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May 12, 2015

Edelweiss on SRF

SRF LTD (SRF IN, INR 922, BUY)                                               
SRF Ltd’s (SRF) standalone Q4FY15 sales came in line with our estimates. However, EBITDA and PAT were slightly lower than estimates on account of inventory losses in technical textile (TTB) and packaging film (PFB) businesses. Key positives were: (i) 28% YoY and 3% QoQ revenue growth in chemical business; (ii) chemical business EBIT margins continued to remain stable at +21% adjusted for one-off cost related to Dymel acquisition; and (iii) During the quarter, phase I of the Speciality Chemicals Plant and 2nd Multipurpose Plant  in Dahej, Gujarat was  commissioned. Key negatives were: (i) 17% YoY dip in technical textile revenues due to strike related issues and (ii) 100bps QoQ EBIT margin decline in TTB and PFB due to inventory losses related to crude fall. SRF appears to be in a sweet spot thanks to factors such as - secular growth drivers, tough sector entry barriers and a sturdy revenue growth along with a capacity expansion in specialty chemicals - which would lead to a strong earnings growth (28% CAGR over FY15-17E) and a re-rating in the stock. We re-iterate ‘BUY’, with a TP of INR 1325.
 
Revenues in line, PAT lower due to lower commodity prices 
SRF’s Q4FY15 revenues decline marginally by 3% YoY to INR 847cr, mainly due to decline in realizations in TTB and PFB businesses due to crude fall.  EBITDA margins improved 370bps QoQ to 15.7% mainly due to higher revenue growth and share from chemical business but were lower than our estimates due to inventory losses of INR 9cr and 6cr in TTB and PFB. EBITDA grew by 27% YoY to INR 135cr. PAT came in at INR 59cr (up 11% YoY) marginally lower than our estimates. Consol FY15 revenues grew by 13% YoY at INR 4,540cr and PAT came at INR 303cr (up  87% YoY). Consol FY15 chemical business grew at 32% YoY with EBIT margins of 24%.
Speciality chemicals focus to spur growth
SRF has posted 15.7% revenue CAGR over FY10-14 outside of the CER income. We expect SRF’s consolidated revenues to grow at a CAGR of 11% over FY14-FY17E, due to flat growth in NTCF business (54% revenues). Specialty chemical business is expected to grow at 30% CAGR over FY14-17E propelled by an expansion in capacities as well as strong sales from existing products. We expect PAT to grow at 47% CAGR over FY14-17E led by the improving EBITDA margins due to a business mix change from low margin NTCF business to high margin speciality chemical business.
 
Outlook and valuations: Attractive; Re-iterate – BUY with TP of INR 1350
The company is poised for a good growth given its strong brand equity, high entry barriers in the R&D driven chemical segment and a sound management. It appears to be in a sweet spot, aided by multiple drivers such as higher revenues and margin expansion from specialty chemicals and a turnaround in the packaging films business. Ramp up of new Dahej capacity will lead to a strong earnings growth and may trigger a re-rating in the stock going forward. The stock currently trades at P/E of 14x FY16E and 11x FY17E EPS of INR 70 and INR 86, respectively.
Year to March (INR Cr)
Q4FY15
Q4FY14
% change
Q3FY15
% change
FY15
FY16E
FY17E
Income from operations
862
887
(3)
875
(1)
4,540
4,876
5,477
EBITDA
135
106
27
155
(13)
718
922
1,041
EBIT
79
60
33
103
(23)
473
648
766
Adjusted net profit
59
53
11
73
(19)
303
407
505
Diluted EPS (INR)
10
9
11
13
(19)
51.7
69.6
86.4
Diluted P/E (x)
 
 
 
 
 
18.0
13.4
10.8
EV/EBITDA (x)
 
 
 
 
 
10.9
8.5
7.6

* Qtrly Standalone / Yrly Consol
 Regards,

EdelInvest Fundamental

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