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Earnings momentum intact; maintain Buy

* SRF reported ~14% beat on our/Street sales estimates, driven by accelerated growth in Chemicals/Packaging Films business (up ~31%/63% yoy). Technical Textiles’ rebound too has been consistently impressive (up ~27% yoy). EBITDA was ahead of estimates by ~8% on better gross margins and lower SG&A costs.

* The remarkable performance in Specialty Chemicals was driven by improved offtake in highvalue molecules from export markets. Fluorochemicals too registered higher volume growth, along with increased market penetration for certain products. Higher utilization levels and better product mix in PFB aided topline growth, while margin normalization was witnessed in BOPET.

* Management has cited 10-15% growth guidance for Specialty Chemicals in FY22E (~45% growth in FY21) due to high base and capacity constraints, which we believe is on the conservative side given the high growth potential from pharmaceutical and agrochemical molecules. FY22E capex guidance is Rs16-19bn (~60-70% dedicated towards Chemicals).

* We remain positive on the Chemicals business, supported by strong growth in Specialty chemicals and Fluorochemicals. PFB, backed by asset expansion and better product mix, enhances earnings visibility. We introduce FY24 estimates and forecast CB/PFB to see revenue CAGR of 24/21% in FY21-24E. We arrive at a revised TP of Rs7,060 (Rs6,173 earlier) by rolling forward to Jun’23E EBITDA (11.9x vs. 11.5x earlier). Maintain Buy and OW stance in EAP

Margins in Chemicals business (CB) touch new highs:

SRF’s Chemicals business (CB) reported ~31%/27% yoy/qoq growth, while margins improved ~600bps yoy to ~24%. This is the third-consecutive quarter in which it has witnessed sequential growth in both revenues and margins. Accelerated growth in the Specialty business was driven by higher offtake of complex molecules by the EU. Fluorochemicals products delivered higher volumes on seasonality, while certain products (R134a) saw enhanced market penetration in the domestic market as well. For FY21, Specialty Chemicals and Fluorochemicals registered ~45% and 35% growth, respectively. The new MPP-4 plant project costing Rs3.75bn was approved by the board. It will have superior technical capabilities and commercial capacities. Management aims to renew its attention on pharma-related opportunities, given the momentum in both domestic and export markets.

BOPP margins remain strong; Technical Textiles recovery robust:

PFB delivered 63% yoy/22% qoq growth, driven by higher capacity utilization levels in both domestic and international markets, as well as strong demand. Operating margins in PFB tapered ~400bps qoq on margin normalization in the BOPET line. The new BOPP line in Thailand is expected be commissioned by next quarter. Management expects the new BOPET line in Hungary (commissioned in Aug’20) to reach optimum utilization levels in next few months. Domestic preference over imports remains key catalyst for recovery in Technical Textiles (up ~26% yoy).

Long-term growth story intact; maintain Buy:

We remain positive on the overall chemical business, given 1) strong momentum in the global agrochemical market; 2) limited competition in complex molecules; and 3) capacity expansion in chloromethane and R-gas. PF demand is likely to remain strong in FY22E amid Covid. We introduce FY24 estimates and forecast CB/PFB to see 24/21% revenue CAGR in FY21-24E. We arrive at a revised TP of Rs7,060 by rolling forward to Jun’23E EBITDA (11.9x vs. 11.5x earlier). Maintain Buy and OW in EAP. Key risks: underperformance in the Specialty Chemicals and margin erosion in PFB.

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