SRF posted another disappointing quarter with Q1FY18 revenue/ EBITDA/ PAT declining 6%/32%/37% y-o-y to Rs 12.9/2/1 billion on poor performance by chemical segment. Margins of chemical segment too plummeted to all-time low levels of 15.5%, primarily pulled down by negative operative leverage.
However, the other two businesses – technical textile and packaging film, extended in-line performance. Our muted stance on the company with ‘Hold’ rating is owing to slower-than-expected recovery in chemical business, since global agrochemical market remains weak, and we await demand to pick up in this segment.
Factoring in below-estimated results, we further cut our FY18/19E EPS by 13%/5% and subsequently our SoTP-based target price by 12% to Rs 1,598. As we monitor pick up in chemical business, we maintain ‘hold’, though a sharp correction may offer an entry opportunity. Chemical revenue, at Rs 4.1 billion, declined 8% y-o-y following a fall in specialty chemical revenue due to continued slowdown in global agrochem space, reduced off-take in domestic refrigerants business ahead of GST implementation, and rupee appreciation. Margin, at 15.5%, down 1,000 bps y-o-y, came much below our estimate of 17%.
Management believes poor performance was due to deferment of orders and expects segment to turnaround from Q4FY18. They are also hopeful of recouping profitability.
Technical textile and packaging films revenues at Rs 5.6 billion, up 11% y-o-y, and Rs 4.1 billion, up 19% y-o-y, respectively, with margins of ~11% each were broadly in line with estimates. Management expects to regain margins of 14-15% in packaging films by Q4FY18. Technical textiles segment is expected to remain a steady cash generator.
Pick up in global agrochemical market is a key trigger for SRF. We revise down FY18E and FY19E EPS by 13% and 5% respectively, to factor in continued pressure in chemicals segment.