SRF Limited - Packaging film margin zooms - ICICI Securities

SRF's specialty chemical and packaging film delivered good growth despite Covid-19. Chemical business EBIT rose only 12.6% YoY despite strong growth in specialty segment due to severe weakness in ref-gas. Packaging films' EBIT margin surged to 33% on significant expansion in spreads. SRF maintains its guidance of 20-25% revenue growth in specialty and sees growth in ref-gas from strong overseas demand (positive surprise). It aims to grow the specialty segment at 20-25% CAGR for next 3-4 years, which shows the company's confidence in molecule pipeline. Packaging film margins are unsustainable and it could dip in H2FY21, which would create volatility in earnings. We increase our EPS estimate by 28% / 7% for FY21E / FY22E as we see higher margins for packaging films in the near term. We increase the target price to Rs3,687 (from Rs3,653). Reiterate HOLD.

- Chemical business benefits from low base. SRF's revenues declined 15.5% YoY to Rs15.4bn impacted by Covid-19. Chemical business revenues rose 16.9% YoY to Rs7.0bn on low base, which was impacted from plant shutdowns in the industry. Specialty chemical business has grown strong while ref-gas was severely hurt from lower volumes and decline in prices. Packaging film revenues fell 3.5% YoY to Rs6.8bn on decrease in raw material prices. Technical textile segment, with revenues down 68.6% YoY to Rs1.4bn, was the worst hit.

- EBITDA margin expanded 350bps YoY. Gross profit decline was limited to 4.5% YoY at Rs8.0bn as margin improved 600bps YoY to 52.0% on likely better margins in packaging films. EBITDA fell only 0.6% YoY to Rs3.6bn and benefited from 25% YoY fall in power charges. EBITDA margin expanded 353bps YoY to 23.5%. EBIT was down 4.4% YoY to Rs2.6bn and PAT declined 6.5% YoY to Rs1.8bn.

- Packaging business EBIT rose 51.6% YoY to Rs2.2bn and EBIT margin expanded to 32.6% (up 11.8pps) on strong spread expansion. SRF sees these margins unsustainable and expects the same to normalise in H2FY21 with rise in supply. Chemical business EBIT rose 12.6% YoY to Rs886mn and its EBIT margin came in at 12.6%, down 40bps YoY. The margin declined despite higher specialty contribution on significant HFC capacity addition. Technical textile segment reported EBIT loss of Rs140mn vs Rs372mn positive EBIT in Q4FY20.

- Investment pipeline provides long-term earnings visibility. SRF has guided for a capex of Rs13bn in FY21. This would be required to complete its announced packaging films capacity expansion in Hungary and Thailand; Rs2.4bn capex in specialty; and Rs3.2bn for doubling of capacity in chloromethane solvents. SRF has delayed PTFE plant execution by 12-18 months on demand weakness. These capacity expansions provide strong visibility on earnings growth in specialty chemicals, ref-gas (HFC capacity doubled in FY20) and packaging films for the next few years.

Shares of SRF LTD. was last trading in BSE at Rs.3791.65 as compared to the previous close of Rs. 3758.65. The total number of shares traded during the day was 15960 in over 2586 trades.

The stock hit an intraday high of Rs. 3885 and intraday low of 3762.25. The net turnover during the day was Rs. 60909066.

Source : Equity Bulls

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