MOSL: SRF (Buy)-New refrigerants, healing agri-chemicals to stabilize growth

​SRF: New refrigerants, healing agchem to stabilize growth

(SRF IN, Mkt Cap USD1.5b, CMP INR1732, TP INR1992, 15% Upside, Buy)

• Results below estimates: SRF’s revenue grew 5.8% YoY to INR12.86b (est. of INR14.03b) in 2QFY18. Chemicals segment grew by 3.8% YoY, packaging rose by 17.5% YoY, while Technical textile declined 1% YoY. EBITDA margin contracted 330bp YoY to 16.4% (est. of 18.1%) in 2QFY18 due to higher-than-expected raw material cost (54.9% of net sales v/s est. of 48.5%). EBITDA declined 12% YoY to INR2,110m (est. of INR2,541m), as the gross margin contracted 800bp YoY to 45.1%. Consequently, adj. PAT declined 16.3% YoY to INR1,028m (est. of INR1,147m). PBIT margin came in at 11.9% for Technical textile v/s 12.7% in 2QFY17; 13.1% for Chemical v/s 17.5% in 2QFY17; and 12.1% for Packaging v/s 15.1% in 2QFY17. The margin in technical textile business was impacted on account of volatile caprolactam prices. In the packaging business, the margin took a hit on account of higher supply of BOPET and BOPP in the overseas market.
  
• Expansion of refrigerants portfolio to bolster growth: SRF is set to establish an integrated facility to produce HFCs and AHF at a capex of INR3,560m, which includes the acquisition cost of HFC125 assets and 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, strengthening the company’s position in the high-growth refrigerants market.