SRF Ltd: Coming of Age

The expansion projects in the last two years are set to lift future profits of SRF

LOW valuation, attractive dividend yield and an expansion spree make SRF a compelling buy, but lack of clarity on carbon credits means the investors can invest only for medium term and review their decision based on the company’s future growth.

BUSINESS: SRF is a Gurgaonbased diversified company that manufactures technical textiles, chemicals and packaging film. The company is India’s largest manufacturer of nylon tyre cord fabric (NTCF) and specialised fluoro-chemicals including refrigerants. Its other products include chloromethanes and polyester film. The company made two overseas acquisitions in FY09 augmenting its current lines of technical textile business – Thai Baroda Industries in Thailand that manufactures NTCF and Industex Belting in South Africa that manufactures belting fabrics.
It also purchased the engineering plastics and industrial yarn business of its sister concern SRF Polymers during the year. With these acquisitions, the company now operates 11 plants including three overseas. The company is taking deliberate steps to reduce its dependence on NTCF business, which brought in over 55% of the company’s FY09 revenues. Similarly it is going for backward integration to ensure high margins.

GROWTH DRIVERS: The company has been steadily expanding its production capacities in the last couple of years, the benefits of which will become available in the next few years. Particularly, the company has invested around Rs 70 crore to add over 1000 tonne of fluoro specialty capacity. It added 14,500 TPA polyester industrial yarn capacity that can cater to the increasing demand for radial tyres, besides debottlenecking and modernising its facilities.
The company has acquired nearly 850 acres of land in Dahej to set up fluoro-chemical plants over next five years. It is also setting up a laminated fabrics plant in Uttarakhand with annual capacity of 48 million square metres to commission by March ‘10.
The company has commissioned over Rs 600 crore investment projects in last 18 months and projects worth Rs 725 crore are presently under way.
India imposed anti-dumping duty on NTCF imported from Belarus and China in May 2009. This, besides the auto sector revival, stands to benefit the company, which derives nearly half of its revenues from sale of NTCF.

FINANCIALS: The company’s net profit has grown at a cumulative annual growth rate (CAGR) of 29.4% in last five years while its net sales grew 17.5% during the period. The company has a strong history of operating cash flows and dividends. Last three years witnessed its interest coverage ratio on a consolidated basis deteriorate to 4.6 in FY09 from 12.5 in FY07. In the same period, its debt-equity ratio has jumped to 1.1 from 0.6. The ongoing investment phase of the company has taken its net block including capital work up 56% in this period to Rs 1,859 crore.
The company’s chemical business producing fluorine-based refrigerants, speciality chemicals, chloro-methanes and engineering plastics, is the largest profit making segment representing over 80% of the company’s FY09 profit. Packaging film segment contributed 11.6% and technical textiles accounted for just 4.6%. In FY09, the company completed a buy-back of its shares which led to around 5.3% reduction in its equity capital to Rs 61.88 crore. The company’s board has now approved another buy-back scheme at Rs 160 per share, which will remain open till July 2010.

VALUATIONS: The company is currently valued at 6.1 times its profits for the trailing 12 months. The company had paid Rs 10 per share dividend for FY09 translating in a dividend yield of 4.9%. Its peers Century Enka (P/E 9.2), Gujarat Fluorochemicals (P/E 4.9) and Jindal Polyfilms (P/E 4.8) are trading at around similar valuation.

RISK FACTORS: The company does not publish revenues and profit from sale of carbon credits, which boosts the profits of its chemicals business and may face profit erosion depending on the price and quantity of carbon credits sold. At the same time, there is little clarity on future of carbon credits after the first phase of the Kyoto Protocol ends in 2012.