MOSL: SRF (Buy)-Above-estimate-New refrigerants, healing agchem to stabilize growth

SRF: Above-estimate; New refrigerants, healing agchem to stabilize growth

(SRF IN, Mkt Cap USD1.7b, CMP INR1777, TP INR2040, 15% Upside, Buy)

• Results above estimates: SRF’s revenue grew 23.3% YoY to INR13.97b (est. of INR13.26b) in 3QFY18. Chemicals segment grew by 18.5% YoY, Packaging rose by 28.3% YoY, and Technical textile grew by 5.3% YoY. EBITDA margin contracted 230bp YoY to 18.1% (est. of 17.8%) in 3QFY18 due to higher-than-expected raw material cost (52.6% of net sales v/s est. of 48.0%). EBITDA rose by 9.3% YoY to INR2,527m (est. of INR2,360m) and adj. PAT grew by 17.2% YoY to INR1,312m (est. of INR1,030m). PBIT margin came in at 14.9% for Technical textile v/s 13.4% in 3QFY17; 16.6% for Chemical v/s 16.3% in 3QFY17; and 12.1% for Packaging v/s 14.2% in 3QFY17.
• Chemicals segment to see strong growth: SRF is expected to end FY18 with 90-95% utilization in R22 and R134a, and thus, has decided to incur capex of INR3.6b, which includes acquisition cost for HFC125 assets and for technical know-how from a global HFC player, gaining the unique advantage of manufacturing all three major HFCs: HFC134a, 32 and 125. Capacity expansion would double its existing capacities, driving growth. The company expects better growth in specialty chemicals to continue in FY19, which should help improve utilization rates and margins. Within BOPET films, the company expects pricing to remain firm, which should ensure healthy margins, as bulk of the supply over the last one year gets absorbed by growth in demand.