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SRF: Forex losses mar profits - Views on News from Equitymaster

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SRF: Forex losses mar profits
Nov 28, 2011

SRF has announced second quarter results of financial year 2011-2012 (2QFY12). The company has reported 22.2% YoY growth in sales. However, net profits have declined by 11.8% YoY. Here is our analysis of the results.

Performance summary
  • Top line registered a growth of 22.2% YoY during 2QFY12 led by strong performance from the Chemicals & Polymers business.
  • Operating profits increase 17.7% YoY in 2QFY12, lower than the growth in top-line.
  • Net profits decline 11.8% YoY in 2QFY12 due to an exchange loss of Rs 338.0 m during the quarter compared to gain of Rs 158 m in 2QFY11. Adjusting for these exceptional items, net profits increased 33.3% YoY.
  • The company has bought back approximately 1.3 m shares at an average price of Rs 304 till date. The company aims/may buy-back shares worth Rs 900 m (inclusive of the current buy-back) by February 2012.
  • The board has approved an interim dividend of Rs 7 per share.

Standalone financial snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Total income 7,482 9,139 22.2% 13,672 17,527 28.2%
Expenditure 5,344 6,623 23.9% 10,244 13,370 30.5%
Operating profit (EBDITA) 2,138 2,517 17.7% 3,428 4,157 21.3%
Operating profit margin (%) 28.6% 27.5%   25.1% 23.7%  
Other income 18 39 117.2% 76 130 71.7%
Interest 205 210 2.2% 401 413 2.8%
Depreciation 381 390 2.3% 748 776 3.7%
Profit before tax 1,570 1,956 24.6% 2,354 3,099 31.6%
Exchange fluctuation Loss/ (Gain) (158) 338   (179) 339  
Tax 514 548 6.6% 772 862 11.7%
Profit after tax/(loss) 1,214 1,070 -11.8% 1,762 1,899 7.8%
Net profit margin (%) 16.2% 11.7%   12.9% 10.8%  
No. of shares (m)         60.0  
Basic earnings per share (Rs)         31.6  
P/E ratio (x) *         3.5  
*On trailing 12 month basis

What has driven performance in 2QFY12?
  • SRF's top line increased 22.2% YoY during 2QFY12 led by strong performance from the Chemical & Polymers Business (CPB) and Technical Textile Business (TTB). Revenues from the CPB and TTB segment increased 84.9% YoY and 18.1% YoY respectively. However, revenues from the Packaging Films Business (PFB) segment declined 24.1% YoY.

  • Operating margins declined to 27.5% in 2QFY12 due to increase in operating expenses as a percentage of revenues. On a segmental basis, margins from the PFB declined substantially from 41.6% in 2QFY11 to 6.7% in 2QFY12 due to adverse demand-supply situation. Even the TTB segment faced margin pressures due to raw material price inflation.

    Segment-wise performance (Standalone)
      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Technical Textile
    Revenue (Rs m) 3,553 4,197 18.1% 6,925 8,379 21.0%
    % share 47.4% 45.8%   50.6% 47.7%  
    PBIT margin 9.5% 7.0%   10.6% 8.2%  
    Chemicals & Polymers
    Revenue (Rs m) 1,805 3,338 84.9% 3,086 5,685 84.2%
    % share 24.1% 36.4%   22.5% 32.4%  
    PBIT margin 37.4% 56.3%   37.8% 46.6%  
    Packaging Films
    Revenue (Rs m) 2,139 1,624 -24.1% 3,687 3,493 -5.3%
    % share 28.5% 17.7%   26.9% 19.9%  
    PBIT margin 41.6% 6.7%   32.5% 9.5%  
    Total
    Revenue (Rs m)* 7,497 9,158 22.2% 13,699 17,557 28.2%
    PBIT margin 25.4% 24.9%   22.6% 20.9%  
    *Excluding inter-segment revenues

  • The net profits of the company declined 11.8% YoY due to an exchange loss of Rs 338 m during the quarter. However, adjusting for the onetime loss net profits increased 33.3% YoY. Strong performance at the operating level and rise in other income boosted adjusted profits. It may be noted that the tax rate for the quarter stood at 28.0% compared to 32.7% in 2QFY11.

What to expect?
While the top-line growth was boosted by strong performance from the CPB segment, margin pressures were visible during the quarter. Going forward, management expects both volumes and margins to remain under pressure in light of the weak macro-environment. However, capacity expansion plans and a niche product portfolio keep the long term growth prospects intact. Thus, we maintain our positive view on the stock from 2-3 year perspective.

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