Buy Sarla Performance Fibers; target of Rs 83: Centrum

Centrum's research report on Sarla Performance Fibers

We maintain our BUY on Sarla Performance Fibers with a Buy and TP of Rs 83. As seen in H1FY17, increasing contribution from industrial and performance yarn would help in gross margin expansion for the company. Further we believe de-bonding of the Vapi unit would help in volume growth for the domestic business while increasing sales of wind power would aid margins. Despite fall in volumes in Sarla Flex, company has been able to generate operating profit which we believe is sustainable given the reduction in fixed cost. We believe any volume increase in Sarla Flex would lead to significant upside (R 27/sh at 50% utilisation) in the stock price.

We maintain our BUY on Sarla Performance Fibre with a TP of Rs 83 as we value it on adjusted OCF (AOCF = OCF – Interest) to enterprise value (EV) yield. We believe the earnings growth would be substantial in FY17E/FY18E due to lower losses in US business, incremental revenues from wind power, traction in domestic business coupled with margin expansion. We believe there could be further upside from Sarla Flex with increase in capacity utilisation given the high fixed cost. Key risks being sustained losses in US business and raw material volatility.