MOSL: SRF (Buy)-Order book deferred-Recovery pushed to 2HFY18

​SRF: Order book deferred; Recovery pushed to 2HFY18

(SRF IN, Mkt Cap USD1.4b, CMP INR1437, TP INR1648, 15% Upside, Buy)

• Revenue exceeds estimate; PAT in-line: SRF reported overall revenue of INR13.88b (est. of INR11.46b) in 1QFY18 v/s INR12.9b in 1QFY17. On a YoY basis, Chemicals segment declined 8%, while Technical textiles/Packaging grew by 11.3%/19.4%. EBITDA margin contracted from 22.8% in 1QFY17 to 15.1% (est. of 21.3%) in 1QFY18. EBITDA during the quarter stood at INR2,091m (est. of INR2,441m), as against INR2,962m in 1QFY17 - down 29% as gross margin contracted 610bp YoY to 48.3%. Consequently, adj. PAT declined 33% from INR1,546m in 1QFY17 to INR1,038m (est. of INR1,063m) in 1QFY18.
• SpChem continues facing headwinds: SpChem witnessed another subdued quarter due to unfavorable global agrochem environment. Overall, SRF faced pressure from higher effective tax rate, channel destocking on account of GST, and unfavorable currency movement. However, the company continues to develop products and commit capex on demand revival expectations. Management expects the operating macroeconomic situation to ease in 2HFY18, enabling execution of the deferred order book.
• Ref gas grows despite domestic turbulence: On the domestic front, Ref gas witnessed a loss of sale of ~200 tonnes due to GST transitional phase in peak season. However, exports (~60% of total ref gas) remained strong, with 1QFY18 witnessing highest production and sales of refrigerants and blends due to higher HFC32 usage. The segment is likely to continue increasing market share.