SRF Share Price: Sharekhan maintains Buy rating with Price target of Rs 8100

SRF Share price: Sharekhan says that SRF Q4FY2021 results were significantly ahead of estimates with a big beat of 17% in revenues at Rs. 2,608 crore (up 40.4% yoy; up 21.5% qoq). Robust revenue growth reflects strong demand traction across businesses and the same is clearly visible in the 31%/63%/26% y-o-y rise in revenues of chemical/ packaging/technical textiles segments to Rs. 1,153 crore/Rs. 980 crore/Rs. 401 crore. Growth in the chemicals segment was driven by strong demand for specialty chemicals in the export market (especially Europe), higher volume for refrigerants in the fluorochemicals and healthy contribution from the chloromethane segment. Packaging segment benefited from higher volume and ramp-up of new capacities in Thailand and Hungary. A recovery in the tyre industry led to strong revival and growth in the technical textiles segment.

However, adjusted OPM (adjusted for a forex gain of Rs. 9 crore) at 24% (up 161 bps yoy) marginally missed our estimate by 87 bps on account of a 61 bps yoy contraction in gross margins to 50%, given the sharp jump in the input costs. Consequently, adjusted operating profit grew sharply by 50.5% yoy (up 19.5% qoq) to Rs. 625 crore, 13%/9% above our and consensus estimate. The EBIT margin from chemical and technical textiles increased by 586/642 bps yoy to 23.9%/18.2%. However, EBIT margin of the packaging segment declined by 417 bps qoq (up only 58 bps yoy) to 22.3%, says Sharekhan.

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Sharekhan added that Adjusted PAT at Rs. 372 crore (up 68.3% yoy; up 23% qoq) was 21%/15% above our and consensus estimate led by strong performance from the chemical and technical textiles segments. In terms of outlook, management has guided for 10-15% y-o-y revenue growth for the specialty chemical business on a high base of FY2021 (revenue increased by ~45% y-o-y) and expects that near-term margin in the packaging films business could remain good as there has been delay in commissioning to new capacities. SRF’s high capex intensity towards the chemical business (60-70% of the planned capex of Rs. 1,600-1,900 crore for FY2022) would drive sustained high earnings growth in FY2023 and beyond.

The potential increase in the share of high-growth specialty chemicals businesses in overall business mix over next few years would act as a key rating catalyst for SRF. In addition, Sharekhan believes that structural high growth cycle for Indian specialty chemicals sector (expected to grow at a 9% CAGR over 2019-2025) given favourable dynamics (China Plus One strategy by global companies) to support premium valuation for quality players like SRF. Hence, Sharekhan maintains a Buy on SRF with a revised Price target of Rs 8100.
 
SRF Key positives:

Strong revenue growth of 31%/63%/26% y-o-y for chemicals/packaging film/technical textiles segments
EBIT margin from chemical/technical textiles expanded by 586/624 bps y-o-y to 23.9%/18.2%

|SRF Key negatives:

EBIT margin in packaging segment declined by 417 bps q-o-q to 22.3%

SRF Key Risks:

Slower offtake from user industries and concerns on a correction in product prices can impact revenue growth
Input cost price volatility might impact margins.