SRF Ltd [Earlier name Shriram Fibres Ltd ] -- A strong, reliable and focussed company

SRF established in 1973 is a multi-business, multi-location company which a part of Bharat Sriram Group and is engaged in the manufacture of the following products :

• Textiles Business – manufactures Nylon Tyre Cord Fabrics & Coated Fbrics, Nylon Tyre Cord Fabric used as reinforcement for all kinds of tyres
• Chemical Business – manufactures Refrigerant Gases which is primarily used in air-conditioning and refrigeration.
• Pharma Chemicals Business – manufactures intermediates, conducts contract research, custom synthesis /contract services to the Pharma industry.
• Packaging Films Business – manufactures Biaxially Oriented Poly Ethylene Terephthalate [ BOPET ] or Polyster [ PET ] used in flexible packaging.

SRF has manufacturing facilities in Manali, Gwalior, Bhiwadi and Indore. Besides, it has operations in U.A.E, South Africa and Thailand.

In 2004, SRF became the first tyre cord company in the world to win the prestigious Deming Application Prize for Total Quality Management. In 2008, Mr. Arun Bharat Ram, Chairman, Chairman honoured with the prestigious Officer's Cross of the Order of Merit, presented by the Federal Government of Germany.

Asset Growth & Sales Growth

Gross assets which stood at Rs.1418 crores has touched Rs.2707 crores as of March 2010, an incremental growth of Rs.1259 crores and currently Rs.127 crores is capital WIP. All this is happening against the backdrop of a Debt Equity ratio which has been less than one for the past five years, meaning much of the expansion has been financed from internal accruals in the absence of equity dilution.

The top line is growing at a CARG of 11.08 per cent and PAT registered CARG of 24.33 per cent. Revenue and PAT for fiscal 2009-10 was Rs.2193 crores and Rs.309 crores respectively. The corresponding figures for fiscal 2008-09 was Rs.1812 crores and Rs.163 crores respectively.

Thus, topline has increased by 21 per cent whereas bottom line has impressively shot up by 89 per cent.

Good fundamentals

SRF has generated Net Profit margins in the range of 11-22 per cent since the last five years. The Debt Equity ratio is less than one and Book Value is around Rs.200 as against today’s Share price of Rs. 246.55, up by Rs.5.55 /2.30 per cent over previous day’s close. Besides having good working capital management, the company’s Return on Equity is 29.07 per cent and Return on Capital Employed is 26.40 per cent. The promotors stake in the company is 47.25 per cent.

Conclusion: SRF which has a Market capitalization of 1462 crores is available at a PE of just 4.73 and is definitely an attractive medium/long term buy considering the strong potential of the various business segments that the company operates in especially the technical textile business which contributes to more than 50 per cent revenue. Moreover, the company enjoys a global leadership status in the technical textile business segment. Now, on an Equity base of about Rs.60 crores, the EPS for fiscal works out to Rs.51 and if the company continues to perform well then we can apply a conservative PE of 10 and we get a piece of business that should be quoting at Rs.510/share! Hence, going forward we can expect the stock price to more than double in about a years time. And there is good news for short term investors too. From the technical angle too the stock is in a bullish territory with the Fibonacci price projections revealing the potential for the stock to move up to a level of Rs.317/= which signifies a return close to 30 per cent that can be generated probably in less than three months. In any case, SRF should be purchased and accumulated on sharp corrections to magnify returns.

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd