01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Neutral SRF Ltd For Target Rs.6,336 - Motilal Oswal
News By Tags | #872 #1660 #4315 #1302 #3116

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel

https://t.me/InvestmentGuruIndiacom

Download Telegram App before Joining the Channel

Robust performance continues

Valuations rich; Downgrade to Neutral

* SRF’s 4QFY21 operating performance was robust on the back of margin expansion across segments (on a YoY basis). On a QoQ basis, EBIT margins have further moderated (-420bp QoQ) in the Packaging segment.

* SRF’s performance over the last three years has been robust, with an earnings CAGR of 42% and stock price CAGR of ~43%.

* On the other hand, we expect the earnings momentum to slow to a 21% CAGR over FY21–23, primarily due to a) margin contraction in the Packaging segment and b) reduced growth momentum in Specialty Chemicals, weighed by a high base.

* On a one-year forward EV/EBITDA basis, SRF currently trades at 18.1x (on FY22), at a premium of ~50% to its avg. trading multiples for 3 and 5 years, respectively. This, in our view, is rich vis-à-vis earnings growth.

* Based on these factors, we downgrade the stock from Buy to Neutral.

 

Margin expansion across segments

* SRF reported overall revenue growth of 40% YoY to INR26.1b (v/s est. INR23.2b) in 4QFY21. The EBITDA margin was up 340bp to 24.3% (v/s est. 25.3%), led by the Chemicals and Technical Textiles businesses. EBITDA rose 63% YoY to INR6.3b (v/s est. INR5.9b). Adjusted PAT grew 68% YoY to INR3.7b (v/s est. INR3.4b) on account of lower interest cost (-44% YoY) and higher other income (+2x YoY). However, the same was offset by the tax rate (25.9% v/s 10.3% in 4QFY20) and higher depreciation (+17% YoY).

* Revenue/EBITDA/PAT grew 17%/46%/29% in FY21. It generated CFO of INR17.7b, up 36% YoY.

* Chemicals revenue grew 31% YoY to INR11.5b, with EBIT margin expansion of 590bp YoY to 23.9% (EBIT up 73% YoY to INR2.8b). During the quarter, Specialty Chemicals performed exceptionally well owing to strong demand from the overseas markets and enhanced volumes of certain key products supplied to its major customers in Europe. Fluorochemicals saw higher sales volumes in the Refrigerants segment from both the domestic and export markets. Additionally, healthy contribution from the Chloromethane segment augmented overall results.

* Packaging Film revenue grew 63% YoY to INR9.8b, with margin expansion of 60bp YoY to 22.3% (EBIT up 67% YoY to INR2.2b). On a QoQ basis, revenue/EBIT grew 22%/3%, and EBIT margins contracted 420bp. New capacities in Hungary and Thailand and enhanced sales of value-added products have significantly contributed to overall performance.

* Technical Textiles revenue grew 26% YoY to INR4b, with a 640bp EBIT margin expansion to 18.2% (EBIT up 96% YoY to INR728m). Faster recovery in the Tyre industry and a healthy contribution from the Belting Fabrics segment is encouraging.

 

Highlights from management commentary

* The BOD has approved the setting up of a fourth multi-purpose plant (MPP) in Dahej for INR3,750m – to capitalize on emerging business opportunities, to ensure a robust pipeline of new products.

* Growth guidance in Specialty Chemicals: In FY21, Specialty Chemicals revenue grew 42–45% (to INR23–23.5b), and the company has guided for revenue growth of 10–15% in FY22 owing to the high base of FY21.

* Capex: SRF plans to spend INR16–19b on capex activity in FY22. 60–70% of capex would be towards the Chemicals business (Specialty Chemicals, R22, and Chloromethane expansion plans.), across medium and small capex activities. A portion of the capex would also be utilized for Technical Textiles and expansion at the Thailand plant.

 

Valuation and view

* SRF plans to spend INR16–19b on capex in FY22, of which 60–70% would be utilized on the Specialty Chemicals business. Thus, the company is deploying the majority of the incremental capital in Specialty Chemicals – which is not only growing at a faster pace but also yielding higher margins. We believe the said move is a step in the right direction.

* SRF’s performance for the last three years has been robust, with a revenue/EBITDA/PAT CAGR of 15%/33%/42%. Stock price over this period has posted a CAGR of ~43%.

* The earnings momentum is likely to slow, largely due to a) margin contraction in the Packaging segment (EBIT margin of 27.3% in FY21 v/s 21% for FY22 & FY23) and b) reduced growth momentum in Specialty Chemicals on a high base (threeyear revenue CAGR of 60% v/s 24% over FY21–23). Going forward, we expect SRF to post a revenue/EBITDA/PAT CAGR of 22%/17%/21% over FY21–23E.

* On a one-year forward EV/EBITDA basis, SRF currently trades at 18.1x (on FY22), a premium of ~50% to its avg trading multiples for 3 and 5 years, respectively. This, in our view, is rich vis-à-vis earnings growth.

* Based on these factors, we downgrade the stock from Buy to Neutral. We value the stock on an SOTP basis to arrive at TP of INR6,336.

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

 

Above views are of the author and not of the website kindly read disclaimer