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SRF: Forex losses hurt profits

Feb 27, 2013

SRF Ltd has announced third quarter results of financial year 2012-2013 (3QFY13). The company has reported a 6.3% YoY and a 19.3% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line declined 6.3% YoY during 3QFY13 led by a fall in revenues from all the three segments. Revenues from the Chemicals & Polymers Business (CPB) declined 5.0% YoY while that from the Technical Textiles Business (TTB) declined 7.0% YoY. Revenues from the Packaging Films Business (PFB) also declined by 10.1% YoY during the quarter.
  • Operating profits decline 19.1% YoY in 3QFY13. Operating margins also declined to 24.2% in 3QFY13 from 28.1% in 3QFY12.
  • Net profits decline 19.3% YoY in 3QFY13 due to dismal performance at the operating level. It may be noted that the company incurred forex loss of Rs 203 m during the quarter. Adjusting for these losses, profits declined 29.5% YoY.
  • The board approved a second interim dividend of Rs 5 per share during the quarter.

Standalone financial snapshot
(Rs m)  3QFY12   3QFY13  Change  9MFY12   9MFY13  Change
Total income  9,491 8,889 -6.3%  27,018   25,049 -7.3%
Expenditure    6,827 6,735 -1.3% 20,234 20,435 1.0%
Operating profit (EBDITA)   2,664 2,154 -19.1%  6,784  4,614 -32.0%
Operating profit margin (%)  28.1%  24.2%    25.1%  18.4%  
Other income  72 28 -60.9%  202 141 -30.0%
Interest   257 208 -18.9%  768 695 -9.6%
Depreciation   418 478 14.4%  1194 1,363 14.2%
Exchange fluctuation (Loss)/Gain  (448)  (203)    (650)  (245)  
Profit before tax 1,613 1,293 -19.9% 4,373 2,452 -43.9%
Tax 507 400 -21.1% 1369 586 -57.2%
Profit after tax/(loss) 1,106 892 -19.3% 3,004 1,866 -37.9%
Net profit margin (%) 11.6% 10.0%   11.1% 7.5%  
No. of shares (m)          57.4  
Basic earnings per share (Rs)           32.5  
P/E ratio (x) *         3.9  
*On a trailing 12 months basis

What has driven performance in 3QFY13?
  • SRF’s top line declined 6.3% YoY during 3QFY13 led by a 10.1% YoY fall in the PFB. Revenues from the TTB and CFB segment also declined by of 7.0% YoY and 5.0% YoY respectively. Stabilization of laminated fabric plant and improving realization from the tyre cord fabrics arrested the fall in revenues from TTB segment to some extent. Had that not been the case the revenue decline would have been even higher.

  • Operating profits declined by 19.1% YoY in 3QFY13. On a segmental basis, margins from CPB declined substantially to 44.5% during the quarter from 59.1% in 3QFY12. We believe this may be due to decline in income from sale of carbon credits. However, it may be noted that the CPB margins in the current quarter were much better than 20.4% reported in 2QFY13. Margins from the TTB segment improved by 180 bps YoY to 6.4% in 3QFY13. However, the PFB segment reported a loss of Rs 49 m during the quarter.

    Segment-wise performance (Standalone)
      3QFY12  3QFY13  Change 9MFY12  9MFY13  Change
    Technical Textile
    Revenue (Rs m) 4,269  3,972 -7.0% 12,648 12,609 -0.3%
    % share  44.8% 44.6%   46.7% 50.3%  
    PBIT margin 4.6% 6.4%   7.0% 7.4%  
    Chemicals & Polymers 
    Revenue (Rs m) 3,702 3,516 -5.0%  9,388   7,714 -17.8%
    % share  38.8% 39.5%   34.6% 30.8%  
    PBIT margin 59.1% 44.5%   51.2% 34.1%  
    Packaging Films 
    Revenue (Rs m) 1,569 1,410 -10.1%  5,061   4,746 -6.2%
    % share  16.4% 15.8%   18.7% 18.9%  
    PBIT margin -2.6% -3.5%   5.6% 1.1%  
    Revenue (Rs m)* 9,540  8,897 -6.7% 27,097 25,068 -7.5%
    PBIT margin 24.5% 19.9%   22.0% 14.4%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 19.3% YoY due to the weak performance at the operating level. However, after adjusting for the losses arising on foreign exchange, net profits declined 29.5% YoY.

What to expect?
Since the last three quarters, both revenue and profitability growth have been under pressure. Margins have also been quite volatile due to wavering income generated from carbon credits. Since our initial recommendation dated 22 June 2011, the stock has declined by approximately 30% odd due to declining growth and margin concerns. Going forward, as the domestic environment improves growth will be back on track. Even the valuations are quite attractive at 3.9x trailing twelve month earnings and the stock offers a good dividend yield (5.3% based on the interim dividends declared till date during 9MFY13). However, considering the performance over the last few quarters we are likely to revise our estimates and target price downwards. As a result, we would advise investors to HOLD the stock.

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