Recommendation from Diversified 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 LIMITED : CREATING THE RIGHT FORMULA
HERE IS WHY
☛Good growth prospects
☛Reduction in raw material prices
☛Diversified revenue stream.
SRF Limited is engaged in manufacturing chemicals and polymers, technical textiles and packaging films. Its segments include the technical textiles business (TTB) that incorporates nylon tyre cord fabric, belting fabric, coated fabric, polyester tyre cord fabric and industrial yarns along with research and development; chemicals and polymers business (CB) that includes refrigerant gases, pharmaceuticals and allied products, engineering plastics business and its research and development; and the packaging films business (PFB) which includes polyester films.
In 9MFY20, CB contributed 39.1 per cent to the total revenue while PFB and TTB contributed 37.4 per cent and 19.4 per cent, respectively. The company has operations in three countries, namely, India, Thailand and South Africa and an upcoming facility in Hungary. SRF has commercial interests in more than 75 countries. It is a market leader in the domestic fluorochemicals business with integrated capacities and a wide range of refrigerants and their blends in its portfolio.
The company’s consolidated revenues from operations in FY20 were driven by capacity additions in the CB segment and the stable utilisation of new capacities in the PFB segment. The quarterly numbers reflect this improvement. The CB segment’s revenue growth is driven by enhanced volumes and steady realisations in the refrigerants, chloromethanes and speciality chemicals business (SCB) alongside demand recovery in the South American agrochemical market and continued growth in the pharmaceutical segment.
The SCB segment is characterised by high entry barriers, requiring research and development expertise and the technical know-how of handling complex molecules. Commercial production commenced at SRF’s newly commissioned brownfield hydrofluorocarbon facilities at Dahej and Bhiwadi in 3QFY20 with gradual ramp-up likely in FY21. Going forward, this will add to the topline in FY21. With lower crude prices, SRF will benefit from falling raw material prices. In addition, new orders are expected from customers trying to shift their concentration from China. Depreciation of the rupee would further improve the export demand.
For the quarter ended December 2019, its gross sales increased 3.08 per cent to Rs 1,807.45 crores in Q3FY20 from Rs 1,753.52 crores in Q3FY19. PBIDT (excluding other income) showed an increase of 25.06 per cent to Rs 390.16 crores in Q3FY20 from Rs 311.97 crores in the same quarter last year. PBIDT margin (excluding other income) for Q3FY20 stood at 21.08 per cent as against 17.25 per cent in the same quarter last year. PAT for Q3FY20 stood at Rs 342.99 crores as against Rs 165.71 crores in the same quarter last year, showing an increase of 106.98 per cent.
PAT margin (excluding other income) for Q3FY20 stood at 18.67 per cent as against 8.49 per cent in the same quarter last year. The company has manageable debt levels with an interest coverage ratio of about 5.10x. The RoCE for FY19 was 14.16 per cent. Reduction in raw material prices might further help improve the profit margins. The stock is trading at a PE multiple of 20.43x. By virtue of these factors, we recommend our readerinvestors to BUY this stock.