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MOSL: SRF (Buy)-Chemicals/Packaging drive operating performance

SRF: Chemicals/Packaging drive operating performance

(SRF IN, Mkt Cap USD3b, CMP INR3745, TP INR4321, 15% Upside, Buy)

 

Technical Textile drags

• SRF's Chemicals business maintained its revenue momentum with >25% growth for the seventh consecutive quarter, driving the company's overall performance. We expect large part of growth in FY21 to be driven by Chemicals with commissioning of HFC capacity and sustained momentum in Specialty Chemicals.
• Revenue came in 10% below our estimate, whereas EBITDA exceeded our estimate by 4%. To factor in the beat on PAT led by the tax benefit, we upgrade our FY20 PAT estimate by 18%. 

Another quarter of strong performance in Chemicals

• Revenue increased 2% YoY to INR18.5b (our estimate: INR20.6b) in 3QFY20, while EBITDA grew 25% YoY to INR3.9b (our estimate: INR3.8b). PAT was up by an impressive 2.3x YoY at INR3.3b (our estimate: INR1.8b) due to tax benefit. For 9MFY20, revenue/ EBITDA/adj. PAT were up 2%/13%/61% YoY.
• Chemicals revenue grew 39% YoY to INR8.1b, with margin expansion of 460bp YoY to 17.6%. Specialty Chemicals delivered a strong performance, backed by healthy demand for agro-chemicals. Fluorochemicals performance, however, was hurt by the slowdown in the auto sector and lower global refrigerants prices due to weak demand and the normalization of chloromethane product prices from peak.
• Packaging Film revenue declined 9% YoY to INR6.4b, with the margin expanding 10.9pp YoY to 23.4% led by improved efficiencies, expanded product offerings and a higher contribution from value-added products.
• Technical Textiles revenue declined significantly by 26% YoY to INR3.4b due to the slump in the auto sector. Segmental margin contracted 515bp YoY to 10.9% due to inventory loss of INR60-40m.