Valuation view: Technical textile has remained steady and favorable demand-supply situation of BOPET is also playing out well for the company. Specialty chemicals segment – the only dampener in FY18 – has also shown strong signs of revival, with estimated 40-50% YoY growth in FY19. We maintain our estimates (revenue/PAT CAGR of 21%/31% over FY18-21) and roll over our target price to FY21E. We value SRF on an SOTP basis, with implied EV/EBITDA of 9.4x and implied P/E of 15x (in line with its five-year average P/E). Our TP of INR2,636 implies a 30% upside. Maintain Buy.
We assign a multiple of 14x to SRF’s Chemical business – ~25% discount to industry average trading multiple and peer PI’s five-year average multiple owing to subdued RoCE of 8.1% compared to industry average of 16.6%. We assign Technical Textiles EV/EBITDA multiple of 6x – ~30% premium to industry average trading multiple due to much higher RoCE of 25% v/s industry average of ~7%. In case of Packaging business, we assign a multiple of 7x, in line with industry average trading multiple given comparable profitability and RoCE of ~12%. Our valuation implies a target price of INR2,271 (upside of 28%) with implied EV/EBITDA of 10.3x. The implied P/E remains unchanged at 17x post the change in valuation methodology. We have a Buy rating on the stock.
Outlook and valuations: Specialty chemicals to register strong growth in FY19 We believe the growth from dedicated plants and deferred orders in specialty chemicals business would drive growth in FY19 in wake of a delayed AgChem cycle recovery with capacity expansion in refrigerants to bolster growth in FY20. We maintain our ‘BUY’ rating on the stock with a revised target price of INR 2275 valuing the company at a multiple of ~17x FY20E EPS of INR 130.
Valuation view: After an all-round performance in 1QFY19, the outlook remains favorable, with businesses like specialty chemicals (which have been muted so far) expected to start recovering. Considering the improved traction in Chemicals and packaging, we increase our revenue and EBITDA estimate for FY19/20 by 7%/5% each. However, with aggressive capex, newly commissioned plants and higher depreciation arising out of it, we believe that profitability would remain contained. We, thus, keep our earnings estimate unchanged – revenue/PAT CAGR of 17%/29% over FY18- 20. The stock has traded at 14x one-year forward P/E over the last five years – with a much improved outlook and a robust expected RoE of 17.6% in FY20, we believe that valuation of 17x FY20E EPS is justified. Maintain Buy with a target price of INR2,225 (20% upside).