Buy Sarla Performance Fibers; target of Rs 75: Centrum

Centrum's research report on Sarla Performance Fibers

We maintain our BUY on Sarla Performance Fibers and TP of Rs75 as we value the company based on our conservative adj. OCF based methodology. We believe the sales growth of the company would continue on the back of higher contribution from industrial and performance yarn. While volume during the quarter was flat YoY partly impacted by implementation of GST, we believe de-bonding of Vapi would help in volume growth from H2FY18. Further margins would improve once the product mix changes and as sales from SOHL increase. Sarla Flex continues to disappoint and is currently at mere 15% capacity utilisation impacting profitability. We believe any upswing in Sarla Flex can offer significant upside to our estimates.

Outlook
We value SPFL on AOCF/EV yield methodology and arrive at a target AOCF/EV yield of 6.5% for SPFL, and hence, the implied EV/AOCF multiple of 15.5x. We use average cash flows generated over four years (and hence remain conservative) during FY15-19E and apply 6.5% Adj OCF yield to arrive at our target EV and our TP of Rs75. Reiterate Buy. At our TP of Rs75, stock would trade at FY18E/19E P/E of 14.7x/12.9x.

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