A Report By Research Analyst- Mr. A.M.Lodha

1. AUM CAPITAL
SRF LTD
December 27, 2009
Diversified business model
Recommendation: BUY
SRF has a portfolio of established businesses in industrial
intermediates. In the last few years, the company has also
developed new businesses in Packaging Films and
Fluorospecialities as a part of its long-term strategy for growth. It
Current price: 197 classifies its main businesses as: Technical Textiles Business (TTB),
Target price: 270 Chemicals and Polymers Business (CPB) and Packaging Films
Business (PFB).
Sensex: 17,360
Inorganic growth
Historical chart (12 months) Acquired a tyre cord unit in Thailand and the belting fabrics
business of Industex Technical Textiles in South Africa with an aim
SRF Sensex to expand its customer and geographical base especially in ASEAN
and African market
400
300 Robust financial performance
200
Net sales from operations up by 11.5% from Rs 1,615.0 cr. in 2007-08
100
to Rs 1,800.8 cr. 2008-09. Return On Capital employed up from
0 15.9% in 2007-08 to 16.7% in 2008-09. The financial performance is
Dec- Mar- Jun- Sep- Dec- also fuelled by the carbon credits earned by the company on
08 09 09 09 09 consistent basis.
Source: BSE; Note: Rebased to 100 SRF posted a net profit after tax of Rs161 cr for 1H10 which is
almost equivalent to FY09 net profit of Rs 163cr.
Outlook and valuation
Market cap (US$ mm): 256 We estimate a profit after tax growth of 60% & 19% to Rs. 261 cr &
Market cap (Rs mm): 11,937 Rs. 311 cr in FY10E & FY11E respectively. At the current market
price of Rs. 197, SRF stock trades at 4.57 FY10E and 3.84 FY11E
52 week H/L (Rs): 221.7 / 62.3
earnings and a dividend yield of 6% for FY10, which we believe is
Shares issued (in million): 60.5 very attractive.
YE Mar 31 (Rs cr.) FY08 FY09 FY10E FY11E FY12E
Research analyst
Net sales 1,615.3 1,800.8 2,148.4 2,400.0 2,715.0
Abhay Lodha
amlodha@gmail.com EBITDA 335.3 396.5 572.7 662.0 716.8
+91 98300 09886 EBIT 237.7 296.5 453.4 528.7 566.0
Amit Baheti PAT 138.7 163.3 260.9 310.6 327.8
amit.baheti@aumcap.com EPS 20.4 25.8 43.1 51.3 54.2
+91 93316 98790
Cash EPS 34.8 43.4 62.8 73.4 79.1
PER (x) 9.65 7.65 4.57 3.84 3.64
PBV (x) 1.38 1.23 0.99 0.83 0.70
EV/ EBITDA (x) 5.46 5.24 3.47 2.97 2.77
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2. Company overview
Established in 1973, SRF has grown into a global entity with
operations in 4 countries. Business segment comprise of Technical
SRF is world’s 2nd largest Textiles, Chemicals and Polymers and Packaging Films Business.
producer of Nylon 6 tyre cord The company enjoys a significant presence among the key domestic
fabrics and belring fabrics manufacturers of Polyester Films and Fluoro specialities. Building
on its in-house R&D facilities for Technical Textiles Business and
Chemicals Business, the company strives to stay ahead in business
through innovations in operations and product development.
SNAPSHOT
• Rs. 2,000 cr. multi-product, multi-business organisation
• Market leader in Technical Textiles, Refrigerants,
Engineering Plastics and Industrial Yarns
• 8 locations in India, one in Dubai, one in South Africa and
one in Thailand
• World’s 2nd largest producer of Nylon 6 tyre cord fabrics
• World’s 2nd largest producer of belting fabrics
• Exporting to over 60 countries
Management
SRF has created a strong management team – both at the board level
Shareholding and at the operating level. The management team has a large
experience in economic and financial analysis, asset management,
structured products, policy making and infrastructure lending.
Ownership
Non
institution
35.9 Arun Bharat Ram and associated companies are the largest
Promoters
47.3 shareholding of more than 47%. However, the shareholding is
widely dispersed with institutions holding about 17% stake.
Buyback of shares
Institutio
n 16.8
• SRF completed buyback of 73,81,425 shares for a total
amount of Rs 67.9 cr. in June 2008 to June 2009
Source: NSE website
• SRF Board approved another share buyback for price not
exceeding Rs 165 per share with a total cap of Rs 65 cr

3. Investment themes
1. Diversified business model : SRF Ltd operates in 3 business
segments
Tyre cord fabrics are used as Technical Textiles Business (TTB)
reinforcement material for all
categories of tyres – from Technical Textiles Business, which includes Tyre Cord Fabrics,
bicycles to heavy commercial Belting Fabrics and Coated Fabrics, continues to be SRF’s largest
vehicles business segment. TTB market segment is poised to grow at an
average growth of 5-6% for FY10 and FY11 compared to a 9-10%
expected growth in tyre business segment over the same period.
Though the revenues declined marginally in 2009 compared to 2008
due to global slowdown, it contributes 50% (apprx) of the total
revenues. The increase in anti dumping duty on nylon tyre cord
fabric from China will help SRF both on volume and pricing front.
Chemicals and Polymers Business (CPB)
Derives its revenue from the sale of fluorine-based Refrigerants,
Chloromethanes, the fast-growing speciality chemicals business
space and Engineering Plastics. It also includes receipts from the sale
of CERs generated by destruction of the greenhouse gas,
Hydrofluorocarbon-23 (HFC-23) under the mechanism defined by
the Kyoto Protocol.
Growth in the Engineering Plastics will continue to be driven by
automobile and electrical sector.
Packaging Films Business (PFB)
Packaging Film Business are SRF’s is focused on timely project implementation and complete
used in packaging of food, booking of its capacities. Overall, the long-term prospects of this
cosmetics, personal and health business are encouraging. With domestic demand for Packaging
care products Films Business expected to grow at 11-12% and overseas business of
5-6% over FY10 and FY11, SRF will continue to explore various
organic and inorganic opportunities.
SRF – Strategic project expansion of Rs 600 cr
• Commissioned wind energy project of 15MW in Tamil Nadu
for Rs 90cr
• Setting up a Polyster Industrial yarn Plant in Tamil Nadu for
Rs 250 cr
• Plans to set up 27,000 MT manufacture of PET films under
Pakaging Films Business for Rs 165 cr
• Intends to invest Rs 100 cr for its chemical business
especially in the area of upgrading its R&D facilities
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4. 3. Inorganic growth
1. Tyre cord unit in Thailand
Thai Baroda Industries has a In line with SRF’s long-term strategy of consolidation in this
production capacity of around business segment, the Company acquired a tyre cord unit in
12,000 TPA Thailand with an aim to expand its customer and geographical base.
This facility has provided SRF a presence in the coveted automobile
manufacturing hub in South East Asia region. When leveraged, this
would enable growth in tyre cord business with associated benefits
in other segments of Technical Textiles.
The acquisition not only positions SRF as a leader in the ASEAN
region, but also makes it the second largest Nylon 6 Tyre Cord
producer and fifth largest textile Tyre Cord producer in the world.
SRF Technical Textiles has earned a profit of Thai Baht 3,802 mm
(Rs546 cr) for the period from 8th Sep 2008 to March 2009
2. Beltic Fabric Business in South Africa
Industex Technical Textile is Acquisition of a belting fabric manufacturing unit in South Africa
uniquely positioned to capture located in Port Elizabeth has not only strengthened its position in
the conveyor belts business in the mining hub of South Africa, but is also positioned to expand its
the mining industry of Africa customer base with entry into new geographical markets such as
South America. With this acquisition, SRF has become the 2nd largest
belting fabric producer in the world.
With a capacity of only 7,500 TPA of belting fabrics, SRF enjoys
market leadership with a 50% market share and its exports
contribute to 57% of sales
3. Engineering Plastics Business / Industrial Yarn Business
SRF acquired Engineering Plastic Business and Industrial yarn
Business from SRF Polymers at Rs 151.6 cr. With this business
acquisition, SRF’s turnover will rise above Rs 2,000 cr and will
enable further consolidation through synergies between businesses
SRF dividend history
SRF has a long dividend SRF with an excellent track record of rewarding its shareholders
payment history with dividend has recommended an interim dividend of 70% for
March 2010.
March 2006 – 30%
March 2007 – 60%
March 2008 – 50%
March 2009 – 100%
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5. Income statement
YE March 31 (Rs cr) FY08 FY09 FY10E FY11E FY12E
Net sales 1,615 1,801 2,148 2,400 2,715
Other income 20 18 22 24 28
Total income 1,635 1,819 2,170 2,424 2,743
Operating expense 1,300 1,423 1,597 1,762 2,026
EBITDA 335 396 573 662 717
Depreciation 98 100 119 133 151
EBIT 238 296 453 529 566
Interest charges 36 51 60 61 72
PBT 202 246 393 468 494
Tax 64 83 132 157 166
PAT 139 163 261 311 328
Source: Company and AUM Capital research estimates
Balance sheet
YE March 31 (Rs cr) FY08 FY09 FY10E FY11E FY12E
Share capital 69 62 62 62 62
Reserves & surplus 903 915 1,144 1,384 1,641
Shareholders fund 972 976 1,205 1,445 1,702
Total debt 499 885 749 898 1,057
Other liabilities 148 173 173 173 173
Total liabilities 1,619 2,035 2,127 2,516 2,933
Net fixed assets 1,236 1,660 1,777 1,950 2,182
Investments 148 134 134 134 134
Current assets 563 572 617 855 1,084
- Cash 7 3 (46) 124 267
- other assets 555 569 663 732 817
Current liabilities 327 332 401 423 467
Net current assets 235 241 216 433 617
Total Assets 1,619 2,035 2,127 2,516 2,933
Source: Company and AUM Capital research estimates
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6. Financial snapshot
YE March (Rs cr.) 2QFY10 2QFY09 Q-o-Q 1QFY10 1HFY10
growth (%)
Income from operations 527 509 3% 498 1,025
Other income 1 3 NM 2 4
Total income 528 512 3% 500 1,028
Operating expenses 375 364 3% 342 717
EBITDA 153 149 3% 158 311
Depreciation 32 23 37% 29 61
EBIT 121 125 NM 129 251
Interest and finance 16 10 57% 14 30
charges
PBT 103 87 18% 138 241
PAT 69 59 16% 93 161
Source: Company and AUM Capital research estimates
Key ratios
YE March 31 FY08 FY09 FY10E FY11E FY12E
EPS (Rs) 20.44 25.78 43.13 51.34 54.18
Growth (%) (52.0%) 26.1% 67.3% 19.0% 5.5%
DPS (Rs) 5 10 12 10 10
EBITDA margin 20.8% 22.0% 26.7% 27.6% 26.4%
EBIT margin 14.7% 16.5% 21.1% 22.0% 20.8%
Debt / Equity (x) 0.51 0.91 0.62 0.62 0.62
PER (x) 9.65 7.65 4.57 3.84 3.64
PBV (x) 1.38 1.23 0.99 0.83 0.70
EV/ EBITDA (x) 5.46 5.24 3.47 2.97 2.77
Source: Company and AUM Capital research estimates
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