Published on 7/11/2020 1:04:27 PM | Source: HDFC Securities Ltd

Buy SRF Ltd For Target Rs. 5,600 - HDFC Securities

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Blockbuster quarter!

The robust performance of chemical segment (30/25% YoY/QoQ), led by speciality chemicals business, the continuance of strong show of packaging films segment (26/23% YoY/QoQ) owing to healthy demand, and sharp recovery in technical textile segment sequentially (3/136% YoY/QoQ%) along with improved gross margin helped SRF deliver 52/80% beat on estimates. The current momentum in the speciality chemicals business will continue in 2HFY21 as well. Thus, the management has raised the YoY growth guidance for speciality chemical from earlier guidance of 20-22% to >25% for FY21. Over the next 3-4 years, the company will deploy ~50-60% of its Capex toward high growth business of speciality chemicals to tap the opportunities emerging from the agrochemical and pharma industry. We expect, over the next decade, the speciality business to drive the growth for SRF. Besides, it will spend ~20-30% of Capex on packaging films business. We raise the target price to INR 5,600/share (earlier INR 5,120/share) owing to higher guidance and long-term growth prospect of speciality chemicals business and capacity addition in the packaging films business. Maintain BUY.

* Financial performance: Revenue/EBITDA/APAT grew 21/74/57% YoY and 36/56/79% QoQ to INR 21/6/3bn owing to an outstanding performance in the Speciality Chemicals and Packaging Films businesses.

* Chemicals business (CB): Revenue/EBIT from jumped 30/33% YoY to INR 9/2bn. Speciality Chemicals business reported a robust performance on the back of robust demand, which led to better operating leverages and the expansion of overall margins. Fluorochemicals sales remained muted owing to weak demand for refrigerants from the automobile and airconditioning segments and low prices of refrigerants globally.

* Packaging films business (PFB): Revenue/EBIT from jumped 26/90% YoY to INR 8/2bn.

* Technical textile business (TTB): Revenue/EBIT from jumped 3/140% YoY to INR 3/1bn.

* Capex: The Board approved the setting up of a second BOPP film line in India in Indore at a cost of INR 4bn. It also approved the setting up of a dedicated facility to produce 200 MT per year of P16 speciality product at Dahej for INR 175mn.

* Change in estimates: We raised our FY21/22 EPS estimates by 64.8/36.3% to INR 170.5/172.7 on account of (1) faster than anticipated recovery in the business, (2) higher guidance and long-term growth prospect of Speciality Chemicals, and (3) robust performance of PFB and Capex announced for the segment.

* DCF based valuation: Our target price is INR 5,600 (WACC 10%, terminal growth 3%). The stock is trading at 28.2x FY22E EPS.


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