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SRF: Chemicals & Polymers segment suffers - Views on News from Equitymaster
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SRF: Chemicals & Polymers segment suffers
Nov 8, 2012

SRF has announced second quarter results of financial year 2012-2013 (2QFY13). The company has reported 12.1% YoY and 29.6% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Top line declined 12.1% YoY during 2QFY13 led by 38.2% YoY fall in the Chemicals & Polymers Business (CPB). Revenues from Technical Textiles Business (TTB) and Packaging Films Business (PFB) grew 3.5% YoY and 0.8% YoY respectively.
  • Operating profits decline 55.4% YoY in 2QFY13. Operating margins, too, declined to 13.9% in 2QFY13 from 27.3% in 2QFY12.
  • Net profits decline 29.6% YoY in 2QFY13 due to dismal performance at the operating level. It may be noted that the company incurred forex gain of Rs 415.4 m during the quarter. Adjusting for these gains, profits declined 73.4% YoY.
  • The debt/equity ratio as of September 2012 stood at 0.47x
  • The board has approved an interim dividend of Rs 5 per share.

Standalone financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Total income 9,139 8,037 -12.1% 17,527 16,160 -7.8%
Expenditure 6,642 6,924 4.2% 13,407 13,700 2.2%
Operating profit (EBDITA) 2,497 1,114 -55.4% 4,120 2,459 -40.3%
Operating profit margin (%) 27.3% 13.9%   23.5% 15.2%  
Other income 39 40 1.8% 130 113 -12.9%
Interest 326 247 -24.3% 511 486 -4.9%
Depreciation 390 463 18.7% 776 885 14.1%
Exchange fluctuation (Loss)/Gain (202) 415   (203) (42)  
Profit before tax 1,618 859 -46.9% 2,760 1,160 -58.0%
Tax 548 105 -80.8% 862 186 -78.4%
Profit after tax/(loss) 1,070 754 -29.6% 1,899 974 -48.7%
Net profit margin (%) 11.7% 9.4%   10.8% 6.0%  
No. of shares (m)         57.4  
Basic earnings per share (Rs)         17.0  
P/E ratio (x) *         4.4  
* On a 12-month trailing basis

What has driven performance in 2QFY13?
  • SRF's top line declined 12.1% YoY during 2QFY13 led by a 38.2% YoY fall in the CPB. However, revenues from the TTB and PFB segment grew at modest pace of 3.5% YoY and 0.8% YoY respectively.

  • Operating profits declined by 55.4% YoY in 2QFY13. On a segmental basis, margins from CPB declined substantially to 20.4% during the quarter from 55.8% in 2QFY12. We believe this may be due to absence of income from sale of carbon credits. Margins from the PFB segment also declined from 6.5% in 2QFY12 to 3.5% in 2QFY13 due to adverse demand-supply situation.

    Segment-wise performance (Standalone)
      2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Technical Textile
    Revenue (Rs m) 4,197 4,345 3.5% 8,379 8,637 3.1%
    % share 45.8% 54.0%   47.7% 53.4%  
    PBIT margin 7.0% 7.5%   8.2% 7.8%  
    Chemicals & Polymers
    Revenue (Rs m) 3,338 2,063 -38.2% 5,685 4,198 -26.2%
    % share 36.4% 25.6%   32.4% 26.0%  
    PBIT margin 55.8% 20.4%   46.0% 25.4%  
    Packaging Films
    Revenue (Rs m) 1,624 1,637 0.8% 3,493 3,336 -4.5%
    % share 17.7% 20.4%   19.9% 20.6%  
    PBIT margin 6.5% 3.5%   9.3% 3.0%  
    Total
    Revenue (Rs m)* 9,158 8,046 -12.1% 17,557 16,171 -7.9%
    PBIT margin 24.7% 10.0%   20.7% 11.4%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 29.6% YoY due to weak performance at the operating level. However, after adjusting for the onetime gain arising on foreign exchange, net profits declined 73.4% YoY. The tax rate for the quarter stood at 12.2% compared to 33.8% in 2QFY12.

What to expect?
Revenue growth and profitability of both CPB and PFB segments was under pressure in the current quarter. As highlighted in our 1QFY13 results analysis, the overall profitability is governed by CPB which includes income generated from sale of carbon credits. Thus, sustaining the same was always a challenge for the company. Supposedly, there was no material income from the sale of carbon credits in this quarter. As a result, the profits fell dramatically. However, considering its current capacity expansion plans, niche product portfolio, and extremely attractively valuations (4.4x trailing twelve month earnings) we maintain our BUY rating on the stock from 2-3 year perspective.

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