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Ref-gas likely to aid profitability in H2FY22

SRF’s Q2FY22 print was not encouraging, but for strong margin expansion in chemical business from higher realisations in HFCs (ref-gas), we anticipate even higher benefit in H2FY22. Technical textiles and packaging films margin compression QoQ was expected, but pace has negatively surprised. Ref-gas utilisation increase along with higher spreads should support near-term profitability and continued growth in specialty chemicals (guidance: 15-20% growth in FY22 stays). Rising power cost and RM pressure could be key risks. SRF has committed Rs20bn capex in FY22 (Rs6.6bn in H1FY22), of which, chemicals would see Rs12bn investment. Segmental margins have been very dynamical, but on consolidated basis we have increased our EBITDA estimate by 4% / 5% in FY22/ FY23. Our target price has increased to Rs2,010 (adjusted for bonus shares, prior: Rs1,512) and rolled forward to FY24E. HOLD.

* Chemical business revenue rose 27.8% YoY. SRF’s revenues rose 32% YoY to Rs28bn driven by higher realisation in packaging films, NTCF and ref-gas and improvement in utilisation across segments. Revenue from chemicals was up 28% YoY (+1% QoQ) to Rs11bn on higher growth in both specialty and ref-gas. Ref-gas volumes as well as prices were higher in HFCs; specialty benefited from strong demand including expansion in domestic market. Packaging film revenue rose 29% YoY to Rs10.7bn on ramp-up in Thailand and Hungary, and higher realisation on rise in RM cost. Textile revenue was up 68% YoY on RM inflation and price hike.

* EBITDA up 19% YoY to Rs6.8bn. Gross profit rose 25% YoY to Rs14bn and margin dipped 290bps YoY to 49.6% due to mix change in chemical business and RM inflation. EBITDA was up 19% YoY to Rs6.8bn restricted on increase in power cost. Net profit rose 17.9% YoY to Rs3.8bn.

* Chemical business EBIT margin rose 250bps QoQ to 22.3%. Chemical business EBIT rose 44% YoY and 12.9% QoQ to Rs2.5bn which benefited from higher ref-gas prices. It was partly offset by higher power cost. Packaging films’ EBIT was down 27% YoY (24% QoQ) on falling spreads in BOPET, while BOPP spreads were stable. Technical textile EBIT came in at Rs1.3bn, up 165% QoQ (flattish QoQ) on renegotiation of prices.

* Call highlights: 1) Technical textile margins are negotiated for 6-12months, thus, next few quarters should be good;

2) packaging films margins should be steady, though see further capacity addition;

3) HFC margins should improve from higher realisation;

4) H2FY22 specialty margins are generally better, but can see some RM pressure;

5) in Sep’21, HFC capacity utilisation reached optimal level;

6) specialty chemical has seen business development in India, but broadly selling to same global customers. SRF maintained guidance of 15-20% growth for FY22;

7) capex for FY22 seen at Rs20bn with Rs12bn in specialty; and

8) R-32 will see capacity expansion of 2.5ktpa.

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