SRF hits upper circuit, here is what brokerages has to say

Motilal Oswal says SRF share price jumped 10% today as the company announced one more capex of around Rs 424 cr. Over FY11-20, SRF’s capex stood at Rs 8400 cr. Of the total capex incurred over the last 10 years, 57% has been deployed toward Chemicals. Motilal Oswal says SRF delivered strong operating performance; beat estimates on all fronts

SRF reported overall Q2 FY21 revenue of Rs 21 bn (v/s estimate Rs 18.5 bn), up 21% YoY. Chemicals business grew 30% YoY to Rs 8.8 bn and packaging film business grew 26% YoY to Rs 8.3 bn. Technical textiles revenue grew 3% YoY to Rs 3.3 bn whereas revenue of others segment declined 24% YoY (to Rs 569 mn). EBITDA margins expanded 840 bps to 27.7% (v/s estimate of 20.8%), driven by technical textiles and packaging businesses. Raw Material cost as % of sales stood at 45.5% in Q2 FY21 (v/s 50.8% in Q2 FY20), employee cost at 7.2% (v/s 7.4%), power cost at 9% (v/s 9.4%) and other expenses at 10.6% (v/s 13%).

EBITDA stood at Rs 5.8 bn (v/s estimate Rs 3.8 bn), up 74% YoY. EBIT margin in chemicals and polymers business expanded 50 bps YoY to 19.8%; in packaging film business, it expanded 9.9 pp to 29.6%. EBIT margin expanded 8.6 pp to 15.1% in technical textiles. Segment wise YoY EBIT growth: Chemicals (+33%), packaging film (+89%) and technical textiles (+140%). However, adjusted PAT growth was restricted to 59% YoY to Rs 3.3 bn (v/s estimate of Rs 1.9 bn) on account of lower other income (-56% YoY), higher depreciation (+23% YoY) and higher tax rate (26.4% v/s 2% last year), which was offset by lower interest cost (-34% YoY).

Ambit says SRF results surprised

Ambit remains positive on SRF with a target price of Rs 4,750. EBITDA grew 71% YoY (45% ahead of estimate) driven by better performance across segments. Packaging films and technical textiles surprised positively. Packaging films EBIT margin (29% in Q2 FY21) continued to remain at elevated level while technical textiles recovered sharply. Chemicals business margin improved driven by higher capacity utilisation in specialty chemicals while refrigerants demand / realisations remain muted. Ambit believes chemicals margin will continue to improve as refrigerants utilisation / realisations improve driving sharper EBIT growth as significant costs are fixed in nature.

Segmental results: Growth across all segments

Chemicals – Specialty chemicals revenue increased

Chemicals and Polymers business revenue increased 30% YoY (25% QoQ). EBIT increased 33% YoY and almost doubled sequentially. Specialty chemicals EBIT margin in Q2 FY21 was 19.8% improving 50 bps YoY and 724 bps QoQ. Company indicated that the specialty chemicals business was the key driver in improved margins as dedicated and multipurpose plants operated at higher utilisation, leading to better operating leverage. Refrigerants continued to see weak demand and pricing pressure due to weak demand from automobiles and air conditioning segments.

Packaging films – Margins continue to surprise positively

Packaging films revenue increased 26% YoY (23% QoQ) as recently commissioned capacities in Thailand and Hungary started operating. EBIT margin stood at 29.6% improved 995 bps YoY (-303 bps down sequentially). Company indicated that value added products and higher utilisation helped in high margins. Management expects margins to soften going forward. However, volumes will continue to increase as capacity of newly commissioned plants ramp up.

Technical textiles – Sharp recovery

Technical textile revenues increased 3% YoY (136% QoQ). SRF reported profit of Rs 502 mn at EBIT level increasing 140% YoY (vs loss of Rs 140 mn in Q1 FY21). EBIT margins of 15% were a key positive. The faster than expected recovery was led by recovery in the domestic tyre industry.

New capex announcements

SRF’s board has approved a capex of Rs 4.2 bn for Indore, India. SRF is also setting up a dedicated facility for specialty chemicals to produce 200 MTPA at Dahej, India for a capex of Rs 175 mn. This line is expected to be commissioned in next 20 months. In addition, SRF’s board also approved two projects related to water security and thermal oxidation facilities at Dahej. Besides this, SRF is also investing Rs 3.2 bn for setting up a chloromethane plant.