Recommendation From Textiles-Man made Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

SRF Ltd. 

DERIVE THE BENEFITS OF DIVERSIFICATION WITH SRF

HERE IS WHY
Good growth prospects
Focus on lowering debt
Prudent management

SRF Ltd. is a multi-business entity engaged in the manufacturing of chemicals, polymers, technical textiles and packaging films. It operates 12 manufacturing plants in India and three overseas. It exports to 75 countries.

On the consolidated financial front, the company reported total income from operations of Rs.2,072.03 crore in Q4FY19 as against Rs.1,612.27 crore in Q4FY18, posting a growth of 28.52 per cent. EBITDA registered a growth of 43 per cent to Rs.390 crore in Q4FY19. Gross margins contracted by 60 bps to 44.4 per cent. EBITDA margin expanded 190 bps YoY to 18.8 per cent in Q4FY19. Net profit rose to Rs.190.89 crore in Q4FY19 from Rs.123.91 crore in Q4FY18, marking an increase of 54.06 per cent. Consequently, EPS climbed to Rs.33.21 in Q4FY19 from Rs.21.58 in Q4FY18, thereby rising 53.89 per cent. 

Technical Textiles (TT) performed dismally as their margins shrank 270 bps YoY to 11.7 per cent in Q4FY19. This was due to inventory loss of Rs.5-10 crore on account of the volatility in raw material prices as well as lower sales volumes due to muted demand in the auto sector. Nevertheless, belting fabrics showcased healthy YoY growth on account of higher contribution from value-added products. Similarly, new as well as value-added products led to higher sales of polyester yarn, with the plant operating at full utilisation and generating the highest production numbers in FY19. Fortunately, the detrimental impact of TT performance was offset by the chemicals and packaging segments, which showcased revenue growth of 65.8 per cent and 18.3 per cent YoY, respectively. The margin in the chemicals segment expanded 160 bps to 19.8 per cent, while the margin in the packaging segment improved 330 bps to 17 per cent. The growth in the chemicals segment was driven by higher chloromethane sales as well as demand revival in the agro-chemical industry. The growth in the packaging segment was supported by increased capacities and improved margins.

The management has guided for growth of 20-25 per cent in fluorochemicals and 40-50 per cent growth in specialty chemicals in FY20. The pick-up in auto sales in India will impact the OEM-related business of the company. A healthy volume growth was experienced in coated and laminated fabrics. The company maintained its market leadership position in coated fabrics. Due to the unviability of its engineering plastic division, the company is selling the same for a realisation of Rs.320 crore. The proceeds from the same will be utilised for repayment of debt. In FY20, the company intends to lower its standalone debt by Rs.500-600 crore. Meanwhile, the consolidated debt will either remain flat or decline marginally by Rs.50-100 crore.

The specialty chemicals business performed poorly in FY18; however, SRF succeeded in turning around its performance in FY19. With the commissioning of the HFC capacity in June-July 2019, we can expect a major chunk of growth in FY20 to be driven by the chemicals segment. Meanwhile, the specialty chemicals segment is also well-placed to sustain its momentum into the upcoming quarters. By virtue of these factors, we urge our reader-investors to BUY this stock.