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SRF: A weak end to the year - Views on News from Equitymaster

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SRF: A weak end to the year
May 11, 2013

SRF has announced fourth quarter and full results of financial year 2012-2013 (4QFY13). The company has reported 1.3% YoY and 17.4% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line declined 1.3% YoY during 4QFY13 led by a fall in revenues from the Chemicals & Polymers Business (CPB) and the Packaging Films Business (PFB). Revenues from CPB declined 0.7% YoY while that from the PFB declined 5.2% YoY. Revenues from the Technical Textiles Business (TTB) were flat at 0.1% YoY during the quarter.
  • Operating profits decline 10.2% YoY in 4QFY13. Operating margins also declined to 16.3% in 4QFY13 from 17.9% in 4QFY12.
  • Net profits decline 17.4% YoY in 4QFY13 due to dismal performance at the operating level. It may be noted that the company incurred forex gain of Rs 82 m during the current quarter compared to a gain of Rs 428 m in 4QFY12. Adjusting for these gains, profits increased 44.2% YoY.
  • The standalone debt/equity ratio at the end of the year stood at 0.41x
  • The final dividend for the quarter was nil but two quarterly dividends were paid in the interim, taking the full year figure to Rs 10 per share.

Standalone financial performance
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Total income  8,288 8,182 -1.3% 35,272 33,226 -5.8%
Expenditure  6,805 6,850 0.7% 27,039 27,285 0.9%
Operating profit (EBDITA) 1,484 1,332 -10.2% 8,233 5,941 -27.8%
Operating profit margin (%) 17.9% 16.3%   23.3% 17.9%  
Other income 75 292 289.6% 311 438 40.9%
Interest 277 152 -45.2% 1041 847 -18.7%
Depreciation 423 480 13.3% 1617 1,843 14.0%
Exchange fluctuation (Loss)/Gain 428 82 -80.9% (227) (163)  
Profit before tax 1,286 1,074 -16.5% 5,659 3,526 -37.7%
Tax 416 355 -14.6% 1785 941 -47.3%
Profit after tax/(loss) 870 719 -17.4% 3,874 2,585 -33.3%
Net profit margin (%) 10.5% 8.8%   11.0% 7.8%  
No. of shares (m)         57.4  
Basic earnings per share (Rs)          45.0  
P/E ratio (x) *         3.8  
* On a trailing 12-months basis

What has driven performance in 4QFY13?
  • SRF's top line declined 1.3% YoY during 4QFY13 led by a 5.2% YoY fall in the PFB. Revenues from the TTB were flat while that from CFB segment declined by of 0.7% YoY.

  • Operating profits declined by 10.2% YoY in 4QFY13. On a segmental basis, margins from CPB declined substantially to 31.7% during the quarter from 42.7% in 4QFY12. We believe this may be due to decline in income from sale of carbon credits. 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. Margins from the TTB segment improved by 40 bps YoY to 4.8% in 4QFY13. However, the PFB segment continued to report a loss for the quarter.

    Segment-wise performance (Standalone)
      4QFY12 4QFY13 Change FY12 FY13 Change
    Technical Textile
    Revenue (Rs m) 4,095 4,100 0.1% 16,729 16,709 -0.1%
    % share  49.4% 50.0%   47.3% 50.2%  
    PBIT margin 4.4% 4.8%   6.3% 6.7%  
    Chemicals & Polymers 
    Revenue (Rs m) 2,659 2,640 -0.7% 12,041 10,350 -14.0%
    % share  32.0% 32.2%   34.0% 31.1%  
    PBIT margin 42.7% 31.7%   49.3% 33.5%  
    Packaging Films 
    Revenue (Rs m) 1,544 1,463 -5.2% 6,602 6,208 -6.0%
    % share  18.6% 17.8%   18.7% 18.7%  
    PBIT margin -2.4% -1.4%   3.7% 0.5%  
    Total
    Revenue (Rs m)* 8,297 8,203 -1.1% 35,373 33,266 -6.0%
    PBIT margin 15.4% 12.3%   20.5% 13.9%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 17.4% YoY due to weak performance at the operating level. However, after adjusting for the gains arising on foreign exchange, net profits increased 44.2% YoY. For the full year, profits fell 33.3% YoY.

What to expect?
The current quarter and full year performance was a disappointment, both on revenue and profitability front. While revenue growth was impacted due to slowdown in CFP and PFB business segments, profitability was impacted due to fluctuating income from carbon credits. Going forward, while the immediate growth prospects are not that bright, the company has already received approval for setting up two plants producing specialty chemicals at the cost of Rs 900 m.

Even the valuations are quite attractive at 3.8x trailing twelve month earnings and the stock offers a good dividend yield (5.8% based on dividends paid during FY13). As a result, we maintain our HOLD view on the stock.

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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