Buy SRF Ltd For Target Rs.3,065 - ICICI Direct
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Seasoned stalwart strengthening further…
About the stock: Incorporated in 1970, SRF started with nylon cord tyre and thereafter diversified into other areas such as refrigerant gases, speciality chemicals and packaging film among others.
The chemical division accounts for 43% of overall revenues followed by packaging film (39%), technical textile (15%) and others (3%)
Exports constitute 57% of overall revenues (90+ countries across the world) and the rest of revenues are derived from the domestic market
Key triggers for future price performance:
Focused capex towards speciality chemicals keeping in mind higher consumption of fluoro-compounds across agrochemical and pharma besides general themes of vertical integration and higher operating leverage
Maiden foray into polytetrafluoroethylene (PTFE) through backward integration of R22 to diversify business risk, to a certain extent. Prudent and measured strategy to increase presence across other fluoropolymers is likely to enhance revenue visibility over the medium to long run
In packaging, the company has earmarked a capex of | 425 crore towards aluminium foils to tap the import substitution theme (domestic import of aluminium foil | ~4500 crore) with an expected asset turn of 1.75-2x. The company is targeting import market share of mid-teens initially. Going ahead, we expect strong incremental traction from existing customers
Control over working capital along with better operational performance to improve FCF generation. Prudent capital allocation towards high RoCE generating businesses to improve return ratios further
What should investors do? SRF’s share price has grown at 76% CAGR over the past three years. With sustained visibility capex (| 6000 crore in FY16-21 and another | ~6000 crore earmarked in FY21-24E) we believe the company is well poised to expand into newer and more complex areas (such fluoro-chemicals) by leveraging on its strong pedigree.
We initiate coverage under Stock Tales format with a BUY rating and target price of | 3065
Target Price and Valuation: We value SRF on SOTP to arrive at a target price of | 3065/share (refer exhibit 25 for further detail
Alternate Stock Idea: We prefer Neogen Chemicals as an alternate idea
Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity
BUY with a target price of | 2160
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