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SRF Limited: Research meeting excerpts - I
Oct 8, 2009

We recently met up with the management of SRF Limited (SRF) to get a better understanding of its various businesses and the outlook on the same is. Here are the excerpts from the meeting. About SRF

Broadly, SRF is involved in three businesses - technical textiles business (TTB), chemicals & polymers (CPB) and packaging films business (PFB). The company's largest revenue contributor is the TTB, contributing nearly 55% of consolidated revenues (as of FY09). The other two businesses, CPB and PFB, contributed to nearly 30% and 14% of the consolidated revenues respectively. Recently, the company made two foreign acquisitions. First in Thailand, where it acquired Thai Baroda Industries Limited, and the second in South Africa wherein it acquired the belting fabrics business of Industex Technical Textiles (Pty) Limited. While the former is involved in the business of manufacturing tyre cords, the latter manufacturers belting fabrics.

SRF: Consolidated segmentwise revenue breakup (FY09)
Data Source: Company's FY09 annual report

Technical textiles business (TTB)

SRF's TTB can be further broken down into three parts - nylon tyre cord fabric, belting fabric and coated fabric. The nylon tyre cord business contributes to nearly 70% of TTB's revenues. The belting fabrics business adds nearly 20% of the segment's revenues while the balance is contributed by its coated fabrics business. This indirectly makes the tyre cord fabric business the largest contributor to the company's overall revenues.

Before we get into detailed discussion about the various business and products, we shall take a brief look at the tyres market (as SRF's revenues are dependent on this sector). There are two types of tyres - radial tyres and bias tyres. Radial tyres are relatively new tyres in the auto world as against bias tyres. While we will ignore the technical specifications, in simple terms radials are more long lasting tyres, and provide certain benefits to vehicles in the long run. Some of these benefits include lesser fuel consumption, slower wear out, better traction, and better productivity.

However, being a better and newer technology, radials are relatively more expensive. This, along with the fact that the quality of roads in India is not something that the country can boast of, is the reason why bias tyres are preferred in India (barring the passenger car segment). As per tyre manufactures Ceat and MRF, nearly 95% of the tyres in the passenger car segment are radial tyres. However, the commercial vehicles i.e., trucks and buses still run on bias tyres.

It is believed that only 10-12% of such vehicles are radialised. In comparison, the world average of the usage of radial tyres by such vehicles stands at about 60%. As such, the management of Ceat expects radialisation to reach levels of 30% in commercial vehicles (CVs) and 20% in LCVs (light CVs) in approximately three years.

Coming back to SRF's nylon tyre cord business, this product is used as a reinforcement material in bias tyres. As such its final customers would be the CV users. The business is driven indirectly by the overall condition of the economy and hence, the performance of the auto sector. While the company supplies this product directly to the OEMs (original equipment manufacturers, or automakers), nearly 75% of its revenues come from the replacement market.

Giving its view on the growth of this business, the management mentioned that historically, the performance has been in line with the India's GDP growth. In addition, it also added that this business is not likely to witness a fast growth as nylon is considered to be a fabric of the past. A relatively newer technology in the tyre cord business is of polyester cords, which are used for radial tyres. The company has an installed capacity of 14,500 tonnes per annum (TPA) of the same as against its 56,700 TPA capacity for nylon cords.

It may be noted that currently SRF is the domestic leader in the tyre cord fabric business. On the whole, the company has 8 plants, of which 7 are dedicated to TTB (mainly towards tyre cord fabrics). Of these 8 plants, three are located abroad (Thailand, South Africa and Dubai). On the whole, the company has an installed capacity of 54,000 TPA in TTB (again, most of the capacity dedicated towards tyre cord fabrics).

One advantage SRF has over its competitors is of its strong and long relationships with its clients. Tyre manufacturers such as MRF, CEAT, JK, Bridgestone, amongst others are some of the company's long standing clients. As per the company, its clients are secured with the fact that their demands will be met (in terms of volumes) considering that SRF has a good capacity and is the sole supplier in India (apart from Century Enka that has a relatively smaller capacity).

Pricing of these products is done depending on the contract. As per the company, it signs long term contracts with clients. However, as the key raw material for manufacturing this product is caprolactam (a byproduct of crude), SRF needs to keep changing the price (given the volatility in crude oil prices) in order to protect margins. As per the company, nearly 50-55% of the cost is caprolactam, while the balance is shared by catalysts and chemicals, amongst others. The company sources this product from chemical companies such as GSPC and FACT in India.

We shall now move on to the other two segments of TTB - belting fabrics and coated fabrics. Belting fabrics are used as reinforcement material for conveyor belts, which are used in the infrastructure, construction and mining sectors. As per the company, volumes in this segment have increased at an average annual rate of around 13% during the past five years. The company is the market leader in this segment as well, having a domestic market share of about 60%.

SRF's coated fabrics business supplies products used in various applications such as protective covers, dynamic tarpaulins (waterproof canvas), static covers, auto canopies, signages and awnings (sun shelters). During FY09, this business grew by about 17% YoY.

As per the company, the key risks involved with these businesses are the overall slowdown in the economy and the lag effect between the raw material and finished goods pricing. While the company may be the market leader in TTB, it does face a certain amount of competition. Apart from competition from Chinese players, Century Enka is one company that competes with SRF in the domestic arena. At the end of FY09, Century Enka had a tyre cord fabric capacity of 22,000 tonnes.

In the second and final part of this article, we shall be delving into the other two businesses of the company - chemicals & polymers, and packaging films.

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