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Specialty Chemicals momentum to sustain; margin outlook favorable

* SRF reported 16% yoy sales growth, missing our estimate by 5%, dragged down by lower-thanexpected growth in Fluorochemicals while other segments reported solid performance. EBITDA was in line with the expectation on higher-than-anticipated margin expansion in Technical Textiles and Packaging Films. The board announced an interim dividend of Rs19/share.

* Specialty Chemicals reported ~25%/~55% yoy growth in Q3/9MFY21 (as per our estimates), exceeding management’s ~20-25% growth guidance for FY21. Fluorochemicals topline was flat qoq, though volumes trended higher. Sequential decline in Packaging revenues was largely due to price moderation, partially offset by improved volumes led by auto and AC recovery.

* Management remains upbeat on strong demand for specialty chemicals mainly led by demand from agrochemicals and would dedicate a large part of capex for the same. SRF already has a pipeline of Rs12-13bn capex, and may announce Rs3-4bn of additional projects.

* Specialty Chemicals outlook has substantially improved on export demand, while better outlook in R-gas business and overall margin profile lead to an earnings upgrade. We increase EPS estimates by 4.2%/7.2% for FY22/23 and raise our TP to Rs6,173. Retain Buy/OW in EAP.

Upbeat on Specialty Chemicals; R-Gas pricing environment firming up, possibly translating into better margins in the longer run: SRF’s Chemicals business (CB) reported 11.6% yoy growth, largely driven by growth in Spec Chem business. Growth delivery of ~55% (as per our estimates) for 9MFY21 in the Spec Chem has surpassed management’s earlier guidance and the company believes that such momentum is sustainable for the next 3-4 years, mainly aided by agrochemicals space. Incremental capex projects of Rs3-4bn (anticipated) would predominantly cater to this business. Fluorochemicals sales were flat qoq, although the quarter saw better volumes. Global prices of key HFCs are seeing a broad uptrend and may consequently beneit margins in upcoming quarters. Inventory levels shall remain elevated in order to capitalize on seasonal demand in Q4FY21/Q1FY22. Fluorspar prices have increased, though management does not see significant margin impact. Restrictions on imported ACs and ongoing Anti-Dumping cases for R32 and HFC blends, in case positive outcome, should be favourable for this segment.

Softness in pricing for packaging products; Domestic preference over imports favorable for TT margins: Although volumes for packaging films progressed positively, pricing pressures impacted sales and margins on a qoq basis. On a yoy basis, performance remained robust. Thailand resin plant commissioned in Nov’20, catering to Thailand BOPET plant, should provide incremental margin benefits at optimum utilization levels. TT business was impacted favorably as end-user industry preference tilted towards domestic buying as opposed to imports. Replacement demand in the tyre industry would provide tailwinds for upcoming quarters.

Growth outlook firm; maintain Buy: Specialty Chemicals outlook has substantially improved on export demand, while better outlook in R-gas business and overall margin profile lead to an earnings upgrade. We increase EPS estimates by 4.2%/7.2% for FY22/23 and raise our TP to Rs6,173 (from Rs5,466). Retain Buy and OW in EAP. Key risks to our call include underperformance in the Specialty Chemicals segment and lower operating performance in R-gas business.

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