MOSL: SRF (Buy)-Steady performance across segments-Recovery in agrochemicals sector pushed to 3QFY19

SRF: Steady performance across segments; Recovery in agrochemicals sector pushed to 3QFY19

(SRF IN, Mkt Cap USD1.5b, CMP INR1924, TP INR2206, 15% Upside, Buy)

• Results above expectations: Revenue grew 21.6% YoY to INR16,123m (est. of INR14,385m) in 4QFY18. EBITDA grew 19% YoY to INR2,790m (est. of INR2,316m), with the margin contracting 40bp YoY to 17.3% (est. of 16.1%). Adj. PAT fell 4% YoY to INR1,239m (est. of INR1,018m), as the tax rate was higher at 24.2% v/s 21.4% in 4QFY17 and interest cost too was higher at INR425m v/s INR228m in 4QFY17.
• FY18 performance: Revenue grew 16% to INR55,890m. EBITDA declined 4.5% to INR9,526m, with the margin down 370bp to 17%. Consequently, adj. PAT fell 10% YoY to INR4,617m.
• Getting ready for the rebound: In an attempt to be future-ready to meet expected incremental demand post a recovery in agrochemicals, SRF has undertaken increased capex. Further, management guided for strong 40-50% growth in specialty chemicals, but with a recovery expected only by 3QFY19, we assume growth of 25% in the segment for FY19. Moreover, the company is expecting additional volume in R134a driven by exports.
• Valuation view: SRF faced headwinds from a slowdown in the global agrochem industry throughout FY18, and the company does not expect a recovery before 3QFY19. However, we believe that with other segments growing robustly, this would not have much impact on revenues. We, thus, keep our revenue and EBITDA estimates unchanged. However, with aggressive capex, newly commissioned plants and higher tax guidance by the company, we believe that profitability would take a hit. We, thus, cut our earnings estimate by 5%/6% for FY19/20 (we expect CAGR of 28% over FY18-20). With RoE at 17.5% in FY20E, we believe valuation of 17x FY20E EPS is justified. Maintain Buy with a target price of INR2,206 (15% upside).