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Hold SRF Ltd For Target Rs.7,560

Chemical business outlook good

SRF’s chemical business EBIT missed our estimates in Q1FY22 despite higher refgas prices on rise in freight cost and RM pressures. SRF sees lower margins in the segment as transient, and margin expansion in textiles as sustainable on capacity shutdowns in China. As anticipated, SRF has announced large capex in ref-gas, which should commence before capacity freeze in Dec’23. The capex should help in the long run when prices of HFC start rising on restricted supply.

SRF also seems confident of rise in pharma intermediate revenue on new product campaigns, which should help expand specialty chemicals’ contribution in the medium term. We have increased our EPS estimates by 12.7% / 6.5% for FY22E/FY23E on higher margins for textiles. We increase our SoTP-based target price to Rs7,560 (from Rs6,756) on a higher multiple of 24x EBITDA for the chemical business. Maintain HOLD.

* Chemical business revenues sustain on QoQ basis. SRF’s revenues rose 75% YoY to Rs27bn driven by higher realisation in packaging film business and technical textiles on rise in RM prices and strong performance in the chemical business. Revenues from chemicals were up 58% YoY to Rs11bn on higher growth in both specialty and ref-gas. Ref-gas volumes as well as prices were higher in HFC. Packaging film revenues rose 54% YoY to Rs10bn on ramp-up in Thailand and Hungary, and higher realisation on rise in RM cost. Textile revenues were up 251% YoY on RM inflation and price hike.

* EBITDA up 85% YoY to Rs6.7bn. Gross profit rose 70% YoY to Rs13.7bn and margin dipped 135bps YoY to 50.7% due to mix change in the chemical business and RM inflation. EBITDA was up 85% YoY to Rs6.7bn driven by operating leverage. EBIT expanded 112% YoY to Rs5.5bn.

* Chemical business EBIT margin dips 390bps QoQ to 20%. Chemical business EBIT rose 151% YoY, but fell 19% QoQ to Rs2.2bn due to impact of higher freight costs and RM inflation in specialty chemicals. It was partly offset by higher prices in ref-gases. Packaging films’ EBIT was up 7% YoY (+8% QoQ) on rise in volumes and steady spreads Technical textile EBIT came in at Rs1.3bn, up 84% QoQ on renegotiation of prices as well as likely inventory benefits.

* Call highlights: 1) Ref-gas capex of Rs5.5bn will expand HFC capacity and have swing facility with capacity up to 15-16ktpa. HFC capacity expansion in India would come to freeze from Dec’23, hence new capacity will help SRF meet future demands. 2) SRF sees traction in pharma intermediates and aims to its contribution to 25-30% from the existing 10-15% in specialty chemicals. 3) Structural changes are expected in margins for technical textiles due to certain NTCF capacity shutdowns in China. 4) Packaging films’ margins can contract in the near term due to commissioning of new capacities. South Africa packing films plant was partly shut due to riots in Q2FY22. 5) Capex is seen at Rs20bn in FY22 and Rs16bn-18bn in FY23.

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