10 December 2015
Update | Sector: Diversified
BSE SENSEX
25,036
S&P CNX
7,613
SRF
CMP: INR1,189
TP: INR1,465 (+23%)
Buy
Dahej plant visit: Reinforces our conviction in the company
Dahej is SRF’s single largest facility
and produces flourochemicals and specialty
chemicals. The total available land is 293 acres (built-up area: 126 acres) and
employee count stands at 933 (739 in operations and 193 in project). The site’s
development is a reflection of the rapid strides that the company has made in
R&D over the last 15-20 years. The company’s R&D team has filed for 68 process
patents so far. Dahej is in Gujarat and is PCPIR—a chemical zone, which provides
benefits in terms of sourcing bulk chemicals used in the manufacturing of
products. The site is also well connected to port (12km) and national highway.
We met Mr Marwah—Head of Operations and Projects;
he gave us insights into
the technical aspects of chemical plants, refrigerant gases and specialty
chemicals.
New projects on track; enhance visibility:
The company expects to
operationalize a new dedicated plant by mid-January 2016 and expects to set up
a pharma grade HFC-134a plant by March 2016, which will be subject to cGMP
approvals. In the specialty chemicals, the company has eight dedicated plants
and two flexible plants—which have seen increased activity.
Adherence to environmental regulations helps to attract global customers:
The
company adheres to environmental regulations and has set up an effluent
treatment plant (ETP) at Dahej where all the waste is treated before it is disposed
of. The output from ETP is monitored online by government agencies and any
violation can result in heavy penalty. The strict regulatory checks are well
appreciated by global innovators (clients); this helps to develop long-term
relationships. Also, the company’s plant are subject to regular audits by
customers (BASF, Bayer CropScience, Syngenta and others)
Plants/Products are codified to maintain confidentiality:
The company is in a
business where it has to maintain high level of confidentiality of the products
manufactured for global innovator companies. Therefore, the plants are codified
as P10/P11/P12 and so on, which helps to direct the floor level employees to
various plants.
Well equipped to cater to future requirements:
Investment in capacities
supporting infrastructure (mainly ETP, power plant and land) is enough to
support expansion for the next 3-4 years. The power plant which has installed
capacity of 20MW is currently utilizing 6-7MW and will be scaled up as per the
need. Also, there is still vast swathe of unutilized land while ETP and AHP
(Anhydrous Hydrofluoric Acid) have enough capacity to cater to planned future
requirements of the next 3-4 years; this will ensure that incremental capex will
be core investment.
HFC-134a available in various SKUs as per client requirements:
The HFC-134a
refrigerant gases are packed in various SKUs of 5/10/60/900 Kilograms and also
in 16MT ISO tanks. For replacement market and Walmart requirements, it is also
available in smaller SKUs of 340gms and 450gms. The company has a total
capacity of 12,500MT.
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Free float (%)
SRF IN
58.4
69.5/1.0
1,496/831
-4/20/46
47.6
Financials & Valuation (INR Billion)
Y/E MAR
Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2015 2016E 2017E
45.4
7.2
3.0
52.7
86.4
13.9
12.0
22.5
3.0
47.8
9.8
4.2
72.5
37.4
16.9
15.0
16.4
2.7
53.6
11.3
5.2
91.2
25.8
18.5
17.2
13.0
2.3
BV/Sh. (INR) 392.9 448.5 518.9
Estimate change
TP change
Rating change
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.
Chintan Modi
(Chintan.Modi@MotilalOswal.com); +91 22 3982 5422
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 3982 5426

SRF
Control Unit the brain of a chemical plant:
The Control Unit is a part of the
plant from where the technical aspects like temperature, pressure and
feeding of a chemical plant are automatically controlled. The products are
produced in batches, which are of ~28 hours. For every 4-5 dedicated plants,
there is one Control Unit with dedicated systems for each plant and is
controlled by chemical engineers.
Reactors are the key component of a plant:
Each plant has various reactors
depending on the kind of reactions it undergoes—like fluorination,
chlorination, nitration, halogenation and oxidation. Various chemicals are fed
into the reactor as per the requirement and the output undergoes distillation
and collected in vessels or sent for further reactions in other reactors.
Total investment of INR18b:
Till date, the total investment in Dahej has been
INR18b—INR6b in specialty chemicals (eight dedicated facilities and two
flexible manufacturing facilities), INR4b in HFC134a plant (12500 mt), INR1.2b
in a coal-based power plant (20MW), INR3b in fluorochemicals and the
balance in supporting infrastructure.
Exhibit 1:
Evolution of Dahej site
Flexible Manufacturing Plant
(FMP 1)
Dedicated Manufacturing Plant
(P 14/15)
Coal based Captive Power Plant
of 5MW
Effluent Treatment Plant
2012
Dedicated Manufacturing Plant (P 18)
Dedicated Manufacturing Plant (P 19)
Dedicated Manufacturing Plant (P 2)
Dedicated Manufacturing Plant (P 1)
Coal based Captive Power Plant of 20MW
Anhydrous Hydrofluoric plant
Effluent Treatment Plant
2014
2013
Dedicated Manufacturing
Plant (P 11/12)
2015
Flexible Manufacturing Plant (FMP 2)
Dedicated Manufacturing Plant (P 17)
New Dedicated Manufacturing Plant (P 3)
to be operational by mid-Jan 2016
Source: Company
Exhibit 2: Refrigerant gas profile
Category served
Gas used
OEM Customers
Auto
HFC-134a
Wal-Mart, Maruti,
Hyundai, Tata Motors,
Honda, Volvo, Fiat,
Mitsubishi
60%
HFC-134a is the only
viable solution
available today for
Mobile ACs
Refrigerators
HFC-134a
Whirlpool, Carrier, LG,
Samsung
Air Conditioner
R-22
Carrier, LG, Samsung
Domestic Market Share
Comments
60%
38%
Majorly, all
Room Air conditioners
refrigerators bought in
are filled with R-22,
the last 3-4 years will
which will see HFC-32
have HFC-134a. New
as its possible
substitute is HFC-32.
substitute.
Note: SRF has already announced plans to convert HFC-134a facility in Bhiwadi into HFC-32 for swing
plant.
10 December 2015
2

SRF
Valuation and view
We believe SRF will be the preferred choice for global agrochemicals and
pharmaceutical players for fluorine-based molecule requirements on the back of
its strong R&D capabilities and ability to provide support across the value
chain—from access to critical starting materials, in-house process research and
development to lab synthesis, pilot production and setting up dedicated plants
for commercial production.
The high-margin chemicals business is expected to post high revenue CAGR of
25% over FY15-17, leading to an increase in revenue contribution from 28% in
FY15 to 37% in FY17. We expect strong FCF generation (INR5.7b in FY16 and
INR3.6b in FY17) and significant improvement in return ratios (RoCE to improve
from 12% to 17% over FY15-17). We value the stock on blended PE of 16x FY17E
EPS, with a target price of INR1,465—given its strong footing in specialty
chemicals, improving mix and return ratios. Maintain
Buy.
Exhibit 4: Price-to-book (one-year forward)
4.6
P/B (x)
5 Yrs Avg(x)
15 Yrs Avg(x)
10 Yrs Avg(x)
Exhibit 3: Price-to-earnings (0ne-year forward)
24
18
15.3
12
7.8
6
5.8
0
6.3
P/E (x)
5 Yrs Avg(x)
15 Yrs Avg(x)
10 Yrs Avg(x)
3.1
2.6
1.6
1.1
0.1
1.2
1.0
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: SRF Dahej Plant
Source: Company, MOSL
10 December 2015
3

SRF
Story in charts
Exhibit 6: Share of chemicals in revenues increasing
Technical Textiles
16
30
16
27
22
24
Chemicals
27
28
45
FY15
Packaging Films
28
33
38
FY16E
28
37
36
FY17E
Exhibit 7: Contribution
chemicals on uptrend
Specialty chemicals
HFC-134a
Chloromethanes
of
speciality
chemicals
within
Dymel
Other commodity chemcials
Engineering plastics
18
21
32
9
20
FY12
35
14
24
7
20
FY13
44
11
20
7
18
FY14
53
56
54
45
1
12
19
8
15
FY15
47
3
16
16
6
11
FY16E
49
3
17
15
5
11
FY17E
FY12
FY13
FY14
Source: MOSL, Company
Source: MOSL, Company
Exhibit 8: PAT to post a CAGR of 32% over FY15-17
PAT
9.5
6.7
4.0
3,788
FY12
2,530
FY13
1,625
FY14
3,028
FY15
4,092
FY16E
5,235
FY17E
6.7
Margin %
8.6
9.8
Exhibit 9: Debt to equity to reduce to 0.7
Debt
1.1
0.9
0.7
21,753
24,349
22,349
Debt to equity
1.1
0.8
0.7
20,849
12,284
FY12
17,040
FY13
FY14
FY15
FY16E
FY17E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 10: RoCE to improve to 17.4%
23.6
RoCE
17.2
Exhibit 11: Strong free cash flow generating
FCF
5,725
3,575
1,021
579
13.3
7.7
12.0
15.0
-2,517
FY12
FY13
FY14
FY15
FY16E
FY17E
FY12
FY13
-4,430
FY14
FY15
FY16E
FY17E
Source: MOSL, Company
Source: MOSL, Company
10 December 2015
4

SRF
Exhibit 12: Key assumptions (INR m)
Revenues (INR m)
Technical Textile
Chemicals
Packaging
Revenue growth %
Technical Textile
Chemicals
Packaging
PBIT (INR m)
Technical Textile
Chemicals
Packaging
PBIT margins (%)
Technical Textile
Chemicals
Packaging
FY12
40,010
21,375
12,034
6,601
15.0
14.8
61.2
-24.2
7,339
1,145
5,941
252
18.3
5.4
49.4
3.8
FY13
37,829
21,283
10,348
6,199
-5.5
-0.4
-14.0
-6.1
4,760
1,234
3,465
60
12.6
5.8
33.5
1.0
FY14
40,181
21,802
9,561
8,817
6.2
2.4
-7.6
42.2
3,494
1,631
1,913
-50
8.7
7.5
20.0
-0.6
FY15
45,398
20,319
12,634
12,445
13.0
-6.8
32.1
41.1
5,576
1,957
2,983
636
12.3
9.6
23.6
5.1
FY16E
47,811
18,355
15,966
13,491
5.3
-9.7
26.4
8.4
7,354
1,836
3,832
1,686
FY17E
53,614
19,107
19,751
14,756
12.1
4.1
23.7
9.4
8,742
1,911
4,839
1,992
15.4
16.3
10.0
10.0
24.0
24.5
12.5
13.5
Source: Company, MOSL
10 December 2015
5

SRF
Financials and valuations
Consolidated – Income Statement
Y/E March
Total Income from Operations
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
EO Items
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY12
40,010
15.2
8,314
20.8
1,837
6,478
1,172
312
5,617
0
5,617
1,687
142
32.6
3,788
3,788
-21.8
9.5
FY13
37,830
-5.4
6,143
16.2
2,089
4,054
998
420
3,476
0
3,476
564
383
27.2
2,530
2,530
-33.2
6.7
FY14
40,181
6.2
5,053
12.6
2,248
2,806
961
235
2,080
0
2,080
208
247
21.9
1,625
1,625
-35.8
4.0
FY15
45,398
13.0
7,175
15.8
2,450
4,724
1,376
646
3,994
0
3,994
314
652
24.2
3,028
3,028
86.4
6.7
FY16E
47,811
5.3
9,754
20.4
2,878
6,876
1,401
306
5,781
-97
5,684
1,591
0
28.0
4,092
4,162
37.4
8.7
(INR Million)
FY17E
53,614
12.1
11,259
21.0
3,060
8,199
1,296
367
7,271
0
7,271
2,036
0
28.0
5,235
5,235
25.8
9.8
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Goodwill on Consolidation
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Deferred Tax assets
Appl. of Funds
FY12
584
17,931
18,515
2,269
12,284
33,069
41,463
20,713
20,750
30
4,175
1,405
13,321
4,877
4,837
1,401
2,206
6,753
6,500
253
6,568
142
33,068
FY13
584
19,105
19,689
2,648
17,040
39,377
47,566
24,197
23,369
30
5,654
1,512
15,181
5,632
5,087
1,910
2,552
6,513
6,240
273
8,668
145
39,377
FY14
584
20,082
20,667
3,250
21,753
45,670
61,072
25,657
35,415
93
1,121
366
17,693
7,464
6,915
825
2,489
9,516
9,173
343
8,177
498
45,670
FY15
584
22,379
22,963
4,094
24,349
51,406
66,773
27,585
39,188
35
1,041
943
17,624
7,635
6,107
1,073
2,810
8,133
7,850
283
9,491
708
51,406
FY16E
584
25,624
26,208
4,094
22,349
52,651
70,273
30,463
39,810
35
1,096
943
19,860
7,540
6,811
2,549
2,959
9,705
8,518
1,187
10,155
611
52,651
(INR Million)
FY17E
584
29,740
30,324
4,094
20,849
55,267
75,423
33,522
41,901
35
1,230
943
21,590
8,424
7,638
2,210
3,318
11,041
9,516
1,526
10,548
611
55,267
10 December 2015
6

SRF
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Inventory (Days)
Debtor (Days)
Creditor (Days)
Working Cap. Turnover (Days)
Leverage Ratio (x)
Debt/Equity
FY12
64.8
96.3
316.8
13.9
24.9
FY13
44.1
79.0
336.9
10.0
26.4
FY14
28.3
66.3
353.6
10.0
41.3
42.0
17.9
3.4
2.3
17.9
0.8
-75.8
21.3
23.6
77
41
103
47
0.7
13.2
13.3
95
46
106
65
0.9
8.1
7.7
114
58
140
67
1.1
FY15
52.7
93.7
392.9
10.0
22.5
22.5
12.7
3.0
2.0
12.9
0.8
9.9
13.9
12.0
110
46
113
68
1.1
FY16E
72.5
120.5
448.5
12.7
20.7
16.4
9.9
2.7
1.9
9.2
1.1
98.0
16.9
15.0
108
49
122
58
0.9
FY17E
91.2
141.9
518.9
16.8
21.4
13.0
8.4
2.3
1.6
7.8
1.4
61.2
18.5
17.2
108
48
122
57
0.7
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
FY12
5,617
2,404
1,150
-1,658
-64
7,450
-802
6,648
-5,627
1,021
-243
256
-5,614
-900
2,336
-1,028
-940
-536
498
902
1,401
FY13
3,476
2,089
972
-632
-1,445
4,459
-232
4,227
-6,744
-2,517
-63
92
-6,716
0
4,547
-889
-660
2,998
509
1,401
1,910
FY14
2,080
2,248
908
-413
-1,199
3,623
-156
3,467
-7,897
-4,430
1,156
144
-6,597
0
3,911
-1,198
-668
2,045
-1,085
1,910
825
FY15
3,994
2,450
1,346
-850
-1,011
5,931
-507
5,423
-4,845
579
-632
482
-4,994
0
1,889
-1,392
-678
-181
248
825
1,073
FY16E
5,781
2,878
1,401
-1,591
812
9,280
0
9,280
-3,555
5,725
0
0
-3,555
0
-2,000
-1,401
-847
-4,248
1,476
1,073
2,549
(INR Million)
FY17E
7,271
3,060
1,296
-2,036
-732
8,858
0
8,858
-5,283
3,575
0
0
-5,283
0
-1,500
-1,296
-1,119
-3,914
-339
2,549
2,210
10 December 2015
7

SRF
Corporate profile: SRF Ltd
Company description
Exhibit 13: Sensex rebased
SRF is a multi-business entity involved in
Technical Textiles (TTB; 45% of FY15 revenue),
Chemicals (CB; 28%), and Packaging (PB; 27%).
In terms of PBIT, TTB contributed 35%, CB 53%,
and PB 11%.
In the past few years, SRF has invested heavily
(~INR18b) in Dahej for setting up a chemicals
complex, which should begin to contribute
meaningfully from FY15.
The Chemicals business is likely to drive overall
growth and profitability, the Packaging
business is in the midst of an upturn and the
Technical Textiles business continues to
generate enough cash flows to support
expansion of the Chemicals business.
Exhibit 15: Top holders
Mar-15
52.4
13.5
11.5
22.6
Holder Name
Amansa Holdings Pvt Ltd
Sundaram Mutual Fund A/c Sundaram Select Midcap
Goldman Sachs India Fund Ltd
DSP Blackrock Small & Mid Cap Fund
DSP Blackrock Micro Cap Fund
UTI - Midcap Fund
% Holding
5.1
2.6
2.1
1.2
1.2
1.2
Exhibit 14: Shareholding pattern (%)
Sep-15
Promoter
DII
FII
Others
52.4
13.0
15.2
19.5
Jun-15
52.4
12.6
15.5
19.6
Exhibit 16: Top management
Name
Arun Bharat Ram
Ashish Bharat Ram
Kartik Bharat Ram
Rajendra Prasad
Chairman
Managing Director
Dy. Managing Director
President and CFO
Designation
Exhibit 17: Directors
Name
Arun Bharat Ram
Ashish Bharat Ram
Kartikeya Bharat Ram
L Lakshman
Pramod Bhasin
Name
Vellayan Subbiah
Vinayak Chatterjee
Tejpreet Singh Chopra
Meenakshi Gopinath
Anoop K Joshi
*Independent
Exhibit 18: Auditors
Name
Deloitte Haskins & Sells LLP
Sanjay Grover & Associates
H Tara & Co
Sanjay Gupta & Associates
Type
Statutory
Secretarial Audit
Cost Auditor
Cost Auditor
Exhibit 19: MOSL forecast v/s consensus
EPS
(INR)
FY16
FY17
MOSL
forecast
72.5
91.2
Consensus
forecast
75.1
95.4
Variation
(%)
-3.5
-4.4
10 December 2015
8

SRF
NOTES
10 December 2015
9

Disclosures
This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed by it
SRF
its
and/or
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10 December 2015
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