Sarla Performance Fibers Research Report By Centrum

Favourable change in product mix leads to revenue beat

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

We believe any upswing in Sarla Flex can offer significant upside to our estimates.

– Q1FY18 result highlights:

Consolidated net sales rose 5.4% YoY to Rs791mn while standalone net sales increased 9.6% YoY to Rs670mn. Wind power sales declined 11.7% YoY to Rs22mn as the company has yet to sign PPAs for two windmills for which the revenues would be booked in Q2FY18. Operating profit fell 15% YoY to Rs157mn with margins contracting 475bps to 19.9%. Gross margin stood at 53.3% (down 508bps YoY) on consol basis with standalone gross margin at 48.3%. PAT was flat YoY at Rs91mn (inline with expectations) on the back of lower taxes and high other income.

– Standalone business grows at a healthy pace: The standalone yarn business posted gross sales growth of 10.2% at Rs686mn with exports growing by 5% and domestic sales growing by 17% YoY. Volume growth was flat at 2506MT and the bulk of the growth was driven by realisations. Sales were partly impacted due to implementation of GST during the quarter. Movement towards performance and industrial yarn helped in increasing realisation. SOHL posted revenue growth of 19% on the back of realisations despite volume growth of only 2% YoY. SOHL’s PAT increased 57% to Rs51mn.

– US business continues to disappoint: Net sale in the US business fell 31% YoY to Rs70mn on the back of a 25% drop in volumes. Currently the plant is running at mere 15% capacity utilisation. For FY17, the company posted volume drop of 36% since they lost a couple of major clients. Further revenue declined 37% to Rs343mn. The company posted operating loss of Rs14mn during the quarter against a loss of Rs3mn in Q1FY17.

In FY17 the company had posted an operating loss of Rs169mn. Further PAT loss stood at Rs17mn against a loss of Rs22mn in Q1FY17. In FY17 the company posted a loss of Rs115mn despite having high other income of Rs121mn. We believe the company would continue to post losses in the US business unless they are able to increase capacity utilisation.

– Estimates reduced; Maintain BUY: We have reduced our operating profit estimate by ~2.8% each for FY18E and FY19E factoring lower gross margin while PAT estimate has been reduced by ~4% each for FY18E and FY19E. We maintain our BUY on Sarla Performance Fibers with a TP of Rs75 as we value it on adjusted OCF (AOCF = OCF –Interest) to enterprise value (EV) yield. We believe bulk of the growth for the company would be on account for the domestic business due to debonding of the Vapi unit and higher exports though SOHL. Operating profit CAGR would be 15% over FY17-19E for standalone business. We believe there could be further upside from Sarla Flex with increase in capacity utilisation given the high fixed cost. Key risks being sustained losses in the US business and raw material volatility.