Buy Sarla Performance Fibers; target of Rs 67: Centrum

Centrum's report on Sarla Performance Fibers

We maintain our BUY on Sarla Performance Fibers with a revised TP of Rs67 as we value the company based on our conservative adj. OCF based methodology. We expect the domestic volumes to grow by high single digit on the back of increasing capacity in the industrial/performance yarn segment by 700MT while the Nylon66 capacity would be increased to 1600MT from H2FY19. Further the company could take marginal price hikes to mitigate the impact of increase in RM prices. Operating loss of Sarla Flex to reduce to Rs45mn in FY19E from Rs104mn in FY18 would add to margins. Lower debt, improving working capital further gives us comfort while valuations continue to remain undemanding.

Outlook

We maintain our BUY on Sarla Performance Fibres with a TP of Rs67 as we value it on adjusted OCF (AOCF = OCF – Interest) to enterprise value (EV) yield. Key risks being increasing pressure on RM prices lowering gross margins.