Buy SRF Ltd For Target Rs. 2,305.00 - Emkay Global
* SRF’s Q1FY19 revenue grew by 34.6% yoy to Rs17.4bn (Emkay Est. of Rs16.16bn), driven by strong performance of Packaging Films (+64% yoy) and Chemicals (+44% yoy) segments, aided by 6.2% yoy growth in Technical Textiles.
* EBITDA stood at Rs3.1bn with margin expanding by 277bps yoy to 17.9% (Emkay Est: 19.4%) on account of better operational performance across segments. Margin expansion was supported by a healthy performance in Core Speciality Chemicals.
* Forex-adjusted EBIT margins of Packaging Films and Chemical & Polymer segments expanded by 535/323bps yoy to 16.1%/18.7%. There was Rs152mn forex loss in Q1FY19 v/s Rs114mn forex gain in Q1FY18.
* Management sees strong growth in Speciality Chemicals, driven by the commencement of 3 new dedicated facilities and uptick in global agrochemicals cycle. We maintain BUY with SoTP-based TP of Rs2,305 (10.4x EV/EBITDA FY20E).
Recovery in key segments’ growth & profitability…
Speciality Chemicals driving growth in Chemicals segment:
In Q1FY19, the segment revenue grew by 44% yoy to Rs4.77bn (adj. for excise) with 323bps forex adjusted EBIT margin expansion to 18.7% (15.5% in Q1FY18; 17.3% in Q4FY18). Core Speciality Chemicals revenue jumped significantly on yoy basis on the back of new product additions in Chemicals portfolio and a low base. Although domestic Air-Conditioners (AC) market remained sluggish, SRF maintain its market share of more than 50% despite a weak summer. Demand for Refrigerants witnessed low growth due to high inventory in USA. We forecast 23%/22% growth in FY19/20E with 400bps/150bps improvement in EBITDA margin.
Strong performance in Packaging Films (PF):
PF business delivered another strong quarter of growth. Revenue surged by 64% yoy to Rs6.3bn, led by new capacity addition. Further, EBIT margin (forex adjusted) expanded by 535bps yoy to 16.1% (10.8% in Q1FY18), led by robust global demand for BOPET Films. During Q1FY19, the company approved 2nd BOPET Film line (40,000MTPA) and a Resin plant at a cost of US$60mn in Thailand. We forecast 26%/27% top-line growth with 0bps/130bps improvement in EBITDA margin in FY19/20E.
Long-term growth prospects intact; Maintain BUY
Better visibility in the Speciality Chemicals business, along with planned capex across key verticals should position SRF to grow well in future. We maintain our SoTP-based TP of Rs2,305 10.4x EV/EBITDA FY20E) and BUY rating.
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