SRF’s Q3FY22 print was strong on ref-gas pricing/volume expansion and steady growth in specialty chemicals while packaging film and technical textile margins remained high.

SRF continues to be confident of sustaining elevated EBIT margin in the chemical business as anti-dumping duty imposed in India is most likely to play out in Q4FY22. Also, the positive effect of seasonality on specialty chemicals will also be felt in Q4FY22E.

Packaging film margin may see headwinds from new capacity addition. SRF will launch two new sub-categories – PTFE and aluminum foil – which would see gradual ramp-up, and success in them is critical for future growth.

Pharmaceutical intermediates business is accelerating, which should help SRF drive revenue growth in specialty.

ICICI Securities sees existing margins unsustainable in the long run across businesses, but near-term benefit will help SRF generate FCF to fund growth.  The integrated securities firm increases EPS estimates over FY22E-FY24E by 4-7% on better ref-gas prices.

Chemical business revenues rose 57.7% YoY (+26.8% QoQ). SRF’s revenues rose 28.3% YoY to Rs33bn driven by strong performance across segments. Revenues from chemical segment were up 58% YoY (27% QoQ) to Rs14bn on higher growth in ref-gas prices and steady performance in specialty. Ref-gas volumes and prices were higher in HFCs. Packaging film revenues rose 59% YoY to Rs13bn on ramp-up in Thailand and Hungary, and higher prices on rise in RM costs. Textile revenues were up 47% YoY on RM inflation, but down 3.6% QoQ on lower demand for NTCF on slowdown in the auto sector. Gross profit rose 31% YoY to Rs17bn and margin dipped 100bps YoY to 50.9%. EBITDA was up 37% YoY to Rs8.8bn and net profit up 32.7% YoY to Rs5bn.

Chemical business EBIT margin rose 840bps QoQ to 29.4%. Chemical business EBIT rose 121% YoY and 67% QoQ to Rs4.2bn benefiting from higher ref-gas prices. The company sees segmental EBIT margin to sustain in Q4FY22 too, which will be further boosted by anti-dumping duty on R-32. SRF sees acceleration in specialty business driven by seasonality. Packaging films’ EBIT was up 20% YoY (42% QoQ), but SRF expects fresh capacity addition to put pressure on spreads. Technical textile EBIT came in at Rs1.1bn, up 67% QoQ (down 14.5% QoQ on lower volumes) on healthy spreads.

Call highlights: 1) Management announced capex in aluminum foil as a new product category after PTFE. It sees a good business case from import substitution opportunity. The company expects to incur capex of Rs4.25bn with asset turn of 1.75-2x and IRR of 15-18%. It sees synergies with existing customers already using aluminum foil. 2) Scope exists for volume growth of ~20% (in ref-gas in FY23, and thereafter new capacity expansion should help. 3) Company expects ref-gas pricing to sustain and does not anticipate regulatory implications as it has enough time for renewal. 4) SRF expects to incur capex of Rs20bn in FY22 and possibly Rs22bn in FY23, which will be supported by strong operating cashflow. Net debt will remain stable at Rs26bn.