22 March 2016
Update
| Sector:
Textiles
SRF Ltd
Buy
BSE SENSEX
25,330
S&P CNX
7,715
CMP: INR1,227
TP: INR1,500 (+22%)
New client wins in Specialty Chemicals; re-rating imminent
Raising estimates and target price; maintain Buy
In our recent interaction, the management indicated two new client wins in the
Agrochemicals part of the Specialty Chemicals business.
These are US-based global agrochemical giants, who would not only contribute to
growth, but also help SRF achieve client diversification.
In light of this development, we raise our estimates and target price. Buy.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INR m)
Free float (%)
SRF IN
57.4
1,496/876
4/11/45
70.3
1.1
215
47.6
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Net Sales
45.9
51.9
59.8
EBITDA
9.8
11.1
12.6
PAT
4.3
5.2
6.2
EPS (INR)
74.2
90.0 107.2
Gr. (%)
40.6
21.3
21.2
BV/Sh (INR)
449.3 518.6 603.7
RoE (%)
17.3
18.3
19.1
RoCE (%)
15.1
16.9
18.7
P/E (x)
16.5
13.6
11.4
P/BV (x)
2.7
2.4
2.0
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
52.4
12.6
16.1
19.0
52.4
13.0
15.2
19.5
52.4
12.6
12.7
22.3
Specialty Chemicals growing bigger and better:
SRF has won two new clients in
the Agrochemicals part of the Specialty Chemicals business, which has grown at a
CAGR of 62% over FY12-15 and enjoys high EBIT margin of 35%. These new clients
are US-based global agrochemical giants, who would not only contribute to
growth, but also help SRF achieve client diversification. Currently, SRF receives
most of its business from Bayer Crop Science, BASF and Syngenta. Additionally, SRF
has become wiser in terms of planning and efficiency, as it progresses through the
learning curve. In view of the client wins, we raise our Specialty Chemicals revenue
growth estimate from 25% to 34% in FY18.
Enhancement in R&D capabilities to aid growth:
SRF has expanded its R&D team
by 30-40% from 200 people last year. It has added new complex chemistry, which
adds to its capabilities. The R&D funnel is strong, with 30 molecules at various
stages of development and substantial number of molecules expected to achieve
success (track record of 50-60% conversion). SRF has already commercialized 40-50
molecules, with 15-20 molecules under production in FY16. The R&D team has also
been involved in developing new generation refrigeration gases.
Pace of adding dedicated plants to increase:
Given the new developments, we
expect SRF to now add 3-4 dedicated plants per year against its previous guidance
of two per year. Currently, it has 8 dedicated plants and two flexible manufacturing
plants. Each dedicated plant requires an investment of INR250m-400m and we
expect SRF to invest INR2b-3b every year. At peak utilization, which usually takes
2-3 years to achieve, the plants can generate asset turnover ratio of 2-2.5x.
Packaging business to remain stable; Technical Textiles impacted by Chennai
floods:
EBIT margins in the Packaging business are likely to remain stable at ~13%
QoQ, as the spreads remain largely unchanged. The Technical Textiles unit in
Chennai, which has started ramping up, is likely to register EBIT loss to the extent
of ~INR70m in 4QFY16 and INR40m in 1QFY17. In 3QFY16, the Technical Textiles
division recorded EBIT margin of 5.3%, a decline of 310bp.
FII Includes depository receipts
Stock Performance (1-year)
SRF Ltd
Sensex - Rebased
1,600
1,350
1,100
850
600
Valuation and view:
We view these developments as structurally positive and
raise our Specialty Chemicals revenue growth estimate for FY18 from 25% to 34%
and we believe it will continue to see strong growth of ~30% for 2-3 years beyond
FY18. Accordingly we increase our overall earnings estimates by 3% for FY18 to
INR6,263m while keeping FY17 estimates unchanged as these developments will
fully fructify in FY18. Over FY15-18, we expect SRF to post 10% revenue CAGR (to
INR59.8b), 520bp EBITDA margin expansion (to 21%) and 27% PAT CAGR, along
with strong FCF generation (INR3.4b in FY17, INR6b in FY18) and significant
improvement in RoCE from 12% to 19%. We maintain
Buy
with a revised target
price of INR1,500 (earlier INR1,460) valuing it at blended PE of 14x FY18E EPS.
Chintan Modi
(Chintan.Modi@MotilalOswal.com); +91 22 3982 5422
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 3982 5426
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.