Buy SRF; target of Rs 1514: Edelweiss

Edelweiss's reserach report on SRFSRF, underpinned by 26 years’ experience in fluorine chemistry, has built a formidable expertise in R&D driven and high RoCE specialty chemicals business. Consequently, the segment posted phenomenal revenue CAGR of66% over FY09-15. We estimate this business to ride superior growth track anchored by SRF’s expertise, product launches and focused capex. As majority of the company’s capex will be financed via cash flow from technical textiles, SRF’s RoE will catapult to 18.3%/21.5% in FY17/FY20E (FY15: 13.9%).Fuelled by specialty chemicals, we estimate SRF to clock PAT CAGR of 32% over FY15-17 leading to RoE jumping to 18.3% by FY17E. We use SoTP methodology—7.0x FCF for technical textiles (cash cow), 5.5x EV/ FY17E EBITDA for packaging films (comparables) and 12.0x EV/FY17E EBITDA for overall chemicals, factoring in strong growth in fluorochemicals and specialty—to arrive at TP of INR1,514. Retro-analysis implies the CMP is factoring in only 8.0x FY17E EV/EBITDA for specialty chemicals despite incremental RoCE of 35%. We initiate coverage with ‘BUY’ recommendation.

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