MOSL: SRF LTD (Buy)-Refrigerants business on strong footing

​SRF LTD: Refrigerants business on strong footing; Maintain Buy

(SRF IN, Mkt Cap USD1.4b, CMP INR1585, TP INR1816, 15% Upside, Buy)

• EBITDA below estimate, Chemicals continues to underperform: SRF reported overall revenue of INR13.3b (est. of INR12.3b) in 4QFY17, as against INR11.1b in 4QFY16. On a YoY basis, Chemicals grew by 11.7%, Technical Textiles by 23.3% and Packaging by 26.3%. EBITDA margin contracted from 20.2% in 4QFY16 to 16.3% (est. of 20.5%) in the quarter. EBITDA declined 4% to INR2,157m (est. of INR2,533m) from INR2,248m in 4QFY16. Segment-wise, PBIT margin for Technical Textiles was at 10% (v/s 11.1% in 4QFY16), Chemical at 16.6% (v/s 23.2% YoY) and Packaging at 9.7% (v/s 12.8% YoY). Consequently, adj. PAT grew 7% from INR1,072m in 4QFY16 to INR1,147m (est. INR1,161m) in 4QFY17. For FY17, revenue grew 5% YoY to INR48.2b, EBITDA margin shrunk 110bp to 20.1%, while adj. PAT grew 13% to INR4.9b.
  
• Refrigerant Gas business on strong footing: R-134a gas registered healthy growth, driven by exports. Total volume for FY17 is expected to have crossed ~10,000t (v/s ~7,000t for full-year FY16), in line with management guidance. Due to anti-dumping levied on Chinese R-134a in the US, SRF’s performance should see a boost in terms of volumes and margins (approx. 200bp improvement).
  
• Specialty Chemicals to remain subdued in 1HFY18: Management highlighted that the global agri-chem environment continues to remain weak, impacting its SpChem business, and the pain will continue for next few quarters. However, the pipeline of molecules or funnel remains healthy, with SRF continuing to invest in capability building.