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MOSL: SRF (Buy)-Chemicals strong despite plant shutdown

SRF: Chemicals strong despite plant shutdown

(SRF IN, Mkt Cap USD2.4b, CMP INR2988, TP INR3500, 17% Upside, Buy)

 

• Better-than-expected performance: Revenue grew 9% YoY to INR18.3b (our estimate: INR16.8b) in 1QFY20, driven by Chemicals segment (+26% YoY to INR6b). EBITDA increased 10% YoY to INR3.5b (our estimate: INR2.8b), with the margin improving 20bp YoY to 19.2% (our estimate: 16.4%). Adj. PAT was up 18% YoY to INR1.7b (our estimate: INR986m). We note that SRF reported a beat on all fronts as (a) Packaging Film segment outperformed and (b) impact from Dahej plant shutdown was not as severe as expected.
• Technical Textiles disappoints: Chemical revenue increased 26% YoY to INR6b, despite the closure of the Dahej plant in April/May; margin contracted 340bp YoY to 13% owing to higher fixed cost and the absence of operating leverage. Packaging revenue grew 11% YoY to INR7b, with the margin expanding strongly by 530bp YoY to 20.7%. Notably, SRF rolled out value-added products in BOPP, where margins were higher. However, Technical Textiles revenue declined 11% YoY to INR4.5b, with the margin contracting 80bp YoY to 13.6%, due to slowdown in the auto industry.
• Key takeaways: (i) SRF maintained its growth guidance of 40-50% in Specialty Chemicals. (ii) Company will set up an integrated plant of PTFE along with R22 at a cost of INR4.2b.
• Valuation view: We expect large part of growth in FY20 to be driven by Chemicals segment with commissioning of HFC capacity in Sept'19 and sustained momentum in Specialty Chemicals. We revise up our earnings estimates by 14% for FY20/21 to factor in the better operating performance in Chemicals, higher other income and lower interest cost. We expect revenue/PAT CAGR of 15%/31% over FY19-21, and value the company on an SOTP basis to arrive at a TP of INR3,500 (+17% upside). Maintain Buy.