SRF Ltd: In-line results; capex in chemicals boosts confidence

9 August 2016

1QFY17 Results Update | Sector: Textiles

SRF Ltd

Buy

BSE SENSEX

28,085

S&P CNX

8,678

CMP: INR1,580



TP: INR1,815 (+15%)

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In-line results; capex in chemicals boosts confidence

EBITDA in line but PAT exceeds estimates:

SRF’s consolidated revenues were

flat YoY at INR12.2b (est. of INR13.2b). Chemicals business (CB) continued its

slow growth trajectory of 11.5% YoY, while Technical Textiles (TTB) and

Packaging (PB) declined 5.6% and 5.2%, respectively, due to lower realizations.

EBITDA margins expanded to 23.3% in 1QFY17 from 21.8% in 1QFY16, driven

by margin expansion across the chemicals and technical textile businesses.

Accordingly, adj. PAT grew robustly by 24% YoY to INR1,395m (est. of

INR1,317m) in 1QFY17.

Pain in specialty chemicals to continue, focusing on pharma:

Specialty

chemicals is expected to have delivered similar growth in the range of 11-12%

as the global agri-chem environment continues to remain weak due to high

channel inventory. We expect the pain in this business to continue over the

next few quarters, but are not perturbed as it is a temporary phase. Also, the

company continues to invest in capability building and has increased focus on

pharma (share has increased to 25% v/s 19% for the specialty chemicals

business).

Confident of long-term growth in chemicals, announces capex of INR3,450m:

SRF announced capex of INR3,450m toward a multipurpose plant for specialty

chemicals (INR1.8b) and chloromethanes plant (INR1.65b). Both plants are

expected to come up by December 2017. SRF has also announced total capex

of INR35b over the next four years, 70% of which will go toward chemicals.

Valuation and view:

SRF has exhibited superior performance across all

segments, except specialty chemicals, which is going through a transitory

phase. Due to its focus on value-added packaging films, PB has exhibited strong

margins of 15.4% in 1QFY17, while most of the industry players have witnessed

a sharp decline in margins. TTB continues to remain steady, posting strong

margin improvement of 14.5% in 1QFY17. We maintain our estimates and

expect it to post 10.2% revenue CAGR (to INR55.9b) and 20.7% adj. PAT CAGR

over FY16-18E. We value the stock on an SOTP basis, and maintain our

Buy

rating with a TP of INR1,815 (implied P/E of 17x FY18E EPS).

Bloomberg

Equity Shares (m)

M.Cap.(INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val, (INR m)

Free float (%)

SRF IN

57.4

90.7/ 1.4

1,688/1,019

17/19/12

226

47.6



Financials & Valuations (INR b)

Y/E Mar

Sales

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

2016

46.0

9.6

4.2

73.7

39.7

456.8

17.0

19.4

21.5

3.5

2017E

48.6

11.1

5.2

90.2

22.5

531.2

17.9

21.3

17.5

3.0

2018E

55.9

12.7

6.2

107.4

19.0

619.2

18.3

22.9

14.7

2.6



Estimate change

TP change

Rating change

Chintan Modi

(Chintan.Modi@MotilalOswal.com); +91 22 3982 5422

Niket Shah

(Niket.Shah@MotilalOswal.com); +91 22 39825000

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

SRF Ltd

EBITDA inline, PAT beats estimates



SRF’s consolidated revenue was flat YoY to INR12.2b (est: INR13.2b). Chemical

business (CB) continued to remain on slow growth trajectory of 11.5% while

Technical Textiles (TTB) and Packaging (PB) registered de-growth of 5.6% and

5.2% respectively due to lower realizations.



The EBITDA margins expanded to 23.3% in 1QFY17 compared to 21.8% in

1QFY16 driven by margin expansion across chemical business and technical

textile business.



Interest expense was lower on account of renegotiation of interest rates (30-

40bp improvement for full year) and capitalization of interest cost of BOPET

plant



Accordingly, Adj. PAT grew robustly by 24% to INR1,395m (est. INR1,317m) in

1QFY17 on YoY basis.

Exhibit 1: Revenue trend

Revenues (INR m)

11,895

11,132

10,814

12,214

11,646

5.7%

-2.1%

-1.4%

10,974

11,150

3.1%

-0.2%

Growth %

12,192

11,559

Source: Company, MOSL

Exhibit 2: EBITDA margins expanded 150bp YoY to 23.3%

EBITDA (INR m)

22%

16%

17%

15%

21%

Margins (%)

21%

20%

23%

Exhibit 3: PAT trend

PAT (INR m)

Margins (%)

1,395

11%

927

1,124 1,080 1,056 1,042

822

769

578

10%

1,815 1,992 1,876 1,587 2,667 2,480 2,337 2,232 2,841

Source: Company, MOSL

9 August 2016

SRF Ltd

Exhibit 4: Revenue mix

Technical Textile

26%

28%

46%

30%

27%

43%

27%

45%

26%

29%

44%

Chemicals

29%

31%

40%

29%

31%

39%

Packaging

29%

34%

36%

26%

39%

36%

27%

35%

38%

10%

58%

Exhibit 5: PBIT mix

Technical Textile

14%

49%

15%

54%

45%

41%

27%

47%

25%

62%

12%

54%

25%

47%

28%

Chemicals

29%

27%

Packaging

25%

21%

25%

32%

37%

31%

Source: Company, MOSL

Pain in specialty chemicals to continue, focusing on pharma



The specialty chemicals is expected to have delivered similar growth in the

range of 11-12% as the global agri-chem environment continues to remain weak

due to high channel inventory and the pain will continue for next couple of

quarters.

Client companies like BASF and Bayer have reduced their guidance by 10%.

However, we are not perturbed by it as it is a temporary phase and company

continues to invest in capability building and focus on pharma. The share of

pharma has increased to 25% vs 19% YoY in the specialty chemical business.

Volume growth in Refrigerants gas business in 1QFY17 was higher due to

extended summer, the management expects to achieve 100% utilization by FY18

at a capacity of 12500tn in HFC-134a. Additionally, extension of anti-dumping on

import of HFC-134a in India will continue to protect and aid growth for SRF as it

is the only producer in India.

SRF is setting up Electrochemical research facility at a cost of INR68m which will

be new technology to extract fluorine from Hydro Fluoric Acid.

Exhibit 7: PBIT trend

Growth

4,320 4,214

36.4%

24%

27%

24%

19%

11.4%

768

857

746

611

945

854

1,051 1,040 1,116

25%

23%

PBIT (INR m)

Margins (%)

28%

Exhibit 6: Revenue trend

Revenues (INR m)

3,205 3,196 3,066 3,167

3,782 3,640 3,790

23.6%

13.9%

24%

26%

18.0%

Source: Company, MOSL

Confident of long term growth in chemicals, announces capex of INR3,450m



SRF announced capex of INR3,450m towards Multipurpose plant for specialty

chemicals (INR1.8b) and Chloromethanes plant (INR1.65b). Both plants are

expected to come up by Dec 2017. SRF has also announced total capex of

INR35b over next four years, of which 70% will go towards chemicals.

9 August 2016

SRF Ltd



The company will spend INR1650m for doubling the capacity from 40000tnpa to

80000tnpa in Chloromethanes. Chloromenthanes is used in manufacturing of

MDC, Chloroform and CTC. India is short of MDC and net importer to the extent

of 150,000tn where SRF intends to supply 22000-24000tn. SRF capitvely requires

18000tn of chloroform and CTC is also required internal use in agri-chem

business.

SRF plans total investment of INR35b over next 4 years. Of the total investment,

70% will be in chemicals business. For the current year, management has guided

for INR8-9b of capex (INR2.5b spent in 1Q) which also includes capex for

packaging business. Capex will be spread out over next 4 years and will incur as

and when cash flow comes in and may also raise debt if required

Packaging business continues to deliver high margins



In 1QFY17, the packaging film business registered revenue de-growth of 5.2%

YoY to INR3,343m. The PBIT margins were at 17.8% expanding from 17.1% YoY.

However, it included one time exceptional income of INR80m which if excluded

the margins were 15.4%.

However, the management believes that margins are expected to come under

pressure going ahead but will work on improving the cost efficiencies.

The management informed that all plants are stable and operating at optimal

capacity. The management continues to focus on enchancing product mix to

increase value added products. South Africa packaging plant is facing weak

demand and is expected to normalize going ahead.

Exhibit 9: PBIT trend

Growth

3,343

238

5.7%

0.9%

135

PBIT (INR m)

604

17%

204

490

14%

431 14%

13%

406

Margins (%)

596

18%

Exhibit 8: Revenue trend

Revenues (INR m)

3,012

3,538

3,062 2,848

3,527 3,431

3,238

17.1%

-3.0%

2,873

-5.2%

Source: Company, MOSL

Technical textiles



In 1QFY17, the technical textile business registered revenue de-growth of 5.6%

YoY to INR4,647m due to drop in realizations. The PBIT margins were at 14.5%

showing an increase of 300bps on YoY basis.

Pre monsoon demand for NTCF in 1QFY17 was on higher side while coated and

laminated fabrics market share improved which has delivered better

performance.

9 August 2016

SRF Ltd

Exhibit 10: Revenue trend

5,365 5,184

5,025 4,821 4,924

4,596

-8.2%

Revenues (INR m)

Growth

4,647

3,962 3,973

-5.6%

648

422

12%

-17.6%

-21.2%

10%

424

463

Exhibit 11: PBIT trend

PBIT (INR m)

566

460

11%

10%

212

Margins (%)

673

493

12%

14%

-11.3%

Source: Company, MOSL

Valuation and view



We believe SRF will be the preferred choice for global agrochemicals and

pharmaceutical players for fluorine-based molecule requirements on the back of

SRF’s strong R&D capabilities and ability to provide support across value chain—

from access to critical starting materials, in-house process research and

development, lab synthesis and pilot production to setting up dedicated plants

for commercial production.

The high-margin Chemicals business is expected to post high revenue CAGR of

22% over FY16-18E, leading to an increase in revenue contribution from 34% in

FY16 to 41% in FY18.

SRF continues to exhibit superior performance across all segments except

specialty chemicals which is going through transitory phase. Due to focus on

value added films, PB has exhibited strong margins at 15.4% in 1QFY17 while

most of the players in industry have witnessed sharp decline in margins. TTB

continues to remain steady and has posted strong margin improvement at

14.5% in 1QFY17.

We maintain our estimates and expect it to post 10.2% revenue CAGR (to

INR55.9b) while adj. PAT to register 20.7% CAGR over FY16-18E. We value the

stock on SOTP basis and maintain

Buy

with a target price of INR1,815 (implied

P/E of 17x FY18E EPS).

SOTP valuation

Business Segment

Chemicals

Technical Textile

Packaging

Total

EPS FY18E

69.4

22.2

15.8

107.3

P/E Multiple FY18E

22x

16x

Value (INR)

1,527

177

111

1,815

9 August 2016

SRF Ltd

Exhibit 12: Price to earnings (One year forward)

P/E (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

Exhibit 13: Price to book (One year forward)

4.6

15.5

P/B (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

9.0

6.3

6.8

3.1

2.6

1.6

1.1

0.1

1.3

Source: Company, MOSL

9 August 2016

SRF Ltd

Story in charts

Exhibit 14: Share of chemicals in revenues increasing

Technical Textiles

Chemicals

Packaging Films

FY12

FY13

Exhibit 15: Contribution of speciality chemicals within

chemicals on uptrend

Specialty chemicals

HFC-134a

Chloromethanes

Dymel

Other commodity chemcials

Engineering plastics

FY14

FY15

FY16E

FY17E

FY18E

FY15

FY16

FY17E

FY18E

FY12

FY13

FY14

Source: MOSL, Company

Exhibit 16: PAT to post a CAGR of 21% over FY16-18

PAT

9.5

6.7

4.0

6.7

Margin %

10.8

9.2

11.0

Exhibit 17: Debt to equity to reduce to 0.5

Debt

1.1

0.9

0.7

0.9

Debt to equity

0.8

0.6

0.5

12,284

3,788

FY12

2,530

FY13

1,625

FY14

3,028

FY15

4,229

FY16E

5,228

FY17E

6,165

FY18E

FY12

21,753 20,244 21,012

19,512 19,012

17,040

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: MOSL, Company

Exhibit 18: RoCE to improve to 23%

RoE %

RoCE %

Exhibit 19: Strong free cash flow generating

FCF

4,167

2,585

1,021

579

1,956

FY12

FY13

FY14

-2,517

-4,430

FY15

FY16E

FY17E

FY18E

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: MOSL, Company

9 August 2016

SRF Ltd

Exhibit 20: Key assumptions (INR m)

FY12

Revenues (INR m)

Technical Textile

Chemicals

Packaging

Revenue growth %

Technical Textile

Chemicals

Packaging

PBIT (INR m)

Technical Textile

Chemicals

Packaging

PBIT margins (%)

Technical Textile

Chemicals

Packaging

FY13

FY14

FY15

FY16

FY17E

FY18E

40,010

21,375

12,034

6,601

15.0

14.8

61.2

-24.2

7,339

1,145

5,941

252

18.3

5.4

49.4

3.8

37,829

21,283

10,348

6,199

-5.5

-0.4

-14.0

-6.1

4,760

1,234

3,465

12.6

5.8

33.5

1.0

40,181

21,802

9,561

8,817

6.2

2.4

-7.6

42.2

3,494

1,631

1,913

-50

8.7

7.5

20.0

-0.6

45,398

20,319

12,634

12,445

13.0

-6.8

32.1

41.1

5,576

1,957

2,983

636

12.3

9.6

23.6

5.1

46,001

17,429

15,524

13,048

1.3

-14.2

22.9

4.8

7,545

1,728

3,888

1,930

16.4

9.9

25.0

14.8

48,617

17,172

18,596

12,849

5.7

-1.5

19.8

-1.5

8,682

2,112

4,835

1,735

17.9

12.3

26.0

13.5

55,896

17,751

23,165

14,980

15.0

3.4

24.6

16.6

9,881

2,095

6,139

1,648

17.7

11.8

26.5

11.0

Source: Company, MOSL

9 August 2016

SRF Ltd

Financials and Valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Current Tax

Deferred Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY12

40,010

15.2

8,314

20.8

1,837

6,478

1,172

312

5,617

1,687

142

32.6

3,788

-21.8

9.5

FY13

37,830

-5.4

6,143

16.2

2,089

4,054

998

420

3,476

564

383

27.2

2,530

-33.2

6.7

FY14

40,181

6.2

5,053

12.6

2,248

2,806

961

235

2,080

208

247

21.9

1,625

-35.8

4.0

FY15

45,398

13.0

7,175

15.8

2,450

4,724

1,376

646

3,994

314

652

24.2

3,028

86.4

6.7

FY16

46,001

1.3

9,610

20.9

2,892

6,718

1,283

273

5,708

1,478

25.9

4,229

39.7

9.2

FY17E

48,617

5.7

11,133

22.9

3,140

7,994

1,155

259

7,098

7,161

1,933

27.0

5,228

5,182

22.5

10.7

(INR Million)

FY18E

55,896

15.0

12,744

22.8

3,409

9,335

1,098

207

8,445

2,280

27.0

6,165

19.0

11.0

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Deferred Tax assets

Appl. of Funds

E: MOSL Estimates

FY12

584

17,931

18,515

2,269

12,284

33,069

41,463

20,713

20,750

4,175

1,405

13,321

4,877

4,837

1,401

2,206

6,753

5,319

1,181

253

6,568

142

33,068

FY13

584

19,105

19,689

2,648

17,040

39,377

47,566

24,197

23,369

5,654

1,512

15,181

5,632

5,087

1,910

2,552

6,513

5,408

832

273

8,668

145

39,377

FY14

584

20,082

20,667

3,250

21,753

45,670

61,072

25,657

35,415

1,121

366

17,693

7,464

6,915

825

2,489

9,516

8,265

908

343

8,177

498

45,670

FY15

584

22,379

22,963

4,094

20,244

47,301

66,773

27,585

39,188

1,041

943

17,624

7,635

6,107

1,073

2,810

12,238

6,350

5,606

283

5,386

708

47,301

FY16

584

26,110

26,695

4,777

21,012

52,483

72,754

30,476

42,278

1,619

20,765

7,050

5,145

3,892

4,678

12,993

7,542

5,173

278

7,772

779

52,483

FY17E

584

30,456

31,041

4,777

19,512

55,329

78,754

33,616

45,138

1,619

21,336

7,505

5,946

2,941

4,944

13,641

7,179

5,173

1,289

7,695

779

55,329

(INR Million)

FY18E

584

35,604

36,189

4,777

19,012

59,977

85,754

37,025

48,729

1,619

23,803

8,752

6,836

2,282

5,933

15,051

8,372

5,173

1,506

8,752

779

59,977

9 August 2016

SRF Ltd

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Working Cap. Turnover (Days)

Leverage Ratio (x)

Debt/Equity

FY12

64.8

96.3

316.8

13.9

24.9

FY13

44.1

79.0

336.9

10.0

26.4

FY14

28.3

66.3

353.6

10.0

41.3

FY15

52.7

93.7

392.9

10.0

22.5

30.0

16.9

4.0

2.4

15.3

0.6

9.9

21.3

31.3

34.8

1.2

0.7

FY12

5,617

2,404

1,150

-1,658

-64

7,450

-802

6,648

-5,627

1,021

-243

256

-5,614

-900

2,336

-1,028

-940

-536

498

902

1,401

13.2

16.9

20.2

1.0

0.9

FY13

3,476

2,089

972

-632

-1,445

4,459

-232

4,227

-6,744

-2,517

-63

-6,716

4,547

-889

-660

2,998

509

1,401

1,910

8.1

9.4

10.1

0.9

114

126

1.1

FY14

2,080

2,248

908

-413

-1,199

3,623

-156

3,467

-7,897

-4,430

1,156

144

-6,597

3,911

-1,198

-668

2,045

-1,085

1,910

825

13.9

15.6

15.2

1.0

110

0.9

FY15

3,994

2,450

1,346

-850

-1,011

5,931

-507

5,423

-4,845

579

-632

482

-4,994

1,889

-1,392

-678

-181

248

825

1,073

FY16

73.7

121.8

456.8

10.0

15.7

21.5

13.0

3.5

2.3

11.2

0.6

71.3

17.0

19.4

19.3

0.9

110

118

0.8

FY16

5,708

2,892

1,283

-1,478

703

9,107

-4,940

4,167

-676

-5,616

768

-1,283

-664

-672

2,819

1,073

3,892

FY17E

90.2

142.4

531.2

13.2

16.9

17.5

11.1

3.0

2.2

9.6

0.8

44.2

17.9

21.3

21.4

0.9

115

110

0.6

FY17E

7,098

3,140

1,155

-1,933

-874

8,585

-6,000

2,585

-6,000

-1,500

-1,155

-881

-3,536

-951

3,892

2,941

FY18E

107.4

163.8

619.2

15.3

16.5

14.7

9.6

2.6

1.9

8.4

1.0

33.5

18.3

22.9

22.7

0.9

115

110

0.5

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(inc)/dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

E: MOSL Estimates

9 August 2016

(INR Million)

FY18E

8,445

3,409

1,098

-2,280

-1,716

8,956

-7,000

1,956

-7,000

-500

-1,098

-1,017

-2,615

-659

2,941

2,282

SRF Ltd

Corporate profile

Company description

SRF is a multi-business entity involved in Technical

Textiles (TTB; 45% of FY15 revenue), Chemicals (CB;

28%), and Packaging (PB; 27%). In terms of PBIT,

TTB contributed 35%, CB 53%, and PB 11%. In the

past few years, SRF has invested heavily (~INR18b)

in Dahej for setting up a chemicals complex, which

should begin to contribute meaningfully from FY15.

The Chemicals business is likely to drive overall

growth and profitability, the Packaging business is

in the midst of an upturn and the Technical Textiles

business continues to generate enough cash flows

to support expansion of the Chemicals business.

Exhibit 2: Shareholding pattern (%)

Jun-16

Promoter

DII

FII

Others

52.4

12.1

15.8

19.8

Mar-16

52.4

12.0

16.2

19.4

Jun-15

52.4

12.6

15.5

19.6

Source: Capitaline

Exhibit 1: Sensex rebased

Source: MOSL/Bloomberg

Exhibit 3: Top holders

Holder Name

Amansa Holdings Private Limited

DSP Blackrock Balanced Fund

Sundaram Mutual Fund A/C Sundaram

Select Midcap

UTI-Unit Scheme For Charitable And

Religious Trusts And Registered Societies

Max Life Insurance Company Limited A/C -

Ulif00225/06/04lifebalanc104 - Balanced

Fund

% Holding

5.6

4.8

2.3

2.1

1.7

Source: Capitaline

Note: FII Includes depository receipts

Exhibit 4: Top management

Name

Arun Bharat Ram

Ashish Bharat Ram

Kartikeya Bharat Ram

Anoop K Joshi

Designation

Chairman

Managing Director

Deputy Managing Director

CFO & Company Secretary

Exhibit 5: Directors

Name

L Lakshman*

Tejpreet Singh Chopra*

Vinayak Chatterjee*

K Ravichandra

Name

Pramod Bhasin*

Vellayan Subbiah*

Meenakshi Gopinath

Source: Capitaline

*Independent

Exhibit 6: Auditors

Name

Deloitte Haskins & Sells LLP

H Tara & Co

Sanjay Grover & Associates

Sanjay Gupta & Associates

Type

Statutory

Cost Auditor

Secretarial Audit

Cost Auditor

Exhibit 7: MOSL forecast v/s consensus

EPS

(INR)

MOSL

forecast

90.2

107.4

Consensus

forecast

87.8

104.4

Variation

(%)

2.7

2.9

Source: Bloomberg

FY17

FY18

Source: Capitaline

9 August 2016

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