likely to be completed in the next 10?12 months

Valuation

We maintain BUY on SRF with a Mar’24 TP of Rs 3195, as we roll estimates forward and introduce FY25e. Our DCF based target price implies a target multiple of 35x FY25e, as against 28x the stock is currently trading at. Our TP is premised upon a 14.5% CAGR growth in operating earnings over FY22?30e. In our view the growth capex of Rs 150bn committed by SRF over next 5 years, predominantly in the CB segment, has the potential to drive sustained growth in earnings.  

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