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SRF: Forex gain boosts profits - Views on News from Equitymaster

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SRF: Forex gain boosts profits
May 11, 2012

SRF has announced fourth quarter and full year results of financial year 2011-2012 (4QFY12 and FY12). The company has reported 2.8% YoY and 36.1% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line declined 2.8% YoY during 4QFY12 led by 31.2% YoY fall in the Packaging Films Business (PFB).
  • Operating profits decline 38.0% YoY in 4QFY12, due to increase in operating expenditure.
  • Net profits decline 36.1% YoY in 4QFY12 due to increase in depreciation and interest expenses. However, an exchange gain of Rs 428 m boosted the profits for the quarter. Adjusting for this exceptional gain, net profits declined 66.6% YoY.
  • The current standalone debt/equity ratio of the company stands at 0.3x.
  • With two interim dividends paid in November 2011 and February 2012, the total dividend paid for the year stood at Rs 14 per share.

Standalone financial snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Total income 8,520 8,285 -2.8% 30,633 35,303 15.2%
Expenditure 6,134 6,805 10.9% 21,998 27,039 22.9%
Operating profit (EBDITA) 2,386 1,480 -38.0% 8,635 8,263 -4.3%
Operating profit margin (%) 28.0% 17.9%   28.2% 23.4%  
Other income 26 79 199.6% 148 280 89.5%
Interest 204 277 36.2% 777 1,041 34.0%
Depreciation 377 423 12.3% 1517 1,617 6.6%
Exchange fluctuation (Loss)/Gain 40 428 977.8% 286 (227)  
Profit before tax 1,871 1,286 -31.3% 6,775 5,659 -16.5%
Tax 511 416 -18.6% 1940 1,785 -8.0%
Profit after tax/(loss) 1,361 870 -36.1% 4,834 3,874 -19.9%
Net profit margin (%) 16.0% 10.5%   15.8% 11.0%  
No. of shares (m)         59.1  
Basic earnings per share (Rs)         65.6  
P/E ratio (x) *         3.3  
(*On a trailing 12-month basis)

What has driven performance in 4QFY12?
  • SRF's top line declined 2.8% YoY during 4QFY12 led by a 31.2% YoY fall in the PFB. However, revenues from the Chemicals & Polymers Business (CPB) and Technical Textiles Business (TTB) segment increased 12.4% YoY and 4.6% YoY respectively.

  • Operating profits declined by 38.0% YoY in 4QFY12 due to increase in operating expenditure. On a segmental basis, margins from PFB declined substantially with the segment effectively reporting a loss due to adverse demand-supply situation. As for the TTB segment margins fell from 10.5% in 4QFY11 to 4.4% in 4QFY12. Margins from the CPB segment also declined marginally from 43.1% in 4QFY11 to 42.6% in 4QFY12.

    Segment-wise performance (Standalone)
      4QFY11 4QFY12 Change FY11 FY12 Change
    Technical Textile            
    Revenue (Rs m) 3,915 4,096 4.6% 14,512 16,744 15.4%
    % share 45.9% 49.3%   47.3% 47.3%  
    PBIT margin 10.5% 4.4%   7.9% 6.3%  
    Chemicals & Polymers            
    Revenue (Rs m) 2,372 2,665 12.4% 7,467 12,052 61.4%
    % share 27.8% 32.1%   24.3% 34.0%  
    PBIT margin 43.1% 42.6%   38.7% 49.3%  
    Packaging Films            
    Revenue (Rs m) 2,246 1,546 -31.2% 8,713 6,607 -24.2%
    % share 26.3% 18.6%   28.4% 18.7%  
    PBIT margin 36.3% -2.4%   39.7% 3.7%  
    Total            
    Revenue (Rs m)* 8,532 8,307 -2.6% 30,692 35,403 15.3%
    PBIT margin 26.4% 15.4%   25.7% 20.5%  
    * Excluding inter-segment revenues

  • The net profits of the company declined 36.1% YoY due to weak performance at the operating level and increase in interest and depreciation expenses. However, an exchange gain of Rs 428 m boosted profits. After adjusting for this onetime gain net profit declined 66.6% YoY. The tax rate for the quarter stood at 32.3% compared to 27.3% in 4QFY11.

What to expect?
While the CPB and TTB segments reported modest growth rate the PFB segment continued to face challenges. Both revenues and margins were down during the quarter. As far as the overall operating profitability of the year is concerned roughly 72% of the same came from the CPB segment. And the CPB segment includes income generated from the sale of carbon credits which is not sustainable in nature considering the revised Kyoto Protocol norms. As per the new norms, the trading on certain type credits might be banned. This might negatively impact the profitability of the CFP segment which had a lion's share in the overall profitability during FY12. However, considering a niche product portfolio, high dividend yield (6.4%), and extremely attractively valuations (3.3x trailing twelve month earnings) we maintain our positive view on the stock from 2-3 year perspective.

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