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Strong show continues

EBITDA in line; PAT below estimates

* SRF’s 3QFY21 operating performance was robust on the back of a margin expansion seen across segments (on a YoY basis). Specialty Chemicals drove overall revenue in the Chemicals segment as the Fluorochemicals business revenue remained flat YoY. On a QoQ basis, EBIT margin moderated (-310bp QoQ) in the Packaging segment, but expanded 340bp in Technical Textiles.

* We largely maintain our FY21/FY22/FY23 estimates as operating performance was broadly in line with our estimates. Maintain Buy.

Margin expands across segments

* Revenue grew 16% YoY to INR21.5b (v/s our estimate of INR23.3b) in 3QFY21, with EBITDA margin expansion of 430bp to 25.4% (v/s our estimate of 24.7%). EBITDA stood at INR5.4b (v/s our estimate of INR5.8b), up 40% YoY, while adjusted PAT decreased 9% YoY to INR3b (v/s our estimate of INR3.4b) on higher tax rate (28.1% v/s a tax benefit last year). This was offset by lower interest cost (-40% YoY) and higher other income (+290%).

* In 9MFY21, revenue/EBITDA/PAT grew 8%/40%/17%

* The Chemicals business reported 12% YoY revenue growth to INR9.1b, with EBIT margin expansion of 330bp YoY to 21% (EBIT grew 33% YoY to INR1.9b). The Specialty Chemicals business performed well, owing to strong demand from the overseas markets, higher capacity utilization of dedicated/multipurpose facilities, and cost-savings across all product streams. The Fluorochemicals business saw a revival in demand for Refrigerants and healthy contribution from the Chloro-methane segment, leading to a much better overall performance.

* Revenue for Packaging Films segment grew 26% YoY to INR8b, with a margin expansion of 310bp YoY to 26.5% (EBIT grew 42% YoY to INR2.1b). On a QoQ basis, revenue/EBIT declined 4%/14%, with EBIT margin contracting 310bp. New capacities in Thailand and Hungary aided volume growth and both BOPET and BOPP segments witnessed a robust performance due to better operating leverage, improved margin, and a healthy demand from customers.

* The Technical Textiles business reported a 9% YoY increase in revenue to INR3.7b, with 760bp EBIT margin expansion to 18.5% (EBIT grew 86% to INR679m), due to faster than-expected recovery in the Tyre industry. The Belting Fabrics segment contributed significantly to overall performance.

Highlights from the management commentary

* The management remains confident of achieving over 25% revenue growth in Specialty Chemicals.

* Large capex will be carried out in the Specialty Chemicals business in the next two years due to robust demand from global clients as higher demand in this segment is sustainable. As of 3QFY21, the company has deployed INR21b in the Specialty Chemicals business.

* All capacities are currently operating at full utilization levels from Dec’20 onwards. The first two quarters (1Q and 2QFY21) saw an adverse impact due to COVID-19. Going forward, the management expects to report strong growth in Refrigerant gas during the next 12 months.

* All refrigerant gas capacities are currently operating at full utilization levels from Dec’20 onwards. The first two quarters (1Q and 2QFY21) saw an adverse impact due to COVID-19. Going forward, the management expects to report strong growth in Refrigerant gas during the next 12 months.

* Capex for FY22 (from already announced projects): INR12-13b.

Valuation and view

* SRF reported robust operating performance during 3QFY21, led by margin expansion across business segments.

* Strong revenue growth and margin expansion (on a YoY basis) was witnessed in the Packaging Films segment due to higher volumes (new capacities in Thailand and Hungary aided volume growth), better operating leverage, and a healthy demand from customers. On a QoQ basis, EBIT margin contracted 310bp. The moderation in margin was well guided by the management earlier.

* Technical Textiles surprised on the EBIT front, due to faster-than-expected recovery in the Tyre industry and initiatives to enhance operational performance.

* Growth in the Chemicals segment in 3QFY21 was driven by Specialty Chemicals as Fluorochemicals revenue remained flat YoY due to: i) weak demand for Refrigerants from the Automobile and Air Conditioning segments (both from OEM and replacement market), and ii) low prices.

* SRF plans to spend ~INR15-18b annually on capex over the next 2-3 years on the back of capital raised and CFO. About 60-70% capex would be utilized on the Specialty Chemicals business, 20-30% will be spent on Packaging, and the balance would be utilized for maintenance capex in Technical Textiles and other businesses. It is deploying majority of the incremental capital in the Specialty Chemicals segments, which is growing at a faster pace and yielding higher margin. We view the said move as a step in the right direction.

* We maintain our FY21/FY22/FY23 estimates as operating performance was broadly in line with estimates. Revenue/EBITDA/adjusted PAT is expected to grow at 20%/15%/21% CAGR over FY21-23E. We value the stock on a SoTP basis to arrive at our TP of INR6,315. Maintain Buy rating.