Published on 19/11/2019 10:47:54 AM | Source: Reliance Securities Ltd

Hold SRF Ltd For The Target Rs.2,908 - Reliance Securities

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Chemicals Biz Keeps Operating Performance Unsullied

SRF has delivered a steady operating performance in 2QFY20 largely on the back of healthy chemicals business. EBITDA grew by 5.6% YoY to Rs3.35bn (vs. our estimate of Rs3.62bn), while EBITDA margin rose by 120bps YoY to 19.3% (vs. our estimate of 17.8%). Adjusting for a one-off expense of Rs288mn (pertaining to stamp duty paid related to tyre cord division in MP), its EBITDA grew by 14.7% YoY to Rs3.64bn, while margin expanded by 280bps to 20.9%. However, its revenue fell by 1% YoY to Rs17.38bn vs. Our estimate of Rs20.35bn. PAT grew by 40.5% YoY to Rs2.05bn (vs. our estimate ofRs1.82bn) primarily on account of lower tax rate of 2% (vs. 22.6% in 2QFY19), as the Company recognised a tax credit of Rs434mn owing to carried forward longterm capital losses.


Stellar Show by Chemicals Biz

Aided by specialty chemicals, which witnessed strong traction in overseas market, SRF’s revenue from chemicals business grew by a robust 25.1% YoY to Rs6.78bn, while segmental margin expanded by 768bps to 19.3%. The Company also managed to gain domestic market share in key refrigerants despite automotive slump. We expect the segment to sustain momentum, going forward with growth expected to be driven by newly-commissioned HFC capacity and a dedicated facility for agrochemical intermediates. Furthermore, SRF has earmarked Rs400mn capex to expand production capacity of a specialty product for agro, pharma and other specialty industries. The aforementioned expansion is expected to come on stream by Jul’20. We expect the segment to deliver 27% revenue CAGR over FY19-21E.


Technical Textiles Biz Hit; Packaging Films Holds Ground

SRF’s technical textiles business was a dampener in 2QFY20, as segmental revenue fell by 28.8% YoY toRs3.23bn with a margin contraction of 886bps to 6.5%. The segment’s key product (NTCF) witnessed volume and margin decline owing to shut-downs/production cuts by the tyre manufacturers. Moreover, the demand from tyre replacement market too was sluggish due to financing issues. We expect the segmental revenue to annually decline by 12% over FY19-21E. Packaging films on the other hand had a steady quarter with margin expanding by 230bps to 19.6% on account of cost optimisation and better product-mix. However, segmental revenue declined by 4.8% YoY to Rs6.62bn, as incremental BOPET lines created pricing pressure. The segment is witnessing matching demand-supply scenario in BOPP and consequently, SRF has earmarked US$50mn capex for 45kMTPA BOPP capacity in Thailand. We expect the segment to deliver 10% revenue CAGR over FY19-21E.


Outlook & Valuation

2QFY20 for SRF was dominated by the robust growth and profitability of chemicals segment and we expect a large part of growth to be driven by chemicals business, going forward. The newly commissioned capacity of HFC and agrochemical intermediate as well as an upcoming capacity of a specialty product in the segment are expected to ramp-up owing to strong traction in specialty chemicals and domestic market of refrigerants. Factoring in the benefit of lower tax rate in 2QFY20, we raise our earnings estimate by 7% for FY20E, while keeping our EBITDA estimate largely unchanged. Our estimates for FY21E remain largely unchanged as well. We expect SRF’s revenue/earnings to clock 11%/22% CAGR over FY19-21E. We maintain our HOLD recommendation on the stock with an SOTP-based Target Price of Rs2,908, which implies 2% downside from the current level. 


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