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SRF: Operating margins expand - Views on News from Equitymaster

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SRF: Operating margins expand
Nov 6, 2013

SRF has announced second quarter results of financial year 2013-2014 (2QFY14). The company has reported 5.0% YoY growth in sales while net profits have declined by 36.6% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased 5.0% YoY during 2QFY14 led by a 12.4% YoY growth from the Packaging Films Business (PFB). Revenues from the Technical Textiles Business (TTB) also increased by 4.2% YoY. However, growth from the Chemicals & Polymers Business (CPB) was flat during the quarter.
  • Operating profits increased 19.9% YoY in 2QFY14 with margins registering an improvement of 1.9% YoY.
  • Net profits declined 36.6% YoY during the quarter due to an exchange loss of Rs 65 m during the quarter compared to a gain of Rs 415 m in 2QFY13. Adjusting for the forex gain/losses net profits increased 60.6% YoY.
  • The company approved an interim dividend of Rs 3 per share during 2QFY14.
  • The debt to equity ratio stood at 0.5x at the end of the quarter.

Standalone financial snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total income from operations 8,037 8,439 5.0%  16,155 16,688 3.3%
Expenditure 6,924 7,103 2.6% 13,700 14,076 2.7%
Operating profit (EBDITA) 1,114 1,336 19.9% 2,455 2,612 6.4%
Operating profit margin (%) 13.9% 15.8%   15.2% 15.7%  
Other income  40 53 33.2% 118 140 19.4%
Interest  247  226 -8.5% 486 429 -11.8%
Depreciation  463  480 3.6% 885 964 8.9%
Exchange fluctuation (Loss)/Gain 415 (65) NM (42) (229) NM
Profit before tax 859 617 -28.1% 1,160 1,131 -2.5%
Tax 105 140 32.9% 186 215 15.9%
Profit after tax/(loss) 754 478 -36.6% 974 916 -6.0%
Net profit margin (%) 9.4% 5.7%   6.0% 5.5%  
No. of shares (m)           57.3  
Basic earnings per share (Rs)          16.0  
P/E ratio (x) *          4.0  
* On a trailing 12-months basis

What has driven performance in 2QFY14?
  • SRF’s top line increased 5.0% YoY during 2QFY14 led by a 12.4% YoY growth in the PFB. Revenues from the CPB were flat while that from TTB segment increased by 4.2% YoY.

  • Operating profits increased by 19.9% YoY in 2QFY14. On a segmental basis, margins from CPB declined to 16.7% during the quarter from 20.4% in 2QFY13. 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 both TTB and PFB segments registered substantial improvement and were up by 2.8% YoY and 4.1% YoY respectively.

    Segment-wise performance (Standalone)
      2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Technical Textile
    Revenue (Rs m) 4,345 4,529 4.2% 8,637 8,891 2.9%
    % share 54.0% 53.6%   53.4% 53.2%  
    PBIT margin 7.5% 10.3%   7.8% 9.6%  
    Chemicals & Polymers
    Revenue (Rs m) 2,063 2,083 0.9% 4,195 4,380 4.4%
    % share 25.6% 24.6%   25.9% 26.2%  
    PBIT margin 20.4% 16.7%   25.4% 19.9%  
    Packaging Films
    Revenue (Rs m) 1,637 1,841 12.4% 3,335 3,440 3.1%
    % share 20.4% 21.8%   20.6% 20.6%  
    PBIT margin 3.5% 7.6%   3.0% 5.5%  
    Total
    Revenue (Rs m)* 8,046 8,453 5.1% 16,167  16,711 3.4%
    PBIT margin 10.0% 11.3%   11.4% 11.4%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 36.6% YoY due to and exchange loss of Rs 65 m compared to a gain of Rs 415 m in 2QFY13. However, after adjusting for the losses/gains arising on foreign exchange, net profits effectively increased 60.6% YoY.
What to expect?
At the current price of Rs 174, the stock is trading at a multiple of 4x its trailing twelve month earnings. While bottomline performance in the current quarter looks muted, adjusting for exchange differences, profits increased by 60.6% YoY. Revenue growth was relatively modest due to flattish performance from the CPB segment. Nonetheless, margin expansion at the operating level was a big positive. Margin expansion of TTB and PFB businesses led to a strong performance during the quarter. Considering the expansion plans lined up in the past and improvement in margins during the quarter 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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