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.
