Stock corner: ‘Buy’ SRF with SOTP-based with target price of Rs 2,983

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Published: May 17, 2019 1:06:52 AM

SRF’s Q4FY19 was marked by the chemicals business turning in a spectacular performance—revenue jumped 66% YoY & 150bps YoY and margin expanded 670bps QoQ to 20%.

Stock corner: 'Buy' SRF with SOTP-based with target price of Rs 2,983Stock corner: ‘Buy’ SRF with SOTP-based with target price of Rs 2,983

SRF’s Q4FY19 was marked by the chemicals business turning in a spectacular performance—revenue jumped 66% YoY & 150bps YoY and margin expanded 670bps QoQ to 20%.

Management is confident of 40- 50% and 20% spurt in specialty chemicals and fluorochemicals businesses in FY20, respectively, driving 20% CAGR over FY19-21E. On the other hand, it envisages pressure on margin of the packaging film and technical textiles segments due to capacity additions in Q2/Q3FY20 and tepid demand. We revise up FY20/21E EPS 13%/9% factoring pickup in the chemical business led by recovery in global agrochemicals. Hence, we revise SOTP-based TP to `2,983 (keeping Sep’20 EV/EBITDA multiples unchanged—technical textiles: 7x, C&P: 14x, packaging: 6x) from `2,315 and reiterate ‘BUY’.

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The chemical division posted robust top-line growth (66% YoY) led by, chloromethane plant reaching optimal utilisation; volume & price-led surge in the refrigerant business; and strong spurt in the specialty chemicals business fuelled by revival in the agro-chemical industry. Further, margin improved 150bps YoY and 670bps QoQ to 20% led by strong operating leverage.

Management is confident of 40- 50% growth in the specialty chemicals business and 20% growth in fluorochemicals business in FY20 driven by improved visibility from customers and capacity expansion in refrigerants business.

Technical textiles business reported mere 4% revenue growth on account of slowdown in the auto industry. Further, the segment’s margin declined 270bps YoY to 11.7% impacted by `50-60mn inventory loss. On the other hand, packaging films business reported 18% revenue growth with 320bps YoY margin expansion driven by healthy contribution from new capacities and increase in value-added products. Management expects margin in the packaging films business to come under pressure due to capacity additions in the BOPET segment in Q2/Q3FY20.

We believe, momentum in the chemical segment’s revenue will sustain with gradual improvement in margin. Hence, we revise up FY20/21E EPS 13%/9% while maintaining valuation multiples. We maintain ‘BUY’ with SOTP-based target price of `2,983.

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