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SRF's Q2FY20 results (Outperformer) - Strong show in chem / packaging biz

Q2FY20 result highlight

• In Q2FY20, SRF opted to restate the cons. financials for 2 recent corporate actions-divestment of the Engg Plastics biz and closure of the technical textile unit in Thailand, therefore our estimates are not comparable (especially related to technical textile biz).  Q2 results also includes one offs ( Rs434m tax credit and Rs288m stamp duty paid) Adjusting to the restatement and one-offs , Q2 results were broadly in-line with our estimates
• Cons revenues from continuing operations declined by 1% to Rs17.4bn (est: 18.6bn). EBITDA came at Rs3.35bn vs est Rs3.65bn – largely due to higher than expected un-allocable expenses. EBITDA margins improved by 120bps to 19.3% (est. 19.6%).  Reported PAT from continuing operations stood at Rs2bn (est Rs1.8bn) aided by tax credit Rs434m (net tax in Q2FY20 was Rs41m vs est of Rs512m.) Reported PAT (including profit from discontinued operations) stood at Rs3bn aided by sharp tax gains in the discontinued biz.

Segment-wise performance

• Chemicals : Revs grew by 25% yoy to Rs6.7bn (est :Rs7.3bn)  ; However, segment EBIT grew sharply to Rs1.3bn (+108% yoy) vs our est Rs1.1bn; EBIT margins improved to 19.3% vs est 16%; Mgt attributed this to strong show in specialty chem biz
• Packaging film– Revs declined by 5% yoy to Rs6.6bn vs est of flat sales of Rs6.9bn; However, segment EBIT grew by 8% yoy to Rs1.3bn vs est Rs1.18bn; EBIT margins improved to 19.6% vs est 17% driven by cost efficiencies and  increasing contribution of VAP
• Technical Textiles: Revs declined by 29% yoy to Rs3.2bn, while EBIT stood at Rs210m vs est of  Rs600m , down 70% yoy  owing to  to slump in automotive business and inventory loss due to fall in caprolactum prices

Impact on financials: Marginally cut EPS by 2.3%/1.4% in FY20/FY21E

Valuations & view

SRF’s Q2FY20 performance was driven by strong profitability in the speciality chemicals business as well as the packaging film business. Going forward, we expect the growth momentum in speciality chemicals business to sustain supported by continuous investments and R&D in complex fluorine application; leading to healthy 10.4%/19.8% revenue/EBITDA CAGR over FY19-21E. The resultant improvement in profitability will enable SRF to fund future capex through internal accruals and steadily improve ROCE from 13% in FY19 to 15.8% in FY21E. Maintain Outperformer with revised target price of Rs3298 (12% upside from CMP)