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Specialty chemicals beat already-high expectations

SRF’s specialty chemicals sawan outstanding FY20 with revenuesof Rs16.5bn, up 60% (on 82% growth in FY19).However,ref-gas revenues, despite doubling of HFC capacity,slightlydippeddue to pressure on realisation. This also hurt marginsresulting inchemical business EBIT margin improving byonly 160bpsto 17.3%. SRF has guided for 20-25% specialty chemical revenue growth in FY21,and last two years’track record suggests it should surpass the guidance. Management expects operating leverage to drive chemical business margins in coming years. We have slightly cut our EPS estimate by 0.3%/3.8% for FY21E/FY22E, but increasedour target price to Rs3,653 (from Rs3,361) on rise in EBITDA multiple for chemical business to 15x (from 13.5x) and that of packaging films to 9x (from 7x)on better performance. However, we downgrade our rating to HOLD (from Buy)as stock looks fairly priced.

* Weakness in ref-gas hurt chemical segment growth.SRF’s revenuesdipped10.3% YoY to Rs18.6bn, impacted by lower RM prices,sale of engineering plastic businessand closureof Thailand plant. Chemical business revenuesrose only 5% YoY to Rs8.8bnon lower volumes and weak realisationin ref-gas,but specialty chemicals performance remains on a strong footing. Packaging film revenuesfell 3.5% YoY on decrease inraw material prices while technical textiles dipped34.2% YoY to Rs3.2bn on weak demand due to slowdown in auto sales and lower caprolactam prices–in addition to closureof its plantsin Thailand.

* EBITDA margin expanded 73bps YoY. SRF’s gross profit rose 2.3% YoY to Rs9.4bn and margin improved 600bps YoY to 50.6% on higher revenue mix from chemical businessand better margins in packaging films.EBITDA fell 6.9% YoY to Rs3.6bn and EBITDA margin expanded 73bps YoY to 19.4%. EBIT was down11% YoY to Rs2.6bn.PAT declined 2.7% YoY to Rs1.9bn and benefited from lower tax rate.

* Chemical business EBIT dipped 4.3% YoY to Rs1.3bn and EBIT margin contracted 174bps to 18%, whichwas disappointing considering the better mix of specialty chemicals. It implies ref-gas realisation dip has been steeper. Packaging businessEBIT rose 23.7% YoY to Rs1.3bn and its EBIT margin stayedhigh at21.7%.However, we see divergent trend in margins for international operations where EBIT margin shrunk 600bps QoQ to 14.5% while India margins expanded 80bps to 25.6%.Technical textile EBIT dipped 34% YoYto Rs372mn.

* Operating cashflow was Rs13bn in FY20 vsRs9bn in FY19. OCF before working capital grew 8% YoY to Rs14.7bn.Declinefrom working capital was Rs239mn (from Rs3.2bn in FY19), partly helped by lower RM prices. Capex stood at Rs13bn in FY20. Net debt remained flattish at Rs33bn-34bn, and was helped by Rs3bn received from asset sale.SRF expectscapex to continue to drive growth and help grab opportunities, and sees deleveraging of Rs2bn-3bn annually in coming years.

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