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SRF: Margin pressures prevail - Views on News from Equitymaster
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SRF: Margin pressures prevail
Feb 23, 2012

SRF has announced third quarter results of financial year 2011-2012 (3QFY12). The company has reported 12.4% YoY growth in sales. However, net profits have declined by 35.4% YoY. Here is our analysis of the results.

Performance summary
  • Top line registered a growth of 12.4% YoY during 3QFY12 led by strong performance from the Chemicals & Polymers business (CPB) and Technical Textile business (TTB). .
  • Operating profits decline 6.8% YoY in 3QFY12, due to increase in operating expenditure.
  • Net profits decline 35.4% YoY in 3QFY12 due to an exchange loss of Rs 511 m during the quarter compared to gain of Rs 67 m in 3QFY11. Adjusting for these exceptional items, net profits declined 1.7% YoY.
  • As a part of its buy-back program, the company has bought back approximately 3 m shares which resulted in an outflow of Rs 899 m till date. With this the company's buyback plan has come to an end.
  • The board has approved a second interim dividend of Rs 7 per share.


Standalone financial snapshot
(Rs m) 3QFY11  3QFY12  Change 9MFY11  9MFY12  Change
Total income  8,441 9,491 12.4% 22,113 27,018 22.2%
Expenditure  5,567 6,811 22.3% 15,811 20,181 27.6%
Operating profit (EBDITA) 2,874 2,680 -6.8% 6,302 6,837 8.5%
Operating profit margin (%) 34.1% 28.2%   28.5% 25.3%  
Other income 46 72 56.0% 122 202 65.7%
Interest 225 210 -6.7% 626 622 -0.6%
Depreciation 393 418 6.5% 1140 1,194 4.7%
Profit before tax 2,303 2,124 -7.8% 4,657 5,223 12.1%
Exchange fluctuation Loss/ (Gain) (67) 511   (246) 850  
Tax 658 507 -22.9% 1430 1,369 -4.3%
Profit after tax/(loss) 1,712 1,106 -35.4% 3,474 3,004 -13.5%
Net profit margin (%) 20.3% 11.6%   15.7% 11.1%  
No. of shares (m)         59.6  
Basic earnings per share (Rs)         50.4  
P/E ratio (x) *         3.9  
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • SRF's top line increased 12.4% YoY during 3QFY12 led by strong performance from the CPB and TTB segments. Revenues from the CPB and TTB segment increased 84.3% YoY and 16.3% YoY respectively. However, revenues from the Packaging Films Business (PFB) segment declined 43.6% YoY.

  • Operating margins declined to 28.2% in 3QFY12 due to increase in operating expenses as a percentage of revenues. On a segmental basis, margins from PFB declined substantially with the segment effectively reporting a loss due to adverse demand-supply situation. Even the TTB segment faced margin pressures due to raw material price inflation.

    Segment-wise performance (Standalone)
      3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Technical Textile            
    Revenue (Rs m) 3,672 4,269 16.3% 10,598 12,648 19.3%
    % share 43.4% 44.8%   47.8% 46.7%  
    PBIT margin 11.1% 4.6%   10.8% 7.0%  
    Chemicals & Polymers            
    Revenue (Rs m) 2,009 3,702 84.3% 5,095 9,388 84.2%
    % share 23.7% 38.8%   23.0% 34.6%  
    PBIT margin 36.6% 59.4%   37.3% 51.6%  
    Packaging Films            
    Revenue (Rs m) 2,780 1,569 -43.6% 6,467 5,061 -21.7%
    % share 32.9% 16.4%   29.2% 18.7%  
    PBIT margin 52.5% -2.4%   41.1% 5.8%  
    Total            
    Revenue (Rs m)* 8,461 9,540 12.8% 22,160 27,097 22.3%
    PBIT margin 30.7% 24.7%   25.7% 22.2%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 35.4% YoY due to an exchange loss of Rs 511 m during the quarter. However, adjusting for the onetime loss net profits declined 1.7% YoY. Muted performance at the operating level and rise in depreciation expenses impacted the profits. It may be noted that the tax rate for the quarter stood at 23.9% compared to 28.6% in 3QFY11.

What to expect?
While the top-line growth was boosted by strong performance from the CPB segment, TTB and PFB segments continue to face challenges. Margins also remained under pressure due to rising input cost and adverse demand-supply environment which makes absorption of fixed cost difficult. Going forward, volumes and margins are expected to remain under pressure in light of the weak macro-environment. However, considering a niche product portfolio, high dividend yield and attractive valuations (4x trailing twelve month earnings) we maintain our positive view on the stock from 2-3 year perspective.

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