SRF Ltd - Technical textiles garners high realisation - HDFC Securities

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

We retain our ADD rating on SRF with a target price of INR 8,630 on the back of (1) continued healthy performance from speciality chemicals business and packging films business, (2) recovery in the technical textiles segment, (3) strong balance sheet, and (4) deployment of Capex towards high-growth speciality chemicals business over the next 3-4 years to tap the opportunities emerging from the agrochemical and pharmaceutical industry. EBITDA/APAT were 6/8% above our estimates, owing to lower-than-expected raw material costs, lower-than-expected opex, higher-than-expected other income, offset by a higher-than-expected tax outgo.

Financial performance: Revenue/EBITDA grew 75/78% YoY, owing to a low base, and 4/5% QoQ to INR 27/7bn in Q1, despite facing challenges of lockdowns due to the strike of the second wave of the COVID-19 pandemic.

Chemicals business (CB): Revenue/EBIT jumped 58/151% YoY to INR 11/2bn. The speciality chemicals business performed well, given higher sales in exports and domestic markets. The fluorochemicals business witnessed higher sales volumes in the refrigerants and blends segments with better sales realisations, especially from the export markets.

Technical textiles business (TTB): Revenue grew 251% YoY to INR 5bn and EBIT came at INR 1bn. TTB clocked in the highest-ever EBIT margin in a quarter at 27% in Q1. The restructuring of margin profile with long-term customers has contributed to TTB's overall performance.

Capex: The Board has approved a project for expansion of the fluorocarbon-based refrigerant capacity at Dahej at a cost of INR 5.5bn to meet the growing demand for refrigerants in the domestic and exports market and it is expected to be completed in 24 months. To cater to the growing power requirements of new and upcoming plants at Dahej, the Board has approved the installation of a 200 KV grid at a cost of INR 1.35bn.

Change in estimates: We raise our FY22/23 EPS estimate by 6.1/6.1% to INR 223.6/246.9 to account for better realisations expected from TTB and Capex plans announced by the Board.

DCF-based valuation: Our target price is INR 8,630 (WACC 10%, terminal growth 4.5%). The stock is trading at 32.1x FY23E EPS.

Shares of SRF LTD. was last trading in BSE at Rs. 8665 as compared to the previous close of Rs. 7926.25. The total number of shares traded during the day was 65862 in over 11819 trades.

The stock hit an intraday high of Rs. 8720.2 and intraday low of 7939.4. The net turnover during the day was Rs. 562088123.

Source : Equity Bulls

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