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SRF: Forex losses mars profits - Views on News from Equitymaster
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SRF: Forex losses mars profits
Aug 1, 2012

SRF has announced first quarter results of financial year 2012-2013. The company has reported 3.2% YoY and 73.4% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line declined 3.2% YoY during 1QFY13 led by 7.8% YoY and 9.1% YoY fall in the Chemicals & Polymers Business (CFB) and Packaging Films Business (PFB) respectively.
  • Operating profits decline 17.0% YoY in 1QFY13. Operating margins too decline to 16.6% in 1QFY13.
  • Net profits decline 73.4% YoY in 1QFY13 due to dismal performance at the operating level and forex losses incurred during the quarter. It may be noted that the company incurred forex losses of Rs 457 m during the quarter. Adjusting for these losses, profits declined 18.3% YoY.
  • Three projects in Dahej, Gujarat which involved capex worth Rs 2.5 bn were capitalized and commissioned in the month of July.

Standalone financial snapshot
(Rs m) 1QFY12 1QFY13 Change
Total income  8,388 8,122 -3.2%
Expenditure 6,766 6,776 0.2%
Operating profit (EBDITA) 1,622 1,346 -17.0%
Operating profit margin (%) 19.3% 16.6%  
Other income 91 73 -19.3%
Interest 185 239 29.3%
Depreciation 385 422 9.5%
Exchange fluctuation (Loss)/Gain (1) (457)  
Profit before tax 1,142 301 -73.7%
Tax 314 81 -74.3%
Profit after tax/(loss) 828 220 -73.4%
Net profit margin (%) 9.9% 2.7%  
No. of shares (m)   57.4  
Basic earnings per share (Rs)   3.8  
P/E ratio (x) *   3.6  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • SRF's top line declined 3.2% YoY during 1QFY13 led by a 9.1% YoY fall in the PFB. Revenues from the CFB segment too declined 7.8% YoY. However, revenues from the Technical Textiles Business (TTB) segment increased 2.6% YoY.

  • Operating profits declined by 17.0% YoY in 1QFY13. On a segmental basis, margins from PFB declined substantially to 2.6% during the quarter due to adverse demand-supply situation whereby the Supreme Court has banned use of plastics for packaging of chewing tobacco. As for the TTB segment, margins fell from 9.4% in 1QFY12 to 8.1% in 1QFY13.

    Segment-wise performance (Standalone)
      1QFY12 1QFY13 Change
    Technical Textile      
    Revenue (Rs m) 4,182 4,291 2.6%
    % share 49.8% 52.6%  
    PBIT margin 9.4% 8.1%  
    Chemicals & Polymers      
    Revenue (Rs m) 2,347 2,164 -7.8%
    % share 28.0% 26.5%  
    PBIT margin 32.2% 29.8%  
    Packaging Films      
    Revenue (Rs m) 1,869 1,699 -9.1%
    % share 22.3% 20.8%  
    PBIT margin 11.7% 2.6%  
    Total      
    Revenue (Rs m)* 8,398 8,153 -2.9%
    PBIT margin 16.3% 12.7%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 73.4% YoY due to weak performance at the operating level and forex loss of Rs 457 m incurred during the quarter. After adjusting for this onetime loss, net profits declined 18.3% YoY. The tax rate for the quarter stood at 26.8% compared to 27.5% in 1QFY12.

What to expect?
Revenue growth and profitability of both CPB and PFB segments was under pressure in the current quarter. The profitability of the PFB is expected to remain under pressure due to ban on plastics used for packaging of chewing tobacco. Also, it may be noted that the overall profitability is governed by the CFB segment which includes income generated from sale of carbon credits. With sale of certain type of carbon credits expected to be banned, sustainability of the overall profits is a big issue.

As far as the expansion plans are concerned, SRF has plans to set up a fluorinated specialty plant in Gujarat at an investment of Rs 430 m. The plant will be commissioned in July 2013. It has also commissioned three projects in Gujarat recently with total cost of Rs 2.5 bn. Thus, considering its current capacity expansion plans, niche product portfolio, high dividend yield (7% at current price), and extremely attractively valuations (3.6x trailing twelve month earnings) we maintain our buy rating on the stock from 2-3 year perspective.

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