SRF rallies 5%, hits new high post strong Q2 results, capex plan

The management said the specialty chemicals business performed well with strong demand witnessed in the overseas markets.

Shares of SRF hit a new high of Rs 3,094, rallying 5 per cent on the BSE on Wednesday, after the company reported a strong operational performance with margin improvement of 230 bps in the September quarter (Q2FY20), led by the chemical business and operating leverage. The company has also announced three capex programmes. The stock surpassed its previous high of Rs 3,090 touched on August 26, 2019 in the intra-day trade.

In Q2FY20, EBITDA (earnings before interest, tax, depreciation and amortisation) margin improved to 20.6 per cent from 18.3 per cent in the year ago quarter, while the consolidated profit before tax (PBT) grew 23 per cent YoY to Rs 205 crore.

The company’s consolidated net profit increased 56 per cent YoY at Rs 201 crore. Gross operating revenue, however, declined 1 per cent to Rs 1,738 crore from Rs 1,755 crore. The management attributed the improvement in performance to the chemicals business. 

"The specialty chemicals business performed well with strong demand witnessed in the overseas markets. The technical textiles business was hit badly because of a significant drop in demand. Overall, the global packaging films industry is witnessing improvement in capacity utilization. However in the short term, there will be a supply overhang which will affect margins negatively," the management said in a statement.

Meanwhile, the board has approved setting up of a Biaxially Oriented PolyPropylene (BOPP) film line in Thailand by SRF Industries (Thailand) (a wholly owned subsidiary of the Company) at a total cost of approximately Rs 350 crore. This project will provide an additional substrate to SRF in the South East Asian region which will help in offering sustainable solutions to the customers in biaxially-oriented polyethylene terephthalate (BOPET) as well as BOPP.

"The board also approved a capital expenditure (capex) of Rs 40 crore to expand the capacity for production of a high volume specialty product that finds application in agro, pharma and other specialty industries. It also approved a capex for capacity enhancement cum modernization of the Tyre Cord Fabric value chain at an estimated cost of Rs 125 crore," it added.

Given the subdued performance in TTB (and closure of a plant in Thailand), expected margin contraction in BOPET for H2FY20 and beyond and considering a weak Q1FY20 (due to Dahej plant shutdown), analysts at Dolat Capital have cut FY20E and FY21E estimates (sales/EBITDA/PAT cut by 8.7/4.3/4.8 in FY20 and 8.5/8.2/10.4 per cent in FY21). The brokerage firm has price target of Rs 3,177 for the stock.

“We remain positive on the medium to long-term growth prospects of SRF, given the continued outperformance of the chemical division. Overall EBITDA margins are estimated to expand by 270bps between FY19-22E, thereby improving the RoE/RoCE by 130bps/250bps, respectively,” analysts at Systematix Shares and Stocks (India) said in result update. The brokerage firm has ‘buy’ rating on the stock with target price of Rs 3,347 per share.

At 10:29 am, SRF was trading 4 per cent higher at Rs 3,074 on the BSE, as compared to a 0.35 per cent decline in the S&P BSE Sensex. A combined 543,984 equity shares have changed hands on the counter on the NSE and BSE so far.