Market dominance, high return and low valuation make for an attractive buy

Moneylife Digital Team

SRF is the dominant manufacturer of tyre cord fabrics used in tyres of every means of transport—from bicycles to heavy vehicles. The company’s textiles division also manufactures belting fabrics and coated fabrics. Belting fabrics are used as reinforcement material for conveyor belts and coated fabrics find use in static and dynamic applications—from agriculture to defence.

The slowdown in demand for nylon tyre cord fabrics (NTCF), which began during the second half of 2008-09, affected SRF in a limited way. Building on its internal efficiencies, the company very quickly ramped up production when things turned favourable. SRF was thus able to service the increased market demand and, in the process, posted a robust growth of around 30% in 2009-10, year-on-year (y-o-y), in the NTCF segment of the textiles business. SRF is the world’s second-largest manufacturer of ‘Nylon 6’ tyre cord as well as belting fabrics.

In the chemicals segment, SRF produces fluoro-chemicals and fluoro-specialties. Its refrigerant gases are used in the domestic industry as well as exported, for refrigeration and air-conditioning, as a blowing agent for insulating foam, as a propellant for aerosols, in mobile air-conditioning, and as a propellant in metered-dose inhalers for pharmaceutical companies.



During FY09-10, the chemicals business posted strong margins, riding on the constrained availability of the commodity globally. The challenges in sourcing of raw materials were compensated by rising finished goods prices.

The prospects of further growth in the fluoro-specialties business remain encouraging, and the company continues to invest in this R&D (research & development) intensive, technologically-driven business segment. Coated fabrics are used in a wide range of applications—including protective covers, dynamic tarpaulins, static covers, auto-canopies and awnings.

Building on its 17% growth recorded during the slowdown years of 2008 and 2009, growth was 32% in FY09-10. Recognising the opportunity in the laminated fabrics segment, SRF made a maiden entry into this product by setting up a production facility at Kashipur (Uttaranchal). With commencement of commercial production during end Q4 2009-10, SRF today offers a basket of products in this segment for agriculture, industrial applications and display solutions (signage) for the advertising industry.

In the packaging segment, SRF produces polyester (PET) films which are used in packaging of foods, cosmetics, and personal & healthcare products. In the industrial yarn segment, it is the market leader in India, with over 50% of the market share in multi-filament twine, and caters to major fishnet manufacturers in India. In engineering plastics, it produces Nylon-6 engineering plastics used in the automobile and electrical industries. SRF has also expanded beyond India. It has eight manufacturing locations in India and one each in the UAE, Thailand and South Africa.  

SRF posted a profit after tax (PAT) of Rs171 crore during Q3 FY10-11, a 350% increase over the corresponding year-ago quarter. Revenue during October-December 2010 improved by 72% to Rs844 crore as against Rs490 crore a year ago. The average revenue and operating profit growth for the past five quarters was an impressive 44% and 81%, respectively. Based on annualised results for the December 2010 quarter, its market-cap to sales is just 0.57 times and market-cap to operating profit is 1.68 times. Return on net worth for the fiscal ended March 2010 was a decent 24%. The company’s board did not recommend any final dividend; but, during the year, SRF has paid two interim dividends each of Rs7 per share, aggregating Rs14 per share.

SRF’s strategy will be to ensure a timely start-up of the backward integration project and full capacity utilisation. The long-term prospects of this business are encouraging and SRF will continue to explore various organic and inorganic opportunities in this business to maximise shareholders’ returns. Most importantly, the stock valuation is low, given the excellent return on capital that it enjoys. Buy the stock at current market price.

(This report was first published in Moneylife magazine, in the edition dated 24 March 2011, that was available on the newsstands on 10 March 2011)