IGI Logo

Chemicals and Packaging business to pave the path for growth

Earning above our estimates; maintain our Neutral rating

* SRF reported a strong 3QFY22, with revenue growth across all businesses, driven by the Chemicals and Packaging business. Operating performance has been largely driven by the Chemicals business (72% of total incremental EBIT YoY).

* Factoring in its 3QFY22 performance, with higher than estimated Chemicals and Packaging EBIT, we have upgraded our FY22E/FY23E/FY24E earnings estimate by 5%/7%/6%.

* We are encouraged by the long term structural opportunity in the Chemicals sector. While we certainly believe the company can cash-in on these opportunities, we maintain our Neutral stance owing to the high valuations, which have been priced into the near-term upside.

Chemicals segment largely drives overall operating performance

* SRF reported a revenue of INR33.5b (est. INR30.2b) in 3QFY22, up 56% YoY. EBITDA margin was flat YoY at 25.3% (est. 24.3%) due to margin contraction in the Packaging segment. EBITDA stood at INR8.5b (est. INR7.3b), up 56% YoY. Adjusted PAT grew 56% YoY to INR4.7b (est. INR4.5b).

* Revenue in the Chemicals segment (43% of total sales) grew 58% YoY to INR14.3b, with EBIT growth of 2.2x to INR4.2b. EBIT margin expanded by 840bp YoY to 29.4%. The Fluorochemicals business delivered a robust performance due to better HFC mix, higher price realizations, and increasing contribution from the Chloromethane segment. The Specialty Chemicals business delivered a healthy performance owing to incremental revenue from domestic and export markets on improved demand from global Agrochemical manufacturers. Input pressures continue on increasing crude prices, logistic challenges, and global shortages of some key raw materials.

* Revenue from Packaging Films (38% of total sales) grew 59% YoY to INR12.8b. EBIT rose 20% YoY to INR2.5b, but margin contracted by 660bp to 19.9%. The segment has seen healthy growth on higher volumes owing to additional capacity in Hungary and Thailand and better margin in BOPP.

* Revenue from Technical Textiles (16% of total sales) grew 47% YoY to INR5.4b, with EBIT margin expanding by 260bp to 21.1%. EBIT surged by 67% YoY to INR1.1b. The business showed a healthy performance, despite weak demand for Nylon Tire Cord Fabrics, due to sustained sales volumes for Belting Fabrics and Polyester Industrial Yarns.

* Revenue/EBITDA/adjusted PAT grew 53%/45%/50% in 9MFYY22.

Key highlights from the management interaction

* SRF is expected to deliver better margin in the Chemicals segment ahead, with new HFC and PTFE capacities coming on-stream, better mix, higher exports, and favorable prices of refrigerant products in key global markets.

* Capex: The company has declared a capex of INR4.3b on a new aluminum foil facility at Indore and has declared an INR1.9b and INR610m capex for a Pharma Intermediary and agrochemical products (300 MTPA) facility in its Dahej complex. The company has envisioned a completion time frame of 20 months for the aluminum project.

* The company expects to achieve better volumes in Packaging segment in FY23 with new capacities coming in (7% growth guidance) and reducing logistics costs on a global scale to aid margins

Valuation and view

* Earnings momentum is likely to slow down due to margin contraction in the Packaging segment (EBIT margin of 27.3% in FY21 v/s 19.3%/18.5%/18.5% for FY22E/FY23E/FY24E) and reduced growth momentum in the Specialty Chemicals due to a high base (three-year revenue CAGR of 61% v/s 27% over FY21-24E). Going forward, we expect SRF to post a revenue/EBITDA/PAT CAGR of 22%/20%/24% over FY21-24E.

* Factoring in its 3QFY22 performance, with higher than estimated Chemicals and Packaging EBIT, we have upgraded our FY22E/FY23E/FY24E earnings estimate by 5%/7%/6%.

* We are encouraged by the long term structural opportunity in the Chemicals sector. While we certainly believe the company can cash-in on these opportunities, we maintain our Neutral stance owing to the high valuations, which have been priced into the near-term upside.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer