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MOSL: SRF (Buy)-Stellar growth, RM exerts pressure on margin; Outlook remains strong across segments

SRF: Stellar growth, RM exerts pressure on margin; Outlook remains strong across segments

(SRF IN, Mkt Cap USD1.6b, CMP INR2022, TP INR2636, 30% Upside, Buy)

 

• Results exceed expectations: SRF's revenue increased 40.6% YoY to INR19,640m (our estimate: INR17,637m) in 3QFY19. EBITDA margin expanded 30bp YoY to 16.9% (our estimate: 17.7%) in 3QFY19, even as the gross margin contracted 480bp YoY to 42.6%. EBITDA grew 43% YoY to INR3,310m (our estimate: INR3,122m). Adj. PAT increased 36.5% YoY to INR1,572m (our estimate: INR1,372m).
• 9MFY19 performance: Revenue grew by 41.3% YoY, with the margin expanding by 110bp YoY. Adj. PAT grew by 44.7% YoY.
• Margin contraction across segments: SRF witnessed margin contraction across segments in 3QFY19. EBIT margin contracted by 200bp (to 14.9%) in Technical textiles, by 510bp (to 13.1%) in Chemicals, by 210bp (to 12.5%) in Packaging film and by 130bp (to 9.3%) in Others segment. The all-round margin contraction was largely driven by (a) raw material price volatility (higher fluorspar price in Chemicals and inventory loss of INR200m in Packaging film) and (b) fixed cost due to capex capitalization in Specialty chemicals. However, over the last three months, the price of caprolactam (key RM for technical textiles) and MEG (key RM for packaging film) has corrected 25% YoY and 35% YoY, respectively, which should ease the situation.