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Tuesday, 13 March, 2007

SRF Ltd.

Company Details: Google Finance, Kotak Securities

Prof. Bakshi posted his views on SRF Ltd. yesterday on his blog.

Shankar asked me to look at SRF. SRF is currently trading at close to its 52 week low (CMP as on 13-MAR-07 is 120 and 52 week low is 110 on 12-MAR-07). For me this is a very important criterion in stock selection. I dont understand PE Ratios and hence I look at historical prices to see if a stock is "cheap" or not. Almost every investor would disagree with me but until I learn about PE and other ratios, I would keep using this.

The stock was cheap in first glance. Prof. Bakshi had talked about it (although it was more negative than positive) and Shankar asked me to look at it. I had to dig in. I smelled another investment opportunity.

Unaudited financial results for Dec 06 are available here and the press release is available here. It said

"SRF Q3 FY2007 revenues up 52% to Rs. 450.36 crores (vs. Q3 FY2006)" and "PAT up 418% to Rs. 70.11 crores; EPS at Rs. 10.33".
Looked like a turnaround story with huge improvements in revenues and margins.

Mr. Arun Bhagat Ram, Chairman, SRF Limited, added:
" ...The revenues and profits improved significantly by 52 % and 418 % respectively in the third quarter. Though there have been pressures on realizations and margins in our businesses, we believe our continued focus on cost efficiencies and improvement in margins will see the current businesses revert to providing healthy returns."
However there is one thing in the financial results that struck me as odd. One of the notes to results said
"The receipt of CERs (Certified Emission Reduction) income is likely to vary and may not recur from Quarter to Quarter."
When I looked at the results, I found out that income from CERs was 122.28 crores (out of total income of 450.36 crores). And this is where I had problems.

If this income of 122 crores was taken out, revenues would fall to 330 crore (compared with previous years' 296.27). Increase in just about 10%. With the economy growing at 9% and inflation at 6%, its less than average. And this income is temporary in nature and might not recur. I might be proved wrong and this income might get even more money for the company but I am not willing to bet my money on a company that doesn't make money from its core business.

Talking about the core business, SRF is majorly into
1. Technical Textiles (input for automobile tyres including aeroplanes, conveyor belts, contributes 65% of revenues before income from CERs starting coming in),
2. Chemical Business (majorly greenhouse gases and other chemicals, contributes 20% to revenues, and according to management, as these are governed by Montreal protocol, there is limited growth) and
3. Packaging Films (currently loss making business, stiff competition from domestic firms, problems with exports because of anti-dumping restrictions by EU).

These core businesses are not making any strong ripples in profitability or revenues or market expansion.

The cash flow from CERs (not permanent), the revenues and hence profitability is expected to be jittery in my opinion. CER income might dry up all of a sudden or it might start churning money - in either case, I would loose my sleep over this stock and this is unacceptable to me.

In the end, I do not have the advantage of making decision by looking into future. In view of current situations and conditions I would not want to invest into this "cheap" company.

I know I would be wrong at a lot of places. Please correct me if you happen to stumble on this post.

9 comments:

Anonymous said...

Please can you relook at SRF thru SRF polymers since every SRF polymers share has an equivalent holding of 4 shares of SRF and it is not a pure holding company it does have some earnings.
-Ranjit

Anonymous said...

cers if not sold or not cleared by the unfcc are unstable in nature but once the cers are sold at pre determined pirces where does the question of instability come. u need to understand the cer modul better before coming to the conslusion that this income stream in unstable. as for SRF the deals have been done and wud give u a clear idea as to the future cash flows from tyhis specific div and the supplementary effect if thses strong cash flows on the existing biz of the co.

Anonymous said...

Hi.. Nice study and I feel perfect comment of SRF. The Co. is not doing well in its core business and the profit is only a result of CER, which as per Co. 2006 annual report shuld be around Rs. 256 crore p.a.. But as far my knowledge concern co. has booked more than Rs. 256 crore of CER in first 9 months FY07 means they are distorting their results by prebooking revenue.

I feel the co. want to maintain its profitability by booking early profit on CER, until its core business becomes more profitable.

SA said...

This reminds me of a quote, and i think Garg will remember it as something we discussed last saturday

The Washington Post Chairman and CEO, Don Graham said in a speech in 2004, “Quarterly earnings are not
in the top 100 things you should care about if you want to value the company. If you care about that sort of
thing, you shouldn't own our stock.”
Garg remember where we read
that :-) :-)
SA

Anonymous said...

Hi SA,

If you are talking about letters to shareholders of a certain company you like .. then I remember it and if you are not talking about it, then I dont !

And I still havent been able to look at the annual report.

-
Garg

Anonymous said...

http://www.geocities.com/concorde1980/pe_ratio.ppt

in case u want to get some insight into a p/e ratio..

taken from this blog
http://graham-2-livermore.blogspot.com/

rajdori said...

I read through your views on SRF. Have something to say about CERs being temporary.
- SRF's CDM project would be valid for 10 years.
- It is based upon incineration of a ozone-polluting gas. I.e. instead of spitting this gas into atmosphere, they destroy it and in turn they receive/earn CERs.
- Such projects with such high amounts of CERs are very reliable and fetch high prices in international markets.
- Buyers of SRF credits are reputed like Shell etc. Prices they are fetching also vouch for this - approx. 1000 Rs/CER or 25 USD/CER.
- Also, prices for CERs deliverable post-2007 have not come down.
- UK and US have not yet registered Kyoto treaties, if they do, prices are expected to shoot up.
- So, SRF can be expected to fetch similar prices in future also.
- Not saying that nothing can go wrong with CER prices. All I am saying is that it is very less likely to happen.
- But then at current prices of SRF, only it's current business is reflected in it. Crude prices, if and when come down can boost it's bottomlines.
- Now, can I add one more dimension...
- Each SRF Polymer share holds approx. 4 shares of SRF.
- Even if you take current price of SRF and apply 50% discount, SRFPoly should be quoting at approx. 250 Rs. Instead it is at 25% of holding value.
- So, now imagine a double whanmmy 1) if SRF appreciates to 250 or something and 2) Decides to offload some stake in SRF -
- It should be obvious that SRF/Arun Bharat Ram would, at some point be interested in getting some buck home - then SRFPoly is the only owner who would offload shares to new investors.
- This HAS to happen - don't know when.
- SRFPoly's dividend income from SRF provides us with more than 10% div yield with SRFPoly at 120/130 CMP....
- Talking of risk, how much risk is there in SRFPoly at CMP of 130?
- Now, provide me some reasons/risks in buying into SRFPoly at these prices...rajdori

Anonymous said...

Please update your view on SRF

Sandeep Dhawan said...

any update on srf