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ADD on SRF - Returning to normalcy - HDFC Securities

Posted On: 2021-01-25 09:34:18 (Time Zone: Arizona, USA)

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We retain our ADD rating on SRF with a target price of INR 6,080 on the back of (1) continued healthy performance from Speciality Chemicals business and Packging Films business, (2) recovery in the Technical Textile segment, (3) strong balance sheet, and (4) deployment of Capex towards high-growth Speciality Chemicals business over 3-4 years to tap the opportunities emerging from the agrochemical and pharmaceutical industry. EBITDA/APAT were 33/43% above estimates, owing to 6% higher revenue and lower-than- anticipated operating expenses and interest costs.

Financial performance: Revenue/EBITDA grew 16/40% YoY to INR 21.5/5.4bn in 3Q, owing to a healthy performance in the Speciality Chemicals and Packaging Films businesses. All business segments have returned to normalcy post the pandemic, and are performing well.

Chemicals business (CB): Revenue/EBIT jumped 12/33% YoY to INR 9/2bn. Specialty Chemicals Business performed exceedingly well, given strong demand from the overseas markets, higher capacity utilisation of dedicated/ multipurpose facilities and significant cost savings across all product streams. The Fluorochemicals business witnessed a revival in demand of refrigerants and healthy contribution from the chloromethanes segment, leading to a much better overall performance.

Packaging Films business (PFB): Revenue/EBIT jumped 26/42% YoY to INR 8/2bn. New capacities in Thailand and Hungary aided further volume growth and both the BOPET and BOPP segments witnessed robust performance due to better operating leverage, improved margins, and healthy demand.

Technical Textile business (TTB): Revenue/EBIT jumped 9/86% YoY to INR 4/1bn owing to a faster-than-expected recovery in the tyre industry. The Belting Fabrics segment contributed significantly to the TTB's performance.

Interim dividend: The Board has declared an interim dividend at 190% i.e. INR 19 per share on the paid-up equity share capital of the company.

DCF-based valuation: Our target price is INR 6,080 (WACC 10%, terminal growth 3.5%). The stock is trading at 29.7x FY23E EPS.

Shares of SRF LTD. was last trading in BSE at Rs.5388.9 as compared to the previous close of Rs. 5406.3. The total number of shares traded during the day was 19350 in over 3655 trades.

The stock hit an intraday high of Rs. 5502 and intraday low of 5239.9. The net turnover during the day was Rs. 104568957.

Source: Equity Bulls

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