SRF’s Q1FY23 print was strong on good show in textile and packaging films; chemical business sustained strong margin at 30.2%.

However, it expects packaging films margin to compress, and inventory loss to add to pain in Q2FY23. It is taking advantage of ref-gas, and locking volumes and prices for HFC for next season (Oct’22-Feb’23) which will help sustain HFC realisation. SRF remains optimistic on specialty chemicals opportunity, and has increased capex guidance to Rs32-33bn (from earlier Rs25-27bn) with 2/3rd allocation to specialty chemicals.

The capex spend of Rs12-15bn in 12-18 months will provide the launch pad for doubling specialty chemicals revenue. Near-term capex commissioning in CMS and PTFE is on track, and should be available in H2FY23. Nonetheless, it will have certain headwinds in the near term on margins across businesses.

Chemical business revenue up 55% YoY (9.5% QoQ). SRF’s revenue rose 37% YoY to Rs39bn driven by strong performance across segments. Revenue from chemical segment was up 55% YoY to Rs17bn on higher ref-gas (particularly HFCs) prices and steady performance in specialty. Packaging film revenue rose 44% YoY to Rs15bn on ramp up in Thailand plants, and higher prices on rise in raw material (RM) costs. Textile revenue increased 16% YoY on RM inflation. Gross profit rose 45% YoY to Rs20bn but margin dipped 80bps QoQ to 52.3% on higher realisation. EBITDA was up 47% YoY to Rs10bn and net profit was up 59% YoY to Rs6.1bn.

Chemical business EBIT margin healthy at 30.2%. Chemical business EBIT rose 2.3x YoY and 3.2% QoQ to Rs5.2bn, and was partially impacted by higher power cost. Favourable ref-gas prices continue to aid margins. SRF guided segmental EBIT margin to be higher than >27% (FY22 levels) in FY23. Packaging films EBIT was up 25% YoY, but SRF expects fresh capacity addition to put pressure on spreads, particularly in BOPET, and inventory loss in Q2FY23. Technical textile EBIT came in at Rs1.2bn, down 13% YoY (up 27% QoQ) on healthy spreads.

Call highlights: 1) SRF has guided specialty chemical capex guidance of Rs12-15bn over 12-18months, which gives run way for >doubling revenue. However, revenue guidance is unchanged at >20%, but expects tailwinds from more outsourcing opportunity in Europe; 2) SRF has scaled-up capacity to execute capex faster which decreases lead time. New capex of Rs2.5bn for agro-chemicals is likely to complete in 8-10 months; 3) margins in specialty chemical should improve from operating leverage and scale; 4) ref-gas capacity utilisation is at peak; prices may sustain baring volatility from seasonal trend; 5) CMS plant to commence production in Q2FY23, and scale up in 6 months; PTFE plant should come up in Q3FY23, and should see gradual ramp up in 12-18 months; and 6) SRF increased capex guidance to Rs32-33bn for FY23 (from Rs25-27bn) with allocation to chemical business at Rs22-23bn.