SRF: Capacity Addition to Beat Revenue Blues

Despite fears of slackening revenues, SRF’s expansion plans and inexpensive valuation make it a strong long-term bet

The shares of Gurgaon-based multi-business company SRF are trading near 52-week low on poor FY12 show and apprehensions over slackening carbon credit revenues. However, the company’s expansion plans, which will make up for the lost carbon credit revenues, inexpensive valuations and high dividend yield make it attractive for long-term investors. 

BUSINESS SRF manufactures a variety of products including fluorine derivatives, polyester (BOPET) film and technical textiles. The company is a leading manufacturer of refrigerant gases and derives a chunk of its income from carbon credits on incineration of HFC-23. This benefit stands to be phased out from May 2013, which has impacted the prices of carbon credits, SRF’s profits as well as valuations.
The company’s FY11 annual report mentioned 64.17 crore received on account of carbon credits. The corresponding number for FY12 is not known. SRF has eight manufacturing plants in India and three overseas. It derived 53.5% of its FY12 revenues from technical textiles, which include NTCF, coated and belting fabrics, 30% of its revenues came from chemicals and remaining 16.5% was from packaging film. 

GROWTH DRIVERS The company is expanding the capacity of fluoro-specialty chemicals, packaging films and technical textiles, keeping in mind the absence of carboncredit income in future.
Mid-FY12 it commissioned the first phase of new coated fabrics plant in Gummidipoondi, which makes lacquered tarpaulins and coated fabrics for high tensile structures and niche industrial applications. Its chemical complex at Dahej will start producing fluoro-specialty chemicals from June 2012, which will be scaled up in phases by March 2014. It will set up a plant with 12,500 TPA capacity of HFC 134a refrigerant gas at Dahej. First half of FY14 will see greenfield packaging film plants coming up in Thailand and South Africa. 

FINANCIALS The company’s profits for FY12 were 21.8% lower compared to last year due to fall in prices of carbon credits and extraordinary profitability in BOPET business in FY11. The company’s debt-to-equity stood at 0.3 at end-March 2012. It has a history of strong operating cash flows with tight management of working capital. 

VALUATIONS
The company is currently valued at 3.2 times its FY12 profits and 0.7 times its book value at end-FY12. Removing 50 crore from net profit as coming from carbon credits, which are unlikely to continue in future, the P/E would stand at 3.9. The company has paid 14 per share dividend in the past two years, which translates into a yield of 6.5%. The valuations are attractive compared to its peers.