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SRF Ltd: Lots of spunk and drive - Outside View by Luke Verghese
 
 
SRF Ltd: Lots of spunk and drive

The management appears to be giving its all in running this company in a professional manner, barring some minor glitches that is

The flagship of the Arun Bharat Ram group

SRF is the flagship company of the Arun Bharat Ram group. Arun is the offspring of the late Lala Bharat Ram, one of the three sons of the founder, Lala Sri Ram. (The venture was initially named as Sri Ram Fibres). It now appears to be firmly ensconced in the Arun Bharat Ram fold, without any hindrance from the extended family. Besides Arun, who is the chairman of the board, it includes his son Ashish, the managing director, and his second son Kartikeya who is the deputy managing director. Between the threesome they took home a collective gross remuneration of Rs 95 m. All in all it amounts to a neat package for a year's hard work. (The two offspring of Arun appear to prefer the grandfather's first name as a second name).The promoters currently make do with a holding of 47.4% in the paid up equity of Rs 615 m. With the buy-back programme of its shares being actioned, the promoter holding in the company at the end of the exercise, will in all likelihood, sail over the 50% mark. The directors' have given their sanction for the buyback of shares, through the secondary markets, for a total value of Rs 900 m at a maximum price of Rs 380 per share. At the maximum price of Rs 380, the company will be able to buyback 2.4 m shares, and reduce the capital by a like amount. The FIIs hold around 13.2% of the capital, so there must be something in this share.

A maker of industrial intermediates

It has in the 40 years of its corporate existence developed into a large enterprise by Indian standards. It has a portfolio of businesses in industrial intermediates - which are classified under four broad heads. It consists of the technical textile business, chemicals and polymers business, packaging films business, and engineering plastics. The first named makes do with 4 manufacturing facilities, the second with 5 separate factories and one common facility, and the third named has one separate facility, besides sharing a common facility. All in all collectively, there are 12 manufacturing facilities. The factories are spread over the five states of Tamil Nadu, Rajasthan, MP, Uttarakhand and Gujarat, with Tamil Nadu alone boasting 5 factories, and Uttarakhand another 3 factories.

It also makes do with 10 subsidiaries, including step down subsidiaries, some of which are located offshore. (The book value of such trade investments was a little in excess of Rs 1 bn, before the write-downs in the investment value of some of the investments. The diminution in their value amounted to Rs 172 m. The book value of the trade investments underwent a shift, falling from Rs 1.8 bn in the preceding year end. This fall was however more than compensated for by new investments in current debt instruments to the tune of Rs 1.1 bn). Besides, not only is the consolidated entity bulky, the annual report and accounts at 128 pages is just as bulky.

Its revenue accruals

On a standalone basis the company registered gross revenues including other income and excise duty, of Rs 33.8 bn in 2010-11 against Rs 24.1 bn previously, or a rise of 41%. The other income is a sizeable constituent at Rs 1.2 bn against Rs 681 m previously. The pre-tax profit on the other hand rose 49% to Rs 6.8 bn. (Some reasons for this are that it has a very firm grip on its trade debtors, on the inventory levels, and on the interest outflow on the large debt. The interest quantum debited to capital account is not known. Amazingly enough, and for a manufacturing company at that, the trade debtors at year end was a mere 13.5% of gross manufactured sales). In this turnover mix, the biggest constituent of the turnover was the technical textiles business with sales of Rs 14.4 bn. This line consists of tyre cords reinforcement, belting fabric, coated and laminated fabrics, and the industrial yarn business. The Chemicals and Polymers biz consists of refrigerants, chloromethanes, and fluorospecialities. The third line is the packaging films biz. The last named is engineering plastics, which caters to the automotive and electrical industries. The individual contributions of the last three are not immediately known.

Individually, the single biggest sales quotient is an item labelled as nylon tyre cord/polyester tyre cord/industrial yarn fabric, which ratcheted up a turnover of Rs 13.3 bn. That accounts for over 40% of gross turnover of Rs 32.6 bn. Next in line are polyester films, accounting for another 30% of gross revenues. Standing third in the sweepstakes is fluorochemicals and allied products accounting for another 9% of revenues. The three product lines, from among the 11 manufactured items which generated the top-line cash flow, accounted for close to 80% of all revenues. Sales revenues also included income from waste sales, traded goods, and an apology of an item called conversion income. Purchased items for resale include small quantities of yarn, chloromethanes, polyester chips and nylon chips. What value addition such traded sales bring in beats me totally. What must be noted here is that foreign exchange earnings brought in a very sizeable income of Rs 7.9 bn, or 27% of net revenues.

On a segmental revenue basis, the technical textiles biz begat a profit margin of a mere 10.7% on sales. The chemicals and polymers biz realised a margin of 39.4%, while the packaging films biz made do with a margin of 40%. Ironically, the two divisions that contribute 24% and 28% to gross revenues, including other income, generate the big bucks. This profit margin calculation is slightly way off target, as the substantial other income component which has to be excluded, cannot be isolated from the revenues. The margins have also to be in conjunction to the fact that 53% of the allocable segment assets are hogged by the technical textiles biz. Such differing margins could also infer that there is less competition in the polymers business and in the packaging biz than in the first category. The unknown element here is the margins that the sizeable export business generates. It is buried in the segmental data. It should be made mandatory for companies to give more data on such revenue accretions.

The input factor

The raw material base includes a stiff dose of petro based components. With oil prices flip flopping, it is no surprise that material input costs rose 45% to Rs 15.9 bn during the year, against a 39% increase in net manufactured sales. The foreign exchange outgo amounted to a very sizeable Rs 7.6 bn. The value of imported materials consumed accounted for 41% of all raw materials consumed. (This dependence may play nuts with the company's costing in the current year if it cannot pass on cost increases due to the fall in the rupee parity rate). But the second biggest item of revenue expenditure, manufacturing expenses, grew only 28% to Rs 5.9 bn. What is surprising is that interest charges debited to revenue account rose 23% to Rs 839 m, inspite of a year-end fall in outstanding debt to Rs 8.1 bn from Rs 9.4 bn previously. There was a marginal increase in depreciation provision too. The company was also fortunate that there was a 75% increase in other income to Rs 1.2 bn. (This was due to a windfall receipt of Rs 718 m from the sale of carbon emission credits). A credit of this quantum may not be forthcoming in the current year. Other income accounted for 18% of pre-tax profits against a lower 15% previously. The company is also very lucky that it on the right side of the forex hedging deals, given its humungous forex needs, to lubricate the import and export churning. Receipts from forex gains were substantial in either year. Such receipts if any are also unquantifiable.

Funds generation

In keeping with the margins that it generated, the funds generation schedule reveals that the company was more than able to ante up the cash from operations to fund fixed assets growth. The company spent two billion bucks on fixed assets. In the preceding year it spent Rs 3.5 bn on fixed assets. This addition has led to a marginal increase in the production capacity of the nylon tyre cord plant, and of the HFC plant. With the excess funds at its disposal including the Rs 880 m that it realised from the sale of its wholly owned subsidiary, SRF Overseas Ltd, (through a book entry), it bought and sold debt securities. It had excess securities to the tune of Rs 1.1 bn at the end of the trading exercise. If it made any revenue gains, other than dividend incomes, if any, from this exercise, it is not showing up in the other income schedule. SRF Overseas, now its step down subsidiary was the company through which it routed some of the purchase of goods and the sale of goods during the year, besides rendering services to it. The sale of SRF Overseas led to a marginal profit of Rs 29 m. Despite the flurry of trade in debt instruments, which left it out of pocket, the surplus cash generated from operations was enough to tide it over. The balance surplus funds in turn enabled the company to reduce long term debt at the end of the year after paying off interest on debt and dividend payouts.

The subsidiaries

This brings us into the ambit of the subsidiaries. For purposes of consolidation, the company has incorporated the results of 9 subsidiaries and/ or step-own subsidiaries and step-downs of the step downs. (There are in all 10 siblings). The list includes five offshore companies. The parent has six direct subsidiaries of its own, and the balance four companies are step down subsidiaries. For the purpose of comparison between the consolidated group and the standalone company, the revenues logged in by the consolidated results show up at Rs 35.2 bn, with a pre-tax profit of Rs 6.9 bn. The revenues are appreciably higher, but the pre-tax profit is languishing. The parent has a holding company styled as SRF Global BV. This company seems to have taken over the role of SRF Overseas Ltd. SRF Global is the beneficiary of the biggest investment outlay at Rs 796 m by the parent, out of a cumulative investment of Rs 1.1 bn that it has made. The acronym BV is for companies incorporated in the Netherlands - which is some sort of a tax haven - whatever that means. The face value of the shares is euro 100 which translates into Rs 6,174 each. This company in turn has spawned one subsidiary, SRF Tech Textiles and three step-down subsidiaries. The three step downs are based out of South Africa, UAE, and Thailand respectively.

But the parent company of the siblings, SRF Global, is quite a scream by itself. It has a capital base of Rs 776 m (the shareholding of the parent in the company shows Rs 796 m), investments of the value of Rs 771 m and nothing else. On a zilch turnover, it conjured up the Harry Houdini trick of generating a pre-tax profit of Rs 3.7 m. SRF Global's entire investment portfolio is in its 100% subsidiary SRF Tech Textiles BV. Though this company boasts total assets of Rs 446 m, it could only generate a marginal turnover of Rs 10 m. It also reported a loss before tax of Rs 24.4 m. There is not much therefore to write home here on this zombie. SRF Tech Textiles in turn procreated three companies going by the names of SRF Overseas Ltd, SRF Technical Textiles and SRF Industries Belting. So SRF Overseas Ltd has now gravitated to being a step down a subsidiary of the parent. Wonder how the sale price of this company was arrived at.

SRF Tech Textiles in turn has an investment portfolio of Rs 1.2 bn and it is invested in the capital base of its three aforesaid siblings. SRF Overseas, which has capital base of Rs 1.1 bn, SRF Technical Textiles with a capital base of Rs 147 m, and SRF Industex Belting with a capital base of Rs 87 m. The total capital bases of the three companies' amounts to Rs 1.3 bn, which is greater than the investment portfolio of their parent! Considering that these companies are 100% subsidiaries of their parent, it does not appear to quite add up. SRF Overseas has negative reserves of Rs 393 m and total assets of Rs 956 m. On a sizeable turnover of Rs 1.6 bn it however posted a pre-tax loss of Rs 40 m. This is inspite of its sizeable deals going with the ultimate parent, SRF Ltd. The Thai subsidiary on the other hand appears to be standing on firm legs. It has positive reserves of Rs 982 m, and a total asset base of Rs 2.6 bn. On a turnover of Rs 2.6 bn it even managed a pipsqueak profit of Rs 38 m.SRF Industex Belting too is on a roll.

The only other company of significance in this jigsaw puzzle is the colourfully named SRF Transnational Holdings Ltd, a direct subsidiary of SRF Ltd. This company has a capital base of Rs 325 m (shown in the investment portfolio of the parent at a value of Rs 147 m and fully provided for to boot).It has negative reserves of Rs 230 m and total assets of Rs 153 m. On a turnover of Rs 16 m, it rustled up a pre-tax profit of Rs 5 m. It appears to be on the mend or some such.

What is coming cross clearly about the subsidiaries is that the companies with the big ticket capital bases-SRF Global, SRF Tech Textiles and SRF Overseas Ltd are in the boondocks, while the companies with the meagre capital bases are on a roll. It is also not known whether any or all of these subsidiaries have also cannibalised or not on the loans and advances portfolio of the parent-there are no foot notes on this score.

Barring the fact that its major subsidiaries seem to be totally out of depth, this company is worth taking a long look at.

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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