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SRF's Q3FY20 results (Outperformer) - Strong profitability

Q3FY20 result highlight

SRF reported EBITDA ahead of est led by positive beat in packaging film business, while chemical biz EBIT were below est.

• Overall, on a reported basis, continuing revs grew by 2% to Rs18.5bn (est: Rs19.4bn). EBITDA came at Rs3.9bn above our est Rs3.69bn.EBITDA margins stood at 21.1% vs est 19%. Reported PAT from continuing operations stood at Rs3.45bn (est Rs1.8bn), up 125% yoy aided by one-off tax benefit of Rs1.23bn. Reported PAT (including loss from discontinued operations) stood at Rs3.43bn.

Segment-wise performance

• Chemicals: Revs in line; EBIT miss on higher depreciation costs: Revs grew by 39% to Rs8.1bn (in line with est); while segment EBIT grew by 87% to Rs1.4bn below our est : Rs1.6bn; EBIT % improved by 455bps to 17.6%. Mgt attributed to strong show in specialty chem biz owing to healthy uptick from overseas markets. The Fluorochemicals biz was hit by the auto sector slowdown, and overall drop in the global prices of refrigerants
• Packaging film–Strong EBIT beat: Revs declined 9% yoy to Rs6.38bn  vs est of flat sales; However, segment EBIT grew sharply by  70% to Rs1.5bn vs est Rs1.13bn; EBIT % improved to 23.4% vs est 16%, This is the 3nd consecutive qtr of strong profitability driven by increasing contribution from value added products and improving efficiencies for both BOPET and BOPP
• Technical Textiles-Marginal EBIT beat: Revs declined 26% yoy to Rs3.3bn (in line with est), while EBIT declined 50% yoy to Rs363m vs est Rs272m owing to slump in automotive business and inventory loss due to fall in caprolactum prices.

Impact on financials: Increase EPS by 23%/1% in FY20/FY21E to factor in lower tax rate and higher packaging film margins. Introduce FY22 EPS of Rs201.4/sh

Valuations & view

SRF’s Q3FY20 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 12.4%/18.9% revenue/EBITDA CAGR over FY19-22E. The resultant improvement in profitability will enable SRF to fund future capex through internal accruals and steadily improve ROCE from 13% in FY19 to 16.5% in FY22E. Maintain Outperformer with revised target price of Rs4,244 (21XFY22 EPS)​