SRF - Specialty Chemicals continues to shine! - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities and Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We retain our ADD rating on SRF with a target price of INR 7,300 on the back of (1) continued healthy performance from Speciality Chemicals business and Packging Films business, (2) recovery in the Technical Textile segment, (3) strong balance sheet, and (4) deployment of Capex towards high-growth Speciality Chemicals business over 3-4 years to tap the opportunities emerging from the agrochemical and pharmaceutical industry. EBITDA/APAT were 14/19% above estimates, owing to a 22% higher revenue.

Financial performance: Revenue/EBITDA grew 40/63% YoY to INR 26.1/6.3bn in 4Q, owing to an excellent performance in the Speciality Chemicals and Packaging Films businesses.

Chemicals business (CB): Revenue/EBIT jumped 31/73% YoY to INR 11.5/2.8bn. Specialty Chemicals business performed exceedingly well, given strong demand from the overseas markets, and enhanced volumes of certain key products supplied to major customers in Europe. Higher sales volumes in the refrigerants segment and healthy contribution from the chloromethanes segment together augmented the overall results.

Packaging Films business (PFB): Revenue/EBIT jumped 63/67% YoY to INR 9.8/2.2bn. Volume growth, better cost efficiencies, value-added product sales, new capacities coming onstream, and higher customer-centricity have resulted in SRF establishing itself as a global major in the PFB industry.

Technical Textile business (TTB): Revenue/EBIT jumped 26/96% YoY to INR 4.0/0.7bn, owing to a faster-than-expected recovery in the tyre industry. The Belting Fabrics segment contributed significantly to TTB's performance.

Capex: The Board has approved a project to create a chemicals multi-purpose plant at Dahej with an investment of INR 3.8bn to come on stream in 2QFY23. Augmented capacity will help SRF to capatalise on emerging business opportunities and ensure robust pipeline of new products.

Change in estimates: We raised our FY22/23 EPS estimate by 14.4/13.5% to INR 210.8/232.8 to account for Capex plans announced by the Board & better-than-expected performance in Specialty Chemicals BU and PFB in 4Q.

DCF-based valuation: Our target price is INR 7,300 (WACC 10%, terminal growth 3.5%). The stock is trading at 29.0x FY23E EPS.

Shares of SRF LTD. was last trading in BSE at Rs.6276 as compared to the previous close of Rs. 6861.65. The total number of shares traded during the day was 44631 in over 6869 trades.

The stock hit an intraday high of Rs. 6820 and intraday low of 6226. The net turnover during the day was Rs. 284061320.

Source : Equity Bulls

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