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SRF Limited: Research meeting excerpts - II - Views on News from Equitymaster
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SRF Limited: Research meeting excerpts - II
Oct 20, 2009

In the first part of this article, we discussed about the major business of SRF – the technical textiles business. In this second and final part of the article, we shall discuss the other two businesses of the company - chemicals & polymers (CPB), and packaging films (PFB). During FY09, the CPB and PFB businesses contributed to nearly 30% and 14% of the company’s consolidated revenues respectively. Chemicals and polymers business
This segment of SRF is further divided into two segments – fluorochemicals and fluorospecialities. The fluorochemicals business is involved in the production of refrigerants and chloromethane. Refrigerants are fluids that are made up of certain chemicals such as hydrogen, fluorine and carbon. They have the characteristic of absorbing heat at low temperatures and rejects heat at higher temperatures. In simple terms, a refrigerant is any substance that is used to provide cooling. As such they are primarily used as a cooling medium by the air-conditioning and refrigeration industry.

SRF is amongst the largest players in this segment having a share of 40% of the domestic market. As per the company, exports of the business are spread across 45 countries, accounting for over 80% of the volumes produced. The main clients for this segment would be Whirlpool, Electrolux, Videocon, BPL, Carrier, LG, Maruti, Telco, Hyundai. As per the company, a large part of the revenues comes from direct supply to the OEMs. As such, the replacement market demand here is very low.

Chlorofluorocarbons (CFCs) have been the company’s key product over the past few years. So have hydrochlorofluorocarbons (HCFCs), which is fluorocarbon that is considered to be an interim replacement to CFCs. However, as these compounds are considered to be destructive to the atmosphere (due to their chlorine content), their production is being phased out under the Montreal Protocol. This is on account of their implications in the accelerated depletion of ozone in the Earth's stratosphere. Hydrofluorocarbons (HFCs), which are compounds that are chlorine free, have been considered as potential replacements for CFCs.

SRF has developed and commercialized HFC-134a, a compound which is finds application in air-conditioning and refrigeration. The company is believed to have the only manufacturing plant in India producing this compound. The fact that the company developed this compound in-house was a great achievement for it.

The company also produces other compounds such as R-22 (a HCFC which is sold to customers) and R-23 (a HFC by which they earn revenues through carbon credits).

However, considering that the phase out of CFCs (a significant revenue generator for the company) has taken place, it will put some amount of pressure on the business segment going forward. It also gives an indication of the importance of its in-house R&D efforts. For the time being SRF plans on commercializing its in-house developed product, the HFC-134a. While the company’s management believes that the industry is growing, a lot of depends on technologies that are being developed as these products tend to phase out in regular intervals.

SRF also manufactures Chloromethane, which has applications as refrigerant gases and also acts as a solvent in the pharmaceuticals industry. Some of the clients for this product include Dr. Reddy's Labs, Ranbaxy, Morepen Speciality Chemicals - Gharda, HFL, Hindustan Rasayan, Torrent.

The company’s fluorospecialities segment involved in production of fluorine based specialty chemicals. These find uses in fields such as agrochemicals, pharmaceuticals and performance products. SRF entered this space in FY04 having a focus on leveraging its expertise to produce intermediates and advanced intermediates, which are used to manufacture Active Pharmaceutical Ingredients (APIs) and agrochemicals.

Packaging Films Business
This segment of the company manufactures Biaxially Oriented Poly Ethylene Terephthalate (BOPET) or Polyester (PET) films, which are used mainly for packaging applications. The company supplies these products to some of the country and world’s largest FMCG companies. These include companies that manufacture soaps, detergents, shampoos, tea, amongst others. SRF also exports these products to SAARC countries, Middle East & West Asia, South East Asia, Europe, CIS countries and the Americas. These products are also suited for a variety of other applications like cable wrap and flexible ducting applications.

The PFB segment of the company has an installed capacity of around 32,000 tonnes per annum. As per the company’s management the industry is growing at a pace of about 20%. During FY09, this segment’s revenues grew by about 27% YoY.

Other details
SRF intends to spend nearly Rs 7 bn over the next two financial years towards capex. Of this, the company intends to invest Rs 3 bn in the technical textiles business (including laminates), Rs 1 bn in its chemicals business and the balance Rs 2 bn in its packaging segment.

Giving its view on its debt repayment plans, the company’s management indicated that it is comfortable with a debt to equity ratio of 1:1. At the end of FY09, SRF’s consolidated debt to equity ratio stood at about 1.1:1. It plans to keep it in the range of 1 to 1.25 by the end of FY10.

Conclusion
At the current price of Rs 218, the stock is trading at a multiple of 6 times its trailing twelve months earnings. While this may seem like an attractive proposition in terms of valuations, the fact that a large part of SRF’s revenues are dependent on the slow growing technical textiles business cannot be ignored. The company’s high debt/equity ratio is also a cause for concern.

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