Challenges To Continue: Neutral
Challenges To Continue: Neutral
Challenges To Continue: Neutral
SRF
NEUTRAL
INDUSTRY CHEMICALS Challenges to continue
SRFs 3QFY17 revenues were muted at Rs 11.3bn However, the stock is fairly valued and we see no
CMP (as on 13 Feb 2017) Rs 1,601
(+3% YoY) led by a decline in its specialty biz. Lower positive trigger in the near term. Our TP is Rs
Target Price Rs 1,600 margins (PBITM 16% vs. 26%) negated the strong 1,600/sh (15x 12 months rolling forward EPS).
Nifty 8,805
results in the Technical Textile and Packaging Maintain NEUTRAL.
segments. EBITDA was at Rs 2.3bn (-1%). Lower Highlights of the quarter
Sensex 28,352
interest cost/tax rate boosted PAT to Rs 1.0bn (+8%).
KEY STOCK DATA Technical textile: Revenues were at Rs 4.9bn (+13%
Bloomberg SRF IN
We expect this muted outlook to continue in the YoY) led by higher volumes and realisations (products
near term. Growth and margins in the specialty are crude derivates). EBIT was strong at Rs 631mn
No. of Shares (mn) 57
segment will be soft, in line with the global (+196%) led by higher volumes and better product mix.
MCap (Rs bn) / ($ mn) 92/1,372
agrochemical market. Whereas, the capitalisation of
6m avg traded value (Rs mn) 452 capex will lead to higher capital costs. Rising capital
Chemical business: Revenues were at Rs 3.8bn (-4%).
EBIT margins were down to 16% (26.4% YoY, 17.5%
STOCK PERFORMANCE (%) allocation (capex of Rs 6.3bn over the next two years
QoQ) led by pressure in the global agrochem market.
52 Week high / low Rs 1,970/1,022 in BOPET and BOPP) in the cyclical and low-RoCE
EBIT was Rs 613mn (-42%).
3M 6M 12M packaging films business is another overhang for the
Absolute (%) (6.2) 1.3 38.1 stock. We expect margins in packaging to soften in Packaging films: Revenues were at Rs 3.4bn (-0.2%)
FY18/19, with new capacities coming on-stream. and EBIT was Rs 474mn (+10%). We see sequential
Relative (%) (10.2) 0.3 20.1
pressure in margins owing to upcoming capacities.
SHAREHOLDING PATTERN (%) Long-term prospects remain bright, with drivers such
Promoters 52.38 as (1) additional volumes of R134a, (2) strong Near-term outlook: The stock will be under pressure.
prospects in specialty chemicals, (3) rising share of Muted global agrochemical environment will impact
FIs & Local MFs 10.78
pharma molecules, and (4) Strengthening refrigerant growth in the specialty business. Packaging margins
FPIs 18.64
portfolio (SRF has introduced a R134a pharma grade, have peaked, and sequential decline will start with new
Public & Others 18.20 R32 and setting up a pilot plant for HFO-1234yf). capacities coming online.
Source : BSE
Financial Summary (Consolidated)
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Net Sales 11,330 10,956 3.4 11,438 (0.9) 46,001 47,569 52,814 60,037
Satish Mishra EBITDA 2,316 2,337 (0.9) 2,326 (0.4) 9,610 10,074 11,074 12,624
[email protected] APAT 1,047 969 8.1 1,193 (12.2) 4,195 4,882 5,389 6,368
+91-22-6171-7334 Diluted EPS (Rs) 18.2 16.9 8.1 20.8 (12.2) 73.1 85.0 93.9 110.9
P/E (x) 21.9 18.8 17.1 14.4
Deepak Kolhe EV / EBITDA (x) 11.6 11.2 10.2 8.9
[email protected] RoE (%) 16.9 17.1 16.5 17.1
+91-22-6171-7316 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
SRF : RESULTS REVIEW 3QFY17
Margin Analysis
3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps)
Material Expenses as % of Net Sales 47.9 50.6 (264) 48.3 (39)
Traded Goods as % of Net Sales 1.2 0.6 52 1.5 (37)
EBITDA margins were lower Employee Expenses as % of Net Sales 9.5 8.6 84 8.9 60
because of lower margins in Other Expenses as % of Net Sales 21.0 18.8 217 20.9 6
the chemical segment EBITDA Margin (%) 20.4 21.3 (88) 20.3 11
Net Profit Margin (%) 9.2 8.8 40 10.4 (119)
Tax Rate (%) 20.6 25.1 (453) 20.0 58
Source: Company, HDFC sec Inst Research
Page | 2
SRF : RESULTS REVIEW 3QFY17
Segmental Analysis
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Segmental Revenues
Technical textile segments
Technical Textile Business 4,892 4,319 13.3 4,805 1.8
revenues increased owing to
Chemicals Business 3,822 3,989 (4.2) 3,864 (1.1)
higher volumes
Packaging Film Business 3,352 3,360 (0.2) 3,494 (4.1)
Total 12,066 11,668 3.4 12,163 (0.8)
Chemicals business growth
Segmental Results (EBIT)
was muted owing to weak
Technical Textile Business 631 213 196.0 610 3.4
global agrochemical market
Chemicals Business 613 1,053 (41.8) 676 (9.3)
Packaging Film Business 474 431 10.1 527 (10.0)
Total 1,718 1,697 1.2 1,813 (5.3)
Less : Interest 270 312 (13.4) 242 11.7
Other Un-allocable Expenditure 129 91 41.6 81 60.2
Profit Before Tax 1,318 1,293 1.9 1,491 (11.6)
EBIT Margin (%)
Packaging margins are strong Technical Textile Business 12.9 4.9 796 12.7 20
and we expect sequential Chemicals Business 16.0 26.4 (1,036) 17.5 (146)
pressure Packaging Film Business 14.2 12.8 133 15.1 (94)
Total 14.2 14.5 (31) 14.9 (67)
Capital Employed
Technical Textile Business 12,244 11,652 5.1 12,040 1.7
Chemicals Business 27,297 25,349 7.7 26,033 4.9
Packaging Film Business 16,455 13,004 26.5 15,355 7.2
Total 55,996 50,005 12.0 53,428 4.8
Source: Company, HDFC sec Inst Research
Page | 3
SRF : RESULTS REVIEW 3QFY17
Quarterly Performance
Technical Textiles Performance Chemicals & Polymers Performance
Revenues (Rs bn) EBIT Margin (%) (RHS) Revenues (Rs bn) EBIT Margin (%) (RHS)
Technical textiles reported 6.0 14.0 5.0 30.0
strong margins, led by higher 4.5
5.0 12.0
volumes and a better product 4.0 25.0
mix 10.0 3.5
4.0 20.0
8.0 3.0
3.0 2.5 15.0
5.4
4.5
5.2
6.0
5.1
4.3
5.0
5.0
4.9
4.9
4.8
4.8
4.0
2.0
3.9
3.9
3.8
3.8
4.3
2.0
4.0
10.0
3.2
3.2
3.2
3.1
4.0 1.5
Weakness in the global 1.0 1.0 5.0
2.0
agrochemical market led to 0.5
- - - -
muted growth in Chemicals
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
(specialty)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
3.5
3.5
3.5
3.4
3.4
8.0
3.1
3.0
1.5 8
2.9
2.8
6.0 5.0
1.0 7
4.0
0.5 -
2.0 6
- - 5 (5.0)
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Page | 4
SRF : RESULTS REVIEW 3QFY17
100% 100%
Softness in Chemical 10 14 15
5
26 27 26 26 27 28 27 25 21 25 28
segments mainly led by 30 29 29 29 29 29 29
80% 80%
Specialty business 54
60% 28 27 29 60% 58 49
27 31 31 39 34 32 32 54 36
34 54 47 37
45 47
40% 40% 62
20% 46 43 45 44 40 40 39 40 41 20% 41
37 36 32 37 31 34 37
27 26 25 28
13
0% 0%
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
20%
28 28 26 24 24 22 23 22 23 23 22
0%
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
Page | 5
SRF : RESULTS REVIEW 3QFY17
100%
18 18
Higher share of Specialty and 26 22 27 28 27 27 29
R134a will keep margins 80% 4 8
3 11
strong 15
17 14 13 16 16 16 16
60% 13
15
18 18 20 21
40%
56 60 60 54
20% 45 39
38 37 35
0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
EBIT Share
Technical Textiles Chemicals (incl specilty) and Polymers Packaging Film
100% 3
8 11
Profitability from Packaging 24 22
26 26
remains cyclical and volatile 80%
50 42
55
55 53
60%
Profit share from Chemical 52
42 45 50
and Polymers will increase 40% 23
56
20% 47
37 35 33 31
26 23 28
0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Page | 6
SRF : RESULTS REVIEW 3QFY17
Assumptions
FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Revenue Growth (%)
1. Technical Textiles (%) (0.8) 2.6 (6.7) (10.6) 8.0 5.0 5.0
Specialty growth will be
2. Chemical & Polymers (%) (14.1) (7.6) 32.1 26.2 5.3 17.7 17.5
muted in FY17
2 a. Specialty Fluorochemicals (%) 100.9 56.9 34.8 24.3 5.0 12.0 18.0
2 b. Fluorochemicals (%) (32.7) (40.1) 35.9 14.8 1.5 21.6 13.1
R-134a Capacity (t) 5,000 5,000 17,500 17,500 17,500 17,500 17,500
Pick-up in R134a volumes is
R-134a Utilisation (%) 57.1 65.3 26.3 40.0 50.0 65.0 75.0
key
Ex R-134a Growth (%) (33.0) (48.5) 32.2 (10.6) (10.0) 10.0 10.0
2 c. Engineering Plastics (%) (4.1) 12.0 12.2 72.9 15.0 25.0 25.0
3. Packaging (%) (6.0) 42.2 41.1 6.9 0.5 11.5 20.6
EBIT Margins (%)
1. Technical Textiles 5.8 7.5 9.6 9.5 13.0 13.0 13.0
2. Chemical & Polymers 33.5 20.0 23.6 24.4 19.5 19.5 21.5
We expect a drop in margins
3. Packaging 1.0 (0.6) 5.1 14.5 15.0 14.0 12.0
in specialty segment
Source: Company, HDFC sec Inst Research
Change In Estimates
(Rs mn) FY18E Old FY18E New % Ch FY19E Old FY19E New % Ch
Cut in estimates factoring Revenue 55,836 52,050 (6.8) 63,724 59,235 (7.0)
lower growth and margins in EBITDA 11,462 11,074 (3.4) 13,092 12,624 (3.6)
specialty segment PAT 5,612 5,389 (4.0) 6,635 6,368 (4.0)
EPS (Rs/sh) 97.7 93.9 (3.9) 115.5 110.9 (4.0)
Source: Company, HDFC sec Inst Research
Page | 7
SRF : RESULTS REVIEW 3QFY17
Peer Valuations
Mcap CMP TP EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)
Rating
(Rs bn) (Rs/sh) (Rs/sh) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
AGROCHEMICALS
UPL 370.1 730 NEU 720 31.3 37.6 43.7 23.3 19.4 16.7 3.9 3.3 2.8 21.4 21.5 21.1
PI Industries 123.4 904 BUY 900 29.8 33.1 38.9 30.4 27.3 23.2 8.2 6.6 5.4 30.4 26.8 25.4
Rallis India 46.7 240 BUY 270 9.6 11.7 14.1 24.9 20.6 17.0 4.2 3.7 3.3 18.5 19.0 20.4
Dhanuka Agritech 38.7 773 BUY 820 24.8 31.3 39.3 31.1 24.7 19.7 6.8 5.7 4.7 23.8 25.2 26.4
Insecticides India 11.7 568 BUY 635 26.5 33.2 41.9 21.4 17.1 13.5 2.6 2.3 2.0 12.6 14.0 15.4
FERTILISERS
Coromandel Int 103.0 353 BUY 365 14.8 20.3 25.7 23.9 17.4 13.8 3.8 3.4 2.9 16.8 20.6 22.6
Chambal Fertilisers 33.3 80 BUY 100 9.7 9.8 10.0 8.3 8.2 8.0 1.2 1.1 1.0 15.9 14.4 13.2
CHEMICALS
SRF Ltd 91.9 1,601 NEU 1,600 85.0 93.9 110.9 18.8 17.1 14.4 3.0 2.6 2.3 17.1 16.5 17.1
Vinati Organics 38.6 748 BUY 820 26.0 33.8 38.5 28.7 22.2 19.5 6.0 4.9 4.0 22.6 24.2 22.7
Navin Fluorine 25.3 2,582 BUY 3,200 118.0 142.1 165.9 21.9 18.2 15.6 3.4 3.0 2.6 16.6 17.5 18.0
Source : Company, HDFC sec Inst Research
Page | 8
SRF : RESULTS REVIEW 3QFY17
Page | 9
SRF : RESULTS REVIEW 3QFY17
Page | 10
SRF : RESULTS REVIEW 3QFY17
RECOMMENDATION HISTORY
SRF TP Date CMP Reco Target
2,200 9-Feb-16 1,159 BUY 1,500
2,000 13-May-16 1,385 NEU 1,330
1,800 10-Aug-16 1,581 NEU 1,490
1,600 11-Nov-16 1,691 NEU 1,600
1,400 13-Feb-17 1,601 NEU 1,600
1,200
1,000 Rating Definitions
800 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Aug-16
Apr-16
Jan-17
Feb-16
Jul-16
Sep-16
Feb-17
Nov-16
Jun-16
May-16
Dec-16
Mar-16
Oct-16
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Page | 11
SRF : RESULTS REVIEW 3QFY17
Disclosure:
We, Satish Mishra, PGDM, & Deepak Kolhe, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in
this report.
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Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No
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Page | 12