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SRF, 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 of 66% 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%). Initiate coverage with ‘BUY’ and TP of INR1,514 (32% upside).

Car/refrigerator sales to spur fluorochems; R&D to drive specialty Capacity utilisation in SRF’s fluorochemicals business is anticipated to surge riding spurt in sales of refrigerators & cars and import substitution. Ergo, the segment will clock 14% revenue & EBITDA CAGR over FY15-20E. Moreover, R&D investments, cornerstone of SRF’s commendable success in high entry barriers specialty chemicals, have yielded handsome dividends—filed 54 process patents and commercialised more than 40 products—leading to 66% revenue CAGR over FY09-15. With a pipeline of 75 products and focused capex, we estimate the division to post 29% revenue CAGR over FY15-20, catapulting its revenue/EBITDA share from 13%/33% in FY15 to 28%/48% in FY20E.

Technical textiles: Cash cow; Packaging: consumption growth play SRF has been channelising technical textiles’ ~INR2.2bn/year FCF to finance incremental capex in other divisions. This division, riding limited capex and stable volumes driven by import substitution, will continue to be the company’s cash cow. SRF’s packaging films division is also estimated to clock 18.4% margin by FY17 (FY15: 8.9%) spurred by surge in demand from FMCG and limited industry capacity expansion.

Outlook and valuations: Changing profile; initiate with ‘BUY’ 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.

INITIATING COVERAGE

SRF

The specialist

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Growth

MARKET DATA (R: SRFL.BO, B: SRF IN)

CMP : INR 1,145

Target Price : INR 1,514

52-week range (INR) : 1,494 / 651

Share in issue (mn) : 57.4

M cap (INR bn/USD mn) : 64 / 958

Avg. Daily Vol.BSE/NSE(‘000) : 293.4

SHARE HOLDING PATTERN (%)

Current Q2FY15 Q1FY15

Promoters * 52.4 52.4 52.4

MF's, FI's & BK’s 12.6 12.4 12.6

FII's 15.5 14.2 12.7

Others 19.5 21.0 22.3 * Promoters pledged shares (% of share in issue)

: Nil

RELATIVE PERFORMANCE (%)

Sensex Stock

Stock over Sensex

1 month (8.1) (12.9) (4.9)

3 months (2.8) 10.4 13.3

12 months (5.1) 57.1 62.2

Niraj Mansingka, CFA +91 22 6623 3315 [email protected] Click on image to view video Nihal Mahesh Jham +91 22 6623 3352 [email protected]

India Equity Research| Chemicals

September 14, 2015

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FinancialsYear to March FY14 FY15 FY16E FY17ENet revenues (INR mn) 40,181 45,398 47,444 52,462 Revenue growth (%) 6.2 13.0 4.5 10.6 EBITDA (INR mn) 5,053 7,175 10,022 11,357 Adj. profit (INR mn) 1,625 3,028 4,419 5,265 Adj. diluted EPS (INR) 28.3 52.7 77.0 91.7 Diluted P/E (x) 40.5 21.7 14.9 12.5 EV/EBITDA (x) 17.1 12.3 8.7 7.6 ROAE (%) 8.1 13.9 17.8 18.3

https://www.edelresearch.com/webcast/webcast_new.aspx?Id=30066&Type=ynaj9XvqmJoptbYzJzovtA==

Chemicals

2 Edelweiss Securities Limited

Investment Rationale Fluorochemicals: Adaptation, expertise, potential lend winning edge

Strong legacy and expertise in refrigerants since 1989

The Fluorochemicals business derives revenue from the sale of fluorine based refrigerants/propellants (R-22, R-134a) and solvents. SRF has an edge with 26 years’ experience in fluorine based refrigerants.

Table 1: SRF—Timeline of legacy in fluorochemicals

Source: Company, Edelweiss research

Refrigerant business: Adapting and innovating to grow

SRF has, over the years, adapted seamlessly to the changes in the business environment, a unique quality which has helped it not only survive, but thrive in the face of adverse regulatory changes. The company entered the refrigerants business by manufacturing chlorofluorocarbons (CFCs) R11 and R12. However, post the Montreal Protocol, which led to phasing out of CFCs in India (2008), the company had to invest in R&D and shift to manufacturing R-22 (also known as HCFC-22 and used in domestic refrigeration) and R-134a (also known as HFC-134a and used in air conditioning & refrigerators). Once again, under the Kyoto/Montreal Protocol, R-22 is in phase out mode. Ergo, to sustain market share in the future, the company has recently announced conversion of its 5KTPA R-134a facilty in

Year Event1989 Entered chemicals business with production of CFCs and HCFCs through tie-up with Allied Signal (now Honeywell) 1993 Pilot plant for the production of halons (phased out)1995 Began commercial production of chloromethanes through tie-up with Atofina (now Arkema) 1998 Launched R-23 through in-house development and became the first manufacturer in India2003 First and only company in India to develop technology to manufacture R-134a through in-house R&D2004 Received a process patent for HFC 322012 Chemicals business wins the Deming Prize2014 Acquired Dymel, global 134a regulated medical pharmaceutical propellant business from DuPontNA Developed indigenous technology to manufacture: halons, trichloroethylene and perchloroethylene

• SRF’s Fluorochemicals business derives revenue from sale of fluorine based refrigerants/propellants (R-22, R-134a) and solvents.

• SRF has an edge with 26 years’ experience in fluorine-based refrigerants and has survived changes in the industry through innovation and adaption.

• Ability to understand the difficult-to-handle fluorine chemistry is a significant entry barrier.

• High sales of refrigerators and cars will spur growth of R-134a (also called HFC-134a) in India (consumption to post 10% CAGR during FY15-20E). Import substitution of R-134a will also boost sales as SRF is sole domestic manufacturer.

• SRF is entering next generation refrigerants (R-32, R-410a), cementing its position as a leading domestic supplier.

• We estimate SRF’s refrigerants/fluorochemicals revenue and EBITDA to clock 13.5% and 14% CAGR over FY15-20, respectively.

SRF


Bhiwadi into a swing plant to make both R-134a and R-32 (also known as HFC-32). The latter is a probable alternative to R-22. This is a clear testimony to the company’s mantra of adapting for survival. Also, with an eye on the future, it has been developing another potential refrigerant R-1234yf. SRF boasts of a strong innovation DNA and has always strived to garner new products to increase differentiation. Unique winning combination of research experience and fluorine expertise

SRF has more than 25 years’ experience in handling fluorine. Its expertise can be gauged from its process innovation to manufacture HFC-134a and process patent for HFC-32. It also developed indigenous technology to manufacture Halons, Trichloroethylene (TCE) and Perchloroethylene (PCE). Post its acquisition of the Dymel brand from Dupont, SRF has become the sole Indian company supplying HFC-134a pharma grade gas. As a result of its expertise and innovation, SRF has become the leader in the fluorochemical space in India. The company has also scaled up in fluorine-based specialty chemicals to produce intermediates and advanced intermediates required to manufacture active pharmaceutical ingredients (APIs) and agro chemicals.

Table 2: History of innovations – indicative


Fluorine is versatile but difficult to handle: Fluorine is the 13th most abundant element found on earth and the lightest among halogens. Almost 30% of all agrochemicals and almost 25% of all pharmaceuticals contain fluorine molecules. It is so reactive that exposure of fluorite to sulphuric acid releases acid which corrodes glass. So difficult is fluorine to handle that its isolation in 1886 earned Moissan the Nobel Prize in 1906. Process innovation key to success: While more than 1mn compounds containing carbon fluorine are known, barely more than 10 of those occur naturally. Hence, one has to depend on synthetic routes to produce a wide variety of fluoro-organic molecules. This opens up huge opportunities for process innovation in fluorine chemistry, on which SRF has been focusing.

Sole domestic supplier of HFC-134a; passenger vehicle spurt to spur sales

In FY15, HFC-134a contributed 23% of SRF’s fluorochemical revenues. The market-size of HFC-134a in India is 8.0KTPA, which is burgeoning with rise in automobile and refrigerator sales. We estimate HFC-134a’s consumption to clock 10.1% CAGR till FY20 as sales of passenger vehicles pick up from FY17 (HFC-134a gas is used as refrigerants in cars). With a capacity of 17.5KTPA, SRF is the sole domestic producer of R-134a and its market share increased to 41% in FY15. Imports have broadly remained flat at ~4,700MT during the past 5 years. Going forward, we believe imports should remain flat driven by: 1) lower working capital requirements for end users of domestically sourced material; 2) issues related to return of empty HFC cans; and 3) push from SRF to raise its capacity utilisation. Therefore, we estimate SRF’s domestic volumes of R-134a to clock 20% CAGR over the next 5 years.

Year Achievement1979 First company to start polymer compounding2003 First and the only company in India to develop technology to manufacture R-134a through in-house R&D2004 Holds a process patent for HFC 32, 2014 Developed a new polyester fabric for application in tyresNA Developed indigenous technology to manufacture: halons, trichloroethylene and perchloroethylene

SRF’s board has approved a development plan for elemental fluorine with capacity of 1TPM.

Halogens: Group in the periodic table consisting of five chemically related elements: Fluorine (F), chlorine (Cl), bromine (Br), iodine (I), and astatine (At).

Chemicals


Chart 1: SRF’s market share of R-134a increased from NIL in FY07 to 41% in FY15

Source: Industry, Edelweiss research

Innovation key growth trigger in light of regulatory uncertainty

SRF also sells other refrigerants like R-22 and 4-series blends (R404A, R407C and R410A). Domestic competition is restricted as no imports of R-22 are allowed. The company is also venturing into next generation refrigerants (R-32, R-410a) further bolstering its position in the domestic refrigerant market. The industry is yet not on clear which refrigerants will replace R-22. Hence, innovation capability remains a key attribute to emerge successful in the industry.

Fig. 1: Not yet clear which refrigerant will evolve – hence innovation remains key

Source: Trane

In FY15, SRF bought Dupont’s Dymel brand i.e. HFC134a pharma grade gas business, for USD20mn. As per the deal, SRF will own the Dymel brand and also receive the technology and know how for setting up its own facility for manufacturing pharma grade HFC-134a. The manufacturing transition is expected in 2 years. With 15% market share in pharma grade R-134a, Dymel not only offers existing demand of 1,200TPA (7% of SRF’s current R-134a capacity), but it is also a critical step for the company’s entry in the high-end pharmaceutical

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segment. The company anticipates demand for pharma grade R-134a to rise to 1,500TPA in 2 years. FY15-20 revenue and EBITDA CAGR estimated at 13.5% and 14.0%, respectively

We estimate SRF’s fluorochemicals business to post revenue and EBITDA CAGR of 13.5% and 14.0% over FY15-20, respectively, driven mostly by spurt in sales of refrigerators and cars. We have assumed EBTIDA margin to remain flat at 26.0% despite increased capacity utilisation coming in play. Chart 2: Growth to be driven by spurt in sales of refrigerators and cars


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Specialty chemicals: Superior RoCE, margin potent growth drivers

SRF’s entry into specialty chemicals was a natural progression

In light of SRF’s expertise in fluorochemicals and halogen chemistry, expanding into specialty chemicals was a natural progression for the company. The specialty chemicals business is highly Intellectual Property (IP) and knowledge-oriented, giving the company a unique advantage over low-cost manufacturers from China. SRF tested waters in specialty chemicals by initial investment in its Bhiwadi facility. The company was already supplying chloromethanes and refrigerant gases to domestic pharma companies. As its existing customers had requirements for fluorine-based intermediates, it seemed natural for the company to extend its fluorochemicals business to cater to this segment as well. Also, its backward integration into basic raw material gives it a cost and quality advantage. Thus, leveraging on its existing strength in fluorinated chemicals, SRF ventured into the specialty chemicals business in FY03. Later, SRF commissioned a new chemical complex in Dahej. Expertise in fluorine and higher outsouring lead to high RoCE

Fluorospecialty chemicals are versatile chemicals but difficult to handle. Almost 30% of all agrochemicals and almost 25% of all pharmaceuticals contains fluorine molecules. Growth in fluorospecialty chemicals is expected to continue due to low penetration and outcome of various process innovation by players. Specific capabilities and scale of manufacturing make outsouring by agrochemical and pharmaceutical firms a necessity. Infact, most of the outsourced products are initiated by these agro/pharma firms as who are keen on focusing only on late end critical reactions. Special know how and expertise required to succeed in fluorine chemistry like: (a) safe handling of toxic & corrosive reagents like HF, BF3, and DAST; (b) special apparatus & technical equipment needed like PTFE, hastelloy; and (c) properties of fluoro compounds like stability, reactivity and toxicity.

• In light of SRF’s expertise in fluorochemicals and halogen chemistry, expanding into specialty chemicals was a natural progression.

• Specialty chemicals is a superior growth (new usage & research), high RoCE (~40% pre-tax RoCE) and high entry barriers (fluorine is difficult to handle) business.

• In FY15, SRF spent INR564mn on R&D. Its R&D investments have reaped rich dividends—commercialised 40 products. Since FY11, SRF has invested INR18.5bn in chemicals business (specialty + fluorochemicals)—66% of total capex during FY11-15—which was driven by process innovation to develop new specialty chemicals. As a result, this segment clocked 56% revenue CAGR over past 5 years. Its contribution to consolidated revenue has catapulted from 1% in FY09 to 13% in FY15.

• Sales to agrochemical companies account for ~85% of SRF’s sales. Pharma contributes 15% to sales.

• We are enthused by the segment’s high pre-tax RoCE and estimate it to clock 28% RoCE by FY20.

SRF


Generally, fluorochemicals are needed in smaller quantities. Hence, companies scout for reliable and cost-effective procedures to make available fluorinated building blocks. Also, buyers generally prefer associating with a R&D driven organisation to serve their customized needs. While these products are extremely profitable, they generally do not constitute a significant portion of the molecule developed by its inventors (global agrochemical / pharmaceutical firms) and hence incremental margins earned by outsourced players on these intermediate molecules are inconsequential to buyers. Thus, RoCE for the industry is ~40% Table 3: Model RoCE of specialty chemicals (2 years post-commercialisation)

Source: Edelweiss research

Particulars Low Average HighAsset turns within 2 years (x) 1.0 1.8 2.5 Working capital (days) 45.0 45.0 45.0 EBITDA margins (%) 28.0 32.0 38.0 Depreciation (% GFA) 8.0 8.0 8.0 Tax rate (% PBT) 34.0 34.0 34.0 Debt:Equity (x) 1.0 1.0 1.0 Cost of debt (%) 13.0 13.0 13.0

Assumed capex for a plant (INR mn) 1,000 1,000 1,000 Working capital investment (INR mn) 123 216 308 Total capital investment (INR mn) 1,123 1,216 1,308

Debt (INR mn) 562 608 654 Equity (INR mn) 562 608 654

Revenues (INR mn) 1,000 1,750 2,500 EBITDA (INR mn) 280 560 950

Depreciation (INR mn) 80 80 80 EBIT (INR mn) 200 480 870 Interest (INR mn) 73 79 85

PBT (INR mn) 127 401 785 Tax (INR mn) 43 136 267 PAT (INR mn) 84 265 518

EBIT margins (%) 20.0 27.4 34.8 PAT margins (%) 8.4 15.1 20.7 Pre-tax ROCE (%) 17.8 39.5 66.5 ROE (%) assuming D:E=1:1 14.9 43.5 79.2 ROE (%) assuming zero debt 11.8 26.1 43.9

The ROCE in the table is estimated assuming incremental investments in specialty chemicals plant – does not include investment in common facilties, offices, and utilities. SRF’s Dahej facility has already invested in common facilities and utilities.

Chemicals


Sizeable R&D investments….

The specialty chemicals segment has been key focucs area of SRF’s R&D. The company has significantly enhanced R&D spending over the past 2 years—from 10% CAGR over FY11-13 to 34% CAGR over FY13-15. As a result, its R&D spending (as % of sales) has catapulted from 0.8% in FY11 to 1.2% in FY15. SRF has also ramped up its R&D team—added 150 to its base of 100 scientists and engineers in FY15, taking total tally to 250.

Chart 3: Focus on R&D has increased significantly since FY13 Chart 4: Strong built up of R&D team


At 1.2% of revenue, SRF’s R&D spending is much higher than Indian chemical firms and comparable to global peers. With success in R&D, the company has stepped up its R&D focus and aslo set up a Chemical Technology Group (CTG) specifically to focus on developing new processes and technologies for specialty chemicals. Post the formation of CTG, the company’s R&D spending has seen significant upswing.

Chart 5: SRF’s R&D is higher than median spent by Indian firms Chart 6: SRF’s R&D more than its Indian peers

Source: Company, Edelweiss research Source: Edelweiss research

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“Build a Company known and respected for its R&D capabilities” – Arun Bharat Ram, Chairman, SRF

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… resulting in significant patent traction…

SRF is focused on ramping up presence in specialty chemicals and has already filed 54 process patents till date, with 36 of them filed in the past 3 years.

Chart 7: Strong increase in filing of process patents


… leading to rich pipeline of products….

Fig. 2: Rich pipeline of products


SRF has developed a stable pipeline of R&D stage molecules, rendering commendable demand visibilty. There are currently 75 products in the company’s R&D funnel—literature studies in ~60 products, more than 15 molecules in lab-scale process and 8 plus molecules in pilot stage. Post success in the pilot stage, products are manufactured in a flexible manufacturing plant (FMP). The company builds a dedicated plant for large and sustainable demand of specialty chemicals. Each molecule, if commercial, will have life cycle revenue potential of USD20-50mn (varies depending on chemicals). Any new entrant will need to not only market its skill set to customers, but also secure orders from them—a cumbersome

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There are 75 products in SRF’s R&D funnel.

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process which takes more than a year. Till date, SRF has commercialised 40 molecules. Management is targeting ~5 molecules to enter the flexible manufacturing stage (produced as per client demand; resources allocated as per demand) and 1-2 through to the dedicated plant every year (specified quantity being produced throughout the year, resources are dedicated for the facility).

… and acceptance from buyers globally…

SRF’s expertise in handling fluorine chemistry makes it a preferred supplier for global majors. Infact, most of the products are customer initiated as its customers are keen on focusing only on late-end critical reactions. The company uses its intellectual property of handling fluorine based molecule development developed overtime to reduce turnaround time and build superior molecule. SRF works on the entire R&D process on its own and patents the process it develops; there is no transfer of technology or process to clients on completion. This gives competitive edge to SRF in R&D and leads to high EBITDA margin. Apart from process research, the segment also carries out custom and collaborative research. It has a separate team to work on futuristic platform chemistries. …leading to most investments since FY11 being made in chemicals business in Dahej … SRF entred fluorospecialty chemicals by investing INR200mn in its chemicals complex in Bhiwadi, Rajasthan, in FY03. However, the company stepped up focus on specialty chemicals when it decided to build a dedicated chemical complex in Dahej. Since FY11, majority of SRF’s capex has been focused on specialty chemicals—mostly in Dahej facility. Dahej unit: SRF has till date spent ~INR18.5bn in Dahej to put up an integrated chemical facility (Specialty+fluorochemicals) of 22.5KTPA. The current development complex is located on 91 acres on a land bank of 292 acres.

Chart 8: Cumulative capex spend FY11-15 Chart 9: Evolved from Techincal textiles to chemicals focused


Currently, time taken for a molecule to reach plant manufacturing from initial R&D is 2-3 years. SRF expects to reduce this time with continous capex investment for technology upgradation. It has established a test pad which could simultaneosly record test outcome of same reaction under different physical conditions like temperature, moisture etc. This will help cut experimenting time significantly.

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SRF’s major customers in specialty segment are Syngenta, Bayer and BASF. These three companies together dominate global agrochemcials market with ~50% share.

SRF develops all the molecules on its own after it has received client requests…this gives competitive edge to SRF for R&D and leads to higher margins.

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… resulting in superior growth in revenue and EBITDA

Riding product launches and significant expansion of specialty chemicals, the segment’s revenue share has increased from an inconsequential contribution of 1.4% in FY09, to 13.2% in FY15. While global and India’s specialty chemical markets have posted 6% and 13% revenue CAGR, respectively, over the past 6 years, SRF’s niche focus has led to the company clocking 66% CAGR over FY09-15. In terms of EBITDA, the share has been even higher as the segment’s margin profile is much superior than existing businesses. We estimate the specialty chemicals business contributed ~33% to SRF’s consolidated EBITDA in FY15.

Chart 10: SRF has evolved into a specialty chemicals firm Chart 11: SRF’s growth is way ahead of market

Source: Company, Edelweiss research Source: FICCI, Company, Edelweiss research

*For FY09-13, includes performance chemicals like agrochemicals,

API’s, construction chemicals etc.**Considers estimates from FY11 Significant growth potential from untapped agro chemical players and nascent pharma

Agrochemicals: The agrochemical industry is concentrated with the top 10 global firms accounting for ~85% of total market. SRF already supplies to the top 3 agrochemical manufacturers (BASF, Bayer Crop Science, Syngenta), which cumulatively account for ~50% of the total industry revenue. Infact, it has become a strategic supplier to 2 of them (i.e., one of their top 25 suppliers). Considering it is already a supplier to the top 3 in the industry, we believe it is just a matter of time before SRF will start supplying to the other agrochemical majors as well. We also expect the company’s sales of specialty chemicals to other agrochemical players to increase as newer products are introduced and sold.

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At present, SRF is primarily focused on Agrochemicals with ~85% of its revenues coming from this segment. The remaining share is contributed by Pharma.

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Chart 12: At present, SRF supplies to only 3 of the top 10 global agrochemical players

Source: Sharda Cropchem, Edelweiss research

Pharma: Fluorochemical companies have shown increased interest in the manufacture of pharmaceutical molecules as many of the required fluorochemical intermediates in their synthesis are coming off patent. Currently, pharma contributes ~15% to SRF’s specialty chemicals revene and the company is aiming to take it to 25% in 2 years. It has also recently acquired R-134a pharma grade gas from Dupont. The product acquisition will primarily help it understand niche pharma related aspects. Increased pharma presence will improve revenue visibility and thus reduce earnings volatility. Also, lifecycle for pharma molecule is higher than that of agri molecules (4-5 years). Most incremental capex is now planned in specialty chemicals space

SRF is planning to catapult brownfield capacity of specialty chemicals 6.0x and of refrigerants 5.5x at a total capital cost of INR48bn over the next 5-10 years. However, this capex is dependent on demand for its products. As of now, management estimates capex of INR3.0-3.5bn per year, which could be raised in case of higher demand for products. In our estimates, we have assumed capex of INR3bn per year for the next 5 years.

Fig. 3: SRF has proposed capex of INR48bn to increase capacity of specialty chemicals by 600%

Source: Edelweiss research, Industry

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S SRF’s proposed capacity expansion to produce

additional 61KTPA specialty chemicals

SRF’s existing capacity to produce 10KTPA specialty chemicals

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All these factors to drive strong growth in the segment with high RoCE

SRF has clocked robust revenue CAGR of 66% over the past 6 years. Considering the strong emphasis on research and potential from the pharma segment, we estimate 29% CAGR over FY20 in specialty chemicals revenue to INR22bn. The segment’s contribution to total revenue is expected to rise to 28% by FY20 from 13% at FY15 end.

Chart 13: Specialty segment to see strong revenue growth Chart 14: RoCE to reach 28% by FY20E

Source: Company, Edelweiss research Source: Company, Edelweiss research *Incremental RoCE over FY13

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Technical textiles: Potent cash cow to feed capex of other divisions

Stable production driven by import substitution

Trend of radialisation of tyres, especially in passenger vehicles and UVs, has dented demand for NTCF in favour of Polyester Tyre Cord Fabric (PTCF). While overall usage has fallen since 2010, domestic production of NTCF has remained flat as the volume dip was offset by reduction in imports (~50% from China). With the government’s recent decision to continue with the anti-dumping duty on imports from China for the next 5 years till April 2020, we do not see any possibility of imports getting cheaper and affecting domestic production.

Chart 15: While imports have fallen; domestic production has been stable

Source: Industry, Ministry of Commerce, Edelweiss research

Overall NTCF demand has fallen a mere 3% CAGR. With imports still accounting for ~50% of the total NTCF consumption in India, there is still a lot of headroom before domestic production starts falling. Also, with SRF and Century Enka making up the NTCF capacity in India and no expansion plans from either of them, SRF’s production is expected to remain stable for the coming years.

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• SRF's technical textiles product basket contains nylon tyre cord fabrics (NTCF), polyester tyre cord fabrics, belting fabrics, coated fabrics, laminated fabrics, fishnet twines and industrial yarns. NTCF is the primary constituent of technical textiles segment, contributing ~65% of the segment’s revenue.

• SRF is not only the largest manufacturer of technical textiles in India, but it also enjoys global leadership in most of the products in this business.

• NTCF business has been facing radialisation headwind. However, a significant portion of demand is still met via imports and any demand dip will lead to import cuts.

• Incremental demand is anticipated from off the road (OTR) tyres driven by India’s increased infrastructure spend, along with strong trend in exports of OTR tyres.

• The segment is estimated to generate operating cash flow of ~INR2.5bn/annum and post 25% RoCE in FY20E spurred by stable volumes and absence of capex plans.

Anti-dumping duty of USD0.52-1.10/kg has been imposed on imports from China till 2020. SRF’s NTCF realization was USD5.0/Kg in FY15.

NTCF domestic production has remained flat while imports have filled up the demand-supply gap. As demand tapers off, so will the imports.

SRF


Earthmoving & construction equipment industry growth to spur OTR tyre segment

Use of bias ply tyres, where NTCF is the input, continues to be strong in the OTR (Off-the -Road) tyre segment. As per AT Kearney, the earthmoving and construction equipment (ECE) industry is expected to touch USD16-20bn by FY20 from the current USD3bn. Spurt in infrastructure spending over the 12th Five Year Plan is expected to jump from 7.2% of GDP to 9.0%, driving growth in the ECE market. Chart 16: Growth in the ECE market to drive demand for OTR tyres

Source: AT Kearney, Edelweiss research

Strong growth in export of OTR tyres from India

While domestic demand for OTR tyres will be driven by infrastructure investment and mining revival, exports surge is also expected to remain robust. Since the beginning of the decade, while overall tyre export grew 11%, OTR tyre market grew 14%.

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The governments is planning to increase coal production from 600MMT to 1,500MMT by 2020. This should boost mining capex and opex related spending. While a big portion of the mining machinery is imported, the replacement OTR tyre market is serviced by the domestic industry and will be a part of the boom in increased coal production in India.


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“For severe off-road driving, the bias ply is a stronger tire. The nylon sidewalls resist abrasions more than the polyester.” Off-road.com

Chemicals


Chart 17: Strong growth in OTR exports

Source: ATMA, Edelweiss research

Technical textiles margins have broadly remained stable in USD terms

Margins of SRF’s technical textiles business /NTCF have broadly remained stable in USD/kg at USD0.61-0.67. This is an outcome of anti-dumping duty on Chinese imports, despite overall fall in demand for NTCF. We believe imports will continue to decline as anti-dumping duties on imports have been extended till April 2020. We estimate EBITDA margin of the segment/NTCF to remain stable in USD/kg at USD0.64. Chart 18: Margins of NTCF has broadly remained stable in USD/kg terms

Source: Company, Edelweiss Research

Cash cow; to feed capex needs of other businesses

Over FY11-15, SRF’s technical textiles division reported average EBITDA of INR2.5bn/year. After an average investment capex of INR565mn/year, ~INR2bn of FCF (Free cash flow) was available to feed capex requirements of other business divisions. While in the past, the company financed its capex in other businesses via Certified Emission Reductions (CER) credits it received, going forward the cash flow generated from the technical textiles

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SRF


division will be used to finance majority of the capex requirement. In fact, management seems to have decided on keeping capex minimal. Recent closure of the UAE plant is a clear indication of management’s intent of rationing capex.

Chart 19: Generating a significant cash flows since FY11 Chart 20: Expect cash flows to fund ~50% of consol capex*

*Note: Division cash flow = EBITDA less capex


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Packaging films: Demand levers intact; play on consumption revival

Demand levers intact …

Consumer slowdown in the past led to SRF reporting flat revenue growth in India over FY12-15. Majority of the packaging demand is consumption driven. The much anticipated surge in FMCG sector—Neilsen expects growth to pick up from 7.5% in 2014E to 12.5% in 2016E—coupled with rising urbanisation will spur SRF’s packaging division. Also, the current per capita packaging consumption in India (USD9-10) is much below the world average (~USD75), offering tremendous long-term growth potential.

Chart 21: India FMCG growth to be much stronger ahead Chart 22: Urbanization trend also expected to continue

Source: Neilsen, Edelweiss research Source:FICCI, Edelweiss research

Demand growth was already visible in Q1FY16 as SRF’s utilisation for both its plants in India —Indore and Kashipur—was significantly above capacity (114% and 104%, respectively). Overall, we see high utilisation to continue till FY17E, post which we expect moderation in utilisation after the planned capacity increase of 30KTPA announced in Q1FY16.

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• SRF manufactures Bi-axially Oriented Poly-Ethylene Terephthalate (BOPET) films and Bi-axially Oriented Polypropylene (BOPP) films under the packaging films division.

• Anticipated surge in FMCG sector in conjunction with rising urbanisation to spur packaging segment.

• Industry’s moderating capacity addition along with robust demand will boost India’s industry utilisation. Ergo, SRF’s India margins will surge 860bps over FY15-17E.

• High capacity utilisation in Thailand and South Africa subsidiaries to sustain.

• As a result, we expect consolidated segment margin to improve from 8.9% in FY15 to 18.4% by FY17E and RoCE to jump from 5.0% to 15.6%.

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Chart 23: SRF capacity utilisation has already reached high levels


Rise in industry utilisation to revive margin

While SRF reported strong margins from FY09-11, the significant capacity increase in addition to slowing demand led to oversupply, resulting in substantial fall in the company’s margins. As per our analysis, capacity addition is expected to moderate significantly going ahead—CAGR of only 5.5% over FY15-17E. This, coupled with 10-12% demand CAGR till FY17E, should boost industry utilisation by ~6%. Factoring in this, we expect significant improvement in SRF’smargin.

Chart 24: India capacity utilisation to increase… …Chart 25: Leading to improvement in margins for SRF


Packaging margins in Thailand / South Africa to sustain high utilisation

SRF’s investments in Thailand and South Africa are paying dividends. RoCEs of its packaging subsidiaries have increased to 10% in Q1FY16. With almost 100% of the capex being debt funded, the RoE of the investment is high. South Africa margins are expected to remain high due to benefits of import duty differential between BOPP films and resins.

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Chemicals


Thailand: SRF commissioned 28.5KTPA BOPET capacity in Thailand in July 2013 at capital cost of USD65mn and total investment of USD71mn. The project has been funded by International Finance Corporation (IFC) via USD45mn long-term loan. The project has benefits of: (1) tax holiday for 8 years and 50% tax rate for another 5 years; (2) double deduction of investment in utilities; and (3) exemption of import duty on machinery. SRF sells its products to Japan/Korea, which is a quality conscious market. The facility has been running at 100% plus capacity utilisation since June 2014. South Africa: SRF commissioned 27KTPA BOPP capacity in South Africa in November 2013 at capital cost of USD62mn and total investment of USD67mn. The project has been funded by IFC via USD40mn long-term loan. The project has twin benefits: (1) South Africa imports around 20,000 TPA BOPP plain films; and (2) import duty protection of 10% to make BOPP films. The facility is running at 100% plus capacity utilisation since Q1FY16 after approval from a large buyer (Specification FSSC12000). SRF intends to benefit from the deficit of BOPP in the South African market. The company has been established as a credible supplier in South Africa as well as in chosen International markets.

Chart 26: Capacity utilisation in subsidiaries is healthy Chart 27: Packaging subsidiaries RoCE has also improved


Overall margin expected to rise due to increased utilisation

Overall, on account of increased utilisation across all its units in India and international subsidiaries, we expect the division’s margin to improve significantly from 8.9% in FY15 to 18.4% by FY17E. As a result, the division’s RoCE is also expected to show similar trend.

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Chart 28: FY16/17 margins to increase as utilisation increases Chart 29: ROCE to reach 16% by FY17


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Valuations

SRF’s FY15-17E PAT CAGR at 32%; RoE to increase to 18.3% by FY17; initiate with ‘BUY’

SRF’s EBITDA is estimated to clock FY15-17 CAGR of 25.8% driven by 23.9% EBITDA CAGR in chemicals & polymers division (fluorochemicals + specialty chemicals) over the period. EBITDA margins are expected to jump from 15.8% in FY15 to 21.6% in FY17E due to higher contribution from high margin (35% plus EBITDA margin) and RoCE in chemicals business. As a result, we estimate the company’s RoE to increase to 18.3% in FY17E and 21.5% in FY20E. We initiate coverage with ‘BUY’ recommendation. Table 4: SRF’s ROE is set to increase to 18.3% by FY17; FY15-17 PAT CAGR at 31.9%


Value varied businesses using SoTP methodology

SRF’s technical textiles, packaging films and chemicals division have diverse business profiles. While technical textiles is a cash cow, packaging films is a B2B cyclical business and chemicals is a high RoCE IP-driven business. Hence, we value the businesses differently using SoTP methodology. We arrive at a target price of INR1,514 per share. Our target price implies FY17E P/E and EV/EBITDA of 16.5x and 9.5x, respectively.

FY13 FY14 FY15 FY16E FY17EEBITDA (INR mn) 6,143 5,053 7,175 10,022 11,357 Number of shares (mn) 57 57 57 57 57 EPS (INR/share) 44.1 28.3 52.7 77.0 91.7 CEPS (INR/share) 87.1 71.7 106.8 139.4 160.7 ROE (%) 13.2 8.1 13.9 17.8 18.3 Pre-tax ROCE (%) 13.3 7.7 12.0 15.5 16.9 CMP (INR/share) 1,145 P/E (x) 26.0 40.5 21.7 14.9 12.5 P/CEPS (x) 13.2 16.0 10.7 8.2 7.1 EV/EBITDA (x) 12.9 17.1 12.3 8.7 7.6

• SRF to clock EPS and net profit CAGR of 31.9% over FY15-17E driven by surge in thespecialty chemicals business. Consequently, RoE is expected to jump to 18.3% by FY17E.

• While technical textiles is a cash cow, packaging films is a B2B cyclical business andchemicals & polymers division is high-RoCE and IP-driven business. Hence, we value thebusinesses differently using SoTP methodology. We arrive at a target price of INR1,514.Our target price implies FY17E P/E and EV/EBITDA of 16.5x and 9.5x, respectively.

• Retro-analysis implies the stock is factoring in 8.0x FY17E EV/EBITDA for specialtychemicals segment despite having incremental RoCE of 35% plus.

• Initiate coverage with ‘BUY’.

SRF


Table 5: SRF value using SOTP comes at INR1,514 per share

* Based on EBIT proportion Source: Edelweiss research

SOTP valuation of various divisions is as follows:

a. Technical textiles: Being a cash cow, we value this business at 7.0x EV/5-year average FCF i.e. yield of 15%. This implies an FY17E EV/EBITDA of 5.3x

b. Packaging films: This business has reported historical 10-year RoCE of 12.4%. Since it is recovering from a cyclical trough, we estimate EBITDA CAGR of 56.6% over FY15-17. Globally, while B2B packaging companies trade at 10x EV/EBITDA, Indian BOPET/BOPP companies trade at 6.1x EV/FY15 EBITDA. Considering that the industry is in a cyclical upswing, we value SRF’s packaging films business at 5.5x FY17E EV/EBITDA (on improving EBITDA). The value implies EV/FY17E Capital employed = 1.05x.

Table 6: Valuations of Indian BOPP/BOPET companies


c. Chemicals & polymers: Since SRF combines reporting of fluorochemicals and specialty chemicals numbers, we value both the segments together. We value the combined chemicals business using EV/EBITDA multiple. For the same, we use 3 reference points: (1) India CRAMS firms; (2) global specialty chemical players; and (3) Indian specialty chemical companies. Global specialty chemical companies trade at 6.5x FY16E EV/EBITDA and are estimated to clock 1.8% PAT CAGR over FY15-17 while reporting FY17E RoCE of 13.7%. Indian specialty chemical companies trade at 10.2x FY16E EV/EBITDA and estimated to post 18.2% PAT CAGR while reporting RoCE of 22.7%. Indian CRAMS companies trade at 19.8x FY16E EV/EBITDA and are estimated to register 24.6% CAGR while reporting RoCE of 41.6%. We believe specialty chemicals segment is closer in its profile to Indian

FY17 EBITDA(INR mn)

FY17 EBIT (INR mn)

FY17 PAT(INR mn)*

FY17 EPS(INR mn)

EV/EBITDA(x)

EV(INR mn)

FY15-17 EBITDA CAGR (%)

FY15-17 average ROCE (%)

Technical texti les 2,987 2,333 1,308 23 5.3 15,750 7.1 18.7Chemicals & polymers 6,472 4,839 2,714 47 12.0 77,661 23.9 15.6Packaging fi lms 2,720 2,216 1,243 22 5.5 14,957 56.6 12.6SRF 11,357 8,435 5,265 92 108,368 25.8 14.8

FY16E EV (INR mn) 108,368FY16E Net Debt (INR mn) 21,439SRF Equity Value (INR mn) 86,929SRF number of shares (mn) 57SRF TP (INR mn) 1,514CMP 1,145% upside 32

Company Name M CapFY15 EBITDA

marginFY13-15 PAT

CAGRFY15 post

tax RoCE FY15 RoEFY15

EV/EBITDA FY15 P/E(USD bn) (%) (%) (%) (%) (x) (x)

Polyplex Corp 0.10 8.9 8.3 1.8 2.7 6.1 8.3Jindal Poly Films 0.25 8.9 382.4 9.5 8.8 5.5 9.1Uflex 0.15 12.5 15.8 8.4 8.8 4.0 3.9Garware Polyester 0.04 6.8 (20.7) 3.3 3.0 9.0 14.6Cosmo Films 0.04 6.6 56.2 6.1 7.5 6.9 9.9Median 8.9 15.8 6.1 7.5 6.1 9.1

Chemicals


CRAMS companies (IP driven, high RoCE). We forecast SRF’s chemicals & polymers division’s pre-tax RoCE to jump from 14.1% in FY15 to 17.2% in FY17 and 27.6% in FY20, predominantly driven by increase in investments in high-RoCE specialty plants and increased capacity utilisation at existing facilities. We value the chemical & polymers division at 12x FY17E EV/EBITDA, giving a discount of 40% on valuation of Indian CRAMS firms, which we will raise to industry average of 15-18x post the RoCE scales up. We note that the company’ specialty chemicals business is generating incremental RoCE of 35%.

Table 7: Valuation of Global specialty chemical companies have lower valuations due to lower growth opportunities


Table 8: Sensitivity of EPS and SOTP


Retro-analysis implies stock factoring in 8.0x FY17E EV/EBITDA

We applied the above valuation metrics (SoTP methodology) to individual business divisions to estimate the residual value of specialty chemicals segment. We estimate the stock is factoring in FY17E EV/EBITDA of 8.0x. Assuming the specialty chemicals business to be valued at 10x/15x, we see 12%/44% upside from current level .

Company Name M Cap

FY15 EBITDA margin

FY15-17 PAT CAGR

FY17 post tax RoCE FY17 RoE %

FY15 EV/EBITDA

FY16 EV/EBITDA

FY17 EV/EBITDA FY15 P/E FY16 P/E FY17 P/E

(USD bn) (%) (%) (%) (%) (x) (x) (x) (x) (x) (x)Global specialtyBASF SE 72.7 14.7 1.8 13.7 18.0 7.4 6.8 6.4 13.6 12.0 11.0DuPont 43.7 17.0 (3.8) 15.4 23.0 9.1 8.8 8.1 16.1 14.3 13.0Solvay 9.6 19.2 49.1 12.0 10.7 5.3 4.8 4.5 13.3 11.1 10.0Evonik 16.4 16.9 26.2 17.5 15.6 5.9 5.8 5.5 13.6 13.0 12.4Mitsubishi Chemical 8.2 9.2 (0.4) 5.4 5.9 8.4 6.5 6.2 10.3 13.5 10.4

Indian specialtyAtul 0.6 14.8 17.4 27.1 31.7 11.3 9.2 7.9 17.3 14.8 12.5Aarti Industries 0.6 16.1 19.0 18.3 28.8 10.3 9.0 7.8 17.7 14.9 12.5Vinati Organics 0.4 24.9 12.0 28.2 33.4 12.9 11.7 10.3 21.1 19.2 16.8Navin Fluorine 0.2 12.4 27.1 15.6 15.7 15.2 11.2 8.4 19.3 15.7 11.9

Indian CRAMSDivi's Laboratories 4.3 37.4 23.0 45.8 36.9 23.7 19.5 16.1 33.4 26.8 22.1PI Industries 1.4 19.6 26.1 37.3 43.6 24.1 20.1 15.8 36.9 30.5 23.2

SummaryMedian - Global Firms 16.4 16.9 1.8 13.7 15.6 7.4 6.5 6.2 13.6 13.0 11.0Median - Indian specialty 0.5 15.5 18.2 22.7 30.2 12.1 10.2 8.1 18.5 15.3 12.5Median - Indian CRAMS 2.8 28.5 24.6 41.6 40.2 23.9 19.8 16.0 35.2 28.7 22.6SRF* 1.0 16.2 36.5 14.4 24.6 12.2 8.8 7.7 21.8 14.7 11.7

EPS change (%) SOTP change (%)

1% increase in Specia lty Chemica ls revenue CAGR 0.9 0.9

1% increase in Chemica ls EBITDA margin 2.4 2.5

1% increase in Packaging EBIT margin 2.1 1.0

1 unit depreciation of USD/INR 2.4 1.6

USD0.10/kg increase in Technica l textile EBITDA margin 5.8 0.4

SRF


Table 9: Retro analysis - What does current market price of SRF imply for Specialty


Fig. 4: Current implied Specialty chemical valuation indicates upside

Source: Edelweiss research, *SRF Bloomberg consensus

ParticularsCurrent stock price (INR/share) 1,145 Current market capitalisation (INR bn) 65.8 FY16E net debt (INR bn) 21.4 Implied Mar-2016 EV (INR bn) 87.2 Value of Technical Textiles (INR bn) 15.8 Value of Packaging (INR bn) 15.0 Value of Fluorochemicals/Refrigerants (INR bn) 23.1 Implied value of Specialty Chemicals (INR bn) 33.4 Specialty Chemicals FY17E EBITDA (INR bn) 4.2 Implied FY17E EV/EBITDA of Specialty Chemicals (x) 8.0

10.0x 11.0x 12.0x 13.1x 14.0x 15.0x

Target price (INR/share) 1,288 1,361 1,433 1,514 1,578 1,651

CMP 1,145 1,145 1,145 1,145 1,145 1,145

% upside 12 19 25 32 38 44

181716151413121110987 19

PAT CAGR: 18%

RoCE:23%

EBITDA margin: 15%

PAT CAGR: 2%

RoCE: 14%

EBITDA margin: 17%

Global Specialty India Specialty

PAT CAGR: 25%

RoCE: 42%

EBITDA margin: 28%

India CRAMS

PAT CAGR: 35%

RoCE: 14%

EBITDA margin: 16%

SRF Cons.*

EBIT CAGR: 37%

RoCE: 18%

EBITDA margin:~40%

SRF Specialty(Based on TP)

EBIT CAGR: 37%

RoCE: 18%

EBITDA margin:~40%

SRF Specialty(Based on CMP)

EBIT CAGR: 15%

RoCE: 17%

EBITDA margin:~25%

SRF Flourochemical

Current specialty chemicals RoCE/growth indicates valuation upside

In the long run could reach valuations of Indian CRAMS provided RoCE's increase

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Chemicals


Chart 30: Focus in specialty chemicals led to change in its EV/EBITDA valuation range

Source: Edelweiss research, Bloomberg

Chart 31: Similarly for its P/E valuation range

Source: Edelweiss research, Bloomberg

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Key Risks

Limited product life cycle Going forward, SRF is planning to focus on developing fluorine-based specialty chemical molcules for agriculture and pharmaceutical sectors. The company currently has a funnel of 75 molecules and is investing regularly to improve its efficiency for regular development of molecules. Each molecule has lifetime revenue potential of USD20-50mn over a life cycle of 4-5 years. However, there is a risk of early phase out of the molecule due to availability of a subsitiute or development of some other molecule in the other market. Though early phase out will hurt revenue prediction, continous funnel size and expertise in handling volatile fluorine will limit the downside risk. Also, SRF continues to own equipment even if the molecule is no longer in use. Alternatively, it is also possible that SRF may find subsitutive uses for the molecule.

Pace of launch of new molecules SRF currently has a funnel of 75 molecules, of which it is planning to take atleast 7-8 to the flexible manufacturing stage every year. The company faces inventory risk as the timing of launch of a molecule is determined by client campaign. Also, this leads to volatilty risk on quarterly basis as when a molecule is launched profitability shoots up significantly. SRF, however, safeguards its interest by having multiple simultaneous molecules in its pipeline through out the year.

Availability of key raw material Flourspar, an ingredient used in all fluorine-based molecules, is sourced primarily from China. Export restrictions on flourspar could impact SRF’s production plans. In case of restrictions, it could be sourced from other countries. SRF also intends to maintain its margin from fluorine chemical business and will pass on any additional raw material prices.

Chemicals


Company Description A diversified fluorine based specialty chemical player SRF is a multi-business entity manufacturing chemical-based industrial intermediates. It commenced operations as Shri Ram Fibres in 1970 when its parent company DCM decided to set up a separate entity to manufacture nylon tyre cord fibres. Its business portfolio covers technical textiles, fluorochemicals, chloromethanes, specialty chemicals, engineering plastics and packaging films. SRF does business with 75 countries and has 9 facilities in India and 2 each in Thailand and South Africa. The company’s business is divided into 3 divisions: (1) technical textiles, (2) chemical & polymers; and (3) packaging films.

Table 10: SRF’s reported business divisions


Fig. 5: Key milestones


Segment OverviewFY15

Revenue shareFY15

EBITDA shareTechnical Textiles Includes nylon tyre cord fabric, belting fabric, coated

fabric, laminated fabric, polyester tyre cordfabric, industrial yarns and its research and development

45% 33%

Chemicals and Polymers Includes refrigerant gases, chlorinated solvents, specialty chemicals, engineering plastics business and its research and development.

28% 53%

Packaging BOPET and BOPP fi lms 27% 14%

2008

2012

2013

2015

2003

Made 2 overseas acquisitions, one for tyre cord plant in Thailand, theother one for belting fabrics in South Africa

New Chemical Complex partly commissioned at Dahej, Gujarat in India

Set up facilities in Thailand and South Africa in the Packaging Films Busines

Aquired Global Dupont™ Dymel® HFC 134a Pharma Business

Entereed into speciality chemicals business

1995Ventured into Packaging films business

Commenced commercial production of Chloromethanes

1990 Shri Ram Fibres renamed as SRF Ltd

1989 Entered Chemicals Business with production of refrigerants

1986 Commenced production of coated fabrics

1983

1979

Commissioning of Belting Fabrics facilities

Commences production of nylon engineering plastics

1974

1970

Commenced operations of nylon tyre cord at Manal

Incorporated as Shri Ram Fibres

SRF


• Technical textiles

SRF's technical textiles product basket contains nylon tyre cord fabrics (NTCF), polyester tyre cord fabrics, belting fabrics, coated fabrics, laminated fabrics, fishnet twines and industrial yarns. The company is not only the largest manufacturer of technical textiles in India, but it also enjoys global leadership in most of the products in this business. The company also has manufacturing plants in Thailand and South Africa.

Table 11: Technical textile division—Overview of products

*Estimated

NTCF is a high entry barrier business due to: (1) high break-even plant size; (2) high project cost; (3) approval lead time from customers. SRF earns ~65% revenue in this division from NTCF. The company has 64,000MTPA capacity and supplies nearly 35% of India’s NTCF demand. Most of the division’s sales are within India. Technical tetilles is a low margin high volume business and operates with ~12% EBITDA margin.

Chart 32: Low margin, high volume business


Products Year Overview Application/clientsRevenue share

(%)* Market positionNylon Tyre cord fabrics (NTCF) 1974 Used as reinforcement for Bias tyres Major tyre companies in India

and abroad65 Global : No 2

India: No 1

Polyester Tyre cord fabrics (PTCF)

NA Used as reinforcement for Radial tyres Major tyre companies in India and abroad

15 Sole manufacturer in India

Belting fabrics 1983 Used for re-enforcement of conveyor belt and other mechanica l rubber equipment for conveying materia l

Belt majors across the globe NA Global : No 2India: No 1

Coated fabrics 1986 Produces synthetic coated fabrics us ing polyester based fabrics with PVC (plastic) formulation

Awnings , tarpaul ins , pitch cover, sports mat, gloves etc.

NA -

Laminated fabrics NA Base fabric (polyester in SRF's case) i s laminated with a fi lm (PVC) on either s ide or both s ides .

Provides frontl i t and backl i t fabrics for Bi l lboards ,s ignages. Also used in pandal covers , gra in covers etc.

5 -

Industria l yarn 1977 Manufacturer of Nylon 6 industria l yarn, fi shnet twines and polyester industria l yarn.

Yarn of various end use appl ications such as tyrecord fabric, belting Fabric etc.

10 India: No 1 (Fishnet twines)

0.0

4.0

8.0

12.0

16.0

20.0

0

6

12

18

24

30


(%)

(INR

bn)

Revenues EBITDA margin (%)

13.1

RoCE

8.1 9.3 12.6 17.0

Chemicals


• Chemicals & polymers Established in 1979, SRF, through its engineering plastics business, was the first company in India to start polymer compounding. It entered the fluorochemicals segment in 1989 and has grown to become a backward integrated producer of refrigerants, chlorinated solvents and specialty chemicals.

Table 12: Chemicals & polymers division—Overview of products


*Estimated

The chemical & polymer business is further divided into: Fluorochemicals: Under the fluorochemicals business, SRF sells fluorine-based refrigerants/propellants (both R-22 and R-134a) and solvents. The company is the domestic market leader in this segment with its brand Floron cornering 40% plus market share. It is the only manufacturer of R134a in India with a capacity of 17.5 KTPA and has produced the technology indigenously. Over the years, it has phased out old generation refrigerants and added new age environmentally safer varieties. In 2014, it acquired Dupont’s Dymel HFC134a pharma business (now Chemours). The company entered the chloromethanes business in 1995 as a backward integration project for its fluorochemicals. Specialty chemicals: SRF focuses on developing fluorine-based specialty chemcials and this business is expected to be the company’s primary growth driver. Agrochemical & pharmaceutical companies often outsource bulk manufacture of their key intermediates to specialist firms. The critical success factors for the industry include understanding customer needs and product/ application development to meet the same at a favourable price-performance ratio. Its focus is on expanding the range of specialty products and moving towards higher value-added products in agrochemical and pharmaceutical sectors. The company has commercialised more than 40 molecules and another 75 molecules are at different stages of development and commercialisation.

Division Year Category Products Brand Application/clientsRevenue share

(%)* Market Position1989 Refrigerants HCFC 22, HFC 134a and

HFC blends (HFC 410A, 404A, 407C).

Floron Air conditioning (home/commercial/automobi les), refrigerants , foam blowing agent, aerosol

30 India No. 1

1995 Chlorinated solvents

Hydrofluoric acid, Methylenechloride, chloroform, carbon tetra chloride

NM Feedstock for Refrigerants and insecticides, Solvent in drugs

10 -

2014 Pharma grade propel lants

HFC 134a Pharma grade gas

Dymel Acquired from DuPont. Used in metered-dose inhalers and other pharmaceutical appl ications.

NA -

Specia lty chemicals

2003 Organic intermediates

Organic intermediates NM Pharmaceutical and agrochemical intermediates 45 India No. 1

1979 - Polyamides TUFNYL

Polybutylene Terephthalate

TUFBET

Polycarbonate TUFPC

Used for various weight & cost reduction, insulation, corros ion res istance and strenght

10Engineering plastics

Fluorochemicals

India No. 1

Specilaty Chemicals will be the focus are of SRF going forward each successful molecule has revenue potential of USD 20-50mn over its lifecycle. The business is expected too grow at CAGR of 30% + over FY20 with sustainable EBITDA margin of 40% plus.

SRF


The business is fully integrated across the value chain. From access to critical starting materials, to in-house process research & development, lab synthesis, pilot production, and finally to setting up dedicated plants for commercial production, the business offers complete support to its highly quality conscious customers globally. SRF also engages with customers for Custom Research, Contract Manufacturing and Collaborative Research/ Manufacturing. Engineering plastics: The engineering plastics segment offers engineered compounds under the TUFNYL (polyamide 6 & polyamide 66 engineering resins), TUFBET (polybutylene terephthalate (PBT) engineering resins) and UFPC (polycarbonate (PC) engineering resins) brands. Engineering plastics, though currently battling slow growth, hold tremendous potential in the light of upcoming fuel efficiency norms.

Chart 33: Chemicals & polymer division—Potential growth driver


The chemicals business has its manufacturing units at Bhiwadi (Rajasthan) and the newly developed Chemical Complex at Dahej (Gujarat). The engineering divisoin’s plants are at Manali (near Chennai) and Pantnagar (Uttarakhand). SRF added a new 22.5KTPA plant at Dahej at a capex of INR18.5bn to set up 91 acres of development complex on 292acres. Though the plant is expected to prodcue multiple products, it will be primarily used for refrigerants (R-134a, INR4.2bn capex) and specialty fluorochemicals (6 plants with capex of INR3.8bn and another 6 plants are in the pipeline).

• Packaging films business: SRF manufactures Bi-axially Oriented Poly-Ethylene

Terephthalate (BOPET) films and Bi-axially Oriented Polypropylene (BOPP) films under this business division. It has been manufacturing BOPET films since 1995 and ventured into BOPP in 2013. SRF derives ~80% of revenues from BOPET sales and the remaining from BOPP. It has the PETLAR (BOPET) and OPLAR (BOPP) brands. SRF is the second-largest manufacturer of thin BOPET films in India.

0.0

15.0

30.0

45.0

60.0

75.0

0

4

8

12

16

20


(%)

(INR

bn)


37.2

RoCE

18.3 7.0 11.7 14.1

Chemicals


SRF has the following facilities:

o BOPET capacity of 7.5KTPA in Kashipur, Uttarakhand, set up in 1995.

o BOPET capacity of 54.5KTPA in Indore SEZ, Madhya Pradesh.

o Thin film BOPET capacity of 28.5KTPA at Thailand commercialised in FY14.

o BOPP capacity of 25.5KTPA at South Africa commercialised in FY14

SRF has 11% share of India’s 0.5MMTPA capacity (~15% of world BOPET capacity). The company has an advantage vis-à-vis competitors as it also has a chips making facility. Its product mix comprises only 25% plain vanilla films compared to industry’s sales mix of 75% leading to better margins. Both new facilities in Thailand and South Africa were commercialised in FY14 and are currently running at full capacity on exit rate basis.

Chart 34: Though off its FY11 peak, packaging margins have recovered marginally

Fig. 6: Plant locations


0.0

10.0

20.0

30.0

40.0

50.0

0

4

8

12

16

20


(%)

(INR

bn)


71.1

RoCE

5.6 0.7 (0.4) 5.0

PortElizabeth

ManaliTrichy

IndoreDahej

Bhiwadi PantnagarKashipur

Gummidipoondi

Thailand

Technical textilesChemicalsPolymersPackaging

SRF


Key Management Fig. 7: Management profile

Source: Company

Mr. Arun Bharat Ram, Chairman

Mr. Arun Bharat Ram set up SRF in 1970 as a manufacturer of nylon tyre cords. He has been President of CII

during 2000-2001 and is currently Chairman of CII Education Council and the Indian Co-Chairman of the Indo

German Consultative Group. Mr. Arun is an alumnus of the University of Michigan, USA.

Mr. Ashish Bharat Ram, MD

Mr. Ashish Bharat Ram joined SRF in 1994 and took over as MD in January 2007. Under his leadership, the

company has grown into a multi locational global entity with operations in 4 countries. Prior to this, Mr. Ashish

had worked as a Management Trainee at Toyota Motor Corporation, Tokyo, and American Express Bank, New

Delhi. He has done his schooling from Doon School and graduation in Economics from Hindu College, Delhi

University. Mr. Ashish has also done his MBA from The Johnson Graduate School of Management, Cornell

University, Ithaca, NY, US.

Mr. Kartik Bharat Ram

Mr. Kartik Bharat Ram joined SRF in 1993 and took over as Deputy Managing Director in February 2007. He is a

graduate from Santa Clara University and MBA from Cornell University, New York.

Rajdeep Anand

Mr. Rajdeep Anand joined SRF for a second time in 1993 as Head of Corporate Planning. He had earlier served in

the company for a brief period in 1982. He is a Chemical Engineer from IIT Kharagpur and credited with building

the company's in-house R&D capability in refrigerants and specialty chemicals. Mr. Anand also won critical

acclaim for making SRF the only company in India to have developed technology to manufacture HFC-134a.

Mr. Rajendra Prasad, President & CFO

Mr. Rajendra Prasad, prior to joining SRF as CFO in March 2006, had worked with American Express for 17 years

as Lead Controller. He is a Chartered Accountant by qualification. Additionally, Mr. Prasad is a trainer for in-

company programmes, a Six Sigma Black Belt resource and a qualified Information Systems Auditor (ISA) and a

qualified CISA.

Key Management

Chemicals


Industry Overview Nylon tyre cord fabric (NTCF) industry Predominant demand from tyre industry: NTCF is used to reinforce bias ply tyres in automobiles and guarantees their resistance and safety. While cotton, rayon etc., can also be used as tyre cord material, nylon by and large meets the desirable performance criteria. The fortunes of NTCF are directly linked to the market dynamics of the automotive industry as ~95% of it is used by the tyre industry. As per SIAM, NTCF constitutes 19% of total raw material cost (~72% of sales) of a tyre. We estimate NTCF’s market size in India at ~INR40bn. Chart 35: NTCF is the 2nd largest component in a tyre after rubber

Source: SIAM, Edelweiss research

Import share at 49%: India is a net importer of NTCF as domestic capacity is insuffient to meet demand. While domestic production did increase, it has failed to keep pace with the rise in consumption. As a result, the share of gross imports has surged from 31% in FY03 to 49% in FY15. However, it has been on the decline over the past few years post the imposition of anti-dumping duty on Chinese imports. Radialisation led to a declining trend: While demand for NTCF is linked to the fortunes of the tyre industry, the recent trend of radialisation in the tyre industry has led to higher use of Polyester Tyre Cord Fabric (PTCF). Radialisation has increased from 85% and 11% in passenger vehicles and light commercial vehicles in 2004 to 98% and 20%, respectively, currently. As a result, demand for NTCF has been waning since 2010—down 3% CAGR. India a duopoly market: The domestic NTCF industry is a duoploy dominated by— SRF and Century Enka. With the extension of the anti-dumping duty till 2020, their share is expected to remain constant.

Natural Rubber44%

Nylon Tyre Cord Fabric19%

Carbon Black12%

Rubber Chemicals

5%

Butyl Rubber4%

PBR5%

SBR5%

Others6%

Radial Cross ply

Life ✓

Fuel consumption ✓

Safety ✓

Total cost of ownership ✓

Maneuverability ✓

Overloading ✓

SRF


Chart 36: Volumes peaked in FY10 and are declining since then Chart 37: The NTCF market is a duopoly*

Source: Company, Ministry of Commerce, Edelweiss research Source: Company, Edelweiss research. *Note: Estimated

Packaging films (BOPP and BOPET) industry Flexible packaging typically includes materials such as plastic films and paper & aluminum foil. Over the years, BOPET and BOPP films (forms of plastic-based flexible packaging film) have become the preferred choice for packaging consumer articles including food, personal products and clothing. Global BOPET market: Polyester film commonly known BOPET film is used in a large number of packaging and industrial applications such as X-ray films, solar panels, magnetic tapes, flat-panel screens and motor windings. The global market is split between thick fims (>50 microns, 25% of demand) and thin fims (<50 microns, 75% of demand). Flexible packaging makes up 50% of the overall demand and 70% of the thin film demand. More than half of the world’s BOPET film capacity is in Central and East Asia (China, Japan, South Korea & Taiwan) and half of global demand is also in this region, with China being the largest contributing to 1/3rd of the global demand. However, recently, the strong expansion in India and China has led to softening in global film prices and weaker margins. Global BOPET demand expected to grow at 5-6% per year: The 3.5MMTPA global BOPET market is growing at 5-6% per year. Demand surge is emanating from: (1) conversion from rigid (metal/ glass) to flexible (paper/laminated) packaging; (2) sustainability: shift from other substrates such as PVC to BOPET, which is more environment friendly; (3) increased R&D in BOPET leading to thinner and simplified laminate structures offering similar or better performance driving growth in value-added flexible films; and (4) demographic & lifestyle changes in fast developing and emerging economies augmenting consumption of ready to eat /snack foods by the ever expanding upper middle class. India BOPET market: With a capacity of ~0.5MMTPA, India makes up 15% of total global BOPET capacity.

0

35,000

70,000

105,000

140,000

175,000FY

03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

(MT)

NTCF consumption

Domestic production Net imports

SRF60%

Century Enka40%

Split of domestic production

Chemicals


Chart 38: Indian BOPET capacity utilisation is set to increase Chart 39: SRF has 11% share of India’s BOPET capacity

Source: Edelweiss research, Industry

Global BOPP market: Polypropylene film commonly known as BOPP is widely used for food packaging, textile bags, overwraps for cigarettes & personal products, adhesive tapes and labels. Its protective qualities (for odours, oxygen and water vapour) and its shiny appearance make it suitable in the flexible packaging market. Better moisture retention properties render BOPP films more suitable for food products. While a majority of BOPP films are used in flexible packaging i.e., food and non-food, ~65% are used for food-based flexible packaging. Chart 40: The FMCG segment dominates the demand for BOPP

Source: Max Specialty Films, Edelweiss research

Accordint to PCI Films Consulting, between 2009 and 2014, global BOPP film demand clocked 6.3% CAGR to an estimated 7.4MMTPA. While China, India and Indonesia continue to dominate in terms of demand and capacity surge, US industry has consolidated over the past few years. The global industry is dominated by China, which accounts for nearly 40% of capacity and consumption.

56.0

65.8

75.6

85.4

95.2

105.0

0.00

0.15

0.30

0.45

0.60

0.75


(%)

(MM

TPA

)

Capacity Demand Utilization (%)

Snacks20%

Pasta15%

Biscuits14%

Other foods10%

Confectionary5%

Tobacco2%

Tape16%

Labels8%

Other app10%

Global BOPP demand FY15

Jindal Polyfilms

24%

Uflex12%

SRF11%

Ester11%

Polyplex10%

Vacmet India10%

Garware Poly9%

Surat Metalic

6%

Sparsh6%

Others1%

India BOPET capacity breakup

SRF


Since 2000, China’s BOPP film industry has expanded 10x, adding 4MMT of capacity, accounting for 57% of all installations. While consumption of BOPP films in China has grown by only 2.8MMT over the same period, exports only expanding by 0.10 MMT. As a result, the BOPP industry has been suffering from low margins and under-utilised capacity.

Fluorochemicals Acording to Freedonia, tthe global fluorochemicals industry is estimated at USD18bn with a total tonnage of 3.2MMT and expected to clock a 3.8% CAGR till FY18E to reach 3.8MMT. India is expected to be the fastest growing market for fluorochemicals globally. Key drivers of the segment are production of refrigeration & cooling equipment and aluminum output. The global fluorochemicals industry is dominated by the refrigerant market. However, the phase out of refrigerants in the past raises a question mark on demand sustainability. China is the largest fluorochemical market in the world and produces over half of global output, benefitting from its strong position in the raw material fluorspar. Chart 41: Industry is dominated by the refrigerant market

Source: Transparency Market Research, Edelweiss research

The main producers of fluorochemicals worldwide include companies such as DuPont, Daikin, Solvay, Asahi Glass, Dongyue, Arkema, Honeywell, Pelchem, Mexichem and Mitsui Chemicals. Refrigerant demand in India: Impacted by phaseout’s The demand for refrigerants in India has been strong over the last decade driven by the growth in sales of refrigerants and cars is India. The annual growth is expected to be in 10-15% range, inline with the growth in these industries. However, the phase-out requirements of various types of refrigerants has created the need of alternatives being developed. While CFC’s were phased out by 2008 (Deadline 2010) in India, HCFC’s have to be phased out gradually by 2040. There are about 40 chemicals which fall in this category with HCFC-141b and HCFC-22 being the most widely used. Production and consumption of HCFCs will be subject to a freeze at 2015 levels from 01 January 2016 and are required to be completely eliminated by 2040.

Refrigerants43%

Inorganics 37%

Fluorocarbons ex-Refrigerants

11%

Fluoropolymers9%

Chemicals


Chart 42: CFC’s phaseout saw HCFC’s reporting strong growth Fig. 8: HCFC phase-out schedule

Source: Ministry of Environment & Forests, Edelweiss research

While overall demand for refrigerants was stable, the phase out of CFC’s saw HCFC’s clocking a 72% CAGR between 2006-08. However, once CFC’s were phased out by 2008, demand remained flat, impacted by the global slowdown. HFC’s to be the next set of alternatives; phaseout worry not an immediate concern: The alternate for HCFC’ gases are HFC gases. HFCs don't affect the ozone layer but impact global warming. There is intenational pressure to phase-out of HFC’s also as of now. While India had been opposed to the phaseout, it has recently commited to working to phaseout of HFC’s. However, there is no international mechanism to reduce or eliminate the production or consumption. Even if implemented and accepted, as per reports the earliest possible phaseout for HFC’s in India wont be before 2050.

Specialty chemicals (fluorinated intermediate chemicals) Fluorinated intermediate chemicals are chemicals with a fluorine base which are used in the manufacture of an end chemical, pharmaceutical or agrochemical product. There are essentially 3 types of fluorinated intermediate chemicals, organic compounds, inorganic compounds and polymers. There are a variety of methods of producing fluorinated intermediate chemicals, each of them produces compounds with differing characteristics. The method of manufacture can thus determine the suitability of the compound for its end use. Major organic intermediaries include Trifluoroacetic acid (TFA), Trifluoroacetylchloride (TFAC), Trifluoroacetic anhydride (TFAH). Some of the major players in this segment are Solvay, Halocarbon, SRF, Sinochem,Lantian. According to Solvay, more than 50% of agrochemicals recently developed contain fluorine because of its efficiency increasing attributes for fungicides, herbicides and insecticides. A growing number of blockbuster drugs also contain fluorine atoms because they increase bioactivity of the API. Fluorine can be found in different medicinal treatments such as Antibiotics, Antiviral drugs, Anti-HIV treatments etc.

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010

(MT)

CFC phaseout impact on HCFC

CFC production quota HCFC consumption

SRF


Financial Outlook

Table 13: Summary financials

** Excludes CER revenues Source: Company, Edelweiss research

Note: CER refers to certified emission reduction income which stopped accruing from FY13. Over

FY06-13 SRF earned INR22.8bn (Net of tax ~15.1bn) through these credits which helped fund 45%

of capex over this period.

Specialty chemicals and refrigerants to spearhead revenue surge We estiamte SRF’s consolidated revenue to post 11.4% CAGR over the next 5 years, in line with the trend over FY10-15 (12.5% CAGR). Legacy businesses—technical textiles, fluorochemicals and packaging films—had spurred growth in the earlier phase (FY10-15), contributing 77% of incremental revenue. However, going forward, we expect the chemicals segment—specialty chemicals and refrigerants—to spearhead revenue surge and contribute 65% of incremental revenue. Overall, refrigerants/fluorochemicals are estimated to post 13.5% revenue CAGR over FY15-20 driven by improved R-134a sales riding import substitution and higher sales of passenger vehicles & refrigerators. Specialty chemicals registered 55.5% revenue CAGR over FY10-15 and we expect the momentun to continue going ahead as well (29.3% CAGR over FY15-20E).

Financial summary FY10 FY15 FY20ERevenue (INR mn)Technical Textile 15,242 20,396 23,352Chemicals & Polymers** 3,982 12,634 33,747Packaging 3,365 12,460 21,054EBITDA margin (%)Technical Textile 20.9 12.8 14.4Chemicals & Polymers** 12.5 33.4 36.1Packaging 18.0 8.9 15.7RoCE (%)Technical Textile 16.5 17.0 25.0Chemicals & Polymers 3.4 14.1 27.6Packaging 10.6 5.0 15.0SRF ConsolidatedEBITDA margin (%) 25.2 15.8 22.9PAT margin (%) 12.9 6.7 12.5RoCE (%) 25.6 12.0 24.8RoE (%) 28.8 13.9 21.5

• SRF will clock 11.4% revenue CAGR over FY15-20 riding robust specialty chemicals and refrigerant segments.

• Consolidated margin estimated to catapult more than 700bps by FY20 on account of margin improvement in all the 3 segments.

• While improved utilisation will boost packaging segment’s RoCE, technical textile division’s RoCE will improve on account of no investment requirement. Superior specialty chemicals contribution will buoy chemical segment’s margin surge.

• Limited capex outgo to generate robust cash flows.

Chemicals


Chart 43: Specialty segment to lead the growth in phase Chart 44: Specialty share to increase to 28% by FY20E


Margin to surge to 23% in FY20E spurred by packaging films, chemicals

We anticipate margin revival in the packaging division riding improved utilisation. We estimate margins in the chemicals & polymers (C&P) division (fluorochemicals + specialty chemicals) to average 35.3% over FY15-20E, up from average 28.6% over FY10-15, but in line with FY15 EBITDA margin of 33.4%. Superior specialty chemicals margin will buoy the chemical division’s margin surge. Ergo, we forecast SRF’s consolidated margin to catapult from 15.8% in FY15 to 22.9% in FY20—584bps expansion by FY17E and 714bps by FY20E.

Chart 45: Chemicals have superior margins … Chart 46: … leading to improvement in overall margins


*Excluding CERrevenues

(30.0)

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Fluorochemicals Packaging film

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SRF cons. revenues Share of Speciality chemicals

SRF


RoCE on a roll; limited capex outgo to boost free cash flow

SRF’s overall RoCE is expected to improve in all the 3 segments. Technical textile division’s RoCE will improve as no further investments are on the anvil in the segment and we expect profitability to remain constant. RoCE improvement in the packaging division will be led by margin improvement. High RoCE of incremental investment in specialty chemicals and increase in utilisation of refrigerants are expected to spur chemicals & polymer division’s RoCE.

Chart 47: Low capex to drive Techincal Textiles RoCE Chart 48: Overall return ratios to bounce back


*Excluding CER revenues

We expect limited capex outgo ahead as majority of the capex has already been made. Going forward, SRF is expected to generate strong cash flow, sufficient to fund capex and repay debt as well.

Chart 49: Expect cash flows to be sufficient to fund capex Chart 50: With balance cash to be used for debt repayment


(10.0)

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Technical Textile C&P* Packaging Film

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15

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

FY19

E

FY20

E

(x)

(INR

bn)

Capex CFO

0.0

0.4

0.8

1.2

1.6

2.0

0

6

12

18

24

30

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

FY19

E

FY20

E

(x)

(INR

bn)

Gross debt Net debt Gross debt/Equity (x)

0.0

7.0

14.0

21.0

28.0

35.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

FY19

E

FY20

E

(%)

Consolidated RoCE & RoE

Pre Tax RoCE RoE


Chemicals

Financial Statements

Key assumption

Year to March FY14 FY15 FY16E FY17E

Macro Assumptions

GDP(Y-o-Y %) 6.9 7.4 8.0 8.7

Inflation (Avg) 9.5 5.9 5.0 5.0

Repo rate (exit rate) 8.0 7.5 6.8 6.5

USD/INR (Avg) 60.5 61.2 64.5 65.0

Industry Assumptions

PV production growth (%) (1.0) 1.0 8.0 15.0

Refigerator sales growth (%) (3.0) 9.7 8.0 8.0 India BOPET demand growth (%) 3.9 (3.2) 14.0 10.0

Financial Assumptions

NTCF realization - (USD/Kg) 5.2 5.0 4.0 4.1

R134a sales (MT) 3,281 4,248 5,760 6,912

Production growth - Specialty (%) 32.5 32.3 28.6 27.8

Packaging net realization (USD/Kg) 2.1 2.0 1.8 1.9

NTCF EBITDA (USD/Kg) 0.7 0.6 0.7 0.7

EBITDA margins - Fluorochemical (%) 19.5 25.4 26.0 26.0

EBITDA margins - Specialty (%) 35.0 40.0 40.0 40.0

Packaging EBITDA (USD/Kg) 0.2 0.2 0.3 0.3

Balance Sheet Assumptions

Capex (INR mn) 7,995 5,118 5,367 6,171

Inventory (days) 100 108 108 105

Receivables (days) 55 52 49 49

Payable (days) 99 98 83 81

Income statement (INR mn)Year to March FY14 FY15 FY16E FY17E

Net Revenues 40,181 45,398 47,444 52,462Raw Material Costs 23,972 25,420 26,089 28,323Employee costs 3,110 3,561 4,078 4,669Other expenses 8,045 9,243 7,254 8,113Total expenses 35,128 38,224 37,421 41,105EBITDA 5,053 7,175 10,022 11,357Depreciation & amortization 2,247 2,450 2,714 2,922EBIT 2,805 4,724 7,308 8,435Less: Interest Expense 961 1,376 1,394 1,341Add: Other income 235 646 236 262Add: Exceptional items - - - - Profit Before Tax 2,080 3,994 6,150 7,356Less: Provision for Tax 455 966 1,731 2,091Less: Minority Interest - - - - Add: Share of profit from assoc. - - - - Reported Profit 1,625 3,028 4,419 5,265Less: Excep. Items (Net of Tax) - - - - Adjusted Profit 1,625 3,028 4,419 5,265No. of Shares outstanding (mn) 57.4 57.4 57.4 57.4Adjusted Basic EPS 28.3 52.7 77.0 91.7No. of dil. shares outstand. (mn) 57.4 57.4 57.4 57.4Adjusted Diluted EPS 28.3 52.7 77.0 91.7Adjusted Cash EPS 71.7 106.8 139.4 160.7Dividend per share 10.0 10.0 12.0 15.0Dividend Payout Ratio (%) 41.4 22.5 18.2 19.1

Common size metrics - as % of revenuesYear to March FY14 FY15 FY16E FY17E

Materials costs 59.7 56.0 55.0 54.0Staff costs 7.7 7.8 8.6 8.9S G & A expenses 20.0 20.4 15.3 15.5Depreciation 5.6 5.4 5.7 5.6Interest Expense 2.4 3.0 2.9 2.6EBITDA margins 12.6 15.8 21.1 21.6Net Profit margins 4.0 6.7 9.3 10.0

Growth metrics (%)Year to March FY14 FY15 FY16E FY17E

Revenues 6.2 13.0 4.5 10.6EBITDA (17.7) 42.0 39.7 13.3PBT (40.2) 92.1 54.0 19.6Adjusted Profit (35.8) 86.4 45.9 19.2EPS (35.8) 86.4 45.9 19.2


SRF

Balance sheet (INR mn)As on 31st March FY14 FY15 FY16E FY17E

Share capital 584 584 584 584Reserves & Surplus 20,082 22,379 25,992 30,249Total shareholders funds 20,667 22,963 26,576 30,834Minority interest 0 0 0 0Long term Borrowings 17,126 17,882 16,819 15,543Short term Borrowings 4,627 6,467 6,541 6,798Total Borrowings 21,753 24,349 23,360 22,342Long Term Liabilities & Prov. 172 667 712 787Deferred Tax Liability (net) 2,752 3,386 4,254 5,292Sources of funds 45,343 51,365 54,902 59,254Gross Block 60,605 65,358 70,567 76,738Net Block 35,230 38,158 40,652 43,902Capital work in progress 1,121 1,041 1,200 1,200Intangible Assets 278 1,065 1,065 1,065Total Fixed Assets 36,629 40,265 42,918 46,167Non current investments 101 1 1 1Cash & bank balances 1,089 2,015 1,920 1,996Inventories 7,464 7,635 7,827 8,497Sundry Debtors 6,915 6,107 6,642 7,345Loans & Advances 2,325 2,679 3,175 3,511Other Current Assets 164 131 146 161Total Current Assets (Ex Cash) 16,868 16,551 17,790 19,514Trade payable 7,886 5,814 6,001 6,514Other Current Liab. & ST Prov. 1,458 1,652 1,726 1,909Total Current Liab. & Provisions 9,344 7,466 7,727 8,423Net Current Assets (ex cash) 7,524 9,085 10,063 11,091Uses of funds 45,343 51,365 54,902 59,254Book value per share (BV) (INR) 360 400 463 537

Free cash flow (INR mn)Year to March FY14 FY15 FY16E FY17E

Reported Profit 1,625 3,028 4,419 5,265Add: Depreciation 2,247 2,450 2,714 2,922Interest (Net of Tax) 751 1,043 1,001 960Others 44 (87) (133) 78Less:Changes in WC 1,199 1,011 934 952Operating cash flow 3,467 5,423 7,068 8,272Less: Capex 7,995 5,118 5,367 6,171Free cash flow (4,528) 305 1,701 2,101

Cash flow statementYear to March FY14 FY15 FY16E FY17E

Operating cash flow 3,467 5,423 7,068 8,272Investments cashflow (6,570) (4,998) (5,367) (6,171)Financing cash flow 2,045 (181) (1,795) (2,026)Net cash Flow (1,058) 245 (95) 75Capex (7,995) (5,118) (5,367) (6,171) Dividends Paid (667) (678) (806) (1,008)

Profitability & liquidity ratiosYear to March FY14 FY15 FY16E FY17E

ROAE (%) 8.1 13.9 17.8 18.3ROACE (%) 7.7 12.0 15.5 16.9Inventory Days 100 108 108 105Debtors Days 55 52 49 49Payble Days 99 98 83 81Cash conversion cycle (days) 55 62 75 73Current Ratio 1.9 2.5 2.6 2.6Gross Debt/EBITDA 4.3 3.4 2.3 2.0Gross Debt/Equity 1.1 1.1 0.9 0.7Adjusted Debt/Equity 1.2 1.2 1.0 0.8Net Debt/Equity 1.0 1.0 0.8 0.7Interest Coverage Ratio 2.9 3.4 5.2 6.3

Operating ratiosYear to March FY14 FY15 FY16 FY17

Total asset turnover(x) 0.9 0.9 0.9 0.9Fixed asset turnover(x) 1.4 1.2 1.2 1.2Equity turnover(x) 2.0 2.1 1.9 1.8

Valuation parametersYear to March FY14 FY15 FY16E FY17E

Adjusted Diluted EPS (INR) 28.3 52.7 77.0 91.7Y-o-Y growth (%) (35.8) 86.4 45.9 19.2Adjusted Cash EPS (INR) 71.7 106.8 139.4 160.7Diluted P/E (x) 40.5 21.7 14.9 12.5Price/BV (x) 3.2 2.9 2.5 2.1EV/Sales (x) 2.1 1.9 1.8 1.6EV/EBITDA (x) 17.1 12.3 8.7 7.6Dividend yield (%) 0.9 0.9 1.0 1.3


Chemicals

Holding – Top10 Perc. Holding Perc. Holding

Amansa Capital 5.02 DSP Blackrock 4.23

Sundaram Asset Mgmt 3.67 UTI Asset Mgmt 2.49

Goldman Sachs Asset Mgmt 2.30 Norges Bank 1.86

Government Pension Fund - Global 1.42 Dimensional Fund Advisors 1.34

FID Funds Mauritius 1.07 Fidelity Investments 1.07

*as per latest available data

Insider Trades

Reporting Date Acquired / Seller B/S Qty Traded27-May-15 Amansa Capitl PTE Ltd A/C Amansa

Holdings Pvt. Ltd. Buy 135,591

13-Aug-15 KAMA Holdings Ltd. Buy 45,000 13-Aug-15 Karmav Real Estate Holding LLP Sell 48,000

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

*in last one year

Additional Data

Directors Data Arun Bharat Ram Chairman Ashish Bharat Ram Managing DirectorKartik Bharat Ram Dy Managing Director K. Ravichandra Director Vellayan Subbiah Non-Executive Director Vinayak Chatterjee Non-Executive DirectorPramod Bhasin Non-Executive Director Tejpreet S. Chopra Non-Executive DirectorL. Lakshman Non-Executive Director Meenakshi Gopinath Non-Executive Director

Auditors - Deloitte Haskins & Sells

*as per latest available data


SRF

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Coverage group(s) of stocks by primary analyst(s): MiscellaneousAarti Industries, Essel Propack

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 155 45 8 208* stocks under review

Market Cap (INR) 151 54 3

Date Company Title Price (INR) Recos

Recent Research

07-Aug-15 AartiIndustries

Margin march; Result Update

427 Buy

14-May-15 AartiIndustries

Its benzene again!; Result Update

314 Buy

10-Feb-15 AartiIndustries

Volume growth to boost earnings; Result Update

284 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

One year price chart

Nirav Sheth

Head Research

[email protected]

200

500

800

1,100

1,400

1,700

Sep

14

Oct

14

Nov

14

Dec

14

Jan

15

Feb

15

Mar

15

Apr

15

May

15

Jun

15

Jul 1

5

Aug

15

Sep

15

(INR)

SRF


Chemicals

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SRF

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Chemicals

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