Buy SRF Ltd due to robust future growth expectations: Emkay Research Report

Solid outperformance by specialty chemicals and packaging films

SRF Ltd’s (SRF) Q2FY21 performance was significantly ahead of our expectations with revenue at INR 2,101 cr, up 21% YoY/36% QoQ. Continued strong performances in packaging films (PFB) and specialty chemicals (SCB) segment were key driving factors. Consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) rose 73% YoY/58% QoQ to INR 572 crore. EBITDA margin expanded 820bps YoY/374bps QoQ to 27.3%. Consolidated profit after tax (PAT) increased 57% YoY/78% QoQ to INR 316 crore. We maintain BUY, as performance of SCB and PFB continue to be robust, and consistent capex alongwith diversification into new and complex chemistries is expected to drive future growth.

SRF hits fresh high today

Did you know that SRFs market cap in 2013 was 1200 crs and it has risen to ~29000 crs in 2020.

Thats a 24x jump in market cap in 7 years!

today we find out how to pick the next SRF on our show Smart Money at 3: 30 pm on @CNBCTV18News

— Sonia Shenoy (@_soniashenoy) November 6, 2020

SCB and PFB remain robust, TTB bounces back

SRF’s Chemical Business (CB) clocked a 30% YoY/25% QoQ growth in turnover mainly due to SCB, while fluorochemical business (FCB) was muted during the quarter due to weak demand and low prices of refrigerants. SCB’s growth was on the back of higher volume and new product launch, which also helped the margin profile (at 20%, up 47bps YoY/ 724 bps QoQ) through operating leverage.

PFB (revenue at record quarterly highs of INR 833 cr, up 26% YoY/23% QoQ) benefited from increasing utilization in the Thailand BOPET facility, along with higher volumes and better margin for products. Lower demand and excess inventory with converters at the end of Q2 and new lines could soften margin profile going forward.

Technical textiles segment (TTB) recorded revenue at pre-COVID level (INR 332 cr, up 3% YoY/136% QoQ), with expansion in margins. This is on the back of recovery in volumes. With traction in the domestic tyre industry, performance of TTB can improve going forward.

Capex pipeline strong

SRF’s capex plans remain strong and would aid growth over the next few years in both CB and PFB. While sweating of recently commissioned capex in FCB and PFB will aid in FY21-22, further growth will come from next leg of capex like those in chloromethanes, SCB and BOPP business. SRF aims to move into complex chemistries beyond fluorination through investment of QIP proceeds, which we believe could be a significant positive and open up new growth opportunities.

Outlook and valuation: Revise FY21/22 estimates; maintain BUY

We maintain our BUY recommendation due to robust future growth expectations across CB and PFB and revise our FY21/22 EPS estimates upwards to INR 193/226, respectively, with a revised target price of INR 5,647 per share, valuing the company at 25x FY22E EPS.