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SRF: Absence of carbon credit sale impacts profits - Views on News from Equitymaster
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  • Mar 11, 2014 - SRF: Absence of carbon credit sale impacts profits

SRF: Absence of carbon credit sale impacts profits
Mar 11, 2014

SRF has announced third quarter results of financial year 2013-2014 (3QFY14). The company has reported 3.1% YoY decline in sales while net profits have declined by 19.3% YoY. Here is our analysis of the results.

Performance summary
  • Top line declined 3.1% YoY during 3QFY14 led by a 23.2% YoY decline from the Chemicals & Polymers Business (CPB). However, revenues from the Packaging Films Business (PFB) and Technical Textiles Business (TTB) were up by 4.8% YoY and 12.3% YoY respectively.
  • Operating profits declined 32.6% YoY in 3QFY14. Margins stood at 16.9% compared to 24.2% in 3QFY13.
  • Net profits declined by a slower pace of 19.3% YoY during the quarter despite poor performance at the operating level. A 46.8% YoY increase in other income and 23.4% YoY fall in interest expenses arrested the decline in profits. Adjusting for the forex gain/losses, net profits declined 40.1% YoY.
  • The company approved an interim dividend of Rs 7 per share during 3QFY14.
  • The company has approved capex plans of Rs 330 m to expand capacities.

Standalone financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Total income from operations  8,889 8,616 -3.1% 25,044 25,304 1.0%
Expenditure  6,735 7,164 6.4% 20,435 21,240 3.9%
Operating profit (EBDITA) 2,154 1,452 -32.6% 4,609 4,064 -11.8%
Operating profit margin (%) 24.2% 16.9%   18.4% 16.1%  
Other income 28  41 46.8% 146 182 24.7%
Interest 208 160 -23.4% 695 588 -15.3%
Depreciation 478 479 0.1% 1363 1,443 5.8%
Exchange fluctuation (Loss)/Gain (203) 64 NM (245) (165) NM
Profit before tax 1,293 919 -28.9% 2,452 2,050 -16.4%
Tax 400 198 -50.5% 586 413 -29.4%
Profit after tax/(loss) 892 721 -19.3% 1,866 1,636 -12.3%
Net profit margin (%) 10.0% 8.4%   7.5% 6.5%  
No. of shares (m)         57.4  
Basic earnings per share (Rs)          28.5  
P/E ratio (x) *         6.8  
* On a trailing 12-months basis

What has driven performance in 3QFY14?
  • SRF's top line declined 3.1% YoY during 3QFY14 due to 23.2% YoY decline in the CPB segment. Revenues from CPB declined as 3QFY13 results included income from sale of carbon credits which stands discontinued now due to changes in norms. Revenues from TTB and PFB increased 12.3% YoY and 4.8% YoY respectively.

  • Operating profits declined by 32.6% YoY in 3QFY14 due to absence of income from sale of carbon credits. On a segmental basis, margins from CPB declined to 25.8% during the quarter from 44.5% in 3QFY13. Margins from this segment have shown quite a bit of volatility in the past depending upon the extent to which the income from sale of carbon credit materializes. However, the encouraging fact was that margins from both TTB and PFB segments registered substantial improvement during the quarter.

    Segment-wise performance (Standalone)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Technical Textile
    Revenue (Rs m) 3,972 4,462 12.3% 12,609 13,353 5.9%
    % share 44.6% 51.7%   50.3% 52.7%  
    PBIT margin 6.4% 8.6%   7.4% 9.3%  
    Chemicals & Polymers
    Revenue (Rs m) 3,516 2,700 -23.2% 7,710 7,079 -8.2%
    % share 39.5% 31.3%   30.8% 27.9%  
    PBIT margin 44.5% 25.8%   34.1% 22.2%  
    Packaging Films
    Revenue (Rs m) 1,410 1,477 4.8% 4,745 4,917 3.6%
    % share 15.8% 17.1%   18.9% 19.4%  
    PBIT margin -3.5% 0.0%   1.1% 3.8%  
    Total
    Revenue (Rs m)* 8,897 8,638 -2.9% 25,064 25,349 1.1%
    PBIT margin 19.9% 12.5%   14.4% 11.8%  
    *Excluding inter-segment revenues

  • The net profits of the company declined at a slower pace of 19.3% YoY (compared to the de-growth at the operating level) due to 46.8% YoY growth in other income and 23.4% YoY fall in interest expenses. However, after adjusting for the losses/gains arising on foreign exchange, net profits effectively declined 40.1% YoY.
What to expect?
At the current price of Rs 279, the stock is trading at a multiple of 6.8x its trailing twelve month earnings. We recommended the stock in June 2011 at Rs 276. Since then, the stock corrected quite a bit and tested the lows of 160's. However, since our last result update the stock has appreciated by almost 56% and has reached our recommendation price. Also, SRF has doled out Rs 34 in dividends since our recommendation. Thus, while capital gains from the stock have been limited dividend income has been healthy.

While the overall performance for the quarter looks muted, margin improvement in the TTB and PFB business indicates that a revival is on the cards. This is a good sign considering that the economic conditions are still fragile. Considering the expansion plans lined up and improvement in margins during the quarter we maintain our HOLD view on the stock. We will re-visit our rating and view on the stock in the next quarter when it roughly completes 3 years - our intended time horizon for recommendations.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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