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SRF: Lower forex losses boost profits
Aug 21, 2013

SRF has announced first quarter results of financial year 2013-2014 (1QFY14). The company has reported 1.6% YoY growth in sales while net profits have doubled on a YoY basis. Here is our analysis of the results.

Performance summary
  • Top line increased 1.6% YoY during 1QFY14 led by a 6.4% YoY growth from the Chemicals & Polymers Business (CPB). Revenues from the Technical Textiles Business (TTB) increased 1.6% YoY. However, the Packaging Films Business (PFB) registered a fall of 5.8% YoY during the quarter.
  • Operating profits decline 4.8% YoY in 1QFY14. Operating margins also declined to 15.5% in 1QFY14 from 16.5% in 1QFY13.
  • Net profits doubled during the quarter due to fall in interest expenses (-15.2% YoY), increase in other income (+12.4% YoY) and lower forex losses. It may be noted that the company incurred forex loss of Rs 164 m during the current quarter compared to a loss of Rs 457 m in 1QFY13. Adjusting for these losses, profits declined 11.1% YoY.

Standalone financial snapshot
(Rs m) 1QFY13 1QFY14 Change
Total income from operations 8,118 8,249 1.6%
Expenditure 6,776 6,972 2.9%
Operating profit (EBDITA) 1,341 1,277 -4.8%
Operating profit margin (%) 16.5% 15.5%  
Other income 78 87 12.4%
Interest 239 203 -15.2%
Depreciation 422 484 14.7%
Exchange fluctuation (Loss)/Gain (457) (164) NM
Profit before tax 300.8 513.6 70.7%
Tax 81 76 -6.3%
Profit after tax/(loss) 220 438 99.0%
Net profit margin (%) 2.7% 5.3%  
No. of shares (m)   57.4  
Basic earnings per share (Rs)   7.6  
P/E ratio (x) *   2.8  
* On a trailing 12-months basis

What has driven performance in 1QFY14?
  • SRF's top line increased 1.6% YoY during 1QFY14 led by a 6.4% YoY growth in the CPB. Revenues from the TTB were flat while that from PFB segment declined by 5.8% YoY.

  • Operating profits declined by 4.8% YoY in 1QFY14. On a segmental basis, margins from CPB declined substantially to 22.9% during the quarter from 29.9% in 1QFY13. 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 70 bps YoY to 8.8% while that from the PFB segment increased 40 bps YoY to 3.0% during the quarter.

    Segment-wise performance (Standalone)
      1QFY13 1QFY14 Change
    Technical Textile
    Revenue (Rs m) 4,291 4,362 1.6%
    % share 52.7% 52.8%  
    PBIT margin 8.1% 8.8%  
    Chemicals & Polymers
    Revenue (Rs m) 2,160 2,297 6.4%
    % share 26.5% 27.8%  
    PBIT margin 29.9% 22.9%  
    Packaging Films
    Revenue (Rs m) 1,698 1,600 -5.8%
    % share 20.8% 19.4%  
    PBIT margin 2.6% 3.0%  
    Total
    Revenue (Rs m)* 8,148.9 8,258.1 1.3%
    PBIT margin 12.7% 11.6%  
    *Excluding inter-segment revenues

  • The net profits of the company increased 99.0% YoY due to fall in interest expenses, rise in other income and decline in forex losses during the quarter. However, after adjusting for the losses arising on foreign exchange, net profits effectively declined 11.1% YoY. Also, it may be noted that exchange difference of Rs 414.3 m arising on acquisition of depreciating assets has been added to the cost of fixed assets as per provisions of Accounting Standard 11. As a result of such change, net profits were higher during the quarter.

What to expect?
At the current price of Rs 135, the stock is trading at a multiple of 2.8x its trailing twelve month earnings. While bottomline performance in the current quarter was exceptional, adjusting for exchange differences profits declined by 11.1% YoY. Also, revenue growth was impacted due to slowing growth from TTB and PFB segments. Going forward, the board has approved a capex plan amounting to Rs 500 m pertaining to a new plant that will manufacture specialty chemicals catering to the agrochemical industry. SRF also commissioned its first overseas PFB plant in Thailand during the quarter. Based on the strong expansion plans, increasing overseas presence and attractive valuations (2.8X TTM earnings) 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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