Key takeaways from SRF’s FY18 annual report analysis are: 1) positive revenue growth outlook across businesses, barring BOPP, in FY19 is encouraging; 2) 4 out of 9 sub-segments revenue dip in FY18, and chlorinated solvent revenue declined despite commissioning of new CMS plant is surprising; 3) it undertook capex of Rs 13bn (of which 72% or Rs 9.4bn was in CPB), and should aid revenue growth in FY19 as SRF is seeing green shoots in the agro-chemicals industry; 4) it expects to commission three more plants in specialty chemicals including a cGMP plant during FY19; 5) net debt rose by Rs 8bn to Rs 29bn in FY18 (3.23x net debt to EBITDA) looks optically high, but increase in capacity utilisation should aid in deleveraging.
We trim our EBITDA estimates by 2.8%/0.1% for FY19/FY20, and target price to Rs 2,160 as we cut 1.0x EV/EBITDA multiple to 7.0x for technical textiles and packaging films on rise in capex. Maintain buy. Within CPB, only ref-gas revenue grew in FY18; but SRF remains positive across segments for FY19. In FY18, SRF’s chemical & polymers (CPB) revenue growth was impacted as specialty chemical revenue dipped 5.7%, engineering plastic was down 2.9%, and surprisingly, chlorinated solvents revenue also dropped 19.7% despite commissioning of CMS plant. Ref-gas revenues grew a strong 29.1%.
However, SRF remains positive about revenue growth across segments for FY19, particularly for specialty chemicals where green shoots are visible in agrochemical industry. CPB EBITDA dipped 2.3% to Rs 4.8bn in FY18. The company has spent Rs 1bn in R&D (2.3% of revenue) in FY18. It has worked on 46 molecules and 17 products were taken for process development. A total of 29 scale-up campaigns were carried out, 13 production campaigns were completed in commercial multipurpose plants, and 6 new dedicated plants were commissioned in FY18. SRF expects healthy demand for BOPET, but sees supply overhang in BOPP. It expects marginal growth for NTCF and healthy growth for belting/ laminated fabrics in FY19. Company plans expansion of dipping and belting fabric facilities during FY19.