SRF LTD

Result Update: Q1 FY 12 C.M.P Target Price Date : Rs.315.00 : Rs.356.00 : 21th Sep 2011

BUY
SYNOPSIS

Stock Data: Sector: Face Value Rs. 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Textiles
Rs.10.00 444.30/267.00 15000 503806 18906.30

Established in 1973, SRF has grown into a global enterprise with operations in 4 countries. SRF is a multi-business entity engaged in the manufacturing of chemical based industrial intermediates. SRF is world second largest producer of Nylon 6 tyre cord fabrics and belting fabrics. The company exports its products to over 60 countries. SRF Ltd has Investment in a thin BOPET film line (28500 TPA) and metalizer (7050 TPA) in Thailand as a cost of USD 65 million equivalent to Rs. 290 crores (appx); The plan to set up 28500 MT BOPET Film plant in Bangladesh through a 80:20 joint venture with Nitol Niloy Group. Net Sales and PAT of the company are expected to grow at a CAGR of 22% and 27% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs.828.10 million from Rs.547.80 million in previous year same quarter.

Share Holding Pattern

1 Year Comparative Graph

SRF LTD

BSE SENSEX

Years FY 11 FY 12E FY 13E

Net sales 30632.80 35534.05 40153.47

EBITDA 9131.10 10023.37 11379.19

Net Profit 4834.40 5456.39 6300.50

EPS 79.91 90.91 104.97

P/E 3.94 3.46 3.00

Peer Group Comparison

Name of the company SRF Ltd Alok Industries Ltd Garden Silk Mills Ltd Indo Rama Synthetics Ltd CMP(Rs.) 315.00 18.80 77.00 35.30 Market Cap.(Rs.Mn.) 18906.30 14771.0 2948.4 5359.3 EPS(Rs.) 79.91 4.93 19.10 13.40 P/E(x) 3.94 3.80 4.03 2.63 P/Bv(x) 1.20 0.48 0.52 1.00 Dividend (%) 140.00 2.50 18.00 20.00

Investment Highlights
Q1 FY12 Results Update SRF LTD disclosed results for the quarter ended June 2011. Net sales for the quarter moved up 36% to Rs.8388.00 million as compared to Rs.6189.80 million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs.828.10 million from the quarter ended June 2011. Rs.547.80 million in previous year same quarter. The Basic EPS of the company stood at Rs.13.80 for

Quarterly Results - Standalone (Rs in mn)

As At Net sales PAT Basic EPS

June-11
8388.00

June-10
6189.80

%change
36

828.10

547.80

51

13.80

9.05

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Basic EPS of the company stood at Rs.13.80

Break up of Expenditure Expenditure for the quarter stood at Rs.6748.20mn, which is around 38% higher than the corresponding period of the previous year. Consumption of Raw Material cost of the company for the quarter accounts for 62% of the sales of the company and stood at Rs.5196.40mn from Rs.3738.90mn of the corresponding period of the previous year. Cost of Power & Fuel cost increased 21%YoY to Rs.629.8mn from Rs.522.60 mn and accounts for 8% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 21% and 10% respectively from 22% and 9% respectively of the same period of the last year.

FY11 Performance Net profit of the company has increased at 56% yoy Rs.4834.40mn from Rs.3094.20mn of same period of last year. Total revenue for the year stood at Rs.30632.80mn from Rs.21938.50 which is 40% increased than that of a year ago. EPS for the year stood at Rs.79.91 per equity share of Rs.10.00 each. Operating profit of the company stood at Rs.9131.10mn. OPM for the year stood at 29.81%. Expenditure of the company increased 40% YoY to Rs.21649.60 mn. Interest expenses for the year stood at Rs.839.20mn.

Interim Dividend SRF Ltd has has paid two interim dividends each of Rs. 7 per share aggregating to Rs. 14 per share for the year 2010-11, The Board of Directors of the Company at its meeting held on May 09, 2011, has recommended a NIL final dividend for the year 2010-11.

Investment Plan SRF Ltd has Investment in a thin BOPET film line (28500 TPA) and metalizer (7050 TPA) in Thailand as a cost of USD 65 million equivalent to Rs. 290 crores (appx); The plan to set up 28500 MT BOPET Film plant in Bangladesh through a 80:20 joint venture with Nitol Niloy Group will be reviewed by the Board. Revised capital expenditure for the Multipurpose Chemical Plant at Dahej to Rs. 132 Crores from Rs. 97 Crores (approved by the Board at its meeting held on March 29, 2010).

Company Profile

The multi-business corporate group SRF with head quarters in Gurgaon, India has over the years expanded its footprints beyond the national boundaries. Today it enjoys the status of a global entity with operations in four countries; eight manufacturing plant locations in India and one each in UAE, Thailand and South Africa. The market leader in most of its businesses in its home market in India, SRF is the world's 2nd largest manufacturer of both the Nylon 6 tyre cord as well as the belting fabrics. SRF strives to ensure faster integration of people, procedures and practices across global entities to build synergies and create value for its stakeholders. 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.

Business Technical Textiles Chemicals Packaging Films Engineering Plastics

Subsidiaries SRF Global B.V. SRF Tech textile B.V. SRF Technical Textiles (Thailand) Ltd SRF Industex Belting (Pty) Ltd SRF Overseas Ltd. (SRFO) SRF Transnational Holdings Ltd. SRF Properties Ltd. SRF Holiday Home Limited SRF Fluorochemicals Limited SRF Energy Limited and SRF Fluor Private Limited

Financial Results
12 Months Ended Profit & Loss Account (Standalone)
Value(Rs.in million) FY10A 12m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value(Rs.) EPS *A=Actual, *E=Estimated 21938.50 90.70 22029.20 -15497.00 6532.20 -680.50 5851.70 -1312.60 4539.10 -1444.90 3094.20 605.00 11499.80 10.00 51.14 30632.80 147.90 30780.70 -21649.60 9131.10 -839.20 8291.90 -1517.10 6774.80 -1940.40 4834.40 605.00 15223.80 10.00 79.91 35534.05 180.44 35714.49 -25691.12 10023.37 -852.10 9171.27 -1592.96 7578.32 -2121.93 5456.39 600.20 20680.19 10.00 90.91 40153.47 216.53 40370.00 -28990.81 11379.19 -894.70 10484.49 -1672.60 8811.89 -2511.39 6300.50 600.20 26980.69 10.00 104.97 FY11A 12m FY12E 12m FY13E 12m

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Dec-10 3m(A) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value(Rs.) EPS *A=Actual, *E=Estimated 8441.20 46.10 8487.30 -5499.80 2987.50 -224.80 2762.70 -392.60 2370.10 -658.40 1711.70 605.00 10.00 28.29 8520.10 26.20 8546.30 -6084.90 2461.40 -213.10 2248.30 -377.00 1871.30 -510.50 1360.80 605.00 10.00 22.49 8388.00 90.70 8478.70 -6748.20 1730.50 -202.90 1527.60 -385.40 1142.20 -314.10 828.10 600.20 10.00 13.80 9562.32 48.41 9610.73 -6884.87 2725.85 -213.05 2512.81 -404.67 2108.14 -579.74 1528.40 600.20 10.00 25.46 30-Mar-11 3m(A) 30-Jun-11 3m(A) 30-Sep-11 3m(E)

Key Ratio
Particulars EPS (Rs.) EBITDA Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV FY10 51.14 29.78% 14.10% 5.45 25.56% 24.28% 2.58 0.78 200.08 1.39 FY11 79.91 29.81% 15.78% 3.94 30.54% 31.79% 2.09 0.51 261.63 1.20 FY12E 90.91 28.21% 15.36% 3.46 25.64% 28.28% 1.89 0.40 354.55 0.89 FY13E 104.97 28.34% 15.69% 3.00 22.84% 26.57% 1.66 0.32 459.53 0.69

Charts:

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Outlook and Conclusion

At the current market price of Rs.315.00, the stock is trading at 3.46 x FY12E and 3.00 x FY13E respectively. Price to Book Value of the stock is expected to be at 0.89 x and 0.69 x respectively for FY12E and FY13E. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.90.91 and Rs.104.97 respectively. SRF is world second largest producer of Nylon 6 tyre cord fabrics and belting fabrics. The company exports its products to over 60 countries. SRF Ltd has Investment in a thin BOPET film line (28500 TPA) and metalizer (7050 TPA) in Thailand as a cost of USD 65 million equivalent to Rs. 290 crores (appx); The plan to set up 28500 MT BOPET Film plant in Bangladesh through a 80:20 joint venture with Nitol Niloy Group. Net Sales and PAT of the company are expected to grow at a CAGR of 22% and 27% over 2010 to 2013E respectively. During the quarter, the company has reported Net Profit increased to Rs.828.10 million from Rs.547.80 million in previous year same quarter.

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On the basis of EV/EBITDA, the stock trades at 1.89 x for FY12E and 1.66 x for FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.356.00 for Medium to Long term investment.

Industry Overview

The textiles industry in India enjoys a distinctive position due to the pivotal role it plays by way of contribution to industrial output, employment generation (second largest after agriculture) and export earnings of the country. The industry is rich and varied, embracing the hand-spun and hand-woven sector at one end and the capital intensive, sophisticated mill sector at the other. Its association with the ancient culture and tradition of the country lends it a unique advantage in comparison with textiles industry of other countries, thus giving it an uncommon edge to cater to a vast variety of products and market segments both domestically, as well as, globally. The industry currently contributes about 14 per cent to industrial production, 4 per cent to GDP, and 17 per cent to the countrys export earnings, according to the Annual Report 2010-11 of the Ministry of Textiles. The industry accounts for nearly 12 per cent share of the country's total exports basket. It provides direct employment to more than 35 million people. Industry sub-sectors The textile industry comprises the following:

Organised Cotton/Man-Made Fibre Textiles Mill Industry Man-Made Fibre / Filament Yarn Industry Wool and Woollen Textiles Industry Sericulture and Silk Textiles Industry Handlooms, Handicrafts, the Jute and Jute Textiles Industry Textiles Exports

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Market size The Vision Statement for the textiles industry for the 11th Five Year Plan (2007-12) sees India securing a 7 per cent share in the global textiles trade by 2012. At current prices, the Indian textiles industry is valued at US$ 55 billion, 64 per cent of which caters to domestic demand. The export of textiles and clothing (T&C) aggregated to US$ 22.42 billion in 2009-10. The Government fixed the target for 2010-11 at US$ 25.48 billion. So far during the period April- September 2010, exports of T&C have been achieved at US$ 11.26 billion. Production During February 2011, total cloth production rose by 5.8 per cent year-on-year (y-o-y). During April- February 2011 cloth production increased by 4.5 per cent y-o-y. Export Total textile exports during April-December 2010 registered an increase of 16.54 per cent in rupee terms at Rs 87,582.83 crore as against Rs 75,149.98 crore during the corresponding period of the previous year, according to the latest data released by DGCI&S, Kolkata. The same were valued at US$ 19,217.12 million as against US$ 15,695.07 million during the corresponding period of the previous year, registering an increase of 22.44 per cent. The share of textile exports in total exports was 11.29 per cent during April-December 2010 as against 12.34 per cent during April- December 2009. Technical Textile Segment The technical textiles segment is expected to grow by 11 per cent per annum till 201213 and is likely to grow at 6-8 per cent per annum till 2020 without any policy interventions. If the government intervenes by way of regulatory push, the growth of technical textiles industry can be estimated at 12-15 per cent per annum till 2020, according to Rita Menon, Secretary, Union Ministry of Textiles. She added that the

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technical textiles segment in India has the potential to attract investment and create additional employment opportunities in coming years. She further said that investments of US$ 1.1 billion are expected by 2012 and employment is expected to increase to 1.2 million by 2012. Government Initiatives

Technology Upgradation Fund Scheme (TUFS) - The Government has restructured the TUFS, the flagship scheme of Ministry of Textiles for upgradation of technology in the textile and jute sectors. The ministry has issued the Government Resolution on Restructured TUFS for the period 28.04.2011 to 31.03.2012 (both the days inclusive) with an overall subsidy cap of Rs 1,972 crore (US$ 0.43 billion) during the period. The objective of the present Scheme is to leverage investments in technology upgradation in the Textiles and Jute Industry, with a special emphasis on balanced development across the value chain The Scheme for Integrated Textile Park (SITP) - The scheme was approved in July 2005 to facilitate setting up of textiles parks with world class infrastructure facilities. Forty parks have been sanctioned till December 31, 2010 in nine states. The estimated project cost (for common infrastructure and common facilities) is Rs. 4,193.65 Crore (US$ 0.93 billion), of which Government of India assistance would be Rs. 1,419.69 Crore (US$ 0.31 billion). The projected investment in these parks is Rs. 19,456.90 Crore (US$ 4.32 billion) and estimated annual production is Rs 33,568.50 Crore (US$ 7.45 billion) Integrated Skill Development Scheme - The Government launched the Integrated Skill Development Scheme for the T&C Sector, including Jute & Handicrafts, in September 2010. The main objective of the scheme is to address the trained manpower needs of textiles and related segments. The Scheme would target to train approximately 2,56,000 persons during 2010-11 and 2011-12 The government has initiated a number of steps to ensure raw materials security for the textiles industry. In order to balance the interests of all stake holders across the value chain. A multipronged approach was adopted which

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included capping of cotton exports at 55 lac bales for cotton season 2010 11; and permitting yarn exports of 720 million kgs for the year 2010-11

Fiscal incentives are provided for exports of T&C items under various provisions of the Foreign Trade Policy 2009-14 The textile industry is also being supported with an extensive skill development programme to train 3 million persons over a 5 year period, by leveraging the strength of existing institutions under the textile ministry India has the most liberal and transparent policies in Foreign Direct Investment (FDI) amongst emerging countries. Under the automatic route, 100 per cent FDI is allowed in the textile sector. FDI in sectors to the extent permitted under automatic route does not require any prior approval either by the Government of India or Reserve Bank of India (RBI) The government has proposed some more relaxations for the branded garments sector, besides enhancement of duty abatement from 40 per cent to 55 per cent

Investment trends The textile industry plays a significant role in getting the foreign exchange reserves into the country, contributing to approximately 15 per cent of the total exports from the country. Exports in textiles and apparel have registered a strong growth in last few years 11 per cent CAGR from 2004-05 to 2007-08. Indias liberalisation of its foreign investment regulations, buoyant domestic demand for textiles, and strong export potential have led to growing foreign investment in the country. The country has become one of the fastest growing destinations for FDI inflows and collaboration. Indias Special Economic Zones (SEZs) attract foreign investment by providing tax incentives, assistance with bureaucratic and administrative problems, and access to reliable infrastructure. Foreign companies have been motivated to enter into collaborations with Indian firms by the increasing profits gains that can be made by producing brands in India and selling them into the Indian market. Indian companies, on the other hand, have been motivated by the scope for gaining technical and marketing expertise from foreign partners.

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The textiles industry has attracted FDI worth US$ 956.97 million between April 2000 and March 2011, according to data released by the Department of Industrial Policy and Promotion (DIPP) Ahmedabad-based textile company Arvind Ltd. has tied up with another major international brand, Geoffrey Beene, LLC for apparel and non-apparel products. Geoffrey Beene has licensed Arvind Retail Ltd. to manufacture and market its men's apparel and non-apparel products Ahlstrom Corporation has announced investments of EUR 55 million (US$ 79.2 million) in new and expanded manufacturing capacity, including a new medical nonwovens plant to be built in India. The new medical nonwovens plant in India will use spunmelt technology and accounts for EUR 38 million (US$ 54.72 million) of the total investment announced. India and Russia have signed an agreement to increase investment and trade in textile industries in both the countries. A memorandum of understanding (MoU) was signed by the Apparel Export Promotion Council of India (AEPC) and Russian Union of Entrepreneurs of Textiles and Light Industry. The MoU also stipulates the promotion of textile trade, participation in fairs and exhibitions, transfer of technology and exchange of know-how in textile manufacturing and processing

The Road Ahead India's T&C industry has great potential, and is one of the mainstays of the countrys economy. The industry has enormous opportunities for domestic as well as international investors given its consistent growth performance, abundant cheap skilled manpower and growing domestic demand. With the abolition of quotas, India has surged ahead of other countries and positioned itself as a value-added manufacturer with a varied material base, an educated and English-speaking class of executives with high product development and design orientation. On the global front, India is set to become an even bigger participant, both as a consumer and as a producer. The country offers an attractive combination of a large domestic market, and a base for low cost production. The industry has gained a strong position in cotton based products, especially in the readymade garments and home

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furnishings segment, which are expected to be the key drivers of growth for the industry. Besides this, the T&C industry is contributing towards promoting inclusive growth. It has been contributing to broad based socio-economic development by providing employment opportunities at local level. The government envisions building state-of-the-art production capacities and

achieving a preeminent global standing in the textile sector by 2020, which includes manufacture and export of all types of textiles.

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Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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Firstcall India Equity Research: Email info@firstcallindia.com C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods D. Ashakirankumar Automobile A. Rajesh Babu FMCG H.Lavanya Oil & Gas T.Joshna Devi Diversified Dheeraj Bhatia Diversified Manoj kotian Diversified Nimesh Gada Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPOs, QIPs, F.P.Os,Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071 Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089 E-mail: info@firstcallindiaequity.com www.firstcallindiaequity.com

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