SRF Limited’s Q3FY22 results were above our estimates with 8.6%/9.6% beat in revenue/operating profit at Rs. 3,346 crore/Rs. 881 crore, up 55.9%/55.7% y-o-y. Better-than-expected operational performance was driven by: 1) robust growth in chemical segment (revenue/EBIT margin up by 57.7%/839 bps y-o-y) led by strong demand / pricing environment for ref-gas in international market, positive contribution from Chloromethanes and healthy performance from specialty chemical business and 2) sharp sequential recovery in packaging film segment (revenues rose 59.1%/19.1% y-o-y/q-o-q and improvement in EBIT margin by 317 bps q-o-q to 19.9%) supported by improved BOPET/BOPP spreads. However, the technical textiles division’s performance was a tad lower than our expectations with revenue decline of 3.6% q-o-q and margin contraction by 270 bps q-o-q to 21.1% (although per unit margin remained stable), reflecting weak demand for Nylon Tyre Cord Fabrics. PAT at Rs. 506 crore (up 55.9% y-o-y; up 32.2% q-o-q) was in-line our estimate of Rs. 505 crore as a beat in operating profit was offset by higher depreciation and tax rate at 30.8% (versus assumption of 25.2%).
High growth in the chemical business supported by high capex intensity, sustained strong margin for the technical textiles business and focus on value-added products (VAP) in the packaging film business would drive strong revenue/EBITDA/PAT CAGR of 23%/23%/28% over FY2021- FY2024E and a healthy RoE/RoCE of 21.6%/23.5%. Investment in right areas of specialty chemical business would improve earnings quality and safeguard from cyclical packaging film margins. A superior earnings growth outlook, strong FCF generation and robust balance sheet keep us constructive on SRF and justify its premium valuations. Hence, we maintain a Buy on SRF with a revised PT of Rs. 2,800 reflecting upward revision in earnings on higher growth/margin assumption in chemical business. At CMP, the stock is trading at 34.3x its FY2023E EPS and 27.6x its FY2024E EPS.
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